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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, 2007
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 COMMISSION FILE NUMBER 0-17224
 DORAL FINANCIAL CORPORATION
  Puerto Rico
(State or other jurisdiction of 
incorporation or organization)
    
    66-0312162
(I.R.S. employer
identification number)1451 F.D. Roosevelt Avenue,
    
    00920-2717San Juan, Puerto Rico
    
    (Zip Code)(Address of principal executive offices)
 
 
  þ o
  þ o o
  o þ




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DORAL FINANCIAL CORPORATION
INDEX PAGE
 PAGEPART I  FINANCIAL INFORMATION
    
    
    4Item 1  Financial Statements
    
    
    4Consolidated Statements of Financial Condition (Unaudited) as of March 31, 2007 and
December 31, 2006
    
    
    4Consolidated Statements of (Loss) Income (Unaudited)  Quarters ended March 31, 2007
and March 31, 2006
    
    
    5Consolidated Statements of Changes in Stockholders Equity (Unaudited)  Quarters
ended March 31, 2007 and March 31, 2006
    
    
    6Consolidated Statements of Comprehensive (Loss) Income (Unaudited)  Quarters ended
March 31, 2007 and March 31, 2006
    
    
    7Consolidated Statements of Cash Flows (Unaudited)  Quarters ended March 31, 2007
and March 31, 2006
    
    
    8Notes to Consolidated Financial Statements (Unaudited)
    
    
    9Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    43Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    76Item 4 Controls and Procedures
    
    
    76PART II  OTHER INFORMATION
    
    
    77Item 1 Legal Proceedings
    
    
    77Item 1A Risk Factors
    
    
    77Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    77Item 3 Defaults Upon Senior Securities
    
    
    77Item 4 Submission of Matters to a Vote of Security Holders
    
    
    77Item 5 Other Information
    
    
    77Item 6 Exhibits
    
    
    77SIGNATURES
    
    
    78EX-12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESEX-12.2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDEX-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
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EXPLANATORY NOTE
  FORWARD LOOKING STATEMENTS
   
    
    Doral Financials ability to consummate a recapitalization transaction
(including obtaining shareholder and regulatory approvals and settlement of Doral
Financials shareholder litigation) and realize the benefits of such transaction;
    
    the impact of Doral Financials failure to consummate the recapitalization
transaction or the final settlement of the ongoing shareholder litigation against
Doral Financial;
    
    the ability to consummate the transfer of mortgage servicing rights from the
holding company to Doral Bank Puerto Rico;
    
    potential adverse developments from ongoing enforcement actions by bank
regulatory agencies;
    
    risks associated with recent losses and their adverse impact on Doral
Financials capital position;
    
    risks associated with the Companys contingent obligations regarding recourse
arrangements and representations and warranties in connection with its loan sales;
    
    risks arising from the downgrade and potential further downgrades in the credit
ratings of Doral Financials securities;
    
    risks associated with the potential impact of fluctuating interest rates on
Doral Financials net interest margin resulting from the current mismatch in its
assets and liabilities;
    
    Doral Financials ability to attract new clients and retain existing clients;
    
    Doral Financials ability to retain and attract key employees;
    
    Doral Financials ability to successfully implement new business strategies;
    
    Doral Financial ability to derive sufficient income to realize the benefits of
its deferred tax asset;
    
    potential adverse developments in the credit quality of Doral Financials loan
portfolio;
    
    risks associated with the effects of global, national and regional economic and
political conditions, including with respect to fluctuations in interest rates;
    
    risks arising from worsening economic conditions in Puerto Rico;
    
    potential adverse developments in connection with the ongoing grand jury
investigation by the U.S. Attorneys Office for the Southern District of New York;
    
    risks associated with Doral Financials inability to prepare and timely file
financial statements;
    
    risks arising from material weaknesses in Doral Financials internal control
over financial reporting; and
    
    developments in the regulatory and legal environment for financial services
companies in Puerto Rico and the United States.
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 (IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
 (UNAUDITED
 MARCH 31,
    
    
    DECEMBER 31,2007
    
    
    2006ASSETSCash and due from banks
    
    $
    163,795
    
    
    $
    227,127Money market investments:Money market investments with creditors right to repledge
    
    
    289,978
    
    
    
    234,296Other money market investments
    
    
    940,406
    
    
    
    684,438Total money market investments
    
    
    1,230,384
    
    
    
    918,734Securities purchased under agreements to resell
    
    
    74,400
    
    
    
    Pledged investment securities that can be repledged:Securities held for trading, at fair value
    
    
    94,255
    
    
    
    72,218Securities available for sale, at fair value
    
    
    1,824,424
    
    
    
    2,209,439Securities held to maturity, at amortized cost (market value of $1,603,273 in 2007; $1,746,760 in
2006)
    
    
    1,669,035
    
    
    
    1,823,661Total pledged investment securities that can be repledged
    
    
    3,587,714
    
    
    
    4,105,318Other investment securities:Securities held for trading, at fair value
    
    
    163,026
    
    
    
    111,587Securities available for sale, at fair value
    
    
    204,045
    
    
    
    199,247Securities held to maturity, at amortized cost (market value of $212,027 in 2007; $254,592 in 2006)
    
    
    217,716
    
    
    
    259,276Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    70,533
    
    
    
    70,533Total other investment securities
    
    
    655,320
    
    
    
    640,643Total investment securities
    
    
    4,243,034
    
    
    
    4,745,961Loans:Mortgage loans held for sale, at lower of cost or market, pledged with creditors right to repledge
    
    
    431,574
    
    
    
    442,161Other mortgage loans held for sale, at lower of cost or market
    
    
    1,566,672
    
    
    
    1,326,929Loans receivable, net of allowance for loan and lease losses (2007 - $70,963; 2006 - $67,233)
    
    
    3,026,911
    
    
    
    3,389,937Total loans
    
    
    5,025,157
    
    
    
    5,159,027Receivables and mortgage-servicing advances
    
    
    62,379
    
    
    
    58,187Accrued interest receivable
    
    
    53,422
    
    
    
    64,363Servicing assets, net
    
    
    173,343
    
    
    
    176,367Premises and equipment, net
    
    
    112,763
    
    
    
    138,805Assets to be disposed on sale
    
    
    22,448
    
    
    
    Real estate held for sale, net
    
    
    32,780
    
    
    
    33,197Deferred tax asset
    
    
    255,277
    
    
    
    261,645Other assets
    
    
    86,431
    
    
    
    73,011Total assets
    
    $
    11,535,613
    
    
    $
    11,856,424LIABILITIESDeposits:Non-interest-bearing deposits
    
    $
    312,571
    
    
    $
    327,186Interest-bearing deposits
    
    
    3,918,689
    
    
    
    3,923,574Securities sold under agreements to repurchase
    
    
    3,659,730
    
    
    
    3,899,365Advances from FHLB
    
    
    1,034,500
    
    
    
    1,034,500Loans payable
    
    
    432,785
    
    
    
    444,443Notes payable
    
    
    922,962
    
    
    
    923,913Accrued expenses and other liabilities
    
    
    385,579
    
    
    
    400,039Total liabilities
    
    
    10,666,816
    
    
    
    10,953,020STOCKHOLDERS EQUITYPreferred stock, $1 par value; 40,000,000 shares authorized; 9,015,000 shares issued and outstanding in
2007 and 2006, at aggregate liquidation preference value:Perpetual noncumulative nonconvertible preferred stock (Series A, B and C)
    
    
    228,250
    
    
    
    228,250Perpetual cumulative convertible preferred stock
    
    
    345,000
    
    
    
    345,000Common stock, $1 par value; 500,000,000 shares authorized; 107,948,236 shares issued and outstanding
    
    
    107,948
    
    
    
    107,948Additional paid-in capital
    
    
    166,818
    
    
    
    166,495Legal surplus
    
    
    23,596
    
    
    
    23,596Retained earnings
    
    
    94,343
    
    
    
    139,051Accumulated other comprehensive loss, net of income tax benefit of $846 in 2007 and $1,129 in 2006
    
    
    (97,158
    )
    
    
    (106,936
    )Total stockholders equity
    
    
    868,797
    
    
    
    903,404Total liabilities and stockholders equity
    
    $
    11,535,613
    
    
    $
    11,856,424
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF (LOSS) INCOME
 (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
 (UNAUDITED)
 QUARTER ENDEDMARCH 31,2007
    
    
    2006Interest income:Loans
    
    $
    89,593
    
    
    $
    137,872Mortgage-backed securities
    
    
    22,240
    
    
    
    51,195Interest-only strips (IOs)
    
    
    1,494
    
    
    
    1,831Investment securities
    
    
    27,812
    
    
    
    30,101Other interest-earning assets
    
    
    16,109
    
    
    
    12,440Total interest income
    
    
    157,248
    
    
    
    233,439Interest expense:Deposits
    
    
    42,788
    
    
    
    32,708Securities sold under agreements to repurchase
    
    
    39,636
    
    
    
    62,229Advances from FHLB
    
    
    13,608
    
    
    
    10,378Loans payable
    
    
    7,628
    
    
    
    55,067Notes payable
    
    
    15,424
    
    
    
    14,441Total interest expense
    
    
    119,084
    
    
    
    174,823Net interest income
    
    
    38,164
    
    
    
    58,616Provision for loan and lease losses
    
    
    5,989
    
    
    
    5,173Net interest income after provision for loan
and lease losses
    
    
    32,175
    
    
    
    53,443Non-interest income (loss):Net loss on mortgage loan sales and fees
    
    
    (537
    )
    
    
    (14,693
    )Net loss on securities held for trading, including
gains and losses on the fair value of IOs
    
    
    (1,978
    )
    
    
    (9,947
    )Net (loss) gain on sale of investment securities
    
    
    (268
    )
    
    
    63Servicing
income (net of mark-to-market adjustment for 2007, and net of amortization and
impairment/recovery for 2006)
    
    
    6,000
    
    
    
    5,150Commissions, fees and other income
    
    
    8,411
    
    
    
    9,734Total non-interest income (loss)
    
    
    11,628
    
    
    
    (9,693
    )Non-interest expenses:Compensation and benefits
    
    
    25,383
    
    
    
    19,591Taxes, other than payroll and income taxes
    
    
    2,847
    
    
    
    3,308Advertising
    
    
    1,362
    
    
    
    2,595Professional services
    
    
    20,621
    
    
    
    17,151Communication and information systems
    
    
    4,030
    
    
    
    5,227Occupancy and other office expenses
    
    
    6,299
    
    
    
    7,155Depreciation and amortization
    
    
    5,051
    
    
    
    5,703Other
    
    
    9,625
    
    
    
    5,044Total non-interest expenses
    
    
    75,218
    
    
    
    65,774Loss before income taxes
    
    
    (31,415
    )
    
    
    (22,024
    )Income tax (expense) benefit
    
    
    (5,894
    )
    
    
    39,117Net (loss) income
    
    $
    (37,309
    )
    
    $
    17,093Net (loss) income attributable to common shareholders
    
    $
    (45,634
    )
    
    $
    8,768Net (loss) income per common share:Basic
    
    $
    (0.42
    )
    
    $
    0.08Diluted
    
    $
    (0.42
    )
    
    $
    0.08Dividends per common share
    
    $
    0.00
    
    
    $
    0.08
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 (IN THOUSANDS)
 (UNAUDITED)
 QUARTER ENDEDMARCH 31,2007
    
    
    2006PREFERRED STOCK
    
    $
    573,250
    
    
    $
    573,250COMMON STOCK
    
    
    107,948
    
    
    
    107,930ADDITIONAL PAID-IN CAPITAL:Balance at beginning of period
    
    
    166,495
    
    
    
    165,609Stock-based compensation recognized
    
    
    323
    
    
    
    75Balance at end of period
    
    
    166,818
    
    
    
    165,684LEGAL SURPLUS
    
    
    23,596
    
    
    
    23,596RETAINED EARNINGS:Balance at beginning of period
    
    
    139,051
    
    
    
    404,885Net (loss) income
    
    
    (37,309
    )
    
    
    17,093Cumulative effect of accounting change (adoption of
SFAS No. 156)
    
    
    926
    
    
    
    Cash dividends declared on common stock
    
    
    
    
    
    
    (8,634
    )Cash dividends declared on preferred stock
    
    
    (8,325
    )
    
    
    (8,325
    )Balance at end of period
    
    
    94,343
    
    
    
    405,019ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX:Balance at beginning of period
    
    
    (106,936
    )
    
    
    (125,461
    )Other comprehensive income (loss), net of deferred tax
    
    
    9,778
    
    
    
    (61,088
    )Balance at end of period
    
    
    (97,158
    )
    
    
    (186,549
    )Total stockholders equity
    
    $
    868,797
    
    
    $
    1,088,930
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (IN THOUSANDS)
 (UNAUDITED)
 QUARTER ENDEDMARCH 31,2007
    
    
    2006Net (loss) income
    
    $
    (37,309
    )
    
    $
    17,093Other comprehensive income (loss), before tax:Unrealized gains (losses) on securities arising during the period
    
    
    9,782
    
    
    
    (63,843
    )Amortization of unrealized loss on securities reclassified to held to maturity
    
    
    11
    
    
    
    11Reclassification of realized losses (gains) included in net income
    
    
    268
    
    
    
    (63
    )Other comprehensive income (loss), before tax
    
    
    10,061
    
    
    
    (63,895
    )Income tax (expense) benefit related to items of other comprehensive income (loss)
    
    
    (283
    )
    
    
    2,807Other comprehensive income (loss)
    
    
    9,778
    
    
    
    (61,088
    )Comprehensive loss, net of tax
    
    $
    (27,531
    )
    
    $
    (43,995
    )
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (UNAUDITED)
 QUARTER ENDEDMARCH 31,2007
    
    
    2006Cash flows from operating activities:Net (loss) income
    
    $
    (37,309
    )
    
    $
    17,093Adjustments to reconcile net (loss) income to net cash  used in operating activities:Stock-based compensation
    
    
    323
    
    
    
    75Depreciation and amortization
    
    
    5,051
    
    
    
    5,703Mark-to-market adjustment (2007) and amortization and impairment (2006) of servicing
assets
    
    
    5,725
    
    
    
    4,239Deferred tax expense (benefit)
    
    
    5,228
    
    
    
    (43,404
    )Provision for loan and lease losses
    
    
    5,989
    
    
    
    5,173Amortization of premium and accretion of discount on loans, investment securities and debt
    
    
    (2,058
    )
    
    
    1,838Unrealized
loss on mortgage loans held for sale
    
    
    1,145
    
    
    
    17,313Net increase on mortgage loans held for sale
    
    
    (59,478
    )
    
    
    (273,546
    )Loss (gain) on sale of securities
    
    
    2,269
    
    
    
