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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 March 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 COMMISSION FILE NUMBER 0-17224
 DORAL FINANCIAL CORPORATION
  Puerto Rico
    
    66-0312162(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification number)1451 F.D. Roosevelt Avenue,
    
    00920-2717San Juan, Puerto Rico
    
    (Zip Code)(Address of principal executive offices)
 
 
 þ o
  Large accelerated filer o

 

    Accelerated filer þ

 

Non-accelerated filer   o
(Do not check if a smaller reporting company)

    

 Smaller reporting company o
 o þ




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##### 



DORAL FINANCIAL CORPORATION
INDEX PAGE
 PAGEPART I  FINANCIAL INFORMATION
    
    
    3Item 1  Financial Statements
    
    
    3Consolidated Statements of Financial Condition (Unaudited) as of March 31, 2008 and
December 31, 2007
    
    
    3Consolidated Statements of Loss (Unaudited)  Quarters ended March 31, 2008 and March
31, 2007
    
    
    4Consolidated Statements of Changes in Stockholders Equity (Unaudited)  Quarters ended
March 31, 2008 and March 31, 2007
    
    
    5Consolidated Statements of Comprehensive Income (Loss) (Unaudited)  Quarters ended
March 31, 2008 and March 31, 2007
    
    
    6Consolidated Statements of Cash Flows (Unaudited)  Quarter ended March 31, 2008 and
March 31, 2007
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    36Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    
    70Item 4  Controls and Procedures
    
    
    71PART II  OTHER INFORMATION
    
    
    71Item 1  Legal Proceedings
    
    
    72Item 1A  Risk Factors
    
    
    72Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    72Item 3  Defaults Upon Senior Securities
    
    
    72Item 4  Submission of Matters to a Vote of Security Holders
    
    
    72Item 5  Other Information
    
    
    72Item 6  Exhibits
    
    
    72SIGNATURES
    
    
    73EX-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
 MARCH 31,
    
    
    DECEMBER 31,2008
    
    
    2007ASSETSCash and due from banks
    
    $
    84,016
    
    
    $
    67,884Money market investments:Money market investments with creditors right to repledge
    
    
    10,994
    
    
    
    199,795Other money market investments
    
    
    478,124
    
    
    
    317,490Total money market investments
    
    
    489,118
    
    
    
    517,285Securities purchased under agreements to resell
    
    
    
    
    
    
    204,000Pledged investment securities that can be repledged:Securities held for trading, at fair value
    
    
    1,888
    
    
    
    14,070Securities available for sale, at fair value
    
    
    1,742,022
    
    
    
    891,961Total pledged investment securities that can be repledged
    
    
    1,743,910
    
    
    
    906,031Other investment securities:Securities held for trading, at fair value
    
    
    203,242
    
    
    
    262,392Securities available for sale, at fair value
    
    
    1,519,706
    
    
    
    1,029,979Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    120,442
    
    
    
    73,867Total other investment securities
    
    
    1,843,390
    
    
    
    1,366,238Total investment securities
    
    
    3,587,300
    
    
    
    2,272,269Loans:Loans held for sale, at lower of cost or market
    
    
    376,688
    
    
    
    418,556Loans receivable, net of allowance for loan and lease losses (2008 - $121,182; 2007 - $124,733)
    
    
    5,028,531
    
    
    
    4,926,200Total loans
    
    
    5,405,219
    
    
    
    5,344,756Receivables and mortgage-servicing advances
    
    
    60,682
    
    
    
    62,098Accrued interest receivable
    
    
    43,225
    
    
    
    42,434Servicing assets, net
    
    
    139,570
    
    
    
    150,238Premises and equipment, net
    
    
    104,591
    
    
    
    106,317Real estate held for sale, net
    
    
    41,116
    
    
    
    38,154Assets to be disposed of by sale
    
    
    8,496
    
    
    
    8,970Deferred tax asset
    
    
    404,777
    
    
    
    392,860Other assets
    
    
    103,327
    
    
    
    97,113Total assets
    
    $
    10,471,437
    
    
    $
    9,304,378LIABILITIESDeposits:Non-interest-bearing deposits
    
    $
    279,070
    
    
    $
    242,821Interest-bearing deposits
    
    
    3,849,465
    
    
    
    4,025,203Total Deposits
    
    
    4,128,535
    
    
    
    4,268,024Securities sold under agreements to repurchase
    
    
    2,182,152
    
    
    
    1,444,363Advances from FHLB
    
    
    1,819,000
    
    
    
    1,234,000Loans payable
    
    
    388,926
    
    
    
    402,701Notes payable
    
    
    281,308
    
    
    
    282,458Accrued expenses and other liabilities
    
    
    392,611
    
    
    
    326,125Total liabilities
    
    
    9,192,532
    
    
    
    7,957,671STOCKHOLDERS EQUITYPreferred stock, $1 par value; 40,000,000 shares authorized; 9,015,000 shares issued and
outstanding, at aggregate liquidation preference value:Perpetual noncumulative nonconvertible preferred stock (Series A, B and C)
    
    
    228,250
    
    
    
    228,250Perpetual cumulative convertible preferred stock
    
    
    345,000
    
    
    
    345,000Common stock, $0.01 par value; 97,500,000 shares authorized; 53,810,110 shares issued and
outstanding
    
    
    538
    
    
    
    538Additional paid-in capital
    
    
    849,081
    
    
    
    849,081Legal surplus
    
    
    23,596
    
    
    
    23,596Accumulated deficit
    
    
    (77,233
    )
    
    
    (66,610
    )Accumulated other comprehensive loss, net of income tax benefit of $14,875 and $6,075 in 2008 and
2007, respectively
    
    
    (90,327
    )
    
    
    (33,148
    )Total stockholders equity
    
    
    1,278,905
    
    
    
    1,346,707Total liabilities and stockholders equity
    
    $
    10,471,437
    
    
    $
    9,304,378
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF LOSS
 (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
 (UNAUDITED)
 QUARTER ENDEDMARCH 31,2008
    
    
    2007Interest income:Loans
    
    $
    85,382
    
    
    $
    89,593Mortgage-backed securities
    
    
    19,102
    
    
    
    22,240Interest-only strips (IOs)
    
    
    1,674
    
    
    
    1,494Investment securities
    
    
    14,766
    
    
    
    27,812Other interest-earning assets
    
    
    7,184
    
    
    
    16,109Total interest income
    
    
    128,108
    
    
    
    157,248Interest expense:Deposits
    
    
    42,648
    
    
    
    42,788Securities sold under agreements to repurchase
    
    
    18,313
    
    
    
    39,636Advances from FHLB
    
    
    17,258
    
    
    
    13,608Loans payable
    
    
    5,509
    
    
    
    7,628Notes payable
    
    
    5,336
    
    
    
    15,424Total interest expense
    
    
    89,064
    
    
    
    119,084Net interest income
    
    
    39,044
    
    
    
    38,164Provision for loan and lease losses
    
    
    4,786
    
    
    
    5,989Net interest income after provision for loan and lease losses
    
    
    34,258
    
    
    
    32,175Non-interest income:Net gain (loss) on mortgage loan sales and fees
    
    
    2,368
    
    
    
    (537
    )Net gain (loss) on securities held for trading, including gains
and losses on the fair value of IOs
    
    
    7,668
    
    
    
    (1,978
    )Net gain (loss) on sale of investment securities
    
    
    194
    
    
    
    (268
    )Servicing (loss) income (net of mark-to-market adjustment)
    
    
    (2,711
    )
    
    
    6,000Commissions, fees and other income
    
    
    9,860
    
    
    
    8,411Total non-interest income
    
    
    17,379
    
    
    
    11,628Non-interest expenses:Compensation and benefits
    
    
    19,078
    
    
    
    26,562Taxes, other than payroll and income taxes
    
    
    2,422
    
    
    
    2,847Advertising
    
    
    2,232
    
    
    
    1,362Professional services
    
    
    5,934
    
    
    
    19,442Communication and information systems
    
    
    5,480
    
    
    
    4,054Occupancy and other office expenses
    
    
    5,969
    
    
    
    6,299Depreciation and amortization
    
    
    4,055
    
    
    
    5,051Other
    
    
    9,393
    
    
    
    9,601Total non-interest expenses
    
    
    54,563
    
    
    
    75,218Loss before income taxes
    
    
    (2,926
    )
    
    
    (31,415
    )Income tax (benefit) expense
    
    
    (628
    )
    
    
    5,894Net loss
    
    $
    (2,298
    )
    
    $
    (37,309
    )Net loss attributable to common shareholders
    
    $
    (10,623
    )
    
    $
    (45,634
    )Net loss per common share(1):Basic
    
    $
    (0.20
    )
    
    $
    (8.45
    )Diluted
    
    $
    (0.20
    )
    
    $
    (8.45
    )
 
 (1)
    
    Net loss per common share for the quarter ended March 31, 2007 reflects 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)
 QUARTER ENDEDMARCH 31,2008
    
    
    2007PREFERRED STOCK
    
    $
    573,250
    
    
    $
    573,250COMMON STOCK
    
    
    538
    
    
    
    107,948ADDITIONAL PAID-IN CAPITAL:Balance at beginning of period
    
    
    849,081
    
    
    
    166,495Stock-based compensation recognized
    
    
    
    
    
    
    323Balance at end of period
    
    
    849,081
    
    
    
    166,818LEGAL SURPLUS
    
    
    23,596
    
    
    
    23,596(ACCUMULATED DEFICIT) RETAINED EARNINGS:Balance at beginning of period
    
    
    (66,610
    )
    
    
    139,051Net loss
    
    
    (2,298
    )
    
    
    (37,309
    )Cumulative effect of accounting change (adoption of
SFAS No. 156)
    
    
    
    
    
    
    926Cash dividends declared on preferred stock
    
    
    (8,325
    )
    
    
    (8,325
    )Balance at end of period
    
    $
    (77,233
    )
    
    $
    94,343ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX:Balance at beginning of period
    
    
    (33,148
    )
    
    
    (106,936
    )Other comprehensive (loss) income , net of deferred tax
    
    
    (57,179
    )
    
    
    9,778Balance at end of period
    
    
    (90,327
    )
    
    
    (97,158
    )Total stockholders equity
    
    $
    1,278,905
    
    
    $
    868,797
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF COMPRENHENSIVE LOSS
 (IN THOUSANDS)
 (UNAUDITED)
 QUARTER ENDEDMARCH 31,2008
    
    
    2007Net loss
    
    $
    (2,298
    )
    
    $
    (37,309
    )Other comprehensive (loss) income, before tax:Unrealized (losses) gains on securities arising during the period
    
    
    (62,618
    )
    
    
    9,782Amortization of unrealized loss on securities reclassified to
held to maturity
    
    
    
    
    
    
    11Reclassification of realized (gains) losses included in net loss
    
    
    (194
    )
    
    
    268Other comprehensive (loss) income on investment securities, before
tax
    
    
    (62,812
    )
    
    
    10,061Income tax benefit (expense) related to investment securities
    
    
    8,800
    
    
    
    (283
    )Other comprehensive (loss) income on investment securities, net of
tax
    
    
    (54,012
    )
    
    
    9,778Other comprehensive loss on cash flow hedge, net of tax
    
    
    (3,167
    )
    
    
    Other comprehensive (loss) income, net of tax
    
    
    (57,179
    )
    
    
    9,778Comprehensive loss, net of tax
    
    $
    (59,477
    )
    
    $
    (27,531
    )Accumulated other comprehensive loss, net of taxOther comprehensive loss on investment securities
    
    $
    (86,589
    )
    
    $
    (97,158
    )Other comprehensive loss on cash flow hedge
    
    
    (3,738
    )
    
    
    Total accumulated other comprehensive loss, net of tax
    
    $
    (90,327
    )
    
    $
    (97,158
    )
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (UNAUDITED)
 QUARTER ENDEDMARCH 31,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (2,298
    )
    
    $
    (37,309
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Stock-based compensation
    
    
    
    
    
    
    323Depreciation and amortization
    
    
    4,055
    
    
    
    5,051Mark-to-market adjustment of servicing assets
    
    
    11,597
    
    
    
    5,725Deferred tax provision
    
    
    (975
    )
    
    
    5,228Provision for loan and lease losses
    
    
    4,786
    
    
    
    5,989Accretion of discount on loans, investment securities and debt
    
    
    (7,782
    )
    
    
    (2,058
    )Unrealized loss on loans held for sale
    
    
    10
    
    
    
    1,145Net decrease in loans held for sale
    
    
    (3,649
    )
    
    
    (59,478
    )(Gain) loss on sale of securities
    
    
    (2,959
    )
    
    
    2,269Unrealized (gain) loss on trading securities
    
    
    (5,582
    )
    
    
    135Decrease in securities held for trading
    
    
    60,361
    
    
    
    46,182Amortization and net gain in the fair value of IOs
    
    
    (390
    )
    
    
    2,691Decrease in derivative instruments
    
    
    7,526
    
    
    
    8,873Decrease in receivables and mortgage servicing advances
    
    
    1,416
    
    
    
    2,326(Increase) decrease in accrued interest receivable
    
    
    (791
    )
    
    
    10,941Increase in other assets
    
    
    (8,371
    )
    
    
    (11,931
    )Decrease in accrued expenses and other liabilities
    
    
    (35,279
    )
    
    
    (19,161
    )Total adjustments
    
    
    23,973
    
    
    
    4,250Net cash provided by (used in) operating activities
    
    
    21,675
    
    
    
    (33,059
    )Cash flows from investing activities:Purchases of securities available for sale
    
    
    (1,550,587
    )
    
    
    Principal repayment and sales of securities available for sale
    
    
    315,659
    
    
    
    387,752Principal repayment and maturities of securities held to maturity
    
    
    
    
    
    
    108,353Increase in FHLB stock
    
    
    (46,575
    )
    
    
    Net (increase) decrease of loans receivable
    
    
    (117,491
    )
    
    
    139,774Purchases of premises and equipment
    
    
    (2,329
    )
    
    
    (1,457
    )Proceeds from assets to be disposed of by sale
    
    
    474
    
    
    
    Proceeds from sales of real estate held for sale
    
    
    3,162
    
    
    
    1,605Net cash (used in) provided by investing activities
    
    
    (1,397,687
    )
    
    
    636,027Cash flows from financing activities:Decrease in deposits
    
    
    (139,489
    )
    
    
    (19,500
    )Increase (decrease) in securities sold under agreements to repurchase
    
    
    737,789
    
    
    
    (239,635
    )Proceeds from advances from FHLB
    
    
    1,030,000
    
    
    
    150,000Repayment of advances from FHLB
    
    
    (445,000
    )
    
    
    (150,000
    )Repayment of secured borrowings
    
    
    (13,775
    )
    
    
    (11,658
    )Repayment of notes payable
    
    
    (1,223
    )
    
    
    (1,132
    )Dividends paid
    
    
    (8,325
    )
    
    
    (8,325
    )Net cash provided by (used in) financing activities
    
    
    1,159,977
    
    
    
    (280,250
    )Net (decrease) increase in cash and cash equivalents
    
    $
    (216,035
    )
    
    $
    322,718Cash and cash equivalents at beginning of period
    
    
    789,169
    
    
    
    1,145,861Cash and cash equivalents at the end of period
    
    $
    573,134
    
    
    $
    1,468,579Cash and cash equivalents includes:Cash and due from banks
    
    $
    84,016
    
    
    $
    163,795Money market investments
    
    
    489,118
    
    
    
    1,304,784$
    573,134
    
    
    $
    1,468,579Supplemental schedule of non-cash activities:Loan securitizations
    
    $
    49,325
    
    
    $
    41,702Reclassification of securities from the held for trading portfolio to the available for sale portfolio
    
    $
    68,520
    
    
    $
    Reclassification from the held for sale portfolio to the loans receivable portfolio
    
    $
    48,185
    
    
    $
    Reclassification of securities held to maturity to held for trading in connection with the agreement
to sell certain assets of Doral Bank NY
    
    $
    
    
    
    $
    91,656Reclassification of loans receivable to loans held for sale in connection with the agreement to sell
certain assets of Doral Bank NY
    
    $
    
    
    
    $
    205,629Reclassification of premises and equipment to assets to be disposed on sale
    
    $
    
    
    
    $
    22,448Loans foreclosed
    
    $
    6,108
    
    
    $
    8,927Capitalization of servicing assets
    
    $
    929
    
    
    $
    1,184Remeasurement of fair value of MSRs upon adoption of SFAS 156, net of tax
    
    $
    
    
    
    $
    926Supplemental information for cash flows:Cash used to pay interest
    
    $
    93,763
    
    
    $
    118,849Cash used to pay income taxes
    
    $
    6,939
    
    
    $
    2,390
  7




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




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On February 12, 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position 157-2 (FSP 157-2), Effective Date of FASB Statement No. 157. This statement
delays the effective date of SFAS No. 157, except for items that are disclosed at fair value
in the financial statements on a recurring basis (at least annually). Delayed application of
SFAS No. 157 is permitted for nonfinancial assets and nonfinancial liabilities, except for
items that are disclosed at fair value in the financial statements on a recurring basis,
until fiscal years beginning after November 15, 2008 and interim periods within those fiscal
years. Therefore, we have elected to delay application of SFAS No. 157 for nonfinancial
long-lived assets measured at fair value for an impairment assessment under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, goodwill and other real
estate owned.d.
    
