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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 COMMISSION FILE NUMBER 0-17224
 DORAL FINANCIAL CORPORATION
  Puerto Rico
    
    66-0312162(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification number)1451 F.D. Roosevelt Avenue,
    
    00920-2717San Juan, Puerto Rico
    
    (Zip Code)(Address of principal executive offices)
 (787) 474-6700
(Registrants telephone number, including area code)
 
 þ o
  þ o o
 o þ




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##### 



DORAL FINANCIAL CORPORATION
INDEX PAGE
  
 PAGEPART I  FINANCIAL INFORMATION
    
    
    3Item 1  Financial Statements
    
    
    3Consolidated Statements of Financial Condition (Unaudited) as of September 30, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Loss (Unaudited)  Quarters ended September 30, 2007 and September 30, 2006 and nine month periods ended September 30, 2007 and September 30, 2006
    
    
    4Consolidated
Statements of Changes in Stockholders Equity (Unaudited) 
Nine month periods ended September 30, 2007 and
September 30, 2006
    
    
    5Consolidated Statements of Comprehensive Income (Loss) (Unaudited)  Quarters ended September 30, 2007 and September 30, 2006 and nine month periods ended September 30, 2007 and September 30, 2006
    
    
    6Consolidated Statements of Cash Flows (Unaudited)  Nine month periods ended September 30, 2007 and September 30, 2006
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    44Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    
    79Item 4  Controls and Procedures
    
    
    79PART II  OTHER INFORMATION
    
    
    80Item 1  Legal Proceedings
    
    
    80Item 1A  Risk Factors
    
    
    80Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    80Item 3  Defaults Upon Senior Securities
    
    
    80Item 4  Submission of Matters to a Vote of Security Holders
    
    
    81Item 5  Other Information
    
    
    81Item 6  Exhibits
    
    
    81SIGNATURES
    
    
    82EX-12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESEX-12.2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDSEX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32.1 SECTION 906, CERTIFICATION OF THE CEOEX-32.2 SECTION 906, CERTIFICATION OF THE CFO
  2




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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 (IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
 (UNAUDITED
 SEPTEMBER 30,
    
    
    DECEMBER 31,2007
    
    
    2006ASSETSCash and due from banks
    
    $
    85,343
    
    
    $
    227,127Money market investments:Money market investments with creditors right to repledge
    
    
    49,041
    
    
    
    234,296Other money market investments
    
    
    1,297,392
    
    
    
    684,438Total money market investments
    
    
    1,346,433
    
    
    
    918,734Pledged investment securities that can be repledged:Securities held for trading, at fair value
    
    
    69,142
    
    
    
    72,218Securities available for sale, at fair value
    
    
    617
    
    
    
    2,209,439Securities held to maturity, at amortized cost (market value of $1,375,318 in 2007; $1,746,760 in
2006)
    
    
    1,455,782
    
    
    
    1,823,661Total pledged investment securities that can be repledged
    
    
    1,525,541
    
    
    
    4,105,318Other investment securities:Securities held for trading, at fair value
    
    
    62,301
    
    
    
    111,587Securities available for sale, at fair value
    
    
    308,287
    
    
    
    199,247Securities held to maturity, at amortized cost (market value of $356,407 in 2007; $254,592 in 2006)
    
    
    368,338
    
    
    
    259,276Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    75,532
    
    
    
    70,533Total other investment securities
    
    
    814,458
    
    
    
    640,643Total investment securities
    
    
    2,339,999
    
    
    
    4,745,961Loans:Loans held for sale, at lower of cost or market, pledged with creditors right to repledge
    
    
    193,395
    
    
    
    442,161Other loans held for sale, at lower of cost or market
    
    
    257,551
    
    
    
    1,326,929Loans receivable, net of allowance for loan and lease losses (2007 - $87,616; 2006 - $67,233)
    
    
    4,422,569
    
    
    
    3,389,937Total loans
    
    
    4,873,515
    
    
    
    5,159,027Receivables and mortgage-servicing advances
    
    
    61,876
    
    
    
    58,187Accrued interest receivable
    
    
    39,641
    
    
    
    64,363Servicing assets, net
    
    
    163,854
    
    
    
    176,367Premises and equipment, net
    
    
    109,631
    
    
    
    138,805Real estate held for sale, net
    
    
    35,404
    
    
    
    33,197Assets to be disposed on sale
    
    
    12,955
    
    
    
    Deferred tax asset
    
    
    330,832
    
    
    
    261,645Other assets
    
    
    106,083
    
    
    
    73,011Total assets
    
    $
    9,505,566
    
    
    $
    11,856,424LIABILITIESDeposits:Non-interest-bearing deposits
    
    $
    251,089
    
    
    $
    327,186Interest-bearing deposits
    
    
    3,844,629
    
    
    
    3,923,574Total Deposits
    
    
    4,095,718
    
    
    
    4,250,760Securities sold under agreements to repurchase
    
    
    1,496,537
    
    
    
    3,899,365Advances from FHLB
    
    
    1,271,000
    
    
    
    1,034,500Loans payable
    
    
    416,279
    
    
    
    444,443Notes payable
    
    
    283,995
    
    
    
    923,913Accrued expenses and other liabilities
    
    
    521,474
    
    
    
    400,039Total liabilities
    
    
    8,085,003
    
    
    
    10,953,020STOCKHOLDERS EQUITYPreferred stock, $1 par value; 40,000,000 shares authorized; 9,015,000 shares issued and outstanding in
2007 and 2006, at aggregate liquidation preference value:Perpetual noncumulative nonconvertible preferred stock (Series A, B and C)
    
    
    228,250
    
    
    
    228,250Perpetual cumulative convertible preferred stock
    
    
    345,000
    
    
    
    345,000Common stock, $0.01 par value; 97,500,000 shares authorized; 53,810,110 shares issued and outstanding
(includes a reduction of 1,852,500,000 shares authorized; 1,022,392,000 shares issued and outstanding
as a result of the 1-for-20 reverse stock split effective on August 17, 2007); Common stock, $1 par
value; 500,000,000 shares authorized; 107,948,236 shares issued and outstanding in 2006
    
    
    538
    
    
    
    107,948Additional paid-in capital
    
    
    848,598
    
    
    
    166,495Legal surplus
    
    
    23,596
    
    
    
    23,596(Accumulated deficit) retained earnings
    
    
    (24,312
    )
    
    
    139,051Accumulated other comprehensive loss, net of income tax expense of $7 in 2007 and income tax benefit
$1,129 in 2006
    
    
    (1,107
    )
    
    
    (106,936
    )Total stockholders equity
    
    
    1,420,563
    
    
    
    903,404Total liabilities and stockholders equity
    
    $
    9,505,566
    
    
    $
    11,856,424
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF LOSS
 (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
 (UNAUDITED)
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest income:Loans
    
    $
    86,285
    
    
    $
    97,821
    
    
    $
    262,604
    
    
    $
    364,388Mortgage-backed securities
    
    
    13,495
    
    
    
    45,617
    
    
    
    56,820
    
    
    
    145,613Interest-only strips (IOs)
    
    
    1,650
    
    
    
    1,631
    
    
    
    4,539
    
    
    
    4,956Investment securities
    
    
    21,612
    
    
    
    29,969
    
    
    
    76,498
    
    
    
    89,837Other interest-earning assets
    
    
    11,819
    
    
    
    12,257
    
    
    
    44,891
    
    
    
    38,616Total interest income
    
    
    134,861
    
    
    
    187,295
    
    
    
    445,352
    
    
    
    643,410Interest expense:Deposits
    
    
    39,147
    
    
    
    41,125
    
    
    
    126,040
    
    
    
    111,340Securities sold under agreements to repurchase
    
    
    28,007
    
    
    
    60,375
    
    
    
    106,319
    
    
    
    185,587Advances from FHLB
    
    
    13,477
    
    
    
    11,394
    
    
    
    40,121
    
    
    
    33,181Loans payable
    
    
    7,190
    
    
    
    14,948
    
    
    
    22,124
    
    
    
    110,637Notes payable
    
    
    7,605
    
    
    
    15,305
    
    
    
    38,520
    
    
    
    44,458Total interest expense
    
    
    95,426
    
    
    
    143,147
    
    
    
    333,124
    
    
    
    485,203Net interest income
    
    
    39,435
    
    
    
    44,148
    
    
    
    112,228
    
    
    
    158,207Provision for loan and lease losses
    
    
    5,062
    
    
    
    10,126
    
    
    
    30,373
    
    
    
    21,171Net interest income after provision for loan and lease losses
    
    
    34,373
    
    
    
    34,022
    
    
    
    81,855
    
    
    
    137,036Non-interest loss:Net gain (loss) on mortgage loan sales and fees
    
    
    201
    
    
    
    15,597
    
    
    
    1,185
    
    
    
    (25,937
    )Net loss on
securities held for trading, including gains and losses on the fair value of IOs
    
    
    (23,905
    )
    
    
    (21,545
    )
    
    
    (19,992
    )
    
    
    (39,046
    )Net (loss) gain on sale of investment securities
    
    
    (95,488
    )
    
    
    
    
    
    
    (95,830
    )
    
    
    63Net loss on extinguishment of liabilities
    
    
    (14,806
    )
    
    
    
    
    
    
    (14,806
    )
    
    
    Servicing income (loss) (net of mark-to-market adjustment for 2007,
and net of amortization and impairment/recovery for 2006)
    
    
    8,026
    
    
    
    (2,963
    )
    
    
    23,409
    
    
    
    3,600Commissions, fees and other income
    
    
    6,882
    
    
    
    7,392
    
    
    
    23,469
    
    
    
    28,638Net premium on deposits sold (note a)
    
    
    9,521
    
    
    
    
    
    
    
    9,521
    
    
    
    Total non-interest loss
    
    
    (109,569
    )
    
    
    (1,519
    )
    
    
    (73,044
    )
    
    
    (32,682
    )Non-interest expenses:Compensation and benefits
    
    
    28,886
    
    
    
    21,741
    
    
    
    83,856
    
    
    
    64,366Taxes, other than payroll and income taxes
    
    
    2,565
    
    
    
    2,807
    
    
    
    8,849
    
    
    
    9,379Advertising
    
    
    2,397
    
    
    
    2,593
    
    
    
    6,327
    
    
    
    8,414Professional services
    
    
    13,475
    
    
    
    10,537
    
    
    
    52,709
    
    
    
    43,915Communication and information systems
    
    
    4,178
    
    
    
    4,430
    
    
    
    13,204
    
    
    
    13,985Occupancy and other office expenses
    
    
    5,039
    
    
    
    6,747
    
    
    
    17,789
    
    
    
    20,691Depreciation and amortization
    
    
    4,129
    
    
    
    5,392
    
    
    
    13,607
    
    
    
    17,020Other
    
    
    12,549
    
    
    
    6,071
    
    
    
    28,714
    
    
    
    17,143Total non-interest expenses
    
    
    73,218
    
    
    
    60,318
    
    
    
    225,055
    
    
    
    194,913Loss before income taxes
    
    
    (148,414
    )
    
    
    (27,815
    )
    
    
    (216,244
    )
    
    
    (90,559
    )Income tax benefit (expense)
    
    
    86,266
    
    
    
    (839
    )
    
    
    79,309
    
    
    
    28,073Net loss
    
    $
    (62,148
    )
    
    $
    (28,654
    )
    
    $
    (136,935
    )
    
    $
    (62,486
    )Net loss attributable to common shareholders
    
    $
    (70,472
    )
    
    $
    (36,978
    )
    
    $
    (161,909
    )
    
    $
    (87,460
    )Net loss per common share(1):Basic
    
    $
    (1.59
    )
    
    $
    (6.85
    )
    
    $
    (8.74
    )
    
    $
    (16.21
    )Diluted
    
    $
    (1.59
    )
    
    $
    (6.85
    )
    
    $
    (8.74
    )
    
    $
    (16.21
    )Dividends per common share(1)
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    1.60
 
 (1)
    
    Net loss and dividends per common share give retroactively effect to the 1-for-20 reverse stock split effective August 17, 2007.  4




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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 (IN THOUSANDS)
 (UNAUDITED)
 NINE MONTH PERIODENDED SEPTEMBER 30,2007
    
    
    2006PREFERRED STOCK
    
    $
    573,250
    
    
    $
    573,250COMMON STOCK:Balance at beginning of period
    
    
    107,948
    
    
    
    107,930Change in par value $1 to $0.01
    
    
    (106,869
    )
    
    
    Issuance of common stock
    
    
    9,683
    
    
    
    Shares reduced as a result of 1-for-20 reverse stock split
    
    
    (10,224
    )
    
    
    Shares issued under stock option plan
    
    
    
    
    
    
    18Balance at end of period
    
    
    538
    
    
    
    107,948ADDITIONAL PAID-IN CAPITAL:Balance at beginning of period
    
    
    166,495
    
    
    
    165,609Change in par value $1 to $0.01
    
    
    106,869
    
    
    
    Issuance of common stock
    
    
    600,317
    
    
    
    Cost of issuance
    
    
    (39,790
    )
    
    
    Shares converted as a result of 1-for-20 reverse stock split
    
    
    10,224
    
    
    
    Common shares issued under stock option plan
    
    
    
    
    
    
    77Stock-based compensation recognized
    
    
    4,483
    
    
    
    556Balance at end of period
    
    
    848,598
    
    
    
    166,242LEGAL SURPLUS
    
    
    23,596
    
    
    
    23,596(ACCUMULATED DEFICIT) RETAINED EARNINGS:Balance at beginning of period
    
    
    139,051
    
    
    
    404,885Net loss
    
    
    (136,935
    )
    
    
    (62,486
    )Cumulative effect of accounting change (adoption of SFAS
No. 156)
    
    
    926
    
    
    
    Cumulative effect of accounting change (adoption of FIN 48)
    
    
    (2,380
    )
    
    
    Cash dividends declared on common stock
    
    
    
    
    
    
    (8,634
    )Cash dividends declared on preferred stock
    
    
    (24,974
    )
    
    
    (24,974
    )Balance at end of period
    
    
    (24,312
    )
    
    
    308,791ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX:Balance at beginning of period
    
    
    (106,936
    )
    
    
    (125,461
    )Other comprehensive income (loss), net of deferred tax
    
    
    105,829
    
    
    
    (25,934
    )Balance at end of period
    
    
    (1,107
    )
    
    
    (151,395
    )Total stockholders equity
    
    $
    1,420,563
    
    
    $
    1,028,432
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS
 (IN THOUSANDS)
 (UNAUDITED)
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (62,148
    )
    
    $
    (28,654
    )
    
    $
    (136,935
    )
    
    $
    (62,486
    )Other comprehensive income (loss), before tax:Unrealized gains (losses) on securities arising during the period
    
    
    36,518
    
    
    
    106,185
    
    
    
    11,102
    
    
    
    (24,660
    )Amortization of unrealized loss on securities reclassified to held to
maturity
    
    
    11
    
    
    
    11
    
    
    
    33
    
    
    
    33Reclassification of realized losses (gains) included in net loss
    
    
    95,488
    
    
    
    
    
    
    
    95,830
    
    
    
    (63
    )Other comprehensive income (loss), before tax
    
    
    132,017
    
    
    
    106,196
    
    
    
    106,965
    
    
    
    (24,690
    )Income tax expense related to items of other comprehensive income (loss)
    
    
    (1,302
    )
    
    
    (6,961
    )
    
    
    (1,136
    )
    
    
    (1,244
    )Other comprehensive income (loss)
    
    
    130,715
    
    
    
    99,235
    
    
    
    105,829
    
    
    
    (25,934
    )Comprehensive income (loss), net of tax
    
    $
    68,567
    
    
    $
    70,581
    
    
    $
    (31,106
    )
    
    $
    (88,420
    )
  6




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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (UNAUDITED)
 NINE MONTH PERIOD ENDEDSEPTEMBER 30,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (136,935
    )
    
    $
    (62,486
    )Adjustments to reconcile net loss to net cash provided by operating activities:Stock-based compensation
    
    
    4,483
    
    
    
    556Depreciation and amortization
    
    
    13,607
    
    
    
    17,020Mark-to-market adjustment (2007) and amortization and impairment (2006) of servicing assets
    
    
    8,214
    
    
    
    27,481Deferred tax benefit
    
    
    (82,915
    )
    
    
    (30,921
    )Provision for loan and lease losses
    
    
    30,373
    
    
    
    21,171Net premium on deposits sold
    
    
    (9,521
    )
    
    
    Amortization of premium (accretion of discount) on loans, investment securities and debt
    
    
    5,681
    
    
    
    3,457Unrealized loss on loans held for sale
    
    
    2,068
    
    
    
    17,300Net (increase) decrease on loans held for sale
    
    
    (138,508
    )
    
    
    2,086,858Loss on sale of securities
    
    
    102,868
    
    
    
    5,416Unrealized loss on trading securities
    
    
    25,973
    
    
    
    2,706Decrease on securities held for trading
    
    
    169,942
    
    
    
    332,022Amortization and net loss in the fair value of IOs
    
    
    1,701
    
    
    
    55,878Decrease on derivative instruments
    
    
    20,505
    
    
    
    765Decrease (increase) in receivables and mortgage servicing advances
    
    
    1,829
    
    
    
