DORAL FINANCIAL CORPORATION

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008


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

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


Puerto Rico (State or other jurisdiction of incorporation or organization)		66-0312162 (I.R.S. employer identification number)

1451 F.D. Roosevelt Avenue, San Juan, Puerto Rico (Address of principal executive offices)		00920-2717 (Zip Code)

(787) 474-6700
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer þ

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

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yeso No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock: 53,810,110 outstanding as of August 7, 2008.

DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)


	JUNE 30,			DECEMBER 31,
(In thousands, except for share information)	2008			2007
ASSETS
Cash and due from banks	$	87,057		$	67,884

Money market investments:
Money market investments with creditors’ right to repledge		7,095			199,795
Other money market investments		423,206			317,490

Total money market investments		430,301			517,285


Securities purchased under agreements to resell		—			204,000


Pledged investment securities that can be repledged:
Securities held for trading, at fair value		123,955			14,070
Securities available for sale, at fair value		1,593,580			891,961

Total pledged investment securities that can be repledged		1,717,535			906,031

Other investment securities:
Securities held for trading, at fair value		107,301			262,392
Securities available for sale, at fair value		1,562,486			1,029,979
Federal Home Loan Bank of NY (FHLB) stock, at cost		114,140			73,867

Total other investment securities		1,783,927			1,366,238

Total investment securities		3,501,462			2,272,269

Loans:
Loans held for sale, at lower of cost or market		374,420			418,556


Loans receivable		5,234,986			5,054,709
Allowance for loan and lease losses		(122,099	)		(124,733	)
Unearned income		(2,893	)		(3,776	)

Total loans receivable		5,109,994			4,926,200

Total loans		5,484,414			5,344,756


Receivables and mortgage-servicing advances		70,664			62,098
Accrued interest receivable		45,184			42,434
Servicing assets, net		145,527			150,238
Premises and equipment, net		102,650			106,317
Real estate held for sale, net		53,731			38,154
Assets to be disposed of by sale		7,166			8,970
Deferred tax asset, net		402,268			392,860
Other assets		119,447			97,113


Total assets	$	10,449,871		$	9,304,378


LIABILITIES
Deposits:
Non-interest-bearing deposits	$	264,306		$	242,821
Interest-bearing deposits		4,066,422			4,025,203

Total Deposits		4,330,728			4,268,024
Securities sold under agreements to repurchase		2,100,271			1,444,363
Advances from FHLB		1,829,000			1,234,000
Loans payable		379,815			402,701
Notes payable		279,716			282,458
Accrued expenses and other liabilities		300,854			326,125

Total liabilities		9,220,384			7,957,671


STOCKHOLDERS’ EQUITY
Preferred stock, $1 par value; 40,000,000 shares authorized; 9,015,000 shares issued and outstanding, at aggregate liquidation preference value:
Perpetual noncumulative nonconvertible preferred stock (Series A, B and C)		228,250			228,250
Perpetual cumulative convertible preferred stock		345,000			345,000
Common stock, $0.01 par value; 97,500,000 shares authorized; 53,810,110 shares issued and outstanding		538			538
Additional paid-in capital		849,081			849,081
Legal surplus		23,596			23,596
Accumulated deficit		(83,916	)		(66,610	)
Accumulated other comprehensive loss, net of income tax benefit of $19,988 and $6,075 in 2008 and 2007, respectively		(133,062	)		(33,148	)


Total stockholders’ equity		1,229,487			1,346,707

Total liabilities and stockholders’ equity	$	10,449,871		$	9,304,378

The accompanying notes are an integral part of these financial statements.

DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)


	QUARTERS ENDED						SIX MONTH PERIODS
	JUNE 30,						ENDED JUNE 30,
(In thousands, except for share information)	2008			2007			2008			2007
Interest income:
Loans	$	85,910		$	86,726		$	171,292		$	176,319
Mortgage-backed securities		29,936			21,085			49,038			43,325
Interest-only strips (“IOs”)		1,756			1,395			3,430			2,889
Investment securities		13,912			27,074			28,678			54,886
Other interest-earning assets		4,132			16,963			11,316			33,072


Total interest income		135,646			153,243			263,754			310,491

Interest expense:
Deposits		37,268			44,105			79,916			86,893
Securities sold under agreements to repurchase		22,091			38,676			40,404			78,312
Advances from FHLB		17,549			13,036			34,807			26,644
Loans payable		4,568			7,306			10,077			14,934
Notes payable		5,315			15,491			10,651			30,915


Total interest expense		86,791			118,614			175,855			237,698


Net interest income		48,855			34,629			87,899			72,793

Provision for loan and lease losses		10,683			19,322			15,469			25,311


Net interest income after provision for loan and lease losses		38,172			15,307			72,430			47,482

Non-interest income:
Net gain on mortgage loan sales and fees		3,858			1,521			6,226			984
Net (loss) gain on securities held for trading, including gains and losses on the fair value of IOs		(7,916	)		5,891			(248	)		3,913
Net (loss) gain on sale of investment securities		—			(74	)		194			(342	)
Servicing income (net of mark-to-market adjustment)		12,434			9,383			9,723			15,383
Commissions, fees and other income		16,519			8,176			26,379			16,587


Total non-interest income		24,895			24,897			42,274			36,525

Non-interest expenses:
Compensation and benefits		17,057			30,641			36,135			57,203
Taxes, other than payroll and income taxes		2,379			3,437			4,801			6,284
Advertising		2,273			2,568			4,505			3,930
Professional services		8,076			17,559			14,010			37,001
Communication and information systems		5,641			5,264			11,121			9,318
Occupancy and other office expenses		5,680			6,451			11,649			12,750
Depreciation and amortization		4,072			4,427			8,127			9,478
Other		10,448			6,272			19,841			15,873


Total non-interest expenses		55,626			76,619			110,189			151,837


Income (loss) before income taxes		7,441			(36,415	)		4,515			(67,830	)
Income tax expense		5,799			1,063			5,171			6,957


Net income (loss)	$	1,642		$	(37,478	)	$	(656	)	$	(74,787	)


Net loss attributable to common shareholders	$	(6,683	)	$	(45,803	)	$	(17,306	)	$	(91,437	)


Net loss per common share^{(1) (2)}	$	(0.12	)	$	(8.49	)	$	(0.32	)	$	(16.94	)


⁽¹⁾		Net loss per common share for the quarter and six month period ended June 30, 2007 reflects the 1-for-20 reverse stock split effective August 17, 2007.

⁽²⁾		For the quarters and six month periods ended June 30, 2008 and 2007, net loss per common shares represents the basic and diluted loss per common share, respectively, for each of the periods presented.

The accompanying notes are an integral part of these financial statements.

DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)


	SIX MONTH PERIODS
	ENDED JUNE 30,
(In thousands)	2008			2007

PREFERRED STOCK	$	573,250		$	573,250


COMMON STOCK		538			107,948


ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period		849,081			166,495
Stock-based compensation recognized		—			660


Balance at end of period		849,081			167,155


LEGAL SURPLUS		23,596			23,596


(ACCUMULATED DEFICIT) RETAINED EARNINGS:
Balance at beginning of period		(66,610	)		139,051
Net loss		(656	)		(74,787	)
Cumulative effect of accounting change (adoption of SFAS No. 156)		—			926
Cumulative effect of accounting change (adoption of FIN 48)		—			(2,380	)
Cash dividends declared on preferred stock		(16,650	)		(16,650	)


Balance at end of period		(83,916	)		46,160


ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX:
Balance at beginning of period		(33,148	)		(106,936	)
Other comprehensive loss, net of deferred tax		(99,914	)		(24,886	)


Balance at end of period		(133,062	)		(131,822	)


Total stockholders’ equity	$	1,229,487		$	786,287

The accompanying notes are an integral part of these financial statements.

DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPRENHENSIVE LOSS
(UNAUDITED)


	QUARTERS ENDED						SIX MONTH PERIODS
	JUNE 30,						ENDED JUNE 30,
(In thousands)	2008			2007			2008			2007

Net income (loss)	$	1,642		$	(37,478	)	$	(656	)	$	(74,787	)


Other comprehensive loss, before tax:

Unrealized losses on securities arising during the period		(50,771	)		(35,198	)		(113,389	)		(25,416	)
Amortization of unrealized loss on securities reclassified to held to maturity		—			11			—			22
Reclassification of realized losses (gains) included in net loss		—			74			(194	)		342


Other comprehensive loss on investment securities, before tax		(50,771	)		(35,113	)		(113,583	)		(25,052	)

Income tax benefit related to investment securities		5,113			449			13,913			166


Other comprehensive loss on investment securities, net of tax		(45,658	)		(34,664	)		(99,670	)		(24,886	)

Other comprehensive income (loss) on cash flow hedge, net of tax		2,923			—			(244	)		—


Other comprehensive loss, net of tax		(42,735	)		(34,664	)		(99,914	)		(24,886	)


Comprehensive loss, net of tax	$	(41,093	)	$	(72,142	)	$	(100,570	)	$	(99,673	)


Accumulated other comprehensive loss, net of tax

Other comprehensive loss on investment securities	$	(132,247	)	$	(131,822	)	$	(132,247	)	$	(131,822	)
Other comprehensive loss on cash flow hedge		(815	)		—			(815	)		—


Total accumulated other comprehensive loss, net of tax	$	(133,062	)	$	(131,822	)	$	(133,062	)	$	(131,822	)

The accompanying notes are an integral part of these financial statements.

DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


	SIX MONTH PERIODS ENDED
	JUNE 30,
(In thousands)	2008			2007
Cash flows from operating activities:
Net loss	$	(656	)	$	(74,787	)

Adjustments to reconcile net loss to net cash provided by operating activities:
Stock-based compensation		—			660
Depreciation and amortization		8,127			9,478
Mark-to-market adjustment of servicing assets		7,099			6,280
Deferred tax provision		3,647			5,083
Provision for loan and lease losses		15,469			25,311
Net gain on sale of assets to be disposed of by sale		(23	)		—
Accretion of discount on loans, investment securities and debt		(13,715	)		(3,888	)
Unrealized loss on loans held for sale		—			2,008
Net decrease in loans held for sale		(55,475	)		(158,017	)
(Gain) loss on sale of securities		(3,157	)		4,676
Unrealized loss on trading securities		2,983			3,751
Decrease in securities held for trading		127,744			138,327
Amortization and net (loss) gain in the fair value of IOs		(2,768	)		171
(Increase) decrease in derivative instruments		(770	)		8,551
(Increase) decrease in receivables and mortgage servicing advances		(8,022	)		5,139
(Increase) decrease in accrued interest receivable		(2,750	)		6,816
Increase in other assets		(20,415	)		(29,482	)
Decrease in accrued expenses and other liabilities		(31,273	)		(15,185	)

Total adjustments		26,701			9,679

Net cash provided by (used in) operating activities		26,045			(65,108	)

Cash flows from investing activities:
Purchases of securities available for sale		(1,848,684	)		—
Principal repayment and sales of securities available for sale		581,837			446,459
Principal repayment and maturities of securities held to maturity		—			166,099
(Increase) decrease in FHLB stock		(40,273	)		6,094
Net (increase) decrease of loans receivable		(267,143	)		147,928
Purchases of premises and equipment		(3,651	)		(2,799	)
Proceeds from sale of servicing assets		—			7,000
Proceeds from assets to be disposed by sale		474			—
Proceeds from sales of real estate held for sale		8,398			3,615

Net cash (used by) provided by investing activities		(1,569,042	)		774,396

Cash flows from financing activities:
Increase (decrease) in deposits		62,704			(354,174	)
Increase (decrease) in securities sold under agreements to repurchase		655,908			(568,759	)
Proceeds from advances from FHLB		1,440,000			190,000
Repayment of advances from FHLB		(845,000	)		(240,000	)
Repayment of secured borrowings		(22,886	)		(19,995	)
Repayment of notes payable		(2,890	)		(5,181	)
Dividends paid		(16,650	)		(16,650	)

Net cash provided by (used in) financing activities		1,271,186			(1,014,759	)

Net decrease in cash and cash equivalents	$	(271,811	)	$	(305,471	)
Cash and cash equivalents at beginning of period		789,169			1,145,861

Cash and cash equivalents at the end of period	$	517,358		$	840,390

Cash and cash equivalents includes:
Cash and due from banks	$	87,057		$	119,104
Money market investments		430,301			721,286

	$	517,358		$	840,390

Supplemental schedule of non-cash activities:
Loan securitizations	$	147,574		$	111,950

Reclassification of securities from the held for trading portfolio to the available for sale portfolio	$	68,520		$	—

Reclassification of securities held to maturity to held for trading in connection with the agreement to sell certain assets of Doral Bank NY	$	—		$	91,045

Reclassification of loans receivable to loans held for sale in connection with the agreement to sell certain assets of Doral Bank NY	$	—		$	205,629

Reclassification of premises and equipment to assets to be disposed of by sale	$	—		$	22,457

Reclassification of assets to be disposed of by sale to premises and equipment	$	809		$	—

Loans foreclosed	$	25,032		$	8,575

Reclassification of loans held for sale to loans receivable	$	48,185		$	1,340,833

Capitalization of servicing assets	$	2,975		$	2,546

Remeasurement of income taxes payable upon adoption of FIN 48	$	—		$	2,380

Remeasurement of fair value of MSRs upon adoption of SFAS 156, net of tax	$	—		$	926

Supplemental information for cash flows:
Cash used to pay interest	$	184,658		$	237,279

Cash used to pay income taxes	$	17,816		$	2,587

The accompanying notes are an integral part of these financial statements.

DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Consolidated Financial Statements (unaudited) include the accounts of Doral Financial Corporation, Doral Mortgage LLC (“Doral Mortgage”), Doral Securities, Inc. (“Doral Securities”), Doral Bank (“Doral Bank PR”), Doral Bank, FSB (“Doral Bank NY”), Doral Money, Inc. (“Doral Money”), Doral International, Inc. (“Doral International”), Doral Properties, Inc. (“Doral Properties”), Doral Insurance Agency, Inc. (“Doral Agency”) and CB, LLC. On July 18, 2007, Sana Mortgage Corporation (“Sana”) was merged with and into Doral Mortgage and Centro Hipotecario de Puerto Rico (“Centro Hipotecario”) was merged with and into Doral Financial. References herein to “Doral Financial” or “the Company” shall be deemed to refer to the Company and its consolidated subsidiaries, unless otherwise provided. All significant intercompany accounts and transactions have been eliminated in consolidation. The Consolidated Financial Statements (unaudited) have been prepared in conformity with the accounting policies stated in the Company’s Annual Audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, except for the implementation of Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”) detailed in notes “c” and “x” below. Certain information and note disclosure normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) has been condensed or omitted from these statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, accordingly, these financial statements should be read in conjunction with the audited Consolidated Financial Statements of the Company for the year ended December 31, 2007, included in the Company’s 2007 Annual Report on Form 10-K. All adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the statement of financial position, results of operations and cash flows for the interim periods have been reflected.

The results of operations for the quarter and six month period ended June 30, 2008 are not necessarily indicative of the results to be expected for the full year.

The Company adopted SFAS No. 157 on January 1, 2008. SFAS No. 157 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements for fair value measurements. This statement defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs when measuring fair value. The standard describes three levels of inputs that are used to measure fair value:

	Level 1		Valuation is based upon unadjusted quoted prices for identical instruments traded in active markets.

	Level 2		Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market, or are derived principally from or corroborated by observable market data, by correlation or by other means.

	Level 3		Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The Company applied the fair value framework established by SFAS No. 157 to the following financial assets and liabilities: securities available for sale, securities held for trading, loans held for sale, loans held for investment, mortgage servicing rights (MSRs) and derivatives. Please refer to note “x” for further information.

		On February 12, 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position 157-2 (“FSP 157-2”), “Effective Date of FASB Statement No. 157”. This statement delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. Therefore, we have elected to delay application of SFAS No. 157 for nonfinancial long-lived assets measured at fair value for an impairment assessment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, goodwill and other real estate owned.

d.		At June 30, 2008, escrow funds and custodial accounts included approximately $92.5 million deposited with Doral Bank PR. These funds are included in the Company’s consolidated financial statements. Escrow funds and custodial accounts also included approximately $20.3 million deposited with other banks, which were excluded from the Company’s assets and liabilities. The Company had fidelity bond and errors and omissions coverage of $17.5 million and $17.0 million, respectively, as of June 30, 2008.

e.		The reconciliation of the numerator and denominator of the basic and diluted earnings-per-share follows:


	Quarters Ended						Six Month Periods Ended
	June 30,						June 30,
(Dollars in thousands, except per share amounts)	2008			2007			2008			2007

Net Income (Loss):

Net income (loss)	$	1,642		$	(37,478	)	$	(656	)	$	(74,787	)


Convertible preferred stock dividend		(4,097	)		(4,097	)		(8,194	)		(8,194	)


Nonconvertible preferred stock dividend		(4,228	)		(4,228	)		(8,456	)		(8,456	)


Net loss attributable to common shareholders	$	(6,683	)	$	(45,803	)	$	(17,306	)	$	(91,437	)


Weighted-Average Shares^{(1) (2)}:

Basic weighted-average number of common shares outstanding		53,810,110			5,397,412			53,810,110			5,397,412

Diluted weighted-average number of common shares outstanding		53,810,110			5,397,412			53,810,110			5,397,412

Net Loss per Common Share⁽²⁾:

Basic	$	(0.12	)	$	(8.49	)	$	(0.32	)	$	(16.94	)


Diluted	$	(0.12	)	$	(8.49	)	$	(0.32	)	$	(16.94	)


⁽¹⁾		For the quarters and six month periods ended June 30, 2008 and 2007, there were 1,380,000 shares of the Company’s 4.75% perpetual cumulative convertible preferred stock that were excluded from the computation of diluted earnings per share because their effect would have been antidilutive. Each share of convertible preferred stock is currently convertible into 0.31428 shares of common stock, subject to adjustment under specific conditions. The option of the purchasers to convert the convertible preferred stock into shares of the Company’s common stock is exercisable only (a) if during any fiscal quarter after September 30, 2003, the closing sale price of the Company’s common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading date of the preceding fiscal quarter exceeds 120% of the conversion price of the convertible preferred stock (currently 120% of $795.47, or $954.56); (b) upon the occurrence of certain corporate transactions; or (c) upon the delisting of the Company’s common stock. On or after September 30, 2008, the Company may, at its option, cause the convertible preferred stock to be converted into the number of shares of common stock that are issuable at the conversion price. The Company may only exercise its conversion right if the closing sale price of the Company’s common stock exceeds 130% of the conversion price of the convertible preferred stock in effect for 20 trading days within any period of 30 consecutive trading days ending on a trading day not more than two trading days prior to the date the Company gives notice of conversion.

⁽²⁾		Weighted-average shares and net loss per common share for the quarter and six month period ended June 30, 2007 reflects the 1-for-20 reverse stock split effective August 17, 2007.

Employee costs and other expenses are shown in the Consolidated Statements of Income net of direct loan origination costs which, pursuant to Statement of Financial Accounting Standard (“SFAS”) No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases” (“SFAS 91”), are capitalized as part of the carrying cost of loans and are offset against net gains on loan sales and fees when the loans are sold or amortized as yield adjustment in the case of loans receivable.

Set forth below is a reconciliation of the application of SFAS 91 to employee costs and other expenses:


	Quarters Ended						Six Month Periods Ended
	June 30,						June 30,
(In thousands)	2008			2007			2008			2007

Employee costs, gross	$	19,498		$	32,360		$	40,768		$	60,638
Deferred costs pursuant to SFAS 91		(2,441	)		(1,719	)		(4,633	)		(3,435	)


Employee cost, net	$	17,057		$	30,641		$	36,135		$	57,203


Other expenses, gross	$	10,657		$	6,616		$	20,140		$	17,208
Deferred costs pursuant to SFAS 91		(209	)		(344	)		(299	)		(1,335	)


Other expenses, net	$	10,448		$	6,272		$	19,841		$	15,873

		As of June 30, 2008, the Company had a net deferred origination cost on loans held for sale amounting to approximately $0.4 million, compared to a net deferred origination fee of approximately $0.9 million as of December 31, 2007. Net deferred origination fees on loans receivable amounted to approximately $11.9 million as of June 30, 2008, compared to $10.9 million as of December 31, 2007.

g.		Segment information

		The Company operates in four reportable segments: mortgage banking activities, banking (including thrift operations), institutional securities operations and insurance agency activities. The Company’s segment reporting is organized by legal entity and aggregated by line of business. Legal entities that do not meet the threshold for separate disclosure are aggregated with other legal entities with similar lines of business. Management made this determination based on operating decisions particular to each business line and because each one targets different customers and requires different strategies. The majority of the Company’s operations are conducted in Puerto Rico. The Company also operates in the mainland United States, principally in the New York City metropolitan area.

		During 2006, the Company reduced the operations of Doral Securities and sold substantially all of Doral Securities’ investment securities. During the third quarter of 2007, Doral Securities voluntarily withdrew its license as broker dealer with the SEC and its membership with the Financial Industry Regulatory Authority (“FINRA”). As a result, Doral Securities’ operations are currently limited to acting as a co-investment manager to a local fixed-income investment company. The Company intends to assign its contract to Doral Bank PR.

		During 2007, in connection with the recapitalization transaction, Doral Financial transferred the Company’s mortgage origination platform and servicing portfolio, subject to certain exceptions, to Doral Bank PR. Following the transfer, Doral Financial’s mortgage origination business is conducted by Doral Mortgage, as a wholly owned subsidiary of Doral Bank PR, and Doral Financial’s servicing business is operated from Doral Bank PR. Management determined that it was impracticable to change the composition of reportable segments for earlier periods. Therefore, we have presented below segment information for the quarter and six month period ended June 30, 2008 with the new reportable segment structure as well as comparative segment information for the quarters and six month periods ended June 30, 2008 and 2007, using the old report segment structure. In establishing the old reportable segment structure for the quarter ended June 30, 2008, the servicing asset and the related income and expenses that were transferred during the third quarter of 2007 to Doral Bank PR have been reclassified to the mortgage banking segment.

		The accounting policies followed by the segments are the same as those described in the Summary of Significant Accounting Policies.

		The following tables present net interest income (loss), non-interest (loss) income, net (loss) income and identifiable assets for each of the Company’s reportable segments for the periods presented using the old reportable segment structure.


