##### 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, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 COMMISSION FILE NUMBER 0-17224
 DORAL FINANCIAL CORPORATION
  Puerto Rico
(State or other jurisdiction of 
incorporation or organization)
    
    66-0312162
(I.R.S. employer
identification number)1451 F.D. Roosevelt Avenue, 
San Juan, Puerto Rico
(Address of principal 
executive offices)
    
    00920-2717
(Zip Code)
 
 
 þ o
  Large accelerated filer oAccelerated filer þNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o o þ




---



##### 



DORAL FINANCIAL CORPORATION
INDEX PAGE
 PAGEPART I  FINANCIAL INFORMATIONItem 1 
    
    Financial StatementsConsolidated Statements of Financial Condition (Unaudited) as
of June 30, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Income (Loss) (Unaudited)  Quarters ended June 30, 2008 and June
30, 2007 and Six month periods ended June 30, 2008 and June 30, 2007
    
    
    4Consolidated Statements of Changes in Stockholders Equity (Unaudited)  Six month periods ended June 30, 2008 and June 30, 2007
    
    
    5Consolidated Statements of Comprehensive Income (Loss) (Unaudited)  Quarters ended June 30, 2008 and June 30, 2007 and Six month periods ended June 30, 2008 and June 30, 2007
    
    
    6Consolidated Statements of Cash Flows (Unaudited)  Six month periods ended June 30, 2008 and June 30, 2007
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8Item 2 
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    39Item 3 
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    76Item 4 
    
    Controls and Procedures
    
    
    77PART II  OTHER INFORMATION
    
    
    78Item 1 
    
    Legal Proceedings
    
    
    78Item 1A 
    
    Risk Factors
    
    
    78Item 2 
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    78Item 3 
    
    Defaults Upon Senior Securities
    
    
    78Item 4 
    
    Submission of Matters to a Vote of Security Holders
    
    
    79Item 5 
    
    Other Information
    
    
    79Item 6 
    
    Exhibits
    
    
    79SIGNATURES
    
    
    
    
    80EX-12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESEX-12.2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESEX-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




---



##### Table of Contents



DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED
 JUNE 30,
    
    
    DECEMBER 31,(In thousands, except for share information)
    
    2008
    
    
    2007ASSETSCash and due from banks
    
    $
    87,057
    
    
    $
    67,884Money market investments:Money market investments with creditors right to repledge
    
    
    7,095
    
    
    
    199,795Other money market investments
    
    
    423,206
    
    
    
    317,490Total money market investments
    
    
    430,301
    
    
    
    517,285Securities purchased under agreements to resell
    
    
    
    
    
    
    204,000Pledged investment securities that can be repledged:Securities held for trading, at fair value
    
    
    123,955
    
    
    
    14,070Securities available for sale, at fair value
    
    
    1,593,580
    
    
    
    891,961Total pledged investment securities that can be repledged
    
    
    1,717,535
    
    
    
    906,031Other investment securities:Securities held for trading, at fair value
    
    
    107,301
    
    
    
    262,392Securities available for sale, at fair value
    
    
    1,562,486
    
    
    
    1,029,979Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    114,140
    
    
    
    73,867Total other investment securities
    
    
    1,783,927
    
    
    
    1,366,238Total investment securities
    
    
    3,501,462
    
    
    
    2,272,269Loans:Loans held for sale, at lower of cost or market
    
    
    374,420
    
    
    
    418,556Loans receivable
    
    
    5,234,986
    
    
    
    5,054,709Allowance for loan and lease losses
    
    
    (122,099
    )
    
    
    (124,733
    )Unearned income
    
    
    (2,893
    )
    
    
    (3,776
    )Total loans receivable
    
    
    5,109,994
    
    
    
    4,926,200Total loans
    
    
    5,484,414
    
    
    
    5,344,756Receivables and mortgage-servicing advances
    
    
    70,664
    
    
    
    62,098Accrued interest receivable
    
    
    45,184
    
    
    
    42,434Servicing assets, net
    
    
    145,527
    
    
    
    150,238Premises and equipment, net
    
    
    102,650
    
    
    
    106,317Real estate held for sale, net
    
    
    53,731
    
    
    
    38,154Assets to be disposed of by sale
    
    
    7,166
    
    
    
    8,970Deferred tax asset, net
    
    
    402,268
    
    
    
    392,860Other assets
    
    
    119,447
    
    
    
    97,113Total assets
    
    $
    10,449,871
    
    
    $
    9,304,378LIABILITIESDeposits:Non-interest-bearing deposits
    
    $
    264,306
    
    
    $
    242,821Interest-bearing deposits
    
    
    4,066,422
    
    
    
    4,025,203Total Deposits
    
    
    4,330,728
    
    
    
    4,268,024Securities sold under agreements to repurchase
    
    
    2,100,271
    
    
    
    1,444,363Advances from FHLB
    
    
    1,829,000
    
    
    
    1,234,000Loans payable
    
    
    379,815
    
    
    
    402,701Notes payable
    
    
    279,716
    
    
    
    282,458Accrued expenses and other liabilities
    
    
    300,854
    
    
    
    326,125Total liabilities
    
    
    9,220,384
    
    
    
    7,957,671STOCKHOLDERS EQUITYPreferred stock, $1 par value; 40,000,000 shares authorized;
9,015,000 shares issued and outstanding, at aggregate liquidation
preference value:Perpetual noncumulative nonconvertible preferred stock (Series
A, B and C)
    
    
    228,250
    
    
    
    228,250Perpetual cumulative convertible preferred stock
    
    
    345,000
    
    
    
    345,000Common stock, $0.01 par value; 97,500,000 shares authorized;
53,810,110 shares issued and outstanding
    
    
    538
    
    
    
    538Additional paid-in capital
    
    
    849,081
    
    
    
    849,081Legal surplus
    
    
    23,596
    
    
    
    23,596Accumulated deficit
    
    
    (83,916
    )
    
    
    (66,610
    )Accumulated other comprehensive loss, net of income tax benefit of
$19,988 and $6,075 in 2008 and 2007, respectively
    
    
    (133,062
    )
    
    
    (33,148
    )Total stockholders equity
    
    
    1,229,487
    
    
    
    1,346,707Total liabilities and stockholders equity
    
    $
    10,449,871
    
    
    $
    9,304,378
  3




---



##### Table of Contents



DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
 QUARTERS ENDED
    
    
    SIX MONTH PERIODSJUNE 30,
    
    
    ENDED JUNE 30,(In thousands, except for share information)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Interest income:Loans
    
    $
    85,910
    
    
    $
    86,726
    
    
    $
    171,292
    
    
    $
    176,319Mortgage-backed securities
    
    
    29,936
    
    
    
    21,085
    
    
    
    49,038
    
    
    
    43,325Interest-only strips (IOs)
    
    
    1,756
    
    
    
    1,395
    
    
    
    3,430
    
    
    
    2,889Investment securities
    
    
    13,912
    
    
    
    27,074
    
    
    
    28,678
    
    
    
    54,886Other interest-earning assets
    
    
    4,132
    
    
    
    16,963
    
    
    
    11,316
    
    
    
    33,072Total interest income
    
    
    135,646
    
    
    
    153,243
    
    
    
    263,754
    
    
    
    310,491Interest expense:Deposits
    
    
    37,268
    
    
    
    44,105
    
    
    
    79,916
    
    
    
    86,893Securities sold under agreements to repurchase
    
    
    22,091
    
    
    
    38,676
    
    
    
    40,404
    
    
    
    78,312Advances from FHLB
    
    
    17,549
    
    
    
    13,036
    
    
    
    34,807
    
    
    
    26,644Loans payable
    
    
    4,568
    
    
    
    7,306
    
    
    
    10,077
    
    
    
    14,934Notes payable
    
    
    5,315
    
    
    
    15,491
    
    
    
    10,651
    
    
    
    30,915Total interest expense
    
    
    86,791
    
    
    
    118,614
    
    
    
    175,855
    
    
    
    237,698Net interest income
    
    
    48,855
    
    
    
    34,629
    
    
    
    87,899
    
    
    
    72,793Provision for loan and lease losses
    
    
    10,683
    
    
    
    19,322
    
    
    
    15,469
    
    
    
    25,311Net interest income after provision for loan and lease losses
    
    
    38,172
    
    
    
    15,307
    
    
    
    72,430
    
    
    
    47,482Non-interest income:Net gain on mortgage loan sales and fees
    
    
    3,858
    
    
    
    1,521
    
    
    
    6,226
    
    
    
    984Net (loss) gain on securities held for trading, including gains
and losses on the fair value of IOs
    
    
    (7,916
    )
    
    
    5,891
    
    
    
    (248
    )
    
    
    3,913Net (loss) gain on sale of investment securities
    
    
    
    
    
    
    (74
    )
    
    
    194
    
    
    
    (342
    )Servicing income (net of mark-to-market adjustment)
    
    
    12,434
    
    
    
    9,383
    
    
    
    9,723
    
    
    
    15,383Commissions, fees and other income
    
    
    16,519
    
    
    
    8,176
    
    
    
    26,379
    
    
    
    16,587Total non-interest income
    
    
    24,895
    
    
    
    24,897
    
    
    
    42,274
    
    
    
    36,525Non-interest expenses:Compensation and benefits
    
    
    17,057
    
    
    
    30,641
    
    
    
    36,135
    
    
    
    57,203Taxes, other than payroll and income taxes
    
    
    2,379
    
    
    
    3,437
    
    
    
    4,801
    
    
    
    6,284Advertising
    
    
    2,273
    
    
    
    2,568
    
    
    
    4,505
    
    
    
    3,930Professional services
    
    
    8,076
    
    
    
    17,559
    
    
    
    14,010
    
    
    
    37,001Communication and information systems
    
    
    5,641
    
    
    
    5,264
    
    
    
    11,121
    
    
    
    9,318Occupancy and other office expenses
    
    
    5,680
    
    
    
    6,451
    
    
    
    11,649
    
    
    
    12,750Depreciation and amortization
    
    
    4,072
    
    
    
    4,427
    
    
    
    8,127
    
    
    
    9,478Other
    
    
    10,448
    
    
    
    6,272
    
    
    
    19,841
    
    
    
    15,873Total non-interest expenses
    
    
    55,626
    
    
    
    76,619
    
    
    
    110,189
    
    
    
    151,837Income (loss) before income taxes
    
    
    7,441
    
    
    
    (36,415
    )
    
    
    4,515
    
    
    
    (67,830
    )Income tax expense
    
    
    5,799
    
    
    
    1,063
    
    
    
    5,171
    
    
    
    6,957Net income (loss)
    
    $
    1,642
    
    
    $
    (37,478
    )
    
    $
    (656
    )
    
    $
    (74,787
    )Net loss attributable to common shareholders
    
    $
    (6,683
    )
    
    $
    (45,803
    )
    
    $
    (17,306
    )
    
    $
    (91,437
    )Net loss per common share(1) (2)
    
    $
    (0.12
    )
    
    $
    (8.49
    )
    
    $
    (0.32
    )
    
    $
    (16.94
    )
 
 (1)
    
    Net loss per common share for the quarter and six month period ended June 30, 2007 reflects the 1-for-20 reverse stock split
effective August 17, 2007.(2)
    
    For the quarters and six month periods ended June 30, 2008 and 2007, net loss per common shares represents the basic and diluted loss
per common share, respectively, for each of the periods presented.  4




---



##### Table of Contents



DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(UNAUDITED)
 SIX MONTH PERIODSENDED JUNE 30,(In thousands)
    
    2008
    
    
    2007PREFERRED STOCK
    
    $
    573,250
    
    
    $
    573,250COMMON STOCK
    
    
    538
    
    
    
    107,948ADDITIONAL PAID-IN CAPITAL:Balance at beginning of period
    
    
    849,081
    
    
    
    166,495Stock-based compensation recognized
    
    
    
    
    
    
    660Balance at end of period
    
    
    849,081
    
    
    
    167,155LEGAL SURPLUS
    
    
    23,596
    
    
    
    23,596(ACCUMULATED DEFICIT) RETAINED EARNINGS:Balance at beginning of period
    
    
    (66,610
    )
    
    
    139,051Net loss
    
    
    (656
    )
    
    
    (74,787
    )Cumulative effect of accounting change (adoption of SFAS
No. 156)
    
    
    
    
    
    
    926Cumulative effect of accounting change (adoption of FIN 48)
    
    
    
    
    
    
    (2,380
    )Cash dividends declared on preferred stock
    
    
    (16,650
    )
    
    
    (16,650
    )Balance at end of period
    
    
    (83,916
    )
    
    
    46,160ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX:Balance at beginning of period
    
    
    (33,148
    )
    
    
    (106,936
    )Other comprehensive loss, net of deferred tax
    
    
    (99,914
    )
    
    
    (24,886
    )Balance at end of period
    
    
    (133,062
    )
    
    
    (131,822
    )Total stockholders equity
    
    $
    1,229,487
    
    
    $
    786,287
  5




---



##### Table of Contents



DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPRENHENSIVE LOSS
(UNAUDITED)
 QUARTERS ENDED
    
    
    SIX MONTH PERIODSJUNE 30,
    
    
    ENDED JUNE 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    1,642
    
    
    $
    (37,478
    )
    
    $
    (656
    )
    
    $
    (74,787
    )Other comprehensive loss, before tax:Unrealized losses on securities arising during the period
    
    
    (50,771
    )
    
    
    (35,198
    )
    
    
    (113,389
    )
    
    
    (25,416
    )Amortization of unrealized loss on securities reclassified to
held to maturity
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    22Reclassification of realized losses (gains) included in net loss
    
    
    
    
    
    
    74
    
    
    
    (194
    )
    
    
    342Other comprehensive loss on investment securities, before tax
    
    
    (50,771
    )
    
    
    (35,113
    )
    
    
    (113,583
    )
    
    
    (25,052
    )Income tax benefit related to investment securities
    
    
    5,113
    
    
    
    449
    
    
    
    13,913
    
    
    
    166Other comprehensive loss on investment securities, net of tax
    
    
    (45,658
    )
    
    
    (34,664
    )
    
    
    (99,670
    )
    
    
    (24,886
    )Other comprehensive income (loss) on cash flow hedge, net of tax
    
    
    2,923
    
    
    
    
    
    
    
    (244
    )
    
    
    Other comprehensive loss, net of tax
    
    
    (42,735
    )
    
    
    (34,664
    )
    
    
    (99,914
    )
    
    
    (24,886
    )Comprehensive loss, net of tax
    
    $
    (41,093
    )
    
    $
    (72,142
    )
    
    $
    (100,570
    )
    
    $
    (99,673
    )Accumulated other comprehensive loss, net of taxOther comprehensive loss on investment securities
    
    $
    (132,247
    )
    
    $
    (131,822
    )
    
    $
    (132,247
    )
    
    $
    (131,822
    )Other comprehensive loss on cash flow hedge
    
    
    (815
    )
    
    
    
    
    
    
    (815
    )
    
    
    Total accumulated other comprehensive loss, net of tax
    
    $
    (133,062
    )
    
    $
    (131,822
    )
    
    $
    (133,062
    )
    
    $
    (131,822
    )
  6




---



##### Table of Contents



DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 SIX MONTH PERIODS ENDEDJUNE 30,(In thousands)
    
    2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (656
    )
    
    $
    (74,787
    )Adjustments to reconcile net loss to net cash provided by operating activities:Stock-based compensation
    
    
    
    
    
    
    660Depreciation and amortization
    
    
    8,127
    
    
    
    9,478Mark-to-market adjustment of servicing assets
    
    
    7,099
    
    
    
    6,280Deferred tax provision
    
    
    3,647
    
    
    
    5,083Provision for loan and lease losses
    
    
    15,469
    
    
    
    25,311Net gain on
sale of assets to be disposed of  by sale
    
    
    (23
    )
    
    
    Accretion of discount on loans, investment securities and debt
    
    
    (13,715
    )
    
    
    (3,888
    )Unrealized loss on loans held for sale
    
    
    
    
    
    
    2,008Net decrease in loans held for sale
    
    
    (55,475
    )
    
    
    (158,017
    )(Gain) loss on sale of securities
    
    
    (3,157
    )
    
    
    4,676Unrealized loss on trading securities
    
    
    2,983
    
    
    
    3,751Decrease in securities held for trading
    
    
    127,744
    
    
    
    138,327Amortization
and net (loss) gain in the fair value of IOs
    
    
    (2,768
    )
    
    
    171(Increase) decrease in derivative instruments
    
    
    (770
    )
    
    
    8,551(Increase) decrease in receivables and mortgage servicing advances
    
    
    (8,022
    )
    
    
    5,139(Increase) decrease in accrued interest receivable
    
    
    (2,750
    )
    
    
    6,816Increase in other assets
    
    
    (20,415
    )
    
    
    (29,482
    )Decrease in accrued expenses and other liabilities
    
    
    (31,273
    )
    
    
    (15,185
    )Total adjustments
    
    
    26,701
    
    
    
    9,679Net cash provided by (used in) operating activities
    
    
    26,045
    
    
    
    (65,108
    )Cash flows from investing activities:Purchases of securities available for sale
    
    
    (1,848,684
    )
    
    
    Principal repayment and sales of securities available for sale
    
    
    581,837
    
    
    
    446,459Principal repayment and maturities of securities held to maturity
    
    
    
    
    
    
    166,099(Increase) decrease in FHLB stock
    
    
    (40,273
    )
    
    
    6,094Net (increase) decrease of loans receivable
    
    
    (267,143
    )
    
    
    147,928Purchases of premises and equipment
    
    
    (3,651
    )
    
    
    (2,799
    )Proceeds from sale of servicing assets
    
    
    
    
    
    
    7,000Proceeds from assets to be disposed by sale
    
    
    474
    
    
    
    Proceeds from sales of real estate held for sale
    
    
    8,398
    
    
    
    3,615Net cash (used by) provided by investing activities
    
    
    (1,569,042
    )
    
    
    774,396Cash flows from financing activities:Increase (decrease) in deposits
    
    
    62,704
    
    
    
    (354,174
    )Increase (decrease) in securities sold under agreements to repurchase
    
    
    655,908
    
    
    
    (568,759
    )Proceeds from advances from FHLB
    
    
    1,440,000
    
    
    
    190,000Repayment of advances from FHLB
    
    
    (845,000
    )
    
    
    (240,000
    )Repayment of secured borrowings
    
    
    (22,886
    )
    
    
    (19,995
    )Repayment of notes payable
    
    
    (2,890
    )
    
    
    (5,181
    )Dividends paid
    
    
    (16,650
    )
    
    
    (16,650
    )Net cash provided by (used in) financing activities
    
    
    1,271,186
    
    
    
    (1,014,759
    )Net decrease in cash and cash equivalents
    
    $
    (271,811
    )
    
    $
    (305,471
    )Cash and cash equivalents at beginning of period
    
    
    789,169
    
    
    
    1,145,861Cash and cash equivalents at the end of period
    
    $
    517,358
    
    
    $
    840,390Cash and cash equivalents includes:Cash and due from banks
    
    $
    87,057
    
    
    $
    119,104Money market investments
    
    
    430,301
    
    
    
    721,286$
    517,358
    
    
    $
    840,390Supplemental schedule of non-cash activities:Loan securitizations
    
    $
    147,574
    
    
    $
    111,950Reclassification of securities from the held for trading portfolio to the available for sale portfolio
    
    $
    68,520
    
    
    $
    Reclassification of securities held to maturity to held for trading in connection with the agreement
to sell certain assets of Doral Bank NY
    
    $
    
    
    
    $
    91,045Reclassification of loans receivable to loans held for sale in connection with the agreement to sell
certain assets of Doral Bank NY
    
    $
    
    
    
    $
    205,629Reclassification
of premises and equipment to assets to be disposed of by sale
    
    $
    
    
    
    $
    22,457Reclassification
of assets to be disposed of by sale to premises and equipment
    
    $
    809
    
    
    $
    Loans foreclosed
    
    $
    25,032
    
    
    $
    8,575Reclassification of loans held for sale to loans receivable
    
    $
    48,185
    
    
    $
    1,340,833Capitalization of servicing assets
    
    $
    2,975
    
    
    $
    2,546Remeasurement of income taxes payable upon adoption of FIN 48
    
    $
    
    
    
    $
    2,380Remeasurement of fair value of MSRs upon adoption of SFAS 156, net of tax
    
    $
    
    
    
    $
    926Supplemental information for cash flows:Cash used to pay interest
    
    $
    184,658
    
    
    $
    237,279Cash used to pay income taxes
    
    $
    17,816
    
    
    $
    2,587
  7




---



##### Table of Contents



DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 a.
    