    (16,328
    )Decrease in accrued interest receivable
    
    
    22,649
    
    
    
    18,452Increase in other assets
    
    
    (58,937
    )
    
    
    (1,675
    )Decrease in accrued expenses and other liabilities
    
    
    (117,454
    )
    
    
    (80,037
    )Total adjustments
    
    
    2,558
    
    
    
    2,460,121Net cash provided by operating activities
    
    
    (134,377
    )
    
    
    2,397,635Cash flows from investing activities:Purchases of securities available for sale
    
    
    (46,741
    )
    
    
    (46,023
    )Principal repayment and sales of securities available for sale
    
    
    2,305,985
    
    
    
    689,029Purchases of securities held to maturity
    
    
    
    
    
    
    (13,000
    )Principal repayment and maturities of securities held to maturity
    
    
    158,631
    
    
    
    34,605Increase in FHLB stock
    
    
    (4,999
    )
    
    
    (578
    )Net decrease (increase) of loans receivable
    
    
    28,177
    
    
    
    (229,533
    )Proceeds from sale of servicing assets
    
    
    7,000
    
    
    
    Purchases of servicing assets
    
    
    
    
    
    
    (210
    )Purchases of premises and equipment
    
    
    (6,789
    )
    
    
    (8,230
    )Payment in connection with the sale of certain assets and liabilities of Doral Bank NY, including cash delivered
    
    
    (121,824
    )
    
    
    Proceeds from sales of real estate held for sale
    
    
    3,987
    
    
    
    10,791Net cash provided by investing activities
    
    
    2,323,427
    
    
    
    436,851Cash flows from financing activities:Increase in deposits
    
    
    222,449
    
    
    
    139,997Decrease in securities sold under agreements to repurchase
    
    
    (2,392,878
    )
    
    
    (803,499
    )Proceeds from advances from FHLB
    
    
    790,790
    
    
    
    100,000Repayment of advances from FHLB
    
    
    (440,000
    )
    
    
    (35,000
    )Repayment of secured borrowings
    
    
    (28,164
    )
    
    
    (2,665,230
    )Repayment of notes payable
    
    
    (640,358
    )
    
    
    (82,375
    )Payment of consent solicitation to bondholders
    
    
    
    
    
    
    (1,297
    )Issuance of common stock, net
    
    
    610,000
    
    
    
    95Dividends paid
    
    
    (24,974
    )
    
    
    (33,608
    )Net cash used in financing activities
    
    
    (1,903,135
    )
    
    
    (3,380,917
    )Net increase (decrease) in cash and cash equivalents
    
    $
    285,915
    
    
    $
    (546,431
    )Cash and cash equivalents at beginning of period
    
    
    1,145,861
    
    
    
    1,546,502Cash and cash equivalents at the end of period
    
    $
    1,431,776
    
    
    $
    1,000,071Cash and cash equivalents includes:Cash and due from banks
    
    $
    85,343
    
    
    $
    144,955Money market investments
    
    
    1,346,433
    
    
    
    855,116$
    1,431,776
    
    
    $
    1,000,071Supplemental schedule of non-cash activities:Loan securitizations
    
    $
    164,400
    
    
    $
    192,054Reclassification
of securities held to maturity to held for trading in connection with
to sale certain assets of Doral
Bank NY
    
    $
    91,045
    
    
    $
    Reclassification
of loans receivable to loans held for sale in connection with the sale certain assets of Doral Bank NY
    
    $
    205,629
    
    
    $
    Reclassification of premises and equipment to assets to be disposed on sale
    
    $
    22,457
    
    
    $
    Loans foreclosed
    
    $
    14,141
    
    
    $
    17,931Reclassification of loans held for sale to loans receivable
    
    $
    1,382,734
    
    
    $
    885,910Capitalization of servicing assets
    
    $
    3,765
    
    
    $
    48,720Remeasurement of income taxes payable upon adoption of FIN 48
    
    $
    2,380
    
    
    $
    Remeasurement of fair value of MSRs upon adoption of SFAS 156, net of tax
    
    $
    926
    
    
    $
    Supplemental information for cash flows:Cash used to pay interest
    
    $
    349,343
    
    
    $
    501,318Cash used to pay income taxes
    
    $
    3,202
    
    
    $
    4,469The Company sold certain assets and liabilities of Doral Bank NY
The asset and liabilities values as of the sale date were as follows:Assets:Loans
    
    $
    206,074Securities
    
    
    155,264Property, leasehold improvements and equipment
    
    
    9,400Other assets
    
    
    2,321Total assets sold
    
    $
    373,059Liabilities:Securities sold under agreement to repurchase
    
    
    9,950Deposits
    
    
    377,491Advances from FHLB
    
    
    114,290Other liabilities
    
    
    2,674Total liabilities sold
    
    $
    504,405Excess of liabilities over assets sold
    
    
    (131,346
    )Net premium on Deposits Sold
    
    
    9,521Payment in connection with the sale of certain assets and liabilities of Doral Bank NY, including cash delivered
    
    $
    (121,824
    )
  7




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##### Table of Contents



DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 a.
    
    On July 19, 2007, Doral Financial Corporation (Doral Financial) closed the sale of
968,253,968 shares of its common stock, $0.01 par value per share, to Doral Holdings Delaware,
LLC (Doral Holdings). The shares were sold for an aggregate purchase price of $610 million,
or $0.63 per share. Doral Holdings owns approximately 90% of the outstanding common shares the
Company. In connection with this transaction, on July 17, 2007, Doral Financial amended its Restated
Certificate of Incorporation to decrease the par value of the
Companys common stock from $1.00 to 0.01 per share.In connection with the recapitalization transaction, on July 19, 2007, Doral Financial
transferred the Companys mortgage origination platform and servicing portfolio, subject to
certain exceptions, to Doral Bank (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. In connection with the transfer of mortgage servicing rights to Doral Bank PR, the
Federal Deposit Insurance Corporation (FDIC) and the Office of the Commissioner of
Financial Institutions (OCFI) approved the distribution of a $155 million cash dividend
from Doral Bank PR to Doral Financial.As part of the restructuring of Doral Financials origination and servicing business, on
July 18, 2007, Sana Mortgage Corporation (Sana) was merged with and into Doral Mortgage Corporation (Doral Mortgage)
and Centro Hipotecario de Puerto Rico (Centro Hipotecario) was merged with and into Doral
Financial, as tax free reorganizations.On July 27, 2007, Doral Financial completed the sale of its 11 branches in the New York City
Metropolitan Area. The transaction yielded the following results:
 (In thousands)Net deposit premium
    
    $
    9,521Mark-to-market of assets and liabilities soldSecurities held-for-trading
    
    
    (9,816
    )Securities available-for-sale
    
    
    (926
    )Loans held for sale
    
    
    (2,068
    )Repurchase agreements and advances from FHLB
    
    
    (790
    )Total mark-to-market of assets and liabilities sold
    
    
    (13,600
    )Net loss
    
    $
    (4,079
    )
     b.
    
    The Consolidated Financial Statements (unaudited) include the accounts of Doral Financial
Corporation, Doral Mortgage, Doral Securities, Inc. (Doral Securities), Doral Bank (Doral
Bank PR), Doral Bank,
 8




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  c.
    
    The results of operations for the quarter and nine month period ended September 30, 2007 are
not necessarily indicative of the results to be expected for the full year.
 d.
    
    At September 30, 2007, escrow funds and custodial accounts included approximately $88.9
million deposited with Doral Bank PR. These funds are included in the Companys consolidated
financial statements. Escrow funds and custodial accounts also included approximately $21.4
million deposited with other banks, which are excluded from the Companys assets and
liabilities. The Company had fidelity bond and errors and omissions coverage of $17.5 million
and $17.0 million, respectively, as of September 30, 2007.
 9




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 e.
    
    The reconciliation of the numerator and denominator of the basic and diluted
earnings-per-share follows:
 Quarter Ended
    
    
    Nine Month Period EndedSeptember 30,
    
    
    September 30,(Dollars in thousands, except per share amounts)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net Loss:Net loss
    
    $
    (62,148
    )
    
    $
    (28,654
    )
    
    $
    (136,935
    )
    
    $
    (62,486
    )Convertible preferred stock dividend
    
    
    (4,096
    )
    
    
    (4,096
    )
    
    
    (12,290
    )
    
    
    (12,290
    )Nonconvertible preferred stock dividend
    
    
    (4,228
    )
    
    
    (4,228
    )
    
    
    (12,684
    )
    
    
    (12,684
    )Net loss attributable to common shareholders
    
    $
    (70,472
    )
    
    $
    (36,978
    )
    
    $
    (161,909
    )
    
    $
    (87,460
    )Weighted-Average Shares(1) (2):Basic weighted-average number of common
shares outstanding(3)
    
    
    44,338,061
    
    
    
    5,397,412
    
    
    
    18,520,268
    
    
    
    5,396,940Diluted weighted-average number of common
shares outstanding
    
    
    44,338,061
    
    
    
    5,397,412
    
    
    
    18,520,268
    
    
    
    5,396,940Net Loss per Common Share(2):Basic
    
    $
    (1.59
    )
    
    $
    (6.85
    )
    
    $
    (8.74
    )
    
    $
    (16.21
    )Diluted
    
    $
    (1.59
    )
    
    $
    (6.85
    )
    
    $
    (8.74
    )
    
    $
    (16.21
    )
 
 (1)
    
    For the quarter and nine month period ended September 30, 2007 and 2006, 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 reflects the 1-for-20 reverse stock split effective August 17, 2007.(3)
    
    On July 19, 2007, restricted stock units amounting to 10,000 shares vested.  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 mortgage loans and are offset against net gains
on mortgage loan sales and fees when the loans are sold or amortized as yield adjustment in
the case of loans receivable.
 10




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Quarter Ended
    
    
    Nine Month Period EndedSeptember 30,
    
    
    September 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Employee costs, gross
    
    $
    31,703
    
    
    $
    28,637
    
    
    $
    90,108
    
    
    $
    88,748Deferred costs pursuant to SFAS 91
    
    
    (2,817
    )
    
    
    (6,896
    )
    
    
    (6,252
    )
    
    
    (24,382
    )Employee cost, net
    
    $
    28,886
    
    
    $
    21,741
    
    
    $
    83,856
    
    
    $
    64,366Other expenses, gross
    
    $
    13,468
    
    
    $
    7,084
    
    
    $
    30,968
    
    
    $
    20,381Deferred costs pursuant to SFAS 91
    
    
    (919
    )
    
    
    (1,013
    )
    
    
    (2,254
    )
    
    
    (3,238
    )Other expenses, net
    
    $
    12,549
    
    
    $
    6,071
    
    
    $
    28,714
    
    
    $
    17,143
   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 consistent with the Companys business model. 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 decided to reduce the operations of Doral Securities and sold
substantially all of Doral Securities investment securities. As a result of this decision,
Doral Securities operations are currently limited to acting as a co-investment manager to a
local fixed-income investment company. 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).During 2006, the Company decided to consolidate all of its mortgage originations under a
single Doral Mortgage brand, thus eliminating the mortgage banking operations of Sana
Mortgage, Centro Hipotecario and HF Mortgage Bankers.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 third
quarter of 2007 with the new reportable segment structure as well as
comparative segment information for the quarters and nine month
periods ended September 30, 2007 and 2006, using the old report
segment structure. In establishing the old reportable segment structure for the third quarter of 2007, the servicing assets and 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 including the elimination of the dividend paid by Doral Bank PR to the Company
as a result of the transfer.
 11




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
   Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentBanking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations*
    
    Totals(In thousands)
    
    
    
    
    
    
    
    QUARTER ENDED SEPTEMBER 30, 2007Net interest income
    
    $
    2,279
    
    
    
    38,205
    
    
    
    
    
    
    
    
    
    
    
    (1,049
    )
    
    $
    39,435Non-interest income (loss)
    
    $
    17,673
    
    
    
    (115,957
    )
    
    
    228
    
    
    
    2,015
    
    
    
    (13,528
    )
    
    $
    (109,569
    )Net income (loss)
    
    $
    65,686
    
    
    
    (115,162
    )
    
    
    268
    
    
    
    96
    
    
    
    (13,036
    )
    
    $
    (62,148
    )Identifiable assets
    
    $
    2,165,557
    
    
    
    7,631,882
    
    
    
    2,728
    
    
    
    20,384
    
    
    
    (314,985
    )
    
    $
    9,505,566QUARTER ENDED SEPTEMBER 30, 2006Net interest (loss) income
    
    $
    (3,236
    )
    
    
    46,266
    
    
    
    
    
    
    
    
    
    
    
    1,118
    
    
    $
    44,148Non-interest (loss) income
    
    $
    (4,417
    )
    
    
    11,645
    
    
    
    149
    
    
    
    2,180
    
    
    
    (11,076
    )
    
    $
    (1,519
    )Net (loss) income
    
    $
    (36,464
    )
    
    
    16,489
    
    
    
    (135
    )
    
    
    823
    
    
    
    (9,367
    )
    
    $
    (28,654
    )Identifiable assets
    
    $
    2,803,755
    
    
    
    11,272,925
    
    
    
    1,953
    
    
    
    19,281
    
    
    
    (328,041
    )
    
    $
    13,769,873Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentBanking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations*
    
    Totals(In thousands)
    
    
    
    
    
    NINE MONTH PERIOD ENDED SEPTEMBER 30, 2007Net interest (loss) income
    
    $
    (8,028
    )
    
    
    118,679
    
    
    
    
    
    
    
    
    
    
    
    1,577
    
    
    $
    112,228Non-interest income (loss)
    
    $
    45,280
    
    
    
    (108,466
    )
    
    
    516
    
    
    
    7,127
    
    
    
    (17,501
    )
    
    $
    (73,044
    )Net (loss) income
    
    $
    (23,496
    )
    
    
    (102,650
    )
    
    
    371
    
    
    
    2,388
    
    
    
    (13,548
    )
    
    $
    (136,935
    )Identifiable assets
    
    $
    2,165,557
    
    
    
    7,631,882
    
    
    
    2,728
    
    
    
    20,384
    
    
    
    (314,985
    )
    
    $
    9,505,566NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006Net interest income
    
    $
    4,480
    
    
    
    149,942
    
    
    
    587
    
    
    
    
    
    
    
    3,198
    
    
    $
    158,207Non-interest (loss) income
    
    $
    (38,568
    )
    
    
    13,959
    
    
    
    (458
    )
    
    
    6,945
    
    
    
    (14,560
    )
    
    $
    (32,682
    )Net (loss) income
    
    $
    (105,950
    )
    
    
    50,307
    
    
    
    (512
    )
    
    
    3,238
    
    
    
    (9,569
    )
    
    $
    (62,486
    )Identifiable assets
    
    $
    2,803,755
    
    
    
    11,272,925
    
    
    
    1,953
    
    
    
    19,281
    
    
    
    (328,041
    )
    
    $
    13,769,873
 
 *
    
    The intersegment eliminations  in the above table include servicing fees paid by the
banking subsidiaries to the parent company recognized as a reduction of net interest
income, direct intersegment loan origination costs amortized as yield adjustment or
offset against net gains on mortgage loan sales and fees (mainly related with
origination costs paid by the banking segment to the mortgage banking segment) and
other income derived from intercompany transactions, related principally to rental
income paid to Doral Properties, the Companys subsidiary that owns the corporate
headquarters facilities. Assets include internal funding and investment in
subsidiaries accounted for at cost.  Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentBanking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations
    
    Totals(In thousands)
    
    
    
    
    
    
    
    QUARTER ENDED SEPTEMBER 30, 2007Net interest income
    
    $
    2,279
    
    
    
    38,205
    
    
    
    
    
    
    
    
    
    
    
    (1,049
    )
    
    $
    39,435Non-interest income (loss)
    
    $
    165,245
    
    
    
    (108,529
    )
    
    
    228
    
    
    
    2,015
    
    
    
    (168,528
    )
    
    $
    (109,569
    )Net income (loss)
    
    $
    221,164
    
    
    
    (115,640
    )
    
    
    268
    
    
    
    96
    
    
    
    (168,035
    )
    
    $
    (62,147
    )Identifiable assets
    
    $
    2,165,557
    
    
    $
    7,820,193
    
    
    $
    2,728
    
    
    $
    20,384
    
    
    
    (503,296
    )
    
    $
    9,505,566
 
 *
    
    The intersegment eliminations in the above table include servicing fees paid by the
parent company to the banking subsidiaries recognized as a reduction of net interest
income, direct intersegment loan origination costs amortized as yield adjustment or
offset against net gains on mortgage loan sales and fees. Also the intersegment elimination includes the dividend of $155.0 million paid by Doral
Bank PR to the Company as a result of the transfer. 12




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Puerto Rico
    
    Mainland US
    
    Eliminations
    
    Totals(In thousands)
    
    
    
    QUARTER ENDED SEPTEMBER 30, 2007Net interest income
    
    $
    36,559
    
    
    
    2,890
    
    
    
    (14
    )
    
    $
    39,435Non-interest (loss) income
    
    $
    (115,230
    )
    
    
    5,727
    
    
    
    (66
    )
    
    $
    (109,569
    )Net (loss) income
    
    $
    (64,891
    )
    
    
    2,766
    
    
    
    (23
    )
    
    $
    (62,148
    )Identifiable assets
    
    $
    9,463,474
    
    
    
    144,594
    
    
    
    (102,502
    )
    
    $
    9,505,566QUARTER ENDED SEPTEMBER 30, 2006Net interest income
    
    $
    38,221
    
    
    
    5,893
    
    
    
    34
    
    
    $
    44,148Non-interest (loss) income
    
    $
    (1,859
    )
    
    
    452
    
    
    
    (112
    )
    
    $
    (1,519
    )Net (loss) income
    
    $
    (29,654
    )
    
    
    1,000
    
    
    
    
    
    
    $
    (28,654
    )Identifiable assets
    
    $
    13,193,524
    
    
    
    673,484
    
    
    
    (97,135
    )
    
    $
    13,769,873Puerto Rico
    
    Mainland US
    
    Eliminations
    
    Totals(In thousands)
    
    NINE MONTH PERIOD ENDED SEPTEMBER 30, 2007Net interest income
    
    $
    99,553
    
    
    
    12,627
    
    
    
    48
    
    
    $
    112,228Non-interest loss
    
    $
    (69,900
    )
    
    
    (2,883
    )
    
    
    (261
    )
    
    $
    (73,044
    )Net loss
    
    $
    (136,135
    )
    
    
    (780
    )
    
    
    (20
    )
    
    $
    (136,935
    )Identifiable assets
    
    $
    9,463,474
    
    
    
    144,594
    
    
    
    (102,502
    )
    
    $
    9,505,566NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006Net interest income
    
    $
    140,435
    
    
    
    17,684
    
    
    
    88
    
    
    $
    158,207Non-interest (loss) income
    
    $
    (33,371
    )
    
    
    1,011
    
    
    
    (322
    )
    
    $
    (32,682
    )Net (loss) income
    
    $
    (65,964
    )
    
    
    3,479
    
    
    
    (1
    )
    
    $
    (62,486
    )Identifiable assets
    
    $
    13,193,524
    
    
    
    673,484
    
    
    
    (97,135
    )
    
    $
    13,769,873
 13




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 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 and held to maturity are
shown below by category.
 1.
    