    At March 31, 2008, escrow funds and custodial accounts included approximately $94.8 million
deposited with Doral Bank PR. These funds are included in the Companys consolidated financial
statements. Escrow funds and custodial accounts also included approximately $22.2 million
deposited with other banks, which were excluded from the Companys assets and liabilities. The
Company had fidelity bond and errors and omissions coverage of $17.5 million and $17.0
million, respectively, as of March 31, 2008.e.
    
    The reconciliation of the numerator and denominator of the basic and diluted
earnings-per-share follows:
 Quarter EndedMarch 31,(Dollars in thousands, except per share amounts)
    
    2008
    
    
    2007Net Loss:Net loss
    
    $
    (2,298
    )
    
    $
    (37,309
    )Convertible preferred stock dividend
    
    
    (4,097
    )
    
    
    (4,097
    )Nonconvertible preferred stock dividend
    
    
    (4,228
    )
    
    
    (4,228
    )Net loss attributable to common shareholders
    
    $
    (10,623
    )
    
    $
    (45,634
    )Weighted-Average Shares(1) (2):Basic weighted-average number of common shares outstanding
    
    
    53,810,110
    
    
    
    5,397,412Diluted weighted-average number of common shares outstanding
    
    
    53,810,110
    
    
    
    5,397,412Net Loss per Common Share(2):Basic
    
    $
    (0.20
    )
    
    $
    (8.45
    )Diluted
    
    $
    (0.20
    )
    
    $
    (8.45
    )
 
 (1)
    
    For the quarters ended March 31, 2008 and 2007, there were 1,380,000 shares of the Companys
4.75% perpetual cumulative convertible preferred stock that were excluded from the computation of diluted
earnings per share because their effect would have been antidilutive. Each share of convertible preferred
stock is currently convertible into 0.31428 shares of common stock, subject to adjustment under specific
conditions. The option of the purchasers to convert the convertible preferred stock into shares of the
Companys common stock is exercisable only (a) if during any fiscal quarter after September 30, 2003, the
closing sale price of the Companys common stock for at least 20 trading days in a period of 30 consecutive
trading days ending on the last trading date of the preceding fiscal quarter exceeds 120% of the conversion
price of the convertible preferred stock (currently 120% of $795.47, or $954.56); (b) upon the occurrence of
certain corporate transactions; or (c) upon the delisting of the Companys common stock. On or after
September 30, 2008, the Company may, at its option, cause the convertible preferred stock to be converted
into the number of shares of common stock that are issuable at the conversion price. The Company may only
exercise its conversion right if the closing sale price of the Companys common stock exceeds 130% of the
conversion price of the convertible preferred stock in effect for 20 trading days within any period of 30
consecutive trading days ending on a trading day not more than two trading days prior to the date the Company
gives notice of conversion.(2)
    
    Weighted-average shares and net loss per common share for the quarter ended March 31, 2007
reflects the 1-for-20 reverse stock split effective August 17, 2007. f.
    
    Employee costs and other expenses are shown in the Consolidated Statements of Income
net of direct loan origination costs which, pursuant to Statement of Financial Accounting
Standard (SFAS) No. 91,
 9




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##### Table of Contents



Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases
  Quarter EndedMarch 31,(In thousands)
    
    2008
    
    
    2007Employee costs, gross
    
    $
    21,270
    
    
    $
    28,278Deferred costs pursuant to SFAS 91
    
    
    (2,192
    )
    
    
    (1,716
    )Employee cost, net
    
    $
    19,078
    
    
    $
    26,562Other expenses, gross
    
    $
    9,483
    
    
    $
    10,592Deferred costs pursuant to SFAS 91
    
    
    (90
    )
    
    
    (991
    )Other expenses, net
    
    $
    9,393
    
    
    $
    9,601
 As of March 31, 2008, the Company had a net deferred origination fee on loans held for sale
and loans receivable amounting to approximately $158,000 ($879,000 as of December 31, 2007)
and $11.0 million ($10.9 million as of December 31, 2007), respectively.g.
    
    Segment informationThe Company operates in four reportable segments: mortgage banking activities, banking
(including thrift operations), institutional securities operations and insurance agency
activities. The Companys segment reporting is organized by legal entity and aggregated by
line of business. Legal entities that do not meet the threshold for separate disclosure are
aggregated with other legal entities with similar lines of business. Management made this
determination based on operating decisions particular to each business line and because each
one targets different customers and requires different strategies. The majority of the
Companys operations are conducted in Puerto Rico. The Company also operates in the mainland
United States, principally in the New York City metropolitan area.During 2006, the Company reduced the operations of Doral Securities and sold substantially
all of Doral Securities investment securities. During the third quarter of 2007, Doral
Securities voluntarily withdrew its license as broker dealer with the SEC and its membership
with the Financial Industry Regulatory Authority (FINRA). As a result, Doral Securities
operations are currently limited to acting as a co-investment manager to a local
fixed-income investment company. The Company intends to assign its contract to Doral Bank
PR.During 2007, in connection with the recapitalization transaction, Doral Financial
transferred the Companys mortgage origination platform and servicing portfolio, subject to
certain exceptions, to Doral Bank PR. Following the transfer, Doral Financials mortgage
origination business is conducted by Doral Mortgage, as a wholly owned subsidiary of Doral
Bank PR, and Doral Financials servicing business is operated from Doral Bank PR. Management
determined that it was impracticable to change the composition of reportable segments for
earlier periods. Therefore, we have presented below segment information for the quarter
ended March 31, 2008 with the new reportable segment structure as well as comparative
segment information for the quarters ended March 31, 2008 and 2007, using the old report
segment structure. In establishing the old reportable segment structure for the quarter
ended March 31, 2008, the servicing asset and the related income and expenses that were
transferred during the third quarter of 2007 to Doral Bank PR have been reclassified to the
mortgage banking segment.The accounting policies followed by the segments are the same as those described in the
Summary of Significant Accounting Policies.
 10




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##### Table of Contents



Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    Intersegment(In thousands)
    
    Banking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations(1)
    
    TotalsQUARTER ENDED MARCH 31, 2008Net interest income
    
    $
    4,895
    
    
    
    33,795
    
    
    
    
    
    
    
    
    
    
    
    354
    
    
    $
    39,044Non-interest income (loss)
    
    $
    6,361
    
    
    
    15,264
    
    
    
    138
    
    
    
    3,014
    
    
    
    (7,398
    )
    
    $
    17,379Net income (loss)
    
    $
    3,417
    
    
    
    (2,269
    )
    
    
    31
    
    
    
    1,377
    
    
    
    (4,854
    )
    
    $
    (2,298
    )Identifiable assets
    
    $
    2,131,266
    
    
    
    8,802,468
    
    
    
    1,952
    
    
    
    22,636
    
    
    
    (486,885
    )
    
    $
    10,471,437QUARTER ENDED MARCH 31, 2007Net interest (loss) income
    
    $
    (4,342
    )
    
    
    40,760
    
    
    
    
    
    
    
    
    
    
    
    1,746
    
    
    $
    38,164Non-interest income (loss)
    
    $
    13,578
    
    
    
    (2,429
    )
    
    
    144
    
    
    
    2,560
    
    
    
    (2,225
    )
    
    $
    11,628Net (loss) income
    
    $
    (43,653
    )
    
    
    5,171
    
    
    
    48
    
    
    
    1,184
    
    
    
    (59
    )
    
    $
    (37,309
    )Identifiable assets
    
    $
    2,370,367
    
    
    
    9,417,243
    
    
    
    1,574
    
    
    
    25,000
    
    
    
    (278,571
    )
    
    $
    11,535,613
 
 (1)
    
    The intersegment eliminations in the above table include servicing fees paid by the banking subsidiaries to the parent company recognized
as a reduction of the net interest income, direct intersegment loan origination costs amortized as yield adjustment or offset against net gains on
mortgage loan sales and fees (mainly related with origination costs paid by the banking segment to the mortgage banking segment) and other income
derived from intercompany transactions, related principally to rental income paid to Doral Properties, the Companys subsidiary that owns the corporate
headquarters facilities. Assets include internal funding and investments in subsidiaries accounted for at cost.  Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    Intersegment(In thousands)
    
    Banking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations
    
    TotalsQUARTER ENDED MARCH 31, 2008Net interest income
    
    $
    4,895
    
    
    
    33,795
    
    
    
    
    
    
    
    
    
    
    
    354
    
    
    $
    39,044Non-interest income
(loss)
    
    $
    7,645
    
    
    
    13,980
    
    
    
    138
    
    
    
    3,014
    
    
    
    (7,398
    )
    
    $
    17,379Net income (loss)
    
    $
    5,774
    
    
    
    (4,626
    )
    
    
    31
    
    
    
    1,377
    
    
    
    (4,854
    )
    
    $
    (2,298
    )Identifiable assets
    
    $
    2,131,266
    
    
    
    8,968,115
    
    
    
    1,952
    
    
    
    22,636
    
    
    
    (652,532
    )
    
    $
    10,471,437
  (In thousands)
    
    Puerto Rico
    
    Mainland US
    
    Eliminations
    
    TotalsQUARTER ENDED MARCH 31, 2008Net interest income
    
    $
    37,660
    
    
    
    1,313
    
    
    
    71
    
    
    $
    39,044Non-interest income (loss)
    
    $
    16,905
    
    
    
    602
    
    
    
    (128
    )
    
    $
    17,379Net (loss) income
    
    $
    (2,898
    )
    
    
    588
    
    
    
    12
    
    
    $
    (2,298
    )Identifiable assets
    
    $
    10,402,038
    
    
    
    147,883
    
    
    
    (78,484
    )
    
    $
    10,471,437
 11




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##### Table of Contents



(In thousands)QUARTER ENDED MARCH 31, 2007Net interest income
    
    $
    33,100
    
    
    
    5,036
    
    
    
    28
    
    
    $
    38,164Non-interest
income (loss)
    
    $
    16,982
    
    
    
    (5,261
    )
    
    
    (93
    )
    
    $
    11,628Net loss
    
    $
    (35,126
    )
    
    
    (2,182
    )
    
    
    (1
    )
    
    $
    (37,309
    )Identifiable assets
    
    $
    10,978,891
    
    
    
    651,633
    
    
    
    (94,911
    )
    
    $
    11,535,613
 h.
    
    The fair value of the Companys securities held for trading and the fair value and
carrying value of its securities classified as available for sale are shown below by
category.
 1.
    
    The following table summarizes Doral Financials holdings of securities held
for trading as of March 31, 2008 and December 31, 2007.
 SECURITIES HELD FOR TRADING
    
    MARCH 31,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007Mortgage-Backed Securities:GNMA Exempt
    
    $
    
    
    
    $
    33,678GNMA Taxable
    
    
    
    
    
    
    11,928CMO Agencies
    
    
    5
    
    
    
    287CMO Private Label
    
    
    1,517
    
    
    
    15,777FHLMC and FNMA
    
    
    
    
    
    
    8,693Variable Interest-Only Strips
    
    
    50,774
    
    
    
    51,074Fixed Interest-Only Strips
    
    
    764
    
    
    
    854U.S. Treasury Notes
    
    
    151,078
    
    
    
    152,695Derivatives(1)
    
    
    992
    
    
    
    1,476Total
    
    $
    205,130
    
    
    $
    276,462
 
 (1)
    
    Doral Financial uses derivatives to manage its
exposure to interest rate risk caused by changes in interest rates.
Derivatives include interest rate swaps and forward contracts.
Doral Financials general policy is to account for derivatives on a
marked-to-market basis with gains or losses charged to operations
as they occur. The fair value of derivatives is generally reported
net by counterparty; provided that a legally enforceable master
netting agreement exists. Derivatives in a net asset position are
recorded as securities held for trading and derivatives in a net
liability position as liabilities. The gross notional amount of
derivatives recorded as held for trading totaled $296.0 million as
of March 31, 2008 and $414.0 million as of December 31, 2007.
Notional amounts indicate the volume of derivatives activity, but
do not represent Doral Financials exposure to market or credit
risk. In January 2008, the Company transferred $68.5 million from the held for trading
portfolio to the available for sale portfolio as a result of a reassessment of the intention to
trade these securities or to sell them in the short term. This transfer was the final part of the
Companys reassessment of its investment portfolio as a result of the Companys Recapitalization.
The Recapitalization significantly changed Doral Financials
liquidity position which resulted in the Companys decision to
include these assets as core medium to long term investments.2.
    
    The following tables summarize the amortized cost, gross unrealized gains and
losses, approximate market value, weighted-average yield and contractual maturities of
securities available for sale as of March 31, 2008 and December 31, 2007.The weighted-average yield is computed based on amortized cost and, therefore, does
not give effect to changes in fair value. Expected maturities of mortgage-backed
securities and certain debt securities might differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
 12




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##### Table of Contents



SECURITIES AVAILABLE FOR SALEAS OF MARCH 31, 2008 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGE(Dollars in thousands)
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMortgage-Backed SecuritiesGNMADue from one to five years
    
    $
    1,024
    
    
    $
    17
    
    
    $
    
    
    
    $
    1,041
    
    
    
    5.00
    %Due from five to ten years
    
    
    569
    
    
    
    14
    
    
    
    
    
    
    
    583
    
    
    
    6.39
    %Due over ten years
    
    
    47,045
    
    
    
    185
    
    
    
    63
    
    
    
    47,167
    
    
    
    5.80
    %FHLMC and FNMADue from five to ten years
    
    
    957
    
    
    
    
    
    
    
    5
    
    
    
    952
    
    
    
    3.60
    %Due over ten years
    
    
    1,001,461
    
    
    
    8,910
    
    
    
    529
    
    
    
    1,009,842
    
    
    
    5.34
    %CMO AgenciesDue over ten years
    
    
    222,091
    
    
    
    894
    
    
    
    1,288
    
    
    
    221,697
    
    
    
    4.53
    %CMO Private LabelDue over ten years
    
    
    939,194
    
    
    
    
    
    
    
    117,298
    
    
    
    821,896
    
    
    
    5.01
    %Debt SecuritiesFHLB NotesDue from one to five years
    
    
    100,409
    
    
    
    3,677
    
    
    
    
    
    
    
    104,086
    
    
    
    4.16
    %Due over ten years
    
    
    273,595
    
    
    
    805
    
    
    
    610
    
    
    
    273,790
    
    
    
    5.10
    %FNMA NotesDue within one year
    
    
    46,739
    
    
    
    329
    
    
    
    
    
    
    
    47,068
    
    
    
    4.19
    %Due from one to five years
    
    
    200,000
    
    
    
    1,750
    
    
    
    
    
    
    
    201,750
    
    
    
    3.56
    %Due over ten years
    
    
    49,989
    
    
    
    55
    
    
    
    
    
    
    
    50,044
    
    
    
    6.00
    %FHLB Zero CouponDue over ten years
    
    
    139,324
    
    
    
    
    
    
    
    454
    
    
    
    138,870
    
    
    
    6.01
    %FHLMC Zero CouponDue over ten years
    
    
    245,714
    
    
    
    1,665
    
    
    
    
    
    
    
    247,379
    
    
    
    5.83
    %FHLMC NotesDue over ten years
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    5.50
    %P.R. Housing BankDue over ten years
    
    
    4,635
    
    
    
    
    
    
    
    
    
    
    
    4,635
    
    
    
    5.50
    %OtherDue within one year
    
    
    6,900
    
    
    
    14
    
    
    
    6
    
    
    
    6,908
    
    
    
    3.98
    %Due from one to five years
    
    
    25,545
    
    
    
    416
    
    
    
    
    
    
    
    25,961
    
    
    
    4.44
    %Due over ten years
    
    
    8,000
    
    
    
    269
    
    
    
    210
    
    
    
    8,059
    
    
    
    5.61
    %$
    3,363,191
    
    
    $
    19,000
    
    
    $
    120,463
    
    
    $
    3,261,728
    
    
    
    5.09
    %
 13




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##### Table of Contents



SECURITIES AVAILABLE FOR SALEAS OF DECEMBER 31, 2007 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGE(Dollars in thousands)
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMortgage-Backed SecuritiesGNMADue from one to five years
    
    $
    374
    
    
    $
    9
    
    
    $
    
    
    
    $
    383
    
    
    
    6.39
    %Due over ten years
    
    
    3,694
    
    
    
    145
    
    
    
    3
    
    
    
    3,836
    
    
    
    6.91
    %FNMADue over ten years
    
    
    260,143
    
    
    
    4,297
    
    
    
    558
    
    
    
    263,882
    
    
    
    6.05
    %CMO AgenciesDue over ten years
    
    
    7,000
    
    
    
    
    
    
    
    659
    
    
    
    6,341
    
    
    
    6.10
    %CMO Private LabelDue over ten years
    
    
    530,997
    
    
    
    
    
    
    
    28,285
    
    
    
    502,712
    
    
    
    6.22
    %Debt SecuritiesFHLB NotesDue from one to five years
    
    
    100,458
    
    
    
    1,165
    
    
    
    
    
    
    
    101,623
    
    
    
    4.16
    %Due over ten years
    
    
    273,595
    
    
    
    
    
    
    
    3,376
    
    
    
    270,219
    
    
    
    5.10
    %FNMA NotesDue within one year
    
    
    46,000
    
    
    
    
    
    
    
    
    
    
    
    46,000
    
    
    
    4.60
    %Due over ten years
    
    
    49,990
    
    
    
    
    
    
    
    43
    
    
    
    49,947
    
    
    
    6.00
    %FHLB Zero CouponDue over ten years
    
    
    137,131
    
    
    
    
    
    
    
    2,688
    
    
    
    134,443
    
    
    
    6.01
    %FHLMC Zero CouponDue over ten years
    
    
    242,281
    
    
    
    155
    
    
    
    162
    
    
    
    242,274
    
    
    
    5.83
    %FHLMC NotesDue over ten years
    
    
    50,000
    
    
    
    12
    
    
    
    
    
    
    
    50,012
    
    
    
    5.50
    %P.R. Housing BankDue over ten years
    
    
    4,635
    
    
    
    9
    
    
    
    
    
    
    
    4,644
    
    
    
    5.50
    %U.S. Treasury BondsDue over ten years
    
    
    234,361
    
    
    
    
    
    
    
    8,768
    
    
    
    225,593
    
    
    
    4.21
    %OtherDue within one year
    
    
    6,899
    
    
    
    11
    
    
    
    20
    
    
    
    6,890
    
    
    
    3.98
    %Due from one to five years
    
    
    5,025
    
    
    
    21
    
    
    
    
    
    
    
    5,046
    
    
    
    5.15
    %Due over ten years
    
    
    8,001
    
    
    
    231
    
    
    
    137
    
    
    
    8,095
    
    
    
    5.61
    %$
    1,960,584
    
    
    $
    6,055
    
    
    $
    44,699
    
    
    $
    1,921,940
    
    
    
    5.56
    %
 14




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##### Table of Contents



i.
    
