##### 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 June 30, 2007
 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
    
    66-0312162(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification number)1451 F.D. Roosevelt Avenue,
    
    00920-2717San Juan, Puerto Rico
    
    (Zip Code)(Address of principal executive offices)
 
 
 þ o
  þ o o
 o þ




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##### 



DORAL FINANCIAL CORPORATION
INDEX PAGE
 PAGEPART I  FINANCIAL INFORMATION
    
    
    4Item 1  Financial Statements
    
    
    5Consolidated Statements of Financial Condition (Unaudited) as of June 30, 2007 and December 31, 2006
    
    
    5Consolidated Statements of (Loss) Income (Unaudited)  Quarters ended June 30, 2007 and June 30, 2006 and six month periods ended June 30, 2007 and June 30, 2006
    
    
    5Consolidated Statements of Changes in Stockholders Equity (Unaudited)  Six month periods ended June 30, 2007 and June 30, 2006
    
    
    6Consolidated Statements of Comprehensive (Loss) Income (Unaudited)  Quarters ended June 30, 2007 and June 30, 2006 and six month periods ended June 30, 2007 and June 30, 2006
    
    
    7Consolidated Statements of Cash Flows (Unaudited)  Six month periods ended June 30, 2007 and June 30, 2006
    
    
    8Notes to Consolidated Financial Statements (Unaudited)
    
    
    10Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    44Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    81Item 4 Controls and Procedures
    
    
    81PART II  OTHER INFORMATION
    
    
    82Item 1 Legal Proceedings
    
    
    82Item 1A Risk Factors
    
    
    82Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    82Item 3 Defaults Upon Senior Securities
    
    
    82Item 4 Submission of Matters to a Vote of Security Holders
    
    
    82Item 5 Other Information
    
    
    84Item 6 Exhibits
    
    
    84SIGNATURES
    
    
    89EX-12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESEX-12.2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDSEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
  2




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FORWARD LOOKING STATEMENTS
   
    
    potential adverse developments from ongoing enforcement actions by bank
regulatory agencies;
    
    risks associated with the potential impact of fluctuating interest rates on
Doral Financials net interest margin resulting from the current mismatch in its
assets and liabilities;
    
    Doral Financials ability to attract new clients and retain existing clients;
    
    Doral Financials ability to retain and attract key employees;
    
    Doral Financials ability to successfully implement new business strategies;
    
    Doral Financials ability to derive sufficient income to realize the benefits of
its deferred tax asset;
    
    potential in the credit quality of Doral
Financials loan portfolio;
    
    risks associated with the effects of global, national and regional economic and
political conditions, including with respect to fluctuations in interest rates;
    
    risks arising from worsening economic conditions in Puerto Rico;
    
    potential adverse developments in connection with the ongoing grand jury
investigation by the U.S. Attorneys Office for the Southern District of New York;
    
    risks associated with Doral Financials inability to prepare and timely file
financial statements;
    
    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.
   3




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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 (IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
 (UNAUDITED
 JUNE 30,
    
    
    DECEMBER 31,2007
    
    
    2006ASSETSCash and due from banks
    
    $
    119,104
    
    
    $
    227,127Money market investments:Money market investments with creditors right to repledge
    
    
    279,918
    
    
    
    234,296Other money market investments
    
    
    376,968
    
    
    
    684,438Total money market investments
    
    
    656,886
    
    
    
    918,734Securities purchased under agreements to resell
    
    
    64,400
    
    
    
    Pledged investment securities that can be repledged:Securities held for trading, at fair value
    
    
    87,206
    
    
    
    72,218Securities available for sale, at fair value
    
    
    1,733,607
    
    
    
    2,209,439Securities held to maturity, at amortized cost (market value of $1,087,573 in 2007; $1,746,760 in
2006)
    
    
    1,152,029
    
    
    
    1,823,661Total pledged investment securities that can be repledged
    
    
    2,972,842
    
    
    
    4,105,318Other investment securities:Securities held for trading, at fair value
    
    
    144,459
    
    
    
    111,587Securities available for sale, at fair value
    
    
    198,788
    
    
    
    199,247Securities held to maturity, at amortized cost (market value of $634,261 in 2007; $254,592 in 2006)
    
    
    681,469
    
    
    
    259,276Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    64,439
    
    
    
    70,533Total other investment securities
    
    
    1,089,155
    
    
    
    640,643Total investment securities
    
    
    4,061,997
    
    
    
    4,745,961Loans:Loans held for sale, at lower of cost or market, pledged with creditors right to repledge
    
    
    197,849
    
    
    
    442,161Other loans held for sale, at lower of cost or market
    
    
    508,500
    
    
    
    1,326,929Loans receivable, net of allowance for loan and lease losses (2007 - $85,875; 2006 - $67,233)
    
    
    4,328,980
    
    
    
    3,389,937Total loans
    
    
    5,035,329
    
    
    
    5,159,027Receivables and mortgage-servicing advances
    
    
    59,566
    
    
    
    58,187Accrued interest receivable
    
    
    57,547
    
    
    
    64,363Servicing assets, net
    
    
    164,569
    
    
    
    176,367Premises and equipment, net
    
    
    109,669
    
    
    
    138,805Assets to be disposed on sale
    
    
    22,457
    
    
    
    Real estate held for sale, net
    
    
    31,284
    
    
    
    33,197Deferred tax asset
    
    
    243,858
    
    
    
    261,645Other assets
    
    
    115,126
    
    
    
    73,011Total assets
    
    $
    10,741,792
    
    
    $
    11,856,424LIABILITIESDeposits:Non-interest-bearing deposits
    
    $
    283,366
    
    
    $
    327,186Interest-bearing deposits
    
    
    3,613,220
    
    
    
    3,923,574Securities sold under agreements to repurchase
    
    
    3,330,606
    
    
    
    3,899,365Advances from FHLB
    
    
    984,500
    
    
    
    1,034,500Loans payable
    
    
    424,448
    
    
    
    444,443Notes payable
    
    
    919,073
    
    
    
    923,913Accrued expenses and other liabilities
    
    
    400,292
    
    
    
    400,039Total liabilities
    
    
    9,955,505
    
    
    
    10,953,020STOCKHOLDERS EQUITYPreferred stock, $1 par value; 40,000,000 shares authorized; 9,015,000 shares issued and outstanding in
2007 and 2006, 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, $1 par value; 500,000,000 shares authorized; 107,948,236 shares issued and outstanding
    
    
    107,948
    
    
    
    107,948Additional paid-in capital
    
    
    167,155
    
    
    
    166,495Legal surplus
    
    
    23,596
    
    
    
    23,596Retained earnings
    
    
    46,160
    
    
    
    139,051Accumulated other comprehensive loss, net of income tax benefit of $1,295 in 2007 and $1,129 in 2006
    
    
    (131,822
    )
    
    
    (106,936
    )Total stockholders equity
    
    
    786,287
    
    
    
    903,404Total liabilities and stockholders equity
    
    $
    10,741,792
    
    
    $
    11,856,424
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DORAL FINANCIAL CORPORATION 
 CONSOLIDATED STATEMENTS OF (LOSS) INCOME
 (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
 (UNAUDITED)
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    

ENDED JUNE 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest income:Loans
    
    $
    86,726
    
    
    $
    128,695
    
    
    $
    176,319
    
    
    $
    266,567Mortgage-backed securities
    
    
    21,085
    
    
    
    48,801
    
    
    
    43,325
    
    
    
    99,996Interest-only strips (IOs)
    
    
    1,395
    
    
    
    1,494
    
    
    
    2,889
    
    
    
    3,325Investment securities
    
    
    27,074
    
    
    
    29,767
    
    
    
    54,886
    
    
    
    59,868Other interest-earning assets
    
    
    16,963
    
    
    
    13,919
    
    
    
    33,072
    
    
    
    26,359Total interest income
    
    
    153,243
    
    
    
    222,676
    
    
    
    310,491
    
    
    
    456,115Interest expense:Deposits
    
    
    44,105
    
    
    
    37,507
    
    
    
    86,893
    
    
    
    70,215Securities sold under agreements to repurchase
    
    
    38,676
    
    
    
    62,983
    
    
    
    78,312
    
    
    
    125,212Advances from FHLB
    
    
    13,036
    
    
    
    11,409
    
    
    
    26,644
    
    
    
    21,787Loans payable
    
    
    7,306
    
    
    
    40,622
    
    
    
    14,934
    
    
    
    95,689Notes payable
    
    
    15,491
    
    
    
    14,712
    
    
    
    30,915
    
    
    
    29,153Total interest expense
    
    
    118,614
    
    
    
    167,233
    
    
    
    237,698
    
    
    
    342,056Net interest income
    
    
    34,629
    
    
    
    55,443
    
    
    
    72,793
    
    
    
    114,059Provision for loan and lease losses
    
    
    19,322
    
    
    
    5,872
    
    
    
    25,311
    
    
    
    11,045Net interest income after provision for loan and lease losses
    
    
    15,307
    
    
    
    49,571
    
    
    
    47,482
    
    
    
    103,014Non-interest income (loss):Net gain (loss) on mortgage loan sales and fees
    
    
    1,521
    
    
    
    (26,841
    )
    
    
    984
    
    
    
    (41,534
    )Net gain (loss) on securities held for trading, including gains
and losses on the fair value of IOs
    
    
    5,891
    
    
    
    (7,554
    )
    
    
    3,913
    
    
    
    (17,501
    )Net (loss) gain on sale of investment securities
    
    
    (74
    )
    
    
    
    
    
    
    (342
    )
    
    
    63Servicing income (net of mark-to-market adjustment for 2007,
and net of amortization and impairment/recovery for 2006)
    
    
    9,383
    
    
    
    1,413
    
    
    
    15,383
    
    
    
    6,563Commissions, fees and other income
    
    
    8,176
    
    
    
    11,512
    
    
    
    16,587
    
    
    
    21,246Total non-interest income (loss)
    
    
    24,897
    
    
    
    (21,470
    )
    
    
    36,525
    
    
    
    (31,163
    )Non-interest expenses:Compensation and benefits
    
    
    29,587
    
    
    
    23,034
    
    
    
    54,970
    
    
    
    42,625Taxes, other than payroll and income taxes
    
    
    3,437
    
    
    
    3,264
    
    
    
    6,284
    
    
    
    6,572Advertising
    
    
    2,568
    
    
    
    3,226
    
    
    
    3,930
    
    
    
    5,821Professional services
    
    
    18,613
    
    
    
    16,227
    
    
    
    39,234
    
    
    
    33,378Communication and information systems
    
    
    4,996
    
    
    
    4,328
    
    
    
    9,026
    
    
    
    9,555Occupancy and other office expenses
    
    
    6,451
    
    
    
    6,789
    
    
    
    12,750
    
    
    
    13,944Depreciation and amortization
    
    
    4,427
    
    
    
    5,925
    
    
    
    9,478
    
    
    
    11,628Other
    
    
    6,540
    
    
    
    6,028
    
    
    
    16,165
    
    
    
    11,072Total non-interest expenses
    
    
    76,619
    
    
    
    68,821
    
    
    
    151,837
    
    
    
    134,595Loss before income taxes
    
    
    (36,415
    )
    
    
    (40,720
    )
    
    
    (67,830
    )
    
    
    (62,744
    )Income tax
(expense) benefit
    
    
    (1,063
    )
    
    
    (10,205
    )
    
    
    (6,957
    )
    
    
    28,912Net loss
    
    $
    (37,478
    )
    
    $
    (50,925
    )
    
    $
    (74,787
    )
    
    $
    (33,832
    )Net loss attributable to common shareholders
    
    $
    (45,803
    )
    
    $
    (59,250
    )
    
    $
    (91,437
    )
    
    $
    (50,482
    )Net loss per common share:Basic
    
    $
    (0.42
    )
    
    $
    (0.55
    )
    
    $
    (0.85
    )
    
    $
    (0.47
    )Diluted
    
    $
    (0.42
    )
    
    $
    (0.55
    )
    
    $
    (0.85
    )
    
    $
    (0.47
    )Dividends per common share
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.08
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 (IN THOUSANDS)
 (UNAUDITED)
 SIX MONTH PERIODENDED JUNE 30,2007
    
    
    2006PREFERRED STOCK
    
    $
    573,250
    
    
    $
    573,250COMMON STOCK:Balance at beginning of period
    
    
    107,948
    
    
    
    107,930Shares issued under stock option plan
    
    
    
    
    
    
    18107,948
    
    
    
    107,948ADDITIONAL PAID-IN CAPITAL:Balance at beginning of period
    
    
    166,495
    
    
    
    165,609Common shares issued under stock option plan
    
    
    
    
    
    
    77Stock-based compensation recognized
    
    
    660
    
    
    
    310Balance at end of period
    
    
    167,155
    
    
    
    165,996LEGAL SURPLUS
    
    
    23,596
    
    
    
    23,596RETAINED EARNINGS:Balance at beginning of period
    
    
    139,051
    
    
    
    404,885Net loss
    
    
    (74,787
    )
    
    
    (33,832
    )Cumulative effect of accounting change
(adoption of SFAS No. 156)
    
    
    926
    
    
    
    Cumulative
effect of accounting change (adoption of FIN 48)
    
    
    (2,380
    )Cash dividends declared on common stock
    
    
    
    
    
    
    (8,634
    )Cash dividends declared on preferred stock
    
    
    (16,650
    )
    
    
    (16,650
    )Balance at end of period
    
    
    46,160
    
    
    
    345,769ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF
TAX:Balance at beginning of period
    
    
    (106,936
    )
    
    
    (125,461
    )Other comprehensive loss, net of deferred tax
    
    
    (24,886
    )
    
    
    (125,169
    )Balance at end of period
    
    
    (131,822
    )
    
    
    (250,630
    )Total stockholders equity
    
    $
    786,287
    
    
    $
    965,929
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 (IN THOUSANDS)
 (UNAUDITED)
 QUARTER ENDED
    
    
    SIX MONTH PERIOD ENDEDJUNE 30,
    
    
    JUNE 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (37,478
    )
    
    $
    (50,925
    )
    
    $
    (74,787
    )
    
    $
    (33,832
    )Other comprehensive loss, before tax:Unrealized losses on securities arising during the period
    
    
    (35,198
    )
    
    
    (67,002
    )
    
    
    (25,416
    )
    
    
    (130,845
    )Amortization of unrealized loss on securities reclassified to held to
maturity
    
    
    11
    
    
    
    11
    
    
    
    22
    
    
    
    22Reclassification of realized losses (gains) included in net income
    
    
    74
    
    
    
    
    
    
    
    342
    
    
    
    (63
    )Other comprehensive loss, before tax
    
    
    (35,113
    )
    
    
    (66,991
    )
    
    
    (25,052
    )
    
    
    (130,886
    )Income tax benefit related to items of other comprehensive loss
    
    
    449
    
    
    
    2,910
    
    
    
    166
    
    
    
    5,717Other comprehensive loss
    
    
    (34,664
    )
    
    
    (64,081
    )
    
    
    (24,886
    )
    
    
    (125,169
    )Comprehensive loss, net of tax
    
    $
    (72,142
    )
    
    $
    (115,006
    )
    
    $
    (99,673
    )
    
    $
    (159,001
    )
  7




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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (UNAUDITED)
 SIX MONTH PERIOD ENDEDJUNE 30,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (74,787
    )
    
    $
    (33,832
    )Adjustments to reconcile net (loss) income to net cash used in operating activities:Stock-based compensation
    
    
    660
    
    
    
    310Depreciation and amortization
    
    
    9,478
    
    
    
    11,628Mark-to-market adjustment (2007) and amortization and impairment (2006) of servicing assets
    
    
    6,280
    
    
    
    13,051Deferred tax expense (benefit)
    
    
    5,088
    
    
    
    (37,954
    )Provision for loan and lease losses
    
    
    25,311
    
    
    
    11,045Amortization of premium (accretion of discount) on loans, investment securities and debt
    
    
    (3,888
    )
    
    
    2,900Unrealized loss on loans held for sale
    
    
    2,008
    
    
    
    34,857Net (increase) decrease on loans held for sale
    
    
    (158,017
    )
    
    
    2,172,584Loss (gain) on sale of securities
    
    
    4,675
    
    
    
    (3,476
    )Unrealized loss on trading securities
    
    
    3,751
    
    
    
    3,439Decrease on securities held for trading
    
    
    138,327
    
    
    
    200,884Amortization and net (gain) loss in the fair value of IOs
    
    
    171
    
    
    
    55,667Decrease (increase) on derivative instruments
    
    
    8,551
    
    
    
    (20,145
    )Decrease (increase) in receivables and mortgage servicing advances
    
    
    5,139
    
    
    
    (39,199
    )Decrease in accrued interest receivable
    
    
    6,816
    
    
    
    11,553(Increase) decrease in other assets
    
    
    (29,486
    )
    
    
    14,170Decrease in accrued expenses and other liabilities
    
    
    (15,185
    )
    
    
    (18,616
    )Total adjustments
    
    
    9,679
    
    
    
    2,412,698Net cash (used in) provided by operating activities
    
    
    (65,108
    )
    
    
    2,378,866Cash flows from investing activities:Purchases of securities available for sale
    
    
    
    
    
    
    (46,023
    )Principal repayment and sales of securities available for sale
    
    
    446,459
    
    
    
    537,925Purchases of securities held to maturity
    
    
    
    
    
    
    (5,000
    )Principal repayment and maturities of securities held to maturity
    
    
    166,099
    
    
    
    24,036Decrease (increase) in FHLB stock
    
    
    6,094
    
    
    
    (4,718
    )Net decrease (increase) of loans receivable
    
    
    147,928
    
    
    
    (186,183
    )Proceeds from sale of servicing assets
    
    
    7,000
    
    
    
    Purchases of servicing assets
    
    
    
    
    
    
    (216
    )Purchases of premises and equipment
    
    
    (2,799
    )
    
    
    (4,646
    )Proceeds from sales of real estate held for sale
    
    
    3,615
    
    
    
    8,489Net cash provided by investing activities
    
    
    774,396
    
    
    
    323,664Cash flows from financing activities:Decrease in deposits
    
    
    (354,174
    )
    
    
    (27,195
    )Decrease in securities sold under agreements to repurchase
    
    
    (568,759
    )
    
    
    (504,427
    )Proceeds from advances from FHLB
    
    
    190,000
    
    
    
    100,000Repayment of advances from FHLB
    
    
    (240,000
    )
    
    
    Repayment of secured borrowings
    
    
    (19,995
    )
    
    
    (2,645,381
    )Repayment of notes payable
    
    
    (5,181
    )
    
    
    (75,375
    )Payment of consent solicitation to bondholders
    
    
    
    
    
    
    (1,297
    )Issuance of common stock, net
    
    
    
    
    
    
    95Dividends paid
    
    
    (16,650
    )
    
    
    (25,284
    )Net cash used in financing activities
    
    
    (1,014,759
    )
    
    
    (3,178,864
    )Net decrease in cash and cash equivalents
    
    $
    (305,471
    )
    
    $
    (476,334
    )Cash and cash equivalents at beginning of period
    
    
    1,145,861
    
    
    
    1,546,502Cash and cash equivalents at the end of period
    
    $
    840,390
    
    
    $
    1,070,168Cash and cash equivalents includes:Cash and due from banks
    
    $
    119,104
    
    
    $
    211,174Money market investments
    
    
    721,286
    
    
    
    858,994$
    840,390
    
    
    $
    1,070,168Supplemental schedule of non-cash activities:Loan securitizations
    
    $
    111,948
    
    
    $
    135,281Reclassification of securities held to maturity to held for trading in connection with the
agreement to sell certain assets of Doral Bank NY
    
    $
    91,045
    
    
    $
    Reclassification of loans receivable to loans held for sale in connection with
the agreement to sell certain assets of Doral Bank NY
    
    $
    205,629
    
    
    $
    Reclassification of premises and equipment to assets to be disposed on sale
    
    $
    22,457
    
    
    $
    Loans foreclosed
    
    $
    8,575
    
    
    $
    14,473Reclassification of mortgage loans held for sale to loans receivable
    
    $
    1,340,833
    
    
    $
    876,240Capitalization of servicing assets
    
    $
    2,546
    
    
    $
    46,862Remeasurement of income taxes payable upon adoption of FIN 48
    
    $
    2,380
    
    
    $
    Remeasurement of fair value of MSRs upon adoption of SFAS 156, net of tax
    
    $
    926
    
    
    $
    Supplemental information for cash flows:Cash used to pay interest
    
    $
    237,279
    
    
    $
    346,182Cash used to pay income taxes
    
    $
    2,587
    
    
    $
    1,245
  8




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 a.
    