	Mortgage						Institutional			Insurance		Intersegment
	Banking			Banking			Securities			Agency		Eliminations⁽¹⁾			Totals
(In thousands)	QUARTER ENDED JUNE 30, 2008


Net interest income	$	4,882			43,558			—			—		415		$	48,855
Non-interest income	$	22,404			5,355			6			3,535		(6,405	)	$	24,895
Net income (loss)	$	10,027			(6,069	)		(45	)		1,659		(3,930	)	$	1,642
Identifiable assets	$	2,106,364			8,765,476			2,037			24,166		(448,172	)	$	10,449,871

	QUARTER ENDED JUNE 30, 2007


Net interest (loss) income	$	(5,965	)		39,714			—			—		880		$	34,629
Non-interest income	$	14,029			9,920			144			2,552		(1,748	)	$	24,897
Net (loss) income	$	(45,528	)		7,340			55			1,108		(453	)	$	(37,478	)
Identifiable assets	$	2,301,557			8,674,032			2,473			23,890		(260,160	)	$	10,741,792

(In thousands)	SIX MONTH PERIOD ENDED JUNE 30, 2008


Net interest income	$	9,777			77,353			—			—		769		$	87,899
Non-interest income	$	28,765			20,619			144			6,549		(13,803	)	$	42,274
Net income (loss)	$	13,444			(8,338	)		(14	)		3,036		(8,784	)	$	(656	)
Identifiable assets	$	2,106,364			8,765,476			2,037			24,166		(448,172	)	$	10,449,871

	SIX MONTH PERIOD ENDED JUNE 30, 2007


Net interest (loss) income	$	(10,307	)		80,474			—			—		2,626		$	72,793
Non-interest income	$	27,607			7,491			288			5,112		(3,973	)	$	36,525
Net (loss) income	$	(89,181	)		12,511			103			2,292		(512	)	$	(74,787	)
Identifiable assets	$	2,301,557			8,674,032			2,473			23,890		(260,160	)	$	10,741,792


⁽¹⁾		The intersegment eliminations in the above table include servicing fees paid by the banking subsidiaries to the parent company recognized as a reduction of the net interest income, direct intersegment loan origination costs amortized as yield adjustment or offset against net gains on mortgage loan sales and fees (mainly related with origination costs paid by the banking segment to the mortgage banking segment) and other income derived from intercompany transactions, related principally to rental income paid to Doral Properties, the Company’s subsidiary that owns the corporate headquarter facilities. Assets include internal funding and investments in subsidiaries accounted for at cost.

The following table presents net interest income, non-interest income, net (loss) income and identifiable assets for each of the Company’s reportable segments for the quarter and six month period ended June 30, 2008 using the new reportable segment structure. The new reportable structure includes the servicing assets and related income and expenses that were transferred during the third quarter of 2007 to Doral Bank PR as part of the banking segment.


	Mortgage					Institutional			Insurance		Intersegment
	Banking			Banking		Securities			Agency		Eliminations			Totals
(In thousands)	QUARTER ENDED JUNE 30, 2008

Net interest income	$	4,882			43,558		—			—		415		$	48,855
Non-interest income	$	7,432			20,327		6			3,535		(6,405	)	$	24,895
Net (loss) income	$	(3,976	)		7,934		(45	)		1,659		(3,930	)	$	1,642
Identifiable assets	$	2,106,364			8,931,123		2,037			24,166		(613,819	)	$	10,449,871


	Mortgage				Institutional			Insurance		Intersegment
	Banking		Banking		Securities			Agency		Eliminations			Totals
(In thousands)	SIX MONTH PERIOD ENDED JUNE 30, 2008

Net interest income	$	9,777		77,353		—			—		769		$	87,899
Non-interest income	$	15,077		34,307		144			6,549		(13,803	)	$	42,274
Net income (loss)	$	1,798		3,308		(14	)		3,036		(8,784	)	$	(656	)
Identifiable assets	$	2,106,364		8,931,123		2,037			24,166		(613,819	)	$	10,449,871

The following table summarizes the financial results for the Company’s Puerto Rico and mainland U.S. operations.


	Puerto Rico			Mainland US			Eliminations			Totals
(In thousands)	QUARTER ENDED JUNE 30, 2008

Net interest income	$	46,939			1,887			29		$	48,855
Non-interest income	$	24,148			824			(77	)	$	24,895
Net income	$	1,610			33			(1	)	$	1,642
Identifiable assets	$	10,392,531			233,814			(176,474	)	$	10,449,871

	QUARTER ENDED JUNE 30, 2007

Net interest income	$	29,894			4,701			34		$	34,629
Non-interest income (loss)	$	28,349			(3,349	)		(103	)	$	24,897
Net loss	$	(36,118	)		(1,364	)		4		$	(37,478	)
Identifiable assets	$	10,204,592			623,164			(85,964	)	$	10,741,792

(In thousands)	SIX MONTH PERIOD ENDED JUNE 30, 2008

Net interest income	$	84,599			3,200			100		$	87,899
Non-interest income	$	41,053			1,426			(205	)	$	42,274
Net (loss) income	$	(1,288	)		621			11		$	(656	)
Identifiable assets	$	10,392,531			233,814			(176,474	)	$	10,449,871

	SIX MONTH PERIOD ENDED JUNE 30, 2007

Net interest income	$	62,994			9,737			62		$	72,793
Non-interest income (loss)	$	45,331			(8,610	)		(196	)	$	36,525
Net loss	$	(71,244	)		(3,546	)		3		$	(74,787	)
Identifiable assets	$	10,204,592			623,164			(85,964	)	$	10,741,792

The fair value of the Company’s securities held for trading and the fair value and carrying value of its securities classified as available for sale are shown below by category.

The following table summarizes Doral Financial’s holdings of securities held for trading as of June 30, 2008 and December 31, 2007.


SECURITIES HELD FOR TRADING	JUNE 30,		DECEMBER 31,
(In thousands)	2008		2007

Mortgage-Backed Securities:
GNMA Exempt	$	2,539	$	33,678
GNMA Taxable		2,233		11,928
CMO Government Sponsored Agencies		—		287
CMO Private Label		1,541		15,777
FHLMC and FNMA		—		8,693
Variable Interest-Only Strips		48,414		51,074
Fixed Interest-Only Strips		746		854
U.S. Treasury Notes		173,537		152,695
Derivatives⁽¹⁾		2,246		1,476

Total	$	231,256	$	276,462


⁽¹⁾		Doral Financial uses derivatives to manage its exposure to interest rate risk caused by changes in interest rates. Derivatives include interest rate caps and forward contracts. Derivatives not accounted as hedges in a net asset position are recorded as securities held for trading and derivatives in a net liability position as liabilities. The gross notional amount of derivatives recorded as held for trading totaled $293.0 million as of June 30, 2008 and $414.0 million as of December 31, 2007. Notional amounts indicate the volume of derivatives activity, but do not represent Doral Financial’s exposure to market or credit risk.

In January 2008, the Company transferred $68.5 million from the held for trading portfolio to the available for sale portfolio as a result of a reassessment of the intention to trade these securities or to sell them in the short term. This transfer was the final part of the Company’s reassessment of its investment portfolio as a result of the Company’s Recapitalization. The Recapitalization significantly changed Doral Financial’s liquidity position which resulted in the Company’s decision to include these assets as core medium to long term investments.

	2.		The following tables summarize the amortized cost, gross unrealized gains and losses, approximate market value, weighted-average yield and contractual maturities of securities available for sale as of June 30, 2008 and December 31, 2007.

			The weighted-average yield is computed based on amortized cost and, therefore, does not give effect to changes in fair value. Expected maturities of mortgage-backed securities and certain debt securities might differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

SECURITIES AVAILABLE FOR SALE
AS OF JUNE 30, 2008


									WEIGHTED-
	AMORTIZED		UNREALIZED		UNREALIZED		MARKET		AVERAGE
(Dollars in thousands)	COST		GAINS		LOSSES		VALUE		YIELD

Mortgage-Backed Securities
GNMA
Due from one to five years	$	976	$	13	$	16	$	973		4.95	%
Due from five to ten years		549		16		—		565		6.39	%
Due over ten years		65,815		212		850		65,177		5.38	%

FHLMC and FNMA
Due from five to ten years		15,166		—		272		14,894		5.51	%
Due over ten years		1,029,068		1,911		9,286		1,021,693		5.16	%

CMO Government Sponsored Agencies
Due over ten years		675,222		2,637		5,685		672,174		3.77	%

CMO Private Label
Due over ten years		515,375		—		134,399		380,976		6.49	%

Debt Securities
FHLB Notes
Due from one to five years		100,358		1,798		—		102,156		4.16	%
Due from five to ten years		168,595		—		1,739		166,856		5.00	%
Due over ten years		105,000		—		2,170		102,830		5.26	%

FNMA Notes
Due within one year		46,507		97		—		46,604		4.19	%
Due from one to five years		207,149		196		—		207,345		3.55	%
Due over ten years		49,990		41		—		50,031		6.00	%

FHLB Zero Coupon
Due over ten years		141,570		—		4,631		136,939		6.01	%

FHLMC Zero Coupon
Due over ten years		86,349		359		—		86,708		5.91	%

FHLMC Notes
Due over ten years		50,000		25		—		50,025		5.50	%

P.R. Housing Bank
Due from five to ten years		3,595		5		35		3,565		4.92	%
Due over ten years		6,625		13		—		6,638		5.48	%

Other
Due within one year		6,925		5		—		6,930		3.98	%
Due from one to five years		25,466		52		170		25,348		4.44	%
Due over ten years		8,000		—		361		7,639		5.61	%

	$	3,308,300	$	7,380	$	159,614	$	3,156,066		5.01	%

SECURITIES AVAILABLE FOR SALE
AS OF DECEMBER 31, 2007


									WEIGHTED-
	AMORTIZED		UNREALIZED		UNREALIZED		MARKET		AVERAGE
(Dollars in thousands)	COST		GAINS		LOSSES		VALUE		YIELD

Mortgage-Backed Securities
GNMA
Due from one to five years	$	374	$	9	$	—	$	383		6.39	%
Due over ten years		3,694		145		3		3,836		6.91	%

FNMA
Due over ten years		260,143		4,297		558		263,882		6.05	%

CMO Government Sponsored Agencies
Due over ten years		7,000		—		659		6,341		6.10	%

CMO Private Label
Due over ten years		530,997		—		28,285		502,712		6.22	%

Debt Securities
FHLB Notes
Due from one to five years		100,458		1,165		—		101,623		4.16	%
Due over ten years		273,595		—		3,376		270,219		5.10	%

FNMA Notes
Due within one year		46,000		—		—		46,000		4.60	%
Due over ten years		49,990		—		43		49,947		6.00	%

FHLB Zero Coupon
Due over ten years		137,131		—		2,688		134,443		6.01	%

FHLMC Zero Coupon
Due over ten years		242,281		155		162		242,274		5.83	%

FHLMC Notes
Due over ten years		50,000		12		—		50,012		5.50	%

P.R. Housing Bank
Due over ten years		4,635		9		—		4,644		5.50	%

U.S. Treasury Bonds
Due over ten years		234,361		—		8,768		225,593		4.21	%

Other
Due within one year		6,899		11		20		6,890		3.98	%
Due from one to five years		5,025		21		—		5,046		5.15	%
Due over ten years		8,001		231		137		8,095		5.61	%

	$	1,960,584	$	6,055	$	44,699	$	1,921,940		5.56	%

The following tables show Doral Financial’s gross unrealized losses and fair value for available for sale investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2008 and December 31, 2007.

SECURITIES AVAILABLE FOR SALE


	As of June 30, 2008
	Less than 12 months						12 months or more						Total
	Number of				Unrealized		Number of				Unrealized		Number of				Unrealized
(Dollars in thousands)	Positions		Fair Value		Losses		Positions		Fair Value		Losses		Positions		Fair Value		Losses

Mortgage-Backed Securities
GNMA		99	$	58,196	$	866		—	$	—	$	—		99	$	58,196	$	866
FNMA/ FHLMC		29		742,436		9,260		2		1,578		28		31		744,014		9,288
CMO Government Sponsored Agencies		6		243,450		5,522		2		5,950		433		8		249,400		5,955
CMO Private Label		13		380,976		134,399		—		—		—		13		380,976		134,399
Debt Securities
FHLB Notes		4		216,731		1,864		1		52,955		2,045		5		269,686		3,909
FHLB Zero Coupon		—		—		—		1		136,939		4,631		1		136,939		4,631
Other		6		25,764		296		1		2,730		270		7		28,494		566

		157	$	1,667,553	$	152,207		7	$	200,152	$	7,407		164	$	1,867,705	$	159,614

SECURITIES AVAILABLE FOR SALE


	As of December 31, 2007
	Less than 12 months						12 months or more						Total
	Number of				Unrealized		Number of				Unrealized		Number of				Unrealized
(Dollars in thousands)	Positions		Fair Value		Losses		Positions		Fair Value		Losses		Positions		Fair Value		Losses

Mortgage-Backed Securities
GNMA		—	$	—	$	—		1	$	165	$	3		1	$	165	$	3
FNMA		—		—		—		1		32,556		558		1		32,556		558
CMO Government Sponsored Agencies		—		—		—		4		6,341		659		4		6,341		659
CMO Private Label		9		502,712		28,285		—		—		—		9		502,712		28,285
Debt Securities
FNMA Notes		—		—		—		4		95,947		43		4		95,947		43
FHLB Notes		—		—		—		5		270,219		3,376		5		270,219		3,376
FHLB Zero Coupon		—		—		—		2		134,443		2,688		2		134,443		2,688
FHLMC Zero Coupon		—		—		—		2		158,229		162		2		158,229		162
US Treasury		—		—		—		2		225,593		8,768		2		225,593		8,768
Other		1		2,863		137		1		3,880		20		2		6,743		157

		10	$	505,575	$	28,422		22	$	927,373	$	16,277		32	$	1,432,948	$	44,699

The securities held by the Company are principally mortgage-backed securities guaranteed by mortgages or a U.S. government sponsored entity and therefore, principal and interest on the securities are deemed recoverable. Doral Financial’s investment portfolio is mostly composed of debt securities with AAA ratings. The Company has the ability and intent to hold such securities until maturity or until the unrealized losses are recovered. Therefore, no other than temporary impairment loss has been recognized.

		As of June 30, 2008, the only positions showing significant unrealized losses were the U.S. Private Label CMO’s that were purchased during the fourth quarter of 2007 as part of the Company’s asset purchase program. The price movement on these securities has been adversely affected by the conditions of the U.S. financial markets, specifically the non-agency mortgage market. Management believes these price changes are not driven by the deal specific fundamentals like structure and credit performance, but rather by a lack of liquidity in the market place, which has caused a downward spiral in prices. The collateral underlying these bonds can be split up into two categories: Hybrid ARM’s amounting to $147.1 million and Pay Options ARM’s amounting to $221.1 million Hybrid ARM collateral has been less impacted by the recent market turmoil principally due to the fact the underlying characteristics of the collateral provide for more stable cash flows and the delinquencies of the underlying deals have been less than that of the Pay Option ARM backed deals. Price performance of the Pay Option ARM backed deals has been worse than that of the Hybrid ARM deals. Although the trend in delinquency has been worse for these deals, most of the bonds are super senior tranches, which means they are at the top of the capital structure. In addition, these deals carry significantly higher credit enhancement than the equivalent Hybrid ARM backed deals. Management therefore expects these securities to recover value and intends to hold them until value is recovered.

		Private Label CMO’s includes the PR Private Label CMO’s amounting to $12.8 million that are comprised of subordinate tranches of securitizations that Doral made in 2006. The price performance of these bonds has been driven by the events in the U.S. mortgage market and not by the deal performance fundamentals. The delinquency trends of these Doral securitizations has been considerably better than the performance of similar U.S. mortgage backed assets. Since these securities were transferred from the trading category to available for sale at depressed prices and the underlying delinquency of the loans is well behaved, management expects to hold these assets until value is recovered.

		The effects of the conditions in the financial markets and the economy could last through the end of 2008, but management expects that the Company will receive principal and interest due from these positions in a timely fashion. The Company has the ability and intent to hold these positions until maturity or until the unrealized losses are recovered. Furthermore, Doral Financial is able to finance these positions with Advances from FHLB therefore providing the capacity to hold the positions until value is recovered. Doral Financial also has excess funding capacity should it be required.

j.		The following table sets forth certain information regarding Doral Financial’s loans held for sale as of the dates indicated:


LOANS HELD FOR SALE
(In thousands)	JUNE 30, 2008		DECEMBER 31, 2007

Conventional single family residential loans	$	159,371	$	189,995
FHA/VA loans		173,019		141,601
Construction and commercial real estate loans		42,030		86,960

Total loans held for sale ⁽¹⁾	$	374,420	$	418,556


(1)		At June 30, 2008 and December 31, 2007, the loans held for sale portfolio includes $1.1 million and $41.8 million, respectively, related to interest-only loans.

		During the first quarter of 2008, the Company transferred $48.2 million from the loans held for sale portfolio to the loans receivable portfolio. The Company transferred the loans because they were deemed not salable to the Agencies. The Company has the ability and intent to hold these loans until maturity.

		At June 30, 2008 and December 31, 2007, loans held for sale amounting to $175.5 million and $189.0 million, respectively, were pledged to secure financing agreements with local financial institutions, and for which the creditor has the right to repledge this collateral.

		At June 30, 2008 and December 31, 2007, the loans held for sale portfolio includes $131.7 million and $126.0 million, respectively, related to defaulted loans backing GNMA securities for which the Company has an unconditional option (but not an obligation) to repurchase the defaulted loans. Payment on these loans is guaranteed by FHA.

The following table sets forth certain information regarding Doral Financial’s loans receivable as of the dates indicated:

LOANS RECEIVABLE, NET


	JUNE 30, 2008						DECEMBER 31, 2007
(Dollars in thousands)	AMOUNT			PERCENT			AMOUNT			PERCENT
Construction loans⁽¹⁾	$	539,076			10	%	$	588,175			12	%
Residential mortgage loans		3,533,422			67	%		3,340,162			66	%
Commercial — secured by real estate		794,172			15	%		767,441			15	%
Consumer — other:
Personal loans		46,442			1	%		44,810			1	%
Auto loans		154			0	%		195			0	%
Credit cards		25,328			0	%		19,047			0	%
Overdrawn checking accounts		488			0	%		164			0	%
Revolving lines of credit		26,107			1	%		26,941			1	%
Lease financing receivables		28,189			1	%		33,457			1	%
Commercial non-real estate		146,056			3	%		126,484			2	%
Loans on savings deposits		7,671			0	%		11,037			0	%
Land secured		116,894			2	%		119,232			2	%


Loans receivable, gross⁽²⁾		5,263,999			100	%		5,077,145			100	%

Less:
Discount on loans transferred⁽³⁾		(17,106	)					(17,615	)
Unearned interest and deferred loan fees, net		(14,800	)					(8,597	)
Allowance for loan and lease losses		(122,099	)					(124,733	)

		(154,005	)					(150,945	)

Loans receivable, net	$	5,109,994					$	4,926,200


⁽¹⁾		Includes $414.4 million and $422.4 million of construction loans for residential housing projects as of June 30, 2008 and December 31, 2007, respectively. Also includes $124.7 million and $165.8 million of construction loans for commercial, condominiums and multifamily projects as of June 30, 2008 and December 31, 2007, respectively.

⁽²⁾		Includes $206.0 million and $99.3 million of interest-only loans, as of June 30, 2008 and December 31, 2007, respectively.

⁽³⁾		Relates to $1.4 billion of loans transferred during the second and third quarters of 2007, from the loans held for sale portfolio to the loans receivable portfolio.

		At June 30, 2008 and December 31, 2007, loans receivable amounting to $202.7 million and $212.5 million, respectively, were pledged to secure financing agreements with local financial institutions, and for which the creditor has the right to repledge this collateral.

		The Company evaluates impaired loans and the related valuation allowance based on SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” Commercial and construction loans over $2.0 million that are classified as substandard are evaluated individually for impairment. Loans are considered impaired when, based on current information and events, it is probable that the borrower will not be able to fulfill its obligation according to the contractual terms of the loan agreement. The impairment loss, if any, on each individual loan identified as impaired is generally measured based on the present value of expected cash flows discounted at the loan’s effective interest rate. As a practical expedient, impairment may be measured based on loan’s observable market price, or the fair value of the collateral, if the loan is collateral dependent. If foreclosure is probable, the creditor is required to measure the impairment based on the fair value of the collateral. The fair value of the collateral is generally obtained from appraisals.

		As of June 30, 2008, Doral Financial evaluated a total of approximately $308.7 million of construction and commercial loans for impairment. The Company had specific allowances amounting to $47.9 million and it had charged off approximately $10.1 million, with respect to $235.7 million in outstanding balances of construction and commercial loans.

		Doral Financial, records an allowance for small-balance homogeneous loans (including residential mortgages, consumer, commercial and construction loans under $2.0 million) on a group basis under the provisions of SFAS No. 5 “Accounting for Contingencies”. For such loans, the allowance is determined considering the historical charge-off experience of each loan category and delinquency levels as well as charge-off and delinquency trends and economic data, such as interest rate levels, inflation and the strength of the housing market in the areas where the Company operates.

		During the fourth quarter of 2007, the Company started a Loan Restructuring Program (“the Program”) with the purpose of aiding borrowers with seriously delinquent mortgage loans to get back into financial stability. Under the Program, borrowers prove future payment capacity by making three consecutive monthly payments. The Company is not modifying rates or forgiving principal or interest. The Program was designed to comply with all laws and regulations. As of June 30, 2008, the Company had fully restructured and processed into the system $103.6 million of mortgage loans, of which $3.3 million were included as non-performing loans as of June 30, 2008. There were no losses recognized as a result of the restructuring of mortgage loans. The Company has made the determination that the loans restructured under the Program fit the definition of Troubled Debt Restructuring (“TDR”) as defined by the Standard of Financial Accounting 15 “Accounting by Debtors and Creditors of Troubled Debt Restructurings”.

		The following table summarizes certain information regarding Doral Financial’s allowance for loan and lease losses for both Doral Financial’s banking and mortgage banking businesses for the periods indicated.


	QUARTERS ENDED						SIX MONTH PERIODS ENDED
ALLOWANCE FOR LOAN AND LEASE LOSSES	JUNE 30,						JUNE 30,
(In thousands)	2008			2007			2008			2007

Balance at beginning of period	$	121,182		$	70,963		$	124,733		$	67,233
Provision for loan and lease losses		10,683			19,322			15,469			25,311
Losses charged to the allowance		(9,792	)		(4,521	)		(18,845	)		(6,442	)
Recoveries		26			184			742			246
Other⁽¹⁾		—			(73	)		—			(473	)

Balance at end of period	$	122,099		$	85,875		$	122,099		$	85,875


⁽¹⁾		Represents the portion of allowance for loans transferred from the loans receivable portfolio to the loans held for sale portfolio, in connection with the sale of certain assets of Doral Bank NY during the first quarter of 2007.

l.		Doral Financial is the guarantor of various unregistered serial and term bonds issued by Doral Properties, a wholly-owned subsidiary, through the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (“AFICA”). The bonds were issued to finance the construction and development of the Doral Financial Plaza building, the headquarters facility of Doral Financial. As of June 30, 2008, the outstanding principal balance of the bonds was $48.4 million with fixed interest rates, ranging from 6.25% to 6.90%, and maturities ranging from December 2008 to December 2029. Certain series of the bonds are secured by a mortgage on the building and underlying real property.

m.		The Company routinely originates, securitizes and sells mortgage loans into the secondary market. As a result of this process, the Company typically retains the servicing rights and, in the past, also retained interest-only strips. The Company’s interests that continue to be held (“retained interests”) are subject to prepayment and interest rate risks.

		Effective January 1, 2007, under SFAS No. 156, “Accounting for Servicing of Financial Assets”, Doral Financial elected to apply fair value accounting to its mortgage servicing rights (“MSRs”). The Company determines the fair value of its MSRs on the basis of a third party market valuation for the Company’s entire servicing portfolio (governmental, conforming and non-conforming portfolios). The fair value of the MSRs is determined based on a combination of market information on trading activity (MSRs trades and broker valuations), benchmarking of servicing assets (valuation surveys) and cash flow modeling. The valuation of the Company’s MSRs incorporate two sets of assumptions: (1) market derived assumptions for discount rates, servicing costs, escrow earnings rate, float earnings rate and cost of funds and (2) market derived assumptions adjusted for the Company’s loan characteristics and portfolio behavior, for escrow balances, delinquencies and foreclosures, late fees, prepayments and prepayment penalties.