    The following table summarizes Doral Financials holdings of securities held
for trading as of September 30, 2007 and December 31, 2006.
 SECURITIES HELD FOR TRADING
 SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2007
    
    
    2006Mortgage-backed securities:GNMA exempt
    
    $
    34,548
    
    
    $
    52,969GNMA taxable
    
    
    12,064
    
    
    
    19,374CMO certificates
    
    
    17,773
    
    
    
    24,888FHLMC and FNMA
    
    
    8,628
    
    
    
    9,343Variable interest-only strips
    
    
    50,660
    
    
    
    48,864Fixed interest-only strips
    
    
    967
    
    
    
    1,062Derivatives(1)
    
    
    6,777
    
    
    
    27,282Other
    
    
    26
    
    
    
    23Total
    
    $
    131,443
    
    
    $
    183,805
 
 (1)
    
    Doral Financial uses derivatives to manage its exposure to
interest rate risk caused by changes in interest rates.
Derivatives include interest rate swaps, interest rate caps and forward contracts.
Doral Financials general policy is to account for derivatives on
a marked-to-market basis with gains or losses charged to
operations as they occur. The fair value of derivatives is
generally reported net by counterparty; provided that a legally
enforceable master netting agreement exists. Derivatives in a net
asset position are recorded as securities held for trading and
derivatives in a net liability position as liabilities. The
gross notional amount of derivatives totaled $484.0 million as of
September 30, 2007 and $5.1 billion as of December 31, 2006.
Notional amounts indicate the volume of derivatives activity, but
do not represent Doral Financials exposure to market or credit
risk.  2.
    
    The following tables summarize the amortized cost, gross unrealized gains and
losses, approximate market value, weighted-average yield and contractual maturities of
securities available for sale as of September 30, 2007 and December 31, 2006.The weighted-average yield is computed based on amortized cost and, therefore, does
not give effect to changes in fair value. Expected maturities of mortgage-backed
securities and certain debt securities might differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
 14




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES AVAILABLE FOR SALE
AS OF SEPTEMBER 30, 2007
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    610
    
    
    $
    15
    
    
    $
    8
    
    
    $
    617
    
    
    
    7.42
    %CMO CERTIFICATESDue over ten years
    
    
    262,272
    
    
    
    66
    
    
    
    15
    
    
    
    262,323
    
    
    
    6.48
    %DEBT SECURITIESFNMA NOTESDue within one year
    
    
    46,000
    
    
    
    
    
    
    
    36
    
    
    
    45,964
    
    
    
    4.60
    %$
    308,882
    
    
    $
    81
    
    
    $
    59
    
    
    $
    308,904
    
    
    
    6.20
    %
 SECURITIES AVAILABLE FOR SALE
AS OF DECEMBER 31, 2006
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    1,346,927
    
    
    $
    17
    
    
    $
    36,794
    
    
    $
    1,310,150
    
    
    
    4.62
    %FNMADue over ten years
    
    
    217,638
    
    
    
    
    
    
    
    7,331
    
    
    
    210,307
    
    
    
    4.94
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    27,901
    
    
    
    
    
    
    
    404
    
    
    
    27,497
    
    
    
    5.50
    %FNMA NOTESDue from one to five years
    
    
    46,011
    
    
    
    
    
    
    
    300
    
    
    
    45,711
    
    
    
    4.60
    %U.S. TREASURYDue within one year
    
    
    100,032
    
    
    
    
    
    
    
    376
    
    
    
    99,656
    
    
    
    1.97
    %Due from five to ten years
    
    
    761,100
    
    
    
    
    
    
    
    45,735
    
    
    
    715,365
    
    
    
    3.65
    %$
    2,499,609
    
    
    $
    17
    
    
    $
    90,940
    
    
    $
    2,408,686
    
    
    
    4.26
    %
 15




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 3.
    
    The following tables summarize the amortized cost, gross unrealized gains and
losses, approximate market value, weighted-average yield and contractual maturities of
securities held to maturity as of September 30, 2007 and December 31, 2006.The weighted-average yield is computed based on amortized cost and, therefore, does
not give effect to changes in fair value. Expected maturities of mortgage-backed
securities and certain debt securities might differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
 SECURITIES HELD TO MATURITY
AS OF SEPTEMBER 30, 2007
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue from one to five years
    
    $
    422
    
    
    $
    10
    
    
    $
    
    
    
    $
    432
    
    
    
    5.87
    %Due over ten years
    
    
    3,272
    
    
    
    114
    
    
    
    
    
    
    
    3,386
    
    
    
    6.83
    %FNMADue over ten years
    
    
    265,685
    
    
    
    
    
    
    
    5,912
    
    
    
    259,773
    
    
    
    6.05
    %CMO CERTIFICATESDue over ten years
    
    
    7,320
    
    
    
    
    
    
    
    659
    
    
    
    6,661
    
    
    
    5.80
    %DEBT SECURITIESFHLB NOTESDue from one to five years
    
    
    100,548
    
    
    
    
    
    
    
    661
    
    
    
    99,887
    
    
    
    4.16
    %Due over ten years
    
    
    273,595
    
    
    
    
    
    
    
    10,424
    
    
    
    263,171
    
    
    
    5.10
    %FHLB ZERO COUPONDue over ten years
    
    
    135,008
    
    
    
    
    
    
    
    8,460
    
    
    
    126,548
    
    
    
    6.50
    %FHLMC ZERO COUPONDue over ten years
    
    
    239,160
    
    
    
    
    
    
    
    11,713
    
    
    
    227,447
    
    
    
    5.83
    %FHLMC and FNMA NOTESDue over ten years
    
    
    99,990
    
    
    
    
    
    
    
    3,386
    
    
    
    96,604
    
    
    
    5.75
    %P.R. HOUSING BANKDue over ten years
    
    
    6,870
    
    
    
    22
    
    
    
    23
    
    
    
    6,869
    
    
    
    5.73
    %U.S. TREASURYDue from five to ten years
    
    
    201,068
    
    
    
    
    
    
    
    14,068
    
    
    
    187,000
    
    
    
    3.52
    %Due over ten years
    
    
    471,257
    
    
    
    293
    
    
    
    37,150
    
    
    
    434,400
    
    
    
    4.31
    %OTHERDue within one year
    
    
    6,900
    
    
    
    
    
    
    
    68
    
    
    
    6,832
    
    
    
    3.98
    %Due from one to five years
    
    
    5,025
    
    
    
    
    
    
    
    25
    
    
    
    5,000
    
    
    
    5.15
    %Due over ten years
    
    
    8,000
    
    
    
    
    
    
    
    285
    
    
    
    7,715
    
    
    
    5.61
    %$
    1,824,120
    
    
    $
    439
    
    
    $
    92,834
    
    
    $
    1,731,725
    
    
    
    5.05
    %
 16




---



##### Table of Contents



SECURITIES HELD TO MATURITY
AS OF DECEMBER 31, 2006
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue from one to five years
    
    $
    656
    
    
    $
    9
    
    
    $
    
    
    
    $
    665
    
    
    
    5.99
    %Due over ten years
    
    
    3,592
    
    
    
    127
    
    
    
    
    
    
    
    3,719
    
    
    
    6.85
    %FNMADue over ten years
    
    
    291,905
    
    
    
    2,587
    
    
    
    964
    
    
    
    293,528
    
    
    
    6.05
    %CMO CERTIFICATESDue over ten years
    
    
    8,209
    
    
    
    
    
    
    
    542
    
    
    
    7,667
    
    
    
    5.79
    %DEBT SECURITIESFHLB NOTESDue within one year
    
    
    100,000
    
    
    
    
    
    
    
    271
    
    
    
    99,729
    
    
    
    2.86
    %Due from one to five years
    
    
    100,671
    
    
    
    
    
    
    
    2,327
    
    
    
    98,344
    
    
    
    4.15
    %Due from five to ten years
    
    
    50,000
    
    
    
    
    
    
    
    625
    
    
    
    49,375
    
    
    
    4.13
    %Due over ten years
    
    
    273,594
    
    
    
    
    
    
    
    13,555
    
    
    
    260,039
    
    
    
    5.10
    %FHLB ZERO COUPONDue over ten years
    
    
    128,602
    
    
    
    
    
    
    
    5,221
    
    
    
    123,381
    
    
    
    6.50
    %FHLMC ZERO COUPONDue over ten years
    
    
    269,975
    
    
    
    
    
    
    
    8,831
    
    
    
    261,144
    
    
    
    5.85
    %FHLMC and FNMA NOTESDue over ten years
    
    
    149,989
    
    
    
    
    
    
    
    4,357
    
    
    
    145,632
    
    
    
    5.65
    %P.R. HOUSING BANKDue from one to five years
    
    
    5,000
    
    
    
    11
    
    
    
    
    
    
    
    5,011
    
    
    
    6.00
    %Due over ten years
    
    
    7,235
    
    
    
    
    
    
    
    
    
    
    
    7,235
    
    
    
    5.72
    %U.S. TREASURYDue from five to ten years
    
    
    201,195
    
    
    
    
    
    
    
    12,758
    
    
    
    188,437
    
    
    
    3.52
    %Due over ten years
    
    
    472,364
    
    
    
    1,083
    
    
    
    36,194
    
    
    
    437,253
    
    
    
    4.31
    %OTHERDue within a year
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    5.30
    %Due from one to five years
    
    
    11,925
    
    
    
    
    
    
    
    206
    
    
    
    11,719
    
    
    
    4.47
    %Due over ten years
    
    
    8,000
    
    
    
    449
    
    
    
    
    
    
    
    8,449
    
    
    
    5.61
    %$
    2,082,937
    
    
    $
    4,266
    
    
    $
    85,851
    
    
    $
    2,001,352
    
    
    
    4.96
    %
 17




---



##### Table of Contents



i.
    
    The following tables show Doral Financials gross unrealized losses and fair value for
available-for-sale and held-to-maturity investments, aggregated by investment category and
length of time that individual securities have been in a continuous unrealized loss
position, at September 30, 2007 and December 31, 2006.
 SECURITIES
AVAILABLE FOR SALE
(As of September 30, 2007)
 LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(In thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed
SecuritiesGNMA
    
    $
    75
    
    
    $
    4
    
    
    $
    164
    
    
    $
    4
    
    
    $
    239
    
    
    $
    8CMO CERTIFICATES
    
    
    46,753
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    46,753
    
    
    
    15Debt SecuritiesFNMA Notes
    
    
    
    
    
    
    
    
    
    
    45,964
    
    
    
    36
    
    
    
    45,964
    
    
    
    36$
    46,828
    
    
    $
    19
    
    
    $
    46,128
    
    
    $
    40
    
    
    $
    92,956
    
    
    $
    59
 SECURITIES
AVAILABLE FOR SALE
(As of December 31, 2006)
 LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(In thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed
SecuritiesGNMA
    
    $
    484
    
    
    $
    15
    
    
    $
    1,309,019
    
    
    $
    36,779
    
    
    $
    1,309,503
    
    
    $
    36,794FNMA
    
    
    
    
    
    
    
    
    
    
    210,307
    
    
    
    7,331
    
    
    
    210,307
    
    
    
    7,331Debt SecuritiesFNMA Notes
    
    
    45,711
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    45,711
    
    
    
    300FHLB Notes
    
    
    
    
    
    
    
    
    
    
    27,497
    
    
    
    404
    
    
    
    27,497
    
    
    
    404U.S. Treasury
    
    
    
    
    
    
    
    
    
    
    815,021
    
    
    
    46,111
    
    
    
    815,021
    
    
    
    46,111$
    46,195
    
    
    $
    315
    
    
    $
    2,361,844
    
    
    $
    90,625
    
    
    $
    2,408,039
    
    
    $
    90,940
 As of September 30, 2007, securities available for sale included a net unrealized
gain of $22,000, which represented the difference between fair value and amortized
cost. The comparable amount at December 31, 2006 was a net unrealized loss of $90.9
million. The change from a net unrealized loss position at December 31, 2006 to a net
unrealized gain position at September 30, 2007 was principally due to by the sale of
$1.9 billion in available-for-sale investment securities and the realization of a
loss of $95.0 million during the third quarter of 2007. Also, decreases in interest
rates resulted in the change from a net unrealized loss position at December 31, 2006
to a net unrealized gain position at September 30, 2007.The securities held by the Company are principally mortgage-backed securities, U.S.
Treasury and agency securities. Payment on a substantial portion of these
instruments is guaranteed or secured by mortgages, a U.S. government-sponsored
entity or the full faith and credit of the U.S. government and, therefore, principal
and interest on the securities are deemed recoverable. As of September 30, 2007, the
Company had the ability and intent to hold the securities until maturity or until
the unrealized losses are recovered. Therefore, no other-than-temporary impairment
loss was recognized.
 18




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##### Table of Contents



SECURITIES
HELD TO MATURITY
(As of September 30, 2007)
 LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(In thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed
SecuritiesFNMA
    
    $
    224,184
    
    
    $
    4,003
    
    
    $
    35,589
    
    
    $
    1,909
    
    
    $
    259,773
    
    
    $
    5,912CMO Certificates
    
    
    91
    
    
    
    1
    
    
    
    6,570
    
    
    
    658
    
    
    
    6,661
    
    
    
    659Debt SecuritiesFHLB Notes
    
    
    
    
    
    
    
    
    
    
    363,058
    
    
    
    11,085
    
    
    
    363,058
    
    
    
    11,085FHLB Zero Coupon
    
    
    
    
    
    
    
    
    
    
    126,548
    
    
    
    8,460
    
    
    
    126,548
    
    
    
    8,460FHLMC Zero Coupon
    
    
    
    
    
    
    
    
    
    
    227,447
    
    
    
    11,713
    
    
    
    227,447
    
    
    
    11,713FHLMC and FNMA Notes
    
    
    
    
    
    
    
    
    
    
    96,604
    
    
    
    3,386
    
    
    
    96,604
    
    
    
    3,386U.S. Treasury
    
    
    54,662
    
    
    
    1,479
    
    
    
    561,500
    
    
    
    49,739
    
    
    
    616,162
    
    
    
    51,218Other
    
    
    12,327
    
    
    
    308
    
    
    
    8,807
    
    
    
    93
    
    
    
    21,134
    
    
    
    401$
    291,264
    
    
    $
    5,791
    
    
    $
    1,426,123
    
    
    $
    87,043
    
    
    $
    1,717,387
    
    
    $
    92,834
 SECURITIES
HELD TO MATURITY
(As of December 31, 2006)
 LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(In thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed
SecuritiesFNMA
    
    $
    
    
    
    $
    
    
    
    $
    40,143
    
    
    $
    964
    
    
    $
    40,143
    
    
    $
    964CMO Certificates
    
    
    148
    
    
    
    1
    
    
    
    7,519
    
    
    
    541
    
    
    
    7,667
    
    
    
    542Debt SecuritiesFHLB Notes
    
    
    49,375
    
    
    
    625
    
    
    
    458,112
    
    
    
    16,153
    
    
    
    507,487
    
    
    
    16,778FHLB Zero Coupon
    
    
    
    
    
    
    
    
    
    
    123,381
    
    
    
    5,221
    
    
    
    123,381
    
    
    
    5,221FHLMC Zero Coupon
    
    
    