    The Consolidated Financial Statements (unaudited) include the accounts of Doral Financial
Corporation, Doral Mortgage LLC (Doral Mortgage), Doral Securities, Inc. (Doral
Securities), Doral Bank (Doral Bank PR), Doral Bank, FSB (Doral Bank NY), Doral Money,
Inc. (Doral Money), Doral International, Inc. (Doral International), Doral Properties,
Inc. (Doral Properties), Doral Insurance Agency, Inc. (Doral Agency) and CB, LLC. On July
18, 2007, Sana Mortgage Corporation (Sana) was merged with and into Doral Mortgage and
Centro Hipotecario de Puerto Rico (Centro Hipotecario) was merged with and into Doral
Financial. References herein to Doral Financial or the Company shall be deemed to refer to
the Company and its consolidated subsidiaries, unless otherwise provided. All significant
intercompany accounts and transactions have been eliminated in consolidation. The Consolidated
Financial Statements (unaudited) have been prepared in conformity with the accounting policies
stated in the Companys Annual Audited Consolidated Financial Statements included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2007, except for the
implementation of Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157) detailed in notes c and x below. Certain information and
note disclosure normally included in the financial statements prepared in accordance with
generally accepted accounting principles in the United States of America (GAAP) has been
condensed or omitted from these statements pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) and, accordingly, these financial statements should
be read in conjunction with the audited Consolidated Financial Statements of the Company for
the year ended December 31, 2007, included in the Companys 2007 Annual Report on Form 10-K.
All adjustments (consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the statement of financial position, results
of operations and cash flows for the interim periods have been reflected.
 b.
    
    The results of operations for the quarter and six month period ended June 30, 2008 are not
necessarily indicative of the results to be expected for the full year.
 c.
    
    The Company adopted SFAS No. 157 on January 1, 2008. SFAS No. 157 defines fair value,
establishes a consistent framework for measuring fair value and expands disclosure
requirements for fair value measurements. This statement defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. SFAS No. 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable inputs when
measuring fair value. The standard describes three levels of inputs that are used to measure
fair value:
 Level 1
    
    Valuation is based upon unadjusted quoted prices for
identical instruments traded in active markets.Level 2
    
    Valuation is based upon quoted prices for similar
instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation
techniques for which all significant assumptions are observable in the market,
or are derived principally from or corroborated by observable market data, by
correlation or by other means.Level 3
    
    Valuation is generated from model-based techniques that use
significant assumptions not observable in the market. These unobservable
assumptions reflect the Companys estimates of assumptions that market
participants would use in pricing the asset or liability. Valuation techniques
include use of option pricing models, discounted cash flow models and similar
techniques.
 The Company applied the fair value framework established by SFAS No. 157 to the following
financial assets and liabilities: securities available for sale, securities held for
trading, loans held for sale, loans held for investment, mortgage servicing rights (MSRs)
and derivatives. Please refer to note x for further information.
 8




---



##### Table of Contents



On February 12, 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position 157-2 (FSP 157-2), Effective Date of FASB Statement No. 157. This statement
delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial
liabilities, except for those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually), until fiscal years beginning
after November 15, 2008 and interim periods within those fiscal years. Therefore, we have
elected to delay application of SFAS No. 157 for nonfinancial long-lived assets measured at
fair value for an impairment assessment under SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, goodwill and other real estate owned.d.
    
    At June 30, 2008, escrow funds and custodial accounts included approximately $92.5 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 $20.3 million
deposited with other banks, which were excluded from the Companys assets and liabilities. The
Company had fidelity bond and errors and omissions coverage of $17.5 million and $17.0
million, respectively, as of June 30, 2008.e.
    
    The reconciliation of the numerator and denominator of the basic and diluted
earnings-per-share follows:
 Quarters Ended
    
    
    Six Month Periods EndedJune 30,
    
    
    June 30,(Dollars in thousands, except per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net Income (Loss):Net income (loss)
    
    $
    1,642
    
    
    $
    (37,478
    )
    
    $
    (656
    )
    
    $
    (74,787
    )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
    
    $
    (6,683
    )
    
    $
    (45,803
    )
    
    $
    (17,306
    )
    
    $
    (91,437
    )Weighted-Average Shares(1) (2):Basic weighted-average number of common
shares outstanding
    
    
    53,810,110
    
    
    
    5,397,412
    
    
    
    53,810,110
    
    
    
    5,397,412Diluted weighted-average number of common
shares outstanding
    
    
    53,810,110
    
    
    
    5,397,412
    
    
    
    53,810,110
    
    
    
    5,397,412Net Loss per Common Share(2):Basic
    
    $
    (0.12
    )
    
    $
    (8.49
    )
    
    $
    (0.32
    )
    
    $
    (16.94
    )Diluted
    
    $
    (0.12
    )
    
    $
    (8.49
    )
    
    $
    (0.32
    )
    
    $
    (16.94
    )
 
 (1)
    
    For the quarters and six month periods ended June 30, 2008 and 2007, there were 1,380,000 shares of the Companys
4.75% perpetual cumulative convertible preferred stock that were excluded from the computation of diluted earnings per share
because their effect would have been antidilutive. Each share of convertible preferred stock is currently convertible into 0.31428
shares of common stock, subject to adjustment under specific conditions. The option of the purchasers to convert the convertible
preferred stock into shares of the Companys common stock is exercisable only (a) if during any fiscal quarter after September 30,
2003, the closing sale price of the Companys common stock for at least 20 trading days in a period of 30 consecutive trading days
ending on the last trading date of the preceding fiscal quarter exceeds 120% of the conversion price of the convertible preferred
stock (currently 120% of $795.47, or $954.56); (b) upon the occurrence of certain corporate transactions; or (c) upon the delisting
of the Companys common stock. On or after September 30, 2008, the Company may, at its option, cause the convertible preferred
stock to be converted into the number of shares of common stock that are issuable at the conversion price. The Company may only
exercise its conversion right if the closing sale price of the Companys common stock exceeds 130% of the conversion price of the
convertible preferred stock 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)
    
    Weighted-average shares and net loss per common share for the quarter and six month period ended June 30, 2007
reflects the 1-for-20 reverse stock split effective August 17, 2007. f.
    
    Employee costs and other expenses are shown in the Consolidated Statements of Income
net of direct loan origination costs which, pursuant to Statement of Financial Accounting
Standard (SFAS) No. 91, Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases (SFAS 91), are
capitalized as part of the carrying cost of loans and are offset against net gains on loan
sales and fees when the loans are sold or amortized as yield adjustment in the case of
loans receivable.
 9




---



##### Table of Contents



Set forth below is a reconciliation of the application of SFAS 91 to employee costs and
other expenses:
 Quarters Ended
    
    
    Six Month Periods EndedJune 30,
    
    
    June 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Employee costs, gross
    
    $
    19,498
    
    
    $
    32,360
    
    
    $
    40,768
    
    
    $
    60,638Deferred costs pursuant to SFAS 91
    
    
    (2,441
    )
    
    
    (1,719
    )
    
    
    (4,633
    )
    
    
    (3,435
    )Employee cost, net
    
    $
    17,057
    
    
    $
    30,641
    
    
    $
    36,135
    
    
    $
    57,203Other expenses, gross
    
    $
    10,657
    
    
    $
    6,616
    
    
    $
    20,140
    
    
    $
    17,208Deferred costs pursuant to SFAS 91
    
    
    (209
    )
    
    
    (344
    )
    
    
    (299
    )
    
    
    (1,335
    )Other expenses, net
    
    $
    10,448
    
    
    $
    6,272
    
    
    $
    19,841
    
    
    $
    15,873
 As of June 30, 2008, the Company had a net deferred origination cost on loans held for sale
amounting to approximately $0.4 million, compared to a net deferred origination fee of
approximately $0.9 million as of December 31, 2007. Net deferred origination fees on loans
receivable amounted to approximately $11.9 million as of June 30, 2008, compared to $10.9
million as of December 31, 2007.g.
    
    Segment informationThe Company operates in four reportable segments: mortgage banking activities, banking
(including thrift operations), institutional securities operations and insurance agency
activities. The Companys segment reporting is organized by legal entity and aggregated by
line of business. Legal entities that do not meet the threshold for separate disclosure are
aggregated with other legal entities with similar lines of business. Management made this
determination based on operating decisions particular to each business line and because each
one targets different customers and requires different strategies. The majority of the
Companys operations are conducted in Puerto Rico. The Company also operates in the mainland
United States, principally in the New York City metropolitan area.During 2006, the Company reduced the operations of Doral Securities and sold substantially
all of Doral Securities investment securities. During the third quarter of 2007, Doral
Securities voluntarily withdrew its license as broker dealer with the SEC and its membership
with the Financial Industry Regulatory Authority (FINRA). As a result, Doral Securities
operations are currently limited to acting as a co-investment manager to a local
fixed-income investment company. The Company intends to assign its contract to Doral Bank
PR.During 2007, in connection with the recapitalization transaction, Doral Financial
transferred the Companys mortgage origination platform and servicing portfolio, subject to
certain exceptions, to Doral Bank PR. Following the transfer, Doral Financials mortgage
origination business is conducted by Doral Mortgage, as a wholly owned subsidiary of Doral
Bank PR, and Doral Financials servicing business is operated from Doral Bank PR. Management
determined that it was impracticable to change the composition of reportable segments for
earlier periods. Therefore, we have presented below segment information for the quarter and
six month period ended June 30, 2008 with the new reportable segment structure as well as
comparative segment information for the quarters and six month periods ended June 30, 2008
and 2007, using the old report segment structure. In establishing the old reportable segment
structure for the quarter ended June 30, 2008, the servicing asset and the related income
and expenses that were transferred during the third quarter of 2007 to Doral Bank PR have
been reclassified to the mortgage banking segment.The accounting policies followed by the segments are the same as those described in the
Summary of Significant Accounting Policies.The following tables present net interest income (loss), non-interest (loss) income, net
(loss) income and identifiable assets for each of the Companys reportable segments for the
periods presented using the old reportable segment structure.
 10




---



##### Table of Contents



Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentBanking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations(1)
    
    Totals(In thousands)
    
    QUARTER ENDED JUNE 30, 2008Net interest income
    
    $
    4,882
    
    
    
    43,558
    
    
    
    
    
    
    
    
    
    
    
    415
    
    
    $
    48,855Non-interest income
    
    $
    22,404
    
    
    
    5,355
    
    
    
    6
    
    
    
    3,535
    
    
    
    (6,405
    )
    
    $
    24,895Net income (loss)
    
    $
    10,027
    
    
    
    (6,069
    )
    
    
    (45
    )
    
    
    1,659
    
    
    
    (3,930
    )
    
    $
    1,642Identifiable assets
    
    $
    2,106,364
    
    
    
    8,765,476
    
    
    
    2,037
    
    
    
    24,166
    
    
    
    (448,172
    )
    
    $
    10,449,871QUARTER ENDED JUNE 30, 2007Net interest (loss) income
    
    $
    (5,965
    )
    
    
    39,714
    
    
    
    
    
    
    
    
    
    
    
    880
    
    
    $
    34,629Non-interest income
    
    $
    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
    )
    
    $
    10,741,792(In thousands)
    
    SIX MONTH PERIOD ENDED JUNE 30, 2008Net interest income
    
    $
    9,777
    
    
    
    77,353
    
    
    
    
    
    
    
    
    
    
    
    769
    
    
    $
    87,899Non-interest income
    
    $
    28,765
    
    
    
    20,619
    
    
    
    144
    
    
    
    6,549
    
    
    
    (13,803
    )
    
    $
    42,274Net income (loss)
    
    $
    13,444
    
    
    
    (8,338
    )
    
    
    (14
    )
    
    
    3,036
    
    
    
    (8,784
    )
    
    $
    (656
    )Identifiable assets
    
    $
    2,106,364
    
    
    
    8,765,476
    
    
    
    2,037
    
    
    
    24,166
    
    
    
    (448,172
    )
    
    $
    10,449,871SIX MONTH PERIOD ENDED JUNE 30, 2007Net interest (loss) income
    
    $
    (10,307
    )
    
    
    80,474
    
    
    
    
    
    
    
    
    
    
    
    2,626
    
    
    $
    72,793Non-interest income
    
    $
    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
    )
    
    $
    10,741,792
 
 (1)
    
    The intersegment eliminations in the above table include servicing fees paid by the
banking subsidiaries to the parent company recognized as a reduction of the net interest
income, direct intersegment loan origination costs amortized as yield adjustment or offset
against net gains on mortgage loan sales and fees (mainly related with origination costs paid
by the banking segment to the mortgage banking segment) and other income derived from
intercompany transactions, related principally to rental income paid to Doral Properties, the
Companys subsidiary that owns the corporate headquarter facilities. Assets include internal
funding and investments in subsidiaries accounted for at cost.  Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentBanking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations
    
    Totals(In thousands)
    
    QUARTER ENDED JUNE 30, 2008Net interest income
    
    $
    4,882
    
    
    
    43,558
    
    
    
    
    
    
    
    
    
    
    
    415
    
    
    $
    48,855Non-interest income
    
    $
    7,432
    
    
    
    20,327
    
    
    
    6
    
    
    
    3,535
    
    
    
    (6,405
    )
    
    $
    24,895Net (loss) income
    
    $
    (3,976
    )
    
    
    7,934
    
    
    
    (45
    )
    
    
    1,659
    
    
    
    (3,930
    )
    
    $
    1,642Identifiable assets
    
    $
    2,106,364
    
    
    
    8,931,123
    
    
    
    2,037
    
    
    
    24,166
    
    
    
    (613,819
    )
    
    $
    10,449,871
 11




---



##### Table of Contents



Mortgage
    
    
    
    
    
    
    Institutional
    
    
    Insurance
    
    
    IntersegmentBanking
    
    
    Banking
    
    
    Securities
    
    
    Agency
    
    
    Eliminations
    
    
    Totals(In thousands)
    
    SIX MONTH PERIOD ENDED JUNE 30, 2008Net interest income
    
    $
    9,777
    
    
    
    77,353
    
    
    
    
    
    
    
    
    
    
    
    769
    
    
    $
    87,899Non-interest income
    
    $
    15,077
    
    
    
    34,307
    
    
    
    144
    
    
    
    6,549
    
    
    
    (13,803
    )
    
    $
    42,274Net income (loss)
    
    $
    1,798
    
    
    
    3,308
    
    
    
    (14
    )
    
    
    3,036
    
    
    
    (8,784
    )
    
    $
    (656
    )Identifiable assets
    
    $
    2,106,364
    
    
    
    8,931,123
    
    
    
    2,037
    
    
    
    24,166
    
    
    
    (613,819
    )
    
    $
    10,449,871
  Puerto Rico
    
    Mainland US
    
    Eliminations
    
    Totals(In thousands)
    
    QUARTER ENDED JUNE 30, 2008Net interest income
    
    $
    46,939
    
    
    
    1,887
    
    
    
    29
    
    
    $
    48,855Non-interest income
    
    $
    24,148
    
    
    
    824
    
    
    
    (77
    )
    
    $
    24,895Net income
    
    $
    1,610
    
    
    
    33
    
    
    
    (1
    )
    
    $
    1,642Identifiable assets
    
    $
    10,392,531
    
    
    
    233,814
    
    
    
    (176,474
    )
    
    $
    10,449,871QUARTER ENDED JUNE 30, 2007Net interest income
    
    $
    29,894
    
    
    
    4,701
    
    
    
    34
    
    
    $
    34,629Non-interest income (loss)
    
    $
    28,349
    
    
    
    (3,349
    )
    
    
    (103
    )
    
    $
    24,897Net loss
    
    $
    (36,118
    )
    
    
    (1,364
    )
    
    
    4
    
    
    $
    (37,478
    )Identifiable assets
    
    $
    10,204,592
    
    
    
    623,164
    
    
    
    (85,964
    )
    
    $
    10,741,792(In thousands)
    
    SIX MONTH PERIOD ENDED JUNE 30, 2008Net interest income
    
    $
    84,599
    
    
    
    3,200
    
    
    
    100
    
    
    $
    87,899Non-interest income
    
    $
    41,053
    
    
    
    1,426
    
    
    
    (205
    )
    
    $
    42,274Net (loss) income
    
    $
    (1,288
    )
    
    
    621
    
    
    
    11
    
    
    $
    (656
    )Identifiable assets
    
    $
    10,392,531
    
    
    
    233,814
    
    
    
    (176,474
    )
    
    $
    10,449,871SIX 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
    
    $
    (71,244
    )
    
    
    (3,546
    )
    
    
    3
    
    
    $
    (74,787
    )Identifiable assets
    
    $
    10,204,592
    
    
    
    623,164
    
    
    
    (85,964
    )
    
    $
    10,741,792
 12




---



##### Table of Contents



h.
    
    The fair value of the Companys securities held for trading and the fair value and
carrying value of its securities classified as available for sale are shown below by
category.
 1.
    
    The following table summarizes Doral Financials holdings of securities held
for trading as of June 30, 2008 and December 31, 2007.
 SECURITIES HELD FOR TRADING
    
    JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007Mortgage-Backed Securities:GNMA Exempt
    
    $
    2,539
    
    
    $
    33,678GNMA Taxable
    
    
    2,233
    
    
    
    11,928CMO Government Sponsored Agencies
    
    
    
    
    
    
    287CMO Private Label
    
    
    1,541
    
    
    
    15,777FHLMC and FNMA
    
    
    
    
    
    
    8,693Variable Interest-Only Strips
    
    
    48,414
    
    
    
    51,074Fixed Interest-Only Strips
    
    
    746
    
    
    
    854U.S. Treasury Notes
    
    
    173,537
    
    
    
    152,695Derivatives(1)
    
    
    2,246
    
    
    
    1,476Total
    
    $
    231,256
    
    
    $
    276,462
 
 (1)
    
    Doral Financial uses derivatives to manage its
exposure to interest rate risk caused by changes in interest rates. Derivatives
include interest rate caps and forward contracts. Derivatives not accounted as
hedges in a net asset position are recorded as securities held for trading and
derivatives in a net liability position as liabilities. The gross notional
amount of derivatives recorded as held for trading totaled $293.0 million as of
June 30, 2008 and $414.0 million as of December 31, 2007. Notional amounts
indicate the volume of derivatives activity, but do not represent Doral
Financials exposure to market or credit risk.  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, 2008 and December 31, 2007.The weighted-average yield is computed based on amortized cost and, therefore, does
not give effect to changes in fair value. Expected maturities of mortgage-backed
securities and certain debt securities might differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
 13




---



##### Table of Contents



SECURITIES AVAILABLE FOR SALE
AS OF JUNE 30, 2008
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGE(Dollars in thousands)
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMortgage-Backed SecuritiesGNMADue from one to five years
    
    $
    976
    
    
    $
    13
    
    
    $
    16
    
    
    $
    973
    
    
    
    4.95
    %Due from five to ten years
    
    
    549
    
    
    
    16
    
    
    
    
    
    
    
    565
    
    
    
    6.39
    %Due over ten years
    
    
    65,815
    
    
    
    212
    
    
    
    850
    
    
    
    65,177
    
    
    
    5.38
    %FHLMC and FNMADue from five to ten years
    
    
    15,166
    
    
    
    
    
    
    
    272
    
    
    
    14,894
    
    
    
    5.51
    %Due over ten years
    
    
    1,029,068
    
    
    
    1,911
    
    
    
    9,286
    
    
    
    1,021,693
    
    
    
    5.16
    %CMO Government Sponsored AgenciesDue over ten years
    
    
    675,222
    
    
    
    2,637
    
    
    
    5,685
    
    
    
    672,174
    
    
    
    3.77
    %CMO Private LabelDue over ten years
    
    
    515,375
    
    
    
    
    
    
    
    134,399
    
    
    
    380,976
    
    
    
    6.49
    %Debt SecuritiesFHLB NotesDue from one to five years
    
    
    100,358
    
    
    
    1,798
    
    
    
    
    
    
    
    102,156
    
    
    
    4.16
    %Due from five to ten years
    
    
    168,595
    
    
    
    
    
    
    
    1,739
    
    
    
    166,856
    
    
    
    5.00
    %Due over ten years
    
    
    105,000
    
    
    
    
    
    
    
    2,170
    
    
    
    102,830
    
    
    
    5.26
    %FNMA NotesDue within one year
    
    
    46,507
    
    
    
    97
    
    
    
    
    
    
    
    46,604
    
    
    
    4.19
    %Due from one to five years
    
    
    207,149
    
    
    
    196
    
    
    
    
    
    
    
    207,345
    
    
    
    3.55
    %Due over ten years
    
    
    49,990
    
    
    
    41
    
    
    
    
    
    
    
    50,031
    
    
    
    6.00
    %FHLB Zero CouponDue over ten years
    
    
    141,570
    
    
    
    
    
    
    
    4,631
    
    
    
    136,939
    
    
    
    6.01
    %FHLMC Zero CouponDue over ten years
    
    
    86,349
    
    
    
    359
    
    
    
    
    
    
    
    86,708
    
    
    
    5.91
    %FHLMC NotesDue over ten years
    
    
    50,000
    
    
    
    25
    
    
    
    
    
    
    
    50,025
    
    
    
    5.50
    %P.R. Housing BankDue from five to ten years
    
    
    3,595
    
    
    
    5
    
    
    
    35
    
    
    
    3,565
    
    
    
    4.92
    %Due over ten years
    
    
    6,625
    
    
    
    13
    
    
    
    
    
    
    
    6,638
    
    
    
    5.48
    %OtherDue within one year
    
    
    6,925
    
    
    
    5
    
    
    
    
    
    
    
    6,930
    
    
    
    3.98
    %Due from one to five years
    
    
    25,466
    
    
    
    52
    
    
    
    170
    
    
    
    25,348
    
    
    