    On July 19, 2007, Doral Financial Corporation (Doral Financial) announced that it had
closed the sale of 968,263,968 shares of its common stock, $0.01 par value per share, to Doral
Holdings Delaware, LLC (Doral Holdings), a newly formed entity in which Bear Stearns
Merchant Banking and other investors, including funds managed by Marathon Asset Management,
Perry Capital, the D. E. Shaw group and Tennenbaum Capital Partners, invested. The shares were
sold for an aggregate purchase price of $610 million, or $0.63 per share. Following the
closing of the transaction, Doral Holdings owns approximately 90% of the outstanding common
shares the Company.This transaction and certain other transactions described in
note W below resulted in the significant recapitalization of Doral Financial
and provided Doral Financial with the funds needed to repay its $625 million floating rate
senior notes due July 20, 2007, to settle certain pending litigation related to the restatement
and to pay transaction expenses.On July 20, 2007, Doral Financial announced that it had paid in full its $625 million floating
rate senior notes due July 20, 2007.
 b.
    
    The Consolidated Financial Statements (unaudited) include the accounts of Doral Financial, Doral Mortgage Corporation (Doral Mortgage), SANA Mortgage Corporation
(SANA), Centro Hipotecario de Puerto Rico, Inc., 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.
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, 2006.
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 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, 2006, included in the Companys 2006 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.
 The results of operations for the quarter and six month period ended June 30, 2007 are not
necessarily indicative of the results to be expected for the full year.
 c.
    
    At June 30, 2007, escrow funds and custodial accounts included approximately $111.8 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 $24.3 million
deposited with other banks, which are 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 June 30, 2007.
 9




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 d.
    
    The reconciliation of the numerator and denominator of the basic and diluted
earnings-per-share follows:
 Quarter Ended
    
    
    Six Month Period EndedJune 30,
    
    
    June 30,(Dollars in thousands, except per share amounts)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net Loss:Net loss
    
    $
    (37,478
    )
    
    $
    (50,925
    )
    
    $
    (74,787
    )
    
    $
    (33,832
    )Convertible preferred stock dividend
    
    
    (4,097
    )
    
    
    (4,097
    )
    
    
    (8,194
    )
    
    
    (8,194
    )Nonconvertible preferred stock dividend
    
    
    (4,228
    )
    
    
    (4,228
    )
    
    
    (8,456
    )
    
    
    (8,456
    )Net loss attributable to common shareholders
    
    $
    (45,803
    )
    
    $
    (59,250
    )
    
    $
    (91,437
    )
    
    $
    (50,482
    )Weighted-Average Shares(1):Basic weighted-average number of common shares
outstanding(2)
    
    
    107,948,236
    
    
    
    107,937,752
    
    
    
    107,948,236
    
    
    
    107,934,015Incremental shares issuable upon exercise of stock options(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted weighted-average number of common shares outstanding
    
    
    107,948,236
    
    
    
    107,937,752
    
    
    
    107,948,236
    
    
    
    107,934,015Net Loss per Common Share:Basic
    
    $
    (0.42
    )
    
    $
    (0.55
    )
    
    $
    (0.85
    )
    
    $
    (0.47
    )Diluted
    
    $
    (0.42
    )
    
    $
    (0.55
    )
    
    $
    (0.85
    )
    
    $
    (0.47
    )
 
 (1)
    
    For the quarters and six month periods ended June 30, 2007 and 2006, there were 1,380,000 shares of the Companys 4.75% perpetual cumulative convertible
preferred stock issued in the second half of 2003 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 6.2856 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
$39.77, or $47.72); (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 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, unvested shares of restricted stock and unvested
restricted stock units 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, unvested shares of restricted stock and unvested restricted stock units that result in lower potential shares issued than shares purchased under the
treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per
share. As of June 30, 2007, there were 1,636,200 outstanding stock options that were excluded from the computation of diluted earnings per common share for the
quarter and six month period ended June 30, 2007 because the Company reported a net loss for such periods. Also, for the quarter and six month period ended June
30, 2007 there were excluded 200,000 restricted stock units from the computation of diluted earnings per common share because the Company reported a net loss for
both periods. For the quarter and six month period ended June 30, 2006, there were 50,000 shares of restricted stock and 200,000 restricted stock units that were
excluded from the computation of diluted earnings per common share because the Company reported a net loss for both periods. e.
    
    Employee costs and other expenses are shown in the
Consolidated Statements of (Loss) 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 mortgage loans and are offset against net gains
on mortgage loan sales and fees when the loans are sold or amortized as yield adjustment in
the case of loans receivable.
 10




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Quarter Ended
    
    
    Six Month Period EndedJune 30,
    
    
    June 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Employee costs, gross
    
    $
    31,306
    
    
    $
    30,659
    
    
    $
    58,405
    
    
    $
    60,111Deferred costs pursuant to SFAS 91
    
    
    (1,719
    )
    
    
    (7,625
    )
    
    
    (3,435
    )
    
    
    (17,486
    )Employee cost, net
    
    $
    29,587
    
    
    $
    23,034
    
    
    $
    54,970
    
    
    $
    42,625Other expenses, gross
    
    $
    6,884
    
    
    $
    6,908
    
    
    $
    17,500
    
    
    $
    13,297Deferred costs pursuant to SFAS 91
    
    
    (344
    )
    
    
    (880
    )
    
    
    (1,335
    )
    
    
    (2,225
    )Other expenses, net
    
    $
    6,540
    
    
    $
    6,028
    
    
    $
    16,165
    
    
    $
    11,072
 As of June 30, 2007, the Company had a net deferred origination fee on mortgage loans held
for sale and loans receivable amounting to approximately $144,000 ($5.2 million as of
December 31, 2006) and $11.3 million ($8.7 million as of December 31, 2006), respectively.Decreases in deferred costs are mainly due to decreases in direct loan production
expenditures during the quarter and six month period ended June 30, 2007, as compared to the
corresponding 2006 periods. Amounts are further reduced by lower level of success loan
production ratios.The Company defers the expensing of disbursements that are directly related and incremental
to stock and debt issuance. For the six month period ended June 30, 2007, the Company
deferred $17.4 million of disbursements related to the recapitalization process disclosed
below under Subsequent Events  Recapitalization Process. These disbursements will be
accounted for as a reduction of the proceeds of issuance at the time of the consummation of
the transaction.f.
    
    Segment informationThe Company operates in four reportable segments identified by line of business: mortgage
banking activities, banking (including thrift operations), institutional securities
operations and insurance agency activities. 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 decided to reduce the operations of Doral Securities and sold
substantially all of Doral Securities investment securities. Doral Securitiess operations
are currently limited to acting as a co-investment manager to a local fixed-income
investment company. The Company is currently considering opportunities for this business
unit within its community banking strategy. Also, during 2006, the Company decided to
consolidate all of its mortgage originations under a single Doral Mortgage brand, thus
eliminating the mortgage banking operations of Sana Mortgage, Centro Hipotecario and HF
Mortgage Bankers.The following tables present net interest income (loss), non-interest income (loss), net
(loss) income and identifiable assets for each of the Companys reportable segments for the
periods presented, as well as for the Companys Puerto Rico and mainland U.S. operations for
the periods presented.
 11




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Mortgage
    
    
    
    
    
    
    Institutional
    
    
    Insurance
    
    
    Intersegment(In thousands)
    
    Banking
    
    
    Banking
    
    
    Securities
    
    
    Agency
    
    
    Eliminations*
    
    
    TotalsQUARTER ENDED JUNE 30, 2007Net interest (loss) income
    
    $
    (5,965
    )
    
    
    39,714
    
    
    
    
    
    
    
    
    
    
    
    880
    
    
    $
    34,629Non-interest income (loss)
    
    $
    14,029
    
    
    
    9,920
    
    
    
    144
    
    
    
    2,552
    
    
    
    (1,748
    )
    
    $
    24,897Net (loss) income
    
    $
    (45,528
    )
    
    
    7,340
    
    
    
    55
    
    
    
    1,108
    
    
    
    (453
    )
    
    $
    (37,478
    )Identifiable assets
    
    $
    2,301,557
    
    
    
    8,674,032
    
    
    
    2,473
    
    
    
    23,890
    
    
    
    (260,160
    )
    
    $
    10,741,792QUARTER ENDED JUNE 30, 2006Net interest income
    
    $
    2,754
    
    
    
    51,332
    
    
    
    222
    
    
    
    
    
    
    
    1,135
    
    
    $
    55,443Non-interest (loss) income
    
    $
    (22,793
    )
    
    
    1,574
    
    
    
    (969
    )
    
    
    2,058
    
    
    
    (1,340
    )
    
    $
    (21,470
    )Net (loss) income
    
    $
    (69,108
    )
    
    
    17,736
    
    
    
    (954
    )
    
    
    1,022
    
    
    
    379
    
    
    $
    (50,925
    )Identifiable assets
    
    $
    2,982,746
    
    
    
    11,256,028
    
    
    
    18,011
    
    
    
    19,623
    
    
    
    (330,443
    )
    
    $
    13,945,965
 Mortgage
    
    
    
    
    
    
    Institutional
    
    
    Insurance
    
    
    Intersegment(In thousands)
    
    Banking
    
    
    Banking
    
    
    Securities
    
    
    Agency
    
    
    Eliminations*
    
    
    TotalsSIX MONTH PERIOD ENDED JUNE 30, 2007Net interest (loss) income
    
    $
    (10,307
    )
    
    
    80,474
    
    
    
    
    
    
    
    
    
    
    
    2,626
    
    
    $
    72,793Non-interest income (loss)
    
    $
    27,607
    
    
    
    7,491
    
    
    
    288
    
    
    
    5,112
    
    
    
    (3,973
    )
    
    $
    36,525Net (loss) income
    
    $
    (89,181
    )
    
    
    12,511
    
    
    
    103
    
    
    
    2,292
    
    
    
    (512
    )
    
    $
    (74,787
    )Identifiable assets
    
    $
    2,301,557
    
    
    
    8,674,032
    
    
    
    2,473
    
    
    
    23,890
    
    
    
    (260,160
    )
    
    $
    10,741,792SIX MONTH PERIOD ENDED JUNE 30, 2006Net interest income
    
    $
    7,716
    
    
    
    103,676
    
    
    
    587
    
    
    
    
    
    
    
    2,080
    
    
    $
    114,059Non-interest (loss) income
    
    $
    (34,151
    )
    
    
    2,314
    
    
    
    (607
    )
    
    
    4,765
    
    
    
    (3,484
    )
    
    $
    (31,163
    )Net (loss) income
    
    $
    (69,486
    )
    
    
    33,818
    
    
    
    (377
    )
    
    
    2,415
    
    
    
    (202
    )
    
    $
    (33,832
    )Identifiable assets
    
    $
    2,982,746
    
    
    
    11,256,028
    
    
    
    18,011
    
    
    
    19,623
    
    
    
    (330,443
    )
    
    $
    13,945,965
 
 *
    
    The intersegment eliminations in the above table include servicing fees paid by the
banking subsidiaries to the parent company recognized as a reduction of 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
headquarters facilities. Assets include internal funding and investment in
subsidiaries accounted for at cost. (In thousands)
    
    Puerto Rico
    
    
    Mainland US
    
    
    Eliminations
    
    
    TotalsQUARTER ENDED JUNE 30, 2007Net interest income
    
    $
    29,894
    
    
    
    4,701
    
    
    
    34
    
    
    $
    34,629Non-interest income (loss)
    
    $
    28,349
    
    
    
    (3,349
    )
    
    
    (103
    )
    
    $
    24,897Net (loss) income
    
    $
    (36,118
    )
    
    
    (1,364
    )
    
    
    4
    
    
    $
    (37,478
    )Identifiable assets
    
    $
    10,204,592
    
    
    
    623,164
    
    
    
    (85,964
    )
    
    $
    10,741,792
 12




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (In thousands)
    
    Puerto Rico
    
    
    Mainland US
    
    
    Eliminations
    
    
    TotalsQUARTER ENDED JUNE 30, 2006Net interest income
    
    $
    49,473
    
    
    
    5,940
    
    
    
    30
    
    
    $
    55,443Non-interest (loss) income
    
    $
    (21,683
    )
    
    
    315
    
    
    
    (102
    )
    
    $
    (21,470
    )Net (loss) income
    
    $
    (52,132
    )
    
    
    1,205
    
    
    
    2
    
    
    $
    (50,925
    )Identifiable assets
    
    $
    13,283,345
    
    
    
    714,195
    
    
    
    (51,575
    )
    
    $
    13,945,965
 (In thousands)
    
    Puerto Rico
    
    
    Mainland US
    
    
    Eliminations
    
    
    TotalsSIX MONTH PERIOD ENDED JUNE 30, 2007Net interest income
    
    $
    62,994
    
    
    
    9,737
    
    
    
    62
    
    
    $
    72,793Non-interest income (loss)
    
    $
    45,331
    
    
    
    (8,610
    )
    
    
    (196
    )
    
    $
    36,525Net (loss) income
    
    $
    (71,244
    )
    
    
    (3,546
    )
    
    
    3
    
    
    $
    (74,787
    )Identifiable assets
    
    $
    10,204,592
    
    
    
    623,164
    
    
    
    (85,964
    )
    
    $
    10,741,792SIX MONTH PERIOD ENDED JUNE 30, 2006Net interest income
    
    $
    102,214
    
    
    
    11,791
    
    
    
    54
    
    
    $
    114,059Non-interest (loss) income
    
    $
    (31,512
    )
    
    
    559
    
    
    
    (210
    )
    
    $
    (31,163
    )Net (loss) income
    
    $
    (36,310
    )
    
    
    2,479
    
    
    
    (1
    )
    
    $
    (33,832
    )Identifiable assets
    
    $
    13,283,345
    
    
    
    714,195
    
    
    
    (51,575
    )
    
    $
    13,945,965
 13




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Mortgage(In thousands)
    
    Banking
    
    
    BankingQUARTER ENDEDJUNE 30, 2007Net gain (loss) on mortgage loan sales and fees
    
    $
    2,823
    
    
    $
    (1,317
    )Investment activities gain
    
    
    93
    
    
    
    5,725Servicing income
    
    
    10,698
    
    
    
    27Commissions, fees and other income
    
    
    415
    
    
    
    5,485Total non-interest income
    
    $
    14,029
    
    
    $
    9,920
 QUARTER ENDEDJUNE 30, 2006Net loss on mortgage loan sales and fees
    
    $
    (17,787
    )
    
    $
    (9,042
    )Investment activities (loss) gain
    
    
    (11,311
    )
    
    
    4,687Servicing income
    
    
    2,604
    
    
    
    42Commissions, fees and other income
    
    
    3,701
    
    
    
    5,887Total non-interest (loss) income
    
    $
    (22,793
    )
    
    $
    1,574
 Mortgage(In thousands)
    
    Banking
    
    
    BankingSIX MONTH PERIOD ENDEDJUNE 30, 2007Net gain (loss) on mortgage loan sales and fees
    
    $
    4,993
    
    
    $
    (3,494
    )Investment activities gain (loss)
    
    
    3,760
    
    
    
    (274
    )Servicing income
    
    
    18,030
    
    
    
    56Commissions, fees and other income
    
    
    824
    
    
    
    11,203Total non-interest income
    
    $
    27,607
    
    
    $
    7,491
 SIX MONTH PERIOD ENDEDJUNE 30, 2006Net loss on mortgage loan sales and fees
    
    $
    (19,241
    )
    
    $
    (21,747
    )Investment activities (loss) gain
    
    
    (27,799
    )
    
    
    11,151Servicing income
    
    
    8,789
    
    
    
    49Commissions, fees and other income
    
    
    4,100
    
    
    
    12,861Total non-interest (loss) income
    
    $
    (34,151
    )
    
    $
    2,314
  14




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 g.
    
    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 and held to maturity are
shown below by category.
 1.
    
    The following table summarizes Doral Financials holdings of securities held
for trading as of June 30, 2007 and December 31, 2006.
 SECURITIES HELD FOR TRADING
    
    JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2007
    
    
    2006Mortgage-backed securities:GNMA exempt
    
    $
    35,972
    
    
    $
    52,969GNMA taxable
    
    
    11,971
    
    
    
    19,374CMO certificates
    
    
    21,175
    
    
    
    24,888FHLMC and FNMA
    
    
    8,855
    
    
    
    9,343Variable interest-only strips
    
    
    48,719
    
    
    
    48,864Fixed interest-only strips
    
    
    1,036
    
    
    
    1,062FHLMC Notes
    
    
    47,755
    
    
    
    FHLMC Zero Coupon
    
    
    37,428
    
    
    
    Derivatives(1)
    
    
    18,731
    
    
    
    27,282Other
    
    
    23
    
    
    
    23Total
    
    $
    231,665
    
    
    $
    183,805
 
 (1)
    
    Doral Financial uses derivatives to manage its exposure to interest rate risk caused by
changes in interest rates. Derivatives include interest rate swaps and forward contracts. Doral
Financials general policy is to account for derivatives on a marked-to-market basis with gains or
losses charged to operations as they occur. The fair value of derivatives is generally reported
net by counterparty, provided that a legally enforceable master netting agreement exists.
Derivatives 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 totaled $2.2
billion as of June 30, 2007 and $5.1 billion as of December 31, 2006. Notional amounts indicate
the volume of derivatives activity, but do not represent Doral Financials exposure to market or
credit risk. On March 15, 2007, Doral Bank NY, Doral Financials wholly owned New York
City-based thrift subsidiary, entered into a definitive purchase and assumption
agreement with New York Commercial Bank, the commercial bank subsidiary of New York
Community Bancorp, pursuant to which New York Commercial Bank agreed to acquire
Doral Bank NYs 11 existing branches in the New York City metropolitan area and
certain other assets and will assume certain liabilities. Accordingly, during the
first quarter of 2007, Doral Bank NY transferred some securities from the held to
maturity portfolio to its held for trading portfolio and recognized a negative
mark-to-market adjustment against earnings. As of June 30, 2007, the held for
trading portfolio includes approximately $85.2 million in FHLMC Notes and FHLMC Zero
Coupon Notes transferred as a result of their proposal sale of Doral Bank NYs
branch network.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 June 30, 2007 and December 31, 2006.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.
 15




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES AVAILABLE FOR SALE
AS OF JUNE 30, 2007
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    1,124,314
    
    
    $
    343
    
    
    $
    52,148
    
    
    $
    1,072,509
    
    
    
    4.60
    %FHLMC and FNMADue over ten years
    
    
    114,145
    
    
    
    
    
    
    
    8,359
    
    
    
    105,786
    
    
    
    4.67
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    1,975
    
    
    
    
    
    
    
    
    
    
    
    1,975
    
    
    
    5.51
    %FNMA NOTESDue within one year
    
    
    46,005
    
    
    
    
    
    
    
    187
    
    
    
    45,818
    
    
    
    4.60
    %U.S. TREASURYDue from five to ten years
    
    
    758,362
    
    
    
    
    
    
    
    52,055
    
    
    
    706,307
    
    
    
    3.65
    %$
    2,044,801
    
    
    $
    343
    
    
    $
    112,749
    
    
    $
    1,932,395
    
    
    
    4.26
    %
 SECURITIES AVAILABLE FOR SALE
AS OF DECEMBER 31, 2006
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    1,346,927
    
    
    $
    17
    
    
    $
    36,794
    
    
    $
    1,310,150
    
    
    
    4.62
    %FHLMC and FNMADue over ten years
    
    
    217,638
    
    
    
    
    
    
    
    7,331
    
    
    
    210,307
    
    
    
    4.94
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    27,901
    
    
    
    
    
    
    
    404
    
    
    
    27,497
    
    
    
    5.50
    %FNMA NOTESDue from one to five years
    
    
    46,011
    
    
    
    
    
    
    
    300
    
    
    
    45,711
    
    
    
    4.60
    %U.S. TREASURYDue within one year
    
    
    100,032
    
    
    
    
    
    
    
    376
    
    
    
    99,656
    
    
    
    1.97
    %Due from five to ten years
    
    
    761,100
    
    
    
    
    
    
    
    45,735
    
    
    
    715,365
    
    
    
    3.65
    %$
    2,499,609
    
    
    $
    17
    
    
    $
    90,940
    
    
    $
    2,408,686
    
    
    
    4.26
    %
 16




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 3.
    