    (2,954
    )Unrealized
gain (loss) on trading securities
    
    
    135
    
    
    
    (760
    )Decrease on securities held for trading
    
    
    51,564
    
    
    
    67,193Amortization and net (gain) loss in the fair value of IOs
    
    
    (2,691
    )
    
    
    35,332Decrease (increase) on derivative instruments
    
    
    8,873
    
    
    
    (11,830
    )Decrease (increase) in receivables and mortgage servicing advances
    
    
    2,326
    
    
    
    (6,519
    )Decrease in accrued interest receivable
    
    
    10,941
    
    
    
    2,495Increase (decrease) in other assets
    
    
    (11,931
    )
    
    
    16,883Decrease in accrued expenses and other liabilities
    
    
    (19,161
    )
    
    
    (31,622
    )Total adjustments
    
    
    4,250
    
    
    
    (214,391
    )Net cash used in operating activities
    
    
    (33,059
    )
    
    
    (197,298
    )Cash flows from investing activities:Purchases of securities available for sale
    
    
    
    
    
    
    (46,023
    )Principal repayment and sales of securities available for sale
    
    
    387,752
    
    
    
    370,820Principal repayment and maturities of securities held to maturity
    
    
    108,353
    
    
    
    8,185Increase in FHLB stock
    
    
    
    
    
    
    (4,500
    )Net decrease (increase) of loans receivable
    
    
    139,774
    
    
    
    (86,866
    )Purchases of servicing assets
    
    
    
    
    
    
    (216
    )Purchases of premises and equipment
    
    
    (1,457
    )
    
    
    (2,898
    )Proceeds from sales of real estate held for sale
    
    
    1,605
    
    
    
    5,176Net cash provided by  investing activities
    
    
    636,027
    
    
    
    243,678Cash flows from financing activities:Decrease in deposits
    
    
    (19,500
    )
    
    
    (13,157
    )Decrease in securities sold under agreements to repurchase
    
    
    (239,635
    )
    
    
    (196,584
    )Proceeds from advances from FHLB
    
    
    150,000
    
    
    
    100,000Repayment of advances from FHLB
    
    
    (150,000
    )
    
    
    Repayment of secured borrowings
    
    
    (11,658
    )
    
    
    (149,674
    )Repayment of notes payable
    
    
    (1,132
    )
    
    
    (75,000
    )Payment of consent solicitation to bondholders
    
    
    
    
    
    
    (1,297
    )Dividends paid
    
    
    (8,325
    )
    
    
    (16,959
    )Net cash used in financing activities
    
    
    (280,250
    )
    
    
    (352,671
    )Net increase (decrease) in cash and cash equivalents
    
    $
    322,718
    
    
    $
    (306,291
    )Cash and cash equivalents at beginning of period
    
    
    1,145,861
    
    
    
    1,546,502Cash and cash equivalents at the end of period
    
    $
    1,468,579
    
    
    $
    1,240,211Cash and cash equivalents includes:Cash and due from banks
    
    $
    163,795
    
    
    $
    126,452Money market investments
    
    
    1,304,784
    
    
    
    1,113,759$
    1,468,579
    
    
    $
    1,240,211Supplemental schedule of non-cash activities:Loan securitizations
    
    $
    41,702
    
    
    $
    67,849Reclassification
of securities held to maturity to held for trading in connection with the agreement to sell certain assets of
Doral Bank NY
    
    $
    91,656
    
    
    $
    Reclassification
of loans receivable to mortgage loans held for sale in connection with the agreement to sell certain assets of Doral Bank NY
    
    $
    205,629
    
    
    $
    Reclassification of premises and equipment to assets to be disposed on sale
    
    $
    22,448
    
    
    $
    Loans foreclosed
    
    $
    8,927
    
    
    $
    8,251Reclassification of mortgage loans held for sale to loans receivable
    
    $
    
    
    
    $
    876,240Capitalization of servicing assets
    
    $
    1,184
    
    
    $
    4,249Supplemental information for cash flows:Cash used to pay interest
    
    $
    118,849
    
    
    $
    179,229Cash used to pay income taxes
    
    $
    2,390
    
    
    $
    474
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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 Corporation (Doral Mortgage), SANA Mortgage Corporation
(SANA), Centro Hipotecario de Puerto Rico, Inc., Doral Securities, Inc. (Doral
Securities), Doral Bank (Doral Bank PR), Doral Bank, FSB (Doral Bank NY), Doral Money,
Inc. (Doral Money), Doral International, Inc. (Doral International), Doral Properties,
Inc. (Doral Properties), Doral Insurance Agency, Inc. (Doral Agency) and CB, LLC.
References herein to Doral Financial or the Company shall be deemed to refer to the
Company and its consolidated subsidiaries, unless otherwise provided. All significant
intercompany accounts and transactions have been eliminated in consolidation. The
Consolidated Financial Statements (unaudited) have been prepared in conformity with the
accounting policies stated in the Companys Annual Audited Consolidated Financial Statements
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2006.
Certain information and note disclosure normally included in the financial statements prepared
in accordance with generally accepted accounting principles in the United States of America
(GAAP) has been condensed or omitted from these statements pursuant to the rules and
regulations of the SEC and, accordingly, these financial statements should be read in
conjunction with the audited Consolidated Financial Statements of the Company for the year
ended December 31, 2006, included in the Companys 2006 Annual Report on Form 10-K. All
adjustments (consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the statement of financial position, results
of operations and cash flows for the interim periods have been reflected.b.
    
    The Consolidated Financial Statements of the Company have been prepared on a going concern
basis, which contemplates the realization of assets and the discharge of liabilities in the
normal course of business for the foreseeable future. The Company will need significant
outside financing during 2007, principally for the payment of its $625 million floating senior
notes that mature on July 20, 2007 and of amounts required under the settlement agreement
dated April 27, 2007 in respect of the consolidated securities class action and shareholder
derivative litigation brought against the Company following the announcement of the
restatement of its financial statements in 2005. The Companys ability to continue as a going
concern is dependent on its ability to secure the needed outside financing.On May 17, 2007, Doral Financial announced that, on May 16, 2007, it had entered into a
definitive stock purchase agreement with Doral Holdings Delaware, LLC (Holdings),
providing for the private sale by the Company to Holdings of 968,253,968 newly issued shares
for an aggregate purchase price of $610 million of Company common stock, at a price per
share of $0.63. Holdings is a newly-formed entity in which Bear Stearns Merchant Banking and
other investors, including the Marathon Asset Management, Perry Capital, the D. E. Shaw
group, Tennenbaum Capital Partners, Eton Park Capital Management, Goldman Sachs & Co.,
Canyon Capital Advisors and GE Asset Management, will invest. Holdings will be registered as
a bank holding company. Following the closing of the transaction, Holdings will own
approximately 90% of the outstanding common stock of the Company, and the Companys existing
common shareholders will own approximately 10%.As of the date of the agreement, Holdings had obtained equity commitments for approximately
$415 million of the $630 million in equity that it intends to raise to fund its $610 million
investment in the Company and related expenses. On June 3, 2007,
Holdings confirmed to the
Company that it had obtained sufficient additional equity commitments from investors to
fully fund the transaction.In addition to customary conditions, the consummation of the transaction is subject to a
number of other conditions, including shareholder approval of the transaction and certain
related amendments to the Companys certificate of incorporation, various regulatory
approvals and confirmations, final approval by the U.S. District for the Southern District
of New York of the previously announced settlement of the consolidated securities class
action and shareholder derivative lawsuits pending against the Company, the receipt of final
regulatory approvals for the Company to receive, within one day after the closing, at least
$150 million from the transfer of Dorals portfolio of mortgage servicing rights to Doral
Bank Puerto Rico
 9




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 and from a dividend distribution from Doral Bank FSB following consummation of the
previously announced sale of its New York branches, receipt of written confirmation from the
Department of the Treasury of Puerto Rico (the Treasury) regarding certain matters related
to the Companys agreement with the Treasury related to its deferred tax asset, and the
absence of certain material adverse developments with respect to the Company or its
business.
 If the transaction is consummated on a
timely basis, the Company believes that the transaction would satisfy its capital and
liquidity needs. Although the Company will use its reasonable best efforts to seek to
timely satisfy the conditions to closing, no assurance can be given that the transaction
will be completed by July 20, 2007, or at any time. If the transaction or an alternative
transaction is not consummated by July 20, 2007, the Company will likely be unable to repay
the notes at maturity.On June 1, 2007, Doral Financial received an alternative proposal from FBOP Corporation
(FBOP), a privately held Illinois-based bank holding company. A copy of FBOPs proposal is
included as an exhibit to the Companys Current Report on Form 8-K filed with the SEC on
June 4, 2007. Both the transaction with Holdings and FBOPs proposal would significantly
dilute the interests of our existing shareholders. As permitted by the Companys existing
stock purchase agreement with Holdings, the Companys Board of Directors has authorized
discussions with FBOP and FBOP has commenced diligence, which is a condition to its
proposal. Doral Financials existing agreement with Holdings remains in full force and
effect.The failure to refinance the senior notes and recapitalize the holding company would have a
material adverse effect on, and impair, the holding companys financial condition and
ability to operate as going concern. This would likely cause the holding company to seek
protection under applicable bankruptcy laws, which would likely result in the elimination of
all value of the holding companys common stock. Banking regulators could take actions to
protect interests of the depositors of the companys banking subsidiaries, which actions
could have a material adverse effect on the value that the holding company may realize on
its investment in Doral Bank PR and other subsidiaries. Until such time as the Company has
received this investment or has secured alternative sources of financing, there will be
substantial doubt as to its ability to continue as a going concern.These consolidated financial statements do not give effect to any adjustments which would be
necessary should the Company be unable to continue as a going concern and, therefore, be
required to realize its assets and discharge its liabilities in other than the normal course
of business and at amounts different from those reflected in the consolidated financial
statements.c.
    
    The results of operations for the quarter ended March 31, 2007 are not necessarily indicative
of the results to be expected for the full year.d.
    
    At March 31, 2007, escrow funds and custodial accounts included approximately $109.1 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 $25.4 million
deposited with other banks, which are excluded from the Companys assets and liabilities. The
Company had fidelity bond and errors and omissions coverage of $17.5 million and $16.3
million, respectively, as of March 31, 2007.
 10




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 e.
    
    The reconciliation of the numerator and denominator of the basic and diluted
earnings-per-share follows:
 Quarter EndedMarch 31,(Dollars in thousands, except per share amounts)
    
    2007
    
    
    2006Net (Loss) Income:Net (loss) income
    
    $
    (37,309
    )
    
    $
    17,093Convertible preferred stock dividend
    
    
    (4,097
    )
    
    
    (4,097
    )Nonconvertible preferred stock dividend
    
    
    (4,228
    )
    
    
    (4,228
    )Net (loss) income attributable to common shareholders
    
    $
    (45,634
    )
    
    $
    8,768Weighted-Average Shares(1):Basic weighted-average number of common shares
outstanding(2)
    
    
    107,948,236
    
    
    
    107,930,236Incremental shares issuable upon exercise of stock options(3)
    
    
    
    
    
    
    496,013Diluted weighted-average number of common shares outstanding
    
    
    107,948,236
    
    
    
    108,426,249Net (Loss) Income per Common Share:Basic
    
    $
    (0.42
    )
    
    $
    0.08Diluted
    
    $
    (0.42
    )
    
    $
    0.08
 
 (1)
    
    For the quarter ended March 31, 2007 and 2006, there were 1,380,000 shares of the Companys 4.75% Perpetual
cumulative convertible preferred stock issued in the second half of 2003 that were excluded from the computation of
diluted earnings per share because their effect would have been antidilutive. Each share of convertible preferred stock
is currently convertible into 6.2856 shares of common stock, subject to adjustment under specific conditions. The
option of the purchasers to convert the convertible preferred stock into shares of the Companys common stock is
exercisable only (a) if during any fiscal quarter after September 30, 2003, the closing sale price of the Companys
common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading date of
the preceding fiscal quarter exceeds 120% of the conversion price of the convertible preferred stock (currently 120% of
$39.77, or $47.72); (b) upon the occurrence of certain corporate transactions; or (c) upon the delisting of the
Companys common stock. On or after September 30, 2008, the Company may, at its option, cause the convertible preferred
stock to be converted into the number of shares of common stock that are issuable at the conversion price. The Company
may only exercise its conversion right if the closing sale price of the Companys common stock exceeds 130% of the
conversion price of the convertible preferred stock in effect for 20 trading days within any period of 30 consecutive
trading days ending on a trading day not more than two trading days prior to the date the Company gives notice of
conversion.(2)
    
    Excludes unvested shares of restricted stock.(3)
    
    Potential common shares consist of common stock issuable under the assumed exercise of stock options, unvested
shares of restricted stock and unvested restricted stock units using the treasury stock method. This method assumes
that the potential common shares are issued and the proceeds from exercise in addition to the amount of compensation
cost attributed to future services are used to purchase common stock at the exercise date. The difference between the
number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares
outstanding to compute diluted earnings per share. Stock options, unvested shares of restricted stock and unvested
restricted stock units that result in lower potential shares issued than shares purchased under the treasury stock
method are not included in the computation of dilutive earnings per share since their inclusion would have an
antidilutive effect in earnings per share. As of March 31, 2007, there were 1,670,700 outstanding stock options that
were excluded from the computation of diluted earnings per common share for the quarter ended March 31, 2007 because the
Company reported a net loss for such periods. Also, as of March 31, 2007, were excluded 200,000 restricted stock units
from the computation of diluted earnings per common share for the quarter ended March 31, 2007 because the Company
reported a net loss for the period. For the quarter ended March 31, 2006, there were 1,375,833 and 2,778
weighted-average antidilutive stock options and unvested restricted stock, respectively, that were excluded from the
computation of diluted earnings per common share since their inclusion would have an antidilutive effect. f.
    
    Employee costs and other expenses are shown in the Consolidated Statements of Income net of
direct loan origination costs which, pursuant to Statement of Financial Accounting Standard
(SFAS) No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial
 11




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Direct Costs of Leases (SFAS 91), are capitalized as part of the carrying cost of
mortgage loans and are offset against net gains on mortgage loan sales and fees when the
loans are sold or amortized as yield adjustment in the case of loans receivable.Set forth below is a reconciliation of the application of SFAS 91 to employee costs and
other expenses:
 Quarter EndedMarch 31,(In thousands)
    
    2007
    
    
    2006Employee costs, gross
    
    $
    27,099
    
    
    $
    29,452Deferred costs pursuant to SFAS 91
    
    
    (1,716
    )
    
    
    (9,861
    )Employee cost, net
    
    $
    25,383
    
    
    $
    19,591Other expenses, gross
    
    $
    10,616
    
    
    $
    6,389Deferred costs pursuant to SFAS 91
    
    
    (991
    )
    
    
    (1,345
    )Other expenses, net
    
    $
    9,625
    
    
    $
    5,044
 As of March 31, 2007, the Company had a net deferred origination fee on mortgage loans held
for sale and loans receivable amounting to approximately $4.4 million ($5.2 million as of
December 31, 2006) and $7.8 million ($8.7 million as of December 31, 2006), respectively.The Company defers the expensing of disbursements that are directly related
and incremental to stock and debt issuances. During the quarter ended
March 31, 2007, the Company deferred $5.5 million of disbursements
related to the recapitalization process disclosed in note
b. If the proposed transaction is consummated, the
disbursed amounts will be deducted from the common equity raise, or
will otherwise be expensed.g.
    