    4.44
    %Due over ten years
    
    
    8,000
    
    
    
    
    
    
    
    361
    
    
    
    7,639
    
    
    
    5.61
    %$
    3,308,300
    
    
    $
    7,380
    
    
    $
    159,614
    
    
    $
    3,156,066
    
    
    
    5.01
    %
 14




---



##### Table of Contents



SECURITIES AVAILABLE FOR SALE
AS OF DECEMBER 31, 2007
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGE(Dollars in thousands)
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMortgage-Backed SecuritiesGNMADue from one to five years
    
    $
    374
    
    
    $
    9
    
    
    $
    
    
    
    $
    383
    
    
    
    6.39
    %Due over ten years
    
    
    3,694
    
    
    
    145
    
    
    
    3
    
    
    
    3,836
    
    
    
    6.91
    %FNMADue over ten years
    
    
    260,143
    
    
    
    4,297
    
    
    
    558
    
    
    
    263,882
    
    
    
    6.05
    %CMO Government Sponsored AgenciesDue over ten years
    
    
    7,000
    
    
    
    
    
    
    
    659
    
    
    
    6,341
    
    
    
    6.10
    %CMO Private LabelDue over ten years
    
    
    530,997
    
    
    
    
    
    
    
    28,285
    
    
    
    502,712
    
    
    
    6.22
    %Debt SecuritiesFHLB NotesDue from one to five years
    
    
    100,458
    
    
    
    1,165
    
    
    
    
    
    
    
    101,623
    
    
    
    4.16
    %Due over ten years
    
    
    273,595
    
    
    
    
    
    
    
    3,376
    
    
    
    270,219
    
    
    
    5.10
    %FNMA NotesDue within one year
    
    
    46,000
    
    
    
    
    
    
    
    
    
    
    
    46,000
    
    
    
    4.60
    %Due over ten years
    
    
    49,990
    
    
    
    
    
    
    
    43
    
    
    
    49,947
    
    
    
    6.00
    %FHLB Zero CouponDue over ten years
    
    
    137,131
    
    
    
    
    
    
    
    2,688
    
    
    
    134,443
    
    
    
    6.01
    %FHLMC Zero CouponDue over ten years
    
    
    242,281
    
    
    
    155
    
    
    
    162
    
    
    
    242,274
    
    
    
    5.83
    %FHLMC NotesDue over ten years
    
    
    50,000
    
    
    
    12
    
    
    
    
    
    
    
    50,012
    
    
    
    5.50
    %P.R. Housing BankDue over ten years
    
    
    4,635
    
    
    
    9
    
    
    
    
    
    
    
    4,644
    
    
    
    5.50
    %U.S. Treasury BondsDue over ten years
    
    
    234,361
    
    
    
    
    
    
    
    8,768
    
    
    
    225,593
    
    
    
    4.21
    %OtherDue within one year
    
    
    6,899
    
    
    
    11
    
    
    
    20
    
    
    
    6,890
    
    
    
    3.98
    %Due from one to five years
    
    
    5,025
    
    
    
    21
    
    
    
    
    
    
    
    5,046
    
    
    
    5.15
    %Due over ten years
    
    
    8,001
    
    
    
    231
    
    
    
    137
    
    
    
    8,095
    
    
    
    5.61
    %$
    1,960,584
    
    
    $
    6,055
    
    
    $
    44,699
    
    
    $
    1,921,940
    
    
    
    5.56
    %
 15




---



##### Table of Contents



i.
    
    The following tables show Doral Financials gross unrealized losses and fair value for
available for sale investments, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at June 30, 2008
and December 31, 2007.
 SECURITIES AVAILABLE FOR SALE
 As of June 30, 2008Less than 12 months
    
    
    12 months or more
    
    
    TotalNumber of
    
    
    
    
    
    
    Unrealized
    
    
    Number of
    
    
    
    
    
    
    Unrealized
    
    
    Number of
    
    
    
    
    
    
    Unrealized(Dollars in thousands)
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    LossesMortgage-Backed
SecuritiesGNMA
    
    
    99
    
    
    $
    58,196
    
    
    $
    866
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    99
    
    
    $
    58,196
    
    
    $
    866FNMA/ FHLMC
    
    
    29
    
    
    
    742,436
    
    
    
    9,260
    
    
    
    2
    
    
    
    1,578
    
    
    
    28
    
    
    
    31
    
    
    
    744,014
    
    
    
    9,288CMO Government
Sponsored
Agencies
    
    
    6
    
    
    
    243,450
    
    
    
    5,522
    
    
    
    2
    
    
    
    5,950
    
    
    
    433
    
    
    
    8
    
    
    
    249,400
    
    
    
    5,955CMO Private Label
    
    
    13
    
    
    
    380,976
    
    
    
    134,399
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    380,976
    
    
    
    134,399Debt SecuritiesFHLB Notes
    
    
    4
    
    
    
    216,731
    
    
    
    1,864
    
    
    
    1
    
    
    
    52,955
    
    
    
    2,045
    
    
    
    5
    
    
    
    269,686
    
    
    
    3,909FHLB Zero Coupon
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    136,939
    
    
    
    4,631
    
    
    
    1
    
    
    
    136,939
    
    
    
    4,631Other
    
    
    6
    
    
    
    25,764
    
    
    
    296
    
    
    
    1
    
    
    
    2,730
    
    
    
    270
    
    
    
    7
    
    
    
    28,494
    
    
    
    566157
    
    
    $
    1,667,553
    
    
    $
    152,207
    
    
    
    7
    
    
    $
    200,152
    
    
    $
    7,407
    
    
    
    164
    
    
    $
    1,867,705
    
    
    $
    159,614
 SECURITIES AVAILABLE FOR SALE
 As of December 31, 2007Less than 12 months
    
    
    12 months or more
    
    
    TotalNumber of
    
    
    
    
    
    
    Unrealized
    
    
    Number of
    
    
    
    
    
    
    Unrealized
    
    
    Number of
    
    
    
    
    
    
    Unrealized(Dollars in thousands)
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    LossesMortgage-Backed
SecuritiesGNMA
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    1
    
    
    $
    165
    
    
    $
    3
    
    
    
    1
    
    
    $
    165
    
    
    $
    3FNMA
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    32,556
    
    
    
    558
    
    
    
    1
    
    
    
    32,556
    
    
    
    558CMO Government
Sponsored
Agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    6,341
    
    
    
    659
    
    
    
    4
    
    
    
    6,341
    
    
    
    659CMO Private Label
    
    
    9
    
    
    
    502,712
    
    
    
    28,285
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    502,712
    
    
    
    28,285Debt SecuritiesFNMA Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    95,947
    
    
    
    43
    
    
    
    4
    
    
    
    95,947
    
    
    
    43FHLB Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    270,219
    
    
    
    3,376
    
    
    
    5
    
    
    
    270,219
    
    
    
    3,376FHLB Zero Coupon
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    134,443
    
    
    
    2,688
    
    
    
    2
    
    
    
    134,443
    
    
    
    2,688FHLMC Zero Coupon
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    158,229
    
    
    
    162
    
    
    
    2
    
    
    
    158,229
    
    
    
    162US Treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    225,593
    
    
    
    8,768
    
    
    
    2
    
    
    
    225,593
    
    
    
    8,768Other
    
    
    1
    
    
    
    2,863
    
    
    
    137
    
    
    
    1
    
    
    
    3,880
    
    
    
    20
    
    
    
    2
    
    
    
    6,743
    
    
    
    15710
    
    
    $
    505,575
    
    
    $
    28,422
    
    
    
    22
    
    
    $
    927,373
    
    
    $
    16,277
    
    
    
    32
    
    
    $
    1,432,948
    
    
    $
    44,699
  16




---



##### Table of Contents



As of June 30, 2008, the only positions showing significant unrealized losses were the U.S.
Private Label CMOs that were purchased during the fourth quarter of 2007 as part of the
Companys asset purchase program. The price movement on these securities has been adversely
affected by the conditions of the U.S. financial markets, specifically the non-agency mortgage
market. Management believes these price changes are not driven by the deal specific
fundamentals like structure and credit performance, but rather by a lack of liquidity in the
market place, which has caused a downward spiral in prices. The collateral underlying these
bonds can be split up into two categories: Hybrid ARMs amounting to $147.1 million and Pay Options ARMs amounting to $221.1 million Hybrid ARM
collateral has been less impacted by the recent market turmoil principally due to the fact
the underlying characteristics of the collateral provide for more stable cash flows and the
delinquencies of the underlying deals have been less than that of the Pay Option ARM backed
deals. Price performance of the Pay Option ARM backed deals has been worse than that of the
Hybrid ARM deals. Although the trend in delinquency has been worse for these deals, most of
the bonds are super senior tranches, which means they are at the top of the capital
structure. In addition, these deals carry significantly higher credit enhancement than the
equivalent Hybrid ARM backed deals. Management therefore expects these securities to recover
value and intends to hold them until value is recovered.Private Label CMOs includes the PR Private Label
CMOs amounting to $12.8 million that are comprised of subordinate
tranches of securitizations that Doral made in 2006. The price performance of these bonds
has been driven by the events in the U.S. mortgage market and not by the deal performance
fundamentals. The delinquency trends of these Doral securitizations has been considerably
better than the performance of similar U.S. mortgage backed assets. Since these securities
were transferred from the trading category to available for sale at depressed prices and the
underlying delinquency of the loans is well behaved, management expects to hold these assets
until value is recovered.The effects of the conditions in the financial markets and the economy could last through
the end of 2008, but management expects that the Company will receive principal and interest
due from these positions in a timely fashion. The Company has the ability and intent to hold
these positions until maturity or until the unrealized losses are recovered. Furthermore,
Doral Financial is able to finance these positions with Advances from FHLB therefore providing the
capacity to hold the positions until value is recovered. Doral Financial also has excess
funding capacity should it be required.j.
    
    The following table sets forth certain information regarding Doral Financials loans
held for sale as of the dates indicated:
 LOANS HELD FOR SALE(In thousands)
    
    JUNE 30, 2008
    
    
    DECEMBER 31, 2007Conventional single family residential loans
    
    $
    159,371
    
    
    $
    189,995FHA/VA loans
    
    
    173,019
    
    
    
    141,601Construction and commercial real estate loans
    
    
    42,030
    
    
    
    86,960Total loans held for sale (1)
    
    $
    374,420
    
    
    $
    418,556
 
 (1)
    
    At June 30, 2008 and December 31, 2007, the loans held for sale portfolio includes
$1.1 million and $41.8 million, respectively, related to interest-only loans. During the first quarter of 2008, the Company transferred $48.2 million from the loans held
for sale portfolio to the loans receivable portfolio. The Company transferred the loans
because they were deemed not salable to the Agencies. The Company has the ability and intent
to hold these loans until maturity.At June 30, 2008 and December 31, 2007, loans held for sale amounting to $175.5 million and
$189.0 million, respectively, were pledged to secure financing agreements with local
financial institutions, and for which the creditor has the right to repledge this
collateral.At June 30, 2008 and December 31, 2007, the loans held for sale portfolio includes $131.7
million and $126.0 million, respectively, related to defaulted loans backing GNMA securities
for which the Company has an unconditional option (but not an obligation) to repurchase the
defaulted loans. Payment on these loans is guaranteed by FHA.
 17




---



##### Table of Contents



k.
    
    The following table sets forth certain information regarding Doral Financials loans
receivable as of the dates indicated:
 LOANS RECEIVABLE, NET
 JUNE 30, 2008
    
    
    DECEMBER 31, 2007(Dollars in thousands)
    
    AMOUNT
    
    
    PERCENT
    
    
    AMOUNT
    
    
    PERCENTConstruction loans(1)
    
    $
    539,076
    
    
    
    10
    %
    
    $
    588,175
    
    
    
    12
    %Residential mortgage loans
    
    
    3,533,422
    
    
    
    67
    %
    
    
    3,340,162
    
    
    
    66
    %Commercial  secured by real estate
    
    
    794,172
    
    
    
    15
    %
    
    
    767,441
    
    
    
    15
    %Consumer  other:Personal loans
    
    
    46,442
    
    
    
    1
    %
    
    
    44,810
    
    
    
    1
    %Auto loans
    
    
    154
    
    
    
    0
    %
    
    
    195
    
    
    
    0
    %Credit cards
    
    
    25,328
    
    
    
    0
    %
    
    
    19,047
    
    
    
    0
    %Overdrawn checking accounts
    
    
    488
    
    
    
    0
    %
    
    
    164
    
    
    
    0
    %Revolving lines of credit
    
    
    26,107
    
    
    
    1
    %
    
    
    26,941
    
    
    
    1
    %Lease financing receivables
    
    
    28,189
    
    
    
    1
    %
    
    
    33,457
    
    
    
    1
    %Commercial non-real estate
    
    
    146,056
    
    
    
    3
    %
    
    
    126,484
    
    
    
    2
    %Loans on savings deposits
    
    
    7,671
    
    
    
    0
    %
    
    
    11,037
    
    
    
    0
    %Land secured
    
    
    116,894
    
    
    
    2
    %
    
    
    119,232
    
    
    
    2
    %Loans receivable, gross(2)
    
    
    5,263,999
    
    
    
    100
    %
    
    
    5,077,145
    
    
    
    100
    %Less:Discount on loans transferred(3)
    
    
    (17,106
    )
    
    
    
    
    
    
    (17,615
    )Unearned interest and deferred
loan fees, net
    
    
    (14,800
    )
    
    
    
    
    
    
    (8,597
    )Allowance for loan and lease losses
    
    
    (122,099
    )
    
    
    
    
    
    
    (124,733
    )(154,005
    )
    
    
    
    
    
    
    (150,945
    )Loans receivable, net
    
    $
    5,109,994
    
    
    
    
    
    
    $
    4,926,200
 
 (1)
    
    Includes $414.4 million and $422.4 million of construction loans for residential housing
projects as of June 30, 2008 and December 31, 2007, respectively. Also includes $124.7 million and $165.8
million of construction loans for commercial, condominiums and multifamily projects as of June 30, 2008 and
December 31, 2007, respectively.(2)
    
    Includes $206.0 million and $99.3 million of interest-only loans, as of June 30, 2008 and
December 31, 2007, respectively.(3)
    
    Relates to $1.4 billion of loans transferred during the second and third quarters of 2007,
from the loans held for sale portfolio to the loans receivable portfolio. At June 30, 2008 and December 31, 2007, loans receivable amounting to $202.7 million and
$212.5 million, respectively, were pledged to secure financing agreements with local
financial institutions, and for which the creditor has the right to repledge this
collateral.The Company evaluates impaired loans and the related valuation allowance based on SFAS No.
114, Accounting by Creditors for Impairment of a Loan. Commercial and construction loans
over $2.0 million that are classified as substandard are evaluated individually for
impairment. Loans are considered impaired when, based on current information and events, it
is probable that the borrower will not be able to fulfill its obligation according to the
contractual terms of the loan agreement. The impairment loss, if any, on each individual
loan identified as impaired is generally measured based on the present value of expected
cash flows discounted at the loans effective interest rate. As a practical expedient,
impairment may be measured based on loans observable market price, or the fair value of the
collateral, if the loan is collateral dependent. If foreclosure is probable, the creditor is
required to measure the impairment based on the fair value of the collateral. The fair value
of the collateral is generally obtained from appraisals.As of June 30, 2008, Doral Financial evaluated a total of approximately $308.7 million of
construction and commercial loans for impairment. The Company had specific allowances
amounting to $47.9 million and it had charged off approximately $10.1 million, with respect
to $235.7 million in outstanding balances of construction and commercial loans.
 18




---



##### Table of Contents



Doral Financial, records an allowance for small-balance homogeneous loans (including
residential mortgages, consumer, commercial and construction loans under $2.0 million) on a
group basis under the provisions of SFAS No. 5 Accounting for Contingencies. For such
loans, the allowance is determined considering the historical charge-off experience of each
loan category and delinquency levels as well as charge-off and delinquency trends and
economic data, such as interest rate levels, inflation and the strength of the housing
market in the areas where the Company operates.During the fourth quarter of 2007, the Company started a Loan Restructuring Program (the
Program) with the purpose of aiding borrowers with seriously delinquent mortgage loans to
get back into financial stability. Under the Program, borrowers prove future payment
capacity by making three consecutive monthly payments. The Company is not modifying rates or
forgiving principal or interest. The Program was designed to comply with all laws and
regulations. As of June 30, 2008, the Company had fully restructured and processed into the
system $103.6 million of mortgage loans, of which $3.3 million were included as
non-performing loans as of June 30, 2008. There were no losses recognized as a result of the
restructuring of mortgage loans. The Company has made the determination that the loans
restructured under the Program fit the definition of Troubled Debt Restructuring (TDR) as
defined by the Standard of Financial Accounting 15 Accounting by Debtors and Creditors of
Troubled Debt Restructurings.The following table summarizes certain information regarding Doral Financials
allowance for loan and lease losses for both Doral Financials banking and mortgage banking
businesses for the periods indicated.
 QUARTERS ENDED
    
    
    SIX MONTH PERIODS ENDEDALLOWANCE FOR LOAN AND LEASE LOSSES
    
    JUNE 30,
    
    
    JUNE 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    121,182
    
    
    $
    70,963
    
    
    $
    124,733
    
    
    $
    67,233Provision for loan and lease losses
    
    
    10,683
    
    
    
    19,322
    
    
    
    15,469
    
    
    
    25,311Losses charged to the allowance
    
    
    (9,792
    )
    
    
    (4,521
    )
    
    
    (18,845
    )
    
    
    (6,442
    )Recoveries
    
    
    26
    
    
    
    184
    
    
    
    742
    
    
    
    246Other(1)
    
    
    
    
    
    
    (73
    )
    
    
    
    
    
    
    (473
    )Balance at end of period
    
    $
    122,099
    
    
    $
    85,875
    
    
    $
    122,099
    
    
    $
    85,875
 
 (1)
    
    Represents the portion of allowance for loans transferred from the loans receivable
portfolio to the loans held for sale portfolio, in connection with the sale of certain assets of Doral
Bank NY during the first quarter of 2007. l.
    
    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,
2008, the outstanding principal balance of the bonds was $48.4 million with fixed interest
rates, ranging from 6.25% to 6.90%, and maturities ranging from December 2008 to December
2029. Certain series of the bonds are secured by a mortgage on the building and underlying
real property.m.
    
    The Company routinely originates, securitizes and sells mortgage loans into the
secondary market. As a result of this process, the Company typically retains the servicing
rights and, in the past, also retained interest-only strips. The Companys interests that
continue to be held (retained interests) are subject to prepayment and interest rate
risks.Effective January 1, 2007, under SFAS No. 156, Accounting for Servicing of Financial
Assets, Doral Financial elected to apply fair value accounting to its mortgage servicing
rights (MSRs). The Company determines the fair value of its MSRs on the basis of a third
party market valuation for the Companys entire servicing portfolio (governmental,
conforming and non-conforming portfolios). The fair value of the MSRs is determined based on
a combination of market information on trading activity (MSRs trades and broker valuations),
benchmarking of servicing assets (valuation surveys) and cash flow modeling. The valuation
of the Companys MSRs incorporate two sets of assumptions: (1) market derived assumptions
for discount rates, servicing costs, escrow earnings rate, float earnings rate and cost of
funds and (2) market derived assumptions adjusted for the Companys loan characteristics and
portfolio behavior, for escrow balances, delinquencies and foreclosures, late fees,
prepayments and prepayment penalties.
 19




---



##### Table of Contents



The changes in servicing assets measured using the fair value method for the quarters and
six month periods ended June 30, 2008 and 2007 are shown below:
 QUARTERS ENDED
    
    
    SIX MONTH PERIODSJUNE 30,
    
    
    ENDED JUNE 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    139,570
    
    
    $
    173,343
    
    
    $
    150,238
    
    
    $
    177,884Sales of servicing asset(1)
    
    
    
    
    
    
    (9,581
    )
    
    
    
    
    
    
    (9,581
    )Adjustment to MSR fair value for
loans repurchased(2)
    
    
    (587
    )
    
    
    
    
    
    
    (587
    )
    
    
    Capitalization of servicing assets
    
    
    2,046
    
    
    
    1,362
    
    
    
    2,975
    
    
    
    2,546Change in fair value
    
    
    4,498
    
    
    
    (555
    )
    
    
    (7,099
    )
    
    
    (6,280
    )Balance at end of period(3)
    
    $
    145,527
    
    
    $
    164,569
    
    
    $
    145,527
    
    
    $
    164,569
 
 (1)
    
    Amount represents MSRs sales related to $693.9 million in principal balance of mortgage loans.(2)
    
    Amount represents the adjustment of MSR fair value related to the repurchase of $26.7 million sold on a servicing release basis in
principal balance of mortgage loans.(3)
    
    Outstanding balance of loans serviced for third parties amounted to $9.7 billion and $10.8 billion as of June 30, 2008 and 2007,
respectively. Based on recent prepayment experience, the expected weighted-average remaining life of the
Companys servicing assets at June 30, 2008 and June 30, 2007 was 8.0 years and 6.6 years,
respectively. Any projection of the expected weighted-average remaining life of servicing
assets is limited by conditions that existed at the time the calculations were performed.The following tables show the changes in the Companys interest-only strips for each of the
periods shown:
 QUARTERS ENDED
    
    
    SIX MONTH PERIODSJUNE 30,
    
    
    ENDED JUNE 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    51,538
    
    
    $
    52,617
    
    
    $
    51,928
    
    
    $
    49,926Amortization
    
    
    (1,672
    )
    
    
    (2,074
    )
    
    
    (2,739
    )
    
    
    (3,930
    )(Loss) gain on the IO value
    
    
    (706
    )
    
    
    (788
    )
    
    
    (29
    )
    
    
    3,759Balance at end of period
    
    $
    49,160
    
    
    $
    49,755
    
    
    $
    49,160
    
    
    $
    49,755
 At June 30, 2008, fair values of the Companys retained interests were based on internal and
external valuation models that incorporate market driven assumptions, such as discount rates,
prepayment speeds and implied forward LIBOR rates (in the case of variable IOs), adjusted by
the particular characteristics of the Companys servicing portfolio. The constant prepayment rate
assumptions employed for the valuation of servicing assets as of June
30, 2008, were lower than in 2007, the prepayment rate
assumption  was at 9.42% compared to 12.61% as of June 30, 2007.