    The following tables summarize the amortized cost, gross unrealized gains and
losses, approximate market value, weighted-average yield and contractual maturities of
securities held to maturity as of June 30, 2007 and December 31, 2006.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.
 17




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES HELD TO MATURITY
AS OF JUNE 30, 2007
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue from one to five years
    
    $
    493
    
    
    $
    5
    
    
    $
    
    
    
    $
    498
    
    
    
    5.85
    %Due over ten years
    
    
    3,278
    
    
    
    110
    
    
    
    
    
    
    
    3,388
    
    
    
    6.83
    %FHLMC and FNMADue over ten years
    
    
    274,507
    
    
    
    
    
    
    
    6,057
    
    
    
    268,450
    
    
    
    6.05
    %CMO CERTIFICATESDue over ten years
    
    
    7,547
    
    
    
    
    
    
    
    682
    
    
    
    6,865
    
    
    
    5.80
    %DEBT SECURITIESFHLB NOTESDue from one to five years
    
    
    100,596
    
    
    
    
    
    
    
    2,612
    
    
    
    97,984
    
    
    
    4.16
    %Due over ten years
    
    
    273,593
    
    
    
    
    
    
    
    16,697
    
    
    
    256,896
    
    
    
    5.10
    %FHLB ZERO COUPONDue over ten years
    
    
    132,838
    
    
    
    
    
    
    
    7,816
    
    
    
    125,022
    
    
    
    6.50
    %FHLMC ZERO COUPONDue over ten years
    
    
    235,701
    
    
    
    
    
    
    
    8,254
    
    
    
    227,447
    
    
    
    5.83
    %FHLMC and FNMA NOTESDue over ten years
    
    
    99,990
    
    
    
    
    
    
    
    3,386
    
    
    
    96,604
    
    
    
    5.75
    %P.R. HOUSING BANKDue within one year
    
    
    5,000
    
    
    
    2
    
    
    
    
    
    
    
    5,002
    
    
    
    6.00
    %Due over ten years
    
    
    7,235
    
    
    
    66
    
    
    
    25
    
    
    
    7,276
    
    
    
    5.72
    %U.S. TREASURYDue from five to ten years
    
    
    201,111
    
    
    
    
    
    
    
    14,111
    
    
    
    187,000
    
    
    
    3.52
    %Due over ten years
    
    
    471,659
    
    
    
    94
    
    
    
    52,315
    
    
    
    419,438
    
    
    
    4.32
    %OTHERDue within one year
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    5.30
    %Due from one to five years
    
    
    11,925
    
    
    
    
    
    
    
    141
    
    
    
    11,784
    
    
    
    4.47
    %Due over ten years
    
    
    8,000
    
    
    
    270
    
    
    
    115
    
    
    
    8,155
    
    
    
    5.61
    %$
    1,833,498
    
    
    $
    547
    
    
    $
    112,211
    
    
    $
    1,721,834
    
    
    
    5.06
    %
 18




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##### Table of Contents



SECURITIES HELD TO MATURITY
AS OF DECEMBER 31, 2006
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue from one to five years
    
    $
    656
    
    
    $
    9
    
    
    $
    
    
    
    $
    665
    
    
    
    5.99
    %Due over ten years
    
    
    3,592
    
    
    
    127
    
    
    
    
    
    
    
    3,719
    
    
    
    6.85
    %FHLMC and FNMADue over ten years
    
    
    291,905
    
    
    
    2,587
    
    
    
    964
    
    
    
    293,528
    
    
    
    6.05
    %CMO CERTIFICATESDue over ten years
    
    
    8,209
    
    
    
    
    
    
    
    542
    
    
    
    7,667
    
    
    
    5.79
    %DEBT SECURITIESFHLB NOTESDue within one year
    
    
    100,000
    
    
    
    
    
    
    
    271
    
    
    
    99,729
    
    
    
    2.86
    %Due from one to five years
    
    
    100,671
    
    
    
    
    
    
    
    2,327
    
    
    
    98,344
    
    
    
    4.15
    %Due from five to ten years
    
    
    50,000
    
    
    
    
    
    
    
    625
    
    
    
    49,375
    
    
    
    4.13
    %Due over ten years
    
    
    273,594
    
    
    
    
    
    
    
    13,555
    
    
    
    260,039
    
    
    
    5.10
    %FHLB ZERO COUPONDue over ten years
    
    
    128,602
    
    
    
    
    
    
    
    5,221
    
    
    
    123,381
    
    
    
    6.50
    %FHLMC ZERO COUPONDue over ten years
    
    
    269,975
    
    
    
    
    
    
    
    8,831
    
    
    
    261,144
    
    
    
    5.85
    %FHLMC and FNMA NOTESDue over ten years
    
    
    149,989
    
    
    
    
    
    
    
    4,357
    
    
    
    145,632
    
    
    
    5.65
    %P.R. HOUSING BANKDue from one to five years
    
    
    5,000
    
    
    
    11
    
    
    
    
    
    
    
    5,011
    
    
    
    6.00
    %Due over ten years
    
    
    7,235
    
    
    
    
    
    
    
    
    
    
    
    7,235
    
    
    
    5.72
    %U.S. TREASURYDue from five to ten years
    
    
    201,195
    
    
    
    
    
    
    
    12,758
    
    
    
    188,437
    
    
    
    3.52
    %Due over ten years
    
    
    472,364
    
    
    
    1,083
    
    
    
    36,194
    
    
    
    437,253
    
    
    
    4.31
    %OTHERDue within a year
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    5.30
    %Due from one to five years
    
    
    11,925
    
    
    
    
    
    
    
    206
    
    
    
    11,719
    
    
    
    4.47
    %Due over ten years
    
    
    8,000
    
    
    
    449
    
    
    
    
    
    
    
    8,449
    
    
    
    5.61
    %$
    2,082,937
    
    
    $
    4,266
    
    
    $
    85,851
    
    
    $
    2,001,352
    
    
    
    4.96
    %
 h.
    
    The following tables show Doral Financials gross unrealized losses and fair value for
available-for-sale and held-to-maturity investments, aggregated by investment category and
length of time that individual securities have been in a continuous unrealized loss
position, at June 30, 2007 and December 31, 2006.
 19




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##### Table of Contents



SECURITIESAVAILABLE FOR SALE(As of June 30, 2007)
    
    LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(Dollars in thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed SecuritiesGNMA
    
    $
    
    
    
    $
    
    
    
    $
    1,012,403
    
    
    $
    52,148
    
    
    $
    1,012,403
    
    
    $
    52,148FHLMC and FNMA
    
    
    
    
    
    
    
    
    
    
    105,786
    
    
    
    8,359
    
    
    
    105,786
    
    
    
    8,359Debt SecuritiesFNMA Notes
    
    
    
    
    
    
    
    
    
    
    45,818
    
    
    
    187
    
    
    
    45,818
    
    
    
    187U.S. Treasury
    
    
    
    
    
    
    
    
    
    
    706,306
    
    
    
    52,055
    
    
    
    706,307
    
    
    
    52,055$
    
    
    
    $
    
    
    
    $
    1,870,314
    
    
    $
    112,749
    
    
    $
    1,870,314
    
    
    $
    112,749
 SECURITIESAVAILABLE FOR SALE(As of December 31, 2006)
    
    LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(Dollars in thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed SecuritiesGNMA
    
    $
    484
    
    
    $
    15
    
    
    $
    1,309,019
    
    
    $
    36,779
    
    
    $
    1,309,503
    
    
    $
    36,794FHLMC and FNMA
    
    
    
    
    
    
    
    
    
    
    210,307
    
    
    
    7,331
    
    
    
    210,307
    
    
    
    7,331Debt SecuritiesFNMA Notes
    
    
    45,711
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    45,711
    
    
    
    300FHLB Notes
    
    
    
    
    
    
    
    
    
    
    27,497
    
    
    
    404
    
    
    
    27,497
    
    
    
    404U.S. Treasury
    
    
    
    
    
    
    
    
    
    
    815,021
    
    
    
    46,111
    
    
    
    815,021
    
    
    
    46,111$
    46,195
    
    
    $
    315
    
    
    $
    2,361,844
    
    
    $
    90,625
    
    
    $
    2,408,039
    
    
    $
    90,940
   20




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##### Table of Contents



SECURITIESHELD TO MATURITY(As of June 30, 2007)
    
    LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(Dollars in thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed SecuritiesFHLMC and FNMA
    
    $
    231,618
    
    
    $
    4,083
    
    
    $
    36,832
    
    
    $
    1,974
    
    
    $
    268,450
    
    
    $
    6,057CMO Certificates
    
    
    111
    
    
    
    1
    
    
    
    6,754
    
    
    
    681
    
    
    
    6,865
    
    
    
    682Debt SecuritiesFHLB Notes
    
    
    
    
    
    
    
    
    
    
    354,880
    
    
    
    19,309
    
    
    
    354,880
    
    
    
    19,309FHLB Zero Coupon
    
    
    
    
    
    
    
    
    
    
    125,022
    
    
    
    7,816
    
    
    
    125,022
    
    
    
    7,816FHLMC Zero Coupon
    
    
    
    
    
    
    
    
    
    
    227,447
    
    
    
    8,254
    
    
    
    227,447
    
    
    
    8,254FHLMC and FNMA Notes
    
    
    
    
    
    
    
    
    
    
    96,604
    
    
    
    3,386
    
    
    
    96,604
    
    
    
    3,386U.S. Treasury
    
    
    54,665
    
    
    
    1,497
    
    
    
    546,734
    
    
    
    64,929
    
    
    
    601,399
    
    
    
    66,426Other
    
    
    12,820
    
    
    
    180
    
    
    
    6,799
    
    
    
    101
    
    
    
    19,619
    
    
    
    281$
    299,214
    
    
    $
    5,761
    
    
    $
    1,401,072
    
    
    $
    106,450
    
    
    $
    1,700,286
    
    
    $
    112,211
 SECURITIESHELD TO MATURITY(As of December 31, 2006)
    
    LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(Dollars in thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed SecuritiesFHLMC and FNMA
    
    $
    
    
    
    $
    
    
    
    $
    40,143
    
    
    $
    964
    
    
    $
    40,143
    
    
    $
    964CMO Certificates
    
    
    148
    
    
    
    1
    
    
    
    7,519
    
    
    
    541
    
    
    
    7,667
    
    
    
    542Debt SecuritiesFHLB Notes
    
    
    49,375
    
    
    
    625
    
    
    
    458,112
    
    
    
    16,153
    
    
    
    507,487
    
    
    
    16,778FHLB Zero Coupon
    
    
    
    
    
    
    
    
    
    
    123,381
    
    
    
    5,221
    
    
    
    123,381
    
    
    
    5,221FHLMC Zero Coupon
    
    
    
    
    
    
    
    
    
    
    261,144
    
    
    
    8,831
    
    
    
    261,144
    
    
    
    8,831FHLMC and FNMA Notes
    
    
    11,858
    
    
    
    391
    
    
    
    133,774
    
    
    
    3,966
    
    
    
    145,632
    
    
    
    4,357U.S. Treasury
    
    
    214,344
    
    
    
    20,866
    
    
    
    349,195
    
    
    
    28,086
    
    
    
    563,539
    
    
    
    48,952Other
    
    
    4,954
    
    
    
    46
    
    
    
    6,739
    
    
    
    160
    
    
    
    11,693
    
    
    
    206$
    280,679
    
    
    $
    21,929
    
    
    $
    1,380,007
    
    
    $
    63,922
    
    
    $
    1,660,686
    
    
    $
    85,851
 As of June 30, 2007, securities held to maturity included a net unrealized loss of $111.7
million, which represented the difference between fair value and amortized cost. The
comparable amount at December 31, 2006 was a net unrealized loss of $81.6 million. For
the six month period ended of 2007, an increase in interest rates resulted in the increase
of the net unrealized loss position between December 31, 2006 and June 30, 2007.The securities held by the Company are principally Federal Home Loan Bank notes,
mortgage-backed securities, U.S. Treasury and agency securities. Thus, payment on a
substantial portion of these instruments is guaranteed or secured by mortgages, a U.S.
government-sponsored entity or the full faith and credit of the U.S. government and,
therefore, principal and interest on the securities are deemed recoverable. As of June 30,
2007, the Company had the ability and intent to hold the securities until maturity or until
the unrealized losses are recovered. Therefore, no other-than-temporary impairment loss was
recognized.i.
    
    The following table sets forth certain information regarding Doral Financials mortgage
loans held for sale as of the dates indicated:
 
 21




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##### Table of Contents



LOANS HELD FOR SALE(In thousands)
    
    JUNE 30, 2007
    
    
    DECEMBER 31, 2006Conventional single family residential loans
    
    $
    291,587
    
    
    $
    1,371,088FHA/VA loans
    
    
    144,281
    
    
    
    115,225Mortgage loans on residential multifamily
    
    
    18,138
    
    
    
    5,621Commercial non real estate loans
    
    
    102,016
    
    
    
    Consumer loans
    
    
    2,084
    
    
    
    Construction and commercial real estate loans
    
    
    148,243
    
    
    
    277,156Total loans held for sale (1)
    
    $
    706,349
    
    
    $
    1,769,090
 
 (1)
    
    At June 30, 2007 and December 31, 2006, the loans held for
sale portfolio includes $1.9 million and $23.2 million, respectively, related
to interest-only loans.      22




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##### Table of Contents



j.
    
    The following table sets forth certain information regarding Doral Financials loans
receivable as of the dates indicated:
 LOANS RECEIVABLE, NET(Dollars in thousands)
    
    JUNE 30, 2007
    
    
    DECEMBER 31, 2006AMOUNT
    
    
    PERCENT
    
    
    AMOUNT
    
    
    PERCENTConstruction loans(1)
    
    $
    761,685
    
    
    
    17
    %
    
    $
    817,352
    
    
    
    24
    %Residential mortgage loans(2)
    
    
    2,932,207
    
    
    
    66
    %
    
    
    1,785,454
    
    
    
    52
    %Commercial  secured by real estate
    
    
    520,402
    
    
    
    12
    %
    
    
    541,891
    
    
    
    16
    %Consumer  other:Personal loans
    
    
    7,971
    
    
    
    0
    %
    
    
    37,896
    
    
    
    1
    %Auto loans
    
    
    274
    
    
    
    0
    %
    
    
    426
    
    
    
    0
    %Credit cards
    
    
    19,784
    
    
    
    0
    %
    
    
    20,086
    
    
    
    0
    %Overdrawn checking accounts
    
    
    833
    
    
    
    0
    %
    
    
    324
    
    
    
    0
    %Revolving lines of credit
    
    
    55,608
    
    
    
    1
    %
    
    
    28,229
    
    
    
    0
    %Lease financing receivables
    
    
    38,038
    
    
    
    1
    %
    
    
    43,565
    
    
    
    1
    %Commercial non-real estate
    
    
    64,088
    
    
    
    2
    %
    
    
    158,963
    
    
    
    5
    %Loans on savings deposits
    
    
    12,217
    
    
    
    0
    %
    
    
    16,811
    
    
    
    0
    %Land secured
    
    
    40,395
    
    
    
    1
    %
    
    
    42,769
    
    
    
    1
    %Loans receivable, gross(3)
    
    
    4,453,502
    
    
    
    100
    %
    
    
    3,493,766
    
    
    
    100
    %Less:Discount on loans transferred
    
    
    (23,518
    )
    
    
    
    
    
    
    (22,016
    )Unearned interest and deferred
loan fees, net
    
    
    (15,129
    )
    
    
    
    
    
    
    (14,580
    )Allowance for loan and lease losses
    
    
    (85,875
    )
    
    
    
    
    
    
    (67,233
    )(124,522
    )
    
    
    
    
    
    
    (103,829
    )Loans receivable, net
    
    $
    4,328,980
    
    
    
    
    
    
    $
    3,389,937
 
 (1)
    
    Includes $642.0 million and $680.6 million of construction loans for residential
housing projects as of June 30, 2007 and December 31, 2006, respectively. Also includes $119.7 million
and $136.8 million of construction loans for commercial, condominiums and multifamily projects as of June
30, 2007 and December 31, 2006, respectively.(2)
    
    Includes $1.3 billion of loans transferred during the second quarter of 2007, from the
mortgage loans held for sale portfolio.(3)
    
    Includes $59.6 million and $42.6 million of interest-only loans, as of June 30, 2007 and
December 31, 2006, respectively.    23




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##### Table of Contents



QUARTER ENDED
    
    
    SIX MONTH PERIODALLOWANCE FOR LOAN AND LEASE LOSSES
    
    JUNE 30,
    
    
    ENDED JUNE 30,(DOLLARS IN THOUSANDS)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    70,963
    
    
    $
    39,330
    
    
    $
    67,233
    
    
    $
    35,044Provision for loan and lease losses(1)
    
    
    19,322
    
    
    
    5,872
    
    
    
    25,311
    
    
    
    11,045Losses charged to the allowance
    
    
    (4,521
    )
    
    
    (1,151
    )
    
    
    (6,442
    )
    
    
    (2,156
    )Recoveries
    
    
    184
    
    
    
    94
    
    
    
    246
    
    
    
    199Other(2)
    
    
    (73
    )
    
    
    
    
    
    
    (473
    )
    
    
    13Balance at end of period
    
    $
    85,875
    
    
    $
    44,145
    
    
    $
    85,875
    
    
    $
    44,145
 
 (1)
    
    Includes $8.8 million related to the reclassification of $1.3 billion from the mortgage loans held for sale portfolio to the loans receivable
portfolio and $1.0 million related to the repurchased of delinquent loans in connection with recourse obligations.(2)
    
    Amount represents the portion of allowance for loans transferred from loans receivable to loans held for sale,
for the six month period ended June 30, 2007, in connection with the agreement to sell certain assets of Doral Bank NY. k.
    
    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 June 30, 2007, the
outstanding principal balance of the bonds was $49.2 million with fixed interest rates,
ranging from 6.25% to 6.90%, and maturities ranging from December 2007 to December 2029.
Certain series of the bonds are secured by a mortgage on the building and underlying real
property.
 l.
    