    
    
    
    
    
    
    
    261,144
    
    
    
    8,831
    
    
    
    261,144
    
    
    
    8,831FHLMC and FNMA Notes
    
    
    11,858
    
    
    
    391
    
    
    
    133,774
    
    
    
    3,966
    
    
    
    145,632
    
    
    
    4,357U.S. Treasury
    
    
    214,344
    
    
    
    20,866
    
    
    
    349,195
    
    
    
    28,086
    
    
    
    563,539
    
    
    
    48,952Other
    
    
    4,954
    
    
    
    46
    
    
    
    6,739
    
    
    
    160
    
    
    
    11,693
    
    
    
    206$
    280,679
    
    
    $
    21,929
    
    
    $
    1,380,007
    
    
    $
    63,922
    
    
    $
    1,660,686
    
    
    $
    85,851
   19




---



##### Table of Contents



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)
    
    SEPTEMBER 30, 2007
    
    
    DECEMBER 31, 2006Conventional single family residential loans
    
    $
    202,701
    
    
    $
    1,371,088FHA/VA loans
    
    
    152,987
    
    
    
    115,225Mortgage loans on residential multifamily
    
    
    
    
    
    
    5,621Construction and commercial real estate loans
    
    
    95,258
    
    
    
    277,156Total loans held for sale (1)
    
    $
    450,946
    
    
    $
    1,769,090
 
 (1)
    
    At September 30, 2007 and December 31, 2006, the loans held for sale portfolio includes
$1.8 million and $23.2 million, respectively, related to interest-only loans.     20




---



##### 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
 (Dollars in thousands)
    
    SEPTEMBER 30, 2007
    
    
    DECEMBER 31, 2006AMOUNT
    
    
    PERCENT
    
    
    AMOUNT
    
    
    PERCENTConstruction loans(1)
    
    $
    704,463
    
    
    
    16
    %
    
    $
    817,352
    
    
    
    24
    %Residential mortgage loans(2)
    
    
    3,047,977
    
    
    
    67
    %
    
    
    1,785,454
    
    
    
    52
    %Commercial  secured by real estate
    
    
    538,899
    
    
    
    12
    %
    
    
    541,891
    
    
    
    16
    %Consumer  other:Personal loans
    
    
    48,803
    
    
    
    1
    %
    
    
    37,896
    
    
    
    1
    %Auto loans
    
    
    240
    
    
    
    0
    %
    
    
    426
    
    
    
    0
    %Credit cards
    
    
    19,479
    
    
    
    0
    %
    
    
    20,086
    
    
    
    0
    %Overdrawn checking accounts
    
    
    2,174
    
    
    
    0
    %
    
    
    324
    
    
    
    0
    %Revolving lines of credit
    
    
    27,200
    
    
    
    0
    %
    
    
    28,229
    
    
    
    0
    %Lease financing receivables
    
    
    36,055
    
    
    
    1
    %
    
    
    43,565
    
    
    
    1
    %Commercial non-real estate
    
    
    70,166
    
    
    
    2
    %
    
    
    158,963
    
    
    
    5
    %Loans on savings deposits
    
    
    10,899
    
    
    
    0
    %
    
    
    16,811
    
    
    
    0
    %Land secured
    
    
    39,676
    
    
    
    1
    %
    
    
    42,769
    
    
    
    1
    %Loans receivable, gross(3)
    
    
    4,546,031
    
    
    
    100
    %
    
    
    3,493,766
    
    
    
    100
    %Less:Discount on loans transferred
    
    
    (21,715
    )
    
    
    
    
    
    
    (22,016
    )Unearned interest and deferred
loan fees, net
    
    
    (14,131
    )
    
    
    
    
    
    
    (14,580
    )Allowance for loan and lease losses
    
    
    (87,616
    )
    
    
    
    
    
    
    (67,233
    )(123,462
    )
    
    
    
    
    
    
    (103,829
    )Loans receivable, net
    
    $
    4,422,569
    
    
    
    
    
    
    $
    3,389,937
 
 (1)
    
    Includes $630.1 million and $680.6 million of construction loans for residential housing
projects as of September 30, 2007 and December 31, 2006, respectively. Also includes $74.4 million and
$136.8 million of construction loans for commercial, condominiums and multifamily projects as of September
30, 2007 and December 31, 2006, respectively.(2)
    
    Includes $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.(3)
    
    Includes $57.0 million and $42.6 million of interest-only loans, as of September 30, 2007
and December 31, 2006, respectively.    21




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##### Table of Contents



ALLOWANCE
FOR LOAN AND LEASE LOSSES
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    85,875
    
    
    $
    44,145
    
    
    $
    67,233
    
    
    $
    35,044Provision for loan and lease losses(1)
    
    
    5,062
    
    
    
    10,126
    
    
    
    30,373
    
    
    
    21,171Losses charged to the allowance
    
    
    (3,963
    )
    
    
    (1,460
    )
    
    
    (10,405
    )
    
    
    (3,616
    )Recoveries
    
    
    169
    
    
    
    200
    
    
    
    415
    
    
    
    399Other
    
    
    473
    
    
    
    (93
    )
    
    
    
    
    
    
    (80
    )Balance at end of period
    
    $
    87,616
    
    
    $
    52,918
    
    
    $
    87,616
    
    
    $
    52,918
 
 (1)
    
    For the quarter and nine month period ended September 30, 2007, provision for loan and lease losses includes $198,000 and 9.0 million,
respectively, related to the reclassification of $41.9 million and $1.4 billion, respectively, from the loans held for sale portfolio to the loans
receivable portfolio. 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 September
30, 2007, the outstanding principal balance of the bonds was $49.2 million with fixed
interest rates, ranging from 6.25% to 6.90%, and maturities ranging from December 2007 to
December 2029. Certain series of the bonds are secured by a mortgage on the building and
underlying real property.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. 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, Doral Financial elected to apply fair value
accounting to its mortgage servicing rights (MSRs). 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) stratified by
predominant risk characteristics  loan type and coupon. 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.The Company, upon the remeasurement of the MSRs at fair value in accordance with SFAS No.
156 Accounting for Servicing of Financial Assets, recorded a cumulative effect adjustment
to retained earnings (net of tax) as of the beginning of the 2007 fiscal year for the
difference between the fair value and the carrying amount to bring December 2006 MSR balance
to the fair value. The table below reconciles the balance of MSRs as of December 31, 2006
and January 1, 2007.
 (In thousands)Balance at December 31, 2006
    
    $
    176,367Adjustment upon adoption of SFAS No.156
    
    
    1,517Balance at January 1, 2007
    
    $
    177,884
 22




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##### Table of Contents



QUARTER ENDED
    
    
    NINE MONTH PERIOD(In thousands)
    
    SEPTEMBER 30, 2007
    
    
    ENDED SEPTEMBER 30, 2007Balance at beginning of period
    
    $
    164,569
    
    
    $
    177,884Sales of servicing assets(1)
    
    
    
    
    
    
    (9,581
    )Capitalization of servicing assets
    
    
    1,219
    
    
    
    3,765Change in fair value
    
    
    (1,934
    )
    
    
    (8,214
    )Balance at end of period(2)
    
    $
    163,854
    
    
    $
    163,854
 
 (1)
    
    Amount represent MSR sales related to $693.9 million in principal balance of mortgage loans.(2)
    
    Outstanding balance of loans serviced for third parties amounted to $10.5 billion as of September 30, 2007.   QUARTER ENDED
    
    
    NINE MONTH PERIOD(In thousands)
    
    SEPTEMBER 30, 2006
    
    
    ENDED SEPTEMBER 30, 2006Balance at beginning of period
    
    $
    196,971
    
    
    $
    156,812Capitalization of servicing assets
    
    
    1,858
    
    
    
    48,720Net servicing assets recognized as part of
the restructured mortgage loan sale
transactions
    
    
    
    
    
    
    5,985Rights
purchased (sold)
    
    
    (6
    )
    
    
    210Amortization
    
    
    (9,572
    )
    
    
    (22,476
    )Balance before valuation allowance at
end of period
    
    
    189,251
    
    
    
    189,251Valuation allowance for temporary
impairment
    
    
    (11,241
    )
    
    
    (11,241
    )Balance at end of period(1)
    
    $
    178,010
    
    
    $
    178,010Fair Value at September 30, 2006
    
    $
    180,385
    
    
    $
    180,385
 
 (1)
    
    Outstanding balance of loans serviced for third parties amounted to $11.9 billion as of September 30, 2006.  23




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##### Table of Contents



QUARTER ENDED
    
    
    NINE MONTH PERIOD(In thousands)
    
    SEPTEMBER 30, 2006
    
    
    ENDED SEPTEMBER 30, 2006Balance at beginning of period
    
    $
    6,383
    
    
    $
    6,236Temporary impairment charges
    
    
    5,801
    
    
    
    8,642Recoveries
    
    
    (943
    )
    
    
    (3,637
    )Balance at end of period
    
    $
    11,241
    
    
    $
    11,241
  INTEREST-ONLY STRIPS ACTIVITY
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    49,755
    
    
    $
    52,746
    
    
    $
    49,926
    
    
    $
    74,034Amortization
    
    
    (1,142
    )
    
    
    (2,636
    )
    
    
    (5,072
    )
    
    
    (15,441
    )Negative IO value eliminated
as part of the mortgage loans
sale transactions
restructured (mortgage loans
repurchased)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,190Negative value of IOs sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,189Gain (loss) on the IO value
    
    
    3,014
    
    
    
    2,425
    
    
    
    6,773
    
    
    
    (40,437
    )Balance at end of period
    
    $
    51,627
    
    
    $
    52,535
    
    
    $
    51,627
    
    
    $
    52,535
   24




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##### Table of Contents



Servicing
    
    Interest-(Dollars in thousands)
    
    Assets
    
    Only StripsCarrying amount of retained interest
    
    $
    163,854
    
    
    $
    51,627Weighted-average expected life (in years)
    
    
    7.1
    
    
    
    5.6Constant prepayment rate (weighted-average
annual rate)
    
    
    11.28
    %
    
    
    10.36
    %Decrease in fair value due to 10% adverse
change
    
    $
    (4,771
    )
    
    $
    (1,993
    )Decrease in fair value due to 20% adverse
change
    
    $
    (9,200
    )
    
    $
    (3,867
    )Residual cash flow discount rate
(weighted-average annual rate)
    
    
    11.52
    %
    
    
    10.87
    %Decrease in fair value due to 10% adverse
change
    
    $
    (6,445
    )
    
    $
    (1,320
    )Decrease in fair value due to 20% adverse
change
    
    $
    (12,416
    )
    
    $
    (2,571
    )
   Weighted-average(Dollars in thousands)
    
    
    
    
    
    expected life
    
    Change in fairChange in interest rates (basis points)
    

Constant prepayment rate
    
    (Years)
    
    value of IOs
    
    % Change+200
    
    
    7.65
    %
    
    
    6.6
    
    
    $
    (2,911
    )
    
    
    (6
    )%+100
    
    
    8.64
    %
    
    
    6.2
    
    
    
    (1,163
    )
    
    
    (2
    )%+50
    
    
    9.36
    %
    
    
    5.9
    
    
    
    (415
    )
    
    
    (1
    )%Base
    
    
    10.36
    %
    
    
    5.6
    
    
    
    0
    
    
    
    0
    %-50
    
    
    12.11
    %
    
    
    5.0
    
    
    
    (705
    )
    
    
    (1
    )%-100
    
    
    13.88
    %
    
    
    4.6
    
    
    
    (898
    )
    
    
    (2
    )%-200
    
    
    16.45
    %
    
    
    4.0
    
    
    
    1,954
    
    
    
    4
    %
 25




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##### Table of Contents



n.
    
    Stock Option and Other Incentive Plans.Effective January 1, 2006, the Company adopted
SFAS No. 123R Share-Based Payment (SFAS 123R), without a material effect on the
Consolidated Financial Statements of the Company, since in 2003 Doral Financial commenced
expensing the fair vale of stock options granted to employees using the modified
prospective method described in SFAS No. 148 Accounting for Stock-Based Compensation 
Transition and Disclosure  an amendment of FASB Statement No. 123. Using this method,
the Company has expensed the fair value of all employee stock options and restricted stock
granted after January 1, 2003, as well as the unvested portions of previously granted stock
options. SFAS 123R requires the Company to estimate the pre-vesting forfeiture rate, for
grants that are forfeited prior to vesting, beginning on the grant date and to true-up
forfeiture estimates through the vesting date so that compensation expense is recognized
only for grants that vest. When unvested grants are forfeited, any compensation expense
previously recognized on the forfeited grants is reversed in the period of the forfeiture.
Accordingly, periodic compensation expense will include adjustments for actual and
estimated pre-vesting forfeitures and changes in the estimated pre-vesting forfeiture rate.
The Company did not change its adjustments for actual and estimated pre-vesting forfeitures
and changes in the estimated pre-vesting forfeiture rate.The Company currently has one incentive plan, the Doral Financial Corporation Omnibus
Incentive Plan (the Omnibus Plan). The Omnibus Plan provides for equity-based compensation
incentives (the awards) through the grant of stock options, stock appreciation rights,
restricted stock, restricted stock units and dividend equivalents, as well as cash and
equity-based performance awards. The Compensation Committee has full authority and absolute
discretion to determine those eligible to receive awards and to establish the terms and
conditions of any awards; however, the Omnibus Plan has various limits and vesting
restrictions that apply to individual and aggregate awards.Prior to the Omnibus Plan, from April 16, 1997, to April 20, 2004, the Company offered an
employee stock option plan (the Old Plan). All options awarded under the Old Plan were
issued at market value at the date of the grants, for terms of ten years and vest ratably on
an annual basis over a two-year period from the grant date.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 Plan and
the Old Plan effective upon the issuance of the shares of the Companys common stock to
Doral Holdings. In connection with the acceleration and termination of outstanding stock
options, the Company recognized as compensation expense all unvested benefits prior to the
closing of the transaction as follows:
 
    
    For the Old Plan there were 18,225 options outstanding, all of which were fully
vested as of July 19, 2007, and therefore no additional compensation expense was
recorded.
    
    For the Omnibus Plan, the Compensation Committee determined to cancel the
outstanding options in exchange for a payment per share based on the change of
control price, which at the time of the closing was determined to be $0.63. This
resulted in a settlement payment of zero dollars. As of July 19, 2007, there were
1,615,500 options outstanding under the Omnibus Plan. The unrecognized compensation
expense related to the termination of the 1,615,500 options was $2,960,122.
 
    
    There were 200,000 (10,000 on a post-reverse split basis) restricted units outstanding under the Plan.
The unrecognized compensation expense relate to the 200,000 restricted units was $865,283.
   26




---



##### Table of Contents



NINE MONTHQUARTER ENDED
    
    
    PERIOD ENDED(In thousands)
    
    SEPTEMBER 30, 2007
    
    
    SEPTEMBER 30, 2007Stock-based compensation recognized
    
    $
    
    
    
    $
    685Stock-based compensation reversed due
to pre-vesting forfeitures
    
    
    
    
    
    
    (25
    )Stock-based compensation recognized, net
    
    $
    
    
    
    $
    660Stock-based compensation recognized on
termination of option plan
    
    $
    3,823
    
    
    $
    3,823Unrecognized at September 30
    
    $
    0
    
    
    $
    0
  NINE MONTH PERIOD ENDEDSEPTEMBER 30, 2007Number of
    
    
    Weighted-AverageOptions
    
    
    Exercise PriceBeginning of period
    
    
    1,695,050
    
    
    $
    6.45Options granted
    
    
    155,000
    
    
    
    2.54Options exercised
    
    
    
    
    
    
    Post-vesting cancellations
    
    
    (120,575
    )
    
    
    11.53Pre-vesting cancellations forfeited
    
    
    (95,750
    )
    
    
    4.26Balance prior termination
    
    
    1,633,725
    
    
    $
    5.84Terminated
    
    
    (1,633,725
    )
    
    $
    0.00Exercisable at period end
    
    
    0
    
    
    $
    0.00
  2007Weighted-average exercise price
    
    $
    2.54Stock option estimated fair value
    
    $
    0.64-$1.30Expected stock option term (years)
    
    
    2.44 -- 7.87Expected volatility
    
    
    41.65% - 42.72
    %Expected dividend yield
    
    
    0
    %Risk-free interest rate
    
    
    4.70% - 5.02
    %
    27




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##### Table of Contents



28




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##### Table of Contents



o.
    
    The following table summarizes deposit balances:
 SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2007
    
    
    2006Certificates of deposit
    
    $
    2,840,313
    
    
    $
    2,947,892Regular savings
    
    
    331,072
    
    
    
    442,796NOW accounts
    
    
    673,244
    
    
    
    532,885Non interest-bearing deposits
    
    
    251,089
    
    
    
    327,187$
    4,095,718
    
    
    $
    4,250,760
 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. During the third quarter of 2007,
the Company extinguished $1.7 billion of securities sold under
agreements to repurchase, related to the sale of $1.9 billion of
available-for-sale securities, and recognized a loss on extinguishment
of $14.8 million. Securities sold under agreements to repurchase consisted
of the following:
 29




---



##### Table of Contents



SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2007
    
    
    2006Non-callable repurchase agreements with
maturities less than or equal to 90 days,
at various fixed rates averaging 5.36% and
5.40% at September 30, 2007 and December
31, 2006, respectively.
    