    Segment informationThe Company operates in four reportable segments identified by line of business: mortgage
banking activities, banking (including thrift operations), institutional securities
operations and insurance agency activities. Management made this determination based on
operating decisions particular to each business line and because each one targets different
customers and requires different strategies. The majority of the Companys operations are
conducted in Puerto Rico. The Company also operates in the mainland United States,
principally in the New York City metropolitan area.During 2006, the Company decided to reduce the operations of Doral Securities and sold
substantially all of Doral Securities investment securities. Doral Securitiess operations
are currently limited to acting as a co-investment manager to a local fixed-income
investment company. The Company is currently considering opportunities for this business
unit within its community banking strategy. Also, during 2006, the Company decided to
consolidate all of its mortgage originations under a single Doral Mortgage brand, thus
eliminating the mortgage banking operations of Sana Mortgage, Centro Hipotecario and HF
Mortgage Bankers.The following tables present net interest (loss) income, non-interest income (loss), net (loss)
income and identifiable assets for each of the Companys reportable segments for the periods
presented, as well as for the Companys Puerto Rico and mainland U.S. operations for the
periods presented.
 12




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentBanking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations*
    
    Totals(In thousands)
    
    QUARTER ENDED 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
    )
    
    $
    11,535,613QUARTER ENDED MARCH 31, 2006Net interest income
    
    $
    4,962
    
    
    
    52,344
    
    
    
    365
    
    
    
    
    
    
    
    945
    
    
    $
    58,616Non-interest (loss) income
    
    $
    (11,358
    )
    
    
    740
    
    
    
    362
    
    
    
    2,707
    
    
    
    (2,144
    )
    
    $
    (9,693
    )Net (loss) income
    
    $
    (378
    )
    
    
    16,082
    
    
    
    577
    
    
    
    1,393
    
    
    
    (581
    )
    
    $
    17,093Identifiable assets
    
    $
    6,601,263
    
    
    
    11,405,998
    
    
    
    50,480
    
    
    
    17,912
    
    
    
    (246,222
    )
    
    $
    17,829,431
 
 *
    
    The intersegment eliminations in the above table include servicing fees paid by the
banking subsidiaries to the parent company recognized as a reduction of net interest
income, direct intersegment loan origination costs amortized as yield adjustment or
offset against net gains on mortgage loan sales and fees (mainly related with
origination costs paid by the banking segment to the mortgage banking segment) and
other income derived from intercompany transactions, related principally to rental
income paid to Doral Properties, the Companys subsidiary that owns the corporate
headquarters facilities. Assets include internal funding and investment in
subsidiaries accounted for at cost. Puerto Rico
    
    Mainland US
    
    Eliminations
    
    Totals(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
    )
    
    $
    11,535,613QUARTER ENDED MARCH 31, 2006Net interest income
    
    $
    52,741
    
    
    
    5,851
    
    
    
    24
    
    
    $
    58,616Non-interest (loss) income
    
    $
    (9,829
    )
    
    
    244
    
    
    
    (108
    )
    
    $
    (9,693
    )Net income (loss)
    
    $
    15,822
    
    
    
    1,274
    
    
    
    (3
    )
    
    $
    17,093Identifiable assets
    
    $
    17,263,650
    
    
    
    665,010
    
    
    
    (99,229
    )
    
    $
    17,829,431
 13




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  MortgageBanking
    
    
    BankingQUARTER ENDED(In thousands)
    
    MARCH 31, 2007Net gain (loss) on mortgage loan sales and fees
    
    $
    2,170
    
    
    $
    (2,177
    )Investment activities gain (loss)
    
    
    3,667
    
    
    
    (5,999
    )Servicing income
    
    
    7,332
    
    
    
    29Commissions, fees and other income
    
    
    409
    
    
    
    5,718Total non-interest income (loss)
    
    $
    13,578
    
    
    $
    (2,429
    )
 QUARTER ENDEDMARCH 31, 2006Net loss on mortgage loan sales and fees
    
    $
    (1,454
    )
    
    $
    (12,705
    )Investment activities (loss) gain
    
    
    (16,488
    )
    
    
    6,464Servicing income
    
    
    6,185
    
    
    
    7Commissions, fees and other income
    
    
    399
    
    
    
    6,974Total non-interest (loss) income
    
    $
    (11,358
    )
    
    $
    740
 For the first quarter of 2007, the net loss on mortgage loan
sales and fees for the
banking segment is primarily related to the recognition of a lower-of-cost-or-market adjustment
of $1.1 million at Doral Bank NY to reflect the expected sale of assets to, and
assumption of liabilities by, New York Commercial Bank. The banking segment
non-interest loss also includes a loss on investment activities related to a negative
mark-to-market adjustment of $4.3 million for securities held by
Doral Bank NY, in anticipation of that expected sale and assumption.h.
    
    The fair value of the Companys securities held for trading and the fair value and carrying
value of its securities classified as available for sale and held to maturity are shown below
by category.
 1.
    
    The following table summarizes Doral Financials holdings of securities held
for trading as of March 31, 2007 and December 31, 2006.
 14




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES HELD FOR TRADING
 MARCH 31,
    
    
    DECEMBER 31,(In thousands)
    
    2007
    
    
    2006Mortgage-backed securities:GNMA exempt
    
    $
    52,509
    
    
    $
    52,969GNMA taxable
    
    
    12,613
    
    
    
    19,374CMO certificates
    
    
    24,427
    
    
    
    24,888FHLMC and FNMA
    
    
    9,305
    
    
    
    9,343Variable interest-only strips
    
    
    51,547
    
    
    
    48,864Fixed interest-only strips
    
    
    1,070
    
    
    
    1,062FHLMC Notes
    
    
    48,718
    
    
    
    FHLMC Zero Coupon
    
    
    38,660
    
    
    
    Derivatives(1)
    
    
    18,409
    
    
    
    27,282Other
    
    
    23
    
    
    
    23Total
    
    $
    257,281
    
    
    $
    183,805
 
 (1)
    
    Doral Financial uses derivatives to manage its
exposure to interest rate risk caused by changes in interest
rates. Derivatives include interest rate swaps and forward
contracts. Doral Financials general policy is to account for
derivatives on a marked-to-market basis with gains or losses
charged to operations as they occur. The fair value of
derivatives is generally reported net by counterparty, provided
that a legally enforceable master netting agreement exists.
Derivatives in a net asset position are recorded as securities
held for trading and derivatives in a net liability position as
liabilities. The gross notional amount of derivatives totaled
$4.9 billion as of March 31, 2007 and $5.1 billion as of
December 31, 2006. Notional amounts indicate the volume of
derivatives activity, but do not represent Doral Financials
exposure to market or credit risk. 2.
    
    The following tables summarize the amortized cost, gross unrealized gains and
losses, approximate market value, weighted-average yield and contractual maturities of
securities available for sale as of March 31, 2007 and December 31, 2006.The weighted-average yield is computed based on amortized cost and, therefore, does
not give effect to changes in fair value. Expected maturities of mortgage-backed
securities and certain debt securities might differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
 15




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES AVAILABLE FOR SALE  AS OF MARCH 31, 2007
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGE(Dollars in thousands)
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    1,179,908
    
    
    $
    206
    
    
    $
    31,776
    
    
    $
    1,148,338
    
    
    
    4.60
    %FHLMC and FNMADue over ten years
    
    
    118,421
    
    
    
    
    
    
    
    5,401
    
    
    
    113,020
    
    
    
    4.67
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    1,906
    
    
    
    
    
    
    
    
    
    
    
    1,906
    
    
    
    5.51
    %FNMA NOTESDue within one year
    
    
    46,011
    
    
    
    
    
    
    
    220
    
    
    
    45,791
    
    
    
    4.60
    %U.S. TREASURYDue from five to ten years
    
    
    758,820
    
    
    
    
    
    
    
    39,406
    
    
    
    719,414
    
    
    
    3.65
    %$
    2,105,066
    
    
    $
    206
    
    
    $
    76,803
    
    
    $
    2,028,469
    
    
    
    4.27
    %
 SECURITIES AVAILABLE FOR SALE  AS OF DECEMBER 31, 2006
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGE(Dollars in thousands)
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    1,346,927
    
    
    $
    17
    
    
    $
    36,794
    
    
    $
    1,310,150
    
    
    
    4.62
    %FHLMC and FNMADue over ten years
    
    
    217,638
    
    
    
    
    
    
    
    7,331
    
    
    
    210,307
    
    
    
    4.94
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    27,901
    
    
    
    
    
    
    
    404
    
    
    
    27,497
    
    
    
    5.50
    %FNMA NOTESDue from one to five years
    
    
    46,011
    
    
    
    
    
    
    
    300
    
    
    
    45,711
    
    
    
    4.60
    %U.S. TREASURYDue within a year
    
    
    100,032
    
    
    
    
    
    
    
    376
    
    
    
    99,656
    
    
    
    1.97
    %Due from five to ten years
    
    
    761,100
    
    
    
    
    
    
    
    45,735
    
    
    
    715,365
    
    
    
    3.65
    %$
    2,499,609
    
    
    $
    17
    
    
    $
    90,940
    
    
    $
    2,408,686
    
    
    
    4.26
    %
 16




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 3.
    
    The following tables summarize the amortized cost, gross unrealized gains and
losses, approximate market value, weighted-average yield and contractual maturities of
securities held to maturity as of March 31, 2007 and December 31, 2006.The weighted-average yield is computed based on amortized cost and, therefore, does
not give effect to changes in fair value. Expected maturities of mortgage-backed
securities and certain debt securities might differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
 17




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES HELD TO MATURITY  AS OF MARCH 31, 2007
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGE(Dollars in thousands)
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue from one to five years
    
    $
    533
    
    
    $
    7
    
    
    $
    
    
    
    $
    540
    
    
    
    5.84
    %Due over ten years
    
    
    3,360
    
    
    
    127
    
    
    
    
    
    
    
    3,487
    
    
    
    6.83
    %FHLMC and FNMADue over ten years
    
    
    282,389
    
    
    
    2,455
    
    
    
    943
    
    
    
    283,901
    
    
    
    6.05
    %CMO CERTIFICATESDue over ten years
    
    
    7,884
    
    
    
    
    
    
    
    691
    
    
    
    7,193
    
    
    
    5.79
    %DEBT SECURITIESFHLB NOTESDue from one to five years
    
    
    100,625
    
    
    
    
    
    
    
    1,798
    
    
    
    98,827
    
    
    
    4.16
    %Due from five to ten years
    
    
    50,000
    
    
    
    
    
    
    
    625
    
    
    
    49,375
    
    
    
    4.13
    %Due over ten years
    
    
    273,594
    
    
    
    
    
    
    
    11,151
    
    
    
    262,443
    
    
    
    5.10
    %FHLB ZERO COUPONDue over ten years
    
    
    130,703
    
    
    
    
    
    
    
    4,365
    
    
    
    126,338
    
    
    
    6.50
    %FHLMC ZERO COUPONDue over ten years
    
    
    232,291
    
    
    
    
    
    
    
    4,561
    
    
    
    227,730
    
    
    
    5.83
    %FHLMC and FNMA NOTESDue over ten years
    
    
    99,989
    
    
    
    
    
    
    
    1,970
    
    
    
    98,019
    
    
    
    5.75
    %P.R. HOUSING BANKDue within a year
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    6.00
    %Due over ten years
    
    
    7,235
    
    
    
    45
    
    
    
    25
    
    
    
    7,255
    
    
    
    5.72
    %U.S. TREASURYDue from five to ten years
    
    
    201,153
    
    
    
    
    
    
    
    10,903
    
    
    
    190,250
    
    
    
    3.52
    %Due over ten years
    
    
    472,045
    
    
    
    805
    
    
    
    37,578
    
    
    
    435,272
    
    
    
    4.32
    %OTHERDue within a year
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    5.30
    %Due from one to five years
    
    
    11,925
    
    
    
    
    
    
    
    182
    
    
    
    11,743
    
    
    
    4.48
    %Due over ten years
    
    
    8,000
    
    
    
    27
    
    
    
    125
    
    
    
    7,902
    
    
    
    5.61
    %$
    1,886,751
    
    
    $
    3,466
    
    
    $
    74,917
    
    
    $
    1,815,300
    
    
    
    5.03
    %
 18




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##### Table of Contents



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




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##### Table of Contents



SECURITIES  AVAILABLE FOR SALE  (As of March 31, 2007)
 LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(Dollars in thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed SecuritiesGNMA
    
    $
    483
    
    
    $
    16
    
    
    $
    1,113,757
    
    
    $
    31,760
    
    
    $
    1,114,240
    
    
    $
    31,776FHLMC and FNMA
    
    
    
    
    
    
    
    
    
    
    113,020
    
    
    
    5,401
    
    
    
    113,020
    
    
    
    5,401Debt SecuritiesFNMA Notes
    
    
    
    
    
    
    
    
    
    
    45,791
    
    
    
    220
    
    
    
    45,791
    
    
    
    220U.S. Treasury
    
    
    
    
    
    
    
    
    
    
    719,414
    
    
    
    39,406
    
    
    
    719,414
    
    
    
    39,406$
    483
    
    
    $
    16
    
    
    $
    1,991,982
    
    
    $
    76,787
    
    
    $
    1,992,465
    
    
    $
    76,803
 SECURITIES  AVAILABLE FOR SALE  (As of December 31, 2006)
 LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(Dollars in thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed SecuritiesGNMA
    
    $
    484
    
    
    $
    15
    
    
    $
    1,309,019
    
    
    $
    36,779
    
    
    $
    1,309,503
    
    
    $
    36,794FHLMC and FNMA
    
    
    
    
    
    
    
    
    
    
    210,307
    
    
    
    7,331
    
    
    
    210,307
    
    
    
    7,331Debt SecuritiesFNMA Notes
    
    
    45,711
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    45,711
    
    
    
    300FHLB Notes
    
    
    
    
    