The weighted average constant prepayment rate assumption for the Companys IO portfolio as of
June 30, 2008 was 8.00% compared to 10.64% for the correspondent 2007
period. This
reduction in prepayment speed assumption, for the IOs was due to, (1) the
underlying collateral has aged a year, an event that tends to put downward pressure on the price
elasticity of underlying collateral, (2) slight decreases on median
prepayment estimates of U.S.
Benchmarks were observed during the examined period, specifically for moderate and seasoned
pools of similar coupon characteristics, and (3) model adjustments on
prepayment speeds for Puerto Rico mortgages
 contributed to the overall reduction in prepayment speeds given that higher
correlation to U.S. prepayments was observed for the quarter ended in June 30, 2008. Overall
reduction in U.S. Benchmark prepayment speeds during the quarter ended  June 30, 2008 are
due to higher interest rates, near recessionary conditions, tighter credit standards on mortgages and
overall bearishness in mortgage markets due to the sub-prime crisis
experienced in the latter part of
2007 and  early 2008.

Discount rate assumptions for the Companys servicing assets
were relatively stable on the quarters
ended in June 30, 2008 and 2007, which were 11.58% and 11.56%,
respectively. The
increase observed on the discount rate of the Companys IO portfolio, to 13.63% for the quarter
ended in June 30, 2008 from 10.91% for the quarters ended June 30, 2007, is due in most part to
the liquidity premium adjustment made on the IO portfolio to account for the increased illiquidity
observed in that market near 2007 end. The liquidity premium adjustment made during December
2007, however, was partially offset by overall reductions in Benchmark IO Z-spreads.

Whereas the Company continues to generate new MSRs, which impact the average life of the
portfolio, it has not created IOs since 2005. Over time, the difference in burn-out between the
portfolios leads to differences in the corresponding prepayment speeds.The IO internal valuation model utilizes a Z-spread approach to calculate discount rates.
The Z-spread is the market recognized spread over the swap curve that takes into
consideration additional yield requirements based on the risk characteristics of a
particular instrument. As a result, the discount rates used by the Company in the valuation
of its IOs change according to their components; the swap curve and the Z-spread. The
Z-spread incorporates a premium for prepayment optionality and liquidity risk over the
period-end swap curve. As a result of a review by management of current liquidity
conditions in the Puerto
 20




---



##### Table of Contents



Rico and U.S. secondary market for non-conforming loans, the
liquidity premium incorporated in the model is 500 basis points over the curve, increased by
200 basis points during the fourth quarter of 2007, as
adjusted by the Z-spread. Doral Financial obtains the Z-spread from major investment banking
firms. The weighted-averages of the key economic assumptions used by the Company in its
internal and external valuation models and the sensitivity of the current fair value of
residual cash flows to immediate 10 percent and 20 percent adverse changes in those
assumptions for mortgage loans at June 30, 2008, were as follows:
 (Dollars in thousands)
    
    Servicing Assets
    
    Interest-Only StripsCarrying amount of retained interest
    
    $
    145,527
    
    
    $
    49,160Weighted-average expected life (in years)
    
    
    8.0
    
    
    
    6.3Constant prepayment rate
(weighted-average annual rate)
    
    
    9.42
    %
    
    
    8.00
    %Decrease in fair value due to 10%
adverse change
    
    
    (2,552
    )
    
    
    (1,344
    )Decrease in fair value due to 20%
adverse change
    
    
    (6,752
    )
    
    
    (2,630
    )Cash flow discount rate
(weighted-average annual rate)
    
    
    11.58
    %
    
    
    13.63
    %Decrease in fair value due to 10%
adverse change
    
    
    (4,248
    )
    
    
    (1,292
    )Decrease in fair value due to 20%
adverse change
    
    
    (9,940
    )
    
    
    (2,508
    )
 These sensitivities are hypothetical and should be used with caution. As the figures
indicate, changes in fair value based on a 10 percent variation in assumptions generally
cannot be extrapolated because the relationship of the change in assumption to the change in
fair value may not be linear. Also, in the table above, the effect of a variation in a
particular assumption on the fair value of the retained interest is calculated without
changing any other assumption. In reality, changes in one factor may result in changes in
another (for example, increases in market interest rates may result in lower prepayments),
which may magnify or offset the sensitivities.The following table summarizes the estimated change in the fair value of the Companys IOs,
the constant prepayment rate and the weighted-average expected life under the Companys
valuation model, given several hypothetical (instantaneous and parallel) increases or
decreases in interest rates. As of June 30, 2008, all of the mortgage loan sales contracts
underlying the Companys floating rate IOs were subject to interest rate caps, which prevent
a negative fair value for the floating rate IOs.
 (Dollars in thousands)
    

    


    Weighted-AverageChange in Interest
    

    
    
    
    Expected Life

    Change in Fair
    
    PercentageRates (basis points)
    
    Constant Prepayment Rate


        (Years)


    Value of IOs


        Change+200
    

    5.68
%

    
    7.3
    


    $(4,737
    )


    (9.6
)%+100
    

    6.37
%

    
    6.9
    


    (2,142
    )


    (4.4
)%+50
    

    7.00
%

    
    6.7
    


    (844
    )


    (1.7
)%Base
    

    8.00
%

    
    6.3
    


    
    


    0
%-50
    

    9.67
%

    
    5.7
    


    (24
    )


    0
%-100
    

    11.75
%

    
    5.1
    


    (248
    )


    (0.5
)%-200
    

    14.46
%

    
    4.4
    


    2,808
    


    5.7
%
 21




---



##### Table of Contents



n.
    
    Stock Option and Other Incentive Plans.In connection with the recapitalization
transaction and in accordance with the provisions of the stock purchase agreement between
the Company and Doral Holdings, on July 17, 2007, the Board of Directors ratified and
approved the resolutions of the Compensation Committee to accelerate and terminate all
stock options outstanding under the Companys Omnibus Incentive Plan and the 1997 Employee
Stock Option Plan effective upon the issuance of the shares of the Companys common stock
to Doral Holdings.In connection with the closing of the sale of shares of common stock to Doral Holdings all
stock options outstanding as July 19, 2007 were terminated.Please refer to note aa for information related to the 2008 Stock Incentive Plan approved
by the Companys Board of Directors.o.
    
    The following table summarizes deposit balances:
 JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007Certificates of deposit
    
    $
    3,034,099
    
    
    $
    2,998,684Regular savings
    
    
    345,763
    
    
    
    317,436NOW accounts
    
    
    368,380
    
    
    
    389,330Other interest-bearing deposits
    
    
    3,629
    
    
    
    152Money markets accounts
    
    
    314,551
    
    
    
    319,601Total interest-bearing
    
    
    4,066,422
    
    
    
    4,025,203Non interest-bearing deposits
    
    
    264,306
    
    
    
    242,821Total deposits
    
    $
    4,330,728
    
    
    $
    4,268,024
 p.
    
    As part of its financing activities the Company enters into sales of securities under
agreements to repurchase the same or substantially similar securities. The Company retains
control over such securities according to the provisions of SFAS No. 140. Accordingly, the
amounts received under these agreements represent borrowings, and the securities underlying
the agreements remain in the Companys asset accounts. These transactions are carried at
the amounts at which transactions will be settled. The counterparties to the contracts
generally have the right to repledge the securities received as collateral. Those
securities are presented in the Consolidated Statements of Financial Condition as part of
pledged investment securities. Securities sold under agreements to repurchase consisted of
the following:
 JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007Non-callable repurchase
agreements with a maturities
less than or equal to 90 days,
at various fixed rates
averaging 2.13% and 5.56% at
June 30, 2008 and December 31,
2007, respectively.
    
    $
    352,243
    
    
    $
    17,035Non-callable repurchase
agreements with maturities
ranging from February 2009 to
April 2013 (2007  May 2010 to
June 2010), at various fixed
rates averaging 3.70% and
4.15% at June 30, 2008 and
December 31, 2007,
respectively.
    
    
    965,500
    
    
    
    550,000Non-callable repurchase
agreement with a maturity of
January 2008, tied to 3-month
LIBOR adjustable quarterly, at
a rate of 5.15% at December
31, 2007.
    
    
    
    
    
    
    94,800Callable repurchase agreements
with maturities ranging from
August 2009 to February 2014,
at various fixed rates
averaging 5.50% at June 30,
2008 and December 31, 2007,
respectively.
    
    
    782,528
    
    
    
    782,528$
    2,100,271
    
    
    $
    1,444,363
 22




---



##### Table of Contents



q.
    
    Advances from FHLB consisted of the following:
 JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007Non-callable advances with
maturities ranging from July 2008
to May 2013 (2007  March 2008
to October 2012), at various
fixed rates averaging 3.71% and
4.60% at June 30, 2008 and
December 31, 2007, respectively.
    
    $
    1,130,000
    
    
    $
    535,000Non-callable advance due on July
6, 2010, tied to 3-month LIBOR
adjustable quarterly, at a rate
of 2.69% and 5.21% at June 30,
2008 and December 31, 2007,
respectively.
    
    
    200,000
    
    
    
    200,000Non-callable advances with
maturities ranging from September
2008 to November 2012, tied to
1-month LIBOR adjustable monthly,
at a rate of 2.42% and 4.88% at
June 30, 2008 and December 31,
2007, respectively.
    
    
    195,000
    
    
    
    195,000Callable advances with maturities
ranging from July 2009 to March
2012, at various fixed rates
averaging 5.40% at June 30, 2008
and December 31, 2007,
respectively, callable at various
dates beginning in July 2008
(2007  January 2008).
    
    
    304,000
    
    
    
    304,000$
    1,829,000
    
    
    $
    1,234,000
 At June 30, 2008, the Company had pledged qualified collateral in the form of mortgage and
investment securities with a market value of $2.2 billion to secure the above advances from
FHLB, which generally the counterparty is not permitted to sell or repledge.r.
    
    At June 30, 2008 and December 31, 2007, loans payable consisted of financing agreements
with local financial institutions secured by mortgage loans.Outstanding loans payable consisted of the following:
 JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007Secured borrowings with local
financial institution,
collateralized by real estate
mortgage loans, at variable
interest rates tied to 3-month
LIBOR averaging 4.59% and 6.85% at
June 30, 2008 and December 31,
2007, respectively.
    
    $
    356,278
    
    
    $
    377,487Secured borrowings with local
financial institutions,
collateralized by real estate
mortgage loans at fixed interest
rates averaging 7.44% and 7.43% at
June 30, 2008 and December 31,
2007, respectively.
    
    
    23,537
    
    
    
    25,214$
    379,815
    
    
    $
    402,701
 At June 30, 2008 and December 31, 2007, $175.5 million and $189.0 million, respectively, of
loans held for sale and $202.7 million and $212.5 million, respectively, of loans receivable
were pledged to secure financing agreements with local financial institutions. Such loans
can be repledged by the counterparty.
 23




---



##### Table of Contents



s.
    
    Notes payable consisted of the following:
 JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007$100 million notes, net of discount,
bearing interest at 7.65%, due on March
26, 2016, paying interest monthly.
    
    $
    98,382
    
    
    $
    98,307$30 million notes, net of discount,
bearing interest at 7.00%, due on April
26, 2012, paying interest monthly.
    
    
    29,671
    
    
    
    29,634$40 million notes, net of discount,
bearing interest at 7.10%, due on April
26, 2017, paying interest monthly.
    
    
    39,347
    
    
    
    39,322$30 million notes, net of discount,
bearing interest at 7.15%, due on April
26, 2022, paying interest monthly.
    
    
    29,434
    
    
    
    29,423Bonds payable secured by mortgage on
building at fixed rates ranging from 6.35%
to 6.90%, with maturities ranging from
December 2008 to December 2029 (2007 
June 2008 to December 2029), paying
interest monthly.
    
    
    40,770
    
    
    
    41,190Bonds payable at a fixed rate of 6.25%,
with maturities ranging from December 2010
to December 2029, paying interest monthly.
    
    
    7,600
    
    
    
    7,600Note payable with a local financial
institution, collateralized by IOs at a
fixed rate of 7.75%, due on December 25,
2013, paying interest monthly.
    
    
    34,512
    
    
    
    36,982$
    279,716
    
    
    $
    282,458
 t.
    
    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, 2008, the income tax expense for the Companys U.S. subsidiaries
amounted to $0.9 million and $1.1 million, respectively, compared to an income tax benefit
of $1.2 million and $3.1 million, respectively, for the comparable 2007 periods.The maximum statutory corporate income tax rate in Puerto Rico is 39.0%.Doral Financial enjoys income tax exemption on interest income derived from FHA and VA
mortgage loans financing the original acquisition of newly constructed housing in Puerto
Rico and securities backed by such mortgage loans. Doral Financial also invests in U.S.
Treasury and agency securities that are exempt from Puerto Rico taxation and are not subject
to federal income taxation because of the portfolio interest deduction to which Doral
Financial is entitled as a foreign corporation. 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. On July 1, 2008, the Company
transferred substantially all of the assets previously held at the international banking
entity to Doral Bank PR to increase the level of its interest earning assets.
 24




---



##### Table of Contents



For the quarter and six month period ended June 30, 2008, Doral Financial recognized an
income tax expense of $5.8 million and $5.2 million, respectively, compared to $1.1 million
and $7.0 million, respectively, for the comparable 2007 periods.During the first quarter of 2008, the Company entered into an agreement with the Puerto Rico
Treasury Department with respect to the allocation method and period (for tax purposes) of
expenses incurred by the Company related to a settlement agreement (Settlement Expenses)
that resulted from litigation related to the Companys restatement. This agreement was
effective as of December 31, 2007 and permits the total expense related to the settlement of
the lawsuit ($96.0 million) to be allocated to any entity within the Doral group over a
period of three years. As a result of this agreement, the Company expects to be able to
realize part of its deferred tax asset and accordingly released a portion of the valuation
allowance in 2008. However, due to the Companys lower than expected income for the first
two quarters of 2008, management revised its tax forecast and increased its valuation
allowance. The net effect of these transactions, together with the effect of ordinary
operations, resulted in a $6.0 million increase in the valuation allowance to $93.3 million
as of June 30, 2008 from the $87.3 million valuation allowance at December 31, 2007.In assessing the realization of deferred tax assets, the Company considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be
realized. The Company considers the expected realization of its deferred tax assets and
liabilities, projected future taxable income, the Companys ability to replace maturing
brokered deposits and other sources of working capital at market rates, and tax planning
strategies, in making this assessment. The Company determined that it is more likely than
not that $93.3 million of its gross deferred tax asset, related primarily to net operating
losses, will not be realizable and maintained a valuation allowance for that amount.
Benefits recognized for net operating losses are limited by the fact that, under the PR
Code, Doral Financial is not permitted to file consolidated tax returns and, thus, is not
able to utilize losses from one subsidiary to offset gains in another subsidiary. For the
quarter and six month period ended June 30, 2008, net operating losses of $28.6 million and
$62.0 million, respectively, were created. Based on forecasted future taxable income, the
Company will not be able to obtain the full benefit of these net operating losses.During 2006, the Company entered into two agreements with the Puerto Rico Treasury
Department regarding the Companys deferred tax assets related to prior intercompany
transfers of IOs (the IO Tax Asset). The first agreement, executed during the first
quarter, confirmed the previously established tax basis of all the IO transfers within the
Doral Financial corporate group. The second agreement, executed during the third quarter,
clarified that for Puerto Rico income tax purposes, the IO Tax Asset is a stand-alone
intangible asset subject to a straight-line amortization based on a useful life of 15 years.
Furthermore, the agreement provided that the IO Tax Asset could be transferred to any entity
within Doral Financial corporate group, including the Puerto Rico banking subsidiary.The realization of the deferred tax asset is dependent upon the existence of, or generation
of, taxable income during the remaining 12 year period (including 2008-15 year original
amortization period) in which the amortization deduction of the IO Tax Asset is available.
In determining the valuation allowance recorded, the Company considered both the positive
and negative evidence regarding the Companys ability to generate sufficient taxable income
to realize its deferred tax assets. Positive evidence included projected earnings
attributable to the core business through the projection period, repayment of the $625.0
million in senior notes on July 20, 2007, as result of the recapitalization which served to
significantly reduce interest expense, and results of the leveraging plan. Further positive
evidence included the ability to isolate verifiable nonrecurring charges in historical
losses, the core earnings of the business absent these nonrecurring items and the
flexibility to move IO Tax Asset amortization and the Settlement Expenses to profitable
entities in accordance with Doral Financials agreements with the Puerto Rico Treasury
Department. During the fourth quarter of 2007, the Company implemented certain tax planning
actions in order to generate future taxable income that contributed to the reduction in its
valuation allowance. These include the increase in interest earning assets of Doral Bank PR,
through among other things, transferring certain assets to Doral Bank PR. Negative evidence
included the Companys recorded losses for the first quarter of 2008 and for the years ended
December 31, 2007 and 2006, and the shorter operating loss carry-forward period of 7 years,
as well as uncertainty regarding its ability to generate future taxable income. 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, 2007.
 25




---



##### Table of Contents



Failure to achieve sufficient taxable income might affect the ultimate realization of the
net deferred tax asset. Factors that may affect the Companys ability to achieve sufficient
taxable income include, but are not limited to, the following: increased competition, a
decline in margins, increased loans charged off, and loss of market share.In weighing the positive and negative evidence above, Doral Financial considered the more
likely than not criteria contemplated in SFAS 109. Based on this analysis, Doral Financial
concluded that it was more likely than not that a portion of the Companys gross deferred
tax assets of $495.6 million would not be realized. As a result the Company recorded a
valuation allowance. At June 30, 2008, the deferred tax asset, net of its valuation
allowance of $93.3 million, amounted to approximately $402.3 million compared to $392.9
million at December 31, 2007.The Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109, on January 1, 2007. As a result of the adoption,
the Company recorded an adjustment to retained earnings of $2.4 million. As of June 30, 2008
and 2007, the Company had unrecognized tax benefits of $13.7 million and accrued interest
and penalties of $4.5 million and $3.1 million, respectively. The Company classifies all
interest and penalties related to tax uncertainties as income tax expense. For the quarters
and six month periods ended June 30, 2008 and 2007, the Company recognized approximately
$0.3 million and $0.7 million in interest and penalties, respectively.The amount of unrecognized tax benefits may increase or decrease in the future for various
reasons including adding amounts for current tax year positions, expiration of open income
tax returns due to the statutes of limitation, changes in managements judgment about the
level of uncertainty, status of examinations, litigation and legislative activity, and the
addition or elimination of uncertain tax positions. As of June 30, 2008, the following years
remain subject to examination: U.S. Federal jurisdictions  2003 through 2007 and Puerto
Rico  2004 through 2007.It is reasonably possible that within the next twelve months the Company will resolve
certain matters presently contemplated as unrecognized tax benefits due primarily to the
expiration of the statute of limitations. The resolution of this matter would likely result
in a reduction of the provision for income taxes and the effective tax rate in the period of
resolution of substantially all the unrecognized tax benefits.u.
    
    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, 2008, the Company had outstanding $4.3 million in
commercial and financial standby letters of credit. The fair value on these commitments is
not significant.In the ordinary course of the business, Doral Financial makes certain representations and
warranties to purchasers and insurers of mortgages loans, and in certain circumstances, such
as in the event of early or first payment default, the Company retains credit risk exposures
on those loans. If there is a breach of a representation or warranty or if there is an early
payment default, Doral Financial may be required to repurchase the mortgage loan and bear
any subsequent loss related to the loan. Doral Financial works with the purchasers to review
the claims and correct alleged documentation deficiencies. For the quarter and six month
period ended June 30, 2008, repurchases amounted to $2.7 million and $6.8 million,
respectively.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 of loans sold (generally from 10% to
15%). As of June 30, 2008, the Companys records reflected that the outstanding principal
balance of loans sold subject to full or partial recourse was $1.2 billion. As of such
 26




---



##### Table of Contents



date, the Companys records also reflected that the maximum contractual exposure to Doral
Financial if it were required to repurchase all loans subject to recourse was $1.1 billion.
Doral Financials contingent obligation with respect to its recourse provision is not
reflected on the Companys Consolidated Financial Statements, except for a liability of
$10.6 million, as of June 30, 2008, for estimated losses from such recourse agreements,
which is included in Accrued expenses and other liabilities.
 v.
    