The changes in servicing assets measured using the fair value method for the quarters and six month periods ended June 30, 2008 and 2007 are shown below:


	QUARTERS ENDED						SIX MONTH PERIODS
	JUNE 30,						ENDED JUNE 30,
(In thousands)	2008			2007			2008			2007
Balance at beginning of period	$	139,570		$	173,343		$	150,238		$	177,884
Sales of servicing asset⁽¹⁾		—			(9,581	)		—			(9,581	)
Adjustment to MSR fair value for loans repurchased⁽²⁾		(587	)		—			(587	)		—
Capitalization of servicing assets		2,046			1,362			2,975			2,546
Change in fair value		4,498			(555	)		(7,099	)		(6,280	)


Balance at end of period⁽³⁾	$	145,527		$	164,569		$	145,527		$	164,569


(1)		Amount represents MSRs sales related to $693.9 million in principal balance of mortgage loans.

(2)		Amount represents the adjustment of MSR fair value related to the repurchase of $26.7 million sold on a servicing release basis in principal balance of mortgage loans.

(3)		Outstanding balance of loans serviced for third parties amounted to $9.7 billion and $10.8 billion as of June 30, 2008 and 2007, respectively.

		Based on recent prepayment experience, the expected weighted-average remaining life of the Company’s servicing assets at June 30, 2008 and June 30, 2007 was 8.0 years and 6.6 years, respectively. Any projection of the expected weighted-average remaining life of servicing assets is limited by conditions that existed at the time the calculations were performed.

		The following tables show the changes in the Company’s interest-only strips for each of the periods shown:


	QUARTERS ENDED						SIX MONTH PERIODS
	JUNE 30,						ENDED JUNE 30,
(In thousands)	2008			2007			2008			2007
Balance at beginning of period	$	51,538		$	52,617		$	51,928		$	49,926
Amortization		(1,672	)		(2,074	)		(2,739	)		(3,930	)
(Loss) gain on the IO value		(706	)		(788	)		(29	)		3,759


Balance at end of period	$	49,160		$	49,755		$	49,160		$	49,755

		At June 30, 2008, fair values of the Company’s retained interests were based on internal and external valuation models that incorporate market driven assumptions, such as discount rates, prepayment speeds and implied forward LIBOR rates (in the case of variable IOs), adjusted by the particular characteristics of the Company’s servicing portfolio. The constant prepayment rate assumptions employed for the valuation of servicing assets as of June 30, 2008, were lower than in 2007, the prepayment rate assumption was at 9.42% compared to 12.61% as of June 30, 2007. The weighted average constant prepayment rate assumption for the Company’s IO portfolio as of June 30, 2008 was 8.00% compared to 10.64% for the correspondent 2007 period. This reduction in prepayment speed assumption, for the IOs was due to, (1) the underlying collateral has aged a year, an event that tends to put downward pressure on the price elasticity of underlying collateral, (2) slight decreases on median prepayment estimates of U.S. Benchmarks were observed during the examined period, specifically for moderate and seasoned pools of similar coupon characteristics, and (3) model adjustments on prepayment speeds for Puerto Rico mortgages contributed to the overall reduction in prepayment speeds given that higher correlation to U.S. prepayments was observed for the quarter ended in June 30, 2008. Overall reduction in U.S. Benchmark prepayment speeds during the quarter ended June 30, 2008 are due to higher interest rates, near recessionary conditions, tighter credit standards on mortgages and overall bearishness in mortgage markets due to the sub-prime crisis experienced in the latter part of 2007 and early 2008. Discount rate assumptions for the Company’s servicing assets were relatively stable on the quarters ended in June 30, 2008 and 2007, which were 11.58% and 11.56%, respectively. The increase observed on the discount rate of the Company’s IO portfolio, to 13.63% for the quarter ended in June 30, 2008 from 10.91% for the quarters ended June 30, 2007, is due in most part to the liquidity premium adjustment made on the IO portfolio to account for the increased illiquidity observed in that market near 2007 end. The liquidity premium adjustment made during December 2007, however, was partially offset by overall reductions in Benchmark IO Z-spreads. Whereas the Company continues to generate new MSRs, which impact the average life of the portfolio, it has not created IOs since 2005. Over time, the difference in “burn-out” between the portfolios leads to differences in the corresponding prepayment speeds.

		The IO internal valuation model utilizes a Z-spread approach to calculate discount rates. The Z-spread is the market recognized spread over the swap curve that takes into consideration additional yield requirements based on the risk characteristics of a particular instrument. As a result, the discount rates used by the Company in the valuation of its IOs change according to their components; the swap curve and the Z-spread. The Z-spread incorporates a premium for prepayment optionality and liquidity risk over the period-end swap curve. As a result of a review by management of current liquidity conditions in the Puerto

Rico and U.S. secondary market for non-conforming loans, the liquidity premium incorporated in the model is 500 basis points over the curve, increased by 200 basis points during the fourth quarter of 2007, as adjusted by the Z-spread. Doral Financial obtains the Z-spread from major investment banking firms. The weighted-averages of the key economic assumptions used by the Company in its internal and external valuation models and the sensitivity of the current fair value of residual cash flows to immediate 10 percent and 20 percent adverse changes in those assumptions for mortgage loans at June 30, 2008, were as follows:


(Dollars in thousands)	Servicing Assets			Interest-Only Strips

Carrying amount of retained interest	$	145,527		$	49,160
Weighted-average expected life (in years)		8.0			6.3

Constant prepayment rate (weighted-average annual rate)		9.42	%		8.00	%
Decrease in fair value due to 10% adverse change		(2,552	)		(1,344	)
Decrease in fair value due to 20% adverse change		(6,752	)		(2,630	)

Cash flow discount rate (weighted-average annual rate)		11.58	%		13.63	%
Decrease in fair value due to 10% adverse change		(4,248	)		(1,292	)
Decrease in fair value due to 20% adverse change		(9,940	)		(2,508	)

		These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the table above, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or offset the sensitivities.

		The following table summarizes the estimated change in the fair value of the Company’s IOs, the constant prepayment rate and the weighted-average expected life under the Company’s valuation model, given several hypothetical (instantaneous and parallel) increases or decreases in interest rates. As of June 30, 2008, all of the mortgage loan sales contracts underlying the Company’s floating rate IOs were subject to interest rate caps, which prevent a negative fair value for the floating rate IOs.


(Dollars in thousands)				Weighted-Average
Change in Interest				Expected Life		Change in Fair			Percentage
Rates (basis points)	Constant Prepayment Rate			(Years)		Value of IOs			Change
+200		5.68	%		7.3		$(4,737	)		(9.6	)%
+100		6.37	%		6.9		(2,142	)		(4.4	)%
+50		7.00	%		6.7		(844	)		(1.7	)%
Base		8.00	%		6.3		—			0	%
-50		9.67	%		5.7		(24	)		0	%
-100		11.75	%		5.1		(248	)		(0.5	)%
-200		14.46	%		4.4		2,808			5.7	%

	n.		Stock Option and Other Incentive Plans. In connection with the recapitalization transaction and in accordance with the provisions of the stock purchase agreement between the Company and Doral Holdings, on July 17, 2007, the Board of Directors ratified and approved the resolutions of the Compensation Committee to accelerate and terminate all stock options outstanding under the Company’s Omnibus Incentive Plan and the 1997 Employee Stock Option Plan effective upon the issuance of the shares of the Company’s common stock to Doral Holdings.

			In connection with the closing of the sale of shares of common stock to Doral Holdings all stock options outstanding as July 19, 2007 were terminated.

			Please refer to note “aa” for information related to the 2008 Stock Incentive Plan approved by the Company’s Board of Directors.

	o.		The following table summarizes deposit balances:


	JUNE 30,		DECEMBER 31,
(In thousands)	2008		2007

Certificates of deposit	$	3,034,099	$	2,998,684
Regular savings		345,763		317,436
NOW accounts		368,380		389,330
Other interest-bearing deposits		3,629		152
Money markets accounts		314,551		319,601

Total interest-bearing		4,066,422		4,025,203
Non interest-bearing deposits		264,306		242,821

Total deposits	$	4,330,728	$	4,268,024

As part of its financing activities the Company enters into sales of securities under agreements to repurchase the same or substantially similar securities. The Company retains control over such securities according to the provisions of SFAS No. 140. Accordingly, the amounts received under these agreements represent borrowings, and the securities underlying the agreements remain in the Company’s asset accounts. These transactions are carried at the amounts at which transactions will be settled. The counterparties to the contracts generally have the right to repledge the securities received as collateral. Those securities are presented in the Consolidated Statements of Financial Condition as part of pledged investment securities. Securities sold under agreements to repurchase consisted of the following:


	JUNE 30,		DECEMBER 31,
(In thousands)	2008		2007
Non-callable repurchase agreements with a maturities less than or equal to 90 days, at various fixed rates averaging 2.13% and 5.56% at June 30, 2008 and December 31, 2007, respectively.	$	352,243	$	17,035

Non-callable repurchase agreements with maturities ranging from February 2009 to April 2013 (2007 — May 2010 to June 2010), at various fixed rates averaging 3.70% and 4.15% at June 30, 2008 and December 31, 2007, respectively.		965,500		550,000

Non-callable repurchase agreement with a maturity of January 2008, tied to 3-month LIBOR adjustable quarterly, at a rate of 5.15% at December 31, 2007.		—		94,800

Callable repurchase agreements with maturities ranging from August 2009 to February 2014, at various fixed rates averaging 5.50% at June 30, 2008 and December 31, 2007, respectively.		782,528		782,528


	$	2,100,271	$	1,444,363

Advances from FHLB consisted of the following:


	JUNE 30,		DECEMBER 31,
(In thousands)	2008		2007
Non-callable advances with maturities ranging from July 2008 to May 2013 (2007 — March 2008 to October 2012), at various fixed rates averaging 3.71% and 4.60% at June 30, 2008 and December 31, 2007, respectively.	$	1,130,000	$	535,000

Non-callable advance due on July 6, 2010, tied to 3-month LIBOR adjustable quarterly, at a rate of 2.69% and 5.21% at June 30, 2008 and December 31, 2007, respectively.		200,000		200,000

Non-callable advances with maturities ranging from September 2008 to November 2012, tied to 1-month LIBOR adjustable monthly, at a rate of 2.42% and 4.88% at June 30, 2008 and December 31, 2007, respectively.		195,000		195,000

Callable advances with maturities ranging from July 2009 to March 2012, at various fixed rates averaging 5.40% at June 30, 2008 and December 31, 2007, respectively, callable at various dates beginning in July 2008 (2007 — January 2008).		304,000		304,000


	$	1,829,000	$	1,234,000

			At June 30, 2008, the Company had pledged qualified collateral in the form of mortgage and investment securities with a market value of $2.2 billion to secure the above advances from FHLB, which generally the counterparty is not permitted to sell or repledge.

	r.		At June 30, 2008 and December 31, 2007, loans payable consisted of financing agreements with local financial institutions secured by mortgage loans.

			Outstanding loans payable consisted of the following:


	JUNE 30,		DECEMBER 31,
(In thousands)	2008		2007
Secured borrowings with local financial institution, collateralized by real estate mortgage loans, at variable interest rates tied to 3-month LIBOR averaging 4.59% and 6.85% at June 30, 2008 and December 31, 2007, respectively.	$	356,278	$	377,487

Secured borrowings with local financial institutions, collateralized by real estate mortgage loans at fixed interest rates averaging 7.44% and 7.43% at June 30, 2008 and December 31, 2007, respectively.		23,537		25,214


	$	379,815	$	402,701

At June 30, 2008 and December 31, 2007, $175.5 million and $189.0 million, respectively, of loans held for sale and $202.7 million and $212.5 million, respectively, of loans receivable were pledged to secure financing agreements with local financial institutions. Such loans can be repledged by the counterparty.

Notes payable consisted of the following:


	JUNE 30,		DECEMBER 31,
(In thousands)	2008		2007

$100 million notes, net of discount, bearing interest at 7.65%, due on March 26, 2016, paying interest monthly.	$	98,382	$	98,307

$30 million notes, net of discount, bearing interest at 7.00%, due on April 26, 2012, paying interest monthly.		29,671		29,634

$40 million notes, net of discount, bearing interest at 7.10%, due on April 26, 2017, paying interest monthly.		39,347		39,322

$30 million notes, net of discount, bearing interest at 7.15%, due on April 26, 2022, paying interest monthly.		29,434		29,423

Bonds payable secured by mortgage on building at fixed rates ranging from 6.35% to 6.90%, with maturities ranging from December 2008 to December 2029 (2007 — June 2008 to December 2029), paying interest monthly.		40,770		41,190

Bonds payable at a fixed rate of 6.25%, with maturities ranging from December 2010 to December 2029, paying interest monthly.		7,600		7,600

Note payable with a local financial institution, collateralized by IOs at a fixed rate of 7.75%, due on December 25, 2013, paying interest monthly.		34,512		36,982

	$	279,716	$	282,458

	t.		Income Taxes

			Income taxes include Puerto Rico income taxes as well as applicable federal and state taxes. As Puerto Rico corporations, Doral Financial and all of its Puerto Rico subsidiaries are generally required to pay federal income taxes only with respect to their income derived from the active conduct of a trade or business in the United States (excluding Puerto Rico) and certain investment income derived from U.S. assets. Any such tax is creditable, with certain limitations, against Puerto Rico income taxes. Except for the operations of Doral Bank NY and Doral Money, substantially all of the Company’s operations are conducted through subsidiaries in Puerto Rico. Doral Bank NY and Doral Money are U.S. corporations and are subject to U.S. income-tax on their income derived from all sources. For the quarter and six month period ended June 30, 2008, the income tax expense for the Company’s U.S. subsidiaries amounted to $0.9 million and $1.1 million, respectively, compared to an income tax benefit of $1.2 million and $3.1 million, respectively, for the comparable 2007 periods.

			The maximum statutory corporate income tax rate in Puerto Rico is 39.0%.

			Doral Financial enjoys income tax exemption on interest income derived from FHA and VA mortgage loans financing the original acquisition of newly constructed housing in Puerto Rico and securities backed by such mortgage loans. Doral Financial also invests in U.S. Treasury and agency securities that are exempt from Puerto Rico taxation and are not subject to federal income taxation because of the portfolio interest deduction to which Doral Financial is entitled as a foreign corporation. In addition, Doral Financial uses its international banking entity subsidiary to invest in various U.S. securities and U.S. mortgage-backed securities, which interest income and gain on sale, if any, is exempt from Puerto Rico income taxation and excluded from federal income taxation on the basis of the portfolio interest deduction in the case of interest, and in the case of capital gains, because the gains are sourced outside the United States. On July 1, 2008, the Company transferred substantially all of the assets previously held at the international banking entity to Doral Bank PR to increase the level of its interest earning assets.

			For the quarter and six month period ended June 30, 2008, Doral Financial recognized an income tax expense of $5.8 million and $5.2 million, respectively, compared to $1.1 million and $7.0 million, respectively, for the comparable 2007 periods.

			During the first quarter of 2008, the Company entered into an agreement with the Puerto Rico Treasury Department with respect to the allocation method and period (for tax purposes) of expenses incurred by the Company related to a settlement agreement (“Settlement Expenses”) that resulted from litigation related to the Company’s restatement. This agreement was effective as of December 31, 2007 and permits the total expense related to the settlement of the lawsuit ($96.0 million) to be allocated to any entity within the Doral group over a period of three years. As a result of this agreement, the Company expects to be able to realize part of its deferred tax asset and accordingly released a portion of the valuation allowance in 2008. However, due to the Company’s lower than expected income for the first two quarters of 2008, management revised its tax forecast and increased its valuation allowance. The net effect of these transactions, together with the effect of ordinary operations, resulted in a $6.0 million increase in the valuation allowance to $93.3 million as of June 30, 2008 from the $87.3 million valuation allowance at December 31, 2007.

			In assessing the realization of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers the expected realization of its deferred tax assets and liabilities, projected future taxable income, the Company’s ability to replace maturing brokered deposits and other sources of working capital at market rates, and tax planning strategies, in making this assessment. The Company determined that it is more likely than not that $93.3 million of its gross deferred tax asset, related primarily to net operating losses, will not be realizable and maintained a valuation allowance for that amount. Benefits recognized for net operating losses are limited by the fact that, under the PR Code, Doral Financial is not permitted to file consolidated tax returns and, thus, is not able to utilize losses from one subsidiary to offset gains in another subsidiary. For the quarter and six month period ended June 30, 2008, net operating losses of $28.6 million and $62.0 million, respectively, were created. Based on forecasted future taxable income, the Company will not be able to obtain the full benefit of these net operating losses.

			During 2006, the Company entered into two agreements with the Puerto Rico Treasury Department regarding the Company’s deferred tax assets related to prior intercompany transfers of IOs (the “IO Tax Asset”). The first agreement, executed during the first quarter, confirmed the previously established tax basis of all the IO transfers within the Doral Financial corporate group. The second agreement, executed during the third quarter, clarified that for Puerto Rico income tax purposes, the IO Tax Asset is a stand-alone intangible asset subject to a straight-line amortization based on a useful life of 15 years. Furthermore, the agreement provided that the IO Tax Asset could be transferred to any entity within Doral Financial corporate group, including the Puerto Rico banking subsidiary.

			The realization of the deferred tax asset is dependent upon the existence of, or generation of, taxable income during the remaining 12 year period (including 2008-15 year original amortization period) in which the amortization deduction of the IO Tax Asset is available. In determining the valuation allowance recorded, the Company considered both the positive and negative evidence regarding the Company’s ability to generate sufficient taxable income to realize its deferred tax assets. Positive evidence included projected earnings attributable to the core business through the projection period, repayment of the $625.0 million in senior notes on July 20, 2007, as result of the recapitalization which served to significantly reduce interest expense, and results of the leveraging plan. Further positive evidence included the ability to isolate verifiable nonrecurring charges in historical losses, the core earnings of the business absent these nonrecurring items and the flexibility to move IO Tax Asset amortization and the Settlement Expenses to profitable entities in accordance with Doral Financial’s agreements with the Puerto Rico Treasury Department. During the fourth quarter of 2007, the Company implemented certain tax planning actions in order to generate future taxable income that contributed to the reduction in its valuation allowance. These include the increase in interest earning assets of Doral Bank PR, through among other things, transferring certain assets to Doral Bank PR. Negative evidence included the Company’s recorded losses for the first quarter of 2008 and for the years ended December 31, 2007 and 2006, and the shorter operating loss carry-forward period of 7 years, as well as uncertainty regarding its ability to generate future taxable income. Negative evidence also included the Risks Factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007.

			Failure to achieve sufficient taxable income might affect the ultimate realization of the net deferred tax asset. Factors that may affect the Company’s ability to achieve sufficient taxable income include, but are not limited to, the following: increased competition, a decline in margins, increased loans charged off, and loss of market share.

			In weighing the positive and negative evidence above, Doral Financial considered the more likely than not criteria contemplated in SFAS 109. Based on this analysis, Doral Financial concluded that it was more likely than not that a portion of the Company’s gross deferred tax assets of $495.6 million would not be realized. As a result the Company recorded a valuation allowance. At June 30, 2008, the deferred tax asset, net of its valuation allowance of $93.3 million, amounted to approximately $402.3 million compared to $392.9 million at December 31, 2007.

			The Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109”, on January 1, 2007. As a result of the adoption, the Company recorded an adjustment to retained earnings of $2.4 million. As of June 30, 2008 and 2007, the Company had unrecognized tax benefits of $13.7 million and accrued interest and penalties of $4.5 million and $3.1 million, respectively. The Company classifies all interest and penalties related to tax uncertainties as income tax expense. For the quarters and six month periods ended June 30, 2008 and 2007, the Company recognized approximately $0.3 million and $0.7 million in interest and penalties, respectively.

			The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity, and the addition or elimination of uncertain tax positions. As of June 30, 2008, the following years remain subject to examination: U.S. Federal jurisdictions — 2003 through 2007 and Puerto Rico — 2004 through 2007.

			It is reasonably possible that within the next twelve months the Company will resolve certain matters presently contemplated as unrecognized tax benefits due primarily to the expiration of the statute of limitations. The resolution of this matter would likely result in a reduction of the provision for income taxes and the effective tax rate in the period of resolution of substantially all the unrecognized tax benefits.

	u.		Guarantees

			In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45, (“FIN 45”) “Guarantor’s Accounting and Disclosure Requirements for Guarantees.” This interpretation requires a guarantor of certain types of guarantees to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. As of June 30, 2008, the Company had outstanding $4.3 million in commercial and financial standby letters of credit. The fair value on these commitments is not significant.

			In the ordinary course of the business, Doral Financial makes certain representations and warranties to purchasers and insurers of mortgages loans, and in certain circumstances, such as in the event of early or first payment default, the Company retains credit risk exposures on those loans. If there is a breach of a representation or warranty or if there is an early payment default, Doral Financial may be required to repurchase the mortgage loan and bear any subsequent loss related to the loan. Doral Financial works with the purchasers to review the claims and correct alleged documentation deficiencies. For the quarter and six month period ended June 30, 2008, repurchases amounted to $2.7 million and $6.8 million, respectively.

			Certain of the Company’s mortgage loan sale and securitization activities involve transfers of mortgage loans subject to recourse arrangements that require Doral Financial to repurchase or substitute the loan if the loans are 90 — 120 days or more past due or otherwise in default. Under certain of these arrangements, the recourse obligation is terminated upon compliance with certain conditions, which generally involve: (1) the lapse of time (normally from four to seven years), (2) the lapse of time combined with certain other conditions such as the unpaid principal balance of the mortgage loans falling below a specific percentage (normally less than 80%) of the appraised value of the underlying property or (3) the amount of loans repurchased pursuant to recourse provisions reaching a specific percentage of the original principal amount of loans sold (generally from 10% to 15%). As of June 30, 2008, the Company’s records reflected that the outstanding principal balance of loans sold subject to full or partial recourse was $1.2 billion. As of such

date, the Company’s records also reflected that the maximum contractual exposure to Doral Financial if it were required to repurchase all loans subject to recourse was $1.1 billion. Doral Financial’s contingent obligation with respect to its recourse provision is not reflected on the Company’s Consolidated Financial Statements, except for a liability of $10.6 million, as of June 30, 2008, for estimated losses from such recourse agreements, which is included in “Accrued expenses and other liabilities.”

	v.		Related Party Transactions

			The following table summarizes certain information regarding Doral Financial’s loans outstanding to officers, directors and 5% or more stockholders for the periods indicated.


(In thousands)	June 30, 2008			December 31, 2007

Balance at beginning of period	$	5,090		$	5,719
New Loans		—			4,164
Repayments		(68	)		(2,469	)
Loans sold		(511	)		(2,324	)
Loans of former officers		(1,920	)		—

Balance at end of period ⁽¹⁾	$	2,591		$	5,090


	⁽¹⁾		At June 30, 2008 and December 31, 2007, none of the loans outstanding to officers, directors and 5% or more stockholders were delinquent.

			At June 30, 2008 and December 31, 2007, the amount of loans outstanding to officers, directors and 5% or more stockholders secured by mortgages on real estate amounted to $2.4 million and $4.5 million, respectively.

			Since 2000, Doral Financial has done business with an entity that provides property inspection services and is co-owned by the spouse of an Executive VP of the Company. The amount paid by the Company to this entity for the six month periods ended June 30, 2008 and 2007, amounted to $0.8 million.