    
    
    
    
    
    27,497
    
    
    
    404
    
    
    
    27,497
    
    
    
    404U.S. Treasury
    
    
    
    
    
    
    
    
    
    
    815,021
    
    
    
    46,111
    
    
    
    815,021
    
    
    
    46,111$
    46,195
    
    
    $
    315
    
    
    $
    2,361,844
    
    
    $
    90,625
    
    
    $
    2,408,039
    
    
    $
    90,940
 As of March 31, 2007, securities available for sale included a net unrealized loss of
$76.6 million, which represented the difference between fair value and amortized
cost. The comparable amount at December 31, 2006 was a net unrealized loss of $90.9
million. During the first quarter of 2007, declines in interest rates resulted in the
decrease of the net unrealized loss position between December 31, 2006 and March 31,
2007.The securities held by the Company are principally mortgage-backed securities, U.S.
Treasury and agency securities. Thus, payment on a substantial portion of these
instruments is guaranteed or secured by mortgages, a U.S. government-sponsored
entity or the full faith and credit of the U.S. government and, therefore, principal
and interest on the securities are deemed recoverable. As of March 31, 2007, the
Company had the ability and intent to hold the securities until maturity or until
the unrealized losses are recovered. Therefore, no other-than-temporary impairment
loss was recognized.
 20




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##### Table of Contents



SECURITIES  HELD TO MATURITY  (As of March 31, 2007)
 LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(Dollars in thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed SecuritiesFHLMC and FNMA
    
    $
    
    
    
    $
    
    
    
    $
    39,097
    
    
    $
    943
    
    
    $
    39,097
    
    
    $
    943CMO Certificates
    
    
    126
    
    
    
    
    
    
    
    7,067
    
    
    
    691
    
    
    
    7,193
    
    
    
    691Debt SecuritiesFHLB Notes
    
    
    49,375
    
    
    
    625
    
    
    
    361,270
    
    
    
    12,949
    
    
    
    410,645
    
    
    
    13,574FHLB Zero Coupon
    
    
    
    
    
    
    
    
    
    
    126,338
    
    
    
    4,365
    
    
    
    126,338
    
    
    
    4,365FHLMC Zero Coupon
    
    
    
    
    
    
    
    
    
    
    227,730
    
    
    
    4,561
    
    
    
    227,730
    
    
    
    4,561FHLMC and FNMA Notes
    
    
    
    
    
    
    
    
    
    
    98,019
    
    
    
    1,970
    
    
    
    98,019
    
    
    
    1,970U.S. Treasury
    
    
    213,344
    
    
    
    21,656
    
    
    
    350,258
    
    
    
    26,825
    
    
    
    563,602
    
    
    
    48,481Other
    
    
    14,825
    
    
    
    175
    
    
    
    6,743
    
    
    
    157
    
    
    
    21,568
    
    
    
    332$
    277,670
    
    
    $
    22,456
    
    
    $
    1,216,522
    
    
    $
    52,461
    
    
    $
    1,494,192
    
    
    $
    74,917
 SECURITIES  HELD TO MATURITY  (As of December 31, 2006)
 LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(Dollars in thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed SecuritiesFHLMC and FNMA
    
    $
    
    
    
    $
    
    
    
    $
    40,143
    
    
    $
    964
    
    
    $
    40,143
    
    
    $
    964CMO Certificates
    
    
    148
    
    
    
    1
    
    
    
    7,519
    
    
    
    541
    
    
    
    7,667
    
    
    
    542Debt SecuritiesFHLB Notes
    
    
    49,375
    
    
    
    625
    
    
    
    458,112
    
    
    
    16,153
    
    
    
    507,487
    
    
    
    16,778FHLB Zero Coupon
    
    
    
    
    
    
    
    
    
    
    123,381
    
    
    
    5,221
    
    
    
    123,381
    
    
    
    5,221FHLMC Zero Coupon
    
    
    
    
    
    
    
    
    
    
    261,144
    
    
    
    8,831
    
    
    
    261,144
    
    
    
    8,831FHLMC and FNMA Notes
    
    
    11,858
    
    
    
    391
    
    
    
    133,774
    
    
    
    3,966
    
    
    
    145,632
    
    
    
    4,357U.S. Treasury
    
    
    214,344
    
    
    
    20,866
    
    
    
    349,195
    
    
    
    28,086
    
    
    
    563,539
    
    
    
    48,952Other
    
    
    4,954
    
    
    
    46
    
    
    
    6,739
    
    
    
    160
    
    
    
    11,693
    
    
    
    206$
    280,679
    
    
    $
    21,929
    
    
    $
    1,380,007
    
    
    $
    63,922
    
    
    $
    1,660,686
    
    
    $
    85,851
 As of March 31, 2007, securities held to maturity included a net unrealized loss of $71.5
million, which represented the difference between fair value and amortized cost. The
comparable amount at December 31, 2006 was a net unrealized loss of $81.6 million. During
the first quarter of 2007, a decline in interest rates resulted in the reduction of the
net unrealized loss position between December 31, 2006 and March 31, 2007.The securities held by the Company are principally Federal Home Loan Bank notes,
mortgage-backed securities, U.S. Treasury and agency securities. Thus, payment on a
substantial portion of these instruments is guaranteed or secured by mortgages, a U.S.
government-sponsored entity or the full faith and credit of the U.S. government and,
therefore, principal and interest on the securities are deemed recoverable. As of March 31,
2007, the Company had the ability and intent to hold the securities until maturity or until
the unrealized losses are recovered. Therefore, no other-than-temporary impairment loss was
recognized.j.
    
    The following table sets forth certain information regarding Doral Financials mortgage loans
held for sale as of the dates indicated:
 21




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##### Table of Contents



MORTGAGE LOANS HELD FOR SALE
 (In thousands)
    
    MARCH 31, 2007
    
    
    DECEMBER 31, 2006Conventional single family residential loans
    
    $
    1,459,237
    
    
    $
    1,371,088FHA/VA loans
    
    
    126,164
    
    
    
    115,225Mortgage loans on residential multifamily
    
    
    22,389
    
    
    
    5,621Commercial non real estate loans
    
    
    96,951
    
    
    
    Consumer loans
    
    
    953
    
    
    
    Construction and commercial real estate loans
    
    
    292,552
    
    
    
    277,156Total mortgage loans held for sale (1)
    
    $
    1,998,246
    
    
    $
    1,769,090
 
 (1)
    
    At March 31, 2007 and December 31, 2006, the mortgage loans held for sale portfolio
includes $22.1 million and $23.2 million, respectively, related to interest-only loans.    22




---



##### 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, 2007
    
    
    DECEMBER 31, 2006(Dollars in thousands)
    
    AMOUNT
    
    
    PERCENT
    
    
    AMOUNT
    
    
    PERCENTConstruction loans(1)
    
    $
    796,950
    
    
    
    25
    %
    
    $
    817,352
    
    
    
    24
    %Residential mortgage loans
    
    
    1,682,474
    
    
    
    54
    %
    
    
    1,785,454
    
    
    
    52
    %Commercial  secured by real estate
    
    
    413,075
    
    
    
    13
    %
    
    
    541,891
    
    
    
    16
    %Consumer  other:Personal loans
    
    
    7,049
    
    
    
    0
    %
    
    
    37,896
    
    
    
    1
    %Auto loans
    
    
    349
    
    
    
    0
    %
    
    
    426
    
    
    
    0
    %Credit cards
    
    
    20,024
    
    
    
    1
    %
    
    
    20,086
    
    
    
    0
    %Overdrawn checking accounts
    
    
    883
    
    
    
    0
    %
    
    
    324
    
    
    
    0
    %Revolving lines of credit
    
    
    43,405
    
    
    
    2
    %
    
    
    28,229
    
    
    
    0
    %Lease financing receivables
    
    
    40,901
    
    
    
    1
    %
    
    
    43,565
    
    
    
    1
    %Commercial non-real estate
    
    
    68,360
    
    
    
    2
    %
    
    
    158,963
    
    
    
    5
    %Loans on savings deposits
    
    
    15,596
    
    
    
    1
    %
    
    
    16,811
    
    
    
    0
    %Land secured
    
    
    42,453
    
    
    
    1
    %
    
    
    42,769
    
    
    
    1
    %Loans receivable, gross(2)
    
    
    3,131,519
    
    
    
    100
    %
    
    
    3,493,766
    
    
    
    100
    %Less:Discount on loans transferred
    
    
    (20,643
    )
    
    
    
    
    
    
    (22,016
    )Unearned interest and deferred
loan fees, net
    
    
    (13,002
    )
    
    
    
    
    
    
    (14,580
    )Allowance for loan and lease losses
    
    
    (70,963
    )
    
    
    
    
    
    
    (67,233
    )(104,608
    )
    
    
    
    
    
    
    (103,829
    )Loans receivable, net
    
    $
    3,026,911
    
    
    
    
    
    
    $
    3,389,937
 
 (1)
    
    Includes $667.8 million and $680.6 million of construction loans for residential
housing projects as of March 31, 2007 and December 31, 2006, respectively. Also includes $129.2 million
and $136.8 million of construction loans for commercial, condominiums and multifamily projects as of
March 31, 2007 and December 31, 2006, respectively.(2)
    
    Includes $40.9 million and $42.6 million of interest-only loans, as of March 31, 2007 and
December 31, 2006, respectively.    23




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##### Table of Contents



ALLOWANCE
FOR LOAN AND LEASE LOSSES
 QUARTER ENDEDMARCH 31,(Dollars in thousands)
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    67,233
    
    
    $
    35,044Provision for loan and lease losses
    
    
    5,989
    
    
    
    5,173Recoveries
    
    
    62
    
    
    
    105Losses charged to the allowance
    
    
    (1,921
    )
    
    
    (1,005
    )Other(1)
    
    
    (400
    )
    
    
    13Balance at end of period
    
    $
    70,963
    
    
    $
    39,330
 
 (1)
    
    Amount represents the portion of allowance for loans transferred from
loans receivable to mortgage loans held for sale, during the first quarter
of 2007, in connection with the agreement to sell certain assets of Doral Bank NY.  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, 2007, the outstanding
principal balance of the bonds was $49.6 million with fixed interest rates, ranging from 6.25%
to 6.90%, and maturities ranging from June 2007 to December 2029. Certain series of the bonds
are secured by a mortgage on the building and underlying real property.m.
    
    The Company routinely originates, securitizes and sells mortgage loans into the secondary
market. As a result of this process, the Company typically retains the servicing rights. The
Companys interests that continue to be held (retained interests) are subject to prepayment
and interest rate risks.Effective January 1, 2007, under SFAS No. 156, Doral Financial elected to apply fair value
accounting to its mortgage servicing rights (MSR). The Company determines the fair value
of its MSRs on the basis of a third party market valuation for the Companys entire
servicing portfolio (governmental, conforming and non-conforming portfolios) stratified by
predominant risk characteristics  loan type and coupon. The fair value of the MSRs is
determined based on a combination of market information on trading activity (MSRs trades and
broker valuations), benchmarking of servicing assets (valuation surveys) and cash flow
modeling. The valuation of the Companys MSRs incorporate two sets of assumptions: (1)
market derived assumptions for discount rates, servicing costs, escrow earnings rate, float
earnings rate and cost of funds and (2) market derived assumptions adjusted for the
Companys loan characteristics and portfolio behavior, for escrow balances, delinquencies
and foreclosures, late fees, prepayments and prepayment penalties.The Company, upon the remeasurement of the MSRs at fair value in accordance with SFAS No.
156 Accounting for Servicing of Financial Assets, recorded a cumulative effect adjustment
to retained earnings (net of tax) as of the beginning of the fiscal year for the difference
between the fair value and the carring amount to bring December 2006 MSR balance to the fair
value. The table below reconciles the balance of MSRs as of December 31, 2006 and January
1, 2007.
 Balance at December 31, 2006
    
    $
    176,367Adjustment upon adoption of SFAS No.156
    
    
    1,517Balance at January 1, 2007
    
    $
    177,884
 24




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##### Table of Contents



QUARTER ENDED(In thousands)
    
    MARCH 31, 2007Balance at beginning of period
    
    $
    177,884Capitalization of servicing assets
    
    
    1,184Change in fair value
    
    
    (5,725
    )Balance at end of period
    
    $
    173,343
  QUARTER ENDED(In thousands)
    
    MARCH 31, 2006Balance at beginning of period
    
    $
    156,812Capitalization of servicing assets
    
    
    4,249Rights purchased
    
    
    216Amortization
    
    
    (6,418
    )Balance before valuation allowance at end of period
    
    
    154,859Valuation allowance for temporary impairment
    
    
    (4,057
    )Balance at end of period
    
    $
    150,802Fair Value at March 31, 2006
    
    $
    170,530
   QUARTER ENDED(In thousands)
    
    MARCH 31, 2006Balance at beginning of period
    
    $
    6,236Recoveries
    
    
    (2,179
    )Balance at end of period
    
    $
    4,057
  25




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##### Table of Contents



INTEREST-ONLY STRIPS ACTIVITY
 QUARTER ENDEDMARCH 31,(In thousands)
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    49,926
    
    
    $
    74,034Amortization
    
    
    (1,856
    )
    
    
    (8,729
    )Gain (loss) on the value of IOs
    
    
    4,547
    
    
    
    (26,603
    )Balance at end of period
    
    $
    52,617
    
    
    $
    38,702
   26




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##### Table of Contents



Servicing
    
    Interest-(Dollars in thousands)
    
    Assets
    
    Only StripsCarrying amount of retained interest
    
    $
    173,343
    
    
    $
    52,617Weighted-average expected life (in years)
    
    
    6.2
    
    
    
    5.2Constant prepayment rate (weighted-average
annual rate)
    
    
    14.26
    %
    
    
    12.10
    %Decrease in fair value due to 10% adverse
change
    
    $
    (4,810
    )
    
    $
    (2,266
    )Decrease in fair value due to 20% adverse
change
    
    $
    (9,176
    )
    
    $
    (4,384
    )Residual cash flow discount rate
(weighted-average annual rate)
    
    
    11.76
    %
    
    
    11.62
    %Decrease in fair value due to 10% adverse
change
    
    $
    (6,252
    )
    
    $
    (1,392
    )Decrease in fair value due to 20% adverse
change
    
    $
    (12,076
    )
    
    $
    (2,718
    )
   27




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##### Table of Contents



Weighted-average(Dollars in thousands)
    
    
    
    
    
    expected life
    
    Change in fairChange in interest rates (basis points)
    
    Constant prepayment rate
    
    (Years)
    
    value of IOs
    
    % Change+200
    
    
    9.75
    %
    
    
    5.9
    
    
    $
    (3,649
    )
    
    
    (6.9
    )%+100
    
    
    10.58
    %
    
    
    5.7
    
    
    
    (1,635
    )
    
    
    (3.1
    )%+50
    
    
    11.18
    %
    
    
    5.5
    
    
    
    (609
    )
    
    
    (1.2
    )%Base
    
    
    12.10
    %
    
    
    5.2
    
    
    
    0
    
    
    
    0.0
    %-50
    
    
    13.55
    %
    
    
    4.8
    
    
    
    35
    
    
    
    0.1
    %-100
    
    
    15.50
    %
    
    
    4.3
    
    
    
    (623
    )
    
    
    (1.2
    )%-200
    
    
    17.82
    %
    
    
    3.8
    
    
    
    2,684
    
    
    
    5.1
    %
 n.
    