    Related Party TransactionsThe following table summarizes certain information regarding Doral Financials loans
outstanding to officers, directors and 5% or more stockholders for the periods indicated.
 (In thousands)
    
    June 30, 2008
    
    
    December 31, 2007Balance at beginning of period
    
    $
    5,090
    
    
    $
    5,719New Loans
    
    
    
    
    
    
    4,164Repayments
    
    
    (68
    )
    
    
    (2,469
    )Loans sold
    
    
    (511
    )
    
    
    (2,324
    )Loans of former officers
    
    
    (1,920
    )
    
    
    Balance at
end of period (1)
    
    $
    2,591
    
    
    $
    5,090
 
 (1)
  
  At June 30, 2008 and December 31, 2007, none of the loans
outstanding to officers, directors and 5% or more stockholders were
delinquent.
 At June 30, 2008 and December 31, 2007, the amount of loans outstanding to officers,
directors and 5% or more stockholders secured by mortgages on real estate amounted to $2.4
million and $4.5 million, respectively.Since 2000, Doral Financial has done business with an entity that provides property
inspection services and is co-owned by the spouse of an Executive VP of the Company. The
amount paid by the Company to this entity for the six month periods ended June 30, 2008 and
2007, amounted to $0.8 million.For the six month period ended June 30, 2008, the Company assumed $860,000 of the
professional services expense related to Doral Holdings. For the six month period ended June
30, 2007, the Company did not assume expenses related to Doral Holdings.w.
    
    Commitments and ContingenciesThe Company enters into financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
may include commitments to extend credit and sell loans. At June 30, 2008, commitments to
extend credit amounted to approximately $174.8 million and commitments to sell loans at fair
value amounted to approximately $88.3 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 a party to various legal proceedings, including
regulatory and judicial investigations and civil litigation, arising as a result of the
Companys restatement.LawsuitsOn September 14, 2007, a service provider filed a Demand for Arbitration before the American
Arbitration Association alleging that Doral Financial failed to pay for services and comply
with the terms of a written agreement. This service provider is requesting payment of its
monthly service charges and its investment in equipment and software to perform the Data
Processing Services Agreement it entered into with the
 27




---



##### Table of Contents



Company which totals approximately $4.7 million. The service provider and Doral Financial
agreed to mediation, went thru mediation and is now in arbitration. The arbitration process
to which the parties are contractually bound commenced on July 9, 2008 and is scheduled to
continue in August 2008.
 Other Legal MattersOn 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.Banking Regulatory MattersOn March 17, 2006, Doral Financial entered into a consent cease and desist order with the
Federal Reserve. The mutually agreed upon order required Doral Financial to conduct reviews
of its mortgage portfolio, and to submit plans regarding the maintenance of capital adequacy
and liquidity. The consent order contains restrictions on Doral Financial from obtaining
extensions of credit from, or entering into certain asset purchase and sale transactions
with its banking subsidiaries, without the prior approval of the Federal Reserve. The
consent order restricts Doral Financial from receiving dividends from the banking
subsidiaries without the approval of the respective primary banking regulatory agency. Doral
Financial is also required to request permission from the Federal Reserve for the payment of
dividends on its common stock and preferred stock not less than 30 days prior to a proposed
dividend declaration date and requires Doral Financial and Doral Bank PR to submit plans
regarding the maintenance of minimum levels of capital and liquidity. Doral Financial has
complied with these requirements and no fines or civil money penalties were assessed against
the Company under the order.On October 23, 2006, Doral Bank PR entered into an Memorandum of Understanding (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 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 of
civil monetary penalties. Doral Bank PR also was required to pay
civil monetary penalties of $125,000 to the FDIC related to the
deficiencies in compliance with the National Flood Insurance Act related to deficiencies in
flood insurance coverage, failure to maintain continuous flood insurance protection and
failure to ensure that borrowers obtained flood insurance.On February 19, 2008, Doral Bank PR entered into a consent order with the FDIC relating to
failure to comply with certain requirements of the Bank Secrecy Act (BSA). The regulatory
findings that resulted in the order were based on an examination conducted for the period
ended December 31, 2006, and were related to findings that had initially occurred in 2005
prior to the Companys change in management and recapitalization. The order replaces the
Memorandum of Understanding with the FDIC and the Office of the Commissioner dated August
23, 2006. Doral Bank PR was not required to pay any civil monetary penalties in connection
with this order. The order requires Doral Bank PR to correct certain violations of law,
within the timeframes set forth in the order (generally 120 days) including certain
violations regarding the BSA, failure to maintain an adequate BSA/Anti-Money Laundering
Compliance Program (a BSA/AML Compliance Program) and failure to operate with an effective
compliance program to ensure compliance with the regulations promulgated by the United
States Department of Treasurys Office of Foreign Asset Control (OFAC). The order requires
Doral Bank PR to, among other things, amend its policies, procedures and processes and
training programs to ensure full compliance with the BSA and OFAC; conduct an expanded
BSA/AML risk assessment of its operations, enhance its due diligence and account monitoring
procedures, review its BSA/AML staffing and resource needs, amend its policies and
procedures for internal and external audits to include periodic reviews for BSA/AML
compliance, OFAC compliance and perform annual independent testing programs for BSA/AML and
OFAC requirements. The order also requires Doral Bank PR to engage an independent consultant
to review account and transaction
 28




---



##### Table of Contents



activity from April 1, 2006 through March 31, 2007 to determine compliance with suspicious
activity reporting requirements. Doral Financial expects that Doral Bank PR will comply with
the requirements of the order within the required timeframes. A copy of the order was filed
as an exhibit to Doral Financials Current Report on Form 8-K filed on February 22, 2008.
 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.x.
    
    Fair Value of Assets and LiabilitiesThe Company uses fair value measurements to record fair value adjustments to certain assets
and liabilities and to determine fair value disclosures. Securities held for trading,
securities available for sale, derivatives and servicing assets are recorded at fair value
on a recurring basis. Additionally, from time to time, we may be required to record at fair
value other assets on a nonrecurring basis, such as loans held for sale, loans receivable
and certain other assets. These nonrecurring fair value adjustments typically involve
application of lower-of-cost-or-market accounting or write-downs of individual assets.Effective January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157 defines fair
value, establishes a consistent framework for measuring fair value and expands disclosure
requirements for fair value measurements. The Company adopted SFAS No. 159, The Fair Value
Option for Financing Assets and Financial Liabilities, in 2008, but chose not to apply the
fair value option to any of its financial assets or financial liabilities.Fair Value HierarchyUnder SFAS No. 157, the Company groups its assets and liabilities at fair value in three
levels, based on the markets in which the assets and liabilities are traded and the
reliability of the assumptions used to determine fair value. These levels are:
 
    
    Level 1  Valuation is based upon quoted prices for identical instruments traded
in active markets.
    
    Level 2  Valuation is based upon quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant assumptions
are observable in the market, or are derived principally from or corroborated by
observable market data, by correlation or by other means.
    
    Level 3  Valuation is generated from model-based techniques that use significant
assumptions not observable in the market. These unobservable assumptions reflect the
Companys estimates of assumptions that market participants would use in pricing the
asset or liability. Valuation techniques include use of option pricing models,
discounted cash flow models and similar techniques.
 Determination of Fair ValueUnder SFAS No. 157, the Company bases fair values on the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. It is Doral Financials intent to maximize the use of
observable inputs and minimize the use of unobservable inputs when developing fair value
measurements, in accordance with the fair value hierarchy in SFAS No. 157.Fair value measurements for assets and liabilities where there exists limited or no
observable market data and, therefore, are based primarily upon the Companys estimates, are
often calculated based on current
 29




---



##### Table of Contents



pricing policy, the economic and competitive environment, the characteristics of the asset
or liability and other such factors. Therefore, the results cannot be determined with
precision and may not be realized in an actual sale or immediate settlement of the asset or
liability. Additionally, there may be inherent weaknesses in any calculation technique, and
changes in the underlying assumptions used, including discount rates and estimates of future
cash flows, that could significantly affect the results of current or future values.
 Following is a description of valuation methodologies used for instruments recorded at fair
value, including the general classification of such instruments pursuant to the valuation
hierarchy.Securities held for trading:Securities held for trading are reported at fair value and
consist primarily of securities and derivatives held for trading purposes. The valuation
method for trading securities is the same as the methodology used for securities classified
as available for sale. The valuation methodology for interest-only strips and derivatives
are described below under: Servicing assets and interest-only strips, and Derivatives
sections, respectively.Securities available for sale:Securities available for sale are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted
prices are not available, fair values are measured using independent pricing models or other
model-based valuation techniques such as the present value of future cash flows, adjusted
for the securitys credit rating, prepayment assumptions and other factors such as credit
loss assumptions, expected defaults and loss severity. Level 1 securities (held for trading
and available for sale) include U.S. Treasury and agency mortgage-backed securities that are
traded by dealers or brokers in active over-the-counter markets. Level 2 securities include
agency and private collateralized mortgage obligations, municipal bonds, and Puerto Rico
agency mortgage-backed securities. Level 3 securities include certain private label and
agency CMOs for which quoted market prices are not available. For determining the fair value
of Level 3 securities available for sale, the Company uses a valuation model that calculates
the present value of estimated future cash flows. The model incorporates the Companys own
estimates of assumptions market participants use in determining the fair value, including
estimates of prepayment speeds and discount rates.Loans held for sale:Loans held for sale are carried at the lower of net cost or market
value on an aggregate portfolio basis. The amount, by which cost exceeds market value, if
any, is accounted for as a loss through a valuation allowance. Loans held for sale consist
primarily of mortgage loans held for sale. The market value of mortgage loans held for sale
is generally based on quoted market prices for mortgage-backed securities adjusted by
particular characteristics like guarantee fees, servicing fees, actual delinquency and the
credit risk associated to the individual loans. Loans held for sale are classified as Level
2, except for loans where management makes certain adjustments to the model based on
unobservable inputs that are significant. These loans are classified as Level 3.Loans receivable:Loans receivable are those held principally for investment purposes. These
consist of construction loans for new housing development, certain residential mortgage
loans which the Company does not expect to sell in the near future, commercial real estate,
commercial non-real estate, leases, land, and consumer loans. Loans receivable are carried
at their unpaid principal balance, less unearned interest, net of deferred loan fees or
costs (including premiums and discounts), undisbursed portion of construction loans and an
allowance for loan and lease losses. However, from time to time, the Company records
nonrecurring fair value adjustments to loans receivable to reflect (1) partial write-downs
that are based on current appraised value of the collateral, or (2) the full charge-off of
the loan carrying value. The Company classifies loans receivable subject to nonrecurring
fair value adjustments as Level 3.Servicing assets and interest-only strips:The Company routinely originates, securitizes and
sells mortgage loans into the secondary market. As a result of this process, the Company
typically retains the servicing rights and, in the past, also retained interest-only strips.
Servicing assets retained in a sale or securitization arises from contractual agreements
between the Company and investors in mortgage securities and mortgage loans. Since the
adoption of SFAS No. 156 on January 1, 2007, the Company records mortgage servicing assets
at fair value on a recurring basis. Considerable judgment is required to determine the fair
value of the Companys servicing assets. Unlike highly liquid investments, the market value
of servicing assets cannot be readily determined because these assets are not actively
traded in securities markets. The Company determines the fair value of its servicing assets
on the basis of a third party market valuation for the Companys entire servicing portfolio
(governmental, conforming and non-conforming portfolios). The
 30




---



##### Table of Contents



Derivatives:
 Financial Assets and Liabilities Recorded at Fair Value on a Recurring Basis
  (In thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Securities held for trading
    
    $
    229,010
    
    
    $
    175,771
    
    
    $
    2,539
    
    
    $
    50,700
    (1)Securities available for sale
    
    
    3,156,066
    
    
    
    1,174,726
    
    
    
    1,960,920
    
    
    
    20,420Derivatives(2)
    
    
    2,246
    
    
    
    
    
    
    
    2,246
    
    
    
    Servicing assets
    
    
    145,527
    
    
    
    
    
    
    
    
    
    
    
    145,527$
    3,532,849
    
    
    $
    1,350,497
    
    
    $
    1,965,705
    
    
    $
    216,647Liabilities:Derivatives(3)
    
    $
    3,882
    
    
    $
    539
    
    
    $
    3,343
    
    
    $
    
 
 (1)
    
    Represents interest-only strips, of which variable interest-only strips represents substantially all of the balance. Also,
includes certain private label and agency CMOs for which quoted market prices are not available.(2)
    
    Included as part of securities held for trading in the Consolidated Statement of Financial Condition.(3)
    
    Included as part of accrued expenses and other liabilities in the Consolidated Statement of Financial Condition.  Quarter ended June 30, 2008
    
    
    Six month period ended June 30, 2008Securities
    
    
    Securities
    
    
    
    
    
    
    Securities
    
    
    SecuritiesHeld for
    
    
    Available
    
    
    Servicing
    
    
    Held
    
    
    Available
    
    
    Servicing(In thousands)
    
    Trading
    
    
    for Sale
    
    
    Assets
    
    
    for Trading
    
    
    for Sale
    
    
    AssetsBeginning balance:
    
    $
    53,060
    
    
    $
    20,881
    
    
    $
    139,570
    
    
    $
    67,992
    
    
    $
    7,597
    
    
    $
    150,238Change in fair value
    
    
    (2,360
    )
    
    
    (461
    )
    
    
    4,498
    
    
    
    (2,940
    )
    
    
    (1,529
    )
    
    
    (7,099
    )Transfer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,352
    )
    
    
    14,352
    
    
    
    Capitalization / Sales, net
    
    
    
    
    
    
    
    
    
    
    1,459
    
    
    
    
    
    
    
    
    
    
    
    2,388Ending balance
    
    $
    50,700
    
    
    $
    20,420
    
    
    $
    145,527
    
    
    $
    50,700
    
    
    $
    20,420
    
    
    $
    145,527
 31




---



##### Table of Contents



Financial Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
  Loss for the SixMonth Period Ended(In thousands)
    
    Carrying Value
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    June 30, 2008Assets:Loans receivable(1)
    
    $
    29,136
    
    
    $
    
    
    
    $
    
    
    
    $
    29,136
    
    
    $
    (5,028
    )
 
 (1)
    
    Represents the carrying value and related write-downs of loans for which adjustments are based on
the appraised value of the collateral. y.
    
    Derivatives
  June 30, 2008
    
    
    December 31, 2007Fair Value
    
    
    
    
    
    
    Fair Value(In thousands)
    
    Notional Amount
    
    
    Asset
    
    
    Liability
    
    
    Notional Amount
    
    
    Asset
    
    
    LiabilityCash Flow Hedges:Interest rate swaps
    
    $
    195,000
    
    
    $
    
    
    
    $
    (3,343
    )
    
    $
    80,000
    
    
    $
    
    
    
    $
    (937
    )Other Derivatives:Interest rate swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,000
    
    
    
    
    
    
    
    (1,951
    )Interest rate caps
    
    
    270,000
    
    
    
    2,246
    
    
    
    
    
    
    
    270,000
    
    
    
    1,481
    
    
    
    Forward contracts
    
    
    23,000
    
    
    
    
    
    
    
    (539
    )
    
    
    29,000
    
    
    
    
    
    
    
    (6
    )Total
    
    $
    488,000
    
    
    $
    2,246
    
    
    $
    (3,882
    )
    
    $
    494,000
    
    
    $
    1,481
    
    
    $
    (2,894
    )
  Other ComprehensiveGain (Loss) for the
    
    
    Income for the QuartersQuarters Ended June 30,
    
    
    Ended June 30,(1)(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Cash Flow Hedges:Interest rate swaps
    
    $
    
    
    
    $
    
    
    
    $
    2,923
    
    
    $
    Other Derivatives:Interest rate swaps
    
    
    
    
    
    
    8,250
    
    
    
    
    
    
    
    Interest rate caps
    
    
    1,254
    
    
    
    
    
    
    
    
    
    
    
    Forward contracts
    
    
    (96
    )
    
    
    4,378
    
    
    
    
    
    
    
    Total
    
    $
    1,158
    
    
    $
    12,628
    
    
    $
    2,923
    
    
    $
    
 
 (1)
    
    Net of tax. 32




---



##### Table of Contents



Other Comprehensive Loss for(Loss) Gain for the
    
    
    the Six MonthSix Month Periods Ended
    
    
    Periods EndedJune 30,
    
    
    June 30,(1)(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Cash Flow Hedges:Interest rate swaps
    
    $
    
    
    
    $
    
    
    
    $
    (244
    )
    
    $
    Other Derivatives:Interest rate swaps
    
    
    (157
    )
    
    
    3,720
    
    
    
    
    
    
    
    Interest rate caps
    
    
    764
    
    
    
    
    
    
    
    
    
    
    
    Forward contracts
    
    
    (806
    )
    
    
    4,519
    
    
    
    
    
    
    
    Total
    
    $
    (199
    )
    
    $
    8,239
    
    
    $
    (244
    )
    
    $
    
 
 (1)
    
    Net of tax.    June 30, 2008
    
    
    December 31, 2007Fair Value
    
    
    
    
    
    
    Fair Value(In thousands)
    
    Notional Amount
    
    
    Asset
    
    
    Liability
    
    
    Notional Amount
    
    
    Asset
    
    
    LiabilityDerivatives designated as cash flow hedges:Hedging FHLB advances
    
    $
    195,000
    
    
    $
    
    
    
    $
    (3,343
    )
    
    $
    80,000
    
    
    $
    
    
    
    $
    (937
    )Derivatives not designated as cash flow hedges
    
    
    293,000
    
    
    
    2,246
    
    
    
    (539
    )
    
    
    414,000
    
    
    
    1,481
    
    
    
    (1,957
    )Total
    
    $
    488,000
    
    
    $
    2,246
    
    
    $
    (3,882
    )
    
    $
    494,000
    
    
    $
    1,481
    
    
    $
    (2,894
    )
 Cash Flow Hedges
  33




---



##### Table of Contents



Trading and Non-Hedging Activities
      z.
    
    Recent Accounting Pronouncements
 Written Loan Commitments Recorded at Fair Value Through Earnings Application of Accounting Principles to Loan Commitments Accounting for Servicing
of Financial Assets The Fair Value Option for Financial Assets and
Financial Liabilities
 Noncontrolling Interests in Consolidated Financial Statements Noncontrolling Interests in Consolidated Financial Statements Consolidated Financial
Statements
 34




---



##### Table of Contents



Business Combinations Business
Combinations
  Noncontrolling Interest in Consolidated Financial
Statements
 Disclosures about Derivative Instruments and Hedging Activities Disclosures about Derivative Instruments and Hedging Activities Accounting for Derivative Instruments and Hedging Activities
   35




---



##### Table of Contents



The Hierarchy of Generally Accepted Accounting Principles The Hierarchy of Generally Accepted Accounting Principles
    The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles
 aa.
    
    Subsequent EventsMaterial definitive agreement. On July 11, 2008 Doral Bank PR, Doral Financial Corporations
wholly-owned banking subsidiary in Puerto Rico, executed an Interim Servicing Agreement (the
Agreement) with the Federal Home Loan Mortgage Corporation (Freddie Mac) for the
servicing of a portfolio of approximately 46,312 single-family mortgage loans amounting to
approximately $3.9 billion of Freddie Mac loans (the Interim Portfolio).Doral Bank PR will provide servicing for such Interim Portfolio until such time as Freddie
Mac determines to transfer servicing of such Interim Portfolio, which is expected to be no
less than 24 months. Doral Bank PR will receive for each accounting cycle a fee for
servicing the mortgages in existence on the first day of each month during the term of the
Agreement. Doral Bank PR will also receive other ancillary fees related to the transfer of
the Interim Portfolio from a previously servicer and the reimbursement of certain advances
for the servicing of the Interim Portfolio. As of this date, the
servicing has not been transferred to Doral Bank PR.Stock options.On April 8, 2008, the Companys Board of Directors approved the 2008 Stock
Incentive Plan (the Plan) subject to shareholder approval, which was obtained at the
annual shareholders meeting held on May 7, 2008. The Plan replaces the 2004 Omnibus
Incentive Plan (please refer to note n for additional information).The aggregate number of shares of common stock which the Company may issue under the Plan is
limited to 6,750,000. During the third quarter of 2008, the Company expects to award
approximately 2,700,000 stock options to employees at an exercise price of $12.60, which is
equal to the price per share paid by Doral Holdings in the July 2007
recapitalization. All employee options granted will become vested at a rate
of 20 percent each year for a period of five years from the closing date of the
recapitalization which was July 19, 2007. The plan will be accounted for following the provisions of SFAS No. 123R, Share-Based Payment.  Stock options granted will be expensed over the
stock option vesting period based on fair value which will be determined using the
Black-Scholes option-pricing method at the date the options are
granted. On July 22, 2008, certain
independent directors were granted 2,000 shares of restricted stock and stock options to
purchase 20,000 shares of common stock at an exercise price equal to the closing price of
the stock on the grant date. Those options vest ratably over a five year period commencing
with the grant date.
 36




---



##### Table of Contents



Corporate reorganization.
 Capital Contribution
 37




---



##### Table of Contents



FORWARD LOOKING STATEMENTS
   
    
    the strength or weakness of the real estate markets and of the consumer and
commercial credit sectors and its impact on the credit quality of Doral Financials
loans and other assets;
    
    Doral Financials ability to derive sufficient income to realize the benefit of
its deferred tax assets;
    
    the strength or weakness of the Puerto Rico and the United States economies;
    
    changes in interest rates and the potential impact of such changes in interest
rates on Doral Financials net interest income;
    
    the performance of U.S. capital markets;
    
    the fiscal and monetary policy of the federal government and its agencies;
    
    potential adverse development from ongoing enforcement actions by bank
regulatory agencies;
    
    risks arising from material weaknesses in Doral Financials internal control
over financial reporting; and
    
    developments in the regulatory and legal environment for financial services
companies in Puerto Rico and the United States.
  Risk
Factors
 38




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 SUBSEQUENT EVENTS
  OVERVIEW OF RESULTS OF OPERATIONS
   
    
    Net loss attributable to common shareholders for the second quarter of 2008 amounted
to $6.7 million, or a diluted loss per share of $0.12, compared to net loss of $45.8
million, or a diluted loss per share of $8.49, for the second quarter of 2007.
    