    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. The Companys interests that continue to be held (retained interests) are
subject to prepayment and interest rate risks.
   Balance at December 31, 2006
    
    $
    176,367Adjustment upon adoption of SFAS No.156
    
    
    1,517Balance at January 1, 2007
    
    $
    177,884
 24




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##### Table of Contents



The change in servicing assets measured using the fair value method for the quarter and six
month period ended June 30, 2007 was:
 QUARTER ENDED
    
    
    SIX MONTH PERIOD(In thousands)
    
    JUNE 30, 2007
    
    
    ENDED JUNE 30, 2007Balance at beginning of period
    
    $
    173,343
    
    
    $
    177,884Sales of servicing assets(1)
    
    
    (9,581
    )
    
    
    (9,581
    )Capitalization of servicing assets
    
    
    1,362
    
    
    
    2,546Change in fair value
    
    
    (555
    )
    
    
    (6,280
    )Balance at end of period
    
    $
    164,569
    
    
    $
    164,569
 
 (1)
    
    Amount represent MSRs sales related to $693.9 million in principal balance of mortgage loans.  QUARTER ENDED
    
    
    SIX MONTH PERIOD(In thousands)
    
    JUNE 30, 2006
    
    
    ENDED JUNE 30, 2006Balance at beginning of period
    
    $
    154,859
    
    
    $
    156,812Capitalization of servicing assets
    
    
    42,613
    
    
    
    46,862Net servicing assets recognized as
part of the restructured mortgage
loan sale transactions
    
    
    5,985
    
    
    
    5,985Rights purchased
    
    
    
    
    
    
    216Amortization
    
    
    (6,486
    )
    
    
    (12,904
    )Balance before valuation
allowance at end of period
    
    
    196,971
    
    
    
    196,971Valuation allowance for temporary
impairment
    
    
    (6,383
    )
    
    
    (6,383
    )Balance at end of period
    
    $
    190,588
    
    
    $
    190,588Fair Value at June 30, 2006
    
    $
    198,807
    
    
    $
    198,807
 During 2006, impairment charges were recognized through a valuation allowance for each
individual stratum of servicing assets. The valuation allowance was adjusted to reflect the
amount, if any, by which the cost basis of the servicing asset for a given stratum of loans
being serviced exceeds its fair value. Any fair value in excess of the cost basis of the
servicing asset for a given stratum is not recognized. Other-than-temporary impairment, if
any, is recognized as a direct write-down of the servicing asset, and the valuation
allowance is applied to reduce the cost basis of the servicing asset.
 25




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##### Table of Contents



Prior to its adoption of SFAS No. 156, changes in the Companys impairment allowance for
servicing assets were as follows:
 QUARTER ENDED
    
    
    SIX MONTH PERIOD(In thousands)
    
    JUNE 30, 2006
    
    

ENDED JUNE 30, 2006Balance at beginning of period
    
    $
    4,057
    
    
    $
    6,236Temporary impairment charges
    
    
    2,841
    
    
    
    2,841Recoveries
    
    
    (515
    )
    
    
    (2,694
    )Balance at end of period
    
    $
    6,383
    
    
    $
    6,383
   INTEREST-ONLY STRIPS ACTIVITY
    
    QUARTER ENDED
    
    
    SIX MONTH PERIOD(In thousands)
    
    JUNE 30,
    
    
    ENDED JUNE 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    52,617
    
    
    $
    38,702
    
    
    $
    49,926
    
    
    $
    74,034Amortization
    
    
    (2,074
    )
    
    
    (4,076
    )
    
    
    (3,930
    )
    
    
    (12,805
    )Negative IO value eliminated
as part of the mortgage loans
sale transactions
restructured (mortgage loans
repurchased)
    
    
    
    
    
    
    18,190
    
    
    
    
    
    
    
    18,190Negative value of IOs sold
    
    
    
    
    
    
    16,189
    
    
    
    
    
    
    
    16,189Gain (loss) on the IO value
    
    
    (788
    )
    
    
    (16,259
    )
    
    
    3,759
    
    
    
    (42,862
    )Balance at end of period
    
    $
    49,755
    
    
    $
    52,746
    
    
    $
    49,755
    
    
    $
    52,746
   26




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##### Table of Contents



Servicing
    
    
    Interest-(Dollars in thousands)
    
    Assets
    
    
    Only StripsCarrying amount of retained interest
    
    $
    164,569
    
    
    $
    49,755Weighted-average expected life (in years)
    
    
    6.6
    
    
    
    5.5Constant prepayment rate (weighted-average
annual rate)
    
    
    12.61
    %
    
    
    10.64
    %Decrease in fair value due to 10% adverse
change
    
    $
    (5,196
    )
    
    $
    (1,991
    )Decrease in fair value due to 20% adverse
change
    
    $
    (9,988
    )
    
    $
    (3,858
    )Residual cash flow discount rate
(weighted-average annual rate)
    
    
    11.56
    %
    
    
    10.91
    %Decrease in fair value due to 10% adverse
change
    
    $
    (6,325
    )
    
    $
    (1,300
    )Decrease in fair value due to 20% adverse
change
    
    $
    (12,199
    )
    
    $
    (2,532
    )
   27




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##### Table of Contents



(Dollars in thousands)Weighted-averageChange in interest rates
    
    Constant prepayment
    
    expected life
    
    Change in fair(basis points)
    
    rate
    
    (Years)
    
    value of IOs
    
    % Change+200
    
    
    8.54
    %
    
    
    6.3
    
    
    $
    (2,591
    )
    
    
    (5
    )%+100
    
    
    9.24
    %
    
    
    6.0
    
    
    
    (1,029
    )
    
    
    (2
    )%+50
    
    
    9.82
    %
    
    
    5.8
    
    
    
    (347
    )
    
    
    (1
    )%Base
    
    
    10.64
    %
    
    
    5.5
    
    
    
    0
    
    
    
    0
    %-50
    
    
    11.94
    %
    
    
    5.1
    
    
    
    (322
    )
    
    
    (1
    )%-100
    
    
    13.98
    %
    
    
    4.6
    
    
    
    (1,628
    )
    
    
    (3
    )%-200
    
    
    16.82
    %
    
    
    4.0
    
    
    
    (442
    )
    
    
    (1
    )%
 m.
    
    Stock Option and Other Incentive Plans.Effective January 1, 2006, the Company adopted
SFAS No. 123R Share-Based Payment (SFAS 123R), without a material effect on the
Consolidated Financial Statements of the Company, since in 2003 Doral Financial commenced
expensing the fair vale of stock options granted to employees using the modified
prospective method described in SFAS No. 148 Accounting for Stock-Based Compensation 
Transition and Disclosure  an amendment of FASB Statement No. 123. Using this method, the
Company has expensed the fair value of all employee stock options and restricted stock
granted after January 1, 2003, as well as the unvested portions of previously granted stock
options. SFAS 123R requires the Company to estimate the pre-vesting forfeiture rate, for
grants that are forfeited prior to vesting, beginning on the grant date and to true-up
forfeiture estimates through the vesting date so that compensation expense is recognized
only for grants that vest. When unvested grants are forfeited, any compensation expense
previously recognized on the forfeited grants is reversed in the period of the forfeiture.
Accordingly, periodic compensation expense will include adjustments for actual and
estimated pre-vesting forfeitures and changes in the estimated pre-vesting forfeiture rate.
The Company did not change its adjustments for actual and estimated pre-vesting forfeitures
nor its estimated pre-vesting forfeiture rate. The Company did not change its
forfeitures rates during 2006 and has not done so in 2007.Effective April 21, 2004, the Company adopted the Doral Financial Corporation Omnibus
Incentive Plan (the Omnibus Plan). The Omnibus Plan provides for equity-based compensation
incentives (the awards) through the grant of stock options, stock appreciation rights,
restricted stock, restricted stock units and dividend equivalents, as well as cash and
equity-based performance awards. This plan allows the issuance of up to 4,000,000 shares of
common stock subject to adjustments for stock splits, reorganization and other similar
events (as described below), to any employee, including officers and directors who are also
employees of the Company, and 2,025,000 remained available for issuance at December 31,
2006. The Compensation Committee has full authority and absolute discretion to determine
those eligible to receive awards and to establish the terms and conditions of any awards;
however, the Omnibus Plan has various limits and vesting restrictions that apply to
individual and aggregate awards. In case of a stock split, reorganization, merger or other
similar event affecting the common stock, the Compensation Committee, in its discretion,
shall adjust appropriately (a) the aggregate number of shares of common stock available for
awards, (b) the aggregate limitations on the number of shares that may be awarded as a
particular type of award or that may be awarded to any particular participant in any
particular period, and (c) the aggregate number of shares subject to outstanding awards and
the respective exercise prices or base prices applicable to outstanding awards.During the first quarter of 2007, the Companys Compensation Committee awarded 155,000 stock
options with a weighted average grant date fair value of $0.99 per share. The total amount
of stock options awarded during the first quarter of 2007 vests ratably on an annual basis
over a four-year period. No options were awarded during the second quarter of 2007.
 28




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##### Table of Contents



Prior to the Omnibus Plan, from April 16, 1997, to April 20, 2004, the Company offered an
employee stock option plan (the Old Plan). This plan, as amended in 2001, allowed for the
granting of up to 6,750,000 purchase options on shares of the Companys common stock to
employees, including officers and directors who are also employees of the Company. All
options awarded under the Old Plan were issued at market value at the date of the grants,
for terms of ten years and vest ratably on an annual basis over a two-year period from the
grant date. At June 30, 2007, only 20,700 stock options remained outstanding under the Old
Plan.
  QUARTER ENDED JUNE
    
    
    SIX MONTH PERIOD(In thousands)
    
    30, 2007
    
    
    ENDED JUNE 30, 2007Stock-based compensation recognized
    
    $
    340
    
    
    $
    685Stock-based compensation reversed due
to pre-vesting forfeitures
    
    
    (3
    )
    
    
    (25
    )Stock-based compensation recognized, net
    
    $
    337
    
    
    $
    660Unrecognized at June 30
    
    $
    3,823
    
    
    $
    3,823
  SIX MONTH PERIOD ENDEDJUNE 30, 2007Number of
    
    
    Weighted-AverageOptions
    
    
    Exercise PriceBeginning of period
    
    
    1,695,050
    
    
    $
    6.45Options granted
    
    
    155,000
    
    
    
    2.54Options exercised
    
    
    
    
    
    
    Post-vesting cancellations
    
    
    (118,100
    )
    
    
    11.63Pre-vesting cancellations forfeited
    
    
    (95,750
    )
    
    
    4.26End of period
    
    
    1,636,200
    
    
    $
    5.84Exercisable at period end
    
    
    188,450
    
    
    $
    6.53
  Stock Options
    
    
    Restricted StockWeighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageGrant Date
    
    
    
    
    
    
    Grant DateNon-vested Shares
    
    Shares
    
    
    Fair Value
    
    
    Shares
    
    
    Fair ValueNon-vested at December 31, 2006
    
    
    1,573,000
    
    
    $
    2.72
    
    
    
    200,000
    
    
    $
    6.93Granted
    
    
    155,000
    
    
    
    0.99
    
    
    
    
    
    
    
    Vested
    
    
    (184,500
    )
    
    
    2.37
    
    
    
    (50,000
    )
    
    
    6.93Pre-vesting forfeitures
    
    
    (95,750
    )
    
    
    1.41
    
    
    
    
    
    
    
    Non-vested at June 30, 2007
    
    
    1,447,750
    
    
    $
    2.67
    
    
    
    150,000
    
    
    $
    6.93
  29




---



##### Table of Contents



2007Weighted-average exercise price
    
    $
    2.54Stock option estimated fair value
    
    $
    0.64 - $1.30Expected stock option term (years)
    
    
    2.44  7.87Expected volatility
    
    
    41.65% - 42.72
    %Expected dividend yield
    
    
    0
    %Risk-free interest rate
    
    
    4.70% - 5.02
    %
       30




---



##### Table of Contents



n.
    
    The following table summarizes deposit balances:
 JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2007
    
    
    2006Certificates of deposit
    
    $
    2,532,687
    
    
    $
    2,947,892Regular savings
    
    
    410,655
    
    
    
    442,796NOW accounts
    
    
    669,878
    
    
    
    532,885Non interest-bearing deposits
    
    
    283,366
    
    
    
    327,187$
    3,896,586
    
    
    $
    4,250,760
 o.
    
    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 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:
 31




---



##### Table of Contents



(In thousands)
    
    JUNE 30, 
2007
    
    
    DECEMBER 31, 
2006Non-callable repurchase
agreements with maturities
less than or equal to 90
days, at various fixed
rates averaging 5.71% and
5.40% at June 30, 2007 and
December 31, 2006,
respectively.
    
    $
    60,928
    
    
    $
    277,687Non-callable
repurchase agreement with
maturity less than or equal
to 90 days, tied to 3-month
LIBOR adjustable quarterly,
averaging 5.59% at December
31, 2006.
    
    
    
    
    
    
    20,000Non-callable
repurchase agreement with
maturity of less than or
equal to 90 days, tied to
1-month LIBOR adjustable
daily, averaging 8.82% at
June 30, 2007.
    
    
    82,400
    
    
    
    Non-callable
repurchase agreement with
maturity of March 2008, at
a fixed rate of 5.15% at
June 30, 2007.
    
    
    10,000
    
    
    
    Non-callable
repurchase agreements with
maturities ranging from May
2010 to June 2010 (2006 
April 2007 to June 2010),
at various fixed rates
averaging 4.11% and 4.24%
at June 30, 2007 and
December 31, 2006,
respectively.
    
    
    750,000
    
    
    
    846,000Non-callable
repurchase agreements with
maturity of January 2008
(2006  November 2007 to
January 2008), tied to
3-month LIBOR adjustable
quarterly, averaging 5.53%
at June 30, 2007 and
December 31, 2006,
respectively.
    
    
    94,800
    
    
    
    194,800Callable repurchase
agreements with maturities
ranging from March 2009 to
February 2014 (2006  March 2008 to February 2014) at various
fixed rates averaging 5.49%
and 5.19% at June 30, 2007
and December 31, 2006,
respectively.
    
    
    832,478
    
    
    
    960,878Callable repurchase
agreements due on March 22,
2015, at various fixed
rates during non-callable
period averaging 3.22% at
June 30, 2007 and December
31, 2006, callable
beginning on March 22,
2008. Beginning on March
22, 2008, the interest
converts to an inverse
floater (fixed rate minus
3-month LIBOR, subject to a
cap).
    
    
    1,500,000
    
    
    
    1,500,000Callable repurchase
agreements with maturity of
November 24, 2014, tied to
3-month LIBOR adjustable
quarterly, at a rate of
4.62% at December 31,
2006.
    
    
    
    
    
    
    100,000$
    3,330,606
    
    
    $
    3,899,365
 
 32




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##### Table of Contents



(In thousands)
    
    JUNE 30,2007
    
    
    DECEMBER 31, 
2006Non-callable advances with maturities
ranging from September 2007 to November
2011 (2006  January 2007 to October
2011), at various fixed rates averaging
4.89% and 4.85% at June 30, 2007 and
December 31, 2006, respectively.
    
    $
    567,000
    
    
    $
    467,000Non-callable advances due on September
14, 2007, tied to 1-month LIBOR
adjustable monthly (5.33% and 5.36% at
June 30, 2007 and December 31, 2006,
respectively).
    
    
    100,000
    
    
    
    100,000Callable advances with maturities ranging
from July 2009 to March 2012, at various
fixed rates averaging 5.38% and 4.58% at
June 30, 2007 and December 31, 2006,
respectively, callable at various dates
beginning on July 2, 2007.
    
    
    317,500
    
    
    
    467,500$
    984,500
    
    
    $
    1,034,500
 At June 30, 2007, the Company had pledged qualified collateral in the form of first mortgage
notes, investments and mortgage-backed securities with a market value of $1.4 billion to
secure the above advances from the FHLB, which generally the counterparty is not permitted
to sell or repledge.q.
    
    At June 30, 2007 and December 31, 2006, loans payable consisted of financing agreements
with local financial institutions secured by mortgage loans.Outstanding loans payable consisted of the following:
 JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2007
    
    
    2006Secured borrowings with local financial
institutions, collateralized by real estate
mortgage loans at variable interest rates
tied to 3-month LIBOR averaging 6.82% and
6.86% at June 30, 2007 and December 31, 2006,
respectively.
    
    $
    397,512
    
    
    $
    415,019Secured borrowings with local financial
institutions, collateralized by real estate
mortgage loans at fixed interest rates
averaging 7.43% and 7.77% at June 30, 2007
and December 31, 2006, respectively.
    
    
    26,936
    
    
    
    29,424$
    424,448
    
    
    $
    444,443
 At June 30, 2007, $197.8 million of loans held for sale and $225.8 million of loans
receivable were pledged to secure financing agreements with local financial institutions. At
December 31, 2006, loans held for sale amounting to $442.2 million were pledged to secure
financing agreements with local financial institutions. Such loans can be repledged by the
counterparty.
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r.
    
    Notes payable consisted of the following:
 (In thousands)
    
    JUNE 30,2007
    
    
    DECEMBER 31,
 2006$625 million floating rate senior notes tied to 3-month LIBOR (6.19% and
6.20% at June 30, 2007 and December 31, 2006, respectively), due on July
20, 2007, paying interest quarterly
    
    $
    624,974
    
    
    $
    624,814$100 million notes, net of discount, bearing interest at 7.65%, due on
March 26, 2016, paying interest monthly
    
    
    98,235
    
    
    
    98,166$30 million notes, net of discount, bearing interest at 7.00%, due on
April 26, 2012, paying interest monthly
    
    
    29,598
    
    
    
    29,564$40 million notes, net of discount, bearing interest at 7.10%, due on
April 26, 2017, paying interest monthly
    
    
    39,296
    
    
    
    39,272$30 million notes, net of discount, bearing interest at 7.15%, due on
April 26, 2022, paying interest monthly
    
    
    29,411
    
    
    
    29,401Senior term notes at a fixed rate of 8.55% due on August 31, 2007,
paying interest semiannually on February 28 and August 31
    
    
    9,000
    
    
    
    9,000Bonds payable secured by mortgage on building at fixed rates ranging
from 6.30% to 6.90%, with maturities ranging from December 2007 to
December 2029 (2006-June 2007 to December 2029), paying interest monthly
    
    
    41,600
    
    
    
    41,995Bonds payable at a fixed rate of 6.25%, with maturities ranging from
December 2010 to December 2029, paying interest monthly
    
    
    7,600
    
    
    
    7,600Zero coupon senior notes (effective rate of 6.50%), due on April 30, 2007
    
    
    
    
    
    
    2,456Note payable with a local financial institutions, collateralized by IOs
at a fixed rate of 7.75%, due on December 25, 2013, paying interest
monthly
    
    
    39,359
    
    
    
    41,645$
    919,073
    
    
    $
    923,913
 On July 20, 2007, the Company repaid in full its $625 million floating rate senior notes at
their stated maturity.s.
    
    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 six
month period ended June 30 2007, the income tax benefit for the Companys U.S. subsidiaries
amounted to approximately $1.2 million and $3.1 million,
respectively, compared to an income tax expense of $0.8 million and $1.8 million, respectively, for the same
periods in 2006.The maximum statutory corporate income tax rate in Puerto Rico was 41.5% for the taxable
year ended December 31, 2006. In August 2005, the Government of Puerto Rico approved an
increase in the maximum
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statutory rate from 39.0% to 41.5% to corporations and partnerships
for a two-year period. The tax rate was applied retroactively effective January 1, 2005 to
all of the Companys subsidiaries doing business in Puerto Rico. The additional tax related
to the income earned from January 1 to the date of enactment of the law was fully recorded
in the third quarter of 2005 net of the impact in the deferred taxes. In addition, in May
2006, the Government of Puerto Rico approved an additional transitory tax applicable only to
the banking industry that raised the maximum statutory tax rate to 43.5% for taxable years
commenced during the calendar year 2006. For taxable years beginning after December 31,
2006, the maximum statutory tax rate is 39%.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. In addition, Doral Financial uses 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 six month period ended June 30, 2007, Doral Financial recognized an
income tax expense of $1.1 million and $7.0 million, respectively, compared to an income tax
expense of $10.2 million for the second quarter of 2006 and an income tax benefit of $28.9
million for the six month period ended June 30, 2006. The
recognition of income tax expense
for the second quarter and first half of 2007 is mostly related to 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 six month period ended June 30,
2007, net operating losses of $43.6 million and $87.2 million, respectively were recognized
at the subsidiary level that, based on the forecasted future taxable income, will not be
used to offset future income and therefore did not result in a tax benefit. Income tax
expense for the second quarter of 2006 and tax benefit for the six month period ended June
30, 2006 were mainly driven by changes in the Companys valuation allowance for its
deferred tax assets resulting from changes in the projections of taxable income used to
evaluate the realization of the tax assets.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. In assessing such projections, Doral Financial
assumed that the $625 million senior notes maturing on July 20, 2007 would be refinanced
with new debt at market rates (assuming the same spread as that applicable to the senior
notes) and that consequently Doral Financial would maintain its current leverage. The
projections do not take into account the consummation of the recapitalization transaction.
Since the transaction was executed in July 2007, its effects on the income projections will
be considered starting in the third quarter of 2007. The Company is in the process of determining the impact that the recapitalization
transaction will have on its deferred tax assets. The companys management, however,
anticipates that it may result in a benefit that could be significant. In the case of the IO
Tax Asset, the realization of the deferred tax asset is dependent upon the existence of, or
generation of, taxable income during the 15 year period in which the amortization deduction
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 projected
earnings attributable to the core business through the projection period. 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 amortization to profitable entities according to Doral Financials
agreements with the Puerto Rico Treasury Department. Negative evidence included the
Companys recorded losses for
the year ended December 31, 2006 and first six months of 2007 and the net operating loss
short carry forward period of 7 years. Negative evidence also included the Risks Factors
described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006.
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In weighing the positive and negative evidence above, Doral Financial considered the
more-likely-than-not criteria contemplated to 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 $477.1 million would not be realized. As a result, the Company
recorded a valuation allowance. At June 30, 2007, the deferred tax asset, net of its
valuation allowance of $233.2 million, amounted to approximately
$243.9 million compared to
$261.6 million at December 31, 2006.Failure to achieve sufficient projected taxable income might affect the ultimate realization
of the net deferred tax asset. Factors that may affect the Companys ability to achieve
sufficient forecasted taxable income include, but are not limited to, the following:
increased competition, a decline in margins and loss of market share.The Company adopted FIN 48 effective January 1, 2007. As a result of the adoption, the
Company recorded an adjustment to retained earnings amounting to $2.4 million. The Company
classifies all interest and penalties related to tax uncertainties as income tax expense.Unrecognized tax benefits as of June 30, 2007 amounted
to $16.5 million. The amount of
unrecognized tax benefits or liabilities may increase or decrease in the future for various
reasons, including changes in the 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. The Company does not anticipate any
significant changes to its unrecognized tax benefits within the next 12 months.The Companys liability for income taxes includes the liability for unrecognized tax
benefits, interest and penalties which relate to tax years still subject to review by taxing
authorities. Audit periods remain open for review until the statute of limitations has
passed. The completion of review or the expiration of the statute of limitations for a given
audit period could result in an adjustment to our liability for income taxes. Any such
adjustment could be material to our results of operations for any given quarterly or annual
period based, in part, upon the results of operations for the given period. As of June 30,
2007, the statute of limitations for the years ended December 2003, 2004, 2005 and 2006
remained open.t.
    