    Stock Option and Other Incentive Plans.Effective January 1, 2006, the Company adopted
SFAS No. 123R Share-Based Payment (SFAS 123R), without a material effect on the
Consolidated Financial Statements of the Company, since in 2003 Doral Financial commenced
expensing the fair vale of stock options granted to employees using the modified prospective
method described in SFAS No. 148 Accounting for Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement No. 123. Using this method, the Company has
expensed the fair value of all employee stock options and restricted stock granted after
January 1, 2003, as well as the unvested portions of previously granted stock options. SFAS
123R requires the Company to estimate the pre-vesting forfeiture rate, for grants that are
forfeited prior to vesting, beginning on the grant date and to true-up forfeiture estimates
through the vesting date so that compensation expense is recognized only for grants that vest.
When unvested grants are forfeited, any compensation expense previously recognized on the
forfeited grants is reversed in the period of the forfeiture. Accordingly, periodic
compensation expense will include adjustments for actual and estimated pre-vesting forfeitures
and changes in the estimated pre-vesting forfeiture rate. The Company did not change its
adjustments for actual and estimated pre-vesting forfeitures and changes in the estimated
pre-vesting forfeiture rate. The Company did not change its forfeitures rates during 2006.Effective April 21, 2004, the Company adopted the Doral Financial Corporation Omnibus
Incentive Plan (the Omnibus Plan). The Omnibus Plan provides for equity-based compensation
incentives (the awards) through the grant of stock options, stock appreciation rights,
restricted stock, restricted stock units and dividend equivalents, as well as cash and
equity-based performance awards. This plan allows the issuance of up to 4,000,000 shares of
common stock subject to adjustments for stock splits, reorganization and other similar
events (as described below), to any employee, including officers and directors who are also
employees of the Company, and 2,025,000 remained available for issuance at December 31,
2006. The Compensation Committee has full authority and absolute discretion to determine
those eligible to receive awards and to establish the terms and conditions of any awards;
however, the Omnibus Plan has various limits and vesting restrictions that apply to
individual and aggregate awards. In case of a stock split, reorganization, merger or other
similar event affecting the common stock, the Compensation Committee, in its discretion,
shall adjust appropriately (a) the aggregate number of shares of common stock available for
awards, (b) the aggregate limitations on the number of shares that may be awarded as a
particular type of award or that may be awarded to any particular participant in any
particular period, and (c) the aggregate number of shares subject to outstanding awards and
the respective exercise prices or base prices applicable to outstanding awards.During the first quarter of 2007, the Companys Compensation Committee awarded 170,000 stock
options with a weighted average grant date fair value of $0.98 per share. The total amount
of stock options awarded for the first quarter of 2007 vests ratably on an annual basis over
a four-year period.
 28




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##### Table of Contents



Prior to the Omnibus Plan, from April 16, 1997, to April 20, 2004, the Company offered an
employee stock option plan (the Old Plan). This plan, as amended in 2001, allowed for the
granting of up to 6,750,000 purchase options on shares of the Companys common stock to
employees, including officers and directors who are also employees of the Company. All
options awarded under the Old Plan were issued at market value at the date of the grants,
for terms of ten years and vest ratably on an annual basis over a two-year period from the
grant date. During the first quarter of 2007, 1,350 of vested stock options expired
following the departure of an employee and at March 31, 2007, only 20,700 stock options
remained outstanding under the Old Plan.Stock-based compensation recognized at March 31, 2007 is as follows:
 QUARTER ENDED(In thousands)
    
    MARCH 31, 2007Stock-based compensation recognized
    
    $
    345Stock-based compensation reversed due to
pre-vesting forfeitures
    
    
    (22
    )Stock-based compensation recognized, net
    
    $
    323Unrecognized at March 31
    
    $
    4,112
 The activity of stock options during the first quarter of 2007 is set forth below:
 QUARTER ENDEDMARCH 31, 2007Number of
    
    
    Weighted-AverageOptions
    
    
    Exercise PriceBeginning of period
    
    
    1,695,050
    
    
    $
    6.45Options granted
    
    
    170,000
    
    
    
    2.16Options exercised
    
    
    
    
    
    
    Post-vesting cancellations
    
    
    (108,350
    )
    
    
    12.20Pre-vesting cancellations
forfeited
    
    
    (86,000
    )
    
    
    4.15End of period
    
    
    1,670,700
    
    
    $
    5.80Exercisable at period end
    
    
    98,200
    
    
    $
    5.20
 A summary of the status of the Companys nonvested stock options as of March 31, 2007 is
presented below:
 Stock Options
    
    
    Restricted StockWeighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageGrant Date
    
    
    
    
    
    
    Grant DateNon-vested Shares
    
    Shares
    
    
    Fair Value
    
    
    Shares
    
    
    Fair ValueNon-vested at December 31, 2006
    
    
    1,573,000
    
    
    $
    2.72
    
    
    
    200,000
    
    
    $
    6.93Granted
    
    
    170,000
    
    
    
    0.98
    
    
    
    
    
    
    
    Vested
    
    
    (84,500
    )
    
    
    1.47
    
    
    
    
    
    
    
    Pre-vesting forfeitures
    
    
    (86,000
    )
    
    
    1.38
    
    
    
    
    
    
    
    Non-vested at March 31, 2007
    
    
    1,572,500
    
    
    $
    2.68
    
    
    
    200,000
    
    
    $
    6.93
 29




---



##### Table of Contents



2007Weighted-average exercise price
    
    $
    2.54Stock option estimated fair value
    
    $
    0.9897Expected stock option term (years)
    
    
    4.08Expected volatility
    
    
    42.39
    %Expected dividend yield
    
    
    0
    %Risk-free interest rate
    
    
    4.84
    %
        30




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##### Table of Contents



o.
    
    The following table summarizes deposit balances:
 MARCH 31,
    
    
    DECEMBER 31,(In thousands)
    
    2007
    
    
    2006Certificates of deposit
    
    $
    2,934,875
    
    
    $
    2,947,892Regular savings
    
    
    431,242
    
    
    
    442,796NOW accounts
    
    
    552,572
    
    
    
    532,885Non interest-bearing deposits
    
    
    312,571
    
    
    
    327,187$
    4,231,260
    
    
    $
    4,250,760
 p.
    
    As part of its financing activities the Company enters into sales of securities under
agreements to repurchase the same or substantially similar securities. The Company retains
control over such securities according to the provisions of SFAS No. 140. Accordingly, the
amounts received under these agreements represent borrowings, and the securities underlying
the agreements remain in the asset accounts. These transactions are carried at the amounts at
which transactions will be settled. The counterparties to the contracts generally have the
right to repledge the securities received as collateral. Those securities are presented in the
Consolidated Statements of Financial Condition as part of pledged investment securities.
Securities sold under agreements to repurchase consisted of the following:
 31




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##### Table of Contents



March 31,
    
    
    December 31,(In thousands)
    
    2007
    
    
    2006Non-callable repurchase
agreements with maturities less
than or equal to 90 days, at
various fixed rates averaging
5.37% and 5.40% at March 31,
2007 and December 31, 2006,
respectively.
    
    $
    379,652
    
    
    $
    277,687Non-callable repurchase
agreement with maturity less
than or equal to 90 days, tied
to 3-month LIBOR adjustable
quarterly, averaging 5.59% at
December 31, 2006.
    
    
    
    
    
    
    20,000Non-callable repurchase
agreement with maturity of less
than or equal to 90 days, tied
to 1-month LIBOR adjustable
monthly, averaging 8.82% at
March 31, 2007.
    
    
    74,400
    
    
    
    Non-callable repurchase
agreements with maturities
ranging from May 2010 to June
2010 (2006  April 2007 to June
2010), at various fixed rates
averaging 4.11% and 4.24% at
March 31, 2007 and December 31,
2006, respectively.
    
    
    750,000
    
    
    
    846,000Non-callable repurchase
agreements with maturity of
January 2008 (2006  November
2007 to January 2008), tied to
3-month LIBOR adjustable
quarterly, averaging 5.53% at
March 31, 2007 and December 31,
2006, respectively.
    
    
    94,800
    
    
    
    194,800Callable repurchase
agreements with maturities
ranging from March 2008 to
February 2014 at various fixed
rates averaging 5.47% and 5.38%
at March 31, 2007 and December
31, 2006, respectively, callable
at various dates beginning on
January 1, 2007.
    
    
    860,878
    
    
    
    960,878Callable repurchase
agreements due on March 22,
2015, at various fixed rates
during non-callable period
averaging 3.22% at March 31,
2007 and December 31, 2006,
callable beginning on March 22,
2008. Beginning on March 22,
2008, the interest converts to
an inverse floater (fixed rate
minus 3-month LIBOR, subject to
a cap).
    
    
    1,500,000
    
    
    
    1,500,000Callable repurchase
agreements with maturity of
November 24, 2014, tied to
3-month LIBOR adjustable
quarterly, at a rate of 4.62% at
December 31, 2006.
(1)
    
    
    
    
    
    
    100,000$
    3,659,730
    
    
    $
    3,899,365
 
 (1)
    
    Beginning on the call date of this repurchase agreement the Company will
pay interest at a fixed rate of 3.89%. 32




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##### Table of Contents



q.
    
    Advances from the FHLB consisted of the following:
 MARCH 31,
    
    
    DECEMBER 31,(In thousands)
    
    2007
    
    
    2006Non-callable advances with maturities
ranging from April 2007 to October 2011, at
various fixed rates averaging 4.93% and
4.85% at March 31, 2007 and December 31,
2006, respectively.
    
    $
    467,000
    
    
    $
    467,000Non-callable advances due on September 14,
2007, tied to 1-month LIBOR adjustable
monthly (5.33% and 5.36% at March 31, 2007
and December 31, 2006, respectively).
    
    
    100,000
    
    
    
    100,000Callable advances with maturities ranging
from July 2009 to November 2012, at various
fixed rates averaging 4.58% at March 31,
2007 and December 31, 2006, respectively,
callable at various dates beginning on
April 1, 2007.
    
    
    467,500
    
    
    
    467,500$
    1,034,500
    
    
    $
    1,034,500
  r.
    
    At March 31, 2007 and December 31, 2006, loans payable consisted of financing agreements with
local financial institutions secured by mortgage loans.
  MARCH 31,
    
    
    DECEMBER 31,(In thousands)
    
    2007
    
    
    2006Secured borrowings with local financial
institutions, collateralized by real estate
mortgage loans at variable interest rates
tied to 3-month LIBOR averaging 6.81% and
6.86% at March 31, 2007 and December 31,
2006, respectively.
    
    $
    404,287
    
    
    $
    415,019Secured borrowings with local financial
institutions, collateralized by real estate
mortgage loans at fixed interest rates
averaging 7.42% and 7.77% at March 31, 2007
and December 31, 2006, respectively.
    
    
    28,498
    
    
    
    29,424$
    432,785
    
    
    $
    444,443
  33




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##### Table of Contents



s.
    
    Notes payable consisted of the following:
 MARCH 31,
    
    
    DECEMBER 31,(In thousands)
    
    2007
    
    
    2006$625 million floating rate senior notes tied to 3-month LIBOR (6.20% and
5.00% at March 31, 2007 and December 31, 2006, respectively), due on
July 20, 2007, paying interest quarterly(1)
    
    $
    624,894
    
    
    $
    624,814$100 million notes, net of discount, bearing interest at 7.65%, due on
March 26, 2016, paying interest monthly
    
    
    98,200
    
    
    
    98,166$30 million notes, net of discount, bearing interest at 7.00%, due on
April 26, 2012, paying interest monthly
    
    
    29,581
    
    
    
    29,564$40 million notes, net of discount, bearing interest at 7.10%, due on
April 26, 2017, paying interest monthly
    
    
    39,284
    
    
    
    39,272$30 million notes, net of discount, bearing interest at 7.15%, due on
April 26, 2022, paying interest monthly
    
    
    29,406
    
    
    
    29,401Senior term notes at a fixed rate of 8.55% due on August 31, 2007,
paying interest semiannually on February 28 and August 31
    
    
    9,000
    
    
    
    9,000Bonds payable secured by mortgage on building at fixed rates ranging
from 6.30% to 6.90%, with maturities ranging from June 2007 to December
2029, paying interest monthly
    
    
    41,995
    
    
    
    41,995Bonds payable at 6.25%, with maturities ranging from December 2010 to
December 2029, paying interest monthly
    
    
    7,600
    
    
    
    7,600Zero coupon senior notes (effective rate of 6.50%), due on April 30, 2007
    
    
    2,489
    
    
    
    2,456Note payable with a local financial institutions, collateralized by IOs
at a fixed rate of 7.75%, due on December 25, 2013, paying interest
monthly
    
    
    40,513
    
    
    
    41,645$
    922,962
    
    
    $
    923,913
 
 (1)
    
    Doral Financial will need significant outside financing during 2007, principally for the payment
of its $625 million floating rate senior notes that mature on July 20, 2007.   34




---



##### Table of Contents



t.
    
    Income Taxes
       35




---



##### Table of Contents



u.
    
    Guarantees
   36




---



##### Table of Contents



v.
    
    Commitments and Contingencies
    Lawsuits
 Class Action Lawsuits
 Shareholder Derivative Lawsuits
 37




---



##### Table of Contents



Other Lawsuits
  Settlement Agreement
      Lawsuits Concerning the Proposed Recapitalization Transaction Augenbaum v. Doral Financial
Corporation, et al
 38




---



##### Table of Contents



Other Legal Matters.
      39




---



##### Table of Contents



Banking Regulatory Matters
 
     40




---



##### Table of Contents



w.
    