    $
    59,209
    
    
    $
    277,687Non-callable repurchase agreement with
maturity less than or equal to 90 days,
tied to 3-month LIBOR adjustable
quarterly, averaging 5.59% at December 31,
2006.
    
    
    
    
    
    
    20,000Non-callable repurchase agreement with a
maturity of March 2008, at a fixed rate of
5.15% at September 30, 2007.
    
    
    10,000
    
    
    
    Non-callable repurchase agreements with
maturities ranging from May 2010 to June
2010 (2006  April 2007 to June 2010), at
various fixed rates averaging 4.15% and
4.24% at September 30, 2007 and December
31, 2006, respectively.
    
    
    550,000
    
    
    
    846,000Non-callable repurchase agreements with
maturities of January 2008 (2006 
November 2007 to January 2008), tied to
3-month LIBOR adjustable quarterly,
averaging 5.53% at September 30, 2007 and
December 31, 2006, respectively.
    
    
    94,800
    
    
    
    194,800Callable repurchase agreements with
maturities ranging from August 2009 to
February 2014 (2006  March 2008 to
February 2014) at various fixed rates
averaging 5.50% and 5.19% at September 30,
2007 and December 31, 2006, respectively.
    
    
    782,528
    
    
    
    960,878Callable repurchase agreements due on
March 22, 2015, and paid off in 2007, at
various fixed rates during non-callable
period averaging 3.22% at December 31,
2006, callable beginning on March 22,
2008. Beginning on March 22, 2008, the
interest converts to an inverse floater
(fixed rate minus 3-month LIBOR, subject
to a cap).
    
    
    
    
    
    
    1,500,000Callable repurchase agreements with
maturity of November 24, 2014, and paid
off in 2007, tied to 3-month LIBOR
adjustable quarterly, at a rate of 4.62%
at December 31, 2006.
    
    
    
    
    
    
    100,000$
    1,496,537
    
    
    $
    3,899,365
 30




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##### Table of Contents



q.
    
    Advances from FHLB consisted of the following:
 SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2007
    
    
    2006Non-callable advances with maturities
ranging from October 2007 to November 2011
(2006  January 2007 to October 2011), at
various fixed rates averaging 4.77% and
4.85% at September 30, 2007 and December
31, 2006, respectively.
    
    $
    767,000
    
    
    $
    467,000Non-callable advance due on July 6, 2010,
tied to 3-month LIBOR adjustable
quarterly, averaging at 5.33% at September
30, 2007.
    
    
    200,000
    
    
    
    Non-callable advances due on September 14,
2007, tied to 1-month LIBOR adjustable
monthly, averaging at 5.36% at December
31, 2006.
    
    
    
    
    
    
    100,000Callable advances with maturities ranging
from July 2009 to March 2012, at various
fixed rates averaging 5.40% and 4.58% at
September 30, 2007 and December 31, 2006,
respectively, callable at various dates
beginning on October 12, 2007 (2006 
January, 1, 2007).
    
    
    304,000
    
    
    
    467,500$
    1,271,000
    
    
    $
    1,034,500
  r.
    
    At September 30, 2007 and December 31, 2006, loans payable consisted of financing
agreements with local financial institutions secured by mortgage loans.
  SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2007
    
    
    2006Secured borrowings with local financial
institutions, collateralized by real
estate mortgage loans at variable interest
rates tied to 3-month LIBOR averaging
6.85% and 6.86% at September 30, 2007 and
December 31, 2006, respectively.
    
    $
    390,357
    
    
    $
    415,019Secured borrowings with local financial
institutions, collateralized by real
estate mortgage loans at fixed interest
rates averaging 7.43% and 7.77% at
September 30, 2007 and December 31, 2006,
respectively.
    
    
    25,922
    
    
    
    29,424$
    416,279
    
    
    $
    444,443
  31




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##### Table of Contents



s.
    
    Notes payable consisted of the following:
 SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2007
    
    
    2006$625 million floating rate senior notes tied to 3-month LIBOR (6.20% at
December 31, 2006), due on July 20, 2007, paying interest quarterly
    
    $
    
    
    
    $
    624,814$100 million notes, net of discount, bearing interest at 7.65%, due on
March 26, 2016, paying interest monthly
    
    
    98,271
    
    
    
    98,166$30 million notes, net of discount, bearing interest at 7.00%, due on
April 26, 2012, paying interest monthly
    
    
    29,616
    
    
    
    29,564$40 million notes, net of discount, bearing interest at 7.10%, due on
April 26, 2017, paying interest monthly
    
    
    39,309
    
    
    
    39,272$30 million notes, net of discount, bearing interest at 7.15%, due on
April 26, 2022, paying interest monthly
    
    
    29,417
    
    
    
    29,401Senior term notes at a fixed rate of 8.55% due on August 31, 2007,
paying interest semiannually on February 28 and August 31
    
    
    
    
    
    
    9,000Bonds payable secured by mortgage on building at fixed rates ranging
from 6.30% to 6.90%, with maturities ranging from December 2007 to
December 2029 (2006-June 2007 to December 2029), paying interest monthly
    
    
    41,600
    
    
    
    41,995Bonds payable at a fixed rate of 6.25%, with maturities ranging from
December 2010 to December 2029, paying interest monthly
    
    
    7,600
    
    
    
    7,600Zero coupon senior notes (effective rate of 6.50%), due on April 30, 2007
    
    
    
    
    
    
    2,456Note payable with a local financial institutions, collateralized by IOs
at a fixed rate of 7.75%, due on December 25, 2013, paying interest
monthly
    
    
    38,182
    
    
    
    41,645$
    283,995
    
    
    $
    923,913
  t.
    
    Income Taxes
   32




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33




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##### Table of Contents



u.
    
    Guarantees
   34




---



##### Table of Contents



v.
    
    Commitments and Contingencies
    Lawsuits
    Augenbaum v. Doral Financial Corporation, et al
  35




---



##### Table of Contents



Other Lawsuits
   Other Legal Matters
  Banking Regulatory Matters
     36




---



##### Table of Contents



w.
    
    Recent Accounting Pronouncements
 Accounting for Certain Hybrid Financial Instruments.
 37




---



##### Table of Contents



Fair Value Measurements
     Taxes Collected from Customers and Remitted to Governmental Authorities.
 38




---



##### Table of Contents



Issuers Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt
Instrument
 SFAS No. 159
Statement of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. Fair Value Measurements, Disclosures about Fair Value of Financial Instruments.
 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 of Financial Assets and
Financial Liabilities
 39




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##### Table of Contents



x.
    
    Doral Financial Corporation Financial Information
  Doral Financial Corporation
(Parent Company Only)
Statements of Financial Condition
 SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2007
    
    
    2006Assets:Cash and cash equivalents
    
    $
    121,414
    
    
    $
    164,781Investment securities:Trading securities, at fair value
    
    
    131,037
    
    
    
    118,166Securities available for sale, at fair value
    
    
    46,580
    
    
    
    46,841Securities held to maturity, at amortized cost
    
    
    182,928
    
    
    
    117,980Total investment securities
    
    
    360,545
    
    
    
    282,987Mortgage loans held for sale, at lower of cost or market
    
    
    205,274
    
    
    
    722,778Loans receivable, net
    
    
    611,673
    
    
    
    254,492Servicing assets, net
    
    
    
    
    
    
    176,018Premises and equipment, net
    
    
    8,675
    
    
    
    11,067Other assets
    
    
    424,657
    
    
    
    290,710Investments in subsidiaries, at equity
    
    
    658,684
    
    
    
    950,745Total assets
    
    $
    2,390,922
    
    
    $
    2,853,578Liabilities and Stockholders Equity:Securities sold under agreements to repurchase
    
    $
    249,263
    
    
    $
    252,941Loans payable
    
    
    416,279
    
    
    
    444,443Notes payable
    
    
    234,795
    
    
    
    874,318Accounts payable and other liabilities
    
    
    70,022
    
    
    
    378,472Stockholders equity
    
    
    1,420,563
    
    
    
    903,404Total liabilities and stockholders equity
    
    $
    2,390,922
    
    
    $
    2,853,578
 40




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##### Table of Contents



Doral Financial Corporation  (Parent Company Only)  Statements of Income
 QUARTER ENDED     SEPTEMBER 30,
    

    NINE MONTH PERIOD ENDED 
SEPTEMBER 30,(In thousands)
    
    2007
    
    
    2006
    

    2007
    
    
    2006Income:Dividends from subsidiaries
    
    $
    165,059
    
    
    $
    8,338
    

    $
    165,059
    
    
    $
    8,338Interest income
    
    
    21,029
    
    
    
    28,889
    

    
    63,175
    
    
    
    167,375Net gain (loss) on mortgage loan sales and fees
    
    
    5
    
    
    
    10,587
    

    
    4,108
    
    
    
    (7,266
    )Net loss on securities held for trading
    
    
    (5,656
    )
    
    
    (18,181
    )

    
    (7,062
    )
    
    
    (26,661
    )Servicing income
(loss), net of amortization and impairment
    
    
    2,029
    
    
    
    (1,867
    )

    
    20,056
    
    
    
    6,922Other income
(loss)
    
    
    19
    
    
    
    (102
    )

    
    139
    
    
    
    3,329Total income
    
    
    182,485
    
    
    
    27,664
    

    
    245,475
    
    
    
    152,037Expenses:Interest expense
    
    
    18,396
    
    
    
    33,437
    

    
    73,033
    
    
    
    167,708Loan servicing, administrative and general expenses
    
    
    27,933
    
    
    
    27,062
    

    
    102,917
    
    
    
    87,109Provision for loan losses
    
    
    800
    
    
    
    914
    

    
    7,898
    
    
    
    737Total expenses
    
    
    47,129
    
    
    
    61,413
    

    
    183,848
    
    
    
    255,554Gain (loss) before income taxes and equity in
earnings of subsidiaries
    
    
    135,356
    
    
    
    (33,749
    )

    
    61,627
    
    
    
    (103,517
    )Income tax benefit
    
    
    88,209
    
    
    
    13,753
    

    
    99,871
    
    
    
    38,342Equity in
undistributed (losses) earnings of subsidiaries
    
    
    (285,713
    )
    
    
    (8,658
    )

    
    (298,433
    )
    
    
    2,689Net loss
    
    $
    (62,148
    )
    
    $
    (28,654
    )

    $
    (136,935
    )
    
    $
    (62,486
    )
 41




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##### Table of Contents



Doral Financial Corporation  (Parent Company Only)  Statements of Cash Flows
 NINE MONTH PERIOD ENDED 
SEPTEMBER 30,(In thousands)
    
    2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (136,935
    )
    
    $
    (62,486
    )Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:Equity in
earnings (losses) of subsidiaries
    
    
    133,374
    
    
    
    (11,027
    )Loss on sale of securities
    
    
    101
    
    
    
    4,990Depreciation and amortization
    
    
    1,432
    
    
    
    2,106Amortization and impairment of servicing assets
    
    
    6,279
    
    
    
    27,452Provision for loan losses
    
    
    7,898
    
    
    
    737Stock-based compensation recognized
    
    
    4,483
    
    
    
    556Deferred tax benefit
    
    
    (102,572
    )
    
    
    (38,342
    )Originations and purchases of loans held for sale
    
    
    (38,915
    )
    
    
    (867,762
    )Principal repayments and sales of loans held for sale
    
    
    197,048
    
    
    
    3,718,727(Increase) decrease in trading securities
    
    
    (12,972
    )
    
    
    121,106Dividends
received from subsidiaries
    
    
    165,059
    
    
    
    8,338Decrease
(Increase) in prepaid expenses and other assets
    
    
    157,468
    
    
    
    (6,614
    )Decrease accounts payable and other liabilities
    
    
    (308,989
    )
    
    
    (62,774
    )Total adjustments
    
    
    209,694
    
    
    
    2,897,493Net cash (used in) provided by operating activities
    
    
    72,759
    
    
    
    2,835,007Cash flows from investing activities:Principal repayments and maturities of securities held to maturity
    
    
    (64,948
    )
    
    
    1,466Purchases of securities available for sale
    
    
    
    
    
    
    (46,023
    )Principal repayments and sales of securities available for sale
    
    
    477
    
    
    
    184Origination of loans receivable
    
    
    (1,137
    )
    
    
    (1,221
    )Principal repayment of loans receivable
    
    
    (7,118
    )
    
    
    (170,001
    )Proceeds from sale of servicing assets
    
    
    7,000
    
    
    
    Purchase of servicing assets
    
    
    
    
    
    
    (210
    )Return of
investment
    
    
    35,939
    
    
    
    7,662Net cash provided (used in) by investing activities
    
    
    (29,787
    )
    
    
    (208,143
    )Cash flows from financing activities:Decrease in securities sold under agreements to repurchase
    
    
    (3,678
    )
    
    
    (167,579
    )Decrease in loans payable
    
    
    (28,164
    )
    
    
    (2,665,230
    )Decrease in notes payable
    
    
    (639,523
    )
    
    
    (82,774
    )Issuance of common stock, net
    
    
    610,000
    
    
    
    95Dividends paid
    
    
    (24,974
    )
    
    
    (33,608
    )Net cash used in financing activities
    
    
    (86,339
    )
    
    
    (2,949,096
    )Net decrease in cash and cash equivalents
    
    
    (43,367
    )
    
    
    (322,232
    )Cash and cash equivalents at beginning of year
    
    
    164,781
    
    
    
    470,497Cash and cash equivalents at the end of period
    
    $
    121,414
    
    
    $
    148,265
 42




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FORWARD LOOKING STATEMENTS
   
    
    the relative 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;
    
    the relative strength or weakness of the real estate markets and of the
consumer or commercial credit sectors and its impact in 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;
    
    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.
    43




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 INTERNAL CONTROL OVER FINANCIAL REPORTING
   RECENT DEVELOPMENTS
 Recapitalization Process.
     Settlement
Agreement.
 44




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##### Table of Contents



Changes in Board of Directors .
  Recent Amendments to Doral Financials Restated Certificate of Incorporation .
 
    
    an amendment to increase the number of authorized shares of the Companys capital stock
from 540,000,000 to 1,990,000,000 and the number of authorized shares of the Companys
common stock from 500,000,000 to 1,950,000,000;
    
    an amendment to decrease the par value of the Companys common stock from $1.00 to $.01
per share; and
    
    an amendment to effect a reverse stock split of the Companys outstanding common stock
of 1-for-20 following the issuance to Doral Holdings, together with a corresponding
reduction in the number of authorized shares of the Companys common stock and capital
stock.
 Reverse Stock Split .
 Senior
Management Appointments
 
    
    On July 24, 2007, Doral Financial announced the
appointment of Paul Makowski as Executive Vice President and Chief
Risk Officer. Prior to joining Doral Financial, Mr. Makowski
served as Consumer Real Estate Risk Executive at Bank of America in
Charlotte, North Carolina.
    
    On August 6, 2007, Laura Vázquez joined Doral
Financial as Controller and Principal Accounting Officer. Prior to
her appointment, Ms. Vázquez served as First Senior Vice
President and Comptroller of Santander BanCorp.
 OVERVIEW OF RESULTS OF OPERATIONS
   
    
    Net loss attributable to common shareholders for the third quarter of 2007 amounted
to $70.5 million, or a diluted loss per share of $1.59, compared to net loss of $37.0
million, or a diluted loss per share of $6.85, for the third quarter of 2006.
    
    Net interest income for the third quarter of 2007 was $39.4 million, compared to
$44.1 million for the same period in 2006. The decrease in net interest income for
2007, compared to 2006, was related to a decrease in interest income due to the sale
of $1.9 billion in available-for-sale investment securities. This was partially
offset by the reduction in interest expense related to
the termination of the funding associated with the investment securities sold and to
the repayment of $625 million in senior notes due on July 20, 2007 which was funded
primarily from the $610 million equity investment by Doral Holdings on July 19, 2007,
reducing the leverage of Doral Financial. This reduction in leverage also resulted in
the increase in the net interest margin from 1.34% in the third quarter of 2006 to
1.81% in the third quarter of 2007 (see Tables A and C below for information regarding
the Companys net interest income). Average interest-earning assets decreased from
$13.1 billion during the third quarter of 2006 to $8.7 billion for the third quarter
of 2007, while the interest bearing-liabilities decreased from $12.5 billion to $8.1
billion, respectively.
 45




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##### Table of Contents




    
    For the third quarter of 2007, the provision for loan and lease losses was $5.1
million, compared to $10.1 million for the same period in 2006. The decrease in the
provision for loan losses is principally related to the stabilization of delinquencies
in the various loan receivable portfolios, following a period of substantial increases
in the allowance for loan and lease losses over the last
18 months. Management remains cautious about the current
economic environment and its potential impact on delinquencies and
credit losses.
    