    The following tables show Doral Financials gross unrealized losses and fair value for
available for sale investments, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at March 31, 2008
and December 31, 2007.
 SECURITIES AVAILABLE FOR SALE
 As of March 31, 2008Less than 12 months
    
    
    12 months or more
    
    
    TotalNumber of
    
    
    
    
    
    
    Unrealized
    
    
    Number of
    
    
    
    
    
    
    Unrealized
    
    
    Number of
    
    
    
    
    
    
    Unrealized(Dollars in thousands)
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    LossesMortgage-Backed SecuritiesGNMA
    
    
    63
    
    
    $
    24,171
    
    
    $
    61
    
    
    
    1
    
    
    $
    165
    
    
    $
    2
    
    
    
    64
    
    
    $
    24,336
    
    
    $
    63FNMA
    
    
    9
    
    
    
    254,887
    
    
    
    525
    
    
    
    2
    
    
    
    1,664
    
    
    
    9
    
    
    
    11
    
    
    
    256,551
    
    
    
    534CMO Agencies
    
    
    4
    
    
    
    139,584
    
    
    
    856
    
    
    
    3
    
    
    
    6,085
    
    
    
    432
    
    
    
    7
    
    
    
    145,669
    
    
    
    1,288CMO Private Label
    
    
    12
    
    
    
    414,366
    
    
    
    117,298
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    414,366
    
    
    
    117,298Debt SecuritiesFNMA Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    54,389
    
    
    
    610
    
    
    
    1
    
    
    
    54,389
    
    
    
    610FHLB Zero Coupon
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    138,870
    
    
    
    454
    
    
    
    1
    
    
    
    138,870
    
    
    
    454Other
    
    
    1
    
    
    
    2,790
    
    
    
    210
    
    
    
    1
    
    
    
    3,894
    
    
    
    6
    
    
    
    2
    
    
    
    6,684
    
    
    
    21689
    
    
    $
    835,798
    
    
    $
    118,950
    
    
    
    9
    
    
    $
    205,067
    
    
    $
    1,513
    
    
    
    98
    
    
    $
    1,040,865
    
    
    $
    120,463
 SECURITIES AVAILABLE FOR SALE
 As of December 31, 2007Less than 12 months
    
    
    12 months or more
    
    
    TotalNumber of
    
    
    
    
    
    
    Unrealized
    
    
    Number of
    
    
    
    
    
    
    Unrealized
    
    
    Number of
    
    
    
    
    
    
    Unrealized(Dollars in thousands)
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    LossesMortgage-Backed SecuritiesGNMA
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    1
    
    
    $
    165
    
    
    $
    3
    
    
    
    1
    
    
    $
    165
    
    
    $
    3FNMA
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    32,556
    
    
    
    558
    
    
    
    1
    
    
    
    32,556
    
    
    
    558CMO Agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    6,341
    
    
    
    659
    
    
    
    4
    
    
    
    6,341
    
    
    
    659CMO Private Label
    
    
    9
    
    
    
    502,712
    
    
    
    28,285
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    502,712
    
    
    
    28,285Debt SecuritiesFNMA Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    95,947
    
    
    
    43
    
    
    
    4
    
    
    
    95,947
    
    
    
    43FHLB Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    270,219
    
    
    
    3,376
    
    
    
    5
    
    
    
    270,219
    
    
    
    3,376FHLB Zero Coupon
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    134,443
    
    
    
    2,688
    
    
    
    2
    
    
    
    134,443
    
    
    
    2,688FHLMC Zero Coupon
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    158,229
    
    
    
    162
    
    
    
    2
    
    
    
    158,229
    
    
    
    162US Treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    225,593
    
    
    
    8,768
    
    
    
    2
    
    
    
    225,593
    
    
    
    8,768Other
    
    
    1
    
    
    
    2,863
    
    
    
    137
    
    
    
    1
    
    
    
    3,880
    
    
    
    20
    
    
    
    2
    
    
    
    6,743
    
    
    
    15710
    
    
    $
    505,575
    
    
    $
    28,422
    
    
    
    22
    
    
    $
    927,373
    
    
    $
    16,277
    
    
    
    32
    
    
    $
    1,432,948
    
    
    $
    44,699
   15




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##### Table of Contents



The effects of this market turmoil could last through the end of 2008 but management expects
that the Company will receive principal and interest due from these positions in a timely
fashion. Furthermore, Doral Financial is able to finance these positions with the FHLB
therefore providing the capacity to hold the positions until value is recovered. Doral
Financial also has excess funding capacity should it be required.j.
    
    The following table sets forth certain information regarding Doral Financials loans
held for sale as of the dates indicated:
 LOANS HELD FOR SALE
 (In thousands)
    
    MARCH 31, 2008
    
    
    DECEMBER 31, 2007Conventional single family residential loans
    
    $
    178,733
    
    
    $
    189,995FHA/VA loans
    
    
    155,144
    
    
    
    141,601Construction and commercial real estate loans
    
    
    42,811
    
    
    
    86,960Total loans
held for sale (1)
    
    $
    376,688
    
    
    $
    418,556
 
 (1)
    
    At March 31, 2008 and December 31, 2007, the loans held for sale portfolio includes
$1.2 million and $2.0 million, respectively, related to
interest-only loans.    16




---



##### 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
 MARCH 31, 2008
    
    
    DECEMBER 31, 2007(Dollars in thousands)
    
    AMOUNT
    
    
    PERCENT
    
    
    AMOUNT
    
    
    PERCENTConstruction loans(1)
    
    $
    560,603
    
    
    
    11
    %
    
    $
    588,175
    
    
    
    12
    %Residential mortgage loans
    
    
    3,427,291
    
    
    
    66
    %
    
    
    3,340,162
    
    
    
    66
    %Commercial  secured by real estate
    
    
    796,730
    
    
    
    15
    %
    
    
    767,441
    
    
    
    15
    %Consumer  other:Personal loans
    
    
    47,467
    
    
    
    1
    %
    
    
    44,810
    
    
    
    1
    %Auto loans
    
    
    173
    
    
    
    0
    %
    
    
    195
    
    
    
    0
    %Credit cards
    
    
    22,306
    
    
    
    0
    %
    
    
    19,047
    
    
    
    0
    %Overdrawn checking accounts
    
    
    1,061
    
    
    
    0
    %
    
    
    164
    
    
    
    0
    %Revolving lines of credit
    
    
    26,411
    
    
    
    1
    %
    
    
    26,941
    
    
    
    1
    %Lease financing receivables
    
    
    30,804
    
    
    
    1
    %
    
    
    33,457
    
    
    
    1
    %Commercial non-real estate
    
    
    138,259
    
    
    
    3
    %
    
    
    126,484
    
    
    
    2
    %Loans on savings deposits
    
    
    9,705
    
    
    
    0
    %
    
    
    11,037
    
    
    
    0
    %Land secured
    
    
    120,775
    
    
    
    2
    %
    
    
    119,232
    
    
    
    2
    %Loans receivable, gross(2)
    
    
    5,181,585
    
    
    
    100
    %
    
    
    5,077,145
    
    
    
    100
    %Less:Discount on loans transferred(3)
    
    
    (17,542
    )
    
    
    
    
    
    
    (17,615
    )Unearned interest and deferred loan fees, net
    
    
    (14,330
    )
    
    
    
    
    
    
    (8,597
    )Allowance for loan and lease losses
    
    
    (121,182
    )
    
    
    
    
    
    
    (124,733
    )(153,054
    )
    
    
    
    
    
    
    (150,945
    )Loans receivable, net
    
    $
    5,028,531
    
    
    
    
    
    
    $
    4,926,200
 
 (1)
    
    Includes $419.6 million and $422.4 million of construction loans for residential housing
projects as of March 31, 2008 and December 31, 2007, respectively. Also includes $141.0 million and $165.8
million of construction loans for commercial, condominiums and multifamily projects as of March 31, 2008 and
December 31, 2007, respectively.(2)
    
    Includes $56.2 million and $56.4 million of interest-only loans, as of March 31, 2008 and
December 31, 2007, respectively.(3)
    
    Related to $1.4 billion of loans transferred during the second and third quarters of 2007,
from the loans held for sale portfolio to the loans receivable portfolio.  Accounting by Creditors for Impairment of a Loan
  17




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##### Table of Contents



Accounting for Contingencies
 Accounting by Debtors and Creditors of Troubled Debt
Restructurings
  ALLOWANCE FOR LOAN AND LEASE LOSSES
 QUARTER ENDEDMARCH 31,(Dollars in thousands)
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    124,733
    
    
    $
    67,233Provision for loan and lease losses
    
    
    4,786
    
    
    
    5,989Losses charged to the allowance
    
    
    (9,053
    )
    
    
    (1,921
    )Recoveries
    
    
    716
    
    
    
    62Other(1)
    
    
    
    
    
    
    (400
    )Balance at end of period
    
    $
    121,182
    
    
    $
    70,963
 
 (1)
    
    Represents the portion of allowance for loans transferred from the loans
receivable portfolio to the loans held for sale portfolio, in connection with the sale of
certain assets of Doral Bank NY during the first quarter of 2007. l.
    
    Doral Financial is the guarantor of various unregistered serial and term bonds issued
by Doral Properties, a wholly-owned subsidiary, through the Puerto Rico Industrial,
Tourist, Educational, Medical and Environmental Control Facilities Financing Authority
(AFICA). The bonds were issued to finance the construction and development of the Doral
Financial Plaza building, the headquarters facility of Doral Financial. As of March 31,
2008, the outstanding principal balance of the bonds was $48.8 million with fixed interest
rates, ranging from 6.25% to 6.90%, and maturities ranging from June 2008 to December 2029.
Certain series of the bonds are secured by a mortgage on the building and underlying real
property.m.
    
    The Company routinely originates, securitizes and sells mortgage loans into the
secondary market. As a result of this process, the Company typically retains the servicing
rights and, in the past, also retained interest-only strips. The Companys interests that
continue to be held (retained interests) are subject to prepayment and interest rate
risks.Effective January 1, 2007, under SFAS No. 156, Accounting for Servicing of Financial
Assets, Doral Financial elected to apply fair value accounting to its mortgage servicing
rights (MSRs). The Company determines the fair value of its MSRs on the basis of a third
party market valuation for the Companys entire servicing portfolio (governmental,
conforming and non-conforming portfolios). The fair value of the MSRs is determined based on
a combination of market information on trading activity (MSRs trades and broker valuations),
benchmarking of servicing assets (valuation surveys) and cash flow modeling. The valuation
of the Companys MSRs incorporate two sets of assumptions: (1) market derived assumptions
for discount rates, servicing costs, escrow earnings rate, float earnings rate and cost of
funds and (2) market derived assumptions adjusted for the Companys loan characteristics and
portfolio behavior, for escrow balances, delinquencies and foreclosures, late fees,
prepayments and prepayment penalties.
 18




---



##### Table of Contents



The changes in servicing assets measured using the fair value method for the quarters ended
March 31, 2008 and 2007 are shown below:
 QUARTER ENDEDMARCH 31,(In thousands)
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    150,238
    
    
    $
    177,884Capitalization of servicing assets
    
    
    929
    
    
    
    1,184Change in fair value
    
    
    (11,597
    )
    
    
    (5,725
    )Balance at end of period(1)
    
    $
    139,570
    
    
    $
    173,343
 
 (1)
    
    Outstanding balance of loans serviced for third parties
amounted to $9.9 billion and $11.7 billion as of March 31, 2008 and
2007, respectively.   INTEREST-ONLY STRIPS ACTIVITY
 QUARTER ENDEDMARCH 31,(In thousands)
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    51,928
    
    
    $
    49,926Amortization
    
    
    (1,067
    )
    
    
    (1,856
    )Gain on the IO value
    
    
    677
    
    
    
    4,547Balance at end of period
    
    $
    51,538
    
    
    $
    52,617
   19




---



##### Table of Contents



Servicing
    
    Interest-(Dollars in thousands)
    
    Assets
    
    Only StripsCarrying amount of retained interest
    
    $
    139,570
    
    
    $
    51,538Weighted-average expected life (in years)
    
    
    6.5
    
    
    
    5.5Constant prepayment rate
(weighted-average annual rate)
    
    
    13.03
    %
    
    
    10.27
    %Decrease in fair value due to 10%
adverse change
    
    
    (4,784
    )
    
    
    (1,606
    )Decrease in fair value due to 20%
adverse change
    
    
    (9,189
    )
    
    
    (3,133
    )Residual cash flow discount rate
(weighted-average annual rate)
    
    
    11.44
    %
    
    
    14.43
    %Decrease in fair value due to 10%
adverse change
    
    
    (5,092
    )
    
    
    (1,272
    )Decrease in fair value due to 20%
adverse change
    
    
    (9,833
    )
    
    
    (2,472
    )
   (Dollars in thousands)
 Change in Interest
    
    Constant Prepayment
    
    Weighted-Average Expected Life
    
    Change in Fair
    
    Percentage ofRates (basis points)
    
    Rate
    
    (Years)
    
    Value of IOs
    
    Change+200
    
    
    6.53
    %
    
    
    6.9
    
    
    $
    (5,112
    )
    
    
    (9.9
    )%+100
    
    
    7.63
    %
    
    
    6.5
    
    
    
    (1,976
    )
    
    
    (3.8
    )%+50
    
    
    8.70
    %
    
    
    6.1
    
    
    
    (787
    )
    
    
    (1.5
    )%Base
    
    
    10.27
    %
    
    
    5.5
    
    
    
    0
    
    
    
    0
    %-50
    
    
    12.41
    %
    
    
    4.9
    
    
    
    281
    
    
    
    0.5
    %-100
    
    
    13.93
    %
    
    
    4.5
    
    
    
    1,893
    
    
    
    3.7
    %-200
    
    
    15.66
    %
    
    
    4.2
    
    
    
    7,491
    
    
    
    14.5
    %
 n.
    
    Stock Option and Other Incentive Plans.In connection with the recapitalization
transaction and in accordance with the provisions of the stock purchase agreement between
the Company and Doral Holdings, on July 17, 2007, the Board of Directors ratified and
approved the resolutions of the Compensation Committee to accelerate and terminate all
stock options outstanding under the Companys Omnibus Incentive Plan and the 1997 Employee
Stock Option Plan effective upon the issuance of the shares of the Companys common stock
to Doral Holdings.In connection with the closing of the sale of shares of common stock to Doral Holdings all
stock options outstanding as July 19, 2007 were terminated.
 20




---



##### Table of Contents



o.
    