    Recent Accounting Pronouncements
 Accounting for Certain Hybrid Financial Instruments.
 Fair Value Measurements
   41




---



##### Table of Contents



Taxes Collected from Customers and Remitted to Governmental Authorities.
 Issuers Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt
Instrument
 SFAS No. 159 Statement of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. Fair Value Measurements, Disclosures about Fair Value of Financial Instruments.
 42




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 INTERNAL CONTROL OVER FINANCIAL REPORTING
   SUBSEQUENT EVENTS
  Recapitalization Process
      43




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##### Table of Contents



OVERVIEW OF RESULTS OF OPERATIONS
   
    
    Net loss for the first quarter of 2007 amounted to $37.3 million, or a
diluted loss per share of $0.42, compared to net income of $ 17.1 million, or a diluted
earnings per share of $0.08, for the first quarter of 2006.
    
    Net interest income for the first quarter of 2007 was $38.2 million,
compared to $58.6 million for the same period in 2006. The decrease in net interest
income for 2007, compared to 2006, was related to a decrease in the Companys net
interest margin, coupled with a decrease in the average balance of interest earning
assets. Net interest margin decreased from 1.46% in the first quarter of 2006 to 1.43%
in the first quarter of 2007 (see Tables A and C below for information regarding the
Companys net interest income). Average interest-earning assets decreased from $16.2
billion during the first quarter of 2006 to $10.8 billion for the first quarter of
2007.
    
    For the first quarter of 2007, the provision for loan and lease losses was
$6.0 million, compared to $5.2 million for the first quarter of 2006. The increase in
provision reflects principally an increase in specific reserves related to the
allowance for the Companys commercial loan portfolio, as well as deterioration in
delinquency trends, particularly in the construction and commercial portfolios, and
declining economic conditions in Puerto Rico.
    
    Non-interest income for the first quarter of 2007 was $11.6 million,
compared to a non-interest loss of $9.7 million for the same period in 2006. The
increase in non-interest income during the first quarter of 2007 compared to the same
period in 2006 was primarily driven by a reduced loss on mortgage
loan sales and fees,
which amounted to approximately $0.5 million during the first quarter of 2007, compared
to losses of approximately $14.7 million for the first quarter of 2006. The
improvement in non-interest income also reflects lower losses on trading activities. Total loan sales and securitizations for the
first quarter of 2007 amounted to $69.0 million, compared to $231.6 million for the
first quarter of 2006.
    
    Non-interest expense for the first quarter of 2007 was $75.2 compared to
$65.8 million for the same period in 2006. The increase in non-interest expense for
the quarter was driven by a $3.5 million
 44




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##### Table of Contents



increase in professional fees, principally associated with the Companys business
transformation and recapitalization efforts, as well as continued efforts in the
resolution of ongoing legacy issues. Non-interest expense for the first quarter of 2007
also includes approximately $6.4 million in payments and associated benefit costs
related to the Companys key employee incentive plan and a $2.6 million
charge in connection with the settlement of a claim with a local financial
institution as part of a sale of mortgage servicing rights to such institution.
    
    For the first quarter of 2007, Doral Financial recognized an income tax expense of
$5.9 million, compared to an income tax benefit of $39.1 million for the corresponding
period in 2006. The income tax expense recorded during the first quarter of 2007 was
mainly related to an increase in the valuation allowance over the deferred tax asset.
    
    During the first quarter of 2007, the Company had other comprehensive
income of approximately $9.8 million related principally to the positive impact of the
decrease in long-term interest rates on the value of the Companys portfolio of
available for sale securities. As of March 31, 2007, the Companys accumulated other
comprehensive loss (net of income tax benefit) reached $97.2 million, compared to
$106.9 million as of December 31, 2006.
    
    Doral Financials loan production for the first quarter of 2007 was $268.3
million, compared to $875.7 million for the comparable period in 2006, a decrease of
approximately 69%. The decrease in Doral Financials loan production is due to a
number of factors, including changes in the underwriting standards, economic conditions
in Puerto Rico, and competition from other financial institutions. The Company
anticipates that, for the foreseeable future, loan production will continue below
historical levels as these new underwriting standards are implemented and new product
offerings are developed.
    
    Total assets as of March 31, 2007 were $11.5 billion, a decrease of 3%
compared to $11.9 billion as of December 31, 2006. The decrease in total assets was
principally the result of the previously reported sale of $1.7 billion in investment
securities during the fourth quarter of 2006, of which $231 million settled during the
first quarter of 2007.
 CRITICAL ACCOUNTING POLICIES
  Accounting for Uncertainty in
Income Taxes- an Interpretation of FASB Statement 109 Accounting
for Servicing of Financial Assets
 RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 2007 AND 2006
  45




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##### Table of Contents



NET INTEREST INCOME
    
    
    Increased cost of short-term borrowings. The average cost of deposits increased
by 93 basis points between the first quarter of 2006 and the first quarter of 2007,
while the average cost of repurchase agreements increased by 12 basis points. The
higher cost of deposits reflects the competitive retail banking environment in
Puerto Rico and the Companys increased reliance on brokered CDs as a source of
funding. The higher cost of short-term borrowings also is a result of the Federal
Reserve tightening monetary policy, raising the federal funds target rate 150 basis
points from October 1, 2005 to June 30, 2006, and leaving it flat at 5.25% since
July 1, 2006 through the first quarter of 2007.
    
    Increased cost of FHLB Advances and notes payable. FHLB Advances tend to have
short-term maturities and re-price at market rates. The increase in cost on notes
payable reflects the re-pricing of most of the Companys notes payable, which are
floating rate notes indexed to 3-month LIBOR.
    
    The yield on the Companys large portfolio of long-term fixed-rate investment
securities and fixed-rate loans, which re-price at a slower rate than the Companys
liabilities. The increase in asset yields was further dampened by an inverted
yield curve, which results in slower increases in marginal rates for longer
maturity fixed-coupon assets.
  46




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##### Table of Contents



TABLE A
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
 QUARTER ENDED MARCH 31,2007
    
    
    2006AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGE(Dollars in thousands)
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    5,163,015
    
    
    $
    89,593
    
    
    
    7.04
    %
    
    $
    7,987,748
    
    
    $
    137,872
    
    
    
    7.00
    %Mortgage-backed securities
    
    
    1,738,894
    
    
    
    22,240
    
    
    
    5.19
    %
    
    
    4,079,571
    
    
    
    51,195
    
    
    
    5.09
    %Interest-only strips
    
    
    52,143
    
    
    
    1,494
    
    
    
    11.62
    %
    
    
    57,165
    
    
    
    1,831
    
    
    
    12.99
    %Investment securities
    
    
    2,584,714
    
    
    
    27,812
    
    
    
    4.36
    %
    
    
    2,973,732
    
    
    
    30,101
    
    
    
    4.11
    %Other interest-earning assets
    
    
    1,248,729
    
    
    
    16,109
    
    
    
    5.23
    %
    
    
    1,149,713
    
    
    
    12,440
    
    
    
    4.39
    %Total interest-earning assets/interest income
    
    
    10,787,495
    
    
    $
    157,248
    
    
    
    5.91
    %
    
    
    16,247,929
    
    
    $
    233,439
    
    
    
    5.83
    %Total non-interest-earning assets
    
    
    1,230,665
    
    
    
    
    
    
    
    
    
    
    
    1,807,353Total assets
    
    $
    12,018,160
    
    
    
    
    
    
    
    
    
    
    $
    18,055,282LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    4,212,343
    
    
    $
    42,788
    
    
    
    4.12
    %
    
    $
    4,156,798
    
    
    $
    32,708
    
    
    
    3.19
    %Repurchase agreements
    
    
    3,704,961
    
    
    
    39,636
    
    
    
    4.34
    %
    
    
    5,979,612
    
    
    
    62,229
    
    
    
    4.22
    %Advances from the FHLB
    
    
    1,034,500
    
    
    
    13,608
    
    
    
    5.33
    %
    
    
    1,001,722
    
    
    
    10,378
    
    
    
    4.20
    %Loans payable
    
    
    439,185
    
    
    
    7,628
    
    
    
    7.04
    %
    
    
    3,972,827
    
    
    
    55,067
    
    
    
    5.62
    %Notes payable
    
    
    923,507
    
    
    
    15,424
    
    
    
    6.77
    %
    
    
    916,399
    
    
    
    14,441
    
    
    
    6.39
    %Total interest-bearing liabilities/interest expense
    
    
    10,314,496
    
    
    $
    119,084
    
    
    
    4.68
    %
    
    
    16,027,358
    
    
    $
    174,823
    
    
    
    4.42
    %Total non-interest-bearing liabilities
    
    
    361,440
    
    
    
    
    
    
    
    
    
    
    
    423,777Total liabilities
    
    
    10,675,936
    
    
    
    
    
    
    
    
    
    
    
    16,451,135Stockholders equity
    
    
    1,342,224
    
    
    
    
    
    
    
    
    
    
    
    1,604,147Total liabilities and stockholders equity
    
    $
    12,018,160
    
    
    
    
    
    
    
    
    
    
    $
    18,055,282Net interest-earning assets
    
    $
    472,999
    
    
    
    
    
    
    
    
    
    
    $
    220,571Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    38,164
    
    
    
    
    
    
    
    
    
    
    $
    58,616Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.23
    %
    
    
    
    
    
    
    
    
    
    
    1.41
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.43
    %
    
    
    
    
    
    
    
    
    
    
    1.46
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    104.59
    %
    
    
    
    
    
    
    
    
    
    
    101.38
    %
 
 (1)
    
    Average loan balances include the average balance of non-accruing loans, on which interest income is recognized when collected. Also includes the average balance of GNMA defaulted loans for
which the Company has an unconditional buy-back option.(2)
    
    Interest income on loans includes $1.4 million and $1.1 million for the first quarter of 2007 and 2006, respectively, of income from prepayment penalties related to the Companys loan
portfolio.(3)
    
    Interest rate spread represents the difference between Doral Financials weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities.(4) Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets. 47




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TABLE B
NET INTEREST INCOME VARIANCE ANALYSIS
 QUARTER ENDEDMARCH 31,2007 COMPARED TO 2006INCREASE (DECREASE) DUE TO:(In thousands)
    
    VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    (48,770
    )
    
    $
    491
    
    
    $
    (48,279
    )Mortgage-backed securities
    
    
    (29,382
    )
    
    
    427
    
    
    
    (28,955
    )Interest-only strips
    
    
    (161
    )
    
    
    (176
    )
    
    
    (337
    )Investment securities
    
    
    (3,949
    )
    
    
    1,660
    
    
    
    (2,289
    )Other interest-earning assets
    
    
    1,074
    
    
    
    2,595
    
    
    
    3,669TOTAL INTEREST INCOME VARIANCE
    
    
    (81,188
    )
    
    
    4,997
    
    
    
    (76,191
    )INTEREST EXPENSE VARIANCEDeposits
    
    
    436
    
    
    
    9,644
    
    
    
    10,080Repurchase agreements
    
    
    (23,705
    )
    
    
    1,112
    
    
    
    (22,593
    )Advances from the FHLB
    
    
    339
    
    
    
    2,891
    
    
    
    3,230Loans payable
    
    
    (49,021
    )
    
    
    1,582
    
    
    
    (47,439
    )Notes payable
    
    
    112
    
    
    
    871
    
    
    
    983TOTAL INTEREST EXPENSE VARIANCE
    
    
    (71,839
    )
    
    
    16,100
    
    
    
    (55,739
    )NET INTEREST INCOME VARIANCE
    
    $
    (9,349
    )
    
    $
    (11,103
    )
    
    $
    (20,452
    )
 PROVISION FOR LOAN AND LEASE LOSSES
   48




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NON-INTEREST INCOME
  Net Loss on Mortgage Loan Sales and Fees.
   QUARTER ENDED
    
    QUARTER ENDED(In thousands)
    
    MARCH 31, 2007
    
    MARCH 31, 2006Total loan sales and securitizations
    
    $
    69,037
    
    
    $
    231,571MSRs capitalized
    
    $
    1,184
    
    
    $
    4,249
 Net Servicing Income.
 49




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TABLE C
NET SERVICING INCOME
 QUARTER ENDEDMARCH 31,(In thousands)
    
    2007Servicing fees (net of guarantee fees)
    
    $
    9,782Late charges
    
    
    2,365Prepayment penalties
    
    
    130Interest loss
    
    
    (610
    )Other servicing fees
    
    
    58Servicing income, gross
    
    
    11,725Change in fair value of mortgage servicing rights
    
    
    (5,725
    )Total net servicing income
    
    $
    6,000
  TABLE D
NET SERVICING INCOME
 QUARTER ENDEDMARCH 31,(In thousands)
    
    2006Servicing fees (net of guarantee fees)
    
    $
    7,752Late charges
    
    
    2,443Prepayment penalties
    
    
    519Interest loss
    
    
    (1,387
    )Other servicing fees
    
    
    62Servicing income, gross
    
    
    9,389Amortization of servicing assets
    
    
    (6,418
    )Net recovery of servicing assets
    
    
    2,179Total net servicing income
    
    $
    5,150
    50




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Trading Activities.
  TABLE E  COMPONENTS OF TRADING ACTIVITIES
 QUARTER ENDEDMARCH 31,(In thousands)
    
    2007
    
    
    2006Net realized (losses) gains on sales of securities held for trading
    
    $
    (2,001
    )
    
    $
    2,891Gains (losses ) on the IO valuation
    
    
    4,547
    
    
    
    (26,603
    )Net unrealized (losses) gains on trading securities, excluding IOs
    
    
    (135
    )
    
    
    760Net realized and unrealized (losses) gains on derivative instruments
    
    
    (4,389
    )
    
    
    13,005Total
    
    $
    (1,978
    )
    
    $
    (9,947
    )
  Net
(Loss) Gain on Sale of Investment Securities.
 Commissions, Fees and Other Income.
 TABLE F  COMMISSIONS, FEES AND OTHER INCOME
 QUARTERENDED MARCH 31,(In thousands)
    
    2007
    
    
    2006Retail banking fees
    
    $
    5,213
    
    
    $
    4,812Securities brokerage and asset management fees
and commissions
    
    
    143
    
    
    
    271Insurance agency commissions
    
    
    2,323
    
    
    
    2,702Other income
    
    
    732
    
    
    
    1,949Total
    
    $
    8,411
    
    
    $
    9,734
 51




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NON-INTEREST EXPENSE
  TABLE G  NON INTEREST EXPENSE
 QUARTER ENDEDMARCH 31,(In thousands)
    
    2007
    
    
    2006Compensation and employee benefits
    
    $
    25,383
    
    
    $
    19,591Taxes, other than payroll and income taxes
    
    
    2,847
    
    
    
    3,308Advertising
    
    
    1,362
    
    
    
    2,595Professional services  excluding restatement
expenses
    
    
    17,762
    
    
    
    6,074Professional services  restatement related expenses
    
    
    2,859
    
    
    
    11,077Communication and information systems
    
    
    4,030
    
    
    
    5,227Occupancy and other office expenses
    
    
    6,299
    
    
    