    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 June 30, 2007, the Company had outstanding $5.0 million in
commercial and financial standby letters of credit. The fair value on these commitments is
not significant.Certain of the Companys mortgage loan sale and securitization activities involve transfers
of mortgage loans 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. 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 loans sold (generally from 10% to 15%).
As of June 30, 2007, the Companys records reflected that the outstanding principal balance
of loans sold subject to full or partial recourse was $1.0 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 $838.1 million. However,
the Company is currently conducting a reconciliation of its recourse portfolio with the
records of FNMA and FHLMC. The records of FNMA and FHLMC reflect approximately $317.0
million more in recourse obligations than
those reflected on Doral Financial records. The reconciliation process is still in
initial stages.
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While Doral Financial is still examining these issues, as of June 30,
2007, it believes that it is probably that its actual recourse obligation will
increase beyond that currently reflected in its records. Accordingly, it has recorded a
contingency reserve of $2.0 million during the second quarter of 2007, representing 50% of the
estimated maximum economic losses related to this incremented
recourse obligation. This represents managements best estimate of
the potential exposure. 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 of $10.0 million, as
of June 30, 2007, for estimated losses from such recourse agreements, which is included in
Accrued expenses and other liabilities.During the second quarter of 2007, the company repurchased
$24.3 million of delinquent loans in connection with recourse
agreements. Repurchase resulted in a loss of $2.1 million included as
part of the periods result of operations.u.
    
    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 mortgage-backed securities and loans. At
June 30, 2007, commitments to extend credit amounted to approximately $281.5 million and
commitments to sell mortgage-backed securities and loans amounted to approximately $196.2
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. In the opinion of Doral Financials management, except as
described below, the pending and threatened legal proceedings of which management is aware
will not have a material adverse effect on the financial condition or results of operations
of Doral Financial.Since 2005, Doral Financial became subject to various legal proceedings, including
regulatory and judicial investigations and civil litigation, arising as a result of the
Companys restatement.
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LawsuitsFollowing the announcement of the restatement, Doral Financial and certain directors and former
officers and directors were named as defendants in a number of purported securities class action
lawsuits and shareholder derivative actions resulting from the restatement, which were transferred
for coordinated or consolidated proceedings before Judge Richard Owen in the United States District
Court for the Southern District of New York.On April 27, 2007, Doral Financial entered into an agreement to settle all claims in the
consolidated securities class action and shareholder derivative litigation filed against the
Company following the announcement in April 2005 of the need to restate its financial statements
for the period of 2000 to 2004.Under the terms of the settlement agreement and a concurrent agreement entered into by insurers to
the Company and its current and former directors and officers, the Company and insurers agreed to
pay an aggregate of $129 million, of which insurers agreed to pay approximately $34 million. In
addition, one or more individual defendants agreed to pay an aggregate of $1 million (in cash or
Doral Financial stock). As part of the settlement, the Company also agreed to certain corporate
governance enhancements.In accordance with the terms of the settlement agreement, the Company is expected to fund the
settlement within 30 days from the closing and funding of the recapitalization transaction. All
amounts required to be paid by the Company under the settlement were reserved for and charged
against earnings in 2006.On July 17, 2007, Doral Financial received final court approval of the settlement agreement from
Judge Owen, and Judge Owen entered a final judgment dismissing with prejudice the consolidated
securities class action and shareholder derivative litigation in accordance with the settlement.
In connection with his approval of the settlement agreement, Judge Owen also entered an order
directing the dismissal of a lawsuit captioned Augenbaum v. Doral Financial Corporation, et al.
that had been filed in the Supreme Court of the State of New York (County of New York) challenging
the proposed recapitalization transaction. The time to appeal the final judgment and orders issued
on July 17 expires on August 17, 2007.Other LawsuitsOn June 21, 2005, a lawsuit was filed against Doral Financial and certain of its former officers
and directors in the U.S. District Court for the District of Puerto Rico. Between June 29, 2005 and
August 30, 2005, plaintiff filed three amended complaints. The suit as amended concerns a divorce
settlement entered by a former Chairman and chief executive officer of Doral Financial and also
alleges, among other things, violations of federal securities laws, Racketeer Influenced and
Corrupt Organizations (RICO) Act violations, as well as fraud and breach of contract under Puerto
Rico law, some of which are stated in the alternative as derivative claims on behalf of Doral
Financial.Plaintiff seeks an award of damages, costs, and expenses. All defendants have moved to dismiss the
complaint as amended, and such motions have not been decided.In addition, on October 14, 2005, the Company, a director and certain former officers and
directors of the Company were named as defendants in an action brought by an individual plaintiff
filed in the U.S. District Court for the Southern District of New York, alleging violations of
federal securities laws and various Kentucky state laws similar to those alleged in the securities
class action lawsuits. Plaintiff seeks compensatory damages in the amount of $292,000 for losses
the plaintiff allegedly incurred in connection with Doral Financial securities purchased between
January 19, 2005 and March 18, 2005, as well as unspecified punitive damages, interest, costs and
other expenses. This action is at a very early stage and is pending before Judge Owen.
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Other Legal Matters.On August 24, 2005, the U.S. Attorneys Office for the Southern District of New York served
Doral Financial with a grand jury subpoena seeking the production of certain documents
relating to issues arising from the restatement, including financial statements and
corporate, auditing and accounting records prepared during the period from January 1, 2000
to the date of the subpoena. Doral Financial is cooperating with the U.S. Attorneys Office
in this matter, including by producing documents and other information in response to the
subpoena. Doral Financial cannot predict the outcome of this matter and is unable to
ascertain the ultimate aggregate amount of monetary liability or financial impact to Doral
Financial of this
matter. Accordingly, no reserve has been established in the consolidated financial
statements of Doral Financial.
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Banking Regulatory MattersOn March 17, 2006, Doral Financial and its principal Puerto Rico banking subsidiary, Doral
Bank PR, entered into consent orders with the Federal Reserve, the Federal Deposit Insurance
Corporation (FDIC) and the Office of the Commissioner. The mutually agreed upon orders
require Doral Financial and Doral Bank PR to conduct reviews of their mortgage portfolios,
and to submit plans regarding the maintenance of capital adequacy and liquidity. Doral
Financial and Doral Bank PR have complied with these requirements. No fines or monetary
penalties were assessed against Doral Financial or Doral Bank PR under the orders.
Under the terms of the consent order with the FDIC and the Office of the Commissioner, Doral
Bank PR may not pay a dividend or extend credit to, or enter into certain asset purchase and
sale transactions with Doral Financial or its subsidiaries, without the prior consent of the
FDIC and the Office of the Commissioner.The consent order with the Federal Reserve contains similar restrictions on Doral Financial
from obtaining extensions of credit from, or entering into certain asset purchase and sale
transactions with, Doral Bank PR, without the prior approval of the Federal Reserve. The
consent order also restricts Doral Financial from paying dividends on its capital stock
without the prior written approval of the Federal Reserve. Doral Financial is required to
request permission for the payment of dividends on its common stock and preferred stock not
less than 30 days prior to a proposed dividend declaration date.On August 23, 2006, Doral Bank PR entered into a Memorandum of Understanding (MOU) with
the Office of the Commissioner and the FDIC. The MOU relates to certain weaknesses
identified by the regulators with respect to Doral Bank PRs compliance with the Bank
Secrecy Act (BSA). Doral Bank PR was not required to pay any civil monetary penalties in
connection with this MOU. An MOU is characterized by regulatory authorities as an informal
action that is neither published nor made publicly available by agencies and is used when
circumstances warrant a milder form of action than a formal supervisory action, such as a
formal written agreement of a cease and desist order.Under the terms of the MOU, Doral Bank PR is required to correct certain violations of law,
including certain violations regarding the BSA, within various timeframes. In particular,
the MOU confirms the understanding that Doral Bank PR will operate with adequate management
supervision and board of directors oversight on BSA related matters and will develop, adopt,
and implement a system of internal controls designed to ensure full compliance with the BSA
and certain other statutes, regulations, rules and/or guidelines issued or administered by
the United States Department of Treasurys Office of Foreign Assets Control (OFAC). The
implementation of the MOU will include: revisions of Doral Bank PRs policies, procedures
and processes with respect to independent testing and training programs to ensure full
compliance with the BSA and OFAC; designating a BSA and OFAC officer; amending existing
policies, procedures, and processes relating to internal and external audits to review
compliance with BSA and OFAC provisions as part of routine auditing; and engaging
independent consultants to review account and transaction activity from September 1, 2005
through March 31, 2006 to determine compliance with suspicious activity reporting
requirements and to review the effectiveness of the corrective actions taken in response to
the MOU.On October 3, 2006, Doral Financial was notified by the Federal Reserve that it no longer
satisfies the financial holding company requirements for purposes of the Gramm-Leach-Bliley
Act. Doral Financial has entered into an agreement with the Federal Reserve to correct
certain deficiencies at Doral Bank PR within a 180-day period from receipt of the notice or
such longer period as may be permitted by the Federal Reserve. On May 17, 2007, Doral
Financial requested and received an extension from the Federal Reserve until October 1, 2007
to correct these deficiencies. Doral Financial is taking corrective actions to remain as a
financial holding company and does not believe that the loss of financial holding company
status would have a direct material adverse effect upon Doral Financials consolidated
financial position or results of operations.On October 23, 2006, Doral Bank PR entered into an MOU with the FDIC regarding certain
deficiencies in Doral Bank PRs compliance with the data reporting requirements of the Home
Mortgage Disclosure Act,
and weaknesses in its policies and procedures regarding compliance with the
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National Flood
Insurance Act (as amended). Additionally, in connection with the deficiencies related to the
data reporting requirements of the Home Mortgage Disclosure Act, Doral Bank PR paid $12,000
in civil monetary penalties. Doral Bank PR also paid $125,000 in fines to the FDIC related
to the deficiencies in compliance with the National Flood Insurance Act with respect to
deficiencies in flood insurance coverage, failure to maintain continuous flood insurance
protection and failure to ensure that borrowers obtained flood insurance.Doral Financial and Doral Bank PR have undertaken specific corrective actions to comply with
the requirements of the consent orders and the MOUs, but cannot give assurances that such
actions are sufficient to prevent further enforcement actions by the banking regulatory
agencies. Doral Financial expects that the implementation of these corrective actions will
result in additional compliance-related expenses. However, these expenses are not
anticipated to have a material financial impact on the Company or Doral Bank PR.v.
    
    Recent Accounting PronouncementsAccounting for Certain Hybrid Financial Instruments.On February 16, 2006, the FASB issued
SFAS No. 155, Accounting for Certain Hybrid Financial Instruments an amendment of FASB
Statements No. 133 and 140 (SFAS 155), which resolves issues addressed in Statement 133
Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets (DIG Issue D1). SFAS 155 amends SFAS 133 to simplify the
accounting for certain derivatives embedded in other financial instruments (a hybrid
financial instrument) by permitting fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise required bifurcation,
provided that the entire hybrid financial instrument is accounted for on a fair value basis.
SFAS 155 also establishes the requirement to evaluate interests in securitized financial
assets to identify interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, which replaces the
interim guidance in DIG Issue D1. SFAS 155 amends SFAS 140 to allow a qualifying
special-purpose entity to hold a derivative financial instrument that pertains to beneficial
interests other than another derivative financial instrument. SFAS 155 is effective for all
financial instruments acquired or issued after the beginning of the first fiscal year that
begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an
entitys fiscal year, provided the entity has not yet issued financial statements for any
period of the fiscal year. The adoption of the provisions of SFAS 155 did not have material
impact on the Companys financial statements.Fair Value Measurements. In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS 157). This Statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously concluded in
those accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.The definition of fair value retains the exchange price notion in earlier definitions of
fair value. This Statement clarifies that the exchange price is the price in an orderly
transaction between market participants to sell the asset or transfer the liability in the
principal (or most advantageous) market for the asset or liability. The transaction to sell
the asset or transfer the liability is a hypothetical transaction at the measurement date,
considered from the perspective of a market participant that holds the asset or owes the
liability. Therefore, the definition focuses on the price that would be received to sell the
asset or paid to transfer the liability at the measurement date (an exit price), not the
price that would be paid to acquire the asset or received to assume the liability at the
measurement date (an entry price).This Statement emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Therefore, a fair value measurement should be determined based
on the assumptions that market participants would use in pricing the asset or liability. As
a basis for considering market participant assumptions in fair value measurements, this
Statement establishes a fair value hierarchy that distinguishes between (1) market
participant assumptions developed based on market data obtained from sources independent of
the reporting entity (observable inputs) and (2) the reporting entitys own assumptions
about market participant assumptions developed based on the best information available in
the
circumstances (unobservable inputs). The notion of unobservable inputs is intended to allow
for situations in which there is little, if any, market activity for the asset or liability
at the measurement date. In those situations, the reporting entity need not undertake all
possible efforts to obtain information about market participant assumptions. However, the
reporting entity must not ignore information about market participant assumptions that is
reasonably available without undue cost and effort.
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This Statement expands disclosures about the use of fair value to measure assets and
liabilities in interim and annual periods subsequent to initial recognition. The disclosures
focus on the inputs used to measure fair value and for recurring fair value measurements
using significant unobservable inputs (within Level 3 of the fair value hierarchy), the
effect of the measurements on earnings (or changes in net assets) for the period. This
Statement encourages entities to combine the fair value information disclosed under this
Statement with the fair value information disclosed under other accounting pronouncements,
including FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
where practicable.This Statement is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Earlier application is
encouraged, provided that the reporting entity has not yet issued financial statements for
that fiscal year, including financial statements for an interim period within that fiscal
year. The Company is currently evaluating the effect, if any, of the adoption of this
Statement on its financial statements, commencing on January 1, 2008.Taxes Collected from Customers and Remitted to Governmental Authorities.In June 2006, the
Emerging Issues Tax Force (EITF) reached a consensus on EITF Issue No. 06-03, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That Is, Gross versus Net Presentation) (EITF 06-03). EITF 06-03
provides that the presentation of taxes assessed by a governmental authority that is
directly imposed on a revenue-producing transaction between a seller and a customer on
either a gross basis (included in revenues and costs) or on a net basis (excluded from
revenues) is an accounting policy decision that should be disclosed. The provisions of EITF
06-03 were effective for the Company as of January 1, 2007. The adoption of EITF 06-03
did not have a material impact on the Companys consolidated financial statements.Issuers Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt
Instrument. In November 2006, the FASB ratified the consensus reached by the EITF on EITF
Issue No. 06-7, Issuers Accounting for a Previously Bifurcated Conversion Option in a
Convertible Debt Instrument When the Conversion Option No Longer Meets the Bifurcation
Criteria in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities (EITF 06-07). The consensus provides that a previously bifurcated conversion
option in a convertible debt instrument for which the embedded conversion option no longer
meets the bifurcation criteria in SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133), should be reclassified (at its fair value on the date of
reclassification) to stockholders equity. Any debt discount recognized when the conversion
option was bifurcated from the convertible debt instrument should continue to be amortized.
EITF 06-07 should be applied to all previously bifurcated conversion options in convertible
debt instruments that no longer meet the bifurcation criteria in SFAS 133, in interim or
annual periods beginning after December 15, 2006. As of June 30, 2007 the Company does not
have any convertible debt instruments.SFAS No. 159 Statement of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities.In February 2007, the FASB issued SFAS No. 159,
which provides companies with an option to report selected financial assets and liabilities
at fair value. The statement also establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. It also requires entities to display
the fair value of those assets and liabilities for which the company has chosen to use fair
value on the face of the balance sheet. The new statement does not eliminate disclosure
requirements included in other accounting standards, including requirements for disclosures
about fair value measurements included in FASB Statements No. 157, Fair Value Measurements,
and No. 107, Disclosures about Fair Value of Financial Instruments.SFAS No. 159 is
effective as of the beginning of an entitys first fiscal year beginning after November 15,
2007. Early adoption is permitted as of the beginning of the previous fiscal year provided
that the entity makes that choice in the first 120 days of that fiscal year and also elects
to apply the provisions of SFAS No. 157. Management will evaluate the impact that this
recently issued accounting standard may have on its consolidated financial statements.w.
    