    The following table summarizes deposit balances:
 MARCH 31,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007Certificates of deposit
    
    $
    2,788,345
    
    
    $
    2,998,684Regular savings
    
    
    328,085
    
    
    
    317,436NOW accounts
    
    
    379,251
    
    
    
    394,036Money markets accounts
    
    
    357,920
    
    
    
    315,047Total interest-bearing
    
    
    3,853,601
    
    
    
    4,025,203Non interest-bearing deposits
    
    
    274,934
    
    
    
    242,821Total deposits
    
    $
    4,128,535
    
    
    $
    4,268,024
 p.
    
    As part of its financing activities the Company enters into sales of securities under
agreements to repurchase the same or substantially similar securities. The Company retains
control over such securities according to the provisions of SFAS No. 140. Accordingly, the
amounts received under these agreements represent borrowings, and the securities underlying
the agreements remain in the Companys asset accounts. These transactions are carried at
the amounts at which transactions will be settled. The counterparties to the contracts
generally have the right to repledge the securities received as collateral. Those
securities are presented in the Consolidated Statements of Financial Condition as part of
pledged investment securities. Securities sold under agreements to repurchase consisted of
the following:
 MARCH 31,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007Non-callable repurchase
agreements with maturities
less than or equal to 90 days,
at various fixed rates
averaging 2.54% and 5.56% at
March 31, 2008 and December
31, 2007, respectively
    
    $
    434,124
    
    
    $
    17,035Non-callable repurchase
agreements with maturities
ranging from February 2009 to
April 2013 (2007 - May 2010 to
June 2010), at various fixed
rates averaging 3.70% and
4.15% at March 31, 2008 and
December 31, 2007,
respectively
    
    
    965,500
    
    
    
    550,000Non-callable repurchase
agreement with a maturity of
January 2008, tied to 3-month
LIBOR adjustable quarterly, at
a rate of 5.15% at December
31, 2007
    
    
    
    
    
    
    94,800Callable repurchase agreements
with maturities ranging from
August 2009 to February 2014,
at various fixed rates
averaging 5.50% at March 31,
2008 and December 31, 2007,
respectively
    
    
    782,528
    
    
    
    782,528$
    2,182,152
    
    
    $
    1,444,363
 21




---



##### Table of Contents



q.
    
    Advances from FHLB consisted of the following:
 MARCH 31,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007Non-callable advances with
maturities ranging from April
2008 to March 2013 (2007  March
2008 to October 2012), at
various fixed rates averaging
3.68% and 4.60% at March 31,
2008 and December 31, 2007,
respectively
    
    $
    1,120,000
    
    
    $
    535,000Non-callable advance due on July
6, 2010, tied to 3-month LIBOR
adjustable quarterly, at a rate
of 4.61% and 5.21% at March 31,
2008 and December 31, 2007,
respectively
    
    
    200,000
    
    
    
    200,000Non-callable advances with
maturities ranging from
September 2008 to November 2012,
tied to 1-month LIBOR adjustable
monthly, at a rate of 2.69% and
4.88% at March 31, 2008 and
December 31, 2007, respectively
    
    
    195,000
    
    
    
    195,000Callable advances with
maturities ranging from July
2009 to March 2012, at various
fixed rates averaging 5.40% at
March 31, 2008 and December 31,
2007, respectively, callable at
various dates beginning on April
2008. (2007 - January 2008)
    
    
    304,000
    
    
    
    304,000$
    1,819,000
    
    
    $
    1,234,000
 At March 31, 2008, the Company had pledged qualified collateral in the form of mortgage and
investment securities with a market value of $2.3 billion to secure the above advances from
FHLB, which the counterparty is generally not permitted to sell or repledge.r.
    
    At March 31, 2008 and December 31, 2007, loans payable consisted of financing
agreements with local financial institutions secured by mortgage loans.Outstanding loans payable consisted of the following:
 MARCH 31,
    
    
    DECEMBER 31,(In thousands)
    
    2008,
    
    
    2007Secured borrowings with local
financial institutions,
collateralized by real estate
mortgage loans, at variable
interest rates tied to 3-month
LIBOR averaging 4.89% and 6.85% at
March 31, 2008 and December 31,
2007, respectively
    
    $
    364,411
    
    
    $
    377,487Secured borrowings with local
financial institutions,
collateralized by real estate
mortgage loans at fixed interest
rates averaging 7.45% and 7.43% at
March 31, 2008 and December 31,
2007, respectively
    
    
    24,515
    
    
    
    25,214$
    388,926
    
    
    $
    402,701
  22




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##### Table of Contents



s.
    
    Notes payable consisted of the following:
 MARCH 31,
    
    
    DECEMBER 31,(In thousands)
    
    2008
    
    
    2007$100 million notes, net of discount,
bearing interest at 7.65%, due on March
26, 2016, paying interest monthly
    
    $
    98,344
    
    
    $
    98,307$30 million notes, net of discount,
bearing interest at 7.00%, due on April
26, 2012, paying interest monthly
    
    
    29,652
    
    
    
    29,634$40 million notes, net of discount,
bearing interest at 7.10%, due on April
26, 2017, paying interest monthly
    
    
    39,334
    
    
    
    39,322$30 million notes, net of discount,
bearing interest at 7.15%, due on April
26, 2022, paying interest monthly
    
    
    29,429
    
    
    
    29,423Bonds payable secured by mortgage on
building at fixed rates ranging from
6.35% to 6.90%, with maturities ranging
from June 2008 to December 2029, paying
interest monthly
    
    
    41,190
    
    
    
    41,190Bonds payable at a fixed rate of 6.25%,
with maturities ranging from December
2010 to December 2029, paying interest
monthly
    
    
    7,600
    
    
    
    7,600Note payable with a local financial
institution, collateralized by IOs at a
fixed rate of 7.75%, due on December 25,
2013, paying interest monthly
    
    
    35,759
    
    
    
    36,982$
    281,308
    
    
    $
    282,458
 t.
    
    Income TaxesIncome taxes include Puerto Rico income taxes as well as applicable federal and state taxes.
As Puerto Rico corporations, Doral Financial and all of its Puerto Rico subsidiaries are
generally required to pay federal income taxes only with respect to their income derived
from the active conduct of a trade or business in the United States (excluding Puerto Rico)
and certain investment income derived from U.S. assets. Any such tax is creditable, with
certain limitations, against Puerto Rico income taxes. Except for the operations of Doral
Bank NY and Doral Money, substantially all of the Companys operations are conducted through
subsidiaries in Puerto Rico. Doral Bank NY and Doral Money are U.S. corporations and are
subject to U.S. income-tax on their income derived from all sources. For the quarter ended
March 31, 2008, the income tax for the Companys U.S. subsidiaries amounted to $200,000
compared to an income tax benefit of $1.9 million for the comparable 2007 period.The maximum statutory corporate income tax rate in Puerto Rico is 39.0%.Doral Financial enjoys income tax exemption on interest income derived from FHA and VA
mortgage loans financing the original acquisition of newly constructed housing in Puerto
Rico and securities backed by such mortgage loans. Doral Financial also invests in U.S.
Treasury and agency securities that are exempt from Puerto Rico taxation and are not subject
to federal income taxation because of the portfolio interest deduction to which Doral
Financial is entitled as a foreign corporation. In addition, Doral Financial uses its
international banking entity subsidiary to invest in various U.S. securities and U.S.
mortgage-backed securities, which interest income and gain on sale, if any, is exempt from
Puerto Rico income taxation and excluded from federal income taxation on the basis of the
portfolio interest deduction in the case of interest, and in the case of capital gains,
because the gains are sourced outside the United States. During 2008,
the Company will be transferring substantially all of the assets at the international
banking entity to Doral Bank PR to increase the level of its interest earning assets.For the quarter ended March 31, 2008, Doral Financial recognized an income tax benefit of
$0.6 million compared to an income tax expense of $5.9 million for the comparable 2007 period.
The recognition of
 23




---



##### Table of Contents



income tax benefit for the first quarter of 2008 was related to an increase in the deferred
tax asset.During the first quarter of 2008, the Company entered into an agreement with the Puerto Rico
Treasury Department with respect to the allocation method and period (for tax purposes) of
expenses incurred by the Company related to a settlement agreement
(Settlement Expenses) that resulted from
litigation related to the Companys restatement. This agreement
was effective as of December 31, 2007 and permits the total expense
related to the settlement of the lawsuit ($96.0 million) to be
allocated to any entity within the Doral group over a period of three
years. As a result of this agreement the Company
expects to be able to realize part of its deferred tax asset and accordingly released a
portion of the valuation allowance in 2008. However, due to the
Companys recorded losses for the first quarter of 2008,
management revised its tax forecast and increased its valuation
allowance. The net effect of these transactions, together with the
effect of ordinary operations, resulted in a $2.4 million increase in the
valuation allowance to $89.7 million from the $87.3 million
valuation allowance at December 31, 2007.In assessing the realization of deferred tax assets, the Company considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be
realized. The Company considers the expected realization of its deferred tax assets and
liabilities, projected future taxable income, the Companys ability to replace maturing
brokered deposits and other sources of working capital at market rates, and tax planning
strategies, in making this assessment. The Company determined that it is more likely than
not that $89.7 million of its gross deferred tax asset, related primarily to net operating losses,
will not be realizable and maintained a valuation allowance for that amount. Benefits
recognized for net operating losses are limited by the fact that, under the PR Code, Doral
Financial is not permitted to file consolidated tax returns and, thus, is not able to
utilize losses from one subsidiary to offset gains in another subsidiary. For the first
quarter of 2008, net operating losses of $29.5 million were created. Based on forecasted
future taxable income, the Company will not be able to obtain the full benefit of these net
operating losses.During 2006, the Company entered into two separate agreements with the Puerto Rico Treasury
Department regarding the Companys deferred tax asset related to prior intercompany
transfers of IOs (the IO Tax Asset). The first agreement, executed during the first
quarter, confirmed the previously established tax basis of all the IO transfers within the
Doral Financial corporate group. The second agreement, executed during the third quarter,
clarified that for Puerto Rico income tax purposes, the IO Tax Asset is a stand-alone
intangible asset subject to a straight-line amortization based on a useful life of 15 years.
Furthermore, the agreement provided that the IO Tax Asset could be transferred to any entity
within Doral Financial corporate group, including the Puerto Rico banking subsidiary.The realization of the deferred tax asset is dependent upon the existence of, or generation
of, taxable income during the remaining 12 (including 2008-15 year original amortization
period) year period in which the amortization deduction of the IO Tax Asset is available. In
determining the valuation allowance recorded, the Company considered both the positive and
negative evidence regarding the Companys ability to generate sufficient taxable income to
realize its deferred tax assets. Positive evidence included projected earnings attributable
to the core business through the projection period, repayment of the
$625.0 million in senior
notes due in July of 2007, to the recapitalization which served to significantly reduce
interest expense, results of the leveraging plan, which includes loan growth of
approximately $0.5 billion through purchases of single-family loans and the purchase of
approximately $1.0 billion in securities. Further positive evidence included the ability to
isolate verifiable nonrecurring charges in historical losses, the core earnings of the
business absent these nonrecurring items and the flexibility to move IO Tax Asset
amortization and the Settlement expenses to profitable entities according to Doral
Financials agreements with the Puerto Rico Treasury Department. During the fourth quarter
of 2007, the Company implemented certain tax planning actions in order to generate future
taxable income that contributed to the reduction in its valuation allowance. These include
the increase in interest earning assets of Doral Bank PR, through
among other things,
transferring certain assets to Doral Bank PR. Negative evidence
included the Companys recorded losses for the first quarter of
2008 and for the years ended
December 31, 2007 and 2006 and the shorter operating loss carry-forward period of 7 years, as well
as uncertainty regarding its ability to generate future taxable income. Negative evidence
also included the Risks Factors described in Item 1A of our Annual Report on Form 10-K for
the year ended December 31, 2007.Failure to achieve sufficient taxable income might affect the ultimate
realization of the net deferred tax asset. Factors that may affect the Companys ability
to achieve sufficient taxable income include, but are not limited to, the following:
increased competition, a decline in margins and loss of market share.
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##### Table of Contents



In weighing the positive and negative evidence above, Doral Financial considered the
more-likely-than-not criteria contemplated in SFAS 109. Based on this analysis Doral
Financial concluded that it was more likely than not that a portion of the Companys gross
deferred tax assets of $494.5 million would not be realized. As a result, the Company
recorded a valuation allowance. At March 31, 2008, the deferred tax asset, net of its
valuation allowance of $89.7 million, amounted to approximately $404.8 million compared to
$392.9 million at December 31, 2007.u.
    
    GuaranteesIn November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation
No. 45, (FIN 45) Guarantors Accounting and Disclosure Requirements for Guarantees. This
interpretation requires a guarantor of certain types of guarantees to recognize, at the
inception of the guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. As of March 31, 2008, the Company had outstanding $4.5 million in
commercial and financial standby letters of credit. The fair value on these commitments is
not significant.In the ordinary course of business, Doral Financial makes
certain representations and warranties to purchasers and insurers of
mortgage loans, and in certain circumstances, such as in the event of
early or first payment default, the Company retains credit risk
exposure on those loans. If there is a breach of a representation or
warranty or if there is an early payment default, Doral Financial may
be required to repurchase the mortgage loan and bear any subsequent
loss related to the loan. Doral Financial works with purchasers to
review the claims and correct alleged documentation deficiencies. For
the quarter ended March 31, 2008, repurchases amounted to $5.8
million.Certain of the Companys mortgage loan sale and securitization activities involve transfers
of mortgage loans subject to recourse arrangements that require Doral Financial to
repurchase or substitute the loan if the loans are 90  120 days or more past due or
otherwise in default. Under certain of these arrangements, the recourse obligation is
terminated upon compliance with certain conditions, which generally involve: (1) the lapse
of time (normally from four to seven years) (2) the lapse of time combined with certain
other conditions such as the unpaid principal balance of the mortgage loans falling below a
specific percentage (normally less than 80%) of the appraised value of the underlying
property or (3) the amount of loans repurchased pursuant to recourse provisions reaching a
specific percentage of the original principal amount of loans sold (generally from 10% to
15%). As of March 31, 2008, the Companys records reflected that the outstanding principal
balance of loans sold subject to full or partial recourse was $1.3 billion. As of such date,
the Companys records also reflected that the maximum contractual exposure to Doral
Financial if it were required to repurchase all loans subject to recourse was $1.1 billion.
Doral Financials contingent obligation with respect to its recourse provision is not
reflected on the Companys Consolidated Financial Statements, except for a liability of
$11.2 million, as of March 31, 2008, for estimated losses from such recourse agreements,
which is included in Accrued expenses and other liabilities.v.
    
    Related Party TransactionsAt March 31, 2008 and December 31, 2007, the Company had $4.3 million
and $7.4 million of loans outstanding to officers, directors and 5% or more stockholders, of which
$4.0 million and $6.8 million are secured by mortgages on real estate, respectively.Since 2000, Doral Financial has done business with an entity that provides property inspection
services and is co-owned by the spouse of an Executive VP of the Company. The amount paid to this Company
during the first quarter of 2008 amounted to $366,000. The amount paid during 2007 to this Company
amounted to $1.5 million.At March 31, 2008 and December 31, 2007, the Company paid $336,000 and $1.9 million,
respectively, in professional services related to Doral Holdings.w.
    