    Non-interest loss for the third quarter of 2007 was $109.6 million, compared to a
non-interest loss of $1.5 million for the same period in 2006. The non-interest loss
during the third quarter of 2007 compared to the same period in 2006 was primarily
driven by a significant loss related to the sale of $1.9 billion in available-for-sale
investment securities. The sale and the cancellation of related borrowings used to
finance these securities were completed during the third quarter of 2007, at a total
pre-tax loss of approximately $126.2 million, consisting of a loss of $16.4 million on
economic hedging transactions, a loss of $95.0 million on sale of investment securities, and a
net loss on extinguishment of liabilities of $14.8 million. This loss was partly
offset by gains from the sale of Doral Bank NYs branch network and related assets
which net $5.4 million during the third quarter of 2007. Non-interest income from the
operations for the quarter of 2007, without taking into consideration the sale of the
securities and deposits and related transactions was $11.3 million.
    
    Non-interest expense for the third quarter of 2007 was
$73.2 million, compared to
$60.3 million for the same period in 2006. The increase in non-interest expense for
the quarter was driven primarily by a $10.4 million increase in non-recurring
compensation and benefits expenses, related to the recognition of $3.8 million of
stock-based compensation related to the termination of stock options and the payment
of $4.4 million remaining in an escrow account maintained on behalf of the Companys
Chief Executive Officer pursuant to the terms of his employment agreement, the payment
of $1.5 million in severance payments and the final $1.8 million payment for the Key
Employee Incentive Plan. Non-interest expense for the third quarter of 2007 also
reflects an increase of $6.5 million in other expenses principally associated with the
recognition of a provision for possible losses from lawsuits arising in the ordinary course of business of approximately $1.0 million, interest paid on the settlement of the shareholder lawsuit of $1.3 million,
increase in the recourse liability of $1.4 million, write off of certain uncollectible commissions of
approximately $1.1 million and expenses related to foreclosure claims of approximately $1.2 million.
    
    For the third quarter of 2007, Doral Financial recognized an income tax benefit of
$86.3 million, compared to an income tax expense of $0.8 million for the corresponding
period in 2006. The recognition of income tax benefit for the third quarter of 2007 is
mostly related to the release of the valuation allowance of the deferred tax asset,
primarily as a result of the recapitalization transaction of the Company.
    
    During the third quarter of 2007, the Company had other comprehensive income of
approximately $130.7 million related principally to the reversal of the other
comprehensive losses related to the $1.9 billion of available-for-sale investment
securities as of June 30, 2007, as the securities were sold during the quarter of
2007, and the loss was recognized in the statement of loss. As of September 30, 2007,
the Companys balance for accumulated other comprehensive loss (net of income tax
benefit) decreased to $1.1 million, compared to $106.9 million as of December 31,
2006.
    
    Doral Financials loan production for the third quarter of 2007 was $354.0 million,
compared to $329.1 million for the comparable period in 2006, an increase of
approximately 8%. The increase in Doral Financials loan production for the third
quarter of 2007 is primarily the result of purchases of mortgage loans from third
parties amounting to $21.1 million. During the third quarter of 2006, the Companys
did not purchase mortgage loans from third parties.
    
    Total assets as of September 30, 2007 were $9.5 billion, a decrease of 20% compared
to $11.9 billion as of December 31, 2006. The decrease in total assets during 2007 was
due primarily to a decrease in the Companys securities portfolio of $1.9 billion, a
result of the sale of available-for-sale investment securities during the third
quarter of 2007. After the completion of the recapitalization, Doral Financials newly
constituted Board of Directors reassessed, based on existing market conditions, the
Companys intent of holding available-for-sale securities until maturity or recovery
of losses and approved the sale of approximately $1.9 billion in available-for-sale
investment securities. The sale and the cancellation of related borrowings used to
finance these securities were completed on August 8, 2007.
 46




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CRITICAL ACCOUNTING POLICIES
  Accounting for Uncertainty in Income
Taxes- an Interpretation of FASB Statement 109 Accounting for
Servicing of Financial Assets
 RESULTS OF OPERATIONS FOR THE QUARTERS AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2007 AND 2006
  NET INTEREST INCOME
     47




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48




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TABLE A  AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME  (Dollars in thousands)
 QUARTER ENDED SEPTEMBER 30,2007
    
    
    2006AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEBALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    4,962,065
    
    
    $
    86,285
    
    
    
    6.90
    %
    
    $
    5,684,980
    
    
    $
    97,821
    
    
    
    6.83
    %Mortgage-backed securities
    
    
    872,737
    
    
    
    13,495
    
    
    
    6.13
    %
    
    
    3,608,227
    
    
    
    45,617
    
    
    
    5.02
    %Interest-only strips
    
    
    60,223
    
    
    
    1,650
    
    
    
    10.87
    %
    
    
    52,016
    
    
    
    1,631
    
    
    
    12.44
    %Investment securities
    
    
    1,934,863
    
    
    
    21,612
    
    
    
    4.43
    %
    
    
    2,782,123
    
    
    
    29,969
    
    
    
    4.27
    %Other interest-earning assets
    
    
    828,865
    
    
    
    11,819
    
    
    
    5.66
    %
    
    
    968,472
    
    
    
    12,257
    
    
    
    5.02
    %Total interest-earning assets/interest income
    
    
    8,658,753
    
    
    $
    134,861
    
    
    
    6.18
    %
    
    
    13,095,818
    
    
    $
    187,295
    
    
    
    5.67
    %Total non-interest-earning assets
    
    
    1,097,282
    
    
    
    
    
    
    
    
    
    
    
    690,384Total assets
    
    $
    9,756,035
    
    
    
    
    
    
    
    
    
    
    $
    13,786,202LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    3,716,860
    
    
    $
    39,147
    
    
    
    4.18
    %
    
    $
    4,270,692
    
    
    $
    41,125
    
    
    
    3.82
    %Repurchase agreements
    
    
    2,472,871
    
    
    
    28,007
    
    
    
    4.49
    %
    
    
    5,392,295
    
    
    
    60,375
    
    
    
    4.44
    %Advances from FHLB
    
    
    1,100,910
    
    
    
    13,477
    
    
    
    4.86
    %
    
    
    1,037,924
    
    
    
    11,394
    
    
    
    4.36
    %Loans payable
    
    
    421,724
    
    
    
    7,190
    
    
    
    6.76
    %
    
    
    932,594
    
    
    
    14,948
    
    
    
    6.36
    %Notes payable
    
    
    419,708
    
    
    
    7,605
    
    
    
    7.19
    %
    
    
    886,994
    
    
    
    15,305
    
    
    
    6.85
    %Total interest-bearing liabilities/interest expense
    
    
    8,132,073
    
    
    $
    95,426
    
    
    
    4.66
    %
    
    
    12,520,499
    
    
    $
    143,147
    
    
    
    4.54
    %Total non-interest-bearing liabilities
    
    
    352,169
    
    
    
    
    
    
    
    
    
    
    
    316,996Total liabilities
    
    
    8,484,242
    
    
    
    
    
    
    
    
    
    
    
    12,837,495Stockholders equity
    
    
    1,271,793
    
    
    
    
    
    
    
    
    
    
    
    948,707Total liabilities and stockholders equity
    
    $
    9,756,035
    
    
    
    
    
    
    
    
    
    
    $
    13,786,202Net interest-earning assets
    
    $
    526,680
    
    
    
    
    
    
    
    
    
    
    $
    575,319Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    39,435
    
    
    
    
    
    
    
    
    
    
    $
    44,148Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.52
    %
    
    
    
    
    
    
    
    
    
    
    1.13
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.81
    %
    
    
    
    
    
    
    
    
    
    
    1.34
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    106.48
    %
    
    
    
    
    
    
    
    
    
    
    104.60
    %
 
 (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 an unconditional buy-back option.(2)
    
    Interest income on loans includes $0.4 million and $0.3 million for the third quarter of 2007 and 2006, respectively, of income from prepayment penalties related to the Companys loan
portfolio.(3)
    
    Interest rate spread represents the difference between Doral Financials weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities.(4)
    
    Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets. 49




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TABLE B  AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME  (Dollars in thousands)
 NINE MONTH PERIOD ENDED SEPTEMBER 30,2007
    
    
    2006AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEBALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    5,073,794
    
    
    $
    262,604
    
    
    
    6.92
    %
    
    $
    7,194,665
    
    
    $
    364,388
    
    
    
    6.77
    %Mortgage-backed securities
    
    
    1,415,581
    
    
    
    56,820
    
    
    
    5.37
    %
    
    
    3,847,985
    
    
    
    145,613
    
    
    
    5.06
    %Interest-only strips
    
    
    54,476
    
    
    
    4,539
    
    
    
    11.14
    %
    
    
    51,686
    
    
    
    4,956
    
    
    
    12.82
    %Investment securities
    
    
    2,326,134
    
    
    
    76,498
    
    
    
    4.40
    %
    
    
    2,846,379
    
    
    
    89,837
    
    
    
    4.22
    %Other interest-earning assets
    
    
    1,163,009
    
    
    
    44,891
    
    
    
    5.16
    %
    
    
    1,101,986
    
    
    
    38,616
    
    
    
    4.69
    %Total interest-earning assets/interest income
    
    
    10,032,994
    
    
    $
    445,352
    
    
    
    5.93
    %
    
    
    15,042,701
    
    
    $
    643,410
    
    
    
    5.72
    %Total non-interest-earning assets
    
    
    860,853
    
    
    
    
    
    
    
    
    
    
    
    958,341Total assets
    
    $
    10,893,847
    
    
    
    
    
    
    
    
    
    
    $
    16,001,042LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    4,039,828
    
    
    $
    126,040
    
    
    
    4.17
    %
    
    $
    4,219,329
    
    
    $
    111,340
    
    
    
    3.53
    %Repurchase agreements
    
    
    3,236,232
    
    
    
    106,319
    
    
    
    4.39
    %
    
    
    5,710,534
    
    
    
    185,587
    
    
    
    4.35
    %Advances from FHLB
    
    
    1,049,662
    
    
    
    40,121
    
    
    
    5.11
    %
    
    
    1,036,515
    
    
    
    33,181
    
    
    
    4.28
    %Loans payable
    
    
    429,802
    
    
    
    22,124
    
    
    
    6.88
    %
    
    
    2,510,349
    
    
    
    110,637
    
    
    
    5.89
    %Notes payable
    
    
    752,806
    
    
    
    38,520
    
    
    
    6.84
    %
    
    
    897,494
    
    
    
    44,458
    
    
    
    6.62
    %Total interest-bearing liabilities/interest expense
    
    
    9,508,330
    
    
    $
    333,124
    
    
    
    4.68
    %
    
    
    14,374,221
    
    
    $
    485,203
    
    
    
    4.51
    %Total non-interest-bearing liabilities
    
    
    401,473
    
    
    
    
    
    
    
    
    
    
    
    605,316Total liabilities
    
    
    9,909,803
    
    
    
    
    
    
    
    
    
    
    
    14,979,537Stockholders equity
    
    
    984,044
    
    
    
    
    
    
    
    
    
    
    
    1,021,505Total liabilities and stockholders equity
    
    $
    10,893,847
    
    
    
    
    
    
    
    
    
    
    $
    16,001,042Net interest-earning assets
    
    $
    524,664
    
    
    
    
    
    
    
    
    
    
    $
    668,480Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    112,228
    
    
    
    
    
    
    
    
    
    
    $
    158,207Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.25
    %
    
    
    
    
    
    
    
    
    
    
    1.21
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.50
    %
    
    
    
    
    
    
    
    
    
    
    1.41
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    105.52
    %
    
    
    
    
    
    
    
    
    
    
    104.65
    %
 
 (1)
    
    Average loan balances include the average balance of non-accruing loans, on which interest income is recognized when collected. Also includes the average balance of GNMA defaulted loans for
which the Company has an unconditional buy-back option.(2)
    
    Interest income on loans includes $2.2 million and $2.1 million for the nine month period ended September 30, 2007 and 2006, respectively, of income from prepayment penalties related to the
Companys loan portfolio.(3)
    
    Interest rate spread represents the difference between Doral Financials weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities.(4)
    
    Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets.  50




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TABLE C  NET INTEREST INCOME VARIANCE ANALYSIS  (In thousands)
 QUARTER ENDEDSEPTEMBER 30,2007 COMPARED TO 2006INCREASE (DECREASE) DUE TO:VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    (12,400
    )
    
    $
    864
    
    
    $
    (11,536
    )Mortgage-backed securities
    
    
    (34,530
    )
    
    
    2,408
    
    
    
    (32,122
    )Interest-only strips
    
    
    255
    
    
    
    (236
    )
    
    
    19Investment securities
    
    
    (9,125
    )
    
    
    768
    
    
    
    (8,357
    )Other interest-earning assets
    
    
    (1,759
    )
    
    
    1,321
    
    
    
    (438
    )TOTAL INTEREST INCOME VARIANCE
    
    
    (57,559
    )
    
    
    5,125
    
    
    
    (52,434
    )INTEREST EXPENSE VARIANCEDeposits
    
    
    (5,310
    )
    
    
    3,332
    
    
    
    (1,978
    )Repurchase agreements
    
    
    (32,674
    )
    
    
    306
    
    
    
    (32,368
    )Advances from FHLB
    
    
    693
    
    
    
    1,390
    
    
    
    2,083Loans payable
    
    
    (8,177
    )
    
    
    419
    
    
    
    (7,758
    )Notes payable
    
    
    (8,055
    )
    
    
    355
    
    
    
    (7,700
    )TOTAL INTEREST EXPENSE VARIANCE
    
    
    (53,523
    )
    
    
    5,802
    
    
    
    (47,721
    )NET INTEREST INCOME VARIANCE
    
    $
    (4,036
    )
    
    $
    (677
    )
    
    $
    (4,713
    )
 TABLE D  NET INTEREST INCOME VARIANCE ANALYSIS  (In thousands)
 NINE MONTH PERIOD ENDEDSEPTEMBER 30,2007 COMPARED TO 2006INCREASE (DECREASE) DUE TO:VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    (107,502
    )
    
    $
    5,718
    
    
    $
    (101,784
    )Mortgage-backed securities
    
    
    (92,092
    )
    
    
    3,299
    
    
    
    (88,793
    )Interest-only strips
    
    
    269
    
    
    
    (686
    )
    
    
    (417
    )Investment securities
    
    
    (16,477
    )
    
    
    3,138
    
    
    
    (13,339
    )Other interest-earning assets
    
    
    2,156
    
    
    
    4,119
    
    
    
    6,275TOTAL INTEREST INCOME VARIANCE
    
    
    (213,646
    )
    
    
    15,588
    
    
    
    (198,058
    )INTEREST EXPENSE VARIANCEDeposits
    
    
    (4,740
    )
    
    
    19,440
    
    
    
    14,700Repurchase agreements
    
    
    (80,245
    )
    
    
    977
    
    
    
    (79,268
    )Advances from FHLB
    
    
    421
    
    
    
    6,519
    
    
    
    6,940Loans payable
    
    
    (91,711
    )
    
    
    3,198
    
    
    
    (88,513
    )Notes payable
    
    
    (7,180
    )
    
    
    1,242
    
    
    
    (5,938
    )TOTAL INTEREST EXPENSE VARIANCE
    
    
    (183,455
    )
    
    
    31,376
    
    
    
    (152,079
    )NET INTEREST INCOME VARIANCE
    
    $
    (30,191
    )
    
    $
    (15,788
    )
    
    $
    (45,979
    )
 51




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PROVISION FOR LOAN AND LEASE LOSSES
      NON-INTEREST INCOME (LOSS)
  Net Gain (Loss) on Mortgage Loan Sales and Fees.
  52




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NINE MONTH
    
    
    NINE MONTHQUARTER ENDED
    
    
    QUARTER ENDED
    
    
    PERIOD ENDED
    
    
    PERIOD ENDED(In thousands)
    
    SEPTEMBER 30, 2007
    
    
    SEPTEMBER 30, 2006
    
    
    SEPTEMBER 30, 2007
    
    
    SEPTEMBER 30, 2006Total loan
sales and securitizations (1)
    
    $
    70,274
    
    
    $
    85,700
    
    
    $
    215,018
    
    
    $
    3,694,733MSRs capitalized
    
    $
    1,219
    
    
    $
    1,858
    
    
    $
    3,765
    
    
    $
    48,720
 
 (1)
    
    Total loans sales and securitizations for the nine month period ended September 30, 2006 includes $2.6
million in sales related to the restructuring of prior mortgage loans transfers that were classified as secured
borrowings. Trading Activities.
  TABLE E COMPONENTS OF TRADING ACTIVITIES
 QUARTER ENDED
    
    

NINE
MONTH PERIOD ENDEDSEPTEMBER 30,
    
    
    SEPTEMBER 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net realized losses on sales of securities held for trading
    
    $
    (2,704
    )
    
    $
    (8,892
    )
    
    $
    (7,038
    )
    
    $
    (5,479
    )Gains (losses) on the IO valuation
    
    
    3,014
    
    
    
    2,425
    
    
    
    6,773
    
    
    
    (40,437
    )Net unrealized (losses) gains on trading securities, excluding IOs
    
    
    (22,222
    )
    
    
    733
    
    
    
    (25,973
    )
    
    
    (2,706
    )Net realized and unrealized (losses) gains on derivative instruments
    
    
    (1,993
    )
    
    
    (15,811
    )
    
    
    6,246
    
    
    
    9,576Total
    
    $
    (23,905
    )
    
    $
    (21,545
    )
    
    $
    (19,992
    )
    