			For the six month period ended June 30, 2008, the Company assumed $860,000 of the professional services expense related to Doral Holdings. For the six month period ended June 30, 2007, the Company did not assume expenses related to Doral Holdings.

	w.		Commitments and Contingencies

			The Company enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments may include commitments to extend credit and sell loans. At June 30, 2008, commitments to extend credit amounted to approximately $174.8 million and commitments to sell loans at fair value amounted to approximately $88.3 million. Commitments to extend credit are agreements to lend to a customer as long as the conditions established in the contract are met. Commitments generally have fixed expiration dates or other termination clauses. Generally, the Company does not enter into interest rate lock agreements with borrowers.

			Doral Financial and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. In the opinion of Doral Financial’s management, except as described below, the pending and threatened legal proceedings of which management is aware will not have a material adverse effect on the financial condition or results of operations of Doral Financial.

			Since 2005, Doral Financial became a party to various legal proceedings, including regulatory and judicial investigations and civil litigation, arising as a result of the Company’s restatement.

			*Lawsuits*

			On September 14, 2007, a service provider filed a Demand for Arbitration before the American Arbitration Association alleging that Doral Financial failed to pay for services and comply with the terms of a written agreement. This service provider is requesting payment of its monthly service charges and its investment in equipment and software to perform the Data Processing Services Agreement it entered into with the

Company which totals approximately $4.7 million. The service provider and Doral Financial agreed to mediation, went thru mediation and is now in arbitration. The arbitration process to which the parties are contractually bound commenced on July 9, 2008 and is scheduled to continue in August 2008.

			*Other Legal Matters*

			On August 24, 2005, the U.S. Attorney’s Office for the Southern District of New York served Doral Financial with a grand jury subpoena seeking the production of certain documents relating to issues arising from the restatement, including financial statements and corporate, auditing and accounting records prepared during the period from January 1, 2000 to the date of the subpoena. Doral Financial is cooperating with the U.S. Attorney’s Office in this matter, including by producing documents and other information in response to the subpoena. Doral Financial cannot predict the outcome of this matter and is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact to Doral Financial of this matter.

			*Banking Regulatory Matters*

			On March 17, 2006, Doral Financial entered into a consent cease and desist order with the Federal Reserve. The mutually agreed upon order required Doral Financial to conduct reviews of its mortgage portfolio, and to submit plans regarding the maintenance of capital adequacy and liquidity. The consent order contains restrictions on Doral Financial from obtaining extensions of credit from, or entering into certain asset purchase and sale transactions with its banking subsidiaries, without the prior approval of the Federal Reserve. The consent order restricts Doral Financial from receiving dividends from the banking subsidiaries without the approval of the respective primary banking regulatory agency. Doral Financial is also required to request permission from the Federal Reserve for the payment of dividends on its common stock and preferred stock not less than 30 days prior to a proposed dividend declaration date and requires Doral Financial and Doral Bank PR to submit plans regarding the maintenance of minimum levels of capital and liquidity. Doral Financial has complied with these requirements and no fines or civil money penalties were assessed against the Company under the order.

			On October 23, 2006, Doral Bank PR entered into an Memorandum of Understanding (“MOU”) with the FDIC regarding certain deficiencies in Doral Bank PR’s compliance with the data reporting requirements of the Home Mortgage Disclosure Act, and weaknesses in its policies and procedures regarding compliance with the National Flood Insurance Act (as amended). Additionally, in connection with the deficiencies related to the data reporting requirements of the Home Mortgage Disclosure Act, Doral Bank PR paid $12,000 of civil monetary penalties. Doral Bank PR also was required to pay civil monetary penalties of $125,000 to the FDIC related to the deficiencies in compliance with the National Flood Insurance Act related to deficiencies in flood insurance coverage, failure to maintain continuous flood insurance protection and failure to ensure that borrowers obtained flood insurance.

			On February 19, 2008, Doral Bank PR entered into a consent order with the FDIC relating to failure to comply with certain requirements of the Bank Secrecy Act (“BSA”). The regulatory findings that resulted in the order were based on an examination conducted for the period ended December 31, 2006, and were related to findings that had initially occurred in 2005 prior to the Company’s change in management and recapitalization. The order replaces the Memorandum of Understanding with the FDIC and the Office of the Commissioner dated August 23, 2006. Doral Bank PR was not required to pay any civil monetary penalties in connection with this order. The order requires Doral Bank PR to correct certain violations of law, within the timeframes set forth in the order (generally 120 days) including certain violations regarding the BSA, failure to maintain an adequate BSA/Anti-Money Laundering Compliance Program (a “BSA/AML Compliance Program”) and failure to operate with an effective compliance program to ensure compliance with the regulations promulgated by the United States Department of Treasury’s Office of Foreign Asset Control (“OFAC”). The order requires Doral Bank PR to, among other things, amend its policies, procedures and processes and training programs to ensure full compliance with the BSA and OFAC; conduct an expanded BSA/AML risk assessment of its operations, enhance its due diligence and account monitoring procedures, review its BSA/AML staffing and resource needs, amend its policies and procedures for internal and external audits to include periodic reviews for BSA/AML compliance, OFAC compliance and perform annual independent testing programs for BSA/AML and OFAC requirements. The order also requires Doral Bank PR to engage an independent consultant to review account and transaction

activity from April 1, 2006 through March 31, 2007 to determine compliance with suspicious activity reporting requirements. Doral Financial expects that Doral Bank PR will comply with the requirements of the order within the required timeframes. A copy of the order was filed as an exhibit to Doral Financial’s Current Report on Form 8-K filed on February 22, 2008.

			Doral Financial and Doral Bank PR have undertaken specific corrective actions to comply with the requirements of the consent orders and the MOUs, but cannot give assurances that such actions are sufficient to prevent further enforcement actions by the banking regulatory agencies. Doral Financial expects that the implementation of these corrective actions will result in additional compliance-related expenses. However, these expenses are not anticipated to have a material financial impact on the Company or Doral Bank PR.

	x.		Fair Value of Assets and Liabilities

			The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities held for trading, securities available for sale, derivatives and servicing assets are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans receivable and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets.

			Effective January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements for fair value measurements. The Company adopted SFAS No. 159, “The Fair Value Option for Financing Assets and Financial Liabilities”, in 2008, but chose not to apply the fair value option to any of its financial assets or financial liabilities.

			Fair Value Hierarchy

			Under SFAS No. 157, the Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

	•		Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.

	•		Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market, or are derived principally from or corroborated by observable market data, by correlation or by other means.

	•		Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

			Determination of Fair Value

			Under SFAS No. 157, the Company bases fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is Doral Financial’s intent to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in SFAS No. 157.

			Fair value measurements for assets and liabilities where there exists limited or no observable market data and, therefore, are based primarily upon the Company’s estimates, are often calculated based on current

pricing policy, the economic and competitive environment, the characteristics of the asset or liability and other such factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future values.

			Following is a description of valuation methodologies used for instruments recorded at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.

			Securities held for trading: Securities held for trading are reported at fair value and consist primarily of securities and derivatives held for trading purposes. The valuation method for trading securities is the same as the methodology used for securities classified as available for sale. The valuation methodology for interest-only strips and derivatives are described below under: Servicing assets and interest-only strips, and Derivatives sections, respectively.

			Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions, expected defaults and loss severity. Level 1 securities (held for trading and available for sale) include U.S. Treasury and agency mortgage-backed securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 securities include agency and private collateralized mortgage obligations, municipal bonds, and Puerto Rico agency mortgage-backed securities. Level 3 securities include certain private label and agency CMOs for which quoted market prices are not available. For determining the fair value of Level 3 securities available for sale, the Company uses a valuation model that calculates the present value of estimated future cash flows. The model incorporates the Company’s own estimates of assumptions market participants use in determining the fair value, including estimates of prepayment speeds and discount rates.

			Loans held for sale: Loans held for sale are carried at the lower of net cost or market value on an aggregate portfolio basis. The amount, by which cost exceeds market value, if any, is accounted for as a loss through a valuation allowance. Loans held for sale consist primarily of mortgage loans held for sale. The market value of mortgage loans held for sale is generally based on quoted market prices for mortgage-backed securities adjusted by particular characteristics like guarantee fees, servicing fees, actual delinquency and the credit risk associated to the individual loans. Loans held for sale are classified as Level 2, except for loans where management makes certain adjustments to the model based on unobservable inputs that are significant. These loans are classified as Level 3.

			Loans receivable: Loans receivable are those held principally for investment purposes. These consist of construction loans for new housing development, certain residential mortgage loans which the Company does not expect to sell in the near future, commercial real estate, commercial non-real estate, leases, land, and consumer loans. Loans receivable are carried at their unpaid principal balance, less unearned interest, net of deferred loan fees or costs (including premiums and discounts), undisbursed portion of construction loans and an allowance for loan and lease losses. However, from time to time, the Company records nonrecurring fair value adjustments to loans receivable to reflect (1) partial write-downs that are based on current appraised value of the collateral, or (2) the full charge-off of the loan carrying value. The Company classifies loans receivable subject to nonrecurring fair value adjustments as Level 3.

			Servicing assets and interest-only strips: The Company routinely originates, securitizes and sells mortgage loans into the secondary market. As a result of this process, the Company typically retains the servicing rights and, in the past, also retained interest-only strips. Servicing assets retained in a sale or securitization arises from contractual agreements between the Company and investors in mortgage securities and mortgage loans. Since the adoption of SFAS No. 156 on January 1, 2007, the Company records mortgage servicing assets at fair value on a recurring basis. Considerable judgment is required to determine the fair value of the Company’s servicing assets. Unlike highly liquid investments, the market value of servicing assets cannot be readily determined because these assets are not actively traded in securities markets. The Company determines the fair value of its servicing assets on the basis of a third party market valuation for the Company’s entire servicing portfolio (governmental, conforming and non-conforming portfolios). The

fair value of the servicing assets is determined based on a combination of market information on trading activity (servicing asset trades and broker valuations), benchmarking of servicing assets (valuation surveys) and cash flow modeling. The valuation of the Company’s servicing assets incorporates 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. For interest-only strips the Company uses a valuation model that calculates the present value of estimated future cash flows. The model incorporates the Company’s own estimates of assumptions market participants use in determining the fair value, including estimates of prepayment speeds, discount rates, defaults and contractual fee income. Interest-only strips are recorded as securities held for trading. Fair value measurements of servicing assets and interest-only strips use significant unobservable inputs and, accordingly, are classified as Level 3.

Derivatives: Quoted market prices are available and used for exchange-traded derivatives, such as future contracts, which the Company classifies as Level 1. However, substantially all of the Company’s derivatives are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, Doral Financial measures fair value using internally developed widely accepted models that use primarily market observable inputs, such as yield curves and option volatilities, and, accordingly, are classified as Level 2. Examples of Level 2 derivatives are basic interest rate swaps and interest rate caps.

Financial Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the balance of assets and liabilities measured at fair value on a recurring basis as of June 30, 2008.


(In thousands)	Total		Level 1		Level 2		Level 3
Assets:
Securities held for trading	$	229,010	$	175,771	$	2,539	$	50,700	⁽¹⁾
Securities available for sale		3,156,066		1,174,726		1,960,920		20,420
Derivatives⁽²⁾		2,246		—		2,246		—
Servicing assets		145,527		—		—		145,527

	$	3,532,849	$	1,350,497	$	1,965,705	$	216,647


Liabilities:
Derivatives⁽³⁾	$	3,882	$	539	$	3,343	$	—


⁽¹⁾		Represents interest-only strips, of which variable interest-only strips represents substantially all of the balance. Also, includes certain private label and agency CMOs for which quoted market prices are not available.

⁽²⁾		Included as part of securities held for trading in the Consolidated Statement of Financial Condition.

⁽³⁾		Included as part of accrued expenses and other liabilities in the Consolidated Statement of Financial Condition.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:


	Quarter ended June 30, 2008								Six month period ended June 30, 2008
	Securities			Securities					Securities			Securities
	Held for			Available			Servicing		Held			Available			Servicing
(In thousands)	Trading			for Sale			Assets		for Trading			for Sale			Assets
Beginning balance:	$	53,060		$	20,881		$	139,570	$	67,992		$	7,597		$	150,238
Change in fair value		(2,360	)		(461	)		4,498		(2,940	)		(1,529	)		(7,099	)
Transfer		—			—			—		(14,352	)		14,352			—
Capitalization / Sales, net		—			—			1,459		—			—			2,388

Ending balance	$	50,700		$	20,420		$	145,527	$	50,700		$	20,420		$	145,527

Financial Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The valuation methodologies used to measure these fair value adjustments are described above. For assets measured at fair value on a nonrecurring basis in 2008, that were still held in the balance sheet at period end, the following table provides the level of valuation assumptions used to determine the adjustment and the carrying value of the related individual assets or portfolios at June 30, 2008.


									Loss for the Six
									Month Period Ended
(In thousands)	Carrying Value		Level 1		Level 2		Level 3		June 30, 2008
Assets:
Loans receivable⁽¹⁾	$	29,136	$	—	$	—	$	29,136	$	(5,028	)


⁽¹⁾		Represents the carrying value and related write-downs of loans for which adjustments are based on the appraised value of the collateral.

Derivatives

As of June 30, 2008 and December 31, 2007, the Company had the following derivative financial instruments outstanding:


	June 30, 2008							December 31, 2007
			Fair Value							Fair Value
(In thousands)	Notional Amount		Asset		Liability			Notional Amount		Asset		Liability

Cash Flow Hedges:
Interest rate swaps	$	195,000	$	—	$	(3,343	)	$	80,000	$	—	$	(937	)
Other Derivatives:
Interest rate swaps		—		—		—			115,000		—		(1,951	)
Interest rate caps		270,000		2,246		—			270,000		1,481		—
Forward contracts		23,000		—		(539	)		29,000		—		(6	)

Total	$	488,000	$	2,246	$	(3,882	)	$	494,000	$	1,481	$	(2,894	)

The following table discloses Doral Financial losses for the quarters and six month periods ended June 30, 2008 and 2007 related to its derivatives outstanding:


						Other Comprehensive
	Gain (Loss) for the					Income for the Quarters
	Quarters Ended June 30,					Ended June 30,⁽¹⁾
(In thousands)	2008			2007		2008		2007

Cash Flow Hedges:
Interest rate swaps	$	—		$	—	$	2,923	$	—
Other Derivatives:
Interest rate swaps		—			8,250		—		—
Interest rate caps		1,254			—		—		—
Forward contracts		(96	)		4,378		—		—

Total	$	1,158		$	12,628	$	2,923	$	—


⁽¹⁾		Net of tax.


						Other Comprehensive Loss for
	(Loss) Gain for the					the Six Month
	Six Month Periods Ended					Periods Ended
	June 30,					June 30,⁽¹⁾
(In thousands)	2008			2007		2008			2007

Cash Flow Hedges:
Interest rate swaps	$	—		$	—	$	(244	)	$	—
Other Derivatives:
Interest rate swaps		(157	)		3,720		—			—
Interest rate caps		764			—		—			—
Forward contracts		(806	)		4,519		—			—

Total	$	(199	)	$	8,239	$	(244	)	$	—


⁽¹⁾		Net of tax.

The Company maintains an overall interest rate risk-management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. The Company’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that net interest margin is not, on a material basis, adversely affected by movements in interest rates. To achieve its risk management objectives, the Company uses a combination of term funding, derivative financial instruments, particularly interest rate swaps, caps, as well as other types of contracts such as forward sales commitments.

At June 30, 2008 and December 31, 2007, Doral Financial’s interest rate swaps had weighted average receive rates of 2.50% and 4.88%, respectively. At June 30, 2008 and December 31, 2007, the Company’s interest rate swaps had a weighted average pay rate of 4.51%.

The following table discloses Doral Financial’s derivative financial instruments classification and hedging relationships:


	June 30, 2008							December 31, 2007
			Fair Value							Fair Value
(In thousands)	Notional Amount		Asset		Liability			Notional Amount		Asset		Liability

Derivatives designated as cash flow hedges:
Hedging FHLB advances	$	195,000	$	—	$	(3,343	)	$	80,000	$	—	$	(937	)
Derivatives not designated as cash flow hedges		293,000		2,246		(539	)		414,000		1,481		(1,957	)

Total	$	488,000	$	2,246	$	(3,882	)	$	494,000	$	1,481	$	(2,894	)

Cash Flow Hedges

As of June 30, 2008 and December 31, 2007, the Company had $195.0 million and $80.0 million, respectively, outstanding pay fixed interest rate swaps designated as cash flow hedges with maturities between September 2008 and November 2012, and between September 2008 and October 2012, respectively. The Company designated the mentioned pay fixed interest rate swaps to hedge the variability of future interest cash flows of adjustable rate FHLB Advances. For the first quarter of 2008 and the year ended December 31, 2007, no ineffectiveness was recognized. During the second quarter of 2008, the Company recognized $103,000 of ineffectiveness for the interest rate swaps designated as cash flow hedges. As of June 30, 2008, the amount of cash flow hedges included in accumulated other comprehensive loss, net of tax of $0.5 million before tax, was an unrealized loss of $0.8 million, which the Company expects to reclassify approximately $1.3 million before tax into earnings during the next twelve months. As of December 31, 2007, the amount of cash flow hedge included in accumulated other comprehensive loss, net of tax, was an unrealized loss of $0.6 million.

The Company held $115.0 million in freestanding interest rate swaps agreements as of December 31, 2007. These swaps were designated as cash flow hedges as of January 1, 2008, to hedge the variability of future interest cash flows of adjustable rate FHLB Advances.

Trading and Non-Hedging Activities

Doral Financial held $293.0 million and $414.0 million in notional value of derivatives not designated as cash flow hedges at June 30, 2008 and December 31, 2007, respectively.

The Company purchases interest rate caps to manage its interest rate exposure. Interest rate cap agreements generally involve purchases of out of money caps to protect the Company from larger rate moves and to provide the Company with positive convexity. These products are not linked to specific assets and liabilities that appear on the balance sheet or to a forecasted transaction and, therefore, do not qualify for hedge accounting. As of June 30, 2008 and December 31, 2007, the Company had outstanding interest rate caps with a notional amount of $270.0 million. For the quarter and six month period ended June 30, 2008, the Company recognized gains of $1.3 million and $0.8 million, respectively, on interest rate caps transactions. The Company did not have interest rate caps outstanding as of June 30, 2007.

The Company entered into forward contracts to create an economic hedge on its mortgage warehouse line. As of June 30, 2008 and December 31, 2007, the Company had forwards with a notional amount of $23.0 million and $29.0 million, respectively, and recorded losses of $0.1 million and $0.8 million for the quarter and six month period ended June 30, 2008, compared to gains of $4.4 million and $4.5 million, respectively, for the corresponding periods of 2007, on these derivatives.

Credit risk related to derivatives arises when amounts receivable from a counterparty exceed those payable. Because the notional amount of the instruments only serves as a basis for calculating amounts receivable or payable, the risk of loss with any counterparty is limited to a small fraction of the notional amount. Doral Financial’s maximum loss related to credit risk is equal to the gross fair value of its derivative instruments. Doral Financial deals only with derivative dealers that are national market makers with strong credit ratings in its derivatives activities. The Company further controls the risk of loss by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. In addition, counterparties are required to provide cash collateral to Doral Financial when their unsecured loss positions exceed certain negotiated limits.

All derivative contracts to which Doral Financial is a party settle monthly, quarterly or semiannually. Further, Doral Financial has netting agreements with the dealers and only does business with credit worthy dealers. Because of these factors, Doral Financial’s credit risk exposure related to derivatives contracts at June 30, 2008 and December 31, 2007 was not considered material.

Recent Accounting Pronouncements

Written Loan Commitments Recorded at Fair Value Through Earnings. On November 5, 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 109, which supersedes SAB No. 105, “Application of Accounting Principles to Loan Commitments”, and expresses the current view of the staff that, consistent with the guidance in SFAS No. 156, “Accounting for Servicing of Financial Assets”, and SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SAB 109 also retains the staff view expressed in SAB 105, that indicated that the staff believed that internally-developed intangible assets (such as customer relationship intangible assets) should not be recorded as part of the fair value of a derivative loan commitment and prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The adoption of the provisions of SAB 109 did not have a material impact on the Company’s financial statements.

Noncontrolling Interests in Consolidated Financial Statements. On December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). This Statement amends Accounting Research Bulletin No. 51 “Consolidated Financial Statements” (“ARB 51”), to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the

deconsolidation of a subsidiary. SFAS 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations.

The significant changes upon adoption of SFAS 160 are the definition, classification and measurement of noncontrolling interest (previously referred to as minority interest). SFAS 160 defines noncontrolling interest as the portion of equity (net assets) in a subsidiary not attributable to a parent. It also requires the presentation of the noncontrolling interest within the equity section of the statement of financial position separately from parent’s equity and should be clearly identified to distinguish it from other components of the parent’s equity.

SFAS 160 clarifies that all earnings and losses of the subsidiary should be attributed to the parent and the noncontrolling interest, even if the attribution of losses results in a debit balance in stockholders’ equity. In addition, SFAS 160 provides that upon a loss of control (deconsolidation), any gain or loss on the interest sold will be recognized in earnings.

SFAS 160 applies to all fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Calendar year end public companies will have to adopt SFAS 160 in the first quarter of 2009. Earlier application is not permitted. The Company is currently evaluating the effect, if any, of the adoption of this Statement on its financial statements, commencing on January 1, 2009.

Business Combinations. In December 2007, the FASB issued SFAS No. 141(revised), “Business Combinations”. This statement replaces SFAS No. 141 and applies to all transactions or other events in which an entity (the acquirer) obtains control of one or more businesses. SFAS 141(revised) retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (purchase method) be used for all business combinations. This statement defines the acquirer as the entity that obtains control in the business combination and requires the acquirer to be identified.

SFAS 141 (revised) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity at the acquisition date, measured at their fair values as of that date. In addition, this statement expands and improves the information reported about assets acquired and liabilities assumed arising from contingencies. Contingencies arising from a business combination should be recognized as of the acquisition date and measured at their acquisition date fair values.

This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2008. Earlier application is not permitted. The effective date of this Statement is the same as that of the related SFAS No.160, “Noncontrolling Interest in Consolidated Financial Statements”. The Company is currently evaluating the effect, if any, of the adoption of this Statement on its financial statements, commencing on January 1, 2009.

Disclosures about Derivative Instruments and Hedging Activities. In March 2008, The FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”, an amendment of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”. This statement improves the transparency of financial reporting and expands the disclosure requirements of SFAS 133 with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.

To meet those objectives, this statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of, and gains and losses, on derivatives instruments, and disclosures about credit-risk-related contingent features in derivatives agreements.

This statement has the same scope as SFAS 133 and accordingly, applies to all entities. This Statement applies to all derivatives instruments, including bifurcated derivative instruments and related hedged items accounted for under SFAS 133 and its related interpretations. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently evaluating the effect, if any, of the adoption of this Statement on its financial statements, commencing on January 1, 2009.

The Hierarchy of Generally Accepted Accounting Principles. In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).

The current GAAP hierarchy, as set forth in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, has been criticized because (1) it is directed to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process.

The FASB believes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Accordingly, the FASB concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and is issuing this Statement to achieve that result.

There is no expectancy that this Statement will result in a change in current practice. However, transition provisions have been provided by the FASB in the unusual circumstance that the application of the provisions of this Statement results in a change in practice.