    Commitments and ContingenciesThe Company enters into financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
may include commitments to extend credit and sell mortgage-backed securities and loans. At
March 31, 2008, commitments to extend credit amounted to approximately $221.1 million and
commitments to sell mortgage-backed securities and loans amounted to approximately $220.3
million. Commitments to extend credit are agreements to lend to a customer as long as the
conditions established in the contract are met. Commitments generally have fixed expiration
dates or other termination clauses. Generally, the Company does not enter into interest
rate lock agreements with borrowers.
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Doral Financial and its subsidiaries are defendants in various lawsuits arising in the
ordinary course of business. In the opinion of Doral Financials management, except as
described below, the pending and threatened legal proceedings of which management is aware
will not have a material adverse effect on the financial condition or results of operations
of Doral Financial.Since 2005, Doral Financial became a party to various legal proceedings, including
regulatory and judicial investigations and civil litigation, arising as a result of the
Companys restatement.LawsuitsOn June 21, 2005, a lawsuit was filed against Doral Financial and certain of its former
officers and directors in the U.S. District Court for the District of Puerto Rico. Between
June 29, 2005 and August 20, 2005, plaintiff filed three amended complaints. The suit as
amended concerns a divorce settlement entered by a the former chairman and chief executive
officer of Doral Financial and also alleges, among other things, violations of federal
securities laws, Racketeer Influenced and Corrupt Organizations (RICO) Act violations, as
well as fraud and breach of contract under Puerto Rico law, some of which are stated in the
alternative as derivative claims on behalf of Doral Financial. Plaintiff seeks an award of
damages, costs and expenses. All defendants have moved to dismiss the complaint as amended,
and such motions have not been decided. On March 6, 2008, the plaintiff and the defendants
entered into a settlement agreement to dismiss the case in exchange for the defendants
agreeing not to seek attorneys fees and costs from the plaintiff. The case was dismissed
with prejudice on March 14, 2008.In addition, on October 14, 2005, the Company and certain former officers and directors of
the Company were named as defendants in an action brought by an individual plaintiff filed
in the U.S. District Court for the Southern District of New York, alleging violations of
federal securities laws and various Kentucky state laws based on making allegedly materially
false and misleading statements concerning Dorals financial results, allegedly failing to
disclose material information concerning the valuation of the companys IOs, and allegedly
misleading the plaintiff as to the Companys vulnerability to interest rate increases.
Plaintiff seeks compensatory damages in the amount of $292,000 for losses the plaintiff
allegedly incurred in connection with Doral Financial securities purchased between January
19, 2005 and March 18, 2005, as well as unspecified punitive damages, interest, costs and
other expenses. On March 11, 2008, Doral and the plaintiff entered into an agreement to
settle all claims in the case, and on March 13, 2008, the plaintiff filed with the court a
notice of voluntary dismissal with prejudice of all claims against all defendants.On September 14, 2007, a service provider filed a Demand for Arbitration before the American
Arbitration Association alleging that Doral Financial failed to pay for services and comply
with the terms of a written agreement. This service provider is requesting payment of its
monthly service charges and its investment in equipment and software to perform the Data
Processing Services Agreement it entered into with the Company which totals approximately
$4.7 million. Doral Financial agreed to mediation, which will be conducted in Puerto Rico.
The mediation is due to commence in May 2008.Other Legal MattersOn August 24, 2005, the U.S. Attorneys Office for the Southern District of New York served
Doral Financial with a grand jury subpoena seeking the production of certain documents
relating to issues arising from the restatement, including financial statements and
corporate, auditing and accounting records prepared during the period from January 1, 2000
to the date of the subpoena. Doral Financial is cooperating with the U.S. Attorneys Office
in this matter, including by producing documents and other information in response to the
subpoena. Doral Financial cannot predict the outcome of this matter and is unable to
ascertain the ultimate aggregate amount of monetary liability or financial impact to Doral
Financial of this matter.Banking Regulatory MattersOn March 17, 2006, Doral Financial entered into a consent cease and desist order with the
Federal Reserve. The mutually agreed upon order required Doral Financial to conduct reviews
of its mortgage portfolio, and to submit plans regarding the maintenance of capital adequacy
and liquidity. The consent order contains restrictions on Doral Financial from obtaining
extensions of credit from, or entering into certain asset
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purchase and sale transactions with its banking subsidiaries, without the prior approval of
the Federal Reserve. The consent order restricts Doral Financial from receiving dividends
from the banking subsidiaries without the approval of the respective primary banking
regulatory agency. Doral Financial is also required to request permission from the Federal
Reserve for the payment of dividends on its common stock and preferred stock not less than
30 days prior to a proposed dividend declaration date and requires Doral Financial and Doral
Bank PR to submit plans regarding the maintenance of minimum levels of capital and
liquidity. Doral Financial has complied with these requirements and no fines or civil money
penalties were assessed against the Company under the order.Effective January 14, 2008 and in recognition of the corrective actions taken, the Federal
Deposit Insurance Corporation (FDIC) and the Office of Commissioner terminated the March
16, 2008 Cease and Desist Order (the Former Order) applicable to the Companys Puerto Rico
banking subsidiary, Doral Bank PR. The Former Order was similar to the consent order between
Doral Financial and the Federal Reserve and related to safety and soundness issues in
connection with the announcement by the Company in April 2005 of the need to restate its
financial statements for the period from January 1, 2000 to December 31, 2004. Under the
terms of the Former Order, Doral Bank PR could not pay a dividend or extend credit to, or
enter into certain asset purchase and sale transactions with Doral Financial or its
subsidiaries, without the prior approval of the FDIC and the Office of the Commissioner.On October 23, 2006, Doral Bank PR entered into a Memorandum of Understanding (MOU) with
the FDIC regarding certain deficiencies in Doral Bank PRs compliance with the data
reporting requirements of the Home Mortgage Disclosure Act, and weaknesses in its policies
and procedures regarding compliance with the National Flood Insurance Act (as amended).
Additionally, in connection with the deficiencies related to the data reporting requirements
of the Home Mortgage Disclosure Act, Doral Bank PR consented to the payment of $12,000 of
civil monetary penalties. Doral Bank PR also anticipates that it will be required to pay
civil monetary penalties of up to approximately $125,000 to the FDIC related to the
deficiencies in compliance with the National Flood Insurance Act related to deficiencies in
flood insurance coverage, failure to maintain continuous flood insurance protection and
failure to ensure that borrowers obtained flood insurance.On February 19, 2008, Doral Bank PR entered into a consent order with the FDIC relating to
failure to comply with certain requirements of the Bank Secrecy Act (BSA). The regulatory
findings that resulted in the order were based on an examination conducted for the period
ended December 31, 2006, and were related to findings that had initially occurred in 2005
prior to the Companys change in management and recapitalization. The order replaces the
Memorandum of Understanding with the FDIC and the Office of the Commissioner dated August
23, 2006. Doral Bank PR was not required to pay any civil monetary penalties in connection
with this order. The order requires Doral Bank PR to correct certain violations of law,
within the timeframes set forth in the order (generally 120 days) including certain
violations regarding the BSA, failure to maintain an adequate BSA/Anti-Money Laundering
Compliance Program (a BSA/AML Compliance Program) and failure to operate with an effective
compliance program to ensure compliance with the regulations promulgated by the United
States Department of Treasurys Office of Foreign Asset Control (OFAC). The order requires
Doral Bank PR to, among other things, amend its policies, procedures and processes and
training programs to ensure full compliance with the BSA and OFAC; conduct an expanded
BSA/AML risk assessment of its operations, enhance its due diligence and account monitoring
procedures, review its BSA/AML staffing and resource needs, amend its policies and
procedures for internal and external audits to include periodic reviews for BSA/AML
compliance, OFAC compliance and perform annual independent testing programs for BSA/AML and
OFAC requirements. The order also requires Doral Bank PR to engage an independent consultant
to review account and transaction activity from April 1, 2006 through March 31, 2007 to
determine compliance with suspicious activity reporting requirements. Doral Financial
expects that Doral Bank PR will comply with the requirements of the order within the
required timeframes. A copy of the order was filed as an exhibit to Doral Financials
Current Report on Form 8-K filed on February 22, 2008.Doral Financial and Doral Bank PR have undertaken specific corrective actions to comply with
the requirements of the consent orders and the MOUs, but cannot give assurances that such
actions are sufficient to prevent further enforcement actions by the banking regulatory
agencies. Doral Financial expects that the implementation of these corrective actions will
result in additional compliance-related expenses. However, these expenses are not
anticipated to have a material financial impact on the Company or Doral Bank PR.
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##### Table of Contents



x.
    
    Fair Value of Assets and LiabilitiesThe Company uses fair value measurements to record fair value adjustments to certain assets
and liabilities and to determine fair value disclosures. Securities held for trading,
securities available for sale, derivatives and servicing assets are recorded at fair value
on a recurring basis. Additionally, from time to time, we may be required to record at fair
value other assets on a nonrecurring basis, such as loans held for sale, loans receivable
and certain other assets. These nonrecurring fair value adjustments typically involve
application of lower-of-cost-or-market accounting or write-downs of individual assets.Effective January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157 defines fair
value, establishes a consistent framework for measuring fair value and expands disclosure
requirements for fair value measurements. The Company adopted SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, in 2008, but chose not to apply the fair value
option to any of its financial assets or financial liabilities.Fair Value HierarchyUnder SFAS No. 157, the Company groups its assets and liabilities at fair value in three
levels, based on the markets in which the assets and liabilities are traded and the
reliability of the assumptions used to determine fair value. These levels are:
    Determination of Fair Value
    Securities held for trading: Servicing assets and interest-only strips, and Derivatives
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##### Table of Contents



Securities available for sale:
 Loans held for sale:
 Loans receivable:
 Servicing assets and interest-only strips:
 Derivatives:
 29




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##### Table of Contents



Financial
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
  (In thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Securities held for trading
    
    $
    204,138
    
    
    $
    151,078
    
    
    $
    
    
    
    $
    53,060
    (1)Securities available for sale
    
    
    3,261,728
    
    
    
    1,136,993
    
    
    
    2,103,854
    
    
    
    20,881Derivatives(2)
    
    
    992
    
    
    
    
    
    
    
    992
    
    
    
    Servicing assets
    
    
    139,570
    
    
    
    
    
    
    
    
    
    
    
    139,570$
    3,606,428
    
    
    $
    1,288,071
    
    
    $
    2,104,846
    
    
    $
    213,511Liabilities:Derivatives(3)
    
    $
    8,994
    
    
    $
    756
    
    
    $
    8,238
    
    
    $
    
 
 (1)
    
    Represents interest-only strips, of which variable interest-only strips represents substantially all of the balance. Also,
includes certain private label and agency CMOs for which quoted market prices are not available.(2)
    
    Included as part of securities held for trading in the
Consolidated Statement of Financial Condition.(3)
    
    Included as part of accrued expenses and other liabilities in
the Consolidated Statement of Financial Condition.  Quarter ended March 31, 2008Securities
    
    
    Securities
    
    
    Servicing(In thousands)
    
    held for trading
    
    
    available for sale
    
    
    assetsBeginning balance
    
    $
    67,992
    
    
    $
    7,597
    
    
    $
    150,238Amortization
    
    
    
    
    
    
    
    
    
    
    Change in fair value
    
    
    (580
    )
    
    
    (1,068
    )
    
    
    (11,597
    )Transfer
    
    
    (14,352
    )
    
    
    14,352Capitalization
    
    
    
    
    
    
    
    
    
    
    929Ending balance
    
    $
    53,060
    
    
    $
    20,881
    
    
    $
    139,570
 Financial
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
  Loss for theQuarter Ended(In thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    March 31, 2008Assets:Loans held for sale(1)
    
    $
    251,221
    
    
    $
    
    
    
    $
    251,221
    
    
    $
    
    
    
    $
    Loans receivable(2)
    
    
    69,006
    
    
    
    
    
    
    
    
    
    
    
    69,006
    
    
    
    (4,553
    )Total
    
    $
    320,227
    
    
    $
    
    
    
    $
    251,221
    
    
    $
    69,006
    
    
    $
    (4,553
    )
 
 (1)
    
    Excludes $125.5 million of GNMA defaulted loans (for which the Company has the option, but not an obligation, to buy-back
from the pools serviced) included as part of the loans held for sale portfolio.(2)
    
    Represents the carrying value and related write-downs of loans for which adjustments are based on the appraised value of
the collateral. 30




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y.
    
    DerivativesAs of March 31, 2008 and December 31, 2007, the Company had the following derivative
financial instruments outstanding:
 March 31, 2008
    
    
    December 31, 2007Fair Value
    
    
    
    
    
    
    Fair ValueNotional
    
    
    
    
    
    
    
    
    
    
    Notional(In thousands)
    
    Amount
    
    
    Asset
    
    
    Liability
    
    
    Amount
    
    
    Asset
    
    
    LiabilityCash Flow Hedges:Interest rate swaps
    
    $
    195,000
    
    
    $
    
    
    
    $
    (8,238
    )
    
    $
    80,000
    
    
    $
    
    
    
    $
    (937
    )Other Derivatives:Interest rate swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,000
    
    
    
    
    
    
    
    (1,951
    )Interest rate caps
    
    
    270,000
    
    
    
    992
    
    
    
    
    
    
    
    270,000
    
    
    
    1,481
    
    
    
    Forward contracts
    
    
    26,000
    
    
    
    
    
    
    
    (756
    )
    
    
    29,000
    
    
    
    
    
    
    
    (6
    )Total
    
    $
    491,000
    
    
    $
    992
    
    
    $
    (8,994
    )
    
    $
    494,000
    
    
    $
    1,481
    
    
    $
    (2,894
    )
  (Loss) Gain for the
    
    
    Other Comprehensive Loss for theQuarter Ended
    
    

Quarter
Ended (1)March 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Cash Flow Hedges:Interest rate swaps
    
    $
    
    
    
    $
    
    
    
    $
    (3,167
    )
    
    $
    Other Derivatives:Interest rate swaps
    
    
    (157
    )
    
    
    (4,529
    )
    
    
    
    
    
    
    Interest rate caps
    
    
    (490
    )
    
    
    
    
    
    
    
    
    
    
    Forward contracts
    
    
    (710
    )
    
    
    141
    
    
    
    
    
    
    
    Total
    
    $
    (1,357
    )
    
    $
    (4,388
    )
    
    $
    (3,167
    )
    
    $
    
 
 (1)
    
    Net of tax.    31




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##### Table of Contents



March 31, 2008
    
    
    December 31, 2007Fair Value
    
    
    
    
    
    
    Fair ValueNotional
    
    
    
    
    
    
    
    
    
    
    Notional(In thousands)
    
    Amount
    
    
    Asset
    
    
    Liability
    
    
    Amount
    
    
    Asset
    
    
    LiabilityDerivatives designated as cash flow hedges:Hedging FHLB advances
    
    $
    195,000
    
    
    $
    
    
    
    $
    (8,238
    )
    
    $
    80,000
    
    
    $
    
    
    
    $
    (937
    )Derivatives not designated as cash flow hedges
    
    
    296,000
    
    
    
    992
    
    
    
    (756
    )
    
    
    414,000
    
    
    
    1,481
    
    
    
    (1,957
    )Total
    
    $
    491,000
    
    
    $
    992
    
    
    $
    (8,994
    )
    
    $
    494,000
    
    
    $
    1,481
    
    
    $
    (2,894
    )
 Cash Flow HedgesAs of March 31, 2008 and December 31, 2007, the Company had $195.0 million and $80.0
million outstanding, respectively, pay fixed interest rate swaps designated as cash flow
hedges with maturities between September 2008 and November 2012, and between September 2008
and October 2012, respectively. The Company designated the mentioned pay fixed interest rate
swaps to hedge the variability of future interest cash flows of adjustable rate FHLB
Advances. For the quarter ended March 31, 2008 and the year ended December 31, 2007, no
ineffectiveness was recognized. As of March 31, 2008, the amount of cash flow hedges
included in accumulated other comprehensive loss, net of tax, was an unrealized loss of $3.7
million, which the Company expects to reclassify approximately $2.2 million into earnings
during the next twelve months. As of December 31, 2007, the amount of cash flow hedge
included in accumulated other comprehensive loss, net of tax, was an unrealized loss of $0.6
million.The Company held $115.0 million in freestanding interest rate swaps agreements as of
December 31, 2007. These swaps were designated as cash flow hedges as of January 1, 2008, to
hedge the variability of future interest cash flows of adjustable rate FHLB Advances.Trading and Non-Hedging ActivitiesDoral Financial held $296.0 million and $414.0 million in notional value of derivatives not
designated as cash flow hedges at March 31, 2008 and December 31, 2007, respectively. At
March 31, 2008, these instruments were in a net gain position with net estimated fair values
of $236,000, compared to a net loss position with net estimated fair values of $476,000 as
of December 31, 2007.The Company purchases interest rate caps to manage its interest rate exposure. Interest rate
cap agreements generally involve purchases of out of money caps to protect the Company from
larger rate moves and to provide the Company with positive convexity. These products are not
linked to specific assets and liabilities that appear on the balance sheet or to a
forecasted transaction and, therefore, do not qualify for hedge accounting. As of March 31,
2008 and December 31, 2007, the Company had outstanding interest rate caps with a notional
amount of $270.0 million. The Company did not have interest rate
caps outstanding as of March 31, 2007. For the quarter ended March 31, 2008, the Company recognized losses of $0.5 million on
interest rate caps transactions.The Company entered into forward contracts to create an economic hedge on its mortgage
warehouse line. As of March 31, 2008 and December 31, 2007, the Company had forwards with a
notional amount of $26.0 million and $29.0 million,
respectively compared to $702.7 million as of March 31,
2007. The Company recorded a loss of
$0.7 million for the quarter ended March 31, 2008, compared
to a gain of $0.1 million for the corresponding period of 2007, on these derivatives.Credit risk related to derivatives arises when amounts receivable from a counterparty exceed
those payable. Because the notional amount of the instruments only serves as a basis for
calculating amounts receivable or payable, the risk of loss with any counterparty is limited
to a small fraction of the notional amount. Doral Financials maximum loss related to credit
risk is equal to the gross fair value of its derivative instruments. Doral Financial deals
only with derivative dealers that are national market makers with strong credit ratings in
its derivatives activities. The Company further controls the risk of loss by subjecting
counterparties to credit reviews and approvals similar to those used in making loans and
other extensions of credit. In addition, counterparties are required to provide cash
collateral to Doral Financial when their unsecured loss positions exceed certain negotiated
limits.All derivative contracts to which Doral Financial is a party settle monthly, quarterly or
semiannually. Further, Doral Financial has netting agreements with the dealers and only does
business with credit worthy
 32




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dealers. Because of these factors, Doral Financials credit risk exposure related to
derivatives contracts at March 31, 2008 and December 31, 2007 was not considered material.z.
    