    Subsequent EventsPayment of $625 million Floating Rate Senior Notes due July 20, 2007.On July 20, 2007, Doral
Financial announced that it had paid in full its $625 million floating rate senior notes due
July 20, 2007.
 42




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##### Table of Contents



Recapitalization Process.On July 19, 2007, Doral Financial announced that it had closed the
sale of 968,263,968 shares of its common stock, $0.01 par value per share, to Doral Holdings, a newly formed entity in which Bear Stearns Merchant Banking
and other investors, including funds managed by Marathon Asset Management, Perry Capital, the D.
E. Shaw group and Tennenbaum Capital Partners, invested. The shares were sold for an aggregate
purchase price of $610 million, or $0.63 per share. Following the closing of the transaction,
Doral Holdings owns approximately 90% of the outstanding common shares the Company.In connection with the recapitalization transaction, on July 19, 2007, 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 will be conducted by Doral Mortgage as a wholly owned subsidiary of Doral
Bank PR and Doral Financials servicing business will be operated from Doral Bank PR. In
connection with the transfer, the FDIC and the OCFI approved the distribution of a $155 million
cash dividend from Doral Bank PR to Doral Financial.As part of the restructuring of Doral Financials origination and servicing business, on July
18, 2007, Sana was merged with and into Doral Mortgage and Centro Hipotecario was merged with
and into Doral Financial.In addition, in accordance with the provisions of the stock purchase agreement between Doral
Financial and Doral Holdings, the Board of Directors of Doral Financial took certain actions to
accelerate and terminate all stock options outstanding under the Companys Omnibus Incentive Plan
and 1997 Employee Stock Option Plan effective with the completion of the recapitalization
transaction.On July 27, 2007, Doral Financial also announced that Doral Bank NY had completed the previously
announced sale of its 11 branches in New York City to New York Commercial Bank, the commercial
bank subsidiary of New York Community Bancorp. The transaction resulted in a deposit premium to
Doral Bank NY of approximately $9.8 million. In connection with the transaction, Doral Bank NY
received the authorization from the OTS to distribute a $50 million cash dividend from Doral
Bank NY to Doral Financial, of which $      million was paid on
                , 2007.The transactions described above resulted in the significant recapitalization of Doral Financial
and provided Doral Financial with the funds needed to repay its $625 million floating rate
senior notes due July 20, 2007, to settle certain pending litigation related to the restatement
and to pay transaction expenses.Settlement Agreement.On July 17, 2007, Doral Financial announced that it has received final
court approval from the U.S. District Court for the Southern District of New York of the
settlement agreement to settle all claims in the consolidated securities class action and
shareholder derivative litigation filed against the Company following the announcement in April
2005 of the need to restate its previously issued financial statements.Changes in Board of Directors.In connection with the Doral Holdings transaction, on July 19,
2007, in accordance with the provisions of the stock purchase agreement between the Company and
Doral Holdings, Edgar M. Cullman, Jr., John L. Ernst, Peter A. Hoffman, John B. Hughes, Efraim
Kier, Adolfo Marzol, Manuel Peña-Morros and Harold D. Vicente resigned from their positions as
directors of the Company. Dennis G. Buchert and Glen R. Wakeman will continue to serve as
directors of the Company.In addition, the following persons were elected to serve as directors of the Company:Frank W. Baier. Mr. Baier is a consultant and was formerly the Chief Financial Officer of
Independence Community Bank from 2001 to 2006. Mr. Baier is a CPA, and has a B.S.B.A. in
accounting from Seton Hall University and an M.B.A. from the Leonard N. Stern School of
Business, New York University.David E. King.Mr. King is a senior managing director of Bear Stearns & Co., which he joined in
2001. Mr. King received a B.A. from Rice University, an M.S. from SUNY-Stony Brook, and an
M.B.A. from Stanford Graduate School of Business.Howard M. Levkowitz. Mr. Levkowitz is a Managing Partner and Co-founder of Tennenbaum Capital
Partners, LLC, whose predecessor he joined in 1997. Mr. Levkowitz received B.A. and B.S. degrees
from the University
of Pennsylvania (Wharton School) and a J.D. from the University of Southern California.Michael J. OHanlon. Mr. OHanlon is a Senior Managing Director of Marathon Asset Management.
Prior to his current position, Mr. OHanlon held various positions at Lehman Brothers, including
Head of Global Financial Institutions and Head of Financial Sponsor and Restructuring
Groups/AsiaTokyo. Mr. OHanlon received a B.S. degree from The College of St. Rose and an
M.B.A. from the State University of New York at Albany.
 43




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##### Table of Contents



Ori Uziel. Mr. Uziel is a managing director of Perry Corp., which he joined in 2002. Mr. Uziel
received a B.S. from the University of California, Berkeley and an M.B.A. from the Stanford
Graduate School of Business.Recent Amendments to Doral Financials Restated Certificate of Incorporation.On July 17, 2007,
the stockholders of Doral Financial approved certain amendments to the Companys Restated
Certificate of Incorporation, including:
 
    
    an amendment to increase the number of authorized shares of the Companys
capital stock from 540,000,000 to 1,990,000,000 and the number of authorized shares of the
Companys common stock from 500,000,000 to 1,950,000,000;
    
    an amendment to decrease the par value of the Companys common stock from $1.00
to $.01 per share; and
    
    an amendment to effect a reverse stock split of the Companys outstanding
common stock of 1-for-20 following the issuance to Doral Holdings, together with a
corresponding reduction in the number of authorized shares of the Companys common stock
and capital stock.
 Effectiveness of 1-for-20 Reverse Stock Split.
    Quarter Ended
    
    Six Month PeriodJune 30,
    
    Ended June 30,2007

    
    2006

    
    2007

    
    2006Basic
    
    $
    (8.49
    )

    
    $
    (10.98
    )

    
    $
    (16.94
    )

    
    $
    (9.35
    )Diluted
    
    $
    (8.49
    )

    
    $
    (10.98
    )

    
    $
    (16.94
    )

    
    $
    (9.35
    )
 Sale of Investment Securities
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 INTERNAL CONTROL OVER FINANCIAL REPORTING
   SUBSEQUENT EVENTS
  44




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##### Table of Contents



OVERVIEW OF RESULTS OF OPERATIONS
   
    
    Net loss attributable to common shareholders for the second quarter of 2007
amounted to $45.8 million, or a diluted loss per share of $0.42, compared to net loss
of $59.3 million, or a diluted loss per share of $0.55, for the second quarter of 2006.
    
    Net interest income for the second quarter of 2007 was $34.6 million,
compared to $55.4 million for the same period in 2006. The decrease in net interest
income for 2007, compared to 2006, was related to a decrease in the Companys net
interest margin, coupled with a decrease in the average balance of interest earning assets. Net interest margin decreased from 1.47% in the second quarter
of 2006 to 1.30% in the second quarter of 2007 (see Tables A and C below for information
regarding the Companys net interest income). Average interest-earning assets decreased
from $15.2 billion during the second quarter of 2006 to $10.7 billion for the second
quarter of 2007.
 45




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##### Table of Contents




    
    For the second quarter of 2007, the provision for loan and lease losses was
$19.3 million, compared to $5.9 million for the same period in 2006. The increase in
the provision for loan losses is principally related to an increase of $8.8 million in
the provision of the residential mortgage loan portfolio related to the transfer of
$1.3 billion of loans from the mortgage loans held for sale portfolio to the loans
receivable portfolio. Also, the provision for loan losses reflects an increase in the
commercial non-real estate as a result of deterioration in delinquency trends and
deteriorating economic conditions.
    
    Non-interest income for the second quarter of 2007 was $24.9 million,
compared to a non-interest loss of $21.5 million for the same period in 2006. The
increase in non-interest income during the second quarter of 2007 compared to the same
period in 2006 was primarily driven by a gain on mortgage loan sales and fees, which
amounted to approximately $1.5 million during the second quarter of 2007, compared to
losses of approximately $26.8 million for the second quarter of 2006. The loss during
the second quarter of 2006 was principally attributable to the restructuring of
previously reversed loan transfers. Total loan sales and securitizations for the second
quarter of 2007 amounted to $75.7 million, compared to $3.4 billion for the second
quarter of 2006. Non-interest income for the second quarter of 2007
reflected losses on IO valuation of $788,000, compared to losses of
$16.3 million for the second quarter of 2006.
    
    Non-interest expense for the second quarter of 2007 was $76.6, compared to
$68.8 million for the same period in 2006. The increase in non-interest expense for
the quarter was driven by a $6.5 million increase in compensation and benefits, related
to payments and associated benefit costs related to the implementation of the Companys
new key employee incentive plan and reduced deferred employee costs pursuant SFAS 91
as a result of the reduced volume of mortgage loan originations. Non-interest expense
for the second quarter of 2007 also includes approximately $11.6 million in
professional services principally associated with the Companys business transformation
and recapitalization efforts, as well as continued expenses related to the resolution
of ongoing legacy issues.
    
    For the second quarter of 2007, Doral Financial recognized an
income tax expense of
$1.1 million, compared to $10.2 million for the corresponding
period in 2006. The income tax expense for 2006 is principally related to the
changes in the Companys valuation allowance for its deferred
tax assets resulting from changes in projections used to evaluated
the realization of the tax assets.
    
    During the second quarter of 2007, the Company had other comprehensive loss
of approximately $34.7 million related principally to the negative impact of the
increase in long-term interest rates on the value of the Companys portfolio of
available for sale securities. As of June 30, 2007, the Companys accumulated other
comprehensive loss (net of income tax benefit) reached $131.8 million, compared to
$106.9 million as of December 31, 2006.
    
    Doral Financials loan production for the second quarter of 2007 was $308.1
million, compared to $487.0 million for the comparable period in 2006, a decrease of
approximately 37%. The decrease in Doral Financials loan production is due to a number
of factors, including changes in the underwriting standards, economic conditions in
Puerto Rico, and competition from other financial institutions. The Company
anticipates that, for the foreseeable future, loan production will continue below
historical levels as these new underwriting standards are implemented and new product
offerings are developed.
    
    Total assets as of June 30, 2007 were $10.7 billion, a decrease of 9% compared to
$11.9 billion as of December 31, 2006. The decrease in total assets during the first
half of 2007 was due primarily to a decrease in the Companys securities portfolio of
$684.0 million, which resulted principally from the settlement of the sale of $231
million in available-for-sale securities during the first quarter of 2007. This
transaction was part of the Companys efforts to reduce the high level of interest rate
risk and volatility inherent in its balance sheet. A reduction in loan balances of
$105.1 million due primarily to principal repayments during the first half of 2007,
also contributed to the decline in total assets as well as the decline of money markets
and short term investments.
 CRITICAL ACCOUNTING POLICIES
  47




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##### Table of Contents



Accounting for Uncertainty in Income
Taxes- an Interpretation of FASB Statement 109 Accounting for
Servicing of Financial Assets
 RESULTS OF OPERATIONS FOR THE QUARTERS AND SIX MONTHS PERIOD ENDED JUNE 30, 2007 AND 2006
  NET INTEREST INCOME
    48




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##### Table of Contents




    
    Increased cost of deposits and short-term borrowings. The average cost of
deposits increased by 66 basis points between the second quarter of 2006 and the
second quarter of 2007, and by 79 basis points between the six month period ended
June 30, 2007 and the corresponding period of 2006, while the average cost of
repurchase agreements remained stable, with no change during the second quarter of
2007, compared to the second quarter of 2006, and increasing by 6 basis points for
the six month period ended June 30, 2007, compared to the same period of 2006. The
higher cost of deposits reflects the renewal of maturing certificates of deposits
at higher prevailing rates as well as the competitive retail banking environment in
Puerto Rico.
    
    Increased cost of FHLB Advances and notes payable. FHLB Advances tend to have
short-term maturities and re-price at market rates. The increase in cost on notes
payable reflects the re-pricing of most of the Companys notes payable, which are
floating rate notes indexed to 3-month LIBOR.
    
    The yield on the Companys portfolio of long-term fixed-rate investment
securities and fixed-rate loans, which re-price at a slower rate than the Companys
liabilities. The increase in asset yields was further dampened by an inverted
yield curve, which results in slower increases in marginal rates for longer
maturity fixed-coupon assets.
   49




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##### Table of Contents



TABLE A
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(Dollars in thousands)
 QUARTER ENDED JUNE 30,2007
    
    
    2006AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEBALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    5,100,837
    
    
    $
    86,726
    
    
    
    6.82
    %
    
    $
    7,288,374
    
    
    $
    128,695
    
    
    
    7.08
    %Mortgage-backed securities
    
    
    1,644,535
    
    
    
    21,085
    
    
    
    5.14
    %
    
    
    3,861,107
    
    
    
    48,801
    
    
    
    5.07
    %Interest-only strips
    
    
    51,286
    
    
    
    1,395
    
    
    
    10.91
    %
    
    
    45,849
    
    
    
    1,494
    
    
    
    13.07
    %Investment securities
    
    
    2,463,569
    
    
    
    27,074
    
    
    
    4.41
    %
    
    
    2,785,387
    
    
    
    29,767
    
    
    
    4.29
    %Other interest-earning assets
    
    
    1,407,356
    
    
    
    16,963
    
    
    
    4.83
    %
    
    
    1,184,132
    
    
    
    13,919
    
    
    
    4.71
    %Total interest-earning assets/interest income
    
    
    10,667,583
    
    
    $
    153,243
    
    
    
    5.76
    %
    
    
    15,164,849
    
    
    $
    222,676
    
    
    
    5.89
    %Total non-interest-earning assets
    
    
    743,083
    
    
    
    
    
    
    
    
    
    
    
    1,533,511Total assets
    
    $
    11,410,666
    
    
    
    
    
    
    
    
    
    
    $
    16,698,360LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    4,193,390
    
    
    $
    44,105
    
    
    
    4.22
    %
    
    $
    4,228,946
    
    
    $
    37,507
    
    
    
    3.56
    %Repurchase agreements
    
    
    3,544,376
    
    
    
    38,676
    
    
    
    4.38
    %
    
    
    5,766,150
    
    
    
    62,983
    
    
    
    4.38
    %Advances from the FHLB
    
    
    1,012,522
    
    
    
    13,036
    
    
    
    5.16
    %
    
    
    1,069,500
    
    
    
    11,409
    
    
    
    4.28
    %Loans payable
    
    
    428,689
    
    
    
    7,306
    
    
    
    6.84
    %
    
    
    2,798,749
    
    
    
    40,622
    
    
    
    5.82
    %Notes payable
    
    
    920,739
    
    
    
    15,491
    
    
    
    6.75
    %
    
    
    889,413
    
    
    
    14,712
    
    
    
    6.63
    %Total interest-bearing liabilities/interest expense
    
    
    10,099,716
    
    
    $
    118,614
    
    
    
    4.71
    %
    
    
    14,752,758
    
    
    $
    167,233
    
    
    
    4.55
    %Total non-interest-bearing liabilities
    
    
    492,387
    
    
    
    
    
    
    
    
    
    
    
    940,468Total liabilities
    
    
    10,592,103
    
    
    
    
    
    
    
    
    
    
    
    15,693,226Stockholders equity
    
    
    818,563
    
    
    
    
    
    
    
    
    
    
    
    1,005,134Total liabilities and stockholders equity
    
    $
    11,410,666
    
    
    
    
    
    
    
    
    
    
    $
    16,698,360Net interest-earning assets
    
    $
    567,867
    
    
    
    
    
    
    
    
    
    
    $
    412,091Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    34,629
    
    
    
    
    
    
    
    
    
    
    $
    55,443Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.05
    %
    
    
    
    
    
    
    
    
    
    
    1.34
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.30
    %
    
    
    
    
    
    
    
    
    
    
    1.47
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    105.62
    %
    
    
    
    
    
    
    
    
    
    
    102.79
    %
 
 (1)
    
    Average loan balances include the average balance of non-accruing loans, on which interest income is recognized when collected. Also includes the average balance of GNMA defaulted loans for
which the Company has an unconditional buy-back option.(2)
    
    Interest income on loans includes $0.4 million and $0.7 million for the second quarter of 2007 and 2006, 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. 50




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##### Table of Contents



TABLE B
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(Dollars in thousands)
 SIX MONTH PERIOD ENDED JUNE 30,2007
    
    
    2006AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEBALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    5,131,756
    
    
    $
    176,319
    
    
    
    6.93
    %
    
    $
    7,660,942
    
    
    $
    266,567
    
    
    
    7.02
    %Mortgage-backed securities
    
    
    1,691,402
    
    
    
    43,325
    
    
    
    5.17
    %
    
    
    3,969,735
    
    
    
    99,996
    
    
    
    5.08
    %Interest-only strips
    
    
    51,694
    
    
    
    2,889
    
    
    
    11.27
    %
    
    
    51,420
    
    
    
    3,325
    
    
    
    13.04
    %Investment securities
    
    
    2,524,860
    
    
    
    54,886
    
    
    
    4.38
    %
    
    
    2,879,039
    
    
    
    59,868
    
    
    
    4.19
    %Other interest-earning assets
    
    
    1,326,612
    
    
    
    33,072
    
    
    
    5.03
    %
    
    
    1,167,059
    
    
    
    26,359
    
    
    
    4.55
    %Total interest-earning assets/interest income
    
    
    10,726,324
    
    
    $
    310,491
    
    
    
    5.84
    %
    
    
    15,728,195
    
    
    $
    456,115
    
    
    
    5.85
    %Total non-interest-earning assets
    
    
    745,318
    
    
    
    
    
    
    
    
    
    
    
    1,425,632Total assets
    
    $
    11,471,642
    
    
    
    
    
    
    
    
    
    
    $
    17,153,827LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    4,202,772
    
    
    $
    86,893
    
    
    
    4.17
    %
    
    $
    4,193,112
    
    
    $
    70,215
    
    
    
    3.38
    %Repurchase agreements
    
    
    3,624,225
    
    
    
    78,312
    
    
    
    4.36
    %
    
    
    5,872,291
    
    
    
    125,212
    
    
    
    4.30
    %Advances from the FHLB
    
    
    1,023,450
    
    
    
    26,644
    
    
    
    5.25
    %
    
    
    1,035,798
    
    
    
    21,787
    
    
    
    4.24
    %Loans payable
    
    
    433,908
    
    
    
    14,934
    
    
    
    6.94
    %
    
    
    3,359,374
    
    
    
    95,689
    
    
    
    5.74
    %Notes payable
    
    
    922,116
    
    
    
    30,915
    
    
    
    6.76
    %
    
    
    902,832
    
    
    
    29,153
    
    
    
    6.51
    %Total interest-bearing liabilities/interest expense
    
    
    10,206,471
    
    
    $
    237,698
    
    
    
    4.70
    %
    
    
    15,363,407
    
    
    $
    342,056
    
    
    
    4.49
    %Total non-interest-bearing liabilities
    
    
    427,259
    
    
    
    
    
    
    
    
    
    
    
    731,532Total liabilities
    
    
    10,633,730
    
    
    
    
    
    
    
    
    
    
    
    16,094,939Stockholders equity
    
    
    837,912
    
    
    
    
    
    
    
    
    
    
    
    1,058,888Total liabilities and stockholders equity
    
    $
    11,471,642
    
    
    
    
    
    
    
    
    
    
    $
    17,153,827Net interest-earning assets
    
    $
    519,853
    
    
    
    
    
    
    
    
    
    
    $
    364,788Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    72,793
    
    
    
    
    
    
    
    
    
    
    $
    114,059Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.14
    %
    
    
    
    
    
    
    
    
    
    
    1.36
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.37
    %
    
    
    
    
    
    
    
    
    
    
    1.46
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    105.09
    %
    
    
    
    
    
    
    
    
    
    
    102.37
    %
 
 (1)
    
    Average loan balances include the average balance of non-accruing loans, on which interest income is recognized when collected. Also includes the average balance of GNMA defaulted loans for
which the Company has an unconditional buy-back option.(2)
    
    Interest income on loans includes $1.8 million and $1.8 million for the six month period ended June 30, 2007 and 2006, 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.  51




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##### Table of Contents



TABLE C
NET INTEREST INCOME VARIANCE ANALYSIS
(In thousands)
 QUARTER ENDEDJUNE 30,2007 COMPARED TO 2006INCREASE (DECREASE) DUE TO:VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    (38,659
    )
    
    $
    (3,310
    )
    
    $
    (41,969
    )Mortgage-backed securities
    
    
    (28,005
    )
    
    
    289
    
    
    
    (27,716
    )Interest-only strips
    
    
    178
    
    
    
    (277
    )
    
    
    (99
    )Investment securities
    
    
    (3,436
    )
    
    
    743
    
    
    
    (2,693
    )Other interest-earning assets
    
    
    2,623
    
    
    
    421
    
    
    
    3,044TOTAL INTEREST INCOME VARIANCE
    
    
    (67,299
    )
    
    
    (2,134
    )
    
    
    (69,433
    )INTEREST EXPENSE VARIANCEDeposits
    
    
    (317
    )
    
    
    6,915
    
    
    
    6,598Repurchase agreements
    
    
    (24,307
    )
    
    
    
    
    
    
    (24,307
    )Advances from the FHLB
    
    
    (608
    )
    
    
    2,235
    
    
    
    1,627Loans payable
    
    
    (34,412
    )
    
    
    1,096
    
    
    
    (33,316
    )Notes payable
    
    
    509
    
    
    
    270
    
    
    
    779TOTAL INTEREST EXPENSE VARIANCE
    
    
    (59,135
    )
    
    
    10,516
    
    
    
    (48,619
    )NET INTEREST INCOME VARIANCE
    
    $
    (8,164
    )
    
    $
    (12,650
    )
    
    $
    (20,814
    )
 TABLE D
NET INTEREST INCOME VARIANCE ANALYSIS
(In thousands)
 SIX MONTH PERIOD ENDEDJUNE 30,2007 COMPARED TO 2006INCREASE (DECREASE) DUE TO:VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    (87,961
    )
    
    $
    (2,287
    )
    
    $
    (90,248
    )Mortgage-backed securities
    
    
    (57,437
    )
    
    
    766
    
    
    
    (56,671
    )Interest-only strips
    
    
    18
    
    
    
    (454
    )
    
    
    (436
    )Investment securities
    
    
    (7,391
    )
    
    
    2,409
    
    
    
    (4,982
    )Other interest-earning assets
    
    
    3,576
    
    
    
    3,137
    
    
    
    6,713TOTAL INTEREST INCOME VARIANCE
    
    
    (149,195
    )
    
    
    3,571
    
    
    
    (145,624
    )INTEREST EXPENSE VARIANCEDeposits
    
    
    162
    
    
    
    16,516
    
    
    
    16,678Repurchase agreements
    
    
    (47,995
    )
    