This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The Company is currently evaluating the effect, if any, of the adoption of this Statement on its financial statements.

aa.		Subsequent Events

		Material definitive agreement. On July 11, 2008 Doral Bank PR, Doral Financial Corporation’s wholly-owned banking subsidiary in Puerto Rico, executed an Interim Servicing Agreement (the “Agreement”) with the Federal Home Loan Mortgage Corporation (“Freddie Mac”) for the servicing of a portfolio of approximately 46,312 single-family mortgage loans amounting to approximately $3.9 billion of Freddie Mac loans (the “Interim Portfolio”).

		Doral Bank PR will provide servicing for such Interim Portfolio until such time as Freddie Mac determines to transfer servicing of such Interim Portfolio, which is expected to be no less than 24 months. Doral Bank PR will receive for each accounting cycle a fee for servicing the mortgages in existence on the first day of each month during the term of the Agreement. Doral Bank PR will also receive other ancillary fees related to the transfer of the Interim Portfolio from a previously servicer and the reimbursement of certain advances for the servicing of the Interim Portfolio. As of this date, the servicing has not been transferred to Doral Bank PR.

		Stock options. On April 8, 2008, the Company’s Board of Directors approved the 2008 Stock Incentive Plan (the “Plan”) subject to shareholder approval, which was obtained at the annual shareholders’ meeting held on May 7, 2008. The Plan replaces the 2004 Omnibus Incentive Plan (please refer to note “n” for additional information).

		The aggregate number of shares of common stock which the Company may issue under the Plan is limited to 6,750,000. During the third quarter of 2008, the Company expects to award approximately 2,700,000 stock options to employees at an exercise price of $12.60, which is equal to the price per share paid by Doral Holdings in the July 2007 recapitalization. All employee options granted will become vested at a rate of 20 percent each year for a period of five years from the closing date of the recapitalization which was July 19, 2007. The plan will be accounted for following the provisions of SFAS No. 123R, “Share-Based Payment”. Stock options granted will be expensed over the stock option vesting period based on fair value which will be determined using the Black-Scholes option-pricing method at the date the options are granted. On July 22, 2008, certain independent directors were granted 2,000 shares of restricted stock and stock options to purchase 20,000 shares of common stock at an exercise price equal to the closing price of the stock on the grant date. Those options vest ratably over a five year period commencing with the grant date.

FORWARD LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements. In addition, Doral Financial may make forward-looking statements in its press releases or in other public or shareholder communications and its senior management may make forward-looking statements orally to analysts, investors, the media and others. These “forward-looking statements” are identified by the use of words or phrases such as “would be” , “will allow” , “intends to” , “will likely result” , “are expected to” , “will continue” , “is anticipated” , “estimate” , “project” or similar expressions.

Doral Financial cautions readers not to place undue reliance on any of these forward-looking statements since they speak only as of the date made and represent Doral Financial’s expectations of future conditions or results and are not guarantees of future performance. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, the following:

	•		the strength or weakness of the real estate markets and of the consumer and commercial credit sectors and its impact on the credit quality of Doral Financial’s loans and other assets;

	•		Doral Financial’s ability to derive sufficient income to realize the benefit of its deferred tax assets;

	•		the strength or weakness of the Puerto Rico and the United States economies;

	•		changes in interest rates and the potential impact of such changes in interest rates on Doral Financial’s net interest income;

	•		the performance of U.S. capital markets;

	•		the fiscal and monetary policy of the federal government and its agencies;

	•		potential adverse development from ongoing enforcement actions by bank regulatory agencies;

	•		risks arising from material weaknesses in Doral Financial’s internal control over financial reporting; and

	•		developments in the regulatory and legal environment for financial services companies in Puerto Rico and the United States.

Doral Financial does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of those statements.

Investors should carefully consider these factors and the risk factors outlined under Item 1A, Risk Factors, in Doral Financial’s 2007 Annual Report on Form 10-K.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SUBSEQUENT EVENTS

For a description of certain significant events that occurred after June 30, 2008, please refer to note “aa” to the unaudited interim financial statements included in this Form 10-Q.

OVERVIEW OF RESULTS OF OPERATIONS

Net income for the quarter ended June 30, 2008 amounted to $1.6 million, compared to a net loss of $37.5 million for the comparable 2007 period. Doral Financial’s financial performance improved $39.1 million during the second quarter of 2008, compared to the second quarter of 2007, principally due to (1) a $21.0 million reduction in non interest expense principally related to reduction in compensation and employee benefits and professional services, (2) a $14.3 million increase in net interest income, and (3) a $8.6 million reduction in the provision for loan and lease losses. These improvements were partially offset by an increase in income tax expense of $4.7 million.

The highlights of the Company’s financial results for the quarter ended June 30, 2008 included the following:

	•		Net loss attributable to common shareholders for the second quarter of 2008 amounted to $6.7 million, or a diluted loss per share of $0.12, compared to net loss of $45.8 million, or a diluted loss per share of $8.49, for the second quarter of 2007.

	•		Net interest income for the second quarter of 2008 was $48.9 million, compared to $34.6 million for the same period in 2007. The $14.3 million increase in net interest income for 2008, compared to 2007, was driven principally by a reduction in interest expense partially offset by a smaller decline in interest income. The decline in interest expense was due to (1) a $10.2 million reduction in interest expense associated with the repayment of the Company’s $625.0 million senior notes on July 20, 2007 using the proceeds from the $610.0 million equity investment made by Doral Holdings in the Company, and (2) a $6.8 million reduction in deposits costs as a result of the repositioning of the Company’s deposit products during the fourth quarter of 2007 and the general decline in interest rates. The Company also experienced a $14.8 million reduction in borrowing cost, $12.1 million of which was associated with a decrease in interest expense for repurchase agreements and FHLB advances related to the reduction of liabilities funding mortgage-backed securities, investment securities and other interest-earning assets, which were sold in the second half of 2007, and a $2.7 million reduction in loan payable borrowing expense due to the general decline in interest rates. The decline in interest expense was offset by a $17.6 million reduction in interest income primarily associated with investment securities sold during the second half of 2007, due to the Company’s efforts to improve its interest rate risk profile, and the reduction of other interest-earning assets, primarily money market investments. Average interest-earning assets decreased from $10.7 billion for the second quarter of 2007 to $9.7 billion for the second quarter of 2008, while the average interest bearing-liabilities decreased from $9.8 billion to $8.6 billion, respectively. This reduction in leverage, combined with the decline in interest expense, resulted in an expansion in the net interest margin from 1.30% in the second quarter of 2007 to 2.02% in the second quarter of 2008 (see Tables A and C below for information regarding the Company’s net interest income).

	•		For the second quarter of 2008, the provision for loan and lease losses amounted to $10.7 million, compared to $19.3 million for the same period in 2007. In 2007, the Company transferred $1.3 billion of loans from the loans held for sale portfolio to the loans receivable portfolio, which resulted in an increase in the provision of $8.8 million, and accounts for the majority of the difference between the provisions for the second quarter of 2008 compared to the corresponding 2007 period.

	•		Non-interest income for the second quarter of 2008 was $24.9 million, compared to $24.9 million for the same period in 2007. Non-interest income performance for the second quarter of 2008 was primarily driven by (1) a gain of $5.2 million from the redemption of shares of VISA, Inc., pursuant to their global restructuring agreement, (2) an increase of $4.1 million in gain on mortgage loans sales and fees, principally related to the increase of $36.0 million in loans sales and securitizations, (3) a gain of $4.5 million in the change in fair value of MSRs principally related to the increase in interest

			rates in the current quarter, (4) partially offset by a loss on trading activities mainly driven by losses amounting to $7.9 million in U.S. Treasury securities positions, related to the increase in interest rates in the current quarter. The U.S. Treasury securities position serves as an economic hedge against the valuation adjustment of the Company’s MSRs.

	•		Non-interest expense for the second quarter of 2008 was $55.6 million, compared to $76.6 million for the corresponding period in 2007. The $21.0 million reduction in non-interest expense for the quarter was driven by the elimination of expenses associated with the 2007 recapitalization efforts and cost control measures implemented by the Company in 2008. The reductions impacted all expense categories, excluding communication & information systems expense and other expenses which rose due to the increased retail banking activities, increased FDIC insurance fees, and foreclosure expenses, among others. The largest reductions were in compensation and benefits, which reflected a decline of $13.6 million, and professional services, which declined by $9.5 million.

	•		For the second quarter of 2008, Doral Financial recognized an income tax expense of $5.8 million, compared to $1.1 million for the corresponding period in 2007. The recognition of income tax expense for the second quarter of 2008 was principally related to changes in the Company’s valuation allowance for its deferred tax assets resulting from changes in earnings expectations used to evaluate the realization of the tax assets, and the resolution of a past tax matter of one affiliate amounting to approximately $0.5 million.

	•		During the second quarter of 2008, the Company had other comprehensive loss of approximately $42.7 million, compared to $34.7 million for the corresponding 2007 period. The Company’s other comprehensive loss for the second quarter of 2008 was mainly driven by the reduction in value of its U.S. Private Label CMO’s purchased during the fourth quarter of 2007. As of June 30, 2008, the Company’s balance for accumulated other comprehensive loss (net of income tax benefit) increased to $133.1 million, compared to $33.1 million as of December 31, 2007.

	•		Doral Financial’s loan production for the second quarter of 2008 was $383.3 million, compared to $308.8 million for the comparable period in 2007, an increase of approximately 24%. The increase in Doral Financial’s loan production for the second quarter of 2008 was primarily the result of the increased production of residential mortgage loans.

	•		Total assets as of June 30, 2008 were $10.4 billion, an increase of 12% compared to $9.3 billion as of December 31, 2007. The increase in total assets during the first half of 2008 was due primarily to a net increase in the Company’s available for sale securities portfolio of approximately of $1.2 billion as part of the Company’s efforts to improve interest rate risk through the asset purchase program. The increase in total liabilities of $1.2 billion was driven by the increase of borrowings used to finance the purchase of these securities.

INTERNAL CONTROL OVER FINANCIAL REPORTING

Doral Financial is engaged in the implementation of remediation efforts to address the material weaknesses in the Company’s internal control over financial reporting. Doral Financial’s remediation efforts are outlined in “-Remediation of Material Weaknesses” under Item 9A, Controls and Procedures, in the Company’s 2007 Annual Report on Form 10-K, and Part I, Item 4 “Controls and Procedures” in this Quarterly Report on Form 10-Q.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the Company’s Consolidated Financial Statements and accompanying notes. Various elements of Doral Financial’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. The Company believes that the judgments, estimates and assumptions used in the preparation of its Consolidated Financial Statements included in this Quarterly Report on Form 10-Q are appropriate given the factual circumstances as of June 30, 2008. However, given the sensitivity of Doral Financial’s Consolidated Financial Statements to these estimates, the use of other judgments, estimates and assumptions could result in material differences in the Company’s results of operations or financial condition.

Other than the adoption of SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) as of January 1, 2008, the Company’s critical accounting policies are described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of Doral Financial’s 2007 Annual Report on Form 10-K.

Fair Value of Financial Instruments

The Company uses fair value measurements to record fair value adjustments for certain financial instruments and to determine fair value disclosures. Trading assets, securities available for sale, derivatives and servicing assets are financial instruments recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other financial assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve the application of the lower-of-cost-or-market accounting or write-downs of individual assets. The discussion about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact on earnings is included in notes “c” and “x” of the unaudited financial statements included in this Quarterly Report on Form 10-Q.

SFAS No. 157 defines fair value as the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date.

SFAS No. 157 established a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect the Company’s estimates about market data.

	•		Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.

	•		Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market, or are derived principally from or corroborated by observable market data, by correlation or by other means.

	•		Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

In accordance with SFAS No. 157, Doral Financial’s intent is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. When available, the Company uses quoted market prices to measure fair value. If market prices are not available, fair value measurements are based upon models that use primarily market-based or independently-sourced market parameters, including interest rate yield curves, prepayment speeds, option volatilities and currency rates. Substantially all of Doral Financial’s financial instruments use either of the foregoing methodologies, collectively Level 1 and Level 2 measurements, to determine fair value adjustments recorded to the Company’s financial statements. However, in certain cases, when market observable inputs for model-based valuation techniques may not be readily available, the Company is required to make judgments about assumptions market participants would use in estimating the fair value of the financial instruments.

The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, the Company uses valuation techniques requiring more management judgment to estimate the appropriate fair value measurement.

At June 30, 2008, $3.5 billion, or 34%, of the Company’s total assets, consisted of financial instruments recorded at

fair value on a recurring basis. The financial instruments recorded at fair value on a recurring basis consisted of $3.3 billion that are measured using valuation methodologies involving market-based or market-derived information, identified as Level 1 and Level 2 measurements, and $216.6 million of financial assets, consisting principally of interest-only strips and mortgage servicing assets, that are measured using model-based techniques, or Level 3 measurement.

At June 30, 2008, Doral Financial’s liabilities included $3.9 million of financial instruments recorded at fair value on a recurring basis.

Please refer to notes “c” and “x” of the unaudited interim financial statements included in this Quarterly Report Form 10-Q, for additional information on the initial adoption of SFAS No. 157 and a complete discussion of the Company’s use of fair value of financial instruments, the measurement techniques and its impact in the financial statements.

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

The components of Doral Financial’s revenues are: (1) net interest income; (2) net gain (loss) on mortgage loan sales and fees; (3) investment activities; (4) trading activities; (5) servicing (loss) income; and (6) commissions, fees and other income.

NET INTEREST INCOME

Net interest income is the excess of interest earned by Doral Financial on its interest-earning assets over the interest incurred on its interest-bearing liabilities. Doral Financial’s net interest income is subject to interest rate risk due to the repricing and maturity mismatch in the Company’s assets and liabilities. Generally, Doral Financial’s assets have a longer maturity and a later repricing date than its liabilities, which results in lower net interest income in periods of rising short-term interest rates. Refer to “— Risk Management” below for additional information on the Company’s exposure to interest rate risk.

Net interest income for the second quarter and six month period ended June 30, 2008 was $48.9 million and $87.9 million, respectively, compared to $34.6 million and $72.8 million, in the corresponding 2007 periods, an increase of 41% and 21%, respectively. The increase in net interest income was due to the repayment of the Company’s $625.0 million senior notes and a decline in interest paid on deposits, partially offset by the reduction in money market and other investment securities. The reduction in average securities held on the balance sheet resulted in an interest income reduction of $13.2 million and $26.2 million for the quarter and six month period ended June 30, 2008, respectively, compared to the corresponding 2007 periods. Interest income for the quarter and six month period ended June 30, 2008 amounted to $135.6 million and $263.8 million, respectively, compared to $153.2 million and $310.5 million, for the same periods in 2007, a decrease of 11% and 15%, respectively. The reduction in the amount of indebtedness resulted in decreases of $31.8 million, or 27%, and $61.8 million, or 26%, in interest expense for the quarter and six month period ended June 30, 2008, when comparing to the comparable 2007 periods. The primary drivers were (1) the reduction in interest expense associated with the repayment of the Company’s $625.0 million senior notes on July 20, 2007 with the proceeds from the $610.0 million equity investment by Doral Holdings in the Company, (2) a large reduction in deposits costs as a result of the general decline in interest rates and the repositioning of our deposit products during the fourth quarter of 2007, and (3) a large reduction in borrowing costs due to the reduction of borrowing associated to the repayment of repurchase agreements used to fund the $1.7 billion of investment securities which were sold in the second half of 2007 and also to the general decline in interest rates during the fourth quarter of 2007. As stated above, the sale of these securities also caused a decline in interest income. This reduction in leverage, combined with the large decline in interest expense, resulted in an expansion in the net interest margin from 1.30% in the second quarter of 2007 to 2.02% in the second quarter of 2008, and from 1.37% for the six month period ended June 30, 2007 to 1.91% for the corresponding 2008 period.

The reduction in the average interest earning asset balance of $1.0 billion and $1.5 billion for the quarter and six month period ended June 30, 2008, compared to the corresponding 2007 periods, was due to the sale of $1.7 billion of mortgage-backed securities and investment securities during the third quarter of 2007, and the reduction of money market investments held in 2007 to increase liquidity of Doral Bank PR. The cancellation of related borrowings used to finance these securities also impacted the average balance of interest bearing liabilities reflected primarily in the decrease of the average balance of repurchase agreements.

The following tables present, for the periods indicated, Doral Financial’s average balance sheet, the total dollar amount of interest income from its average interest-earning assets and the related yields, as well as the interest expense on its average interest-bearing liabilities expressed in both dollars and rates, and the net interest margin and spread. These tables do not reflect any effect of income taxes. Average balances are based on the average daily balances.

TABLE A
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(Dollars in thousands)


	QUARTERS ENDED JUNE 30,
	2008							2007
	AVERAGE				AVERAGE			AVERAGE				AVERAGE
	BALANCE		INTEREST		YIELD/RATE			BALANCE		INTEREST		YIELD/RATE

ASSETS:
Interest-earning assets:
Total loans⁽¹⁾⁽²⁾	$	5,553,218	$	85,910		6.22	%	$	5,100,837	$	86,726		6.82	%
Mortgage-backed securities		2,316,989		29,936		5.20	%		1,644,535		21,085		5.14	%
Interest-only strips		51,817		1,756		13.63	%		51,286		1,395		10.91	%
Investment securities		1,176,813		13,912		4.75	%		2,463,569		27,074		4.41	%
Other interest-earning assets		621,545		4,132		2.67	%		1,407,356		16,963		4.83	%


Total interest-earning assets/interest income		9,720,382	$	135,646		5.61	%		10,667,583	$	153,243		5.76	%


Total non-interest-earning assets		750,604							743,083

Total assets	$	10,470,986						$	11,410,666


LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities:
Deposits	$	4,051,419	$	37,268		3.70	%	$	3,864,759	$	44,105		4.58	%
Repurchase agreements		2,181,718		22,091		4.07	%		3,544,376		38,676		4.38	%
Advances from FHLB		1,745,374		17,549		4.04	%		1,012,522		13,036		5.16	%
Loans payable		384,698		4,568		4.78	%		428,689		7,306		6.84	%
Notes payable		280,707		5,315		7.62	%		920,739		15,491		6.75	%


Total interest-bearing liabilities/interest expense		8,643,916	$	86,791		4.04	%		9,771,085	$	118,614		4.87	%


Total non-interest-bearing liabilities		595,699							821,018

Total liabilities		9,239,615							10,592,103
Stockholders’ equity		1,231,371							818,563

Total liabilities and stockholders’ equity	$	10,470,986						$	11,410,666


Net interest-earning assets	$	1,076,466						$	896,498
Net interest income on a non-taxable equivalent basis			$	48,855						$	34,629

Interest rate spread⁽³⁾						1.57	%						0.89	%
Interest rate margin⁽⁴⁾						2.02	%						1.30	%
Net interest-earning assets ratio⁽⁵⁾						112.45	%						109.18	%


⁽¹⁾		Average loan balances include the average balance of non-accruing loans, on which interest income is recognized when collected. Also includes the average balance of GNMA defaulted loans for which the Company has the option, but not an obligation, to buy-back the pools serviced.

⁽²⁾		Interest income on loans includes $0.4 million and $0.4 million for the first quarter of 2008 and 2007, respectively, of income from prepayment penalties related to the Company’s loan portfolio.

⁽³⁾		Interest rate spread represents the difference between Doral Financial’s weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities.

⁽⁴⁾		Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets.

⁽⁵⁾		Net interest-earnings assets ratio represents average interest-earning assets as a percentage of average interest-earning liabilities.

TABLE B
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(Dollars in thousands)


	SIX MONTH PERIODS ENDED JUNE 30,
	2008							2007
	AVERAGE				AVERAGE			AVERAGE				AVERAGE
	BALANCE		INTEREST		YIELD/RATE			BALANCE		INTEREST		YIELD/RATE

ASSETS:
Interest-earning assets:
Total loans⁽¹⁾⁽²⁾	$	5,501,828	$	171,292		6.26	%	$	5,131,756	$	176,319		6.93	%
Mortgage-backed securities		1,791,175		49,038		5.51	%		1,691,402		43,325		5.17	%
Interest-only strips		50,830		3,430		13.57	%		51,694		2,889		11.27	%
Investment securities		1,175,526		28,678		4.91	%		2,524,860		54,886		4.38	%
Other interest-earning assets		711,353		11,316		3.20	%		1,326,612		33,072		5.03	%


Total interest-earning assets/interest income		9,230,712	$	263,754		5.75	%		10,726,324	$	310,491		5.84	%


Total non-interest-earning assets		784,654							745,318

Total assets	$	10,015,366						$	11,471,642


LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities:
Deposits	$	3,954,914	$	79,916		4.06	%	$	3,873,318	$	86,893		4.52	%
Repurchase agreements		1,858,953		40,404		4.37	%		3,624,225		78,312		4.36	%
Advances from FHLB		1,634,467		34,807		4.28	%		1,023,450		26,644		5.25	%
Loans payable		387,769		10,077		5.23	%		433,908		14,934		6.94	%
Notes payable		279,663		10,651		7.66	%		922,116		30,915		6.76	%


Total interest-bearing liabilities/interest expense		8,115,766	$	175,855		4.36	%		9,877,017	$	237,698		4.85	%


Total non-interest-bearing liabilities		651,868							756,713

Total liabilities		8,767,634							10,633,730
Stockholders’ equity		1,247,732							837,912

Total liabilities and stockholders’ equity	$	10,015,366						$	11,471,642


Net interest-earning assets	$	1,114,946						$	849,307
Net interest income on a non-taxable equivalent basis			$	87,899						$	72,793

Interest rate spread⁽³⁾						1.39	%						0.99	%
Interest rate margin⁽⁴⁾						1.91	%						1.37	%
Net interest-earning assets ratio⁽⁵⁾						113.74	%						108.60	%


⁽¹⁾		Average loan balances include the average balance of non-accruing loans, on which interest income is recognized when collected. Also includes the average balance of GNMA defaulted loans for which the Company has the option, but not an obligation, to buy-back the pools serviced.

⁽²⁾		Interest income on loans includes $0.7 million and $1.8 million for the first half of 2008 and 2007, respectively, of income from prepayment penalties related to the Company’s loan portfolio.

⁽³⁾		Interest rate spread represents the difference between Doral Financial’s weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities.

⁽⁴⁾		Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets.

⁽⁵⁾		Net interest-earnings assets ratio represents average interest-earning assets as a percentage of average interest-earning liabilities.

The following table presents the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected Doral Financial’s interest income and interest expense during the period indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in volume (change in volume multiplied by prior year rate); (ii) changes in rate (change in rate multiplied by current year volume); and (iii) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated in proportion to the absolute dollar amounts of the changes due to rate and volume.