    Recent Accounting PronouncementsWritten Loan Commitments Recorded at Fair Value Through Earnings. On November 5, 2007, the
SEC issued Staff Accounting Bulletin (SAB) No. 109, which supersedes SAB No. 105,
Application of Accounting Principles to Loan Commitments, and expresses the current view
of the staff that, consistent with the guidance in SFAS No. 156, Accounting for Servicing
of Financial Assets, and SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, the expected net future cash flows related to the associated
servicing of the loan should be included in the measurement of all written loan commitments
that are accounted for at fair value through earnings. SAB 109 also retains the staff view
expressed in SAB 105, that indicated that the staff believed that internally-developed
intangible assets (such as customer relationship intangible assets) should not be recorded
as part of the fair value of a derivative loan commitment and prospective basis to
derivative loan commitments issued or modified in fiscal quarters beginning after December
15, 2007. The adoption of the provisions of SAB 109 did not have a material impact on
the Companys financial statements.Noncontrolling Interests in Consolidated Financial Statements. On December 2007, the FASB
issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS
160). This Statement amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS
160 applies to all entities that prepare consolidated financial statements, except
not-for-profit organizations.The significant changes upon adoption of SFAS 160 are the definition, classification and
measurement of noncontrolling interest (previously referred to as minority interest). SFAS
160 defines noncontrolling interest as the portion of equity (net assets) in a subsidiary
not attributable to a parent. It also requires the presentation of the noncontrolling
interest within the equity section of the statement of financial position separately from
parents equity and should be clearly identified to distinguish it from other components of
the parents equity.SFAS 160 clarifies that all earnings and losses of the subsidiary should be attributed to
the parent and the noncontrolling interest, even if the attribution of losses results in a
debit balance in stockholders equity. In addition, SFAS 160 provides that upon a loss of
control (Deconsolidation), any gain or loss on the interest sold will be recognized in
earnings.SFAS 160 applies to all fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Calendar year end public companies will have to
adopt SFAS 160 in the first quarter of 2009. Earlier application is not permitted. The
Company is currently evaluating the effect, if any, of the adoption of this Statement on its
financial statements, commencing on January 1, 2009.Business Combinations. On December 2007, the FASB issued SFAS No. 141(revised), Business
Combinations. This statement replaces FASB Statement No. 141 and applies to all
transactions or other events in which an entity (the acquirer) obtains control of one or
more business. SFAS 141(revised) retains the fundamental requirements in Statement 141 that
the acquisition method of accounting (purchase method) be used for all business
combinations. This statement defines the acquirer as the entity that obtains control in the
business combination and requires the acquirer to be identified.SFAS 141 (revised) requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquired entity at the acquisition date,
measured at their fair values as of that date. In addition, this statement expands and
improves the information reported about assets acquired and liabilities assumed arising from
contingencies. Contingencies arising from a business combination should be recognized as of
the acquisition date and measured at their acquisition date fair values.This Statement applies prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period on or after December 15,
2008. Earlier application is not permitted. The effective date of this Statement is the same
as that of the related SFAS Statement No. 160, Noncontrolling Interest in Consolidated
Financial Statements. The Company is currently evaluating the effect, if any, of the
adoption of this Statement on its financial statements, commencing on January 1, 2009.
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Disclosures about Derivative Instruments and Hedging Activities. In March 2008, The FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement improves the transparency of financial reporting and
expands the disclosure requirements of Statement No. 133 with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under Statement No. 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows.To meet those objectives, this statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivatives instruments, and disclosures about credit-risk-related contingent features in derivatives agreements.This statement has the same scope as Statement No. 133 and accordingly, applies to all entities. This Statement applies to all derivative instruments, including bifurcated derivative instruments and related hedged items accounted for under Statement 133 and its related interpretations. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not
 require, comparative disclosures for earlier periods at initial adoption. The Company is currently evaluating the effect, if any, of the adoption of this Statement on its financial statements, commencing on January 1, 2009.
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FORWARD LOOKING STATEMENTS
   
    
    the strength or weakness of the real estate markets and of the consumer and
commercial credit sectors and its impact on the credit quality of Doral Financials
loans and other assets;
    
    Doral Financials ability to derive sufficient income to realize the benefit of
its deferred tax assets;
    
    the strength or weakness of the Puerto Rico and the United States economies;
    
    changes in interest rates and the potential impact of such changes in interest
rates on Doral Financials net interest income;
    
    the performance of U.S. capital markets;
    
    the fiscal and monetary policy of the federal government and its agencies;
    
    potential adverse development from ongoing enforcement actions by bank
regulatory agencies;
    
    risks arising from material weaknesses in Doral Financials internal control
over financial reporting; and
    
    developments in the regulatory and legal environment for financial services
companies in Puerto Rico and the United States.
  Risk
Factors
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW OF RESULTS OF OPERATIONS
   
    
    Net loss attributable to common shareholders for the first quarter of 2008 amounted
to $10.6 million, or a diluted loss per share of $0.20, compared to net loss of $45.6
million, or a diluted loss per share of $8.45, for the first quarter of 2007.
    
    Net interest income for the first quarter of 2008 was $39.0 million, compared to
$38.2 million for the same period in 2007. The increase in net interest income for
2008, compared to 2007, was related to the reduction in the Companys leverage, as a
result of $610.0 million equity investment by Doral Holdings on July 19, 2007. This
transaction allowed the Company to repay its $625.0 million senior notes due July 20,
2007. This was partially offset by the reduction in average earning assets of $2.1
billion largely related to the sale of investment securities associated with the
Companys efforts to improve its interest rate risk profile. Average interest-earning
assets decreased from $10.8 billion for the first quarter of 2007 to $8.7 billion for
the first quarter of 2008, while the average interest bearing-liabilities decreased
from $10.0 billion to $7.6 billion, respectively. This reduction in leverage also
resulted in increase in the net interest margin from 1.43% in the first quarter of 2007
to 1.80% in the first quarter of 2008 (see Tables A and B below for information
regarding the Companys net interest income).
    
    For the first quarter of 2008, the provision for loan and lease losses was $4.8
million, compared to $6.0 million for the same period in 2007. The decrease in the
provision for loan losses was principally related to the improvement in performance of
the construction loan portfolio, benefiting from PR governments new home purchase
incentive programs and the Companys initiatives to assist home builders in sales and
marketing. The decrease in the provision during the first quarter of 2008 followed a
period of substantial increases in the allowance for loan and lease losses over the
preceding 24 months. The reduction in the provision for construction loan portfolio was
offset by an increase in the provision for the commercial and mortgage loan portfolios.
    
    Non-interest income for the first quarter of 2008 was $17.4 million, compared to
$11.6 million for the same period in 2007. The increase in non-interest income of $5.8
million for the first quarter of 2008, compared to the same period in 2007, was
primarily driven by improved business fundamentals resulting in increased banking and
insurance fees and the implementation of economic hedging programs designed to protect
the Company from major fluctuation in the value of its servicing
rights and its loans held for sale. The Company uses U.S. Treasury securities,
classified as held for trading, and mortgage-backed securities forward contracts in its
economic hedging programs.
    
    Non-interest expense for the first quarter of 2008 was $54.6 million, compared to
$75.2 million for the corresponding period in 2007. The $20.6 million reduction in
non-interest expense for the quarter was driven by the elimination of expenses
associated with the 2007 recapitalization efforts and cost control measures implemented
by the Company. The reductions impacted all expense categories, excluding advertising
and communication and information systems expense which rose due to the Companys brand
refresh efforts and increased retail banking activities. The largest reductions were in
professional services, which saw a decline of $13.5 million, and compensation and
benefits, which declined by $7.5 million.
    
    For the first quarter of 2008, Doral Financial recognized an income tax benefit of
$0.6 million, compared to an income tax expense of $5.9 million for the corresponding
period in 2007. The
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recognition of income tax benefit for the first quarter of 2008 was
mostly related to the increase of the deferred tax asset.
    
    During the first quarter of 2008, the Company had other comprehensive loss of
approximately $57.2 million, compared to other comprehensive income of $9.8 million for
the corresponding 2007 period. The Companys other comprehensive loss for the first
quarter of 2008 was principally related to the reduction in values of its available for
sale securities. As of March 31, 2008, the Companys balance for accumulated other
comprehensive loss (net of income tax benefit) increased to $90.3 million, compared to
$33.1 million as of December 31, 2007.
    
    Doral Financials loan production for the first quarter of 2008 was $372.1 million,
compared to $247.5 million for the comparable period in 2007, an increase of
approximately 50%. The increase in Doral Financials loan production for the first
quarter of 2008 was primarily the result of the Companys efforts to attract new
clients, implement cross-selling strategies and the offering of new products.
    
    Total assets as of March 31, 2008 were $10.5 billion, an increase of 13% compared to
$9.3 billion as of December 31, 2007. The increase in total assets during 2008 was due
primarily to an increase in the Companys securities portfolio due to the purchase of
approximately of $1.6 billion of available for sale investment securities during the
first quarter of 2008. The increase in total liabilities of $1.2 billion was
driven by the increase of borrowings used to finance the purchase of these securities.
 INTERNAL CONTROL OVER FINANCIAL REPORTING
  CRITICAL ACCOUNTING POLICIES
  Fair Value Measurements
 Fair Value of Financial Instruments
  37




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
    
    Level 1  Valuation is based upon quoted prices for identical instruments
traded in active markets.
    
    Level 2  Valuation is based upon quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant assumptions are
observable in the market, or are derived principally from or corroborated by observable
market data, by correlation or by other means.
    
    Level 3  Valuation is generated from model-based techniques that use significant
assumptions not observable in the market. These unobservable assumptions reflect the
Companys estimates of assumptions that market participants would use in pricing the
asset or liability. Valuation techniques include use of option pricing models, discounted
cash flow models and similar techniques.
      38




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RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 2008 AND 2007
  NET INTEREST INCOME
     39




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TABLE A  AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME  (Dollars in thousands)
 QUARTER ENDED MARCH 31,2008
    
    
    2007AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEBALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    5,450,698
    
    
    $
    85,382
    
    
    
    6.30
    %
    
    $
    5,163,015
    
    
    $
    89,593
    
    
    
    7.04
    %Mortgage-backed securities
    
    
    1,265,345
    
    
    
    19,102
    
    
    
    6.07
    %
    
    
    1,738,894
    
    
    
    22,240
    
    
    
    5.19
    %Interest-only strips
    
    
    46,658
    
    
    
    1,674
    
    
    
    14.43
    %
    
    
    52,143
    
    
    
    1,494
    
    
    
    11.62
    %Investment securities
    
    
    1,174,303
    
    
    
    14,766
    
    
    
    5.06
    %
    
    
    2,584,714
    
    
    
    27,812
    
    
    
    4.36
    %Other interest-earning assets
    
    
    801,160
    
    
    
    7,184
    
    
    
    3.61
    %
    
    
    1,248,729
    
    
    
    16,109
    
    
    
    5.23
    %Total interest-earning assets/interest income
    
    
    8,738,164
    
    
    $
    128,108
    
    
    
    5.90
    %
    
    
    10,787,495
    
    
    $
    157,248
    
    
    
    5.91
    %Total non-interest-earning assets
    
    
    821,301
    
    
    
    
    
    
    
    
    
    
    
    745,800Total assets
    
    $
    9,559,465
    
    
    
    
    
    
    
    
    
    
    $
    11,533,295LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    3,861,770
    
    
    $
    42,648
    
    
    
    4.44
    %
    
    $
    3,876,795
    
    
    $
    42,788
    
    
    
    4.48
    %Repurchase agreements
    
    
    1,536,188
    
    
    
    18,313
    
    
    
    4.79
    %
    
    
    3,704,961
    
    
    
    39,636
    
    
    
    4.34
    %Advances from FHLB
    
    
    1,523,560
    
    
    
    17,258
    
    
    
    4.56
    %
    
    
    1,034,500
    
    
    
    13,608
    
    
    
    5.33
    %Loans payable
    
    
    390,840
    
    
    
    5,509
    
    
    
    5.67
    %
    
    
    439,185
    
    
    
    7,628
    
    
    
    7.04
    %Notes payable
    
    
    278,619
    
    
    
    5,336
    
    
    
    7.70
    %
    
    
    923,507
    
    
    
    15,424
    
    
    
    6.77
    %Total interest-bearing liabilities/interest expense
    
    
    7,590,977
    
    
    $
    89,064
    
    
    
    4.72
    %
    
    
    9,978,948
    
    
    $
    119,084
    
    
    
    4.84
    %Total non-interest-bearing liabilities
    
    
    707,259
    
    
    
    
    
    
    
    
    
    
    
    696,988Total liabilities
    
    
    8,298,236
    
    
    
    
    
    
    
    
    
    
    
    10,675,936Stockholders equity
    
    
    1,261,229
    
    
    
    
    
    
    
    
    
    
    
    857,359Total liabilities and stockholders equity
    
    $
    9,559,465
    
    
    
    
    
    
    
    
    
    
    $
    11,533,295Net interest-earning assets
    
    $
    1,147,187
    
    
    
    
    
    
    
    
    
    
    $
    808,547Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    39,044
    
    
    
    
    
    
    
    
    
    
    $
    38,164Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.18
    %
    
    
    
    
    
    
    
    
    
    
    1.07
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.80
    %
    
    
    
    
    
    
    
    
    
    
    1.43
    %Net interest-earning assets ratio(5)
    
    
    
    
    
    
    
    
    
    
    115.11
    %
    
    
    
    
    
    
    
    
    
    
    108.10
    %
 
 (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 $293,000 and $1.4 million for the first quarter of 2008 and 2007, respectively, of income from prepayment penalties related to the Companys loan portfolio.(3)
    
    Interest rate spread represents the difference between Doral Financials weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities.(4)
    
    Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets.(5)
    
    Net interest-earning assets ratio represents average interest-earning assets as a percentage of average interest-bearing liabilities.  40




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TABLE B  NET INTEREST INCOME VARIANCE ANALYSIS  (In thousands)
 QUARTER ENDEDMARCH 31,2008 COMPARED TO 2007INCREASE (DECREASE) DUE TO:VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    5,297
    
    
    $
    (9,508
    )
    
    $
    (4,211
    )Mortgage-backed securities
    
    
    (5,970
    )
    
    
    2,832
    
    
    
    (3,138
    )Interest-only strips
    
    
    (154
    )
    
    
    334
    
    
    
    180Investment securities
    
    
    (15,114
    )
    
    
    2,068
    
    
    
    (13,046
    )Other interest-earning assets
    
    
    (5,742
    )
    
    
    (3,183
    )
    
    
    (8,925
    )TOTAL INTEREST INCOME VARIANCE
    
    
    (21,683
    )
    
    
    (7,457
    )
    
    
    (29,140
    )INTEREST EXPENSE VARIANCEDeposits
    
    $
    (42
    )
    
    $
    (98
    )
    
    $
    (140
    )Repurchase agreements
    
    
    (23,066
    )
    
    
    1,743
    
    
    
    (21,323
    )Advances from FHLB
    
    
    6,540
    
    
    
    (2,890
    )
    
    
    3,650Loans payable
    
    
    (824
    )
    
    
    (1,295
    )
    
    
    (2,119
    )Notes payable
    
    
    (10,739
    )
    
    
    651
    
    
    
    (10,088
    )TOTAL INTEREST EXPENSE VARIANCE
    
    
    (28,131
    )
    
    
    (1,889
    )
    
    
    (30,020
    )NET INTEREST INCOME VARIANCE
    
    $
    6,448
    
    
    $
    (5,568
    )
    
    $
    880
 PROVISION FOR LOAN AND LEASE LOSSES
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NON-INTEREST INCOME
  Net Gain (Loss) on Mortgage Loan Sales and Fees.
  QUARTER ENDED
    
    QUARTER ENDED(In thousands)
    
    MARCH 31, 2008
    
    MARCH 31, 2007Total loan sales and securitizations
    
    $
    60,333
    
    
    $
    69,037MSRs capitalized
    
    $
    929
    
    
    $
    1,184
 Trading Activities.
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TABLE C  COMPONENTS OF TRADING ACTIVITIES
 QUARTER ENDEDMARCH 31,(In thousands)
    