    7,155Depreciation and amortization
    
    
    5,051
    
    
    
    5,703Other
    
    
    9,625
    
    
    
    5,044Total non-interest expense
    
    $
    75,218
    
    
    $
    65,774
   INCOME TAXES
  52




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53




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BALANCE SHEET AND OPERATING DATA ANALYSIS
 LOAN PRODUCTION
  TABLE H
LOAN PRODUCTION
 QUARTER ENDEDMARCH 31,(Dollars in Thousands, Except forAverage Initial Loan Balance)
    
    2007
    
    2006FHA/VA mortgage loansNumber of loans
    
    
    380
    
    
    
    483Volume of loans
    
    $
    37,076
    
    
    $
    46,369Percent of total volume
    
    
    14
    %
    
    
    5
    %Average initial loan balance
    
    $
    97,569
    
    
    $
    96,002Conventional conforming mortgage loansNumber of loans
    
    
    331
    
    
    
    510Volume of loans
    
    $
    37,906
    
    
    $
    58,861Percent of total volume
    
    
    14
    %
    
    
    7
    %Average initial loan balance
    
    $
    114,519
    
    
    $
    115,414Conventional non  conforming
mortgage loans(1)Number of loans
    
    
    425
    
    
    
    5,497Volume of loans
    
    $
    55,731
    
    
    $
    591,385Percent of total volume
    
    
    21
    %
    
    
    68
    %Average initial loan balance
    
    $
    131,131
    
    
    $
    107,583Other(2)Number of loans
    
    
    1,132
    
    
    
    1,014Volume of loans
    
    $
    137,542
    
    
    $
    179,127Percent of total volume
    
    
    51
    %
    
    
    20
    %Total loansNumber of loans
    
    
    2,268
    
    
    
    7,504Volume of loans
    
    $
    268,255
    
    
    $
    875,742
 
 (1)
    
    Includes $4.5 million and $42.2 million in second mortgages
for the quarters ended March 31, 2007 and 2006, respectively.(2)
    
    Consists of construction loans on residential projects and
mortgage loans secured by multi-family and commercial properties,
as well as other commercial, land, and consumer loans. 54




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TABLE I
LOAN ORIGINATION SOURCES
 QUARTER ENDED MARCH 31,2007
    
    2006Puerto Rico
    
    US
    
    Total
    
    Puerto Rico
    
    US
    
    TotalRetail
    
    
    47
    %
    
    
    
    
    
    
    47
    %
    
    
    72
    %
    
    
    
    
    
    
    72
    %Wholesale(1)
    
    
    2
    %
    
    
    
    
    
    
    2
    %
    
    
    8
    %
    
    
    
    
    
    
    8
    %New Housing Developments
    
    
    26
    %
    
    
    9
    %
    
    
    35
    %
    
    
    11
    %
    
    
    2
    %
    
    
    13
    %Other(2)
    
    
    12
    %
    
    
    4
    %
    
    
    16
    %
    
    
    6
    %
    
    
    1
    %
    
    
    7
    %
 
 (1)
    
    Refers to purchases of mortgage loans from other financial institutions and mortgage lenders.(2)
    
    Refers to commercial, consumer and land loans originated through the banking subsidiaries and other specialized units. MORTGAGE LOAN SERVICING
  55




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TABLE J
MORTGAGE LOAN SERVICING
 AS OF MARCH 31,(Dollars in Thousands, Except for Average Size of Loans)
    
    2007
    
    
    2006COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END:GNMA
    
    $
    2,145,365
    
    
    $
    2,175,165FHLMC/FNMA
    
    
    3,965,805
    
    
    
    4,174,044Other conventional mortgage loans(1)(2)
    
    
    8,902,831
    
    
    
    9,535,232Total servicing portfolio
    
    $
    15,014,001
    
    
    $
    15,884,441SELECTED DATA REGARDING MORTGAGE LOANS SERVICED:Number of loans
    
    
    166,291
    
    
    
    174,924Weighted- average interest rate
    
    
    6.58
    %
    
    
    6.60
    %Weighted- average remaining maturity (months)
    
    
    251
    
    
    
    257Weighted- average gross servicing fee rate  loans serviced to others
    
    
    0.3883
    %
    
    
    0.3974
    %Average servicing portfolio(3)
    
    $
    15,150,561
    
    
    $
    15,806,023Principal prepayments
    
    $
    294,623
    
    
    $
    437,880Constant prepayment rate
    
    
    7
    %
    
    
    10
    %Average size of loans
    
    $
    90,288
    
    
    $
    90,808Servicing assets, net
    
    $
    170,360
    
    
    $
    150,802DELINQUENT MORTGAGE LOANS AND PENDING
FORECLOSURES AT PERIOD END:60-89 days past due
    
    
    1.74
    %
    
    
    1.29
    %90 days or more past due
    
    
    2.20
    %
    
    
    1.51
    %Total delinquencies excluding foreclosures
    
    
    3.94
    %
    
    
    2.80
    %Foreclosures pending
    
    
    2.47
    %
    
    
    1.96
    %SERVICING PORTFOLIO ACTIVITY:Beginning servicing portfolio
    
    $
    15,287,120
    
    
    $
    15,727,604Add:Loans funded and purchased(4)
    
    
    130,712
    
    
    
    689,956Bulk servicing acquired
    
    
    
    
    
    
    16,376Less:Servicing sales
    
    
    
    
    
    
    12,885Run-off(5)
    
    
    403,831
    
    
    
    536,610Ending servicing portfolio
    
    $
    15,014,001
    
    
    $
    15,884,441
 
 (1)
    
    Includes $3.3 billion and $6.2 billion of loans owned by Doral Financial at March 31, 2007 and 2006, respectively, which represented 22%and
39% of the total servicing portfolio as of such dates.(2)
    
    Includes portfolios of $227.3 million and $270.3 million at March 31, 2007 and 2006, respectively, of delinquent FHA/VA and conventional
mortgage loans sold to third parties.(3)
    
    Includes the average balance of loans owned by Doral Financial of $3.1 billion and $6.0 billion at March 31, 2007 and 2006, respectively.(4)
    
    Excludes approximately $128.0 million and $185.8 million of commercial, consumer, construction and other non-mortgage loans originated by
Doral Financial but not part of the mortgage servicing-portfolio as of March 31, 2007 and 2006, respectively.(5)
    
    Run-off refers to regular amortization of loans, prepayments and foreclosures. 56




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LIQUIDITY AND CAPITAL RESOURCES
  Liquidity of the Holding Company
   
    
    the downgrades of its credit ratings;
    
    its inability to access the capital markets;
    
    the decision of a substantial majority of its unsecured creditors not to renew committed credit facilities;
    
    the inability to sell non-conforming mortgage loans in the local market, and
reliance on sales in the U.S. secondary markets, which have stricter underwriting
requirements;
    
    legal, accounting and other professional expenses associated with the
resolution of legacy issues and business transformation efforts;
    
    regulatory consent orders that, as from March 17, 2006, prohibit the Companys
banking subsidiaries from paying dividends to the holding company, without prior regulatory
approval; and
    
    the settlement of the SECs investigation of the Company, which required the
payment of a $25 million civil penalty in February 2007.
 57




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Risk Factors
   Recapitalization of the Holding Company
  58




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Uses of Cash
  59




---



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Sources of Cash
  60




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TABLE K
SOURCES OF BORROWINGS
 AS OF MARCH 31, 2007
    
    AS OF DECEMBER 31, 2006AMOUNT
    
    AVERAGE
    
    AMOUNT
    
    AVERAGE(Dollars in thousands)
    
    OUTSTANDING
    
    RATE
    
    OUTSTANDING
    
    RATEDeposits
    
    $
    4,231,260
    
    
    
    4.01
    %
    
    $
    4,250,760
    
    
    
    3.90
    %Repurchase Agreements
    
    
    3,659,730
    
    
    
    4.33
    %
    
    
    3,899,365
    
    
    
    4.25
    %Advances from FHLB
    
    
    1,034,500
    
    
    
    4.77
    %
    
    
    1,034,500
    
    
    
    4.78
    %Loans Payable
    
    
    432,785
    
    
    
    6.85
    %
    
    
    444,443
    
    
    
    6.92
    %Notes Payable
    
    
    922,962
    
    
    
    6.23
    %
    
    
    923,913
    
    
    
    6.57
    %
      TABLE L
AVERAGE DEPOSIT BALANCE
 QUARTER ENDED
    
    
    YEAR ENDEDMARCH 31, 2007
    
    
    DECEMBER 31, 2006AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE(Dollars in thousands)
    
    BALANCE
    
    
    RATE
    
    
    BALANCE
    
    
    RATECertificates of deposit
    
    $
    2,932,300
    
    
    
    4.80
    %
    
    $
    2,945,920
    
    
    
    4.27
    %Regular passbook savings
    
    
    432,308
    
    
    
    3.68
    %
    
    
    449,732
    
    
    
    3.28
    %NOW accounts
    
    
    524,587
    
    
    
    3.23
    %
    
    
    527,163
    
    
    
    2.80
    %Non-interest bearing
    
    
    323,148
    
    
    
    
    
    
    
    340,772
    
    
    
    Total deposits
    
    $
    4,212,343
    
    
    
    4.12
    %
    
    $
    4,263,587
    
    
    
    3.65
    %
  61




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TABLE M
CERTIFICATES OF DEPOSIT MATURITIES
 (In thousands)
    
    AMOUNTCertificates of deposit maturing:Three months or less
    
    $
    571,767Over three through six months
    
    
    526,444Over six through twelve months
    
    
    529,051Over twelve months
    
    
    762,756Total
    
    $
    2,390,018
  REGULATORY CAPITAL RATIOS
  TABLE N
REGULATORY CAPITAL RATIOS
 As of March 31, 2007DORAL
    
    DORAL
    
    DORALFINANCIAL
    
    BANK PR
    
    BANK NYTotal Capital (Total capital to risk- weighted assets)
    
    
    13.2
    %
    
    
    21.8
    %
    
    
    16.3
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    9.6
    %
    
    
    20.5
    %
    
    
    15.8
    %Leverage Ratio(1)
    
    
    4.7
    %
    
    
    7.8
    %
    
    
    9.4
    %
 
 (1)
    
    Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR and
Tier 1 capital to adjusted total assets in the case of Doral Bank NY. As of December 31, 2006DORAL
    
    DORAL
    
    DORALFINANCIAL
    
    BANK PR
    
    BANK NYTotal Capital (Total capital to risk- weighted assets)
    
    
    13.7
    %
    
    
    21.1
    %
    
    
    16.3
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    10.3
    %
    
    
    19.8
    %
    
    
    15.8
    %Leverage Ratio(1)
    
    
    4.5
    %
    
    
    6.8
    %
    
    
    10.3
    %
 
 (1)
    
    Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR and Tier 1
capital to adjusted total assets in the case of Doral Bank NY. 62




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Legal
Proceedings
   ASSETS AND LIABILITIES
   OFF-BALANCE SHEET ACTIVITIES
  63




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TABLE O
LOANS SUBJECT TO RECOURSE BY LOAN TYPE
 90 or moreLoan
    
    
    
    
    
    
    Outstanding
    
    
    Full
    
    
    6%
    
    
    7%
    
    
    10%
    
    
    4%
    
    
    
    
    
    
    Total
    
    
    Days(Dollars in thousands)
    
    Count
    
    
    LTV
    
    
    Balance
    
    
    Recourse
    
    
    Limit
    
    
    Limit
    
    
    Limit
    
    
    Limit
    
    
    Other
    
    
    Exposure
    
    
    DelinquentFNMA sales
    
    
    7,227
    
    
    
    83
    
    
    $
    836,662
    
    
    $
    759,617
    
    
    $
    12,853
    
    
    $
    9,177
    
    
    $
    
    
    
    $
    3,530
    
    
    $
    
    
    
    $
    785,177
    
    
    $
    29,670Non-conforming loans
    
    
    7,156
    
    
    
    51
    
    
    
    243,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,847
    
    
    
    
    
    
    
    2,572
    
    
    
    91,419
    
    
    
    24,590FHLMC sales
    
    
    1,134
    
    
    
    48
    
    
    
    39,829
    
    
    
    39,829
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,829
    
    
    
    1,087Total
    
    
    15,517
    
    
    
    75
    
    
    $
    1,120,241
    
    
    $
    799,446
    
    
    $
    12,853
    
    
    $
    9,177
    
    
    $
    88,847
    
    
    $
    3,530
    
    
    $
    2,572
    
    
    $
    916,425
    
    
    $
    55,347
     Risk Factors
 64




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CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
  TABLE P
CONTRACTUAL OBLIGATIONS
 (In thousands)
    
    PAYMENT DUE BY PERIODLESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTERCONTRACTUAL OBLIGATIONS(1)
    
    TOTAL
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSDeposits
    
    $
    4,231,260
    
    
    $
    3,650,306
    
    
    $
    531,444
    
    
    $
    45,579
    
    
    $
    3,931Repurchase agreements(2)
    
    
    3,659,730
    
    
    
    2,909,730
    
    
    
    
    
    
    
    750,000
    
    
    
    Advances from the FHLB(2)
    
    
    1,034,500
    
    
    
    934,500
    
    
    
    50,000
    
    
    
    50,000
    
    
    
    Loans payable(3)
    
    
    432,785
    
    
    
    57,330
    
    
    
    95,090
    
    
    
    73,718
    
    
    
    206,647Notes payable
    
    
    922,962
    
    
    
    677,701
    
    
    
    1,770
    
    
    
    400
    
    
    
    243,091Other liabilities
    
    
    285,013
    
    
    
    283,013
    
    
    
    2,000
    
    
    
    
    
    
    
    Non-cancelable operating leases
    
    
    65,965
    
    
    
    8,014
    
    
    
    15,029
    
    
    
    11,676
    
    
    
    31,246Total Contractual Cash Obligations
    
    $
    10,632,215
    
    
    $
    8,520,594
    
    
    $
    695,333
    
    
    $
    931,373
    
    
    $
    484,915
 
 (1)
    
    Amounts included in the table above do not include interest.(2)
    
    Includes $2.4 billion of repurchase agreements with an average rate of 4.04% and $467.5 million in advances from the
FHLB-NY with an average rate of 4.58%,which the lenders have the right to call before their contractual maturities. The majority of
such repurchase agreements and advances from the FHLB-NY are included in the less than one year category in the above table but have
actual contractual maturities ranging from March 2008 to March, 2015.They are included on the first call date basis because increases
in interest rates over the average rate of the Companys callable borrowings may induce the lenders to exercise their call right.(3)
    