TABLE C
NET INTEREST INCOME VARIANCE ANALYSIS
(In thousands)


	QUARTERS ENDED
	JUNE 30,
	2008 COMPARED TO 2007
	INCREASE (DECREASE) DUE TO:
	VOLUME			RATE			TOTAL
INTEREST INCOME VARIANCE
Total loans	$	7,573		$	(8,389	)	$	(816	)
Mortgage-backed securities		8,508			343			8,851
Interest-only strips		14			347			361
Investment securities		(14,154	)		992			(13,162	)
Other interest-earning assets		(9,478	)		(3,353	)		(12,831	)


TOTAL INTEREST INCOME VARIANCE		(7,537	)		(10,060	)		(17,597	)


INTEREST EXPENSE VARIANCE
Deposits	$	2,106		$	(8,943	)	$	(6,837	)
Repurchase agreements		(14,896	)		(1,689	)		(16,585	)
Advances from FHLB		9,383			(4,870	)		4,513
Loans payable		(754	)		(1,984	)		(2,738	)
Notes payable		(10,780	)		604			(10,176	)


TOTAL INTEREST EXPENSE VARIANCE		(14,941	)		(16,882	)		(31,823	)


NET INTEREST INCOME VARIANCE	$	7,404		$	6,822		$	14,226

TABLE D
NET INTEREST INCOME VARIANCE ANALYSIS
(In thousands)


	FOR THE SIX MONTH PERIODS ENDED
	JUNE 30,
	2008 COMPARED TO 2007
	INCREASE (DECREASE) DUE TO:
	VOLUME			RATE			TOTAL
INTEREST INCOME VARIANCE
Total loans	$	12,979		$	(18,006	)	$	(5,027	)
Mortgage-backed securities		2,620			3,093			5,713
Interest-only strips		(48	)		589			541
Investment securities		(29,314	)		3,106			(26,208	)
Other interest-earning assets		(15,315	)		(6,441	)		(21,756	)


TOTAL INTEREST INCOME VARIANCE		(29,078	)		(17,659	)		(46,737	)


INTEREST EXPENSE VARIANCE
Deposits	$	1,874		$	(8,851	)	$	(6,977	)
Repurchase agreements		(38,000	)		92			(37,908	)
Advances from FHLB		16,015			(7,852	)		8,163
Loans payable		(1,582	)		(3,275	)		(4,857	)
Notes payable		(21,521	)		1,257			(20,264	)


TOTAL INTEREST EXPENSE VARIANCE		(43,214	)		(18,629	)		(61,843	)


NET INTEREST INCOME VARIANCE	$	14,136		$	970		$	15,106

PROVISION FOR LOAN AND LEASE LOSSES

The provision for loan and lease losses is charged to earnings to bring the total allowance for loan and lease losses to a level considered appropriate by management based on Doral Financial’s historical loss experience, current delinquency rates, known and inherent risks in the loan portfolio, an assessment of individual troubled loans, the estimated value of the underlying collateral, and an assessment of current economic conditions and emerging risks. While management believes that the current allowance for loan and lease losses is adequate, future additions to the allowance could be necessary if economic conditions change or if credit losses increase substantially from those estimated by Doral Financial in determining the allowance. Unanticipated increases in the allowance for loan and lease losses could result in reductions in Doral Financial’s net income. As of June 30, 2008, approximately 95% of the Company’s loan portfolio was collateralized by real property. As a result, a substantial part of the amounts due on defaulted loans have historically been recovered through the sale of the collateral after foreclosure or negotiated settlements with borrowers.

Starting in the second half of 2006 and continuing throughout 2007, Doral Financial experienced higher levels of delinquencies and noted worsening trends in the Puerto Rico economy that resulted in increased credit risk. As a result, the Company increased its loan loss provisions to account for the increased levels of risk and their effect on the portfolio. The Company’s allowance for loan and lease losses increased by $80.6 million or 183% between June 30, 2006 and December 31, 2007, including a charge of $8.8 million for the reclassification of $1.4 billion of loans from the held for sale portfolio to the loans receivable portfolio. As a result of the increase, the allowance for loan and lease losses as a percentage of loans receivable increased from 1.27% to 2.47% between June 30, 2006 and December 31, 2007.

Doral Financial’s provision for loan and lease losses for the quarter and six month period ended June 30, 2008, amounted to $10.7 million and $15.5 million, respectively, compared to $19.3 million and $25.3 million, respectively, for the corresponding 2007 periods. In 2007, the Company transferred $1.3 billion of loans from the loan held for sale portfolio to the loans receivable portfolio, which resulted in an increase in the provision of $8.8 million, and accounts for the majority of the difference between the provisions for the second quarter of 2008 compared to the corresponding 2007 period.

During the first half of 2008, several residential construction projects financed by the Company experienced increased levels of unit sales, representing an aggregate repayment of $139.7 million of principal. The pick up in sales volume is mainly attributable to the incentives established by the government of Puerto Rico for buyers of newly constructed homes, in the form of a $25,000 down payment assistance and the Company’s own programs to assist builders to sell and market finished units. The Construction portfolio was also affected by favorable developments in loan workout activities and the decrease of financing costs of certain loans with adjustable interest rates. Charge-offs for the non-consumer portfolios for the second quarter of 2008 are mostly due to loans whose credit risk was identified in previous quarters and, as a result, were fully provided for before the start of the present quarter. Although the Company expects continued pressure on asset quality during the next several quarters due to the continued weakness of the Puerto Rico economy, and as a result the possibility of higher provisions exists, it is possible that charge-offs from loans with previously assigned loss reserves could be higher than current provisions.

Refer to the discussions under “—Non-performing assets and allowance for loan and lease losses” and “—Credit Risk” below for further analysis of the allowance for loan and lease losses and non-performing assets and related ratios.

The Company will continue to monitor the impact of macro-economic conditions in Puerto Rico on its loan portfolio when assessing the adequacy of its provision for loan losses.

NON-INTEREST INCOME

Non-interest income consists of net gains (loss) on mortgage loan sales and fees, trading activities and sale of investment securities, as well as net servicing income and commissions, fees, and other income.

Net Gain on Mortgage Loan Sales and Fees. Net gain on mortgage loan sales and fees amounted to $3.9 million for the second quarter of 2008, compared to $1.5 million for the same period in 2007, an increase of $2.4 million. The increase in net gain on mortgage loans sales and fees for the second quarter of 2008 was principally due to the higher mortgage loan fees recognized as a result of higher loan sales and securitizations. Mortgage loan fees and loan sales and securitizations amounted to $6.2 million and $98.2 million, respectively, for the second quarter of 2008, compared to $2.4 million and $62.2 million, respectively, for the corresponding 2007 period. Net gain on mortgage loan sales and fees was also driven by a higher capitalization of MSRs for the second quarter of 2008 that

amounted to $2.0 million, compared to $1.4 million for the corresponding 2007 period. The increase from mortgage loan sales and fees and from the MSRs capitalization was partially offset by higher fees which amounted to $4.3 million for the second quarter of 2008, compared to $2.1 million for the comparable 2007 period.

Net gain on mortgage loan sales and fees amounted to $6.2 million for the six month period ended June 30, 2008, compared to $1.0 million for the same period in 2007, an increase of $5.2 million. The increase in net gain on mortgage loan sales and fees for the first half of 2008 was principally due to the higher mortgage loan fees recognized as a result of higher loan sales and securitizations. Mortgage loan fees and loan sales and securitizations amounted to $10.1 million and $147.6 million, respectively, for the first half of 2008, compared to $3.6 million and $112.0 million, respectively, for the corresponding 2007 period. The increase from mortgage loan sales and fees was partially offset by higher deferred fees which amounted to $6.6 million for the first half of 2008, compared to $3.8 million for the comparable 2007 period.

Set forth below is certain information regarding the Company’s loan sales and securitization activities and the resulting MSR capitalization.


	QUARTERS ENDED				SIX MONTH PERIODS ENDED
	JUNE 30,				JUNE 30,
(In thousands)	2008		2007		2008		2007

Total loan sales and securitizations	$	98,249	$	62,178	$	147,574	$	111,950


MSRs capitalized	$	2,046	$	1,362	$	2,975	$	2,546

Trading Activities. Trading activities include gains and losses, whether realized or unrealized, in the market value of Doral Financial’s securities held for trading, including IOs, as well as options, futures contracts, interest rate swaps and other derivative instruments used for interest rate risk management purposes.

Set forth below is a summary of the components of gains and losses from trading activities:

TABLE E
COMPONENTS OF TRADING ACTIVITIES


	QUARTERS ENDED						SIX MONTH PERIODS ENDED
	JUNE 30,						JUNE 30,
(In thousands)	2008			2007			2008			2007

Net realized gains (losses) on sales of securities held for trading	$	197		$	(2,333	)	$	2,963		$	(4,334	)
(Loss) gain on the IO valuation		(706	)		(788	)		(29	)		3,759
Net unrealized losses on trading securities, excluding IOs		(8,565	)		(3,616	)		(2,983	)		(3,751	)
Net realized and unrealized gains (losses) on derivative instruments		1,158			12,628			(199	)		8,239

Total	$	(7,916	)	$	5,891		$	(248	)	$	3,913

Trading activities for the quarter ended June 30, 2008 resulted in losses of $7.9 million, compared to gains of $5.9 million for the corresponding 2007 period. The trading losses for the second quarter of 2008 were primarily related to $7.9 million in losses in U.S. Treasury security positions, representing economic hedges against the valuation adjustment of the Company’s capitalized mortgage servicing rights, as a result of an increase in interest rates. Also, trading losses for the second quarter of 2008 were driven by reduced gains in derivative instruments amounting to $1.1 million compared to gains of $12.6 million in the corresponding 2007 period. The lower gains on derivatives instruments are principally related to fewer positions held in derivatives during the first half of 2008, compared to the corresponding 2007 period.

Trading activities for the six month period ended June 30, 2008 resulted in a loss of $0.2 million compared to a gain of $3.9 million for the corresponding 2007 period. The loss on trading activities resulted primarily from a loss of $0.2 million on derivatives instruments compared to a gain of $8.2 million for the comparable 2007 period. The loss on derivative instruments for the first half of 2008 was principally related to fewer positions in derivatives, compared to the corresponding 2007 period. Trading activities performance for the first half of 2008 was also the result of a loss on the IO valuation of $29,000 compared to a gain of $3.8 million in 2007. The loss in the value of

the IOs for 2008 compared to 2007 was primarily related to the decline in the unpaid principal balance of the underlying mortgage loans of the Company’s IOs for the first half of 2008. These losses were partially offset by a $3.0 million gain on sales of securities held for trading.

Net (Loss) Gain on Sale of Investment Securities. Net (loss) gain on sale of investment securities represents the impact on income of transactions involving the sale of securities classified as available for sale. For the six month period ended June 30, 2008, gain on sale of investment securities amounted to $0.2 million related to the sale of U.S. Treasury securities that were transferred from held to maturity to available for sale in December 2007, compared to a loss of $0.3 million for the corresponding 2007 period, related to the impairment of available for sale securities held by Doral Bank NY as a result of the agreement to sell certain assets to a third party.

Net Servicing Income. Servicing income represents revenues earned for administering mortgage loans for others, adjusted for changes in the value of the capitalized mortgage servicing rights, under the requirements of SFAS 156. The main component of Doral Financial’s servicing income is loan servicing fees, which depend on the type of mortgage loan being serviced. The servicing fees on residential mortgage loans generally range from 0.25% to 0.50%, of the outstanding principal balance of the serviced loan. As of June 30, 2008, the weighted-average gross servicing fee rate for the entire portfolio was 0.39%. Gross loan servicing and related fees, net of guarantee fees and interest loss, amounted to $7.9 million and $16.8 million for the quarter and six month period ended June 30, 2008, respectively, compared to $9.9 million and $21.7 million, respectively, for the quarter and six month period ended June 30, 2007. The decrease in servicing fees for the quarter and six month period ended June 30, 2008, when compared to corresponding 2007 periods, was principally related to the decrease in the principal balance of loans serviced for third parties associated primarily with regular amortizations and prepayments. Also, the decrease in loans serviced for third parties for the six month period ended June 30, 2008, compared to the corresponding 2007 period, was driven by the Company’s purchase of $26.7 million of loans.

Interest loss for the quarter and six month period ended June 30, 2008 amounted to $2.4 million and $4.5 million, respectively, compared to $1.3 million and $1.9 million for the corresponding 2007 periods. The increase in interest loss was due principally to interest advanced to investors that are deemed unrecoverable, and are a result of mortgage loan repurchases related to, among other things, recourse obligations and representations and warranties obligations.

Total net servicing income, including the adjustment for changes in fair value, as a result of the Company’s adoption of SFAS 156 in January 2007, amounted to $12.4 million for the quarter ended June 30, 2008, compared to $9.4 million for the corresponding 2007 period. The change in fair value of MSR amounted to a gain of $4.5 million for the second quarter of 2008, compared to a loss of $0.5 million for the corresponding 2007 period. The gain in change in fair value for the second quarter of 2008 was driven by the decrease in expected prepayment speed caused by the increase in interest rates during the period when compared to the corresponding 2007 period. Changes in the fair value of MSRs may result from changes in the valuation model inputs or assumptions (principally reflecting changes in discount rates and prepayment speed assumptions) or other changes due to the collection or realization of expected cash flows.

Total net servicing income, including the adjustment for changes in fair value, as a result of the Company’s adoption of SFAS 156 in January 2007, amounted to $9.7 million for the six month period ended June 30, 2008, compared to $15.4 million for the corresponding 2007 period. Change in fair value of MSR amounted to a loss of $7.1 million for the first half of 2008, compared to $6.3 million for the corresponding 2007 period. The decline in the fair value of the MSRs for the first half of 2008 was principally impacted by the decline in interest rates that caused the increase in expected prepayment speed during the first quarter of 2008, partially offset by a subsequent increase in interest rates during the second quarter of 2008.

Set forth below is a summary of the components of the net servicing income using the fair value method for the quarters ended June 30, 2008 and 2007, respectively:

TABLE F
NET SERVICING INCOME


	QUARTERS ENDED						SIX MONTH PERIODS
	JUNE 30,						ENDED JUNE 30,
(In thousands)	2008			2007			2008			2007

Servicing fees (net of guarantee fees)	$	7,805		$	8,602		$	16,199		$	18,384
Late charges		2,274			2,244			4,490			4,609
Prepayment penalties		148			233			248			363
Interest loss		(2,438	)		(1,262	)		(4,518	)		(1,872	)
Other servicing fees		147			121			403			179

Servicing income, gross		7,936			9,938			16,822			21,663
Change in fair value of mortgage servicing rights		4,498			(555	)		(7,099	)		(6,280	)

Total net servicing income	$	12,434		$	9,383		$	9,723		$	15,383

Commissions, Fees and Other Income. Set forth below is a summary of Doral Financial’s principal sources of commissions, fees and other income.

TABLE G
COMMISSIONS, FEES AND OTHER INCOME


	QUARTERS ENDED				SIX MONTH PERIODS ENDED
	JUNE 30,				JUNE 30,
(In thousands)	2008		2007		2008		2007

Retail banking fees	$	6,587	$	5,281	$	12,969	$	10,494
Insurance agency commissions		2,856		2,411		5,261		4,734
Asset management fees and commissions		11		143		149		286
Other income		7,065		341		8,000		1,073


Total	$	16,519	$	8,176	$	26,379	$	16,587

Commissions, fees and other income for the quarter and six month period ended June 30, 2008 amounted to $16.5 million and $26.4 million, respectively, compared to $8.2 million and $16.6 million for the corresponding 2007 periods. The increase in commissions, fees and other income was principally related to increases in retail banking fees and other income driven by a gain from the redemption of shares of VISA, Inc, pursuant to their global restructuring agreement.

For the quarter and six month period ended June 30, 2008, Doral Financial’s banking fees amounted to $6.6 million and $13.0 million, respectively, compared to $5.3 million and $10.5 million, respectively, for the corresponding 2007 periods. The increase in banking fees for the quarter and six month period ended June 30, 2008, was principally driven by a higher number of checking accounts, the conversion of ATH card holders to debit cards, as well as higher service fees associated with these accounts.

Insurance agency commissions amounted to $2.9 million and $5.3 million, respectively, for the quarter and six month period ended June 30, 2008, compared to $2.4 million and $4.7 million, respectively, for the corresponding periods. Insurance agency commissions increased by $0.5 million for the second quarter of 2007 when compared to the corresponding 2007 period, and by $0.6 million for the first half of 2008, when compared to the correspondent 2007 period. Insurance agency activities are closely integrated with the mortgage origination business. Insurance agency commissions are comprised principally of dwelling and title insurance policies sold to borrowers who obtain residential mortgage loans through Doral Bank PR’s subsidiary, Doral Mortgage LLC.

Other income increased by $6.7 million for the second quarter of 2008, from $0.3 million for the second quarter of 2007, to $7.1 million for the corresponding 2008 period. For the six month period ended June 30, 2008, other income increased by $6.9 million, from $1.1 million for the first half of 2007 to $8.0 million for the comparable

2008 period. The increase in other income for the quarter and six month period ended June 30, 2008 was principally due to a gain of $5.2 million from the redemption of shares of VISA, Inc., pursuant to their global restructuring agreement, and to income associated to the sale of certain residential units of a residential housing project that the Company took possession of in 2005 amounting to $0.9 million and $1.3 million, respectively.

NON-INTEREST EXPENSE

A summary of non-interest expenses for the quarter and six month periods ended June 30, 2008 and 2007 is provided below.

TABLE H
NON INTEREST EXPENSE


	QUARTERS ENDED				SIX MONTH PERIODS
	JUNE 30,				ENDED JUNE 30,
(In thousands)	2008		2007		2008		2007

Compensation and employee benefits	$	17,057	$	30,641	$	36,135	$	57,203
Taxes, other than payroll and income taxes		2,379		3,437		4,801		6,284
Advertising		2,273		2,568		4,505		3,930
Professional services		8,076		17,559		14,010		37,001
Communication and information systems		5,641		5,264		11,121		9,318
Occupancy and other office expenses		5,680		6,451		11,649		12,750
Depreciation and amortization		4,072		4,427		8,127		9,478
Other		10,448		6,272		19,841		15,873


Total non-interest expense	$	55,626	$	76,619	$	110,189	$	151,837

Total non-interest expense decreased by $21.0 million, or 27%, for the second quarter of 2008 and by $41.6 million, or 27% for the six month period ended June 30, 2008, compared to corresponding 2007 periods. The decrease in non-interest expense for the quarter and six month period ended June 30, 2008 was due principally to a decrease in compensation and employee benefits of $13.6 million, or 44%, and by $21.1 million, or 37%, respectively, when compared to the corresponding 2007 periods. The decrease in compensation and employee benefits was primarily related to a reduction in variable compensation during 2008 of approximately $8.8 million due to payments related to the key employee incentive plan during the second quarter of 2007. The total amount paid for the first half of 2007 related to the key employee incentive plan amounted to $15.2 million. There was also a reduction of $0.7 million of stock-based compensation since the Company’s stock option plan was terminated in 2007.

Professional services fees decreased by $9.5 million, or 54%, for the second quarter of 2008 and by $23.0 million, or 62%, for the six month period ended June 30, 2008, compared to the corresponding 2007 periods. The decrease in professional services fees during 2008 was principally related to the closing of the recapitalization on July 17, 2007 and the settlement of the class action lawsuit in August, 2007. The Company has, however, been required to continue to advance legal expenses to former officials and directors in connection with the legal proceedings related to its prior restatement discussed under Part I, Item 1A, “Risk Factors” of the Company’s Annual Report of Form 10-K for the year ended December 31, 2007.

These reductions in compensation and benefits expenses and professional services fees were partially offset by increases in other expenses amounting to $4.1 million, or 67%, for the second quarter of 2008, and $4.0 million, or 25%, for the six month period ended June 30, 2008, compared to the corresponding 2007 periods. The increases in other expenses for the quarter and six month period ended June 30, 2008 were primarily driven by: (1) increased foreclosure expenses as a result of an aging analysis and to the increase of foreclosed properties of our mortgage loan portfolio, (2) increases in costs associated to the sale of certain residential units of a residential housing project that the Company took possession of in 2005, and (3) an increase in FDIC insurance fees.

INCOME TAXES

Income taxes include Puerto Rico income taxes as well as applicable federal and state taxes. As Puerto Rico corporations, Doral Financial and all of its Puerto Rico subsidiaries are generally required to pay federal income taxes only with respect to their income derived from the active conduct of a trade or business in the United States

(excluding Puerto Rico) and certain investment income derived from U.S. assets. Any such tax is creditable, with certain limitations, against Puerto Rico income taxes. Except for the operations of Doral Bank NY and Doral Money, substantially all of the Company’s operations are conducted through subsidiaries in Puerto Rico. Doral Bank NY and Doral Money are U.S. corporations and are subject to U.S. income-tax on their income derived from all sources. For the quarter and six month period ended June 30, 2008, the income tax expense for the Company’s U.S. subsidiaries amounted to $0.9 million and $1.1 million, respectively, compared to an income tax benefit of $1.2 million and $3.1 million, respectively, for the comparable 2007 periods.

The maximum statutory corporate income tax rate in Puerto Rico is 39.0%.

Doral Financial enjoys income tax exemption on interest income derived from FHA and VA mortgage loans financing the original acquisition of newly constructed housing in Puerto Rico and securities backed by such mortgage loans. Doral Financial also invests in U.S. Treasury and agency securities that are exempt from Puerto Rico taxation and are not subject to federal income taxation because of the portfolio interest deduction to which Doral Financial is entitled as a foreign corporation. In addition, Doral Financial uses its international banking entity subsidiary to invest in various U.S. securities and U.S. mortgage-backed securities, which interest income and gain on sale, if any, is exempt from Puerto Rico income taxation and excluded from federal income taxation on the basis of the portfolio interest deduction in the case of interest, and in the case of capital gains, because the gains are sourced outside the United States. On July 1, 2008, the Company transferred substantially all of the assets previously held at the international banking entity to Doral Bank PR to increase the level of its interest earning assets.

For the quarter and six month period ended June 30, 2008, Doral Financial recognized an income tax expense of $5.8 million and $5.2 million, respectively, compared to $1.1 million and $7.0 million, respectively, for the comparable 2007 periods.

During the first quarter of 2008, the Company entered into an agreement with the Puerto Rico Treasury Department with respect to the allocation method and period (for tax purposes) of expenses incurred by the Company related to a settlement agreement (“Settlement Expenses”) that resulted from litigation related to the Company’s restatement. This agreement was effective as of December 31, 2007 and permits the total expense related to the settlement of the lawsuit ($96.0 million) to be allocated to any entity within the Doral group over a period of three years. As a result of this agreement, the Company expects to be able to realize part of its deferred tax asset and accordingly released a portion of the valuation allowance in 2008. However, due to the Company’s lower than expected income for the first two quarters of 2008, management revised its tax forecast and increased its valuation allowance. The net effect of these transactions, together with the effect of ordinary operations, resulted in a $6.0 million increase in the valuation allowance to $93.3 million as of June 30, 2008 from the $87.3 million valuation allowance at December 31, 2007.

In assessing the realization of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers the expected realization of its deferred tax assets and liabilities, projected future taxable income, the Company’s ability to replace maturing brokered deposits and other sources of working capital at market rates, and tax planning strategies, in making this assessment. The Company determined that it is more likely than not that $93.3 million of its gross deferred tax asset, related primarily to net operating losses, will not be realizable and maintained a valuation allowance for that amount. Benefits recognized for net operating losses are limited by the fact that, under the PR Code, Doral Financial is not permitted to file consolidated tax returns and, thus, is not able to utilize losses from one subsidiary to offset gains in another subsidiary. For the quarter and six month period ended June 30, 2008, net operating losses of $28.6 million and $62.0 million, respectively, were created. Based on forecasted future taxable income, the Company will not be able to obtain the full benefit of these net operating losses.

During 2006, the Company entered into two agreements with the Puerto Rico Treasury Department regarding the Company’s deferred tax assets related to prior intercompany transfers of IOs (the “IO Tax Asset”). The first agreement, executed during the first quarter, confirmed the previously established tax basis of all the IO transfers within the Doral Financial corporate group. The second agreement, executed during the third quarter, clarified that for Puerto Rico income tax purposes, the IO Tax Asset is a stand-alone intangible asset subject to a straight-line amortization based on a useful life of 15 years. Furthermore, the agreement provided that the IO Tax Asset could be transferred to any entity within Doral Financial corporate group, including the Puerto Rico banking subsidiary.