    2008
    
    
    2007Net realized gains (losses) on sales of securities held for trading
    
    $
    2,766
    
    
    $
    (2,001
    )Gain on the IO valuation
    
    
    677
    
    
    
    4,547Net unrealized gains (losses) on trading securities, excluding IOs
    
    
    5,582
    
    
    
    (135
    )Net realized and unrealized losses on derivative instruments
    
    
    (1,357
    )
    
    
    (4,389
    )Total
    
    $
    7,668
    
    
    $
    (1,978
    )
  Net Gain (Loss) on Sale of Investment Securities.
 Net Servicing Income.
  43




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TABLE D  NET SERVICING (LOSS) INCOME
 QUARTER ENDED
    
    
    QUARTER ENDEDMARCH 31,
    
    
    MARCH 31,(In thousands)
    
    2008
    
    
    2007Servicing fees (net of guarantee fees)
    
    $
    8,394
    
    
    $
    9,782Late charges
    
    
    2,216
    
    
    
    2,365Prepayment penalties
    
    
    100
    
    
    
    130Interest loss
    
    
    (2,080
    )
    
    
    (610
    )Other servicing fees
    
    
    257
    
    
    
    58Servicing income, gross
    
    
    8,887
    
    
    
    11,725Change in fair value of mortgage servicing rights
    
    
    (11,598
    )
    
    
    (5,725
    )Total net servicing (loss) income
    
    $
    (2,711
    )
    
    $
    6,000
   Commissions, Fees and Other Income.
 TABLE E  COMMISSIONS, FEES AND OTHER INCOME
 QUARTER ENDEDMARCH 31,(In thousands)
    
    2008
    
    
    2007Retail banking fees
    
    $
    6,382
    
    
    $
    5,213Insurance agency commissions
    
    
    2,405
    
    
    
    2,323Asset management fees and commissions
    
    
    138
    
    
    
    143Other income
    
    
    935
    
    
    
    732Total
    
    $
    9,860
    
    
    $
    8,411
    NON-INTEREST EXPENSE
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TABLE F  NON INTEREST EXPENSE
 QUARTER ENDEDMARCH 31,(In thousands)
    
    2008
    
    
    2007Compensation and employee benefits
    
    $
    19,078
    
    
    $
    26,562Taxes, other than payroll and income taxes
    
    
    2,422
    
    
    
    2,847Advertising
    
    
    2,232
    
    
    
    1,362Professional services
    
    
    5,934
    
    
    
    19,442Communication and information systems
    
    
    5,480
    
    
    
    4,054Occupancy and other office expenses
    
    
    5,969
    
    
    
    6,299Depreciation and amortization
    
    
    4,055
    
    
    
    5,051Other
    
    
    9,393
    
    
    
    9,601Total non-interest expense
    
    $
    54,563
    
    
    $
    75,218
   INCOME TAXES
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BALANCE SHEET AND OPERATING DATA ANALYSIS
 PERFORMANCE RATIOS
  Quarter EndedMarch 31,2008
    
    
    2007Return on average assets
    
    
    (0.10
    )%
    
    
    (1.29
    )%Return on average common equity
    
    
    (6.18
    )%
    
    
    (64.25
    )%Equity to assets
    
    
    7.20
    %
    
    
    2.46
    %
 LOAN PRODUCTION
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Table G
 Loan Production
 Quarter EndedMarch 31,(Dollars in thousands, except for average initial loan balance)
    
    2008
    
    
    2007FHA/VA mortgage loansNumber of loans
    
    
    461
    
    
    
    380Volume of loans
    
    $
    50,494
    
    
    $
    37,076Percent of total volume
    
    
    13
    %
    
    
    15
    %Average initial loan balance
    
    $
    109,531
    
    
    $
    97,568Conventional conforming mortgage loansNumber of loans
    
    
    236
    
    
    
    331Volume of loans
    
    $
    28,661
    
    
    $
    37,906Percent of total volume
    
    
    8
    %
    
    
    15
    %Average initial loan balance
    
    $
    121,445
    
    
    $
    114,520Conventional non-conforming mortgage loans(1)Number of loans
    
    
    1,093
    
    
    
    426Volume of loans
    
    $
    155,428
    
    
    $
    56,117Percent of total volume
    
    
    42
    %
    
    
    23
    %Average initial loan balance
    
    $
    142,203
    
    
    $
    131,730Construction developments loansNumber of loans
    
    
    
    
    
    
    9Volume of loans
    
    $
    
    
    
    $
    11,858Percent of total volume
    
    
    
    
    
    
    5
    %Average initial loan balance
    
    $
    
    
    
    $
    1,318Disbursement under existing construction development loansVolume of loans
    
    $
    28,427
    
    
    $
    62,879Percent of total volume
    
    
    8
    %
    
    
    25
    %Commercial loans(2)Number of loans
    
    
    92
    
    
    
    108Volume of loans
    
    $
    65,175
    
    
    $
    31,938Percent of total volume
    
    
    17
    %
    
    
    13
    %Average initial loan balance
    
    $
    708,424
    
    
    $
    295,722Consumer loans(2)Number of loans
    
    
    6,064
    
    
    
    1,013Volume of loans
    
    $
    43,889
    
    
    $
    7,963Percent of total volume
    
    
    12
    %
    
    
    3
    %Average initial loan balance
    
    $
    7,238
    
    
    $
    7,861Other(3)Number of loans
    
    
    
    
    
    
    1Volume of loans
    
    $
    
    
    
    $
    1,783Percent of total volume
    
    
    
    
    
    
    1
    %Total loansNumber of loans
    
    
    7,946
    
    
    
    2,268Volume of loans
    
    $
    372,074
    
    
    $
    247,520
 
 (1)
    
    Includes $9.5 million and $4.5 million in second mortgages for the quarters ended
March 31, 2008 and 2007, respectively.(2)
    
    Commercial and consumer lines of credit are included in the loan production according to the
credit limit approved.(3)
    
    Consists of multifamily loans.  48




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TABLE H
 LOAN ORIGINATION SOURCES
 QUARTER ENDED MARCH 31,2008
    
    2007Puerto Rico
    
    US
    
    Total
    
    Puerto Rico
    
    US
    
    TotalRetail
    
    
    51
    %
    
    
    
    
    
    
    51
    %
    
    
    51
    %
    
    
    
    
    
    
    51
    %Wholesale(1)
    
    
    12
    %
    
    
    
    
    
    
    12
    %
    
    
    2
    %
    
    
    
    
    
    
    2
    %Housing Developments(2)
    
    
    7
    %
    
    
    1
    %
    
    
    8
    %
    
    
    28
    %
    
    
    2
    %
    
    
    30
    %Other(3)
    
    
    22
    %
    
    
    7
    %
    
    
    29
    %
    
    
    13
    %
    
    
    4
    %
    
    
    17
    %
 
 (1)
    
    Refers to purchases of mortgage loans from other financial institutions and mortgage lenders.(2)
    
    Includes new construction development loans and the disbursement of existing construction development loans.(3)
    
    Refers to commercial, consumer and multifamily loans. MORTGAGE LOAN SERVICING
  49




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TABLE I
 LOANS SERVICED FOR THIRD PARTIES
 AS OF MARCH 31,(Dollars in Thousands, Except for Average Size of Loans)
    
    2008
    
    
    2007Composition of Portfolio Serviced for Third Parties at Period End:GNMA
    
    $
    2,103,438
    
    
    $
    2,145,365FHLMC/FNMA
    
    
    3,688,642
    
    
    
    3,965,805Other conventional mortgage loans(1)(2)
    
    
    4,082,418
    
    
    
    5,645,627Total portfolio serviced for third parties
    
    $
    9,874,498
    
    
    $
    11,756,797Selected Data Regarding Mortgage Loans Serviced for Third Parties:Number of loans
    
    
    117,344
    
    
    
    137,405Weighted- average interest rate
    
    
    6.45
    %
    
    
    6.56
    %Weighted- average remaining maturity (months)
    
    
    249
    
    
    
    247Weighted- average gross servicing fee rate
    
    
    0.40
    %
    
    
    0.39
    %Average servicing portfolio
    
    $
    9,973,518
    
    
    $
    11,877,061Principal prepayments
    
    $
    160,228
    
    
    $
    194,032Constant prepayment rate
    
    
    6
    %
    
    
    6
    %Average size of loans
    
    $
    84,150
    
    
    $
    85,563Servicing assets, net
    
    $
    139,570
    
    
    $
    173,343Delinquent Mortgage Loans and Pending Foreclosures at Period End:60-89 days past due
    
    
    1.92
    %
    
    
    1.61
    %90 days or more past due
    
    
    2.04
    %
    
    
    1.94
    %Total delinquencies excluding foreclosures
    
    
    3.96
    %
    
    
    3.55
    %Foreclosures pending
    
    
    2.51
    %
    
    
    2.14
    %Servicing Portfolio Activity:Beginning servicing portfolio
    
    $
    10,072,538
    
    
    $
    11,997,324Additions to servicing portfolio
    
    
    60,333
    
    
    
    69,037Run-off(3)
    
    
    (258,373
    )
    
    
    (309,564
    )Ending servicing portfolio
    
    $
    9,874,498
    
    
    $
    11,756,797
 
 (1)
    
    Excludes $3.8 billion and $3.3 billion of loans owned by Doral Financial at March 31, 2008 and 2007, respectively.(2)
    
    Includes portfolios of $193.5 million and $227.3 million at March 31, 2008 and 2007, respectively, of delinquent FHA/VA and conventional mortgage loans.(3)
    
    Run-off refers to regular amortization of loans, prepayments and foreclosures. 50




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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
  51




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Uses of Cash
      Sources of Cash
  52




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TABLE J  SOURCES OF BORROWINGS
 AS OF MARCH 31, 2008
    
    
    AS OF DECEMBER 31, 2007AMOUNT
    
    
    AVERAGE
    
    
    AMOUNT
    
    
    AVERAGEOUTSTANDING
    
    
    RATE
    
    
    OUTSTANDING
    
    
    RATE(Dollars in thousands)Deposits
    
    $
    4,128,535
    
    
    
    3.64
    %
    
    $
    4,268,024
    
    
    
    4.11
    %Repurchase Agreements
    
    
    2,182,152
    
    
    
    4.12
    %
    
    
    1,444,363
    
    
    
    4.97
    %Advances from FHLB
    
    
    1,819,000
    
    
    
    3.96
    %
    
    
    1,234,000
    
    
    
    4.94
    %Loans Payable
    
    
    388,926
    
    
    
    5.05
    %
    
    
    402,701
    
    
    
    6.88
    %Notes Payable
    
    
    281,308
    
    
    
    7.31
    %
    
    
    282,458
    
    
    
    7.31
    %
   TABLE K  AVERAGE DEPOSIT BALANCE
 QUARTER ENDED
    
    
    YEAR ENDEDMARCH 31, 2008
    
    
    DECEMBER 31, 2007AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE(Dollars in thousands)
    
    BALANCE
    
    
    RATE
    
    
    BALANCE
    
    
    RATECertificates of deposit
    
    $
    2,824,670
    
    
    
    5.06
    %
    
    $
    2,782,709
    
    
    
    4.94
    %Regular passbook savings
    
    
    316,247
    
    
    
    2.97
    %
    
    
    380,710
    
    
    
    3.56
    %NOW accounts
    
    
    386,832
    
    
    
    1.51
    %
    
    
    457,128
    
    
    
    3.06
    %Money market accounts
    
    
    334,021
    
    
    
    3.98
    %
    
    
    151,564
    
    
    
    4.13
    %Total interest-bearing
    
    
    3,861,770
    
    
    
    4.44
    %
    
    
    3,772,111
    
    
    
    4.54
    %Non-interest bearing
    
    
    274,138
    
    
    
    
    
    
    
    309,482
    
    
    
    Total deposits
    
    $
    4,135,908
    
    
    
    4.15
    %
    
    $
    4,081,593
    
    
    
    4.20
    %
  TABLE L  CERTIFICATES OF DEPOSIT MATURITIES
 (In thousands)
    
    AMOUNTCertificates of deposit maturing:Three months or less
    
    $
    897,766Over three through six months
    
    
    712,080Over six through twelve months
    
    
    691,308Over twelve months
    
    
    187,735Total
    
    $
    2,488,889
 53




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REGULATORY CAPITAL RATIOS
  54




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##### Table of Contents



TABLE M  REGULATORY CAPITAL RATIOS
 As of March 31, 2008DORAL
    
    DORAL
    
    DORALFINANCIAL(2)
    
    BANK PR
    
    BANK NYTotal Capital (Total capital to risk- weighted assets)
    
    
    16.5
    %
    
    
    12.9
    %
    
    
    13.1
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    15.2
    %
    
    
    11.7
    %
    
    
    12.8
    %Leverage Ratio(1)
    
    
    10.2
    %
    
    
    6.5
    %
    
    
    9.6
    %
 
 (1)
    
    Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR and Tier 1
capital to adjusted total assets in the case of Doral Bank NY.(2)
    
    Doral Financial was not subject to regulatory capital requirements as of March 31, 2008. Ratios
were prepared as if the company were subject to the requirement for comparability purposes. As of December 31, 2007DORAL
    
    DORAL
    
    DORALFINANCIAL(2)
    
    BANK PR
    
    BANK NYTotal Capital (Total capital to risk- weighted assets)
    
    
    17.8
    %
    
    
    12.5
    %
    
    
    13.8
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    16.5
    %
    
    
    11.3
    %
    
    
    13.0
    %Leverage Ratio(1)
    
    
    10.8
    %
    
    
    6.0
    %
    
    
    10.6
    %
 
 (1)
    
    Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR and Tier 1 capital
to adjusted total assets in the case of Doral Bank NY.(2)
    
    Doral Financial was not subject to regulatory capital requirements as of December 31, 2007.
Ratios were prepared as if the company were subject to the requirement for comparability purposes.   Legal Proceedings
  ASSETS AND LIABILITIES
  55




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OFF-BALANCE SHEET ACTIVITIES
      Risk Factors
 CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
  56




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TABLE N
CONTRACTUAL OBLIGATIONS
 (In thousands)
    
    PAYMENT DUE BY PERIODLESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTERCONTRACTUAL OBLIGATIONS
    
    TOTAL
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSDeposits
    
    $
    4,128,535
    
    
    $
    3,904,344
    
    
    $
    196,156
    
    
    $
    27,474
    
    
    $
    561Repurchase agreements(1) (2)
    
    
    2,182,152
    
    
    
    1,299,652
    
    
    
    691,000
    
    
    
    91,500
    
    
    
    100,000Advances from FHLB(1) (2)
    
    
    1,819,000
    
    
    
    672,000
    
    
    
    669,580
    
    
    
    477,420
    
    
    
    Loans payable(3)
    
    
    388,926
    
    
    
    48,310
    
    
    
    82,230
    
    
    
    66,079
    
    
    
    192,307Notes payable
    
    
    281,308
    
    
    
    5,227
    
    
    
    8,560
    
    
    
    36,037
    
    
    
    231,484Other liabilities
    
    
    252,079
    
    
    
    251,079
    
    
    
    1,000
    
    
    
    
    
    
    
    Non-cancellable operating leases
    
    
    46,918
    
    
    
    5,714
    
    
    
    10,162
    
    
    
    9,326
    
    
    
    21,716Total Contractual Obligations
    
    $
    9,098,918
    
    
    $
    6,186,326
    
    
    $
    1,658,688
    
    
    $
    707,836
    
    
    $
    546,068
 
 (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 10.27 % to estimate the repayments. TABLE O
OTHER COMMERCIAL COMMITMENTS (1)
 (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
    
    $
    221,089
    
    
    $
    153,414
    
    
    $
    67,664
    
    
    $
    11
    
    
    $
    Commitments to sell mortgage-backed
securities and loans
    
    
    220,291
    
    
    
    220,291
    
    
    
    
    
    
    
    
    
    
    
    Commercial and financial standby letters of credit
    
    
    4,508
    
    
    
    
    
    
    
    4,508
    
    
    
    
    
    
    
    Maximum contractual recourse exposure
    
    
    1,093,045
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,093,045Total
    
    $
    1,538,933
    
    
    $
    373,705
    
    
    $
    72,172
    
    
    $
    11
    
    
    $
    1,093,045
 
 (1)
    
    Refer to Off-Balance Sheet Activities above for additional information regarding other commercial commitments of the Company. RISK MANAGEMENT
  Interest Rate and Market Risk Management
  57




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Doral Financials Risk Profile
    Market Value
    
    Net InterestAs of March 31, 2008
    
    Of Equity Risk
    
    Income Risk(1)+ 100 BPS
    
    
    (8.8
    )%
    
    
    3.9
    %- 100 BPS
    
    
    (0.6
    )%
    
    
    (5.2
    )%
 Market Value
    
    Net InterestAs of December 31, 2007
    
    of Equity Risk
    
    Income Risk(1)+ 100 BPS
    
    
    (10.7
    )%
    
    
    (0.8
    )%- 100 BPS
    
    
    1.2
    %
    
    
    (1.9
    )%
 
 (1)
    