    Secured borrowings with local financial institutions, collateralized by real estate mortgage loans at variable interest
rates tied to 3-month LIBOR. These loans are not subject to scheduled payments, but are expected to be repaid according to the regular
amortization and prepayments of the underlying mortgage loans. For purposes of the table above, the Company used a CPR of 11.74% to
estimate the repayments. TABLE Q
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
    
    $
    284,539
    
    
    $
    206,610
    
    
    $
    61,872
    
    
    $
    14,958
    
    
    $
    1,099Commitments to sell mortgage-backed
securities and loans
    
    
    300,979
    
    
    
    300,979
    
    
    
    
    
    
    
    
    
    
    
    Commercial and financial standby letters of credit
    
    
    4,993
    
    
    
    1,106
    
    
    
    3,887
    
    
    
    
    
    
    
    Maximum contractual recourse exposure
    
    
    916,425
    
    
    
    228,787
    
    
    
    451,305
    
    
    
    
    
    
    
    236,333Total
    
    $
    1,506,936
    
    
    $
    737,482
    
    
    $
    517,064
    
    
    $
    14,958
    
    
    $
    237,432
 
 (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
  65




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Doral Financials Risk Profile
    Market Value
    
    Net InterestAs of March 31, 2007
    
    of Equity Risk
    
    Income Risk(1)+ 100 BPS
    
    
    (27.5
    )%
    
    
    3.1
    %- 100 BPS
    
    
    6.7
    %
    
    
    (5.5
    )%
 Market Value of
    
    Net InterestAs of December 31, 2006
    
    Equity Risk
    
    Income Risk(1)+ 100 BPS
    
    
    (24.0
    )%
    
    
    5.3
    %- 100 BPS
    
    
    7.8
    %
    
    
    (7.5
    %)
 
 (1)
    
    Based on 12-month forward change in net interest income.   66




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##### Table of Contents



(In thousands)
    
    March 31, 2007
    
    December 31, 2006Change in Fair
    
    Change in
    
    Change in Fair
    
    Change inValue of
    
    Fair Value of
    
    Value of
    
    Fair Value ofAvailable for
    
    Held to
    
    Available for
    
    Held toChange in interest
    
    Sale Securities
    
    Maturity
    
    Sale Securities
    
    Maturityrates (basis points)
    
    and FHLB Stock
    
    Securities
    
    and FHLB Stock
    
    Securities+200
    
    $
    (193,649
    )
    
    $
    (322,925
    )
    
    $
    (200,632
    )
    
    $
    (329,435
    )+100
    
    
    (94,891
    )
    
    
    (148,236
    )
    
    
    (97,882
    )
    
    
    (152,734
    )+50
    
    
    (46,207
    )
    
    
    (70,658
    )
    
    
    (47,546
    )
    
    
    (73,206
    )Base
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -50
    
    
    41,994
    
    
    
    61,400
    
    
    
    43,007
    
    
    
    64,452-100
    
    
    76,508
    
    
    
    114,962
    
    
    
    78,189
    
    
    
    121,483-200
    
    
    128,381
    
    
    
    209,678
    
    
    
    131,641
    
    
    
    219,065
   Derivatives
  67




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TABLE R
INTEREST RATE SWAPS
(Dollars in thousands)
 INTEREST
    
    INTERESTNOTIONAL
    
    MATURITY
    
    
    
    RATE
    
    RATE
    
    FAIRAMOUNT
    
    DATE
    
    PURPOSE
    
    RECEIVED
    
    PAID
    
    VALUE$550,000
    
    August, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    5.375
    %
    
    
    4.430
    %
    
    $
    2,148$550,000
    
    August, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    5.373
    %
    
    
    4.443
    %
    
    $
    2,143$100,000
    
    September, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    5.353
    %
    
    
    3.688
    %
    
    $
    779$100,000
    
    September, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    5.356
    %
    
    
    3.655
    %
    
    $
    798$200,000
    
    November, 2009
    
    To protect the
spread of the
variable IOs
    
    
    5.360
    %
    
    
    3.773
    %
    
    $
    5,776$200,000
    
    November, 2009
    
    To protect the
spread of the
variable IOs
    
    
    5.360
    %
    
    
    3.975
    %
    
    $
    4,834
   68




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TABLE S
FAIR VALUE RECONCILIATION
 Quarter ended(In thousands)
    
    March 31, 2007Fair value of contracts outstanding at the beginning of the period
    
    $
    26,282Contracts realized or otherwise settled during the period
    
    
    (511
    )Fair value of new contracts entered into during the period
    
    
    511Changes in fair values during the period
    
    
    (8,873
    )Fair value of contracts outstanding at the end of the period
    
    $
    17,409
 TABLE T
SOURCES OF FAIR VALUE
 (In thousands)
    
    Payment Due by PeriodMaturity
    
    
    
    
    
    
    
    
    
    
    Maturityless than
    
    
    Maturity
    
    
    Maturity
    
    
    in excess
    
    
    Total FairAs of March 31, 2007
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    of 5 Years
    
    
    ValueSources of Fair ValuePrices actively quoted
    
    $
    1,931
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,931Prices provided by
other external
sources
    
    
    4,868
    
    
    
    10,610
    
    
    
    
    
    
    
    
    
    
    
    15,478$
    6,799
    
    
    $
    10,610
    
    
    $
    
    
    
    $
    
    
    
    $
    17,409
  69




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TABLE U
DERIVATIVE COUNTERPARTY CREDIT EXPOSURE
 (Dollars in thousands)
    
    March 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
    
    
    $
    400,000
    
    
    $
    7,400
    
    
    $
    
    
    
    $
    7,400
    
    
    
    2.62AA-
    
    
    2
    
    
    
    950,000
    
    
    
    5,166
    
    
    
    
    
    
    
    5,166
    
    
    
    0.32A+
    
    
    3
    
    
    
    1,051,565
    
    
    
    3,644
    
    
    
    
    
    
    
    3,644
    
    
    
    0.21A
    
    
    1
    
    
    
    1,154
    
    
    
    14
    
    
    
    
    
    
    
    14
    
    
    
    2.63Subtotal
    
    
    7
    
    
    
    2,402,719
    
    
    $
    16,224
    
    
    $
    
    
    
    $
    16,224
    
    
    
    0.66Other derivatives
    
    
    
    
    
    
    2,500,000Total Derivatives
    
    
    
    
    
    $
    4,902,719
 
 (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, 2006Weighted AverageNumber of
    
    
    
    
    
    
    Total Exposure
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    

At Fair Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA-
    
    
    2
    
    
    $
    1,428,649
    
    
    $
    15,763
    
    
    $
    (2,080
    )
    
    $
    13,683
    
    
    
    1.15A+
    
    
    3
    
    
    
    1,202,764
    
    
    
    3,938
    
    
    
    (2,262
    )
    
    
    1,676
    
    
    
    0.30Subtotal
    
    
    5
    
    
    
    2,631,413
    
    
    $
    19,701
    
    
    $
    (4,342
    )
    
    $
    15,359
    
    
    
    0.76Other derivatives(4)
    
    
    
    
    
    
    2,500,000Total Derivatives
    
    
    
    
    
    $
    5,131,413
 
 (1)
    
    Based on the S&P Long Term Issuer Credit Ratings.(2)
    
    Based on legal entities. Affiliated legal entities are reported separately.(3)
    
    For each counterparty, this amount includes derivatives with a positive fair value including the related accrued interest receivable/payable (net).(4)
    
    For the year ended December 31, 2006, the Company recognized a realized gain of $2.5 million and an unrealized loss of $1.0 million from a derivative resulting from certain gain-sharing
agreements created in connection with certain mortgage loan sales. The Company has the right to share, on a limited basis, the gains realized by the buyers of such loans within specified time periods from
subsequent sales or securitizations. 70




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Credit Risk
        71




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##### Table of Contents



As of
    
    
    As of(In thousands)
    
    March 31, 2007
    
    
    December 31, 2006Construction loans(1)
    
    $
    796,950
    
    
    $
    817,352Total undisbursed funds under existing commitments
    
    $
    222,640
    
    
    $
    250,422Non-performing construction loans
    
    $
    124,482
    
    
    $
    75,868Net charge offs  Construction loans
    
    $
    513
    
    
    $
    826Allowance for loan losses  Construction loans
    
    $
    37,432
    
    
    $
    37,829Non-performing construction loans to total construction loans
    
    
    15.62
    %
    
    
    9.28
    %Allowance for loan losses  construction loans to total
construction loans
    
    
    4.70
    %
    
    
    4.63
    %Net charge-offs to total construction loans
    
    
    0.06
    %
    
    
    0.10
    %
 
 (1)
    
    Includes $667.8 million and $680.6 million of construction loans for residential
housing projects as of March 31, 2007 and December 31, 2006, respectively. Also includes $129.2 million
and $136.8 million of construction loans for commercial, condominiums and multi-family projects as of
March 31, 2007 and December 31, 2006, respectively. Non-performing assets and allowance for loan and lease losses
      72




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TABLE V
NON-PERFORMING ASSETS
 AS OF
    
    
    AS OF(Dollars in thousands)
    
    MARCH 31, 2007
    
    
    DECEMBER 31, 2006Non-accrual loans:Residential mortgage loans  held for sale (1)
    
    $
    87,345
    
    
    $
    62,466Residential mortgage loans  held for investment
    
    
    102,615
    
    
    
    110,332Total non-accrual residential mortgage loans
    
    
    189,960
    
    
    
    172,798Other lending activities:Construction loans
    
    
    124,482
    
    
    
    75,848Commercial real estate loans
    
    
    61,771
    
    
    
    47,162Commercial real estate loans  held for sale
    
    
    3,652
    
    
    
    3,384Consumer loans
    
    
    3,875
    
    
    
    2,813Commercial non-real estate loans
    
    
    6,575
    
    
    
    5,571Lease financing receivable
    
    
    1,342
    
    
    
    1,075Total non-accrual other lending activities
    
    
    201,697
    
    
    
    135,873Total non-performing loans(3)
    
    
    391,657
    
    
    
    308,671OREO
    
    
    32,780
    
    
    
    33,197Total NPAs of Doral Financial (consolidated)
    
    
    424,437
    
    
    
    341,868Total NPAs as a percentage
of the loans portfolio, net, and OREO
    
    
    8.45
    %
    
    
    6.63
    %Total NPAs of Doral Financial as a percentage of
consolidated total assets
    
    
    3.68
    %
    
    
    2.88
    %Total non-performing loans to total loans (excluding GNMA
defaulted loans)
    
    
    7.85
    %
    
    
    6.02
    %Ratio of allowance for loan and lease losses to total
non-performing loans (excluding non-performing
residential mortgage loans) at end of period(2)
(4)
    
    
    32.55
    %
    
    
    46.70
    %
 
 (1)
    
    Does not include approximately $105.0 million and $100.3 million of GNMA defaulted loans (for
which the Company has the option to buy-back from the pools serviced), included as part of the
mortgage loans held for sale portfolio as of March 31, 2007 and December 31, 2006, respectively.(2)
    
    Refer to non-performing assets allowance for loan and lease losses above for additional
information regarding the Companys methodology for assessing the adequacy of the allowance for loan
and lease losses.(3)
    
    Total non-performing loans exclude $111.0 million and $51.8 million as of March 31, 2007 and
December 31, 2006, respectively, on certain construction loans, classified as substandard loans and
placed on a non-accrual status, but not more than 90 days in arrears.(4)
    
    The proportion of the allowance for loan losses allocated to the residential mortgage loans
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
the 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.  73




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TABLE W
ALLOWANCE FOR LOAN AND LEASE LOSSES
 QUARTER ENDEDMARCH 31,(Dollars in thousands)
    
    2007
    
    
    2006Allowance for Loan and Lease Losses:Balance at beginning of period
    
    $
    67,233
    
    
    $
    35,044Provision (recovery) for loan and lease losses:Construction loans
    
    
    116
    
    
    
    3,799Residential mortgage loans
    
    
    1,143
    
    
    
    583Commercial real estate loans
    
    
    1,496
    
    
    
    (494
    )Consumer loans
    
    
    122
    
    
    
    980Lease financing
    
    
    327
    
    
    
    208Commercial non-real estate loans
    
    
    2,689
    
    
    
    53Land secured loans
    
    
    (304
    )
    
    
    44Other(1)
    
    
    400
    
    
    
    Total provision for loan and lease losses
    
    
    5,989
    
    
    
    5,173Charge  offs:Construction loans
    
    
    (513
    )
    
    
    Residential mortgage loans
    
    
    
    
    
    
    Commercial real estate loans
    
    
    
    
    
    
    (43
    )Consumer loans
    
    
    (1,279
    )
    
    
    (772
    )Lease financing
    
    
    
    
    
    
    Commercial non-real estate loans
    
    
    (129
    )
    
    
    (190
    )Land secured loans
    
    
    
    
    
    
    Total charge-offs
    
    
    (1,921
    )
    
    
    (1,005
    )Recoveries:Construction loans
    
    
    
    
    
    
    Residential mortgage loans
    
    
    
    
    
    
    Commercial real estate loans
    
    
    
    
    
    
    Consumer loans
    
    
    54
    
    
    
    54Lease financing
    
    
    
    
    
    
    Commercial non-real estate loans
    
    
    8
    
    
    
    51Land secured loans
    
    
    
    
    
    
    Total recoveries
    
    
    62
    
    
    
    105Net charge-offs
    
    
    (1,859
    )
    
    
    (900
    )Other
    
    
    (400
    )
    
    
    13Balance at end of period
    
    $
    70,963
    
    
    $
    39,330Allowance for loan losses as a percentage of
loans receivable outstanding, at the end of period
    
    
    2.29
    %
    
    
    1.14
    %Provision for loan losses to net charge-offs on an
annualized basis
    
    
    322.16
    %
    
    
    567.84
    %Net charge-offs to average loans receivable
outstanding on an annualized basis
    
    
    0.06
    %
    
    
    0.04
    %
 
 (1)
    
    Amount represents the portion of allowance for loans transferred from loans
receivable to mortgage loans held for sale, during the first quarter of 2007, in connection
with the agreement to sell certain assets of Doral Bank NY. 74




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##### Table of Contents



Operational Risk
  Overview of Operational Risk Management
   Internal Control Over Financial Reporting
 Controls and Procedures
 Liquidity Risk
  General Business, Economic and Political Conditions
  Business Risk Factors
  75




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Control and Procedures
    76




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##### Table of Contents



Changes in Internal Control Over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
    77




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##### Table of Contents



SIGNATURES
  DORAL FINANCIAL CORPORATION
(Registrant)Date:
June 14, 2007
    
    /s/ Glen R. WakemanGlen R. WakemanChief Executive Officer and PresidentDate:
June 14, 2007
    
    /s/ Marangal I. DomingoMarangal I. DomingoExecutive Vice President andChief Financial Officer
 78




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##### Table of Contents



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