    $
    (39,046
    )
  53




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Net (Loss) Gain on Sale of Investment Securities.
 Net Loss on Extinguishment of Liabilities.
 Net Servicing Income.
  TABLE F  NET SERVICING INCOME
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2007
    
    
    2007Servicing fees (net of guarantee fees)
    
    $
    8,419
    
    
    $
    26,803Late charges
    
    
    2,243
    
    
    
    6,852Prepayment penalties
    
    
    127
    
    
    
    490Interest loss
    
    
    (946
    )
    
    
    (2,818
    )Other servicing fees
    
    
    116
    
    
    
    295Servicing income, gross
    
    
    9,959
    
    
    
    31,622Change in fair value of mortgage servicing rights
    
    
    (1,933
    )
    
    
    (8,213
    )Total net servicing income
    
    $
    8,026
    
    
    $
    23,409
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TABLE G  NET SERVICING (LOSS) INCOME
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2006
    
    
    2006Servicing fees (net of guarantee fees)
    
    $
    10,018
    
    
    $
    26,543Late charges
    
    
    2,344
    
    
    
    7,097Prepayment penalties
    
    
    121
    
    
    
    884Interest loss
    
    
    (1,076
    )
    
    
    (3,643
    )Other servicing fees
    
    
    60
    
    
    
    200Servicing income, gross
    
    
    11,467
    
    
    
    31,081Amortization of servicing assets
    
    
    (9,572
    )
    
    
    (22,476
    )Net impairment of servicing assets
    
    
    (4,858
    )
    
    
    (5,005
    )Total net servicing (loss) income
    
    $
    (2,963
    )
    
    $
    3,600
   Commissions, Fees and Other Income.
 TABLE H  COMMISSIONS, FEES AND OTHER INCOME
 QUARTER ENDED
    
    
    NINE MONTH PERIOD ENDEDSEPTEMBER 30,
    
    
    SEPTEMBER 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Retail banking fees
    
    $
    4,847
    
    
    $
    4,731
    
    
    $
    15,341
    
    
    $
    14,490Insurance agency commissions
    
    
    1,982
    
    
    
    2,095
    
    
    
    6,716
    
    
    
    6,854Securities brokerage and asset
management fees and
commissions
    
    
    139
    
    
    
    148
    
    
    
    425
    
    
    
    868Other (loss) income
    
    
    (86
    )
    
    
    418
    
    
    
    987
    
    
    
    6,426Total
    
    $
    6,882
    
    
    $
    7,392
    
    
    $
    23,469
    
    
    $
    28,638
 55




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Net
premium on deposits sold
 NON-INTEREST EXPENSE
  TABLE I  NON INTEREST EXPENSE
 QUARTER ENDED
    
    
    NINE MONTH PERIOD ENDEDSEPTEMBER 30,
    
    
    SEPTEMBER 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Compensation and employee benefits
    
    $
    28,886
    
    
    $
    21,741
    
    
    $
    83,856
    
    
    $
    64,366Taxes, other than payroll and income taxes
    
    
    2,565
    
    
    
    2,807
    
    
    
    8,849
    
    
    
    9,379Advertising
    
    
    2,397
    
    
    
    2,593
    
    
    
    6,327
    
    
    
    8,414Professional services
    
    
    13,475
    
    
    
    10,537
    
    
    
    52,709
    
    
    
    43,915Communication and information systems
    
    
    4,178
    
    
    
    4,430
    
    
    
    13,204
    
    
    
    13,985Occupancy and other office expenses
    
    
    5,039
    
    
    
    6,747
    
    
    
    17,789
    
    
    
    20,691Depreciation and amortization
    
    
    4,129
    
    
    
    5,392
    
    
    
    13,607
    
    
    
    17,020Other
    
    
    12,549
    
    
    
    6,071
    
    
    
    28,714
    
    
    
    17,143Total non-interest expense
    
    $
    73,218
    
    
    $
    60,318
    
    
    $
    225,055
    
    
    $
    194,913
  56




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INCOME TAXES
    57




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58




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BALANCE SHEET AND OPERATING DATA ANALYSIS
 LOAN PRODUCTION
  TABLE J  LOAN PRODUCTION
 QUARTER ENDED
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    ENDED SEPTEMBER 30,(Dollars in Thousands, Except for Average Initial Loan Balance)
    
    2007
    
    2006
    
    2007
    
    2006FHA/VA mortgage loans
Number of loans
    
    
    335
    
    
    
    493
    
    
    
    1,069
    
    
    
    1,515Volume of loans
    
    $
    35,360
    
    
    $
    50,259
    
    
    $
    111,047
    
    
    $
    152,457Percent of total volume
    
    
    10
    %
    
    
    15
    %
    
    
    12
    %
    
    
    9
    %Average initial loan balance
    
    $
    105,552
    
    
    $
    101,945
    
    
    $
    103,879
    
    
    $
    100,632Conventional conforming mortgage loansNumber of loans
    
    
    255
    
    
    
    316
    
    
    
    1,030
    
    
    
    1,167Volume of loans
    
    $
    27,851
    
    
    $
    34,851
    
    
    $
    119,503
    
    
    $
    132,409Percent of total volume
    
    
    8
    %
    
    
    11
    %
    
    
    13
    %
    
    
    8
    %Average initial loan balance
    
    $
    109,220
    
    
    $
    110,288
    
    
    $
    116,022
    
    
    $
    113,461Conventional non  conforming mortgage loans(1)Number of loans
    
    
    1,040
    
    
    
    751
    
    
    
    1,988
    
    
    
    8,055Volume of loans
    
    $
    130,954
    
    
    $
    77,878
    
    
    $
    259,298
    
    
    $
    856,450Percent of total volume
    
    
    37
    %
    
    
    24
    %
    
    
    29
    %
    
    
    51
    %Average initial loan balance
    
    $
    125,917
    
    
    $
    103,699
    
    
    $
    130,431
    
    
    $
    106,325Other(2)Number of loans
    
    
    1,935
    
    
    
    699
    
    
    
    5,928
    
    
    
    2,479Volume of loans
    
    $
    159,854
    
    
    $
    166,131
    
    
    $
    419,823
    
    
    $
    550,537Percent of total volume
    
    
    45
    %
    
    
    50
    %
    
    
    46
    %
    
    
    32
    %Total loans
Number of loans
    
    
    3,565
    
    
    
    2,259
    
    
    
    10,015
    
    
    
    13,216Volume of loans
    
    $
    354,019
    
    
    $
    329,119
    
    
    $
    909,671
    
    
    $
    1,691,853
 
 (1) Includes $6.6 million and $8.6 million in second mortgages for the quarters ended September 30, 2007 and 2006,
respectively, and $15.8 59




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million and $67.5 million in second mortgages for the nine month periods ended September 30, 2007 and
2006, respectively.(2)
    
    Consists of construction loans on residential projects, mortgage loans secured by
multi-family and commercial properties as well as other commercial, land and consumer loans.     TABLE K

LOAN ORIGINATION SOURCES
 NINE MONTH PERIOD ENDED SEPTEMBER 30,2007
    
    2006Puerto Rico
    
    US
    
    Total
    
    Puerto Rico
    
    US
    
    TotalRetail
    
    
    50
    %
    
    
    
    
    
    
    50
    %
    
    
    62
    %
    
    
    
    
    
    
    62
    %Wholesale(1)
    
    
    4
    %
    
    
    
    
    
    
    4
    %
    
    
    4
    %
    
    
    
    
    
    
    4
    %New Housing Developments
    
    
    23
    %
    
    
    2
    %
    
    
    25
    %
    
    
    19
    %
    
    
    3
    %
    
    
    22
    %Multifamily
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    %
    
    
    1
    %Other(2)
    
    
    19
    %
    
    
    2
    %
    
    
    21
    %
    
    
    9
    %
    
    
    2
    %
    
    
    11
    %
 
 (1)
    
    Refers to purchases of mortgage loans from other financial institutions and mortgage lenders.(2)
    
    Refers to commercial, consumer and land loans originated through the banking subsidiaries and other specialized units. MORTGAGE LOAN SERVICING
  60




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TABLE L

MORTGAGE LOAN SERVICING

(Dollars in Thousands, Except for Average Size of Loans)
 AS OF SEPTEMBER 30,2007
    
    
    2006COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END:GNMA
    
    $
    2,117,982
    
    
    $
    2,168,023FHLMC/FNMA
    
    
    3,826,582
    
    
    
    4,033,627Other conventional mortgage loans(1)(2)
    
    
    7,875,047
    
    
    
    9,304,017Total servicing portfolio
    
    $
    13,819,611
    
    
    $
    15,505,667SELECTED DATA REGARDING MORTGAGE LOANS SERVICED:Number of loans
    
    
    155,398
    
    
    
    171,059Weighted- average interest rate
    
    
    6.56
    %
    
    
    6.59
    %Weighted- average remaining maturity (months)
    
    
    250
    
    
    
    254Weighted- average gross servicing fee rate  loans serviced to others
    
    
    0.3789
    %
    
    
    0.3950
    %Average servicing portfolio(3)
    
    $
    14,537,638
    
    
    $
    15,709,088Principal prepayments
    
    $
    1,064,972
    
    
    $
    1,102,310Constant prepayment rate
    
    
    9
    %
    
    
    9
    %Average size of loans
    
    $
    88,930
    
    
    $
    90,645Servicing assets, net
    
    $
    163,854
    
    
    $
    178,010DELINQUENT MORTGAGE LOANS AND PENDING
FORECLOSURES AT PERIOD END:60-89 days past due
    
    
    2.10
    %
    
    
    1.59
    %90 days or more past due
    
    
    1.95
    %
    
    
    1.73
    %Total delinquencies excluding foreclosures
    
    
    4.05
    %
    
    
    3.32
    %Foreclosures pending
    
    
    3.03
    %
    
    
    2.22
    %SERVICING PORTFOLIO ACTIVITY, FOR THE NINE MONTHS PERIOD ENDED
SEPTEMBER 30, 2007 AND 2006:Beginning servicing portfolio
    
    $
    15,287,120
    
    
    $
    15,727,604Add:Loans funded and purchased(4)
    
    
    492,036
    
    
    
    1,144,559Bulk servicing acquired
    
    
    
    
    
    
    16,376Less:Servicing release sales and transferred(5)
    
    
    738,699
    
    
    
    39,891Run-off(6)
    
    
    1,220,846
    
    
    
    1,342,981Ending servicing portfolio
    
    $
    13,819,611
    
    
    $
    15,505,667
 
 (1)
    
    Includes $3.3 billion and $3.6 billion of loans owned by Doral Financial at September 30, 2007 and 2006, respectively, which represented 24% and 23% of the total servicing portfolio as of such dates.(2)
    
    Includes portfolios of $209.4 million and $253.7 million at September 30, 2007 and 2006, respectively, of delinquent FHA/VA and conventional mortgage loans sold to third parties.(3)
    
    Includes the average balance of loans owned by Doral Financial of $3.3 billion and $4.8 billion at September 30, 2007 and 2006, respectively.(4)
    
    Excludes approximately $417.6 million and $547.3 million of commercial, consumer, construction and other non-mortgage loans originated
by Doral Financial but not part of the mortgage
servicing-portfolio as of September 30, 2007 and 2006, respectively.(5)
    
    Includes $682.1 million of principal balance of loans subserviced by the Company and transferred during the second quarter of 2007.(6)
    
    Run-off refers to regular amortization of loans, prepayments and foreclosures. 61




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LIQUIDITY AND CAPITAL RESOURCES
  Impact of Recapitalization of the Holding Company and Restructuring of Mortgage Operations on
Liquidity
     Liquidity of the Banking Subsidiaries
  62




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Uses of Cash
     Sources of Cash
  63




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TABLE M  SOURCES OF BORROWINGS  (Dollars in thousands)
 AS OF SEPTEMBER 30, 2007
    
    AS OF DECEMBER 31, 2006AMOUNT
    
    AVERAGE
    
    AMOUNT
    
    AVERAGEOUTSTANDING
    
    RATE
    
    OUTSTANDING
    
    RATEDeposits
    
    $
    4,095,718
    
    
    
    4.05
    %
    
    $
    4,250,760
    
    
    
    3.90
    %Repurchase Agreements
    
    
    1,496,537
    
    
    
    5.00
    %
    
    
    3,899,365
    
    
    
    4.25
    %Advances from FHLB
    
    
    1,271,000
    
    
    
    5.01
    %
    
    
    1,034,500
    
    
    
    4.78
    %Loans Payable
    
    
    416,279
    
    
    
    6.88
    %
    
    
    444,443
    
    
    
    6.92
    %Notes Payable
    
    
    283,995
    
    
    
    7.31
    %
    
    
    923,913
    
    
    
    6.57
    %
     TABLE N  AVERAGE DEPOSIT BALANCE  (Dollars in thousands)
 NINE MONTH PERIOD ENDED
    
    
    YEAR ENDEDSEPTEMBER 30, 2007
    
    
    DECEMBER 31, 2006AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    AVERAGEBALANCE
    
    
    RATE
    
    
    BALANCE
    
    
    RATECertificates of deposit
    
    $
    2,732,029
    
    
    
    4.88
    %
    
    $
    2,945,920
    
    
    
    4.27
    %Regular passbook savings
    
    
    401,518
    
    
    
    3.68
    %
    
    
    449,732
    
    
    
    3.28
    %NOW accounts
    
    
    585,466
    
    
    
    3.48
    %
    
    
    527,163
    
    
    
    2.80
    %Non-interest bearing
    
    
    320,815
    
    
    
    
    
    
    
    340,772
    
    
    
    Total deposits
    
    $
    4,039,828
    
    
    
    4.17
    %
    
    $
    4,263,587
    
    
    
    3.65
    %
 64




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TABLE O  CERTIFICATES OF DEPOSIT MATURITIES  (In thousands)
 AMOUNTCertificates of deposit maturing:Three months or less
    
    $
    359,398Over three through six months
    
    
    639,914Over six through twelve months
    
    
    899,652Over twelve months
    
    
    552,705Total
    
    $
    2,451,669
  REGULATORY CAPITAL RATIOS
  TABLE P  REGULATORY CAPITAL RATIOS
 As of September 30, 2007DORAL
    
    DORAL
    
    DORALFINANCIAL(2)
    
    BANK PR
    
    BANK NYTotal Capital (Total capital to risk- weighted assets)
    
    
    19.4
    %
    
    
    16.2
    %
    
    
    12.1
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    18.4
    %
    
    
    15.0
    %
    
    
    11.3
    %Leverage Ratio(1)
    
    
    11.6
    %
    
    
    7.0
    %
    
    
    9.8
    %
 
 (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 is not subject to regulatory capital requirements as of September 30, 2007.
Ratios were prepared as if the company were subject to the requirement for comparability purposes. 65




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As of December 31, 2006DORAL
    
    DORAL
    
    DORALFINANCIAL
    
    BANK PR
    
    BANK NYTotal Capital (Total capital to risk- weighted assets)
    
    
    13.7
    %
    
    
    21.1
    %
    
    
    16.3
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    10.3
    %
    
    
    19.8
    %
    
    
    15.8
    %Leverage Ratio(1)
    
    
    4.5
    %
    
    
    6.8
    %
    
    
    10.3
    %
 
 (1)
    
    Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR and
Tier 1 capital to adjusted total assets in the case of Doral Bank NY.   Legal
Proceedings
  ASSETS AND LIABILITIES
   OFF-BALANCE SHEET ACTIVITIES
  66




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TABLE Q  LOANS SUBJECT TO RECOURSE BY LOAN TYPE
 WeightedLoan
    
    
    Average
    
    
    Outstanding
    
    
    Total(Dollars in thousands)
    
    Count
    
    
    LTV
    
    
    Balance
    
    
    ExposureFNMA sales
    
    
    8,742
    
    
    
    83
    
    
    $
    994,931
    
    
    $
    949,831Non-conforming
loans
    
    
    6,353
    
    
    
    52
    
    
    
    204,079
    
    
    
    66,041FHLMC sales
    
    
    1,495
    
    
    
    77
    
    
    
    98,610
    
    
    
    98,610Total
    
    
    16,590
    
    
    
    78
    
    
    $
    1,297,620
    
    
    $
    1,114,482
     Risk Factors
 67




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CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
  TABLE R  CONTRACTUAL OBLIGATIONS
 (In thousands)
    
    PAYMENT DUE BY PERIODLESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTERCONTRACTUAL OBLIGATIONS(1)
    
    TOTAL
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSDeposits
    
    $
    4,095,718
    
    
    $
    3,505,239
    
    
    $
    534,046
    
    
    $
    52,449
    
    
    $
    3,984Repurchase agreements(2)
    
    
    1,496,537
    
    
    
    946,537
    
    
    
    550,000
    
    
    
    
    
    
    
    Advances from FHLB(2)
    
    
    1,271,000
    
    
    
    971,000
    
    
    
    200,000
    
    
    
    100,000
    
    
    
    Loans payable(3)
    
    
    416,279
    
    
    
    49,628
    
    
    
    84,516
    
    
    
    67,957
    
    
    
    214,178Notes payable
    
    
    283,995
    
    
    
    5,507
    
    
    
    9,301
    
    
    
    36,495
    
    
    
    232,692Other liabilities
    
    
    407,310
    
    
    
    405,310
    
    
    