    Net interest income for the second quarter of 2008 was $48.9 million, compared to
$34.6 million for the same period in 2007. The $14.3 million increase in net interest
income for 2008, compared to 2007, was driven principally by a reduction in interest
expense partially offset by a smaller decline in interest income. The decline in
interest expense was due to (1) a $10.2 million reduction in interest expense
associated with the repayment of the Companys $625.0 million senior notes on July 20,
2007 using the proceeds from the $610.0 million equity investment made by Doral
Holdings in the Company, and (2) a $6.8 million reduction in deposits costs as a result
of the repositioning of the Companys deposit products during the fourth quarter of
2007 and the general decline in interest rates. The Company also experienced a $14.8
million reduction in borrowing cost, $12.1 million of which was associated with a
decrease in interest expense for repurchase agreements and FHLB advances related to the
reduction of liabilities funding mortgage-backed securities, investment securities and
other interest-earning assets, which were sold in the second half of 2007, and a $2.7
million reduction in loan payable borrowing expense due to the general decline in
interest rates. The decline in interest expense was offset by a $17.6 million reduction
in interest income primarily associated with investment securities sold during the
second half of 2007, due to the Companys efforts to improve its interest rate risk
profile, and the reduction of other interest-earning assets, primarily money market
investments. Average interest-earning assets decreased from $10.7 billion for the
second quarter of 2007 to $9.7 billion for the second quarter of 2008, while the
average interest bearing-liabilities decreased from $9.8 billion to $8.6 billion,
respectively. This reduction in leverage, combined with the decline in interest
expense, resulted in an expansion in the net interest margin from 1.30% in the second
quarter of 2007 to 2.02% in the second quarter of 2008 (see Tables A and C below for
information regarding the Companys net interest income).
    
    For the second quarter of 2008, the provision for loan and lease losses amounted to
$10.7 million, compared to $19.3 million for the same period in 2007. In 2007, the Company transferred $1.3 billion of loans from the loans held for sale portfolio to the loans receivable portfolio, which resulted in an increase in the provision of $8.8 million, and accounts for the majority of the difference between the provisions for the second quarter of 2008 compared to the corresponding 2007 period.
    
    Non-interest income for the second quarter of 2008 was $24.9 million, compared to
$24.9 million for the same period in 2007. Non-interest income performance for the
second quarter of 2008 was primarily driven by (1) a gain of $5.2 million from the
redemption of shares of VISA, Inc., pursuant to their global restructuring agreement,
(2) an increase of $4.1 million in gain on mortgage loans sales and fees, principally
related to the increase of $36.0 million in loans sales and securitizations, (3) a gain
of $4.5 million in the change in fair value of MSRs principally related to the increase
in interest
 39




---



##### Table of Contents



rates in the current quarter, (4) partially offset by a loss on trading
activities mainly driven by losses amounting to $7.9 million in U.S. Treasury
securities positions, related to the increase in interest rates in the current quarter.
The U.S. Treasury securities position serves as an economic hedge against the valuation
adjustment of the Companys MSRs.
    
    Non-interest expense for the second quarter of 2008 was $55.6 million, compared to
$76.6 million for the corresponding period in 2007. The $21.0 million reduction in
non-interest expense for the quarter was driven by the elimination of expenses
associated with the 2007 recapitalization efforts and cost control measures implemented
by the Company in 2008. The reductions impacted all expense categories, excluding
communication & information systems expense and other expenses which rose due to the
increased retail banking activities, increased FDIC insurance fees, and foreclosure
expenses, among others. The largest reductions were in compensation and benefits,
which reflected a decline of $13.6 million, and professional services, which declined
by $9.5 million.
    
    For the second quarter of 2008, Doral Financial recognized an income tax expense of
$5.8 million, compared to $1.1 million for the corresponding period in 2007. The
recognition of income tax expense for the second quarter of 2008 was principally
related to changes in the Companys valuation allowance for its deferred tax assets
resulting from changes in earnings expectations used to evaluate the realization of the
tax assets, and the resolution of a past tax
matter of one affiliate amounting to approximately $0.5 million.
    
    During the second quarter of 2008, the Company had other comprehensive loss of
approximately $42.7 million, compared to $34.7 million for the corresponding 2007
period. The Companys other comprehensive loss for the second quarter of 2008 was
mainly driven by the reduction in value of its U.S. Private Label CMOs purchased
during the fourth quarter of 2007. As of June 30, 2008, the Companys balance for
accumulated other comprehensive loss (net of income tax benefit) increased to $133.1
million, compared to $33.1 million as of December 31, 2007.
    
    Doral Financials loan production for the second quarter of 2008 was $383.3 million,
compared to $308.8 million for the comparable period in 2007, an increase of
approximately 24%. The increase in Doral Financials loan production for the second
quarter of 2008 was primarily the result of the increased production of residential
mortgage loans.
    
    Total assets as of June 30, 2008 were $10.4 billion, an increase of 12% compared to
$9.3 billion as of December 31, 2007. The increase in total assets during the first
half of 2008 was due primarily to a net increase in the Companys available for sale
securities portfolio of approximately of $1.2 billion as part of the Companys efforts
to improve interest rate risk through the asset purchase program. The increase in total
liabilities of $1.2 billion was driven by the increase of borrowings used to finance
the purchase of these securities.
 INTERNAL CONTROL OVER FINANCIAL REPORTING
  CRITICAL ACCOUNTING POLICIES
  40




---



##### Table of Contents



Fair Value Measurements
 Fair Value of Financial Instruments
    
    
    Level 1  Valuation is based upon quoted prices for identical
instruments traded in active markets.
    
    Level 2  Valuation is based upon quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant assumptions are
observable in the market, or are derived principally from or corroborated by observable
market data, by correlation or by other means.
    
    Level 3  Valuation is generated from model-based techniques that use significant
assumptions not observable in the market. These unobservable assumptions reflect the
Companys estimates of assumptions that market participants would use in pricing the
asset or liability. Valuation techniques include use of option pricing models, discounted
cash flow models and similar techniques.
    41




---



##### Table of Contents



RESULTS OF OPERATIONS FOR THE QUARTERS AND SIX MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
  NET INTEREST INCOME
    42




---



##### Table of Contents



TABLE A  AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME  (Dollars in thousands)
 QUARTERS ENDED JUNE 30,2008
    
    
    2007AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEBALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    5,553,218
    
    
    $
    85,910
    
    
    
    6.22
    %
    
    $
    5,100,837
    
    
    $
    86,726
    
    
    
    6.82
    %Mortgage-backed securities
    
    
    2,316,989
    
    
    
    29,936
    
    
    
    5.20
    %
    
    
    1,644,535
    
    
    
    21,085
    
    
    
    5.14
    %Interest-only strips
    
    
    51,817
    
    
    
    1,756
    
    
    
    13.63
    %
    
    
    51,286
    
    
    
    1,395
    
    
    
    10.91
    %Investment securities
    
    
    1,176,813
    
    
    
    13,912
    
    
    
    4.75
    %
    
    
    2,463,569
    
    
    
    27,074
    
    
    
    4.41
    %Other interest-earning assets
    
    
    621,545
    
    
    
    4,132
    
    
    
    2.67
    %
    
    
    1,407,356
    
    
    
    16,963
    
    
    
    4.83
    %Total interest-earning assets/interest income
    
    
    9,720,382
    
    
    $
    135,646
    
    
    
    5.61
    %
    
    
    10,667,583
    
    
    $
    153,243
    
    
    
    5.76
    %Total non-interest-earning assets
    
    
    750,604
    
    
    
    
    
    
    
    
    
    
    
    743,083Total assets
    
    $
    10,470,986
    
    
    
    
    
    
    
    
    
    
    $
    11,410,666LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    4,051,419
    
    
    $
    37,268
    
    
    
    3.70
    %
    
    $
    3,864,759
    
    
    $
    44,105
    
    
    
    4.58
    %Repurchase agreements
    
    
    2,181,718
    
    
    
    22,091
    
    
    
    4.07
    %
    
    
    3,544,376
    
    
    
    38,676
    
    
    
    4.38
    %Advances from FHLB
    
    
    1,745,374
    
    
    
    17,549
    
    
    
    4.04
    %
    
    
    1,012,522
    
    
    
    13,036
    
    
    
    5.16
    %Loans payable
    
    
    384,698
    
    
    
    4,568
    
    
    
    4.78
    %
    
    
    428,689
    
    
    
    7,306
    
    
    
    6.84
    %Notes payable
    
    
    280,707
    
    
    
    5,315
    
    
    
    7.62
    %
    
    
    920,739
    
    
    
    15,491
    
    
    
    6.75
    %Total interest-bearing liabilities/interest expense
    
    
    8,643,916
    
    
    $
    86,791
    
    
    
    4.04
    %
    
    
    9,771,085
    
    
    $
    118,614
    
    
    
    4.87
    %Total non-interest-bearing liabilities
    
    
    595,699
    
    
    
    
    
    
    
    
    
    
    
    821,018Total liabilities
    
    
    9,239,615
    
    
    
    
    
    
    
    
    
    
    
    10,592,103Stockholders equity
    
    
    1,231,371
    
    
    
    
    
    
    
    
    
    
    
    818,563Total liabilities and stockholders equity
    
    $
    10,470,986
    
    
    
    
    
    
    
    
    
    
    $
    11,410,666Net interest-earning assets
    
    $
    1,076,466
    
    
    
    
    
    
    
    
    
    
    $
    896,498Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    48,855
    
    
    
    
    
    
    
    
    
    
    $
    34,629Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.57
    %
    
    
    
    
    
    
    
    
    
    
    0.89
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    2.02
    %
    
    
    
    
    
    
    
    
    
    
    1.30
    %Net interest-earning assets ratio(5)
    
    
    
    
    
    
    
    
    
    
    112.45
    %
    
    
    
    
    
    
    
    
    
    
    109.18
    %
 
 (1)
    
    Average loan balances include the average balance of non-accruing loans, on which interest income is recognized when collected. Also includes the average balance of GNMA defaulted loans for which the Company
has the option, but not an obligation, to buy-back the pools serviced.(2)
    
    Interest income on loans includes $0.4 million and $0.4 million for the first quarter of 2008 and 2007, respectively, of income from prepayment penalties related to the Companys loan portfolio.(3)
    
    Interest rate spread represents the difference between Doral Financials weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities.(4)
    
    Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets.(5)
    
    Net interest-earnings assets ratio represents average interest-earning assets as a percentage of average interest-earning liabilities. 43




---



##### Table of Contents



TABLE B  AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME  (Dollars in thousands)
 SIX MONTH PERIODS ENDED JUNE 30,2008
    
    
    2007AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEBALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    5,501,828
    
    
    $
    171,292
    
    
    
    6.26
    %
    
    $
    5,131,756
    
    
    $
    176,319
    
    
    
    6.93
    %Mortgage-backed securities
    
    
    1,791,175
    
    
    
    49,038
    
    
    
    5.51
    %
    
    
    1,691,402
    
    
    
    43,325
    
    
    
    5.17
    %Interest-only strips
    
    
    50,830
    
    
    
    3,430
    
    
    
    13.57
    %
    
    
    51,694
    
    
    
    2,889
    
    
    
    11.27
    %Investment securities
    
    
    1,175,526
    
    
    
    28,678
    
    
    
    4.91
    %
    
    
    2,524,860
    
    
    
    54,886
    
    
    
    4.38
    %Other interest-earning assets
    
    
    711,353
    
    
    
    11,316
    
    
    
    3.20
    %
    
    
    1,326,612
    
    
    
    33,072
    
    
    
    5.03
    %Total interest-earning assets/interest income
    
    
    9,230,712
    
    
    $
    263,754
    
    
    
    5.75
    %
    
    
    10,726,324
    
    
    $
    310,491
    
    
    
    5.84
    %Total non-interest-earning assets
    
    
    784,654
    
    
    
    
    
    
    
    
    
    
    
    745,318Total assets
    
    $
    10,015,366
    
    
    
    
    
    
    
    
    
    
    $
    11,471,642LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    3,954,914
    
    
    $
    79,916
    
    
    
    4.06
    %
    
    $
    3,873,318
    
    
    $
    86,893
    
    
    
    4.52
    %Repurchase agreements
    
    
    1,858,953
    
    
    
    40,404
    
    
    
    4.37
    %
    
    
    3,624,225
    
    
    
    78,312
    
    
    
    4.36
    %Advances from FHLB
    
    
    1,634,467
    
    
    
    34,807
    
    
    
    4.28
    %
    
    
    1,023,450
    
    
    
    26,644
    
    
    
    5.25
    %Loans payable
    
    
    387,769
    
    
    
    10,077
    
    
    
    5.23
    %
    
    
    433,908
    
    
    
    14,934
    
    
    
    6.94
    %Notes payable
    
    
    279,663
    
    
    
    10,651
    
    
    
    7.66
    %
    
    
    922,116
    
    
    
    30,915
    
    
    
    6.76
    %Total interest-bearing liabilities/interest expense
    
    
    8,115,766
    
    
    $
    175,855
    
    
    
    4.36
    %
    
    
    9,877,017
    
    
    $
    237,698
    
    
    
    4.85
    %Total non-interest-bearing liabilities
    
    
    651,868
    
    
    
    
    
    
    
    
    
    
    
    756,713Total liabilities
    
    
    8,767,634
    
    
    
    
    
    
    
    
    
    
    
    10,633,730Stockholders equity
    
    
    1,247,732
    
    
    
    
    
    
    
    
    
    
    
    837,912Total liabilities and stockholders equity
    
    $
    10,015,366
    
    
    
    
    
    
    
    
    
    
    $
    11,471,642Net interest-earning assets
    
    $
    1,114,946
    
    
    
    
    
    
    
    
    
    
    $
    849,307Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    87,899
    
    
    
    
    
    
    
    
    
    
    $
    72,793Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.39
    %
    
    
    
    
    
    
    
    
    
    
    0.99
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.91
    %
    
    
    
    
    
    
    
    
    
    
    1.37
    %Net interest-earning assets ratio(5)
    
    
    
    
    
    
    
    
    
    
    113.74
    %
    
    
    
    
    
    
    
    
    
    
    108.60
    %
 
 (1)
    
    Average loan balances include the average balance of non-accruing loans, on which interest income is recognized when collected. Also includes the average balance of GNMA defaulted loans for which the Company
has the option, but not an obligation, to buy-back the pools serviced.(2)
    
    Interest income on loans includes $0.7 million and $1.8 million for the first half of 2008 and 2007, respectively, of income from prepayment penalties related to the Companys loan portfolio.(3)
    
    Interest rate spread represents the difference between Doral Financials weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities.(4)
    
    Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets.(5)
    
    Net interest-earnings assets ratio represents average interest-earning assets as a percentage of average interest-earning liabilities.  44




---



##### Table of Contents



TABLE C  NET INTEREST INCOME VARIANCE ANALYSIS  (In thousands)
 QUARTERS ENDEDJUNE 30,2008 COMPARED TO 2007INCREASE (DECREASE) DUE TO:VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    7,573
    
    
    $
    (8,389
    )
    
    $
    (816
    )Mortgage-backed securities
    
    
    8,508
    
    
    
    343
    
    
    
    8,851Interest-only strips
    
    
    14
    
    
    
    347
    
    
    
    361Investment securities
    
    
    (14,154
    )
    
    
    992
    
    
    
    (13,162
    )Other interest-earning assets
    
    
    (9,478
    )
    
    
    (3,353
    )
    
    
    (12,831
    )TOTAL INTEREST INCOME VARIANCE
    
    
    (7,537
    )
    
    
    (10,060
    )
    
    
    (17,597
    )INTEREST EXPENSE VARIANCEDeposits
    
    $
    2,106
    
    
    $
    (8,943
    )
    
    $
    (6,837
    )Repurchase agreements
    
    
    (14,896
    )
    
    
    (1,689
    )
    
    
    (16,585
    )Advances from FHLB
    
    
    9,383
    
    
    
    (4,870
    )
    
    
    4,513Loans payable
    
    
    (754
    )
    
    
    (1,984
    )
    
    
    (2,738
    )Notes payable
    
    
    (10,780
    )
    
    
    604
    
    
    
    (10,176
    )TOTAL INTEREST EXPENSE VARIANCE
    
    
    (14,941
    )
    
    
    (16,882
    )
    
    
    (31,823
    )NET INTEREST INCOME VARIANCE
    
    $
    7,404
    
    
    $
    6,822
    
    
    $
    14,226
 TABLE D  NET INTEREST INCOME VARIANCE ANALYSIS  (In thousands)
 FOR THE SIX MONTH PERIODS ENDEDJUNE 30,2008 COMPARED TO 2007INCREASE (DECREASE) DUE TO:VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    12,979
    
    
    $
    (18,006
    )
    
    $
    (5,027
    )Mortgage-backed securities
    
    
    2,620
    
    
    
    3,093
    
    
    
    5,713Interest-only strips
    
    
    (48
    )
    
    
    589
    
    
    
    541Investment securities
    
    
    (29,314
    )
    
    
    3,106
    
    
    
    (26,208
    )Other interest-earning assets
    
    
    (15,315
    )
    
    
    (6,441
    )
    
    
    (21,756
    )TOTAL INTEREST INCOME VARIANCE
    
    
    (29,078
    )
    
    
    (17,659
    )
    
    
    (46,737
    )INTEREST EXPENSE VARIANCEDeposits
    
    $
    1,874
    
    
    $
    (8,851
    )
    
    $
    (6,977
    )Repurchase agreements
    
    
    (38,000
    )
    
    
    92
    
    
    
    (37,908
    )Advances from FHLB
    
    
    16,015
    
    
    
    (7,852
    )
    
    
    8,163Loans payable
    
    
    (1,582
    )
    
    
    (3,275
    )
    
    
    (4,857
    )Notes payable
    
    
    (21,521
    )
    
    
    1,257
    
    
    
    (20,264
    )TOTAL INTEREST EXPENSE VARIANCE
    
    
    (43,214
    )
    
    
    (18,629
    )
    
    
    (61,843
    )NET INTEREST INCOME VARIANCE
    
    $
    14,136
    
    
    $
    970
    
    
    $
    15,106
 45




---



##### Table of Contents



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




---



##### Table of Contents



QUARTERS ENDED
    
    
    SIX MONTH PERIODS ENDEDJUNE 30,
    
    
    JUNE 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Total loan sales and securitizations
    
    $
    98,249
    
    
    $
    62,178
    
    
    $
    147,574
    
    
    $
    111,950MSRs capitalized
    
    $
    2,046
    
    
    $
    1,362
    
    
    $
    2,975
    
    
    $
    2,546
 Trading Activities.
  TABLE E  COMPONENTS OF TRADING ACTIVITIES
 QUARTERS ENDED
    
    
    SIX MONTH PERIODS ENDEDJUNE 30,
    
    
    JUNE 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net realized gains (losses) on sales of securities held for trading
    
    $
    197
    
    
    $
    (2,333
    )
    
    $
    2,963
    
    
    $
    (4,334
    )(Loss) gain on the IO valuation
    
    
    (706
    )
    
    
    (788
    )
    
    
    (29
    )
    
    
    3,759Net unrealized losses on trading securities, excluding IOs
    
    
    (8,565
    )
    
    
    (3,616
    )
    
    
    (2,983
    )
    
    
    (3,751
    )Net realized and unrealized gains (losses) on derivative
instruments
    
    
    1,158
    
    
    
    12,628
    
    
    
    (199
    )
    
    
    8,239Total
    
    $
    (7,916
    )
    
    $
    5,891
    
    
    $
    (248
    )
    
    $
    3,913
   47




---



##### Table of Contents



Net (Loss) Gain  on Sale of Investment Securities.
 Net Servicing Income.
    48




---



##### Table of Contents



TABLE F  NET SERVICING INCOME
 QUARTERS ENDED
    
    
    SIX MONTH PERIODSJUNE 30,
    
    
    ENDED JUNE 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Servicing fees (net of guarantee fees)
    