    Based on 12-month forward change in net interest income.  58




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(In thousands)
    
    March 31, 2008
    
    December 31, 2007Change in Fair
    
    Change in FairValue of
    
    Value ofAvailable for
    
    Available forChange in Interest Rates
    
    Sale Securities
    
    Sale Securities(basis points)
    
    and FHLB Stock
    
    and FHLB Stock+200
    
    
    
    (165,613
    )
    
    
    (223,737
    )+100
    
    
    
    (74,752
    )
    
    
    (102,851
    )Base
    
    
    
    
    
    
    -100
    
    
    
    50,120
    
    
    
    70,755-200
    
    
    
    81,058
    
    
    
    129,464
   Derivatives
  59




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TABLE P
INTEREST RATE SWAPS  (Dollars in thousands)
 NOTIONAL
    
    MATURITY
    
    
    
    
    
    FAIRAMOUNT
    
    DATE
    
    FIXED RATE
    
    FLOATING RATE
    
    VALUECASH FLOW HEDGE$
    15,000
    
    
    September, 2008
    
    4.70%
    
    1-month LIBOR minus 0.03%
    
    $
    (173
    )$
    10,000
    
    
    September, 2009
    
    4.57%
    
    1-month LIBOR plus 0.02%
    
    $
    (349
    )$
    8,000
    
    
    September, 2010
    
    4.62%
    
    1-month LIBOR plus 0.02%
    
    $
    (413
    )$
    3,000
    
    
    September, 2011
    
    4.69%
    
    1-month LIBOR plus 0.05%
    
    $
    (190
    )$
    15,000
    
    
    October, 2008
    
    4.44%
    
    1-month LIBOR plus 0.06%
    
    $
    (181
    )$
    10,000
    
    
    October, 2009
    
    4.30%
    
    1-month LIBOR plus 0.04%
    
    $
    (323
    )$
    8,000
    
    
    October, 2010
    
    4.37%
    
    1-month LIBOR plus 0.02%
    
    $
    (374
    )$
    6,000
    
    
    October, 2011
    
    4.51%
    
    1-month LIBOR plus 0.02%
    
    $
    (341
    )$
    5,000
    
    
    October, 2012
    
    4.62%
    
    1-month LIBOR plus 0.05%
    
    $
    (321
    )$
    20,000
    
    
    November, 2008
    
    4.43%
    
    1-month LIBOR plus 0.03%
    
    $
    (282
    )$
    20,000
    
    
    November, 2009
    
    4.35%
    
    1-month LIBOR plus 0.02%
    
    $
    (696
    )$
    15,000
    
    
    November, 2010
    
    4.42%
    
1-month LIBOR
    
    $
    (893
    )$
    15,000
    
    
    November, 2011
    
    4.55%
    
    1-month LIBOR plus 0.02%
    
    $
    (738
    )$
    45,000
    
    
    November, 2012
    
    4.62%
    
    1-month LIBOR plus 0.02%
    
    $
    (2,964
    )
  TABLE Q
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
    
    
    $
    29$
    15,000
    
    
    September, 2011
    
    1-month LIBOR and 5.50%
    
    $
    134
    
    
    $
    42$
    15,000
    
    
    September, 2012
    
    1-month LIBOR and 6.00%
    
    $
    143
    
    
    $
    67$
    35,000
    
    
    October, 2010
    
    1-month LIBOR and 5.00%
    
    $
    199
    
    
    $
    38$
    15,000
    
    
    October, 2011
    
    1-month LIBOR and 5.00%
    
    $
    172
    
    
    $
    58$
    15,000
    
    
    October, 2012
    
    1-month LIBOR and 5.50%
    
    $
    182
    
    
    $
    92$
    50,000
    
    
    November, 2012
    
    1-month LIBOR and 6.50%
    
    $
    228
    
    
    $
    148$
    50,000
    
    
    November, 2012
    
    1-month LIBOR and 5.50%
    
    $
    545
    
    
    $
    310$
    50,000
    
    
    November, 2012
    
    1-month LIBOR and 6.00%
    
    $
    350
    
    
    $
    208
 Freestanding Derivatives.
 60




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Derivatives  Hedge Accounting.
  TABLE R  FAIR VALUE RECONCILIATION
 Quarter Ended(In thousands)
    
    March 31, 2008Fair value of contracts outstanding at the beginning of the period
    
    $
    (476
    )Contracts realized or otherwise settled during the period
    
    
    40Fair value of new contracts entered into during the period
    
    
    2,069Changes in fair values during the period
    
    
    (1,397
    )Fair value of contracts outstanding at the end of the period
    
    $
    236
 TABLE S  SOURCES OF FAIR VALUE
 (In thousands)
    
    Payment Due by PeriodMaturity
    
    
    
    
    
    
    
    
    
    
    Maturityless than
    
    
    Maturity
    
    
    Maturity
    
    
    in Excess
    
    
    Total FairAs of March 31, 2008
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    of 5 Years
    
    
    ValuePrices actively quoted
    
    $
    (756
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (756
    )Prices provided by
other external
sources
    
    
    
    
    
    
    67
    
    
    
    925
    
    
    
    
    
    
    
    992$
    (756
    )
    
    $
    67
    
    
    $
    925
    
    
    $
    
    
    
    $
    236
  61




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TABLE T  DERIVATIVE COUNTERPARTY CREDIT EXPOSURE
 (Dollars in thousands)
    
    March 31, 2008Weighted AverageNumber of
    
    
    
    
    
    
    Total Exposure
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    At Fair Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA-
    
    
    2
    
    
    $
    465,000
    
    
    $
    992
    
    
    $
    (8,238
    )
    
    $
    (7,246
    )
    
    
    3.40A+
    
    
    2
    
    
    
    26,000
    
    
    
    
    
    
    
    (756
    )
    
    
    (756
    )
    
    
    0.04Total Derivatives
    
    
    4
    
    
    $
    491,000
    
    
    $
    992
    
    
    $
    (8,994
    )
    
    $
    (8,002
    )
    
    
    3.22
 
 (1)
    
    Based on the S&P Long Term Issuer Credit Ratings.(2)
    
    Based on legal entities. Affiliated legal entities are reported separately.(3)
    
    For each counterparty, this amount includes derivatives with a positive fair value including the related accrued interest receivable/payable (net). (Dollars in thousands)
    
    December 31, 2007Weighted AverageNumber of
    
    
    
    
    
    
    Total Exposure
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    At Fair Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA
    
    
    1
    
    
    $
    250,000
    
    
    $
    241
    
    
    $
    (2,889
    )
    
    $
    (2,648
    )
    
    
    2.95AA-
    
    
    1
    
    
    
    215,000
    
    
    
    1,241
    
    
    
    
    
    
    
    1,241
    
    
    
    4.45A+
    
    
    2
    
    
    
    29,000
    
    
    
    6
    
    
    
    (12
    )
    
    
    (6
    )
    
    
    0.04Subtotal
    
    
    4
    
    
    $
    494,000
    
    
    $
    1,488
    
    
    $
    (2,901
    )
    
    $
    (1,413
    )
    
    
    3.43
 
 (1)
    
    Based on the S&P Long Term Issuer Credit Ratings.(2)
    
    Based on legal entities. Affiliated legal entities are reported separately.(3)
    
    For each counterparty, this amount includes derivatives with a positive fair value including the related accrued interest receivable/payable (net). Credit Risk
  62




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Loss Mitigation Strategies
    63




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##### Table of Contents



Non-performing assets and allowance for loan and lease losses
   64




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TABLE U
NON-PERFORMING ASSETS
 AS OF
    
    
    AS OF(Dollars in thousands)
    
    MARCH 31, 2008
    
    
    DECEMBER 31, 2007Non-performing loans:Residential mortgage loans  held for sale (1)
    
    $
    5,975
    
    
    $
    4,603Residential mortgage loans  held for investment
    
    
    273,567
    
    
    
    256,949Total non-performing residential mortgage loans
    
    
    279,542
    
    
    
    261,552Other lending activities:Construction loans, classified as substandard but accruing
    
    
    
    
    
    
    114,426Construction loans in non-accrual status
    
    
    283,053
    
    
    
    165,797Commercial real estate loans
    
    
    96,276
    
    
    
    86,590Consumer loans
    
    
    3,784
    
    
    
    4,303Commercial non-real estate loans
    
    
    2,501
    
    
    
    3,040Lease financing receivable
    
    
    1,260
    
    
    
    1,032Land loans
    
    
    560
    
    
    
    731Total non-performing other lending activities
    
    
    387,434
    
    
    
    375,919Total non-performing loans(2)
    
    
    666,976
    
    
    
    637,471Repossessed
assets
    
    
    250
    
    
    
    419OREO
    
    
    41,116
    
    
    
    38,154Total NPAs of Doral Financial (consolidated)
    
    $
    708,342
    
    
    $
    676,044Total NPAs as a percentage of the loan portfolio, net, and OREO
(excluding GNMA defaulted loans)
    
    
    13.42
    %
    
    
    12.95
    %Total NPAs of Doral Financial as a percentage of consolidated
total assets
    
    
    6.76
    %
    
    
    7.27
    %Total non-performing loans to total loans (excluding GNMA
defaulted loans)
    
    
    12.35
    %
    
    
    11.93
    %Ratio of allowance for loan and lease losses to total
non-performing loans (excluding loans held for sale) at end of
period
    
    
    18.33
    %
    
    
    19.71
    %Ratio of allowance for loan and lease losses to total
non-performing loans (excluding non-performing residential
mortgage loans and other non-performing loans held for sale) at
end of period(3)
    
    
    25.29
    %
    
    
    25.58
    %
 
 (1)
    
    Does not include approximately $125.5 million and $126.0 million of GNMA defaulted loans (for
which the Company has the option, but not an obligation, to buy-back from the pools serviced), included as
part of the loans held for sale portfolio as of March 31, 2008 and December 31, 2007, respectively.(2)
    
    Total non-performing loans excludes $35.8 million and $24.5 million as of March 31, 2008 and
December 31, 2007, respectively, on certain commercial loans, classified internally as substandard, but not
more than 90 days in arrears.(3)
    
    The proportion of the allowance for loan and leases losses allocated to residential mortgage loan
portfolio historically has been lower than in other lending portfolios. A substantial part of the amounts due
on delinquent residential mortgage loans has been historically recovered through sale of property after
foreclosure or negotiated settlements with borrowers. For purposes of comparability with the industry, the
ratio of allowance for loan and lease losses to total non-performing loans excludes the allowance allocated to
residential mortgage loans from the numerator and the total residential mortgage loans portfolio and other
non-performing loans held for sale from the denominator. 65




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Accounting by Debtors and Creditors of Troubled Debt Restructurings
      66




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##### Table of Contents



As of
    
    
    As of(Dollars in thousands)
    
    March 31, 2008
    
    
    December 31, 2007Construction loans(1)
    
    $
    560,603
    
    
    $
    588,174Total undisbursed funds under existing commitments
    
    $
    148,746
    
    
    $
    139,172Construction loans on non-accrual status
    
    $
    283,053
    
    
    $
    165,797Construction loans, classified as substandard but accruing(2)
    
    
    
    
    
    
    114,426Total non-performing construction loans
    
    $
    283,053
    
    
    $
    280,223Net charge offs  Construction loans
    
    $
    4,553
    
    
    $
    6,060Allowance for loan losses  Construction loans
    
    $
    48,731
    
    
    $
    56,776Non-performing construction loans to total construction loans
    
    
    50.49
    %
    
    
    47.64
    %Allowance for loan losses  construction loans to total construction
loans
    
    
    8.69
    %
    
    
    9.65
    %Net charge-offs to total construction loans
    
    
    0.81
    %
    
    
    1.03
    %
 
 (1)
    
    Includes $419.6 million and $422.4 million of construction loans for residential housing projects
as of March 31, 2008 and December 31, 2007, respectively. Also includes $141.0 million and $165.8 million of
construction loans for commercial, condominiums and multi-family projects as of March 31, 2008 and December 31,
2007, respectively.(2)
    
    Since January l, 2008, all construction loans classified as substandard, but not more than 90 days
in arrears have been placed on non-accrual and therefore, are
included within Construction loans on non-accrual
status.  TABLE V
 ALLOWANCE FOR LOAN AND LEASE  LOSSES
 QUARTER ENDEDMARCH 31,(Dollars in thousands)
    
    2008
    
    
    2007Allowance for Loan and Lease Losses:Balance at beginning of period
    
    $
    124,733
    
    
    $
    67,233Provision (recovery) for loan and lease losses:Construction loans
    
    
    (3,482
    )
    
    
    37Residential mortgage loans
    
    
    2,549
    
    
    
    841Commercial real estate loans
    
    
    3,076
    
    
    
    1,920Consumer loans
    
    
    2,097
    
    
    
    1,724Lease financing
    
    
    33
    
    
    
    327Commercial non-real estate loans
    
    
    1,141
    
    
    
    740Land secured loans
    
    
    (628
    )
    
    
    Other(1)
    
    
    
    
    
    
    400Total provision for loan and lease losses
    
    
    4,786
    
    
    
    5,989Charge  offs:Construction loans
    
    
    (4,553
    )
    
    
    (513
    )Residential mortgage loans
    
    
    (426
    )
    
    
    Commercial real estate loans
    
    
    (1,033
    )
    
    
    Consumer loans
    
    
    (2,420
    )
    
    
    (1,279
    )Lease financing
    
    
    (178
    )
    
    
    Commercial non-real estate loans
    
    
    (443
    )
    
    
    (129
    )Total charge-offs
    
    
    (9,053
    )
    
    
    (1,921
    )Recoveries:Commercial real estate loans
    
    
    13
    
    
    
    Consumer loans
    
    
    501
    
    
    
    54Lease financing
    
    
    159
    
    
    
    Commercial non-real estate loans
    
    
    43
    
    
    
    8Total recoveries
    
    
    716
    
    
    
    62Net charge-offs
    
    
    (8,337
    )
    
    
    (1,859
    )Other(1)
    
    
    
    
    
    
    (400
    )Balance at end of period
    
    $
    121,182
    
    
    $
    70,963Allowance for loan losses as a percentage of
loans receivable outstanding, at the end of
period
    
    
    2.35
    %
    
    
    2.29
    %Provision for loan losses to net charge-offs
on an annualized basis
    
    
    57.41
    %
    
    
    322.16
    %Net charge-offs to average loans receivable
outstanding on an annualized basis
    
    
    0.16
    %
    
    
    0.06
    %
 
 (1)
    
    Represents the portion of allowance for loans transferred from the
loans receivable portfolio to the loans held for sale portfolio, in
connection to the sale of certain assets of Doral Bank NY during the third
quarter of 2007. 67




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TABLE W
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE
LOSSES
 March 31, 2008
    
    
    December 31, 2007(Dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentLoans receivable:Construction
    
    $
    48,731
    
    
    
    11
    %
    
    $
    56,766
    
    
    
    12
    %Residential mortgage loans
    
    
    23,187
    
    
    
    66
    %
    
    
    21,064
    
    
    
    66
    %Commercial  secured by real estate
    
    
    25,455
    
    
    
    15
    %
    
    
    23,399
    
    
    
    15
    %Consumer
    
    
    7,339
    
    
    
    2
    %
    
    
    7,161
    
    
    
    2
    %Lease financing receivable
    
    
    1,517
    
    
    
    1
    %
    
    
    1,503
    
    
    
    1
    %Commercial non-real estate
    
    
    3,809
    
    
    
    3
    %
    
    
    3,068
    
    
    
    2
    %Land secured
    
    
    11,144
    
    
    
    2
    %
    
    
    11,772
    
    
    
    2
    %Total
    
    $
    121,182
    
    
    
    100
    %
    
    $
    124,733
    
    
    
    100
    %
 Accounting by Creditors for Impairment of a Loan
 68




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##### Table of Contents



Accounting for Contingencies
     Operational Risk
  69




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##### Table of Contents



Overview of Operational Risk Management
  Internal Control Over Financial Reporting
 Controls and Procedures
 Liquidity Risk
  General Business, Economic and Political Conditions
  Business Risk Factors
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  70




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Control and Procedures
     Changes in Internal Control Over Financial Reporting
  71




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
    72




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SIGNATURES
  DORAL FINANCIAL CORPORATION(Registrant)Date: May 12, 2008
    
    /s/ Glen R. WakemanGlen R. WakemanChief Executive Officer and PresidentDate: May 12, 2008
    
    /s/ Marangal I. DomingoMarangal I. DomingoExecutive Vice President andChief Financial Officer
 73




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    
    
    Description12.1
    
    -
    
    Computation of Ratio of Earnings to Fixed Charges.12.2
    
    -
    
    Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.31.1
    
    -
    
    CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    -
    
    CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    -
    
    CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    -
    
    CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 74