    2,000
    
    
    
    
    
    
    
    Non-cancelable operating leases
    
    
    49,271
    
    
    
    6,551
    
    
    
    11,372
    
    
    
    7,140
    
    
    
    24,208Total Contractual Cash Obligations
    
    $
    8,020,110
    
    
    $
    5,889,772
    
    
    $
    1,391,235
    
    
    $
    264,041
    
    
    $
    475,062
 
 (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 10.16 % to estimate the repayments. TABLE S  OTHER COMMERCIAL
COMMITMENTS (1)(2)
 (In thousands)
    
    AMOUNT OF COMMITMENT EXPIRATION PER PERIODTOTALOTHER COMMERCIAL
    
    AMOUNT
    
    
    LESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTERCOMMITMENTS
    
    COMMITTED
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSCommitments to extend credit
    
    $
    258,052
    
    
    $
    182,934
    
    
    $
    69,362
    
    
    $
    5,755
    
    
    $
    1Commitments to sell mortgage-backed
securities and loans
    
    
    96,981
    
    
    
    96,981
    
    
    
    
    
    
    
    
    
    
    
    Commercial and financial standby letters of credit
    
    
    4,855
    
    
    
    968
    
    
    
    3,887
    
    
    
    
    
    
    
    Maximum contractual recourse exposure
    
    
    1,114,482
    
    
    
    490,459
    
    
    
    111,989
    
    
    
    
    
    
    
    512,034Total
    
    $
    1,474,370
    
    
    $
    771,342
    
    
    $
    185,238
    
    
    $
    5,755
    
    
    $
    512,035
 
 (1)
    
    Refer to Off-Balance Sheet Activities above for additional information regarding other commercial commitments of the Company.(2)
    
    As of September 30, 2007, the Company entered into a commitment to
purchase approximately $276.0 million of residential mortgage
loans from a third party, at a discount that was determined on
October 10, 2007, the settlement date. RISK MANAGEMENT
  Interest Rate and Market Risk Management
  68




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Doral Financials Risk Profile
    Market Value
    
    Net Interest IncomeAs of September 30, 2007
    
    Of Equity Risk
    
    Risk(1)+ 100 BPS
    
    
    (10.4
    )%
    
    
    5.4
    %- 100 BPS
    
    
    3.6
    %
    
    
    (7.1
    )%
 Market Value of
    
    Net Interest IncomeAs of December 31, 2006
    
    Equity Risk
    
    Risk(1)+ 100 BPS
    
    
    (24.0
    )%
    
    
    5.3
    %- 100 BPS
    
    
    7.8
    %
    
    
    (7.5
    )%
 
 (1)
    
    Based on 12-month forward change in net interest income.  69




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(In thousands)
    
    September 30, 2007
    
    December 31, 2006Change in Fair
    
    Change in
    
    Change in Fair
    
    Change inValue of
    
    Fair Value of
    
    Value of
    
    Fair Value ofAvailable for
    
    Held to
    
    Available for
    
    Held toChange in interest
    
    Sale Securities
    
    Maturity
    
    Sale Securities
    
    Maturityrates (basis points)
    
    and FHLB Stock
    
    Securities
    
    and FHLB Stock
    
    Securities+200
    
    $
    (6,892
    )
    
    $
    (280,332
    )
    
    $
    (200,632
    )
    
    $
    (329,435
    )+100
    
    
    (3,181
    )
    
    
    (133,198
    )
    
    
    (97,882
    )
    
    
    (152,734
    )+50
    
    
    (1,521
    )
    
    
    (64,759
    )
    
    
    (47,546
    )
    
    
    (73,206
    )Base
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -50
    
    
    1,388
    
    
    
    60,204
    
    
    
    43,007
    
    
    
    64,452-100
    
    
    2,641
    
    
    
    115,682
    
    
    
    78,189
    
    
    
    121,483-200
    
    
    4,813
    
    
    
    212,768
    
    
    
    131,641
    
    
    
    219,065
  Derivatives
  TABLE T  INTEREST RATE SWAPS  (Dollars in thousands)
 INTEREST
    
    INTERESTNOTIONAL
    
    MATURITY
    
    
    
    RATE
    
    RATE
    
    FAIRAMOUNT
    
    DATE
    
    PURPOSE
    
    RECEIVED
    
    PAID
    
    VALUE$200,000
    
    November, 2009
    
    To protect the
spread of the
variable IOs

    5.356%
    
    3.773%
    
    $3,531$200,000
    
    November, 2009
    
    To protect the
spread of the
variable IOs

    
    5.510%
    
    3.975%
    
    $2,871
 70




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TABLE U  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
    
    $187$15,000
    
    September, 2011
    
       1-month LIBOR and 5.50%
    
    $134
    
    $126$15,000
    
    September, 2012
    
    1-month LIBOR and 6.00%
    
    $143
    
    $134
   TABLE V  FAIR VALUE RECONCILIATION
 Nine Month Period Ended(In thousands)
    
    September 30, 2007Fair value of contracts outstanding at the beginning of the period
    
    $
    26,282Contracts realized or otherwise settled during the period
    
    
    11,187Fair value of new contracts entered into during the period
    
    
    (9,705
    )Changes in fair values during the period
    
    
    (20,987
    )Fair value of contracts outstanding at the end of the period
    
    $
    6,777
 TABLE W  SOURCES OF FAIR VALUE
 (In thousands)
    
    Payment Due by PeriodMaturity
    
    
    
    
    
    
    
    
    
    
    Maturityless than
    
    
    Maturity
    
    
    Maturity
    
    
    in excess
    
    
    Total FairAs of September 30, 2007
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    of 5 Years
    
    
    ValueSources of Fair ValuePrices actively quoted
    
    $
    (72
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (72
    )Prices provided by
other external
sources
    
    
    
    
    
    
    6,589
    
    
    
    260
    
    
    
    
    
    
    
    6,849$
    (72
    )
    
    $
    6,589
    
    
    $
    260
    
    
    $
    
    
    
    $
    6,777
 71




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TABLE X  DERIVATIVE COUNTERPARTY CREDIT EXPOSURE
 (Dollars in thousands)
    
    September 30, 2007Weighted AverageNumber of
    
    
    
    
    
    
    Total Exposure At Fair
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA
    
    
    1
    
    
    $
    455,000
    
    
    $
    3,790
    
    
    $
    
    
    
    $
    3,790
    
    
    
    2.33A+
    
    
    1
    
    
    
    29,000
    
    
    
    
    
    
    
    (72
    )
    
    
    (72
    )
    
    
    0.03Total Derivatives
    
    
    2
    
    
    $
    484,000
    
    
    $
    3,790
    
    
    $
    (72
    )
    
    $
    3,718
    
    
    
    2.19
 
 (1)
    
    Based on the S&P Long Term Issuer Credit Ratings as of
September 30, 2007.(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, 2006Weighted AverageNumber of
    
    
    
    
    
    
    Total Exposure
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    At Fair Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA-
    
    
    2
    
    
    $
    1,428,649
    
    
    $
    15,763
    
    
    $
    (2,080
    )
    
    $
    13,683
    
    
    
    1.15A+
    
    
    3
    
    
    
    1,202,764
    
    
    
    3,938
    
    
    
    (2,262
    )
    
    
    1,676
    
    
    
    0.30Subtotal
    
    
    5
    
    
    
    2,631,413
    
    
    $
    19,701
    
    
    $
    (4,342
    )
    
    $
    15,359
    
    
    
    0.76Other derivatives(4)
    
    
    
    
    
    
    2,500,000Total Derivatives
    
    
    
    
    
    $
    5,131,413
 
 (1)
    
    Based on the S&P Long Term Issuer Credit Ratings as of
December 31, 2006.(2)
    
    Based on legal entities. Affiliated legal entities are reported separately.(3)
    
    For each counterparty, this amount includes derivatives with a positive fair value including the related accrued interest receivable/payable (net).(4)
    
    For the year ended December 31, 2006, the Company recognized a realized gain of $2.5 million and an unrealized loss of $1.0 million from a derivative resulting from certain gain-sharing
agreements created in connection with certain mortgage loan sales. The Company has the right to share, on a limited basis, the gains realized by the buyers of such loans within specified time periods from
subsequent sales or securitizations. 72




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Credit Risk
         73




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##### Table of Contents



As of
    
    
    As of(Dollars in thousands)
    
    September 30, 2007
    
    
    December 31, 2006Construction loans(1)
    
    $
    704,463
    
    
    $
    817,352Total undisbursed funds under existing commitments
    
    $
    183,842
    
    
    $
    250,422Construction
loans, past due more than 90 days
    
    $
    114,939
    
    
    $
    75,868Construction loans, classified as substandard, but not more
than 90 days in arrears
    
    
    104,831
    
    
    
    65,270Total non-performing construction loans
    
    $
    219,770
    
    
    $
    141,138Net charge offs  Construction loans
    
    $
    513
    
    
    $
    826Allowance for loan losses  Construction loans
    
    $
    37,149
    
    
    $
    37,829Non-performing construction loans to total construction loans
    
    
    31.20
    %
    
    
    17.27
    %Allowance for loan losses  construction loans to total
construction loans
    
    
    5.27
    %
    
    
    4.63
    %Net charge-offs to total construction loans
    
    
    0.07
    %
    
    
    0.10
    %
 
 (1)
    
    Includes $630.1 million and $680.6 million of construction loans for residential housing projects
as of September 30, 2007 and December 31, 2006, respectively. Also includes $74.4 million and $136.8 million of
construction loans for commercial, condominiums and multi-family projects as of September 30, 2007 and December
31, 2006, respectively. Non-performing assets and allowance for loan and lease losses
      74




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TABLE Y  NON-PERFORMING ASSETS  (Dollars in thousands)
 AS OF
    
    
    AS OFSEPTEMBER 30, 2007
    
    
    DECEMBER 31, 2006Non-accrual loans:Residential mortgage loans  held for sale (1) (2)
    
    $
    1,934
    
    
    $
    62,466Residential mortgage loans  held for investment(2)
    
    
    238,748
    
    
    
    110,332Total non-accrual residential mortgage loans
    
    
    240,682
    
    
    
    172,798Other lending activities:Construction loans
    
    
    114,939
    
    
    
    75,868Commercial real estate loans
    
    
    73,642
    
    
    
    47,162Commercial real estate loans  held for sale
    
    
    
    
    
    
    3,384Consumer loans
    
    
    4,292
    
    
    
    2,813Commercial non-real estate loans
    
    
    3,018
    
    
    
    5,571Lease financing receivable
    
    
    802
    
    
    
    1,075Land loans
    
    
    855
    
    
    
    Total non-accrual other lending activities
    
    
    197,548
    
    
    
    135,873Construction and commercial loans, classified as substandard, but
not more than 90 days in arrears
    
    
    121,131
    
    
    
    68,770Total non-performing loans(3)
    
    
    559,361
    
    
    
    377,441OREO
    
    
    35,404
    
    
    
    33,197Total NPAs of Doral Financial (consolidated)
    
    $
    594,765
    
    
    $
    410,638Total NPAs as a percentage of the loans portfolio, net, and OREO
(excluding GNMA defaulted loans)
    
    
    12.53
    %
    
    
    8.12
    %Total NPAs of Doral Financial as a percentage of
consolidated total assets
    
    
    6.26
    %
    
    
    3.47
    %Total non-performing loans to total loans (excluding GNMA defaulted
loans)
    
    
    11.57
    %
    
    
    7.36
    %Ratio of
allowance for loan and lease losses to total non-performing loans (excluding loans held for sale) at end of
period(4)
    
    
    15.72
    %
    
    
    21.58
    %
 
 (1)
    
    Does not include approximately $126.8 million and $100.3 million of GNMA defaulted loans (for which the Company has the option to buy-back from the pools serviced),
included as part of the mortgage loans held for sale portfolio as of September 30, 2007 and December 31, 2006, respectively.(2)
    
    During 2007, the Company transferred $1.4 billion of loans from the loans held for sale portfolio to the loans receivable portfolio.(3)
    
    Total non-performing loans include $24.3 million of
delinquent loans repurchased during the second quarter of 2007 in connection with a recourse agreement with a local
financial institution.(4)
    
    Refer to non-performing assets allowance for loan and lease losses above for additional information regarding the Companys methodology for assessing the adequacy
of the allowance for loan and lease losses.  75




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TABLE Z  ALLOWANCE FOR LOAN AND LEASE LOSSES
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(Dollars in thousands)2007
    
    
    2006
    
    
    2007
    
    
    2006Allowance for Loan and Lease Losses:Balance at beginning of period
    
    $
    85,875
    
    
    $
    44,145
    
    
    $
    67,233
    
    
    $
    35,044Provision (recovery) for loan and lease losses:Construction loans
    
    
    (1,822
    )
    
    
    1,394
    
    
    
    76
    
    
    
    7,956Residential mortgage loans
    
    
    1,489
    
    
    
    2,383
    
    
    
    14,231
    
    
    
    3,171Commercial real estate loans
    
    
    3,503
    
    
    
    3,918
    
    
    
    6,801
    
    
    
    4,553Consumer loans
    
    
    1,275
    
    
    
    1,441
    
    
    
    6,588
    
    
    
    3,769Lease financing
    
    
    119
    
    
    
    246
    
    
    
    310
    
    
    
    679Commercial non-real estate loans
    
    
    912
    
    
    
    862
    
    
    
    2,448
    
    
    
    1,092Land secured loans
    
    
    59
    
    
    
    (118
    )
    
    
    (81
    )
    
    
    (49
    )Other
    
    
    (473
    )
    
    
    
    
    
    
    
    
    
    
    Total provision for loan and lease losses
    
    
    5,062
    
    
    
    10,126
    
    
    
    30,373
    
    
    
    21,171Charge  offs:Construction loans
    
    
    
    
    
    
    
    
    
    
    (513
    )
    
    
    Residential mortgage loans
    
    
    (879
    )
    
    
    
    
    
    
    (879
    )
    
    
    Commercial real estate loans
    
    
    (68
    )
    
    
    
    
    
    
    (947
    )
    
    
    (133
    )Consumer loans
    
    
    (1,653
    )
    
    
    (1,263
    )
    
    
    (4,832
    )
    
    
    (2,993
    )Lease financing
    
    
    (484
    )
    
    
    
    
    
    
    (869
    )
    
    
    Commercial non-real estate loans
    
    
    (879
    )
    
    
    (197
    )
    
    
    (2,365
    )
    
    
    (490
    )Total charge-offs
    
    
    (3,963
    )
    
    
    (1,460
    )
    
    
    (10,405
    )
    
    
    (3,616
    )Recoveries:Commercial real estate loans
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    14Consumer loans
    
    
    92
    
    
    
    51
    
    
    
    319
    
    
    
    178Lease financing
    
    
    43
    
    
    
    
    
    
    
    43
    
    
    
    Commercial non-real estate loans
    
    
    34
    
    
    
    141
    
    
    
    53
    
    
    
    207Total recoveries
    
    
    169
    
    
    
    200
    
    
    
    415
    
    
    
    399Net charge-offs
    
    
    (3,794
    )
    
    
    (1,260
    )
    
    
    (9,990
    )
    
    
    (3,217
    )Other
    
    
    473
    
    
    
    (93
    )
    
    
    
    
    
    
    (80
    )Balance at end of period
    
    $
    87,616
    
    
    $
    52,198
    
    
    $
    87,616
    
    
    $
    52,918Allowance for loan losses as a percentage of
loans receivable outstanding, at the end of period
    
    
    1.94
    %
    
    
    1.52
    %
    
    
    1.94
    %
    
    
    1.52
    %Provision for loan losses to net charge-offs on an
annualized basis
    
    
    133.42
    %
    
    
    803.65
    %
    
    
    304.03
    %
    
    
    658.10
    %Net charge-offs to average loans receivable
outstanding on an annualized basis
    
    
    0.08
    %
    
    
    0.04
    %
    
    
    0.26
    %
    
    
    0.09
    %
 76




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##### Table of Contents



Operational
Risk
  Overview
of Operational Risk Management
   Internal
Control Over Financial Reporting
  Liquidity Risk
  General Business, Economic and Political Conditions
  77




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Control and Procedures
   78




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##### Table of Contents



Changes in Internal Control Over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  79




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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
    80




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##### Table of Contents



SIGNATURES
  DORAL FINANCIAL CORPORATION
(Registrant)Date: November 9, 2007
    /s/ Glen R. WakemanGlen R. WakemanChief Executive Officer and President Date: November 9, 2007
    /s/ Marangal I. DomingoMarangal I. DomingoExecutive Vice President and
Chief Financial Officer 81




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    
    
    Description10.1
    
    -
    
    Securityholders and Registration Rights Agreement, dated as of July 19, 2007,
between Doral Financial Corporation and Doral Holding Delaware, LLC
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed with the SEC on July 26, 2007).10.2
    
    -
    
    Advisory Services Agreements, dated as of July 19, 2007, between Doral
Financial Corporation and Bear Sterns Merchant Manager III, L.P. (incorporated
by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the
SEC on July 26, 2007).12.1
    
    -
    
    Computation of Ratio of Earnings to Fixed Charges.12.2
    
    -
    
    Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.31.1
    
    -
    
    CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    -
    
    CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    -
    
    CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    -
    
    CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 82