    $
    7,805
    
    
    $
    8,602
    
    
    $
    16,199
    
    
    $
    18,384Late charges
    
    
    2,274
    
    
    
    2,244
    
    
    
    4,490
    
    
    
    4,609Prepayment penalties
    
    
    148
    
    
    
    233
    
    
    
    248
    
    
    
    363Interest loss
    
    
    (2,438
    )
    
    
    (1,262
    )
    
    
    (4,518
    )
    
    
    (1,872
    )Other servicing fees
    
    
    147
    
    
    
    121
    
    
    
    403
    
    
    
    179Servicing income, gross
    
    
    7,936
    
    
    
    9,938
    
    
    
    16,822
    
    
    
    21,663Change in fair value of mortgage servicing rights
    
    
    4,498
    
    
    
    (555
    )
    
    
    (7,099
    )
    
    
    (6,280
    )Total net servicing income
    
    $
    12,434
    
    
    $
    9,383
    
    
    $
    9,723
    
    
    $
    15,383
 Commissions, Fees and Other Income.
 TABLE G  COMMISSIONS, FEES AND OTHER INCOME
 QUARTERS ENDED
    
    
    SIX MONTH PERIODS ENDEDJUNE 30,
    
    
    JUNE 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Retail banking fees
    
    $
    6,587
    
    
    $
    5,281
    
    
    $
    12,969
    
    
    $
    10,494Insurance agency commissions
    
    
    2,856
    
    
    
    2,411
    
    
    
    5,261
    
    
    
    4,734Asset management fees and commissions
    
    
    11
    
    
    
    143
    
    
    
    149
    
    
    
    286Other income
    
    
    7,065
    
    
    
    341
    
    
    
    8,000
    
    
    
    1,073Total
    
    $
    16,519
    
    
    $
    8,176
    
    
    $
    26,379
    
    
    $
    16,587
     49




---



##### Table of Contents



NON-INTEREST EXPENSE
  TABLE H  NON INTEREST EXPENSE
 QUARTERS ENDED
    
    
    SIX MONTH PERIODSJUNE 30,
    
    
    ENDED JUNE 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Compensation and employee benefits
    
    $
    17,057
    
    
    $
    30,641
    
    
    $
    36,135
    
    
    $
    57,203Taxes, other than payroll and income
taxes
    
    
    2,379
    
    
    
    3,437
    
    
    
    4,801
    
    
    
    6,284Advertising
    
    
    2,273
    
    
    
    2,568
    
    
    
    4,505
    
    
    
    3,930Professional services
    
    
    8,076
    
    
    
    17,559
    
    
    
    14,010
    
    
    
    37,001Communication and information systems
    
    
    5,641
    
    
    
    5,264
    
    
    
    11,121
    
    
    
    9,318Occupancy and other office expenses
    
    
    5,680
    
    
    
    6,451
    
    
    
    11,649
    
    
    
    12,750Depreciation and amortization
    
    
    4,072
    
    
    
    4,427
    
    
    
    8,127
    
    
    
    9,478Other
    
    
    10,448
    
    
    
    6,272
    
    
    
    19,841
    
    
    
    15,873Total non-interest expense
    
    $
    55,626
    
    
    $
    76,619
    
    
    $
    110,189
    
    
    $
    151,837
    INCOME TAXES
  50




---



##### Table of Contents



51




---



##### Table of Contents



BALANCE SHEET AND OPERATING DATA ANALYSIS
 PERFORMANCE RATIOS
  52




---



##### Table of Contents



TABLE I
PERFORMANCE RATIOS
 QUARTERS ENDED
    
    SIX MONTH PERIODS ENDEDJUNE 30,
    
    JUNE 30,2008
    
    2007
    
    2008
    
    2007Return on average assets
    
    
    0.06
    %
    
    
    (1.32
    )%
    
    
    (0.01
    )%
    
    
    (1.31
    )%Return on average common equity
    
    
    (4.08
    )%
    
    
    (74.89
    )%
    
    
    (5.16
    )%
    
    
    (69.67
    )%Average common equity to
average assets
    
    
    6.28
    %
    
    
    2.15
    %
    
    
    6.73
    %
    
    
    2.31
    %
 LOAN PRODUCTION
  53




---



##### Table of Contents



TABLE J  LOAN PRODUCTION
 Quarters Ended
    
    
    Six Month Periods EndedJune 30,
    
    
    June 30,(Dollars in thousands, except for average initial loan balance)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007FHA/VA mortgage loansNumber of loans
    
    
    760
    
    
    
    354
    
    
    
    1,221
    
    
    
    734Volume of loans
    
    $
    91,755
    
    
    $
    38,611
    
    
    $
    142,249
    
    
    $
    75,687Percent of total volume
    
    
    24
    %
    
    
    13
    %
    
    
    19
    %
    
    
    14
    %Average initial loan balance
    
    $
    120,730
    
    
    $
    109,071
    
    
    $
    116,502
    
    
    $
    103,116Conventional conforming mortgage loansNumber of loans
    
    
    240
    
    
    
    444
    
    
    
    476
    
    
    
    775Volume of loans
    
    $
    28,213
    
    
    $
    53,746
    
    
    $
    56,874
    
    
    $
    91,652Percent of total volume
    
    
    7
    %
    
    
    18
    %
    
    
    8
    %
    
    
    16
    %Average initial loan balance
    
    $
    117,554
    
    
    $
    121,050
    
    
    $
    119,483
    
    
    $
    118,261Conventional non-conforming mortgage loans(1)Number of loans
    
    
    1,087
    
    
    
    522
    
    
    
    2,180
    
    
    
    948Volume of loans
    
    $
    136,201
    
    
    $
    72,227
    
    
    $
    291,629
    
    
    $
    128,344Percent of total volume
    
    
    36
    %
    
    
    23
    %
    
    
    39
    %
    
    
    23
    %Average initial loan balance
    
    $
    125,300
    
    
    $
    138,366
    
    
    $
    133,775
    
    
    $
    135,384Construction developments loans(2)Number of loans
    
    
    13
    
    
    
    6
    
    
    
    13
    
    
    
    15Volume of loans
    
    $
    44,596
    
    
    $
    6,956
    
    
    $
    44,596
    
    
    $
    18,814Percent of total volume
    
    
    12
    %
    
    
    2
    %
    
    
    6
    %
    
    
    3
    %Average initial loan balance
    
    $
    3,430,462
    
    
    $
    1,159,333
    
    
    $
    3,430,462
    
    
    $
    1,254,267Disbursement under existing construction development loansVolume of loans
    
    $
    23,186
    
    
    $
    62,799
    
    
    $
    51,613
    
    
    $
    125,678Percent of total volume
    
    
    6
    %
    
    
    20
    %
    
    
    7
    %
    
    
    23
    %Commercial loans(3)Number of loans
    
    
    86
    
    
    
    90
    
    
    
    178
    
    
    
    198Volume of loans
    
    $
    52,719
    
    
    $
    55,358
    
    
    $
    117,894
    
    
    $
    87,296Percent of total volume
    
    
    14
    %
    
    
    18
    %
    
    
    15
    %
    
    
    16
    %Average initial loan balance
    
    $
    613,012
    
    
    $
    615,089
    
    
    $
    662,326
    
    
    $
    440,883Consumer loans(4)Number of loans
    
    
    508
    
    
    
    2,768
    
    
    
    6,572
    
    
    
    3,781Volume of loans
    
    $
    4,639
    
    
    $
    18,713
    
    
    $
    48,528
    
    
    $
    26,676Percent of total volume
    
    
    1
    %
    
    
    6
    %
    
    
    6
    %
    
    
    5
    %Average initial loan balance
    
    $
    9,132
    
    
    $
    6,760
    
    
    $
    7,384
    
    
    $
    7,055Other(3)Number of loans
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    2Volume of loans
    
    $
    2,000
    
    
    $
    405
    
    
    $
    2,000
    
    
    $
    2,188Percent of total volume
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Total loansNumber of loans
    
    
    2,695
    
    
    
    4,185
    
    
    
    10,641
    
    
    
    6,453Volume of loans
    
    $
    383,309
    
    
    $
    308,815
    
    
    $
    755,383
    
    
    $
    556,335
 
 (1)
    
    Includes $8.1 million and $4.7 million in second mortgages for the quarters ended June 30, 2008 and 2007, respectively, and $17.6 million and $9.2 million in second mortgages for the six month
periods ended June 30, 2008 and 2007, respectively.(2)
    
    Related to new commitments to fund construction loans in New York.(3)
    
    Commercial and consumer lines of credit are included in the loan production according to the credit limit approved.(4)
    
    Consists of multifamily loans.   54




---



##### Table of Contents



TABLE K  LOAN ORIGINATION SOURCES
 SIX MONTH PERIODS ENDED JUNE 30,2008
    
    2007Puerto Rico
    
    US
    
    Total
    
    Puerto Rico
    
    US
    
    TotalRetail
    
    
    54
    %
    
    
    
    
    
    
    54
    %
    
    
    51
    %
    
    
    
    
    
    
    51
    %Wholesale(1)
    
    
    11
    %
    
    
    
    
    
    
    11
    %
    
    
    2
    %
    
    
    
    
    
    
    2
    %Housing Developments(2)
    
    
    6
    %
    
    
    7
    %
    
    
    13
    %
    
    
    24
    %
    
    
    2
    %
    
    
    26
    %Other(3)
    
    
    13
    %
    
    
    9
    %
    
    
    22
    %
    
    
    17
    %
    
    
    4
    %
    
    
    21
    %
 
 (1)
    
    Refers to purchases of mortgage loans from other financial institutions and mortgage lenders.(2)
    
    Includes new construction development loans and the disbursement of existing construction development loans. During the first half of 2008, Doral
Financial did not enter into new commitments to fund construction loans in Puerto Rico.(3)
    
    Refers to commercial, consumer and multifamily loans. MORTGAGE LOAN SERVICING
  55




---



##### Table of Contents



TABLE L  LOANS SERVICED FOR THIRD PARTIES
 AS OF JUNE 30,(Dollars in thousands, except for average size of loans)
    
    2008
    
    
    2007Composition of Portfolio Serviced for Third Parties at Period End:GNMA
    
    $
    2,135,166
    
    
    $
    2,129,096FHLMC/FNMA
    
    
    3,607,022
    
    
    
    3,893,830Other conventional mortgage loans(1)(2)
    
    
    3,938,708
    
    
    
    4,731,030Total portfolio serviced for third parties
    
    $
    9,680,896
    
    
    $
    10,753,956Selected Data Regarding Mortgage Loans Serviced for Third Parties:Number of loans
    
    
    115,094
    
    
    
    127,479Weighted- average interest rate
    
    
    6.44
    %
    
    
    6.50
    %Weighted- average remaining maturity (months)
    
    
    247
    
    
    
    251Weighted- average gross servicing fee rate
    
    
    0.39
    %
    
    
    0.32
    %Average servicing portfolio
    
    $
    9,875,978
    
    
    $
    13,685,026Principal prepayments
    
    $
    359,141
    
    
    $
    408,770Constant prepayment rate
    
    
    7
    %
    
    
    6
    %Average size of loans
    
    $
    84,113
    
    
    $
    84,359Servicing assets, net
    
    $
    145,527
    
    
    $
    164,569Delinquent Mortgage Loans and Pending Foreclosures at Period End:60-89 days past due
    
    
    1.98
    %
    
    
    1.85
    %90 days or more past due
    
    
    2.31
    %
    
    
    1.64
    %Total delinquencies excluding foreclosures
    
    
    4.29
    %
    
    
    3.49
    %Foreclosures pending
    
    
    2.48
    %
    
    
    2.00
    %Servicing Portfolio Activity:Beginning servicing portfolio
    
    $
    10,072,538
    
    
    $
    11,997,324Additions to servicing portfolio
    
    
    147,574
    
    
    
    111,950Servicing sold and released due to repurchases(3)
    
    
    (26,699
    )
    
    
    (738,604
    )Run-off(4)
    
    
    (512,517
    )
    
    
    (616,714
    )Ending servicing portfolio
    
    $
    9,680,896
    
    
    $
    10,753,956
 
 (1)
    
    Excludes $4.0 billion and $3.3 billion of loans owned by Doral Financial at June 30, 2008 and 2007, respectively.(2)
    
    Includes portfolios of $189.7 million and $219.8 million at June 30, 2008 and 2007, respectively, of delinquent FHA/VA and conventional mortgage loans.(3)
    
    As of June 30, 2008, includes $26.7 million of principal balance of loans repurchased from a third party. As of June 30, 2007, includes $693.9 million of principal balance of
loans related to MSRs sales.(4)
    
    Run-off refers to regular amortization of loans, prepayments and foreclosures. 56




---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
  Impact of Recapitalization of the Holding Company and Restructuring of Mortgage Operations on
Liquidity
    Liquidity of the Banking Subsidiaries
  57




---



##### Table of Contents



Uses of Cash
      Sources of Cash
  58




---



##### Table of Contents



TABLE M  SOURCES OF BORROWINGS
 AS OF JUNE 30, 2008
    
    AS OF DECEMBER 31, 2007AMOUNT
    
    AVERAGE
    
    AMOUNT
    
    AVERAGE(Dollars in thousands)
    
    OUTSTANDING
    
    RATE
    
    OUTSTANDING
    
    RATEDeposits
    
    $
    4,330,728
    
    
    
    3.37
    %
    
    $
    4,268,024
    
    
    
    4.11
    %Repurchase Agreements
    
    
    2,100,271
    
    
    
    4.11
    %
    
    
    1,444,363
    
    
    
    4.97
    %Advances from FHLB
    
    
    1,829,000
    
    
    
    3.74
    %
    
    
    1,234,000
    
    
    
    4.94
    %Loans Payable
    
    
    379,815
    
    
    
    7.28
    %
    
    
    402,701
    
    
    
    6.88
    %Notes Payable
    
    
    279,716
    
    
    
    7.31
    %
    
    
    282,458
    
    
    
    7.31
    %
   TABLE N  AVERAGE DEPOSIT BALANCE
 SIX MONTH PERIOD ENDED
    
    
    YEAR ENDEDJUNE 30, 2008
    
    
    DECEMBER 31, 2007AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE(Dollars in thousands)
    
    BALANCE
    
    
    RATE
    
    
    BALANCE
    
    
    RATECertificates of deposit
    
    $
    2,922,938
    
    
    
    4.62
    %
    
    $
    2,782,709
    
    
    
    4.94
    %Regular passbook savings
    
    
    322,962
    
    
    
    2.71
    %
    
    
    380,710
    
    
    
    3.56
    %NOW accounts
    
    
    402,707
    
    
    
    1.34
    %
    
    
    437,321
    
    
    
    3.04
    %Money market accounts
    
    
    301,981
    
    
    
    3.80
    %
    
    
    171,371
    
    
    
    4.05
    %Other interest-bearing deposits
    
    
    4,327
    
    
    
    3.65
    %
    
    
    
    
    
    
    Total interest-bearing
    
    
    3,954,915
    
    
    
    4.06
    %
    
    
    3,772,111
    
    
    
    4.54
    %Non-interest bearing
    
    
    246,121
    
    
    
    
    
    
    
    309,482
    
    
    
    Total deposits
    
    $
    4,201,036
    
    
    
    3.82
    %
    
    $
    4,081,593
    
    
    
    4.20
    %
  TABLE O  CERTIFICATES OF DEPOSIT MATURITIES
 (In thousands)
    
    AMOUNTCertificates of deposit maturing:Three months or less
    
    $
    1,207,722Over three through six months
    
    
    492,809Over six through twelve months
    
    
    918,739Over twelve months
    
    
    329,133Total
    
    $
    2,948,403
 59




---



##### Table of Contents



REGULATORY CAPITAL RATIOS
  60




---



##### Table of Contents



TABLE P
REGULATORY CAPITAL RATIOS
 As of June 30, 2008DORAL
    
    DORAL
    
    DORALFINANCIAL(2)
    
    BANK PR
    
    BANK NYTotal Capital (Total capital to risk- weighted assets)
    
    
    17.0
    %
    
    
    13.5
    %
    
    
    14.1
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    15.7
    %
    
    
    12.3
    %
    
    
    13.6
    %Leverage Ratio(1)
    
    
    9.5
    %
    
    
    6.1
    %
    
    
    10.2
    %
 
 (1)
    
    Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR and Tier 1 capital
to adjusted total assets in the case of Doral Bank NY.(2)
    
    Doral Financial was not subject to regulatory capital requirements as of June 30, 2008. Ratios were
prepared as if the company were subject to the requirement for comparability purposes. As of December 31, 2007DORAL
    
    DORAL
    
    DORALFINANCIAL(2)
    
    BANK PR
    
    BANK NYTotal Capital (Total capital to risk- weighted assets)
    
    
    17.8
    %
    
    
    12.5
    %
    
    
    13.8
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    16.5
    %
    
    
    11.3
    %
    
    
    13.0
    %Leverage Ratio(1)
    
    
    10.8
    %
    
    
    6.0
    %
    
    
    10.6
    %
 
 (1)
    
    Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR and Tier 1 capital to
adjusted total assets in the case of Doral Bank NY.(2)
    
    Doral Financial was not subject to regulatory capital requirements as of December 31, 2007. Ratios
were prepared as if the company were subject to the requirement for comparability purposes.     ASSETS AND LIABILITIES
  61




---



##### Table of Contents



OFF-BALANCE SHEET ACTIVITIES
      Risk Factors
 CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
  62




---



##### Table of Contents



TABLE Q  CONTRACTUAL OBLIGATIONS
 PAYMENT DUE BY PERIODLESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTER(In thousands)
    
    TOTAL
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSDeposits
    
    $
    4,330,728
    
    
    $
    3,970,381
    
    
    $
    298,962
    
    
    $
    57,533
    
    
    $
    3,852Repurchase agreements(1) (2)
    
    
    2,100,271
    
    
    
    1,217,771
    
    
    
    691,000
    
    
    
    191,500
    
    
    
    Advances from FHLB(1) (2)
    
    
    1,829,000
    
    
    
    662,000
    
    
    
    669,580
    
    
    
    497,420
    
    
    
    Loans payable(3)
    
    
    379,815
    
    
    
    39,568
    
    
    
    70,230
    
    
    
    59,829
    
    
    
    210,188Notes payable
    
    
    279,716
    
    
    
    4,406
    
    
    
    7,017
    
    
    
    35,401
    
    
    
    232,892Other liabilities
    
    
    179,277
    
    
    
    178,277
    
    
    
    1,000
    
    
    
    
    
    
    
    Non-cancelable operating leases
    
    
    45,506
    
    
    
    5,714
    
    
    
    9,786
    
    
    
    8,970
    
    
    
    21,036Total Contractual Cash Obligations
    
    $
    9,144,313
    
    
    $
    6,078,117
    
    
    $
    1,747,575
    
    
    $
    850,653
    
    
    $
    467,968
 
 (1)
    
    Amounts included in the table above do not include interest.(2)
    
    Includes $782.5 million of repurchase agreements with an average rate of 5.50% and $304.0 million in advances from
FHLB-NY with an average rate of 5.40%,which the lenders have the right to call before their contractual maturities. The majority of
such repurchase agreements and advances from FHLB-NY are included in the less than one year category in the above table but have actual
contractual maturities ranging from July 2009 to March 2012.They are included on the first call date basis because increases in
interest rates over the average rate of the Companys callable borrowings may induce the lenders to exercise their call right.(3)
    
    Secured borrowings with local financial institutions, collateralized by real estate mortgage loans at variable
interest rates tied to 3-month LIBOR. These loans are not subject to scheduled payments, but are required to be
repaid according to the regular amortization and prepayments of the underlying mortgage loans. For purposes of the table above, the
Company used a CPR of 8.00% to estimate the repayments. TABLE R  OTHER COMMERCIAL COMMITMENTS (1)
 AMOUNT OF COMMITMENT EXPIRATION PER PERIODTOTALAMOUNT
    
    
    LESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTER(In thousands)
    
    COMMITTED
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSCommitments to extend credit
    
    $
    174,758
    
    
    $
    120,049
    
    
    $
    54,707
    
    
    $
    2
    
    
    $
    Commitments to sell loans at fair value
    
    
    88,309
    
    
    
    88,309
    
    
    
    
    
    
    
    
    
    
    
    Commercial and financial standby letters of credit
    
    
    4,295
    
    
    
    3,957
    
    
    
    338
    
    
    
    
    
    
    
    Maximum contractual recourse exposure
    
    
    1,053,748
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,053,748Total
    
    $
    1,321,110
    
    
    $
    212,315
    
    
    $
    55,045
    
    
    $
    2
    
    
    $
    1,053,748
 
 (1)
    
    Refer to Off-Balance Sheet Activities above for additional information regarding other commercial commitments of the Company. RISK MANAGEMENT
  Interest Rate and Market Risk Management
  63