    
    1,095
    
    
    
    (46,900
    )Advances from the FHLB
    
    
    (264
    )
    
    
    5,121
    
    
    
    4,857Loans payable
    
    
    (83,376
    )
    
    
    2,621
    
    
    
    (80,755
    )Notes payable
    
    
    621
    
    
    
    1,141
    
    
    
    1,762TOTAL INTEREST EXPENSE VARIANCE
    
    
    (130,852
    )
    
    
    26,494
    
    
    
    (104,358
    )NET INTEREST INCOME VARIANCE
    
    $
    (18,343
    )
    
    $
    (22,923
    )
    
    $
    (41,266
    )
 52




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PROVISION FOR LOAN AND LEASE LOSSES
     NON-INTEREST INCOME
  Net Gain (Loss) on Mortgage Loan Sales and Fees.
   53




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QUARTER
    
    QUARTER
    
    SIX MONTH
    
    SIX MONTHENDED
    
    ENDED
    
    PERIOD ENDED
    
    PERIOD ENDED(In thousands)
    
    JUNE 30, 2007
    
    JUNE 30, 2006
    
    JUNE 30, 2007
    
    JUNE 30, 2006Total loan sales and securitizations
    
    $
    75,707
    
    
    $
    3,377,462
    
    
    $
    144,744
    
    
    $
    3,609,033MSRs capitalized
    
    $
    1,362
    
    
    $
    42,613
    
    
    $
    2,546
    
    
    $
    46,862
 Net Servicing Income.
  TABLE E
NET SERVICING INCOME
(In thousands)
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2007
    
    
    2007Servicing fees (net of guarantee fees)
    
    $
    8,602
    
    
    $
    18,384Late charges
    
    
    2,244
    
    
    
    4,609Prepayment penalties
    
    
    233
    
    
    
    363Interest loss
    
    
    (1,262
    )
    
    
    (1,872
    )Other servicing fees
    
    
    121
    
    
    
    179Servicing income, gross
    
    
    9,938
    
    
    
    21,663Change in fair value of mortgage servicing rights
    
    
    (555
    )
    
    
    (6,280
    )Total net servicing income
    
    $
    9,383
    
    
    $
    15,383
  TABLE F
NET SERVICING INCOME
(In thousands)
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2006
    
    
    2006Servicing fees (net of guarantee fees)
    
    $
    8,773
    
    
    $
    16,525Late charges
    
    
    2,310
    
    
    
    4,753Prepayment penalties
    
    
    244
    
    
    
    763Interest loss
    
    
    (1,180
    )
    
    
    (2,567
    )Other servicing fees
    
    
    78
    
    
    
    140Servicing income, gross
    
    
    10,225
    
    
    
    19,614Amortization of servicing assets
    
    
    (6,486
    )
    
    
    (12,904
    )Net impairment of servicing assets
    
    
    (2,326
    )
    
    
    (147
    )Total net servicing income
    
    $
    1,413
    
    
    $
    6,563
  54




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Trading Activities.
  TABLE G
COMPONENTS OF TRADING ACTIVITIES
(In thousands)
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net realized (losses) gains on sales of securities held for trading
    
    $
    (2,333
    )
    
    $
    522
    
    
    $
    (4,334
    )
    
    $
    3,413(Losses ) gains on the IO valuation
    
    
    (788
    )
    
    
    (16,259
    )
    
    
    3,759
    
    
    
    (42,862
    )Net unrealized losses on trading securities, excluding IOs
    
    
    (3,616
    )
    
    
    (4,199
    )
    
    
    (3,751
    )
    
    
    (3,439
    )Net realized and unrealized gains on derivative instruments
    
    
    12,628
    
    
    
    12,382
    
    
    
    8,239
    
    
    
    25,387Total
    
    $
    5,891
    
    
    $
    (7,554
    )
    
    $
    3,913
    
    
    $
    (17,501
    )
   Net (Loss) Gain on Sale of Investment Securities.
 55




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Commissions, Fees and Other Income.
 TABLE H
COMMISSIONS, FEES AND OTHER INCOME
(In thousands)
 QUARTER
    
    
    SIX MONTH PERIODENDED JUNE 30,
    
    
    ENDED JUNE 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Retail banking fees
    
    $
    5,281
    
    
    $
    4,947
    
    
    $
    10,494
    
    
    $
    9,759Insurance agency commissions
    
    
    2,411
    
    
    
    2,057
    
    
    
    4,734
    
    
    
    4,759Securities brokerage and asset
management fees and
commissions
    
    
    143
    
    
    
    449
    
    
    
    286
    
    
    
    720Other income
    
    
    341
    
    
    
    4,059
    
    
    
    1,073
    
    
    
    6,008Total
    
    $
    8,176
    
    
    $
    11,512
    
    
    $
    16,587
    
    
    $
    21,246
     NON-INTEREST EXPENSE
  56




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TABLE I
NON INTEREST EXPENSE
(In thousands)
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Compensation and employee benefits
    
    $
    29,587
    
    
    $
    23,034
    
    
    $
    54,970
    
    
    $
    42,625Taxes, other than payroll and income taxes
    
    
    3,437
    
    
    
    3,264
    
    
    
    6,284
    
    
    
    6,572Advertising
    
    
    2,568
    
    
    
    3,226
    
    
    
    3,930
    
    
    
    5,821Professional services
    
    
    18,613
    
    
    
    16,227
    
    
    
    39,234
    
    
    
    33,378Communication and information systems
    
    
    4,996
    
    
    
    4,328
    
    
    
    9,026
    
    
    
    9,555Occupancy and other office expenses
    
    
    6,451
    
    
    
    6,789
    
    
    
    12,750
    
    
    
    13,944Depreciation and amortization
    
    
    4,427
    
    
    
    5,925
    
    
    
    9,478
    
    
    
    11,628Other
    
    
    6,540
    
    
    
    6,028
    
    
    
    16,165
    
    
    
    11,072Total non-interest expense
    
    $
    76,619
    
    
    $
    68,821
    
    
    $
    151,837
    
    
    $
    134,595
    INCOME TAXES
  57




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BALANCE SHEET AND OPERATING DATA ANALYSIS
 LOAN PRODUCTION
  TABLE J
LOAN PRODUCTION
(Dollars in Thousands, Except for Average Initial Loan Balance)
 QUARTER ENDED
    
    SIX MONTH PERIODJUNE 30,
    
    ENDED JUNE 30,2007
    
    2006
    
    2007
    
    2006FHA/VA mortgage loansNumber of loans
    
    
    354
    
    
    
    539
    
    
    
    734
    
    
    
    1,022Volume of loans
    
    $
    38,611
    
    
    $
    55,829
    
    
    $
    75,687
    
    
    $
    102,198Percent of total volume
    
    
    13
    %
    
    
    12
    %
    
    
    14
    %
    
    
    8
    %Average initial loan balance
    
    $
    109,071
    
    
    $
    103,579
    
    
    $
    103,116
    
    
    $
    99,998Conventional conforming mortgage loansNumber of loans
    
    
    444
    
    
    
    341
    
    
    
    775
    
    
    
    851Volume of loans
    
    $
    53,746
    
    
    $
    38,697
    
    
    $
    91,652
    
    
    $
    97,558Percent of total volume
    
    
    17
    %
    
    
    8
    %
    
    
    16
    %
    
    
    7
    %Average initial loan balance
    
    $
    121,050
    
    
    $
    113,481
    
    
    $
    118,261
    
    
    $
    114,639
 59




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QUARTER ENDED
    
    SIX MONTH PERIODJUNE 30,
    
    ENDED JUNE 30,2007
    
    2006
    
    2007
    
    2006Conventional non  conforming mortgage loans(1)Number of loans
    
    
    522
    
    
    
    1,807
    
    
    
    948
    
    
    
    7,304Volume of loans
    
    $
    72,228
    
    
    $
    187,187
    
    
    $
    128,344
    
    
    $
    778,572Percent of total volume
    
    
    23
    %
    
    
    38
    %
    
    
    23
    %
    
    
    57
    %Average initial loan balance
    
    $
    138,368
    
    
    $
    103,590
    
    
    $
    135,384
    
    
    $
    106,595Other(2)Number of loans
    
    
    2,862
    
    
    
    766
    
    
    
    3,993
    
    
    
    1,780Volume of loans
    
    $
    143,547
    
    
    $
    205,279
    
    
    $
    259,969
    
    
    $
    384,406Percent of total volume
    
    
    47
    %
    
    
    42
    %
    
    
    47
    %
    
    
    28
    %Total loansNumber of loans
    
    
    4,182
    
    
    
    3,453
    
    
    
    6,450
    
    
    
    10,957Volume of loans
    
    $
    308,132
    
    
    $
    486,992
    
    
    $
    555,652
    
    
    $
    1,362,734
 
 (1)
    
    Includes $4.7 million and $16.7 million in second mortgages for the quarters ended June 30, 2007 and 2006,
respectively, and $9.2 million and $58.9 million in second mortgages for the six month periods ended June 30, 2007 and 2006,
respectively.(2)
    
    Consists of construction loans on residential projects, mortgage loans secured by
multi-family and commercial properties as well as other commercial, land and consumer loans.    TABLE K
LOAN ORIGINATION SOURCES
 SIX MONTH PERIOD ENDED JUNE 30,2007
    
    2006Puerto Rico
    
    US
    
    Total
    
    Puerto Rico
    
    US
    
    TotalRetail
    
    
    51
    %
    
    
    
    
    
    
    51
    %
    
    
    65
    %
    
    
    
    
    
    
    65
    %Wholesale(1)
    
    
    2
    %
    
    
    
    
    
    
    2
    %
    
    
    6
    %
    
    
    
    
    
    
    6
    %New Housing Developments
    
    
    24
    %
    
    
    2
    %
    
    
    26
    %
    
    
    16
    %
    
    
    2
    %
    
    
    18
    %Multifamily
    
    
    
    
    
    
    1
    %
    
    
    1
    %
    
    
    
    
    
    
    
    
    
    
    Other(2)
    
    
    17
    %
    
    
    3
    %
    
    
    20
    %
    
    
    9
    %
    
    
    2
    %
    
    
    11
    %
 
 (1)
    
    Refers to purchases of mortgage loans from other financial institutions and mortgage lenders.(2)
    
    Refers to commercial, consumer and land loans originated through the banking subsidiaries and other specialized units. MORTGAGE LOAN SERVICING
  60




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61




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TABLE L
MORTGAGE LOAN SERVICING
(Dollars in Thousands, Except for Average Size of Loans)
 AS OF JUNE 30,2007
    
    
    2006COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END:GNMA
    
    $
    2,129,096
    
    
    $
    2,166,764FHLMC/FNMA
    
    
    3,893,830
    
    
    
    4,111,432Other conventional mortgage loans(1)(2)
    
    
    8,006,892
    
    
    
    9,440,443Total servicing portfolio
    
    $
    14,029,818
    
    
    $
    15,718,639SELECTED DATA REGARDING MORTGAGE LOANS SERVICED:Number of loans
    
    
    156,914
    
    
    
    173,247Weighted- average interest rate
    
    
    6.56
    %
    
    
    6.60
    %Weighted- average remaining maturity (months)
    
    
    249
    
    
    
    255Weighted- average gross servicing fee rate  loans serviced to others
    
    
    0.3810
    %
    
    
    0.3861
    %Average servicing portfolio(3)
    
    $
    14,776,980
    
    
    $
    15,776,895Principal prepayments
    
    $
    591,202
    
    
    $
    798,093Constant prepayment rate
    
    
    7
    %
    
    
    9
    %Average size of loans
    
    $
    89,411
    
    
    $
    90,730Servicing assets, net
    
    $
    164,569
    
    
    $
    190,588DELINQUENT MORTGAGE LOANS AND PENDING
FORECLOSURES AT PERIOD END:60-89 days past due
    
    
    1.99
    %
    
    
    1.44
    %90 days or more past due
    
    
    1.97
    %
    
    
    1.48
    %Total delinquencies excluding foreclosures
    
    
    3.96
    %
    
    
    2.92
    %Foreclosures pending
    
    
    2.71
    %
    
    
    2.09
    %SERVICING PORTFOLIO ACTIVITY:Beginning servicing portfolio
    
    $
    15,287,120
    
    
    $
    15,727,604Add:Loans funded and purchased(4)
    
    
    297,872
    
    
    
    973,325Bulk servicing acquired
    
    
    
    
    
    
    16,376Less:Servicing release sales and transferred(5)
    
    
    738,604
    
    
    
    33,005Run-off(6)
    
    
    816,570
    
    
    
    965,661Ending servicing portfolio
    
    $
    14,029,818
    
    
    $
    15,718,639
 
 (1)
    
    Includes $3.3 billion and $3.6 billion of loans owned by Doral Financial at June 30, 2007 and 2006, respectively, which represented 23%and 23% of the total servicing portfolio as of
such dates.(2)
    
    Includes portfolios of $219.8 million and $261.8 million at June 30, 2007 and 2006, respectively, of delinquent FHA/VA and conventional mortgage loans sold to third parties.(3)
    
    Includes the average balance of loans owned by Doral Financial of $3.3 billion and $5.2 billion at June 30, 2007 and 2006, respectively.(4)
    
    Excludes approximately $257.8 million and $389.4 million of commercial, consumer, construction and other non-mortgage loans originated by Doral Financial but not part of the mortgage
servicing-portfolio as of June 30, 2007 and 2006, respectively.(5)
    
    Includes $682.1 million of principal balance of loans subserviced by the Company and transferred during the second quarter of 2007.(6)
    
    Run-off refers to regular amortization of loans, prepayments and foreclosures. 62




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LIQUIDITY AND CAPITAL RESOURCES
  Liquidity of the Holding Company
   
    
    the downgrades of its credit ratings;
    
    its inability to access the capital markets;
    
    the decision of a substantial majority of its unsecured creditors not to renew committed credit facilities;
    
    the inability to sell non-conforming mortgage loans in the local market, and
reliance on sales in the U.S. secondary markets, which have stricter underwriting
requirements;
    
    legal, accounting and other professional expenses associated with the
resolution of legacy issues and business transformation efforts;
    
    regulatory consent orders that, from March 17, 2006, prohibit the Companys
banking subsidiaries from paying dividends to the holding company, without prior regulatory
approval; and
    
    the settlement of the SECs investigation of the Company, which required the
payment of a $25 million civil penalty in February 2007.
  63




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Impact of Recapitalization of the Holding Company and Restructuring of Mortgage Operations on
Liquidity
    Uses of Cash
  64




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Sources of Cash
  TABLE M
SOURCES OF BORROWINGS
(Dollars in thousands)
 AS OF JUNE 30, 2007
    
    AS OF DECEMBER 31, 2006AMOUNT
    
    AVERAGE
    
    AMOUNT
    
    AVERAGEOUTSTANDING
    
    RATE
    
    OUTSTANDING
    
    RATEDeposits
    
    $
    3,896,586
    
    
    
    4.05
    %
    
    $
    4,250,760
    
    
    
    3.90
    %Repurchase Agreements
    
    
    3,330,606
    
    
    
    4.24
    %
    
    
    3,899,365
    
    
    
    4.25
    %Advances from FHLB
    
    
    984,500
    
    
    
    5.10
    %
    
    
    1,034,500
    
    
    
    4.78
    %Loans Payable
    
    
    424,448
    
    
    
    6.86
    %
    
    
    444,443
    
    
    
    6.92
    %Notes Payable
    
    
    919,073
    
    
    
    6.56
    %
    
    
    923,913
    
    
    
    6.57
    %
    65




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TABLE N
 AVERAGE DEPOSIT BALANCE
 (Dollars in thousands)
 SIX MONTH PERIOD
    
    
    YEAR ENDEDENDED JUNE 30, 2007
    
    
    DECEMBER 31, 2006AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    AVERAGEBALANCE
    
    
    RATE
    
    
    BALANCE
    
    
    RATECertificates of deposit
    
    $
    2,891,148
    
    
    
    4.85
    %
    
    $
    2,945,920
    
    
    
    4.27
    %Regular passbook savings
    
    
    425,293
    
    
    
    3.72
    %
    
    
    449,732
    
    
    
    3.28
    %NOW accounts
    
    
    557,320
    
    
    
    3.43
    %
    
    
    527,163
    
    
    
    2.80
    %Non-interest bearing
    
    
    329,011
    
    
    
    
    
    
    
    340,772
    
    
    
    Total deposits
    
    $
    4,202,772
    
    
    
    4.17
    %
    
    $
    4,263,587
    
    
    
    3.65
    %
  TABLE O
 CERTIFICATES OF DEPOSIT MATURITIES
 (In thousands)
 AMOUNTCertificates of deposit maturing:Three months or less
    
    $
    560,919Over three through six months
    
    
    436,088Over six through twelve months
    
    
    738,565Over twelve months
    
    
    340,005Total
    
    $
    2,075,577
  REGULATORY CAPITAL RATIOS
  66




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TABLE P
 REGULATORY CAPITAL RATIOS
 As of June 30, 2007DORAL
    
    DORAL
    
    DORALFINANCIAL
    
    BANK PR
    
    BANK NYTotal Capital (Total capital to risk- weighted assets)
    
    
    12.9
    %
    
    
    22.8
    %
    
    
    15.9%Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    8.9
    %
    
    
    21.5
    %
    
    
    15.4%Leverage Ratio(1)
    
    
    4.5
    %
    
    
    8.1
    %
    
    
    9.3%
 
 (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. As of December 31, 2006DORAL
    
    DORAL
    
    DORALFINANCIAL
    
    BANK PR
    
    BANK NYTotal Capital (Total capital to risk- weighted assets)
    
    
    13.7
    %
    
    
    21.1
    %
    
    
    16.3
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    10.3
    %
    
    
    19.8
    %
    
    
    15.8
    %Leverage Ratio(1)
    
    
    4.5
    %
    
    
    6.8
    %
    
    
    10.3
    %
 
 (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.   Legal
Proceedings
  67




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ASSETS AND LIABILITIES
   OFF-BALANCE SHEET ACTIVITIES
   TABLE Q
 LOANS SUBJECT TO RECOURSE BY LOAN TYPE
 (Dollars in thousands)
 90 or moreLoan
    
    
    
    
    
    
    Outstanding
    
    
    Full
    
    
    6%
    
    
    7%
    
    
    10%
    
    
    4%
    
    
    
    
    
    
    Total
    
    
    DaysCount
    
    
    LTV
    
    
    Balance
    
    
    Recourse
    
    
    Limit
    
    
    Limit
    
    
    Limit
    
    
    Limit
    
    
    Other
    
    
    Exposure
    
    
    DelinquentFNMA sales
    
    
    6,834
    
    
    
    83
    
    
    $
    781,231
    
    
    $
    707,840
    
    
    $
    12,853
    
    
    $
    9,177
    
    
    $
    
    
    
    $
    3,530
    
    
    $
    
    
    
    $
    733,400
    
    
    $
    32,548Non-conforming loans
    
    
    6,499
    
    
    
    51
    
    
    
    211,566
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,014
    
    
    
    
    
    
    
    2,572
    
    
    
    66,586
    
    
    
    4,651FHLMC sales
    
    
    1,105
    
    
    
    48
    
    
    
    38,133
    
    
    
    38,133
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,133
    
    
    
    968Total
    
    
    14,438
    
    
    
    75
    
    
    $
    1,030,930
    
    
    $
    745,973
    
    
    $
    12,853
    
    
    $
    9,177
    
    
    $
    64,014
    
    
    $
    3,530
    
    
    $
    2,572
    
    
    $
    838,119
    
    
    $
    38,167
  68




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Risk Factors
 CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
  69




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##### Table of Contents



TABLE R
 CONTRACTUAL OBLIGATIONS
(In thousands)
 PAYMENT DUE BY PERIODLESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTERCONTRACTUAL OBLIGATIONS(1)
    
    TOTAL
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSDeposits
    
    $
    3,896,586
    
    
    $
    3,506,009
    
    
    $
    355,660
    
    
    $
    30,904
    
    
    $
    4,013Repurchase agreements(2)
    
    
    3,330,606
    
    
    
    2,580,606
    
    
    
    750,000
    
    
    
    
    
    
    
    Advances from the FHLB(2)
    
    
    984,500
    
    
    