The realization of the deferred tax asset is dependent upon the existence of, or generation of, taxable income during the remaining 12 year period (including 2008-15 year original amortization period) in which the amortization

deduction of the IO Tax Asset is available. In determining the valuation allowance recorded, the Company considered both the positive and negative evidence regarding the Company’s ability to generate sufficient taxable income to realize its deferred tax assets. Positive evidence included projected earnings attributable to the core business through the projection period, repayment of the $625.0 million in senior notes on July 20, 2007, as result of the recapitalization which served to significantly reduce interest expense, and results of the leveraging plan. Further positive evidence included the ability to isolate verifiable nonrecurring charges in historical losses, the core earnings of the business absent these nonrecurring items and the flexibility to move IO Tax Asset amortization and the Settlement Expenses to profitable entities in accordance with Doral Financial’s agreements with the Puerto Rico Treasury Department. During the fourth quarter of 2007, the Company implemented certain tax planning actions in order to generate future taxable income that contributed to the reduction in its valuation allowance. These include the increase in interest earning assets of Doral Bank PR, through among other things, transferring certain assets to Doral Bank PR. Negative evidence included the Company’s recorded losses for the first quarter of 2008 and for the years ended December 31, 2007 and 2006, and the shorter operating loss carry-forward period of 7 years, as well as uncertainty regarding its ability to generate future taxable income. Negative evidence also included the Risks Factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007.

Failure to achieve sufficient taxable income might affect the ultimate realization of the net deferred tax asset. Factors that may affect the Company’s ability to achieve sufficient taxable income include, but are not limited to, the following: increased competition, a decline in margins, increased loans charged off, and loss of market share.

In weighing the positive and negative evidence above, Doral Financial considered the more likely than not criteria contemplated in SFAS 109. Based on this analysis, Doral Financial concluded that it was more likely than not that a portion of the Company’s gross deferred tax assets of $495.6 million would not be realized. As a result the Company recorded a valuation allowance. At June 30, 2008, the deferred tax asset, net of its valuation allowance of $93.3 million, amounted to approximately $402.3 million compared to $392.9 million at December 31, 2007.

The Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109”, on January 1, 2007. As a result of the adoption, the Company recorded an adjustment to retained earnings of $2.4 million. As of June 30, 2008 and 2007, the Company had unrecognized tax benefits of $13.7 million and accrued interest and penalties of $4.5 million and $3.1 million, respectively. The Company classifies all interest and penalties related to tax uncertainties as income tax expense. For the quarters and six month periods ended June 30, 2008 and 2007, the Company recognized approximately $0.3 million and $0.7 million in interest and penalties, respectively.

The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity, and the addition or elimination of uncertain tax positions. As of June 30, 2008, the following years remain subject to examination: U.S. Federal jurisdictions — 2003 through 2007 and Puerto Rico — 2004 through 2007.

It is reasonably possible that within the next twelve months the Company will resolve certain matters presently contemplated as unrecognized tax benefits due primarily to the expiration of the statute of limitations. The resolution of this matter would likely result in a reduction of the provision for income taxes and the effective tax rate in the period of resolution of substantially all the unrecognized tax benefits.

The Company’s gross deferred tax asset was $495.6 million at June 30, 2008, reflecting an increase of $15.4 million compared to $480.2 million at December 31, 2007. This increase was due to a $14.1 million increase in other comprehensive loss, related to unrealized losses on securities available for sale and cash flow hedges. There was also an increase of approximately $1.2 million in other operational activities due to the recognition of the deferred tax asset related to the settlement of the lawsuit of $18.7 million which was partially offset by a reduction of $5.7 million of net operating losses $9.1 million of amortization of IOs and a reduction of $2.7 million in other deferred tax assets.

BALANCE SHEET AND OPERATING DATA ANALYSIS

PERFORMANCE RATIOS

The following table sets forth the performance ratios of Doral Financial for the periods indicated:

TABLE J
LOAN PRODUCTION


	Quarters Ended						Six Month Periods Ended
	June 30,						June 30,
(Dollars in thousands, except for average initial loan balance)	2008			2007			2008			2007
FHA/VA mortgage loans
Number of loans		760			354			1,221			734
Volume of loans	$	91,755		$	38,611		$	142,249		$	75,687
Percent of total volume		24	%		13	%		19	%		14	%
Average initial loan balance	$	120,730		$	109,071		$	116,502		$	103,116
Conventional conforming mortgage loans
Number of loans		240			444			476			775
Volume of loans	$	28,213		$	53,746		$	56,874		$	91,652
Percent of total volume		7	%		18	%		8	%		16	%
Average initial loan balance	$	117,554		$	121,050		$	119,483		$	118,261
Conventional non-conforming mortgage loans⁽¹⁾
Number of loans		1,087			522			2,180			948
Volume of loans	$	136,201		$	72,227		$	291,629		$	128,344
Percent of total volume		36	%		23	%		39	%		23	%
Average initial loan balance	$	125,300		$	138,366		$	133,775		$	135,384
Construction developments loans⁽²⁾
Number of loans		13			6			13			15
Volume of loans	$	44,596		$	6,956		$	44,596		$	18,814
Percent of total volume		12	%		2	%		6	%		3	%
Average initial loan balance	$	3,430,462		$	1,159,333		$	3,430,462		$	1,254,267
Disbursement under existing construction development loans
Volume of loans	$	23,186		$	62,799		$	51,613		$	125,678
Percent of total volume		6	%		20	%		7	%		23	%
Commercial loans⁽³⁾
Number of loans		86			90			178			198
Volume of loans	$	52,719		$	55,358		$	117,894		$	87,296
Percent of total volume		14	%		18	%		15	%		16	%
Average initial loan balance	$	613,012		$	615,089		$	662,326		$	440,883
Consumer loans⁽⁴⁾
Number of loans		508			2,768			6,572			3,781
Volume of loans	$	4,639		$	18,713		$	48,528		$	26,676
Percent of total volume		1	%		6	%		6	%		5	%
Average initial loan balance	$	9,132		$	6,760		$	7,384		$	7,055
Other⁽³⁾
Number of loans		1			1			1			2
Volume of loans	$	2,000		$	405		$	2,000		$	2,188
Percent of total volume		0	%		0	%		0	%		0	%

Total loans
Number of loans		2,695			4,185			10,641			6,453
Volume of loans	$	383,309		$	308,815		$	755,383		$	556,335


⁽¹⁾		Includes $8.1 million and $4.7 million in second mortgages for the quarters ended June 30, 2008 and 2007, respectively, and $17.6 million and $9.2 million in second mortgages for the six month periods ended June 30, 2008 and 2007, respectively.

⁽²⁾		Related to new commitments to fund construction loans in New York.

⁽³⁾		Commercial and consumer lines of credit are included in the loan production according to the credit limit approved.

⁽⁴⁾		Consists of multifamily loans.

The increase of $199.0 million, or 36%, in loan production for the first half of 2008, when compared to the corresponding period of 2007, was primarily related to significant increases in residential mortgage production, commercial lending and consumer production as a result of the Company’s efforts to develop business relationships by combining excellent service with a well-executed sales process that emphasizes cross-selling additional products to existing customers. The increase in loan production for the six month period ended June 30, 2008 was also driven by an increase of $73.1 million in the production purchased from third parties compared to the corresponding 2007 period.

A substantial portion of Doral Financial’s total residential mortgage loan originations has consistently been composed of refinancing transactions. For the six month period ended June 30, 2008 and 2007, refinancing transactions represented approximately 50% and 54%, respectively, of the total dollar volume of internally originated mortgage loans. Doral Financial’s future results could be adversely affected by a significant increase in mortgage interest rates that may reduce refinancing activity. However, the Company believes that refinancing activity in Puerto Rico is less sensitive to interest rate changes than in the mainland United States because a

significant number of refinance loans in the Puerto Rico mortgage market are made for debt consolidation purposes rather than interest savings due to lower rates.

The following table sets forth the sources of Doral Financial’s loan production as a percentage of total loan originations for the periods indicated:

TABLE K
LOAN ORIGINATION SOURCES


	SIX MONTH PERIODS ENDED JUNE 30,
	2008									2007
	Puerto Rico			US			Total			Puerto Rico			US			Total
Retail		54	%		—			54	%		51	%		—			51	%
Wholesale⁽¹⁾		11	%		—			11	%		2	%		—			2	%
Housing Developments⁽²⁾		6	%		7	%		13	%		24	%		2	%		26	%
Other⁽³⁾		13	%		9	%		22	%		17	%		4	%		21	%


⁽¹⁾		Refers to purchases of mortgage loans from other financial institutions and mortgage lenders.

⁽²⁾		Includes new construction development loans and the disbursement of existing construction development loans. During the first half of 2008, Doral Financial did not enter into new commitments to fund construction loans in Puerto Rico.

⁽³⁾		Refers to commercial, consumer and multifamily loans.

MORTGAGE LOAN SERVICING

Doral Financial’s principal source of servicing rights has traditionally been sales of loans from its internal loan production. However, Doral Financial also purchases mortgage loans on a servicing-released basis as well as servicing rights in bulk. Doral Financial intends to continue growing its mortgage-servicing portfolio primarily by internal loan originations, but may also continue to seek and consider attractive opportunities for wholesale purchases of loans with the related servicing rights and bulk purchases of servicing rights from third parties.

The following table sets forth certain information regarding the total mortgage loan-servicing portfolio of Doral Financial for the periods indicated:

TABLE L
LOANS SERVICED FOR THIRD PARTIES


	AS OF JUNE 30,
(Dollars in thousands, except for average size of loans)	2008			2007
Composition of Portfolio Serviced for Third Parties at Period End:
GNMA	$	2,135,166		$	2,129,096
FHLMC/FNMA		3,607,022			3,893,830
Other conventional mortgage loans⁽¹⁾⁽²⁾		3,938,708			4,731,030

Total portfolio serviced for third parties	$	9,680,896		$	10,753,956


Selected Data Regarding Mortgage Loans Serviced for Third Parties:
Number of loans		115,094			127,479
Weighted- average interest rate		6.44	%		6.50	%
Weighted- average remaining maturity (months)		247			251
Weighted- average gross servicing fee rate		0.39	%		0.32	%
Average servicing portfolio	$	9,875,978		$	13,685,026
Principal prepayments	$	359,141		$	408,770
Constant prepayment rate		7	%		6	%
Average size of loans	$	84,113		$	84,359
Servicing assets, net	$	145,527		$	164,569

Delinquent Mortgage Loans and Pending Foreclosures at Period End:
60-89 days past due		1.98	%		1.85	%
90 days or more past due		2.31	%		1.64	%

Total delinquencies excluding foreclosures		4.29	%		3.49	%

Foreclosures pending		2.48	%		2.00	%


Servicing Portfolio Activity:
Beginning servicing portfolio	$	10,072,538		$	11,997,324
Additions to servicing portfolio		147,574			111,950
Servicing sold and released due to repurchases⁽³⁾		(26,699	)		(738,604	)
Run-off⁽⁴⁾		(512,517	)		(616,714	)

Ending servicing portfolio	$	9,680,896		$	10,753,956


⁽¹⁾		Excludes $4.0 billion and $3.3 billion of loans owned by Doral Financial at June 30, 2008 and 2007, respectively.

⁽²⁾		Includes portfolios of $189.7 million and $219.8 million at June 30, 2008 and 2007, respectively, of delinquent FHA/VA and conventional mortgage loans.

⁽³⁾		As of June 30, 2008, includes $26.7 million of principal balance of loans repurchased from a third party. As of June 30, 2007, includes $693.9 million of principal balance of loans related to MSRs sales.

⁽⁴⁾		Run-off refers to regular amortization of loans, prepayments and foreclosures.

Most of the mortgage loans in Doral Financial’s servicing portfolio are secured by single (one-to-four) family residences located in Puerto Rico. At June 30, 2008 and 2007, less than 1% of Doral Financial’s mortgage-servicing portfolio to third parties was related to mortgages secured by real property located on the U.S. mainland.

The amount of principal prepayments on mortgage loans serviced for third parties by Doral Financial was $359.1 million and $408.8 million for the six month periods ended June 30, 2008 and 2007, respectively

During the fourth quarter of 2007, the Company decided to enter into an economic hedge to reduce exposure to fluctuations in the market value of its MSRs. The Company executed this economic hedge by purchasing $150.0 million in 10 year U.S Treasuries at par value and placing the notes in the trading account. Although the positions will not provide a perfect economic hedge, they will help offset the general movements in market value of the Company’s MSRs tied to changes in interest rates.

LIQUIDITY AND CAPITAL RESOURCES

Doral Financial has an ongoing need for capital to finance its lending, servicing and investing activities. Doral Financial’s cash requirements arise mainly from loan originations and purchases, purchases and holding of securities, repayments of debt upon maturity, payments of operating and interest expenses, servicing advances and loan repurchases pursuant to recourse or warranty obligations. The Company’s Asset and Liability Committee (“ALCO”) establishes and monitors liquidity guidelines to ensure the Company’s ability to meet these needs. Doral Financial currently has and anticipates that it will continue to have adequate liquidity, financing arrangements and capital resources to finance its operations in the ordinary course of business.

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

On July 19, 2007, Doral Financial completed the private sale of 48,412,968 newly issued shares of common stock to Doral Holdings for an aggregate purchase price of $610.0 million (the “Recapitalization”). The Recapitalization ensured that the holding company remained a source of strength for its banking subsidiaries.

In connection with the Recapitalization, on July 19, 2007, Doral Financial transferred its mortgage servicing and mortgage origination operations to Doral Bank PR, its principal banking subsidiary. This transfer has resulted in a more traditional operating structure in which most of the Company’s operational liquidity needs are at the subsidiary level. The holding company’s current principal uses of funds are the payment of its obligations, primarily the payment of principal and interest on its debt obligations, and the payment of dividends on its preferred and common stock. The holding company no longer directly funds any mortgage banking activities. Beyond the amount of unencumbered liquid assets at the holding company, the principal sources of funds for the holding company are principal and interest payments on the portfolio of loans and securities retained on the balance sheet by the holding company and dividends from its subsidiaries, including Doral Bank PR, Doral Bank NY and Doral Insurance Agency. An existing cease and desist order applicable to the holding company requires prior regulatory approval for the payment of any dividends from Doral Bank PR to the holding company. In addition, various federal and Puerto Rico statutes and regulations limit the amount of dividends that the Company’s banking and other subsidiaries may pay without regulatory approval. No restrictions exist on the dividends available from Doral Insurance Agency, other than those generally applicable under the Puerto Rico corporation law.

Since April 2006, Doral Financial has not paid dividends on the Company’s common stock. The Company has paid all scheduled dividends on its preferred stock.

Liquidity of the Banking Subsidiaries

Doral Financial’s liquidity and capital position at the holding company differ from the liquidity and capital positions of the Company’s banking subsidiaries. Doral Financial’s banking subsidiaries rely primarily on deposits, including brokered deposits of which are all issued in form so as to meet the full coverage for FDIC deposit insurance up to applicable limits, borrowings under FHLB advances and repurchase agreements secured by pledges of their mortgage loans and mortgage-backed securities as their primary sources of liquidity. To date, these sources of liquidity for Doral Financial’s banking subsidiaries have not been materially impacted by the current adverse liquidity conditions in the U.S. mortgage and credit markets.

Uses of Cash

Servicing agreements relating to the mortgage-backed securities programs of FNMA, FHLMC and GNMA, and to mortgage loans sold to certain other investors, require Doral Financial to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. While Doral Financial generally recovers funds advanced pursuant to these arrangements within 30 days, it must absorb the cost of the funds it advances during the time the advance is outstanding. As of June 30, 2008 and December 31, 2007, the monthly average amount of funds advanced by Doral Financial under such servicing agreements was approximately $35.2 million and $34.7 million, respectively. To the extent the mortgage loans underlying Doral Financial’s servicing portfolio experience increased delinquencies, Doral Financial would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts. In the past, Doral Financial sold pools of delinquent FHA and VA and conventional mortgage loans. Under these arrangements, Doral Financial is required to advance the scheduled payments whether or not collected from the underlying borrower. While Doral Financial expects to recover the amounts advanced through foreclosure or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantee programs, the amounts advanced tend to be greater than normal arrangements because of the delinquent status of the loans. As of June 30, 2008 and December 31, 2007, the outstanding principal balance of such delinquent loans was $189.7 million and $201.7 million, respectively, and the aggregate monthly amount of funds advanced by Doral Financial was $15.2 million and $17.3 million, respectively.

When Doral Financial sells mortgage loans to third parties it generally makes customary representations and warranties regarding the characteristics of the loans sold. To the extent the loans do not meet specified characteristics, investors are generally entitled to cause Doral Financial to repurchase such loans.

In addition to its servicing and warranty obligations, in the past Doral Financial’s loan sale activities have included the sale of non-conforming mortgage loans subject to recourse arrangements that generally require Doral Financial to repurchase or substitute the loans if the loans are 90 days or more past due or otherwise in default up to a specified amount or limited to a period of time after the sale. To the extent the delinquency ratios of the loans sold subject to recourse are greater than anticipated and Doral Financial is required to repurchase more loans than anticipated, Doral Financial’s liquidity requirements would increase. See “—Off-Balance Sheet Activities” below for additional information on these arrangements.

In the past, Doral Financial also sold or securitized mortgage loans with FNMA on a partial or full recourse basis. Doral Financial’s contractual agreements with FNMA authorize FNMA to require Doral Financial to post collateral in the form of cash or marketable securities to secure such recourse obligation to the extent Doral Financial does not maintain an investment grade rating. As of June 30, 2008, Doral Financial’s maximum recourse exposure with FNMA amounted to approximately $940.3 million and FNMA required the posting of a minimum of $44.0 million in collateral to secure these recourse obligations. While deemed unlikely by Doral Financial, FNMA has the contractual right to request collateral for the full amount of Doral Financial’s recourse obligations. Any such request by FNMA would have a material adverse effect on Doral Financial’s liquidity and business. See note “u” and “—Off-Balance Sheet Activities” below for additional information on these arrangements.

Investment activities also involve the use of cash. In the first half of 2008, the Company purchased $1.8 billion of securities for its available for sale portfolio. These purchases were funded with FHLB advances and repurchase agreements.

Sources of Cash

The following table shows Doral Financial’s sources of borrowings and the related average interest rate as of June 30, 2008 and December 31, 2007:

TABLE M
SOURCES OF BORROWINGS


	AS OF JUNE 30, 2008					AS OF DECEMBER 31, 2007
	AMOUNT		AVERAGE			AMOUNT		AVERAGE
(Dollars in thousands)	OUTSTANDING		RATE			OUTSTANDING		RATE

Deposits	$	4,330,728		3.37	%	$	4,268,024		4.11	%
Repurchase Agreements		2,100,271		4.11	%		1,444,363		4.97	%
Advances from FHLB		1,829,000		3.74	%		1,234,000		4.94	%
Loans Payable		379,815		7.28	%		402,701		6.88	%
Notes Payable		279,716		7.31	%		282,458		7.31	%

Doral Financial’s banking subsidiaries obtain funding for their lending activities through the receipt of deposits and through advances from FHLB and from other borrowings, such as term notes backed by Federal Home Loan Bank of New York (“FHLB-NY”) letters of credit. As of June 30, 2008, Doral Financial’s banking subsidiaries held approximately $4.1 billion in interest-bearing deposits at a weighted-average interest rate of 4.06%. For additional information regarding deposit accounts, and advances from FHLB, see Note “o” and “q” to the consolidated financial statements accompanying this Quarterly Report on Form 10-Q.

The following table presents the average balance and the annualized average rate paid on each deposit type for the periods indicated:

TABLE N
AVERAGE DEPOSIT BALANCE


	SIX MONTH PERIOD ENDED					YEAR ENDED
	JUNE 30, 2008					DECEMBER 31, 2007
	AVERAGE		AVERAGE			AVERAGE		AVERAGE
(Dollars in thousands)	BALANCE		RATE			BALANCE		RATE

Certificates of deposit	$	2,922,938		4.62	%	$	2,782,709		4.94	%
Regular passbook savings		322,962		2.71	%		380,710		3.56	%
NOW accounts		402,707		1.34	%		437,321		3.04	%
Money market accounts		301,981		3.80	%		171,371		4.05	%
Other interest-bearing deposits		4,327		3.65	%		—		—

Total interest-bearing		3,954,915		4.06	%		3,772,111		4.54	%
Non-interest bearing		246,121		—			309,482		—

Total deposits	$	4,201,036		3.82	%	$	4,081,593		4.20	%

The following table sets forth the maturities of certificates of deposit having principal amounts of $100,000 or more at June 30, 2008.

TABLE O
CERTIFICATES OF DEPOSIT MATURITIES


(In thousands)	AMOUNT

Certificates of deposit maturing:
Three months or less	$	1,207,722
Over three through six months		492,809
Over six through twelve months		918,739
Over twelve months		329,133

Total	$	2,948,403

The amounts in Table O, include $2.5 billion in brokered deposits issued in denomination greater than $100,000 to brokers-dealers.

As of June 30, 2008 and December 31, 2007, Doral Financial’s retail banking subsidiaries had $2.5 billion in brokered deposits obtained through broker-dealers. Brokered deposits are used by Doral Financial’s retail banking subsidiaries as a source of long-term funds, and Doral Financial’s retail banking subsidiaries have traditionally been able to replace maturing brokered deposits. Certificates of deposits with principal amounts of $100,000 or more includes time deposits issued to deposit brokers in form of large ($100,000 or more) certificates of deposit that have been participated out by the broker in shares of less that $100,000. As of June 30, 2008, all certificates of deposits were within the applicable insurance limit. Brokered deposits, however, are generally considered a less stable source of funding than core deposits obtained through retail bank branches. Brokered-deposit investors are generally very sensitive to interest rates and will generally move funds from one depository institution to another based on minor differences in rates offered on deposits.

Doral Financial’s banking subsidiaries, as members of the FHLB-NY, have access to collateralized borrowings from the FHLB-NY up to a maximum of 30% of total assets. In addition, the FHLB-NY makes available additional borrowing capacity in the form of repurchase agreements on qualifying high grade securities. Advances and reimbursement obligations with respect to letters of credit must be secured by qualifying assets with a market value of 100% of the advances or reimbursement obligations. As of June 30, 2008, Doral Financial’s banking subsidiaries held $1.8 billion in advances from the FHLB-NY at a weighted-average interest rate of 3.83%. Please refer to note “q” to the consolidated financial statements accompanying this Quarterly Report on Form 10-Q for additional information regarding such advances.

Under Doral Financial’s repurchase lines of credit and derivative contracts, Doral Financial is required to deposit cash or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines because of changes in interest rates, a liquidity crisis or any other factors, Doral Financial will be required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity.

Doral Financial also derives liquidity from the sale of mortgage loans in the secondary mortgage markets. The U.S. (including Puerto Rico) secondary mortgage market is the most liquid in the world in large part because of the sale or guarantee programs maintained by FHA, VA, HUD, FNMA and FHLMC. To the extent these programs are curtailed, otherwise rendered unavailable or the standard for insuring or selling loans under such programs is materially increased, or, for any reason, Doral Financial were to fail to qualify for such programs, Doral Financial’s ability to sell mortgage loans and consequently its liquidity would be adversely affected.