---



##### Table of Contents



Doral Financials Risk Profile
    Market Value
    
    Net Interest IncomeAs of June 30, 2008
    
    Of Equity Risk
    
    Risk(1)+ 100 BPS
    
    
    (12.7
    )%
    
    
    9.2
    %- 100 BPS
    
    
    3.1
    %
    
    
    (0.1
    )%
 Market Value of
    
    Net Interest IncomeAs of December 31, 2007
    
    Equity Risk
    
    Risk(1)+ 100 BPS
    
    
    (10.7
    )%
    
    
    (0.8
    )%- 100 BPS
    
    
    1.2
    %
    
    
    (1.9
    )%
 
 (1)
    
    Based on 12-month forward change in net interest income.  64




---



##### Table of Contents



(dollars in thousands)
    
    June 30, 2008
    
    December 31, 2007Change in Fair
    
    Change in FairChange in interest
    
    Value of Available
    
    Value of Availablerates (basis points)
    
    for Sale Securities
    
    for Sale Securities+200
    
    $(219,400)
    
    $(223,737)+100
    
    (101,827)
    
    (102,851)Base
    
    
    
    -100
    
    73,704
    
    70,755-200
    
    128,367
    
    129,464
   Derivatives
  65




---



##### Table of Contents



TABLE SINTEREST RATE SWAPS  (Dollars in thousands)
 NOTIONAL
    
    MATURITY
    
    PAY
    
    RECEIVE
    
    FAIRAMOUNT
    
    DATE
    
    FIXED RATE
    
    FLOATING RATE
    
    VALUECASH FLOW HEDGE$15,000
    
    September, 2008
    
    4.70%
    
    1-month LIBOR minus 0.03%
    
    $
    (71
    )10,000
    
    September, 2009
    
    4.57%
    
    1-month LIBOR plus 0.02%
    
    
    (188
    )8,000
    
    September, 2010
    
    4.62%
    
    1-month LIBOR plus 0.02%
    
    
    (195
    )3,000
    
    September, 2011
    
    4.69%
    
    1-month LIBOR plus 0.05%
    
    
    (81
    )15,000
    
    October, 2008
    
    4.44%
    
    1-month LIBOR plus 0.06%
    
    
    (82
    )10,000
    
    October, 2009
    
    4.30%
    
    1-month LIBOR plus 0.04%
    
    
    (157
    )8,000
    
    October, 2010
    
    4.37%
    
    1-month LIBOR plus 0.02%
    
    
    (152
    )6,000
    
    October, 2011
    
    4.51%
    
    1-month LIBOR plus 0.02%
    
    
    (122
    )5,000
    
    October, 2012
    
    4.62%
    
    1-month LIBOR plus 0.05%
    
    
    (112
    )20,000
    
    November, 2008
    
    4.43%
    
    1-month LIBOR plus 0.03%
    
    
    (137
    )20,000
    
    November, 2009
    
    4.35%
    
    1-month LIBOR plus 0.02%
    
    
    (341
    )15,000
    
    November, 2010
    
    4.42%
    
    1-month LIBOR
    
    
    (306
    )15,000
    
    November, 2011
    
    4.55%
    
    1-month LIBOR plus 0.02%
    
    
    (335
    )45,000
    
    November, 2012
    
    4.62%
    
    1-month LIBOR plus 0.02%
    
    
    (1,064
    )$195,000
    
    
    
    
    
    
    
    $
    (3,343
    )
  TABLE T
INTEREST RATE CAPS  (Dollars in thousands)
 NOTIONAL
    
    MATURITY
    
    ENTITLED PAYMENT
    
    PREMIUM
    
    
    FAIRAMOUNT
    
    DATE
    
    CONDITIONS
    
    PAID
    
    
    VALUE$25,000
    
    September, 2010
    
    1-month LIBOR and 5.00%
    
    $
    205
    
    
    $
    8615,000
    
    September, 2011
    
    1-month LIBOR and 5.50%
    
    
    134
    
    
    
    9915,000
    
    September, 2012
    
    1-month LIBOR and 6.00%
    
    
    143
    
    
    
    13135,000
    
    October, 2010
    
    1-month LIBOR and 5.00%
    
    
    199
    
    
    
    14415,000
    
    October, 2011
    
    1-month LIBOR and 5.00%
    
    
    172
    
    
    
    15815,000
    
    October, 2012
    
    1-month LIBOR and 5.50%
    
    
    182
    
    
    
    18650,000
    
    November, 2012
    
    1-month LIBOR and 6.50%
    
    
    228
    
    
    
    62750,000
    
    November, 2012
    
    1-month LIBOR and 5.50%
    
    
    545
    
    
    
    34950,000
    
    November, 2012
    
    1-month LIBOR and 6.00%
    
    
    350
    
    
    
    466$270,000
    
    
    
    
    
    $
    2,158
    
    
    $
    2,246
 Freestanding Derivatives.
 66




---



##### Table of Contents



Derivatives  Hedge Accounting.
  TABLE U  FAIR VALUE RECONCILIATION
 Six Month Period Ended(In thousands)
    
    June 30, 2008Fair value of contracts outstanding at the beginning of the period
    
    $
    (476
    )Contracts realized or otherwise settled during the period
    
    
    2,382Fair value of new contracts entered into during the period
    
    
    (272
    )Changes in fair values during the period
    
    
    73Fair value of contracts outstanding at the end of the period
    
    $
    1,707
 TABLE V  SOURCES OF FAIR VALUE
 (In thousands)
    
    Payment Due by PeriodMaturity
    
    
    
    
    
    
    
    
    
    
    Maturityless than
    
    
    Maturity
    
    
    Maturity
    
    
    in excess
    
    
    Total FairAs of June 30, 2008
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    of 5 Years
    
    
    ValuePrices actively quoted
    
    $
    (539
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (539
    )Prices provided by
other external
sources
    
    
    
    
    
    
    230
    
    
    
    2,016
    
    
    
    
    
    
    
    2,246$
    (539
    )
    
    $
    230
    
    
    $
    2,016
    
    
    $
    
    
    
    $
    1,707
  67




---



##### Table of Contents



TABLE W  DERIVATIVE COUNTERPARTY CREDIT EXPOSURE
 (Dollars in thousands)
    
    June 30, 2008Total Exposure
    
    
    
    
    
    
    
    
    
    
    Weighted AverageNumber of
    
    
    
    
    
    
    At Fair
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA-
    
    
    2
    
    
    $
    465,000
    
    
    $
    2,246
    
    
    $
    (3,343
    )
    
    $
    (1,097
    )
    
    
    3.15A+
    
    
    1
    
    
    
    5,000
    
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )
    
    
    0.04A
    
    
    1
    
    
    
    18,000
    
    
    
    
    
    
    
    (530
    )
    
    
    (530
    )
    
    
    0.06Total Derivatives
    
    
    4
    
    
    $
    488,000
    
    
    $
    2,246
    
    
    $
    (3,882
    )
    
    $
    (1,636
    )
    
    
    3.00
 
 (1)
    
    Based on the S&P Long Term Issuer Credit Ratings.(2)
    
    Based on legal entities. Affiliated legal entities are reported separately.(3)
    
    For each counterparty, this amount includes derivatives with a positive fair value including the related accrued interest receivable/payable (net). (Dollars in thousands)
    
    December 31, 2007Total Exposure
    
    
    
    
    
    
    
    
    
    
    Weighted AverageNumber of
    
    
    
    
    
    
    At Fair
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA
    
    
    1
    
    
    $
    250,000
    
    
    $
    241
    
    
    $
    (2,889
    )
    
    $
    (2,648
    )
    
    
    2.95AA-
    
    
    1
    
    
    
    215,000
    
    
    
    1,241
    
    
    
    
    
    
    
    1,241
    
    
    
    4.45A+
    
    
    2
    
    
    
    29,000
    
    
    
    6
    
    
    
    (12
    )
    
    
    (6
    )
    
    
    0.04Subtotal
    
    
    4
    
    
    $
    494,000
    
    
    $
    1,488
    
    
    $
    (2,901
    )
    
    $
    1,413
    
    
    
    3.43
 
 (1)
    
    Based on the S&P Long Term Issuer Credit Ratings.(2)
    
    Based on legal entities. Affiliated legal entities are reported separately.(3)
    
    For each counterparty, this amount includes derivatives with a positive fair value including the related accrued interest receivable/payable (net). Credit Risk
    68




---



##### Table of Contents



Loss Mitigation Strategies
    69




---



##### Table of Contents



Non-performing assets and allowance for loan and lease losses
   70




---



##### Table of Contents



TABLE X
NON-PERFORMING ASSETS
 AS OF
    
    
    AS OF(Dollars in thousands)
    
    JUNE 30, 2008
    
    
    DECEMBER 31, 2007Non-performing loans:Residential mortgage loans  held for sale (1)
    
    $
    5,445
    
    
    $
    4,603Residential mortgage loans  held for investment
    
    
    291,987
    
    
    
    256,949Total non-performing residential mortgage loans(2)
    
    
    297,432
    
    
    
    261,552Other lending activities:Construction and land loans, classified as substandard but
accruing
    
    
    
    
    
    
    113,254Construction loans in non-performing status
    
    
    238,100
    
    
    
    152,021Commercial real estate loans
    
    
    105,874
    
    
    
    86,590Consumer loans
    
    
    2,758
    
    
    
    4,303Commercial non-real estate loans
    
    
    3,842
    
    
    
    3,040Lease financing receivable
    
    
    918
    
    
    
    1,032Land loans
    
    
    25,210
    
    
    
    14,507Total non-performing other lending activities
    
    
    376,702
    
    
    
    374,747Total non-performing loans
    
    
    674,134
    
    
    
    636,299Repossessed assets
    
    
    213
    
    
    
    419OREO(3)
    
    
    53,731
    
    
    
    38,154Total NPAs of Doral Financial (consolidated)
    
    $
    728,078
    
    
    $
    674,872Total NPAs as a percentage of the loan portfolio, net, and OREO
(excluding GNMA defaulted loans)
    
    
    14.63
    %
    
    
    12.93
    %Total NPAs of Doral Financial as a percentage of
consolidated total assets
    
    
    6.97
    %
    
    
    7.25
    %Total non-performing loans to total loans (excluding GNMA
defaulted loans)
    
    
    12.31
    %
    
    
    11.91
    %Ratio of allowance for loan and lease losses to total
non-performing loans (excluding loans held for sale) at end of
period
    
    
    18.26
    %
    
    
    19.75
    %Ratio of allowance for loan and lease losses to total
non-performing loans (excluding non-performing residential
mortgage loans and other non-performing loans held for
sale) at end of period(4)
    
    
    25.30
    %
    
    
    27.66
    %
 
 (1)
    
    Does not include approximately $131.7 million and $126.0 million of GNMA defaulted loans
(for which the Company has the option, but not an obligation, to buy-back from the pools serviced),
included as part of the loans held for sale portfolio as of June 30, 2008 and December 31, 2007,
respectively.(2)
    
    Includes approximately $4.9 million and $2.1 million of FHA/VA loans where the principal balance of these loans is insured or guaranteed under applicable programs and interest is, in most loses, fully recovered in foreclosure proceedings.(3)
    
    Excludes FHA/VA claims amounting to $18.0 million and $16.4 million as of June 30, 2008
and December 31, 2007, respectively.(4)
    
    The proportion of the allowance for loan and leases allocated to residential mortgage
loan portfolio historically has been lower than in other lending portfolios. A substantial part of the
amounts due on delinquent residential mortgage loans has been historically recovered through sale of property after foreclosure or negotiated settlements with borrowers. For purposes of comparability with
the industry, the ratio of allowance for loan and lease losses to total non-performing loans excludes
the allowance allocated to residential mortgage loans from the numerator and the total residential
mortgage loans portfolio and other non-performing loans held for sale from the denominator. 71




---



##### Table of Contents



Accounting by Debtors and Creditors of Troubled Debt Restructurings
      72




---



##### Table of Contents



As of
    
    
    As of(Dollars in thousands)
    
    June 30, 2008
    
    
    December 31, 2007Construction loans(1)
    
    $
    539,076
    
    
    $
    588,174Total undisbursed funds under existing commitments
    
    $
    99,571
    
    
    $
    139,172Construction loans on non-performing status
    
    $
    238,100
    
    
    $
    152,021Construction and land loans, classified as substandard but accruing(2)
    
    
    
    
    
    
    113,254Total non-performing construction loans
    
    $
    238,100
    
    
    $
    265,275Net charge offs  Construction loans
    
    $
    8,333
    
    
    $
    6,060Allowance for loan losses  Construction loans
    
    $
    48,549
    
    
    $
    56,776Non-performing construction loans to total construction loans
    
    
    44.17
    %
    
    
    45.10
    %Allowance for loan losses  construction loans to total construction loans
    
    
    9.01
    %
    
    
    9.65
    %Net charge-offs to total construction loans
    
    
    1.55
    %
    
    
    1.03
    %
 
 (1)
    
    Includes $414.4 million and $422.4 million of construction loans for residential housing projects as of June
30, 2008 and December 31, 2007, respectively. Also includes $124.7 million and $165.8 million of construction loans for
commercial, condominiums and multi-family projects as of June 30, 2008 and December 31, 2007, respectively.(2)
    
    Since January l, 2008, the Company placed in non-accrual all residential construction loans classified as
substandard if their source of payment was interest reserves funded by Doral Financial.  TABLE Y
    
    QUARTERS ENDED
    
    
    SIX MONTH PERIODSALLOWANCE FOR LOAN AND LEASE LOSSES
    
    JUNE 30,
    
    
    ENDED JUNE 30,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Allowance for Loan and Lease Losses:Balance at beginning of period
    
    $
    121,182
    
    
    $
    70,963
    
    
    $
    124,733
    
    
    $
    67,233Provision (recovery) for loan and lease losses:Construction loans
    
    
    3,598
    
    
    
    1,861
    
    
    
    116
    
    
    
    1,898Residential mortgage loans
    
    
    4,375
    
    
    
    11,901
    
    
    
    6,924
    
    
    
    12,742Commercial real estate loans
    
    
    25
    
    
    
    1,378
    
    
    
    3,101
    
    
    
    3,298Consumer loans
    
    
    1,829
    
    
    
    3,589
    
    
    
    3,926
    
    
    
    5,313Lease financing
    
    
    204
    
    
    
    (136
    )
    
    
    237
    
    
    
    191Commercial non-real estate loans
    
    
    (63
    )
    
    
    796
    
    
    
    1,078
    
    
    
    1,536Land secured loans
    
    
    715
    
    
    
    (140
    )
    
    
    87
    
    
    
    (140
    )Other(1)
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    473Total provision for loan and lease losses
    
    
    10,683
    
    
    
    19,322
    
    
    
    15,469
    
    
    
    25,311Charge  offs:Construction loans
    
    
    (3,780
    )
    
    
    
    
    
    
    (8,333
    )
    
    
    (513
    )Residential mortgage loans
    
    
    (773
    )
    
    
    
    
    
    
    (1,199
    )
    
    
    Commercial real estate loans
    
    
    (2,994
    )
    
    
    (879
    )
    
    
    (4,027
    )
    
    
    (879
    )Consumer loans
    
    
    (1,746
    )
    
    
    (1,900
    )
    
    
    (4,166
    )
    
    
    (3,179
    )Lease financing
    
    
    (289
    )
    
    
    (385
    )
    
    
    (467
    )
    
    
    (385
    )Commercial non-real estate loans
    
    
    (210
    )
    
    
    (1,357
    )
    
    
    (653
    )
    
    
    (1,486
    )Total charge-offs
    
    
    (9,792
    )
    
    
    (4,521
    )
    
    
    (18,845
    )
    
    
    (6,442
    )Recoveries:Commercial real estate loans
    
    
    64
    
    
    
    
    
    
    
    77
    
    
    
    Consumer loans
    
    
    (68
    )
    
    
    173
    
    
    
    433
    
    
    
    227Lease financing
    
    
    42
    
    
    
    
    
    
    
    201
    
    
    
    Commercial non-real estate loans
    
    
    (12
    )
    
    
    11
    
    
    
    31
    
    
    
    19Total recoveries
    
    
    26
    
    
    
    184
    
    
    
    742
    
    
    
    246Net charge-offs
    
    
    (9,766
    )
    
    
    (4,337
    )
    
    
    (18,103
    )
    
    
    (6,196
    )Other(1)
    
    
    
    
    
    
    (73
    )
    
    
    
    
    
    
    (473
    )Balance at end of period
    
    $
    122,099
    
    
    $
    85,875
    
    
    $
    122,099
    
    
    $
    85,875Allowance for loan losses as a percentage of
loans receivable outstanding, at the end of period
    
    
    2.33
    %
    
    
    1.95
    %
    
    
    2.33
    %
    
    
    1.95
    %Provision for loan losses to net charge-offs on an
annualized basis
    
    
    109.39
    %
    
    
    445.52
    %
    
    
    85.45
    %
    
    
    408.51
    %Net charge-offs to average loans receivable
outstanding on an annualized basis
    
    
    0.76
    %
    
    
    0.47
    %
    
    
    0.71
    %
    
    
    0.35
    %
 73




---



##### Table of Contents



(1)
    
    Represents the portion of allowance for loans transferred from the
loans receivable portfolio to the loans held for sale portfolio, in
connection to the sale of certain assets of Doral Bank NY during the
third quarter of 2007.  TABLE ZALLOCATION OF ALLOWANCE FOR LOANAND LEASE LOSSES
    
    June 30, 2008
    
    
    December 31, 2007(Dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentLoans receivable:Construction
    
    $
    48,549
    
    
    
    10
    %
    
    $
    56,766
    
    
    
    12
    %Residential mortgage loans
    
    
    26,789
    
    
    
    67
    %
    
    
    21,064
    
    
    
    66
    %Commercial  secured by real estate
    
    
    22,550
    
    
    
    15
    %
    
    
    23,399
    
    
    
    15
    %Consumer
    
    
    7,354
    
    
    
    2
    %
    
    
    7,161
    
    
    
    2
    %Lease financing receivable
    
    
    1,474
    
    
    
    1
    %
    
    
    1,503
    
    
    
    1
    %Commercial non-real estate
    
    
    3,524
    
    
    
    3
    %
    
    
    3,068
    
    
    
    2
    %Land secured
    
    
    11,859
    
    
    
    2
    %
    
    
    11,772
    
    
    
    2
    %Total
    
    $
    122,099
    
    
    
    100
    %
    
    $
    124,733
    
    
    
    100
    %
   74




---



##### Table of Contents



Accounting by Creditors for Impairment of a Loan
 Accounting for Contingencies
   Operational Risk
  75




---



##### Table of Contents



Overview of Operational Risk Management
  Internal Control Over Financial Reporting
 Controls and Procedures
 Liquidity Risk
  General Business, Economic and Political Conditions
  Business Risk Factors
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  76




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Control and Procedures
     Changes in Internal Control Over Financial Reporting
   77




---



##### Table of Contents



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
  78




---



##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1.
    
    The election of 10 directors of Doral Financial;2.
    
    The adoption of the Doral Financial 2008 Stock Incentive Plan; and3.
    
    The ratification of the selection of PricewaterhouseCoopers LLP as Doral Financials
independent registered public accounting firm for the fiscal year ending December 31, 2008.
  Election of Directors
 Nominees for One-Year Term
    
    Votes For
    
    Votes Withheld
    
    Broker Non-VotesFrank W. Baier
    
    
    52,351,177
    
    
    
    182,259
    
    
    
    9,081Dennis G. Buchert
    
    
    52,349,472
    
    
    
    183,964
    
    
    
    10,786James E. Gilleran
    
    
    52,350,956
    
    
    
    182,480
    
    
    
    9,302David E. King
    
    
    51,952,508
    
    
    
    580,928
    
    
    
    407,750Howard M. Levkowitz
    
    
    52,358,323
    
    
    
    175,113
    
    
    
    1,935Michael J. OHanlon
    
    
    51,950,913
    
    
    
    582,523
    
    
    
    409,345Raymond J. Quinlan
    
    
    52,360,178
    
    
    
    173,258
    
    
    
    80Ramesh N. Shah
    
    
    52,356,195
    
    
    
    177,241
    
    
    
    4,063Kevin M. Twomey
    
    
    52,350,619
    
    
    
    182,817
    
    
    
    9,639Glen R. Wakeman
    
    
    52,358,427
    
    
    
    175,009
    
    
    
    1,831
 Adoption of Doral Financial 2008 Stock Incentive Plan
 For:
    
    
    49,413,362Against:
    
    
    394,764Abstain:
    
    
    22,315Broker Non-Votes:
    
    
    3,979,670
 Ratification of the Appointment of PricewaterhouseCoopers LLP as the Companys Independent
Registered Public Accounting Firm for 2008
 For:
    
    
    52,319,360Against:
    
    
    170,647Abstain:
    
    
    43,426Broker Non-Votes:
    
    
    1,376,678
 
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 (a)
    
    Exhibits
   79




---



##### Table of Contents



SIGNATURES
  DORAL FINANCIAL CORPORATION
(Registrant)Date: August 8, 2008
    /s/ Glen R. WakemanGlen R. WakemanChief Executive Officer and PresidentDate: August 8, 2008
    /s/ Marangal I. DomingoMarangal I. DomingoExecutive Vice President and
Chief Financial Officer 80




---



##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    
    
    Description12.1
    
    
    
    Computation of Ratio of Earnings to Fixed Charges.12.2
    
    
    
    Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.31.1
    
    
    
    CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    
    CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    
    CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 81