    784,500
    
    
    
    50,000
    
    
    
    150,000
    
    
    
    Loans payable(3)
    
    
    424,448
    
    
    
    50,996
    
    
    
    86,624
    
    
    
    69,409
    
    
    
    217,419Notes payable
    
    
    919,073
    
    
    
    639,650
    
    
    
    12,242
    
    
    
    42,310
    
    
    
    224,871Other liabilities
    
    
    288,990
    
    
    
    286,990
    
    
    
    2,000
    
    
    
    
    
    
    
    Non-cancelable operating leases
    
    
    63,717
    
    
    
    8,056
    
    
    
    14,705
    
    
    
    10,696
    
    
    
    30,260Total Contractual Cash Obligations
    
    $
    9,907,920
    
    
    $
    7,856,807
    
    
    $
    1,271,231
    
    
    $
    303,319
    
    
    $
    476,563
 
 (1)
    
    Amounts included in the table above do not include interest.(2)
    
    Includes $2.3 billion of repurchase agreements with an average rate of 4.03% and $317.5 million in advances from the
FHLB-NY with an average rate of 5.38%,which the lenders have the right to call before their contractual maturities. The majority of
such repurchase agreements and advances from the FHLB-NY are included in the less than one year category in the above table but have
actual contractual maturities ranging from March 2009 to March, 2015.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 expected 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 10.32 % to estimate the repayments. TABLE S
 OTHER COMMERCIAL COMMITMENTS(1)
 (In thousands)
 AMOUNT OF COMMITMENT EXPIRATION PER PERIODTOTALAMOUNT
    
    
    LESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTEROTHER COMMERCIAL COMMITMENTS(1)
    
    COMMITTED
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSCommitments to extend credit
    
    $
    281,510
    
    
    $
    210,327
    
    
    $
    70,669
    
    
    $
    295
    
    
    $
    219Commitments to sell mortgage-backed
securities and loans
    
    
    196,218
    
    
    
    196,218
    
    
    
    
    
    
    
    
    
    
    
    Commercial and financial standby letters of credit
    
    
    4,968
    
    
    
    1,081
    
    
    
    3,887
    
    
    
    
    
    
    
    Maximum contractual recourse exposure(2)
    
    
    838,119
    
    
    
    406,978
    
    
    
    224,810
    
    
    
    
    
    
    
    206,331Total
    
    $
    1,320,815
    
    
    $
    814,604
    
    
    $
    299,366
    
    
    $
    295
    
    
    $
    206,550
 
 (1)
    
    Refer to Off-Balance Sheet Activities above for additional information regarding other commercial commitments of the Company.(2)
    
    Refer to Note T for new information on the Companys ongoing efforts to reconcile its recourse exposure. RISK MANAGEMENT
  Interest Rate and Market Risk Management
  70




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Doral Financials Risk Profile
    Market Value
    
    Net InterestAs of June 30, 2007
    
    of Equity Risk
    
    Income Risk(1)+ 100 BPS
    
    
    (30.6
    )%
    
    
    (2.0
    )%- 100 BPS
    
    
    19.0
    %
    
    
    (1.1
    )%
 Market Value of
    
    Net InterestAs of December 31, 2006
    
    Equity Risk
    
    Income Risk(1)+ 100 BPS
    
    
    (24.0
    )%
    
    
    5.3
    %- 100 BPS
    
    
    7.8
    %
    
    
    (7.5
    )%
 
 (1)
    
    Based on 12-month forward change in net interest income.   71




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##### Table of Contents



(In thousands)
    
    June 30, 2007
    
    December 31, 2006Change in Fair
    
    Change in
    
    Change in Fair
    
    Change inValue of
    
    Fair Value of
    
    Value of
    
    Fair Value ofAvailable for
    
    Held to
    
    Available for
    
    Held toChange in interest
    
    Sale Securities
    
    Maturity
    
    Sale Securities
    
    Maturityrates (basis points)
    
    and FHLB Stock
    
    Securities
    
    and FHLB Stock
    
    Securities+200
    
    $
    (190,246
    )
    
    $
    (308,347
    )
    
    $
    (200,632
    )
    
    $
    (329,435
    )+100
    
    
    (95,505
    )
    
    
    (146,878
    )
    
    
    (97,882
    )
    
    
    (152,734
    )+50
    
    
    (47,369
    )
    
    
    (71,536
    )
    
    
    (47,546
    )
    
    
    (73,206
    )Base
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -50
    
    
    45,771
    
    
    
    66,431
    
    
    
    43,007
    
    
    
    64,452-100
    
    
    87,126
    
    
    
    128,418
    
    
    
    78,189
    
    
    
    121,483-200
    
    
    147,163
    
    
    
    229,922
    
    
    
    131,641
    
    
    
    219,065
   Derivatives
  72




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TABLE T
 INTEREST RATE SWAPS
 (Dollars in thousands)
 INTEREST
    
    INTERESTNOTIONAL
    
    MATURITY
    
    
    
    RATE
    
    RATE
    
    FAIRAMOUNT
    
    DATE
    
    PURPOSE
    
    RECEIVED
    
    PAID
    
    VALUE$
    550,000
    
    
    August, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    5.360
    %
    
    
    4.430
    %
    
    $
    783$
    550,000
    
    
    August, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    5.360
    %
    
    
    4.443
    %
    
    $
    787$
    100,000
    
    
    September, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    5.360
    %
    
    
    3.688
    %
    
    $
    369$
    100,000
    
    
    September, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    5.360
    %
    
    
    3.655
    %
    
    $
    381$
    200,000
    
    
    November, 2009
    
    To protect the
spread of the
variable IOs
    
    
    5.357
    %
    
    
    3.773
    %
    
    $
    7,048$
    200,000
    
    
    November, 2009
    
    To protect the
spread of the
variable IOs
    
    
    5.360
    %
    
    
    3.975
    %
    
    $
    6,219
   73




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TABLE U
 FAIR VALUE RECONCILIATION
(In thousands)
 Six Month Period EndedJune 30, 2007Fair value of contracts outstanding at the beginning of the period
    
    $
    26,282Contracts realized or otherwise settled during the period
    
    
    (6,481
    )Fair value of new contracts entered into during the period
    
    
    6,481Changes in fair values during the period
    
    
    (8,551
    )Fair value of contracts outstanding at the end of the period
    
    $
    17,731
 TABLE V
 SOURCES OF FAIR VALUE

(In thousands)
 Payment Due by PeriodMaturity
    
    
    
    
    
    
    
    
    
    
    Maturityless than
    
    
    Maturity
    
    
    Maturity
    
    
    in excess
    
    
    Total FairAs of June 30, 2007
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    of 5 Years
    
    
    ValueSources of Fair ValuePrices actively quoted
    
    $
    3,145
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,145Prices provided by
other external
sources
    
    
    1,319
    
    
    
    13,267
    
    
    
    
    
    
    
    
    
    
    
    14,586$
    4,464
    
    
    $
    13,267
    
    
    $
    
    
    
    $
    
    
    
    $
    17,731
   TABLE W
 DERIVATIVE COUNTERPARTY CREDIT EXPOSURE
 (Dollars in thousands)
 June 30, 2007Weighted AverageNumber of
    
    
    
    
    
    
    Total Exposure
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    At Fair Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA
    
    
    1
    
    
    $
    400,000
    
    
    $
    14,107
    
    
    $
    
    
    
    $
    14,107
    
    
    
    2.37AA-
    
    
    1
    
    
    
    750,000
    
    
    
    
    
    
    
    (5,527
    )
    
    
    (5,527
    )
    
    
    0.15A+
    
    
    2
    
    
    
    1,050,000
    
    
    
    3,145
    
    
    
    (4,447
    )
    
    
    (1,302
    )
    
    
    0.08Total Derivatives
    
    
    4
    
    
    $
    2,200,000
    
    
    $
    17,252
    
    
    $
    (9,974
    )
    
    $
    7,278
    
    
    
    0.52
 
 (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). 74




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(Dollars in thousands)
    
    December 31, 2006Weighted AverageNumber of
    
    
    
    
    
    
    Total Exposure
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    At Fair Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA-
    
    
    2
    
    
    $
    1,428,649
    
    
    $
    15,763
    
    
    $
    (2,080
    )
    
    $
    13,683
    
    
    
    1.15A+
    
    
    3
    
    
    
    1,202,764
    
    
    
    3,938
    
    
    
    (2,262
    )
    
    
    1,676
    
    
    
    0.30Subtotal
    
    
    5
    
    
    
    2,631,413
    
    
    $
    19,701
    
    
    $
    (4,342
    )
    
    $
    15,359
    
    
    
    0.76Other derivatives(4)
    
    
    
    
    
    
    2,500,000Total Derivatives
    
    
    
    
    
    $
    5,131,413
 
 (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).(4)
    
    For the year ended December 31, 2006, the Company recognized a realized gain of $2.5 million and an unrealized loss of $1.0 million from a derivative resulting from certain gain-sharing
agreements created in connection with certain mortgage loan sales. The Company has the right to share, on a limited basis, the gains realized by the buyers of such loans within specified time periods from
subsequent sales or securitizations. 75




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Credit Risk
         76




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##### Table of Contents



As of
    
    
    As of(Dollars in thousands)
    
    June 30, 2007
    
    
    December 31, 2006Construction loans(1)
    
    $
    761,685
    
    
    $
    817,352Total undisbursed funds under existing commitments
    
    $
    201,007
    
    
    $
    250,422Non-performing construction loans
    
    $
    119,575
    
    
    $
    75,868Net charge offs  Construction loans
    
    $
    513
    
    
    $
    826Allowance for loan losses  Construction loans
    
    $
    39,133
    
    
    $
    37,829Non-performing construction loans to total construction loans
    
    
    15.70
    %
    
    
    9.28
    %Allowance for loan losses  construction loans to total
construction loans
    
    
    5.14
    %
    
    
    4.63
    %Net charge-offs to total construction loans
    
    
    0.07
    %
    
    
    0.10
    %
 
 (1)
    
    Includes $642.0 million and $680.6 million of construction loans for residential
housing projects as of June 30, 2007 and December 31, 2006, respectively. Also includes $119.7 million
and $136.8 million of construction loans for commercial, condominiums and multi-family projects as of
June 30, 2007 and December 31, 2006, respectively. Non-performing assets and allowance for loan and lease losses
      77




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TABLE X
 NON-PERFORMING ASSETS
 (Dollars in thousands)
 AS OF
    
    
    AS OFJUNE 30, 2007
    
    
    DECEMBER 31, 2006Non-accrual loans:Residential mortgage loans  held for sale (1) (2)
    
    $
    4,237
    
    
    $
    62,466Residential mortgage loans  held for investment(2)
    
    
    225,944
    
    
    
    110,332Total non-accrual residential mortgage loans
    
    
    230,181
    
    
    
    172,798Other lending activities:Construction loans
    
    
    119,575
    
    
    
    75,868Commercial real estate loans
    
    
    74,724
    
    
    
    47,162Commercial real estate loans  held for sale
    
    
    
    
    
    
    3,384Consumer loans
    
    
    4,735
    
    
    
    2,813Commercial non-real estate loans
    
    
    3,167
    
    
    
    5,571Lease financing receivable
    
    
    842
    
    
    
    1,075Total non-accrual other lending activities
    
    
    203,043
    
    
    
    135,873Total non-performing loans(3) (4)
    
    
    433,224
    
    
    
    308,671OREO
    
    
    31,284
    
    
    
    33,197Total NPAs of Doral Financial (consolidated)
    
    
    464,508
    
    
    
    341,868Total NPAs as a percentage
of the loans portfolio, net, and OREO
    
    
    9.22
    %
    
    
    6.63
    %Total NPAs of Doral Financial as a percentage of
consolidated total assets
    
    
    4.32
    %
    
    
    2.88
    %Total non-performing loans to total loans (excluding GNMA
defaulted loans)
    
    
    8.66
    %
    
    
    6.02
    %Ratio of allowance for loan and lease losses to total
non-performing loans (excluding mortgage loans held for sale)
at end of period(5)
    
    
    20.02
    %
    
    
    27.69
    %
 
 (1)
    
    Does not include approximately $115.9 million and $100.3 million of GNMA defaulted loans (for
which the Company has the option to buy-back from the pools serviced), included as part of the mortgage
loans held for sale portfolio as of June 30, 2007 and December 31, 2006, respectively.(2)
    
    During the second quarter of 2007, the Company transferred $1.3 billion of loans from the mortgage
loan held for sale portfolio to the loans receivable portfolio.(3)
    
    Total non-performing loans exclude $129.1 million and $51.8 million as of June 30, 2007 and December
31, 2006, respectively, on certain construction loans, classified as substandard loans and performing in accordance with their contractual terms.(4)
    
    Total non-performing loans include $24.3 million of delinquent loans repurchased during the second
quarter in connection with a recourse agreement with a local financial institution.(5)
    
    Refer to non-performing assets allowance for loan and lease losses above for additional information
regarding the Companys methodology for assessing the adequacy of the allowance for loan and lease losses.  78




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TABLE Y
 ALLOWANCE FOR LOAN AND LEASE LOSSES
 (DOLLARS IN THOUSANDS)
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Allowance for Loan and Lease Losses:Balance at beginning of period
    
    $
    70,963
    
    
    $
    39,330
    
    
    $
    67,233
    
    
    $
    35,044Provision (recovery) for loan and lease losses:Construction loans
    
    
    1,701
    
    
    
    2,763
    
    
    
    1,817
    
    
    
    6,562Residential mortgage loans
    
    
    11,212
    
    
    
    205
    
    
    
    12,355
    
    
    
    788Commercial real estate loans
    
    
    1,681
    
    
    
    1,129
    
    
    
    3,177
    
    
    
    635Consumer loans
    
    
    1,517
    
    
    
    1,348
    
    
    
    1,639
    
    
    
    2,328Lease financing
    
    
    (136
    )
    
    
    225
    
    
    
    191
    
    
    
    433Commercial non-real estate loans
    
    
    2,847
    
    
    
    177
    
    
    
    5,536
    
    
    
    230Land secured loans
    
    
    427
    
    
    
    25
    
    
    
    123
    
    
    
    69Other(1)
    
    
    73
    
    
    
    
    
    
    
    473
    
    
    
    Total provision for loan and lease losses
    
    
    19,322
    
    
    
    5,872
    
    
    
    25,311
    
    
    
    11,045Charge  offs:Construction loans
    
    
    
    
    
    
    
    
    
    
    (513
    )
    
    
    Residential mortgage loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate loans
    
    
    (879
    )
    
    
    (90
    )
    
    
    (879
    )
    
    
    (133
    )Consumer loans
    
    
    (1,900
    )
    
    
    (958
    )
    
    
    (3,179
    )
    
    
    (1,730
    )Lease financing
    
    
    (385
    )
    
    
    
    
    
    
    (385
    )
    
    
    Commercial non-real estate loans
    
    
    (1,357
    )
    
    
    (103
    )
    
    
    (1,486
    )
    
    
    (293
    )Land secured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    (4,521
    )
    
    
    (1,151
    )
    
    
    (6,442
    )
    
    
    (2,156
    )Recoveries:Construction loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential mortgage loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate loans
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    6Consumer loans
    
    
    173
    
    
    
    73
    
    
    
    227
    
    
    
    127Lease financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial non-real estate loans
    
    
    11
    
    
    
    15
    
    
    
    19
    
    
    
    66Land secured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    184
    
    
    
    94
    
    
    
    246
    
    
    
    199Net charge-offs
    
    
    (4,337
    )
    
    
    (1,057
    )
    
    
    (6,196
    )
    
    
    (1,957
    )Other(1)
    
    
    (73
    )
    
    
    
    
    
    
    (473
    )
    
    
    13Balance at end of period
    
    $
    85,875
    
    
    $
    44,145
    
    
    $
    85,875
    
    
    $
    44,145Allowance for loan losses as a percentage of
loans receivable outstanding, at the end of period
    
    
    1.95
    %
    
    
    1.27
    %
    
    
    1.95
    %
    
    
    1.27
    %Provision for loan losses to net charge-offs on an
annualized basis
    
    
    445.52
    %
    
    
    547.02
    %
    
    
    408.51
    %
    
    
    564.38
    %Net charge-offs to average loans receivable
outstanding on an annualized basis
    
    
    0.12
    %
    
    
    0.04
    %
    
    
    0.18
    %
    
    
    0.09
    %
 
 (1)
    
    Amount represents the portion of allowance for loans transferred from loans receivable to mortgage loans held for sale, during the first quarter of 2007,
in connection with the agreement to sell certain assets of Doral Bank NY. 79




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##### Table of Contents



Operational Risk
  Overview of Operational Risk Management
   Internal Control Over Financial Reporting
 Controls and Procedures
 Liquidity Risk
  General Business, Economic and Political Conditions
   80




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##### Table of Contents



Business Risk Factors
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Control and Procedures
    81




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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
  
 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
  82




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##### Table of Contents



Issuance of 968,253,968 shares to Doral Holdings
 For:
    
    
    59,376,414Against:
    
    
    2,544,228Abstain:
    
    
    450,612Broker Non-Votes:
    
    
    2
 Amendment to Doral Financials Restated Certificate of Incorporation to increase the number of
authorized shares of the Companys capital stock and Common Stock
 For:
    
    
    59,299,534Against:
    
    
    2,661,762Abstain:
    
    
    409,958Broker Non-Votes:
    
    
    0
 Amendment to Doral Financials Restated Certificate of Incorporation to decrease the par value of
the Companys common stock
 For:
    
    
    59,189,930Against:
    
    
    2,722,690Abstain:
    
    
    458,632Broker Non-Votes:
    
    
    0
 Amendment to Doral Financials Restated Certificate of Incorporation to effect a reverse stock
split of the Companys outstanding common stock of 1-for-20
 For:
    
    
    90,104,080Against:
    
    
    5,421,434Abstain:
    
    
    2,082,299Broker Non-Votes:
    
    
    0
 83




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##### Table of Contents



Election of Directors
 NOMINEES FOR ONE-YEAR TERM
    
    VOTES FOR
    
    VOTES WITHHELDDennis G. Buchert
    
    
    90,026,459
    
    
    
    7,581,351Glen R. Wakeman
    
    
    90,215,557
    
    
    
    7,392,253Edgar M. Cullman, Jr.
    
    
    89,736,435
    
    
    
    7,871,375John L. Ernst
    
    
    89,821,322
    
    
    
    7,786,488Peter A. Hoffman
    
    
    89,913,007
    
    
    
    7,694,803John B. Hughes
    
    
    89,959,481
    
    
    
    7,648,329Efraim Kier
    
    
    85,972,174
    
    
    
    11,635,636Adolfo Marzol
    
    
    89,996,554
    
    
    
    7,611,256Manuel Peña-Morros
    
    
    90,436,117
    
    
    
    7,171,693Harold D. Vicente
    
    
    90,374,672
    
    
    
    7,233,138
 Ratification of the Appointment of PricewaterhouseCoopers LLP as the Companys Independent
Accountants for 2007
 For:
    
    
    90,796,521Against:
    
    
    5,076,977Abstain:
    
    
    1,734,313Broker Non-Votes:
    
    
    0
 
 ITEM 5. OTHER INFORMATION
 Appointment
of Principal Accounting Officer
  Sale of Investment Securities
 NYSE Corporate Governance Standards
 
 ITEM 6. EXHIBITS
    84




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##### Table of Contents



SIGNATURES
  DORAL FINANCIAL CORPORATION(Registrant)Date: August 9, 2007
    
    /s/ Glen R. WakemanGlen R. WakemanChief Executive Officer and PresidentDate: August 9, 2007
    
    /s/ Marangal I. DomingoMarangal I. DomingoExecutive Vice President andChief Financial Officer
 85




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    
    
    Description10.1
    
    
    
    
    Securityholders and Registration Rights Agreement, dated as of July 19, 2007,
between Doral Financial Corporation and Doral Holding Delaware, LLC
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed with the SEC on July 26, 2007).10.2
    
    
    
    
    Advisory Services Agreements, dated as of July 19, 2007, between Doral
Financial Corporation and Bear Sterns Merchant Manager III, L.P. (incorporated
by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the
SEC on July 26, 2007).12.1
    
    
    
    
    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.
 86