REGULATORY CAPITAL RATIOS

As of June 30, 2008, Doral Bank PR and Doral Bank NY were in compliance with all the regulatory capital requirements that were applicable to them as a state non-member bank and federal savings bank, respectively (i.e., total capital and Tier 1 capital to risk weighted assets of at least 8% and 4%, respectively, and Tier 1 capital to average assets of at least 4%). However, as described below, Doral Financial is subject to consent order pursuant to which has submitted a capital plan in which it has agreed to maintain higher ratios at both the holding company and Doral Bank PR level. As a result of the recapitalization pursuant to which Doral Holdings LLC acquired 90% of the common stock of Doral Financial, except for the requirements of the consent order, Doral Financial is no longer required to meet regulatory capital standards. Set forth below are Doral Financial’s, and its banking subsidiaries’ regulatory capital ratios as of June 30, 2008, based on existing Federal Reserve, FDIC and OTS guidelines. For purpose of these tables, ratios for Doral Financial are calculated as if Doral Financial were the ultimate holding company.

TABLE P
REGULATORY CAPITAL RATIOS


	As of June 30, 2008
	DORAL			DORAL			DORAL
	FINANCIAL⁽²⁾			BANK PR			BANK NY

Total Capital (Total capital to risk- weighted assets)		17.0	%		13.5	%		14.1	%
Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)		15.7	%		12.3	%		13.6	%
Leverage Ratio⁽¹⁾		9.5	%		6.1	%		10.2	%


⁽¹⁾		Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR and Tier 1 capital to adjusted total assets in the case of Doral Bank NY.

⁽²⁾		Doral Financial was not subject to regulatory capital requirements as of June 30, 2008. Ratios were prepared as if the company were subject to the requirement for comparability purposes.


	As of December 31, 2007
	DORAL			DORAL			DORAL
	FINANCIAL⁽²⁾			BANK PR			BANK NY

Total Capital (Total capital to risk- weighted assets)		17.8	%		12.5	%		13.8	%
Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)		16.5	%		11.3	%		13.0	%
Leverage Ratio⁽¹⁾		10.8	%		6.0	%		10.6	%


⁽¹⁾		Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR and Tier 1 capital to adjusted total assets in the case of Doral Bank NY.

⁽²⁾		Doral Financial was not subject to regulatory capital requirements as of December 31, 2007. Ratios were prepared as if the company were subject to the requirement for comparability purposes.

As of June 30, 2008, Doral Bank PR and Doral Bank NY were considered well-capitalized banks for purposes of the prompt corrective action regulations adopted by the FDIC pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991. To be considered a well capitalized institution under the FDIC’s regulations, an institution must maintain a Leverage Ratio of at least 5%, a Tier 1 Capital Ratio of at least 6% and a Total Capital Ratio of at least 10% and not be subject to any written agreement or directive to meet a specific capital ratio.

Failure to meet minimum regulatory capital requirements could result in the initiation of certain mandatory and additional discretionary actions by banking regulators against Doral Financial and its banking subsidiaries that, if undertaken, could have a material adverse effect on Doral Financial.

On March 17, 2006, Doral Financial entered into consent orders with the Federal Reserve. For a detailed description of this order, please refer to note “w”. While the Tier 1 and Total capital ratios have risk weighting components that take into account the low level of risk associated with the Company’s mortgage and securities portfolios, the Leverage Ratio is significantly lower because it is based on total average assets without any risk weighting. As of June 30, 2008, the Doral Financial’s banking subsidiaries were in compliance with all capital requirements.

On July 30, 2008, the Board of Directors of Doral Financial approved a capital infusion of $100.0 million to Doral Bank PR to maintain its regulatory capital ratios above well capitalized levels.

ASSETS AND LIABILITIES

At June 30, 2008, Doral Financial’s total assets were $10.4 billion, an increase of 12% compared to $9.3 billion at December 31, 2007. The increase in assets during 2008 corresponded to the Company’s plan to increase its earning assets by $1.0 billion during 2008. The increase in assets was principally driven by an increase of $1.2 billion in the investment securities portfolio, primarily related to the purchase of $1.8 billion in investment securities during the first half of 2008, offset by maturities and sales. Also, the increase in assets was related to a $137.0 million increase in the mortgage loan portfolio, mainly related to increases in loan production.

Total liabilities were $9.2 billion at June 30, 2008, compared to $8.0 billion at December 31, 2007. The increase in liabilities largely corresponded to the increase in investment securities and was reflected by the increase of $655.9 million in securities sold under agreements to repurchase and $595.0 million in Advances from the FHLB-NY.

OFF-BALANCE SHEET ACTIVITIES

Prior to 2006, the Company normally sold loans that did not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”) to local financial institutions on a recourse basis pursuant to which Doral Financial retained part of the credit risk associated with such loans after sale. The Company also sold loans under various recourse agreements to FNMA and FHLMC. Doral Financial’s contingent obligation with respect to such recourse provision is not reflected on Doral Financial’s consolidated financial statements, except for a liability of $10.6 million, as of June 30, 2008, for estimated losses from such recourse agreements, which is included as part of “Accrued expenses and other liabilities.” Doral Financial’s current strategy is to sell loans on a non-recourse basis, except for certain early payment defaults.

In the past, the Company has sold pools of delinquent loans on a servicing retained basis. Following these transactions, the loans are not reflected on Doral Financial’s Consolidated Statements of Financial Condition. Under these arrangements, as part of its servicing responsibilities, Doral Financial is required to advance the scheduled payments of principal and interest whether or not collected from the underlying borrower. For additional information regarding sales of delinquent loans refer to “Liquidity and Capital Resources” above.

Doral Financial is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments may include commitments to extend credit and sell mortgage-backed securities and loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position.

The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit or for forward sales is represented by the contractual amount of these instruments. Doral Financial uses the same credit policies in making these commitments as it does for on-balance sheet instruments. At June 30, 2008, commitments to extend credit and commercial and financial standby letters of credit amounted to approximately $174.8 million and $4.3 million, respectively, and commitments to sell loans at fair value amounted to approximately $88.3 million.

Commitments to extend credit are agreements to lend to a customer as long as the conditions established in the contract are met. Commitments generally have fixed expiration dates or other termination clauses.

In the ordinary course of business, Doral Financial makes certain representations and warranties to purchasers and insurers of mortgage loans. If there is a breach of representations and warranties, Doral Financial may be required to repurchase the mortgage loan and bear any subsequent loss related to the loan. See Item 1A. Risk Factors, “Risks Relating to Doral Financial’s Business — Defective and Repurchased Loans May Harm Doral Financial’s Business and Financial Condition” in the Company’s 2007 Annual Report on Form 10-K.

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

The tables below summarize Doral Financial’s contractual obligations, on the basis of contractual maturity or first call date, whichever is earlier, and other commercial commitments as of June 30, 2008.

TABLE Q
CONTRACTUAL OBLIGATIONS


	PAYMENT DUE BY PERIOD
			LESS THAN						AFTER
(In thousands)	TOTAL		1 YEAR		1-3 YEARS		3-5 YEARS		5 YEARS

Deposits	$	4,330,728	$	3,970,381	$	298,962	$	57,533	$	3,852
Repurchase agreements^{(1) (2)}		2,100,271		1,217,771		691,000		191,500		—
Advances from FHLB^{(1) (2)}		1,829,000		662,000		669,580		497,420		—
Loans payable⁽³⁾		379,815		39,568		70,230		59,829		210,188
Notes payable		279,716		4,406		7,017		35,401		232,892
Other liabilities		179,277		178,277		1,000		—		—
Non-cancelable operating leases		45,506		5,714		9,786		8,970		21,036

Total Contractual Cash Obligations	$	9,144,313	$	6,078,117	$	1,747,575	$	850,653	$	467,968


⁽¹⁾		Amounts included in the table above do not include interest.

⁽²⁾		Includes $782.5 million of repurchase agreements with an average rate of 5.50% and $304.0 million in advances from FHLB-NY with an average rate of 5.40%, which the lenders have the right to call before their contractual maturities. The majority of such repurchase agreements and advances from FHLB-NY are included in the less than one year category in the above table but have actual contractual maturities ranging from July 2009 to March 2012. They are included on the first call date basis because increases in interest rates over the average rate of the Company’s callable borrowings may induce the lenders to exercise their call right.

⁽³⁾		Secured borrowings with local financial institutions, collateralized by real estate mortgage loans at variable interest rates tied to 3-month LIBOR. These loans are not subject to scheduled payments, but are required to be repaid according to the regular amortization and prepayments of the underlying mortgage loans. For purposes of the table above, the Company used a CPR of 8.00% to estimate the repayments.

TABLE R
OTHER COMMERCIAL COMMITMENTS⁽¹⁾


	AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
	TOTAL
	AMOUNT		LESS THAN						AFTER
(In thousands)	COMMITTED		1 YEAR		1-3 YEARS		3-5 YEARS		5 YEARS

Commitments to extend credit	$	174,758	$	120,049	$	54,707	$	2	$	—
Commitments to sell loans at fair value		88,309		88,309		—		—		—
Commercial and financial standby letters of credit		4,295		3,957		338		—		—
Maximum contractual recourse exposure		1,053,748		—		—		—		1,053,748

Total	$	1,321,110	$	212,315	$	55,045	$	2	$	1,053,748


⁽¹⁾		Refer to “Off-Balance Sheet Activities” above for additional information regarding other commercial commitments of the Company.

RISK MANAGEMENT

Doral Financial’s business is subject to four broad categories of risks: interest rate risk, credit risk, operational risk and liquidity risk. Doral Financial has adopted policies and procedures which have been designed to identify and manage risks to which the company is exposed specifically those relating to interest rate risk, credit risk, and operational risks.

Interest Rate and Market Risk Management

Interest rate risk refers to the risk that changes in interest rates may adversely affect the value of Doral Financial’s assets and liabilities and its net interest income. Doral Financial’s risk management strategies are discussed in Doral Financial’s Annual Report on Form 10-K for the year ended December 31, 2007 under Item 1A, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management.

Doral Financial’s Risk Profile

Doral Financial’s goal is to manage market and interest rate risk within targeted levels established and periodically reviewed by the Board of Directors. The interest risk profile of the Company is managed by using natural offsets generated by the different components of the balance sheet during the natural course of business operations and through active hedging activities using debt and derivative instruments to achieve targeted risk levels.

The Company’s interest rate risk exposure can be segregated into linear and non-linear risk components based on the varying changes to the market value of equity due to changes in interest rates. The linear risk is managed through interest rate caps and futures contracts. The non-linear risk arises primarily from embedded optionality in our products and transactions which allows clients and counterparties to modify the maturity of loans, securities, deposits and/or borrowings. Examples of non-linear risks include the ability of a mortgagee to prepay his/her mortgage or a counterparty exercising its puttable option on a structured transaction. The embedded optionality is primarily managed by purchasing or selling options or by other active risk management strategies involving the use of derivatives, including the forward sale of mortgage-backed securities.

The table below shows the risk profile of Doral Financial (taking into account the derivatives set forth below) under 100-basis point parallel and instantaneous increases or decreases of interest rates, as of June 30, 2008 and December 31, 2007.


	Market Value			Net Interest Income
As of June 30, 2008	Of Equity Risk			Risk⁽¹⁾
+ 100 BPS		(12.7	)%		9.2	%
- 100 BPS		3.1	%		(0.1	)%


	Market Value of			Net Interest Income
As of December 31, 2007	Equity Risk			Risk⁽¹⁾
+ 100 BPS		(10.7	)%		(0.8	)%
- 100 BPS		1.2	%		(1.9	)%


⁽¹⁾		Based on 12-month forward change in net interest income.

As of June 30, 2008 the market value of equity (“MVE”) sensitivity measure showed a slight increase when compared to December 31, 2007. This increase is mainly due to the extension of the durations in the mortgage loan and investment securities portfolios. The Company has been actively managing the balance sheet to maintain the interest rate risk measures within policy limits. During the first quarter of 2008, the Company completed a sale of long-duration U.S. Treasury securities in order to reduce interest rate risk. The Company also grew earning assets through the purchase of agency LIBOR-floater and agency hybrid ARM mortgage-backed securities. The hybrid securities were match funded. The Company also extended the maturity of its advances from FHLB and entered into fixed rate non-callable term repurchase agreements. The measure of net interest income sensitivity (“NII”) did improve when comparing June 30, 2008 to December 31, 2007 mainly due to the active balance sheet management employed in the first quarter of 2008.

The following table shows the Company’s investment portfolio sensitivity to changes in interest rates. The table below assumes parallel and instantaneous increases and decreases of interest rates as of June 30, 2008 and December 31, 2007.


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

Doral Financial’s balance sheet includes a $1.7 billion portfolio of long-term investment securities with fixed interest rates, mostly mortgage-backed securities. Many of these securities were purchased as part of prior management’s strategy to maximize tax-exempt income. The investment portfolio was mostly financed with short-term or callable liabilities. In a steep yield curve environment, the strategy increased net interest income but exposed the Company to higher interest rate risk from increasing rates and changes in the shape of the yield curve.

Because of the current composition of Doral Financial’s assets and liabilities, the Company believes that its net interest margin over a 2-year horizon would compress in certain rising and declining interest rate environments, assuming parallel and instantaneous increases or decreases of interest rates. Under certain rising interest rate scenarios, the duration of the Company’s fixed-rate mortgage loans and securities would extend and the Company would be locked into lower-yielding assets for longer periods. At the same time, due to the callable features of a portion of the Company’s liabilities, the duration of the Company’s liabilities would shorten and the Company would have to fund its assets with liabilities at higher rates. Under certain declining interest rate scenarios, the duration of the Company’s fixed-rate mortgage loans and securities would shorten as mortgage refinancing increases (this tendency is referred to as negative convexity) and the Company would have to reinvest its cash into assets with lower rates. Conversely, the duration of the Company’s liabilities would extend as lenders would not exercise their call options. Both these cases illustrate how the Company’s net interest margin would compress. As part of its strategy to reduce the balance sheet’s interest risk volatility, since December 2006, the Company has sold over $4.0 billion of long duration securities and negotiated the termination of callable funding arrangements associated with these securities.

Derivatives. As described above, Doral Financial uses derivatives to manage its exposure to interest rate risk caused by changes in interest rates. Derivatives are generally either privately negotiated over-the-counter (“OTC”) contracts or standard contracts transacted through regulated exchanges. OTC contracts generally consist of swaps, caps and collars, forwards and options. Exchange-traded derivatives include futures and options.

The Company is subject to various interest rate swap agreements to manage its interest rate exposure. Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal. The Company principally uses interest rate swaps to convert floating rate liabilities to fixed rate by entering into pay fixed receive floating interest rate swaps. Non-performance by the counterparty exposes Doral Financial to interest rate risk. The following tables summarize the Company’s interest rate swaps and caps outstanding at June 30, 2008.

TABLE S
INTEREST RATE SWAPS
(Dollars in thousands)


NOTIONAL	MATURITY	PAY	RECEIVE	FAIR
AMOUNT	DATE	FIXED RATE	FLOATING RATE	VALUE

CASH FLOW HEDGE
$15,000	September, 2008	4.70%	1-month LIBOR minus 0.03%	$	(71	)
10,000	September, 2009	4.57%	1-month LIBOR plus 0.02%		(188	)
8,000	September, 2010	4.62%	1-month LIBOR plus 0.02%		(195	)
3,000	September, 2011	4.69%	1-month LIBOR plus 0.05%		(81	)
15,000	October, 2008	4.44%	1-month LIBOR plus 0.06%		(82	)
10,000	October, 2009	4.30%	1-month LIBOR plus 0.04%		(157	)
8,000	October, 2010	4.37%	1-month LIBOR plus 0.02%		(152	)
6,000	October, 2011	4.51%	1-month LIBOR plus 0.02%		(122	)
5,000	October, 2012	4.62%	1-month LIBOR plus 0.05%		(112	)
20,000	November, 2008	4.43%	1-month LIBOR plus 0.03%		(137	)
20,000	November, 2009	4.35%	1-month LIBOR plus 0.02%		(341	)
15,000	November, 2010	4.42%	1-month LIBOR		(306	)
15,000	November, 2011	4.55%	1-month LIBOR plus 0.02%		(335	)
45,000	November, 2012	4.62%	1-month LIBOR plus 0.02%		(1,064	)

$195,000				$	(3,343	)

The Company is subject to various interest rate cap agreements to manage its interest rate exposure. Interest rate cap agreements generally involve purchase of out of the money caps to protect the Company from larger rate moves and to provide the Company with positive convexity. Non-performance by the counterparty exposes Doral Financial to interest rate risk. The following table summarizes the Company’s interest rate caps outstanding at June 30, 2008.

TABLE T
INTEREST RATE CAPS
(Dollars in thousands)


NOTIONAL	MATURITY	ENTITLED PAYMENT	PREMIUM		FAIR
AMOUNT	DATE	CONDITIONS	PAID		VALUE

$25,000	September, 2010	1-month LIBOR and 5.00%	$	205	$	86
15,000	September, 2011	1-month LIBOR and 5.50%		134		99
15,000	September, 2012	1-month LIBOR and 6.00%		143		131
35,000	October, 2010	1-month LIBOR and 5.00%		199		144
15,000	October, 2011	1-month LIBOR and 5.00%		172		158
15,000	October, 2012	1-month LIBOR and 5.50%		182		186
50,000	November, 2012	1-month LIBOR and 6.50%		228		627
50,000	November, 2012	1-month LIBOR and 5.50%		545		349
50,000	November, 2012	1-month LIBOR and 6.00%		350		466

$270,000			$	2,158	$	2,246

Freestanding Derivatives. Doral Financial uses derivatives to manage its market risk and generally accounts for such instruments on a mark-to-market basis with gains or losses charged to current operations as part of net gain (loss) on securities held for trading as they occur. Contracts with positive fair values are recorded as assets and contracts with negative fair values as liabilities, after the application of netting arrangements. Fair values of derivatives such as interest rate futures contracts or options are determined by reference to market prices. Fair values for derivatives purchased in the over-the-counter market are determined by prices provided by external sources or valuation models. The notional amounts of derivatives totaled $293.0 million and $414.0 million as of June 30, 2008 and December 31, 2007, respectively. Notional amounts indicate the volume of derivatives activity, but do not represent Doral Financial’s exposure to market or credit risk. Historically, the high volume of derivatives used by Doral Financial was associated with the Company’s economic hedging strategy. Doral Financial’s current risk management strategy is more focused on internal balance sheet management and the use of interest rate swaps for

interest rate risk management purposes. The increased focus on internal balance sheet management has resulted in a lower volume of derivatives.

Derivatives — Hedge Accounting. Doral Financial seeks to designate derivatives under hedge accounting guidelines when it can clearly identify an asset or liability that can be hedged using the strict hedge accounting guidelines. The notional amount of swaps treated under hedge accounting totaled $195.0 million as of June 30, 2008. The Company typically uses interest rate swaps to convert floating rate FHLB advances to fixed rate by entering into a pay fixed receive floating swaps. In these cases, the Company matches all of the terms in the FHLB advance to the floating leg of the interest rate swap. Since both transactions are symmetrically opposite the effectiveness of the hedging relationship is high.

The following tables summarize the fair values of Doral Financial’s freestanding derivatives as well as the source of the fair values.

TABLE U
FAIR VALUE RECONCILIATION


	Six Month Period Ended
(In thousands)	June 30, 2008
Fair value of contracts outstanding at the beginning of the period	$	(476	)
Contracts realized or otherwise settled during the period		2,382
Fair value of new contracts entered into during the period		(272	)
Changes in fair values during the period		73

Fair value of contracts outstanding at the end of the period	$	1,707

TABLE V
SOURCES OF FAIR VALUE


(In thousands)	Payment Due by Period
	Maturity							Maturity
	less than			Maturity		Maturity		in excess		Total Fair
As of June 30, 2008	1 Year			1-3 Years		3-5 Years		of 5 Years		Value
Prices actively quoted	$	(539	)	$	—	$	—	$	—	$	(539	)
Prices provided by other external sources		—			230		2,016		—		2,246

	$	(539	)	$	230	$	2,016	$	—	$	1,707

The use of derivatives involves market and credit risk. The market risk of derivatives arises principally from the potential for changes in the value of derivative contracts based on changes in interest rates.

The credit risk of OTC derivatives arises from the potential of counterparties to default on their contractual obligations. To manage this credit risk, Doral Financial deals with counterparties of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. Master netting agreements incorporate rights of set-off that provide for the net settlement of contracts with the same counterparty in the event of default. As a result of the ratings downgrades affecting Doral Financial, counterparties to derivatives contracts used for interest rate risk management purposes could increase the applicable margin requirements under such contracts, or could require the Company to terminate such agreements.

The credit risk associated with futures contracts is limited due to daily cash settlement of the net change in the value of open contracts with the exchange on which the contract is traded.

TABLE W
DERIVATIVE COUNTERPARTY CREDIT EXPOSURE


(Dollars in thousands)	June 30, 2008
					Total Exposure								Weighted Average
	Number of				At Fair		Negative Fair						Contractual Maturity
Rating⁽¹⁾	Counterparties⁽²⁾		Notional		Value⁽³⁾		Values			Total Fair Value			(in years)
AA-		2	$	465,000	$	2,246	$	(3,343	)	$	(1,097	)		3.15
A+		1		5,000		—		(9	)		(9	)		0.04
A		1		18,000		—		(530	)		(530	)		0.06

Total Derivatives		4	$	488,000	$	2,246	$	(3,882	)	$	(1,636	)		3.00


⁽¹⁾		Based on the S&P Long Term Issuer Credit Ratings.

⁽²⁾		Based on legal entities. Affiliated legal entities are reported separately.

⁽³⁾		For each counterparty, this amount includes derivatives with a positive fair value including the related accrued interest receivable/payable (net).


(Dollars in thousands)	December 31, 2007
					Total Exposure								Weighted Average
	Number of				At Fair		Negative Fair						Contractual Maturity
Rating⁽¹⁾	Counterparties⁽²⁾		Notional		Value⁽³⁾		Values			Total Fair Value			(in years)
AA		1	$	250,000	$	241	$	(2,889	)	$	(2,648	)		2.95
AA-		1		215,000		1,241		—			1,241			4.45
A+		2		29,000		6		(12	)		(6	)		0.04

Subtotal		4	$	494,000	$	1,488	$	(2,901	)	$	1,413			3.43


⁽¹⁾		Based on the S&P Long Term Issuer Credit Ratings.

⁽²⁾		Based on legal entities. Affiliated legal entities are reported separately.

⁽³⁾		For each counterparty, this amount includes derivatives with a positive fair value including the related accrued interest receivable/payable (net).

Credit Risk

Doral Financial is subject to credit risk with respect to its portfolio of loans receivable. Loans receivable are loans that Doral Financial holds for investment and, therefore, Doral Financial is at risk for the term of the loans.

Because most of Doral Financial’s loans are made to borrowers located in Puerto Rico and secured by properties located in Puerto Rico, Doral Financial is subject to credit risks tied to adverse economic, political or business developments and natural hazards, such as hurricanes, that may affect Puerto Rico. For example, if Puerto Rico’s real estate market were to experience an overall decline in property values, the Company’s rates of loss on foreclosure would increase.

A number of key economic indicators suggest that the Puerto Rico economy suffered a slowdown starting in 2006 that continued during 2007 and the first half of 2008. Doral Financial believes that Puerto Rico will continue to have

a high concentration of delinquent loans, and this will continue to affect the Company’s credit quality and delinquency trends.

With respect to mortgage loans originated for sale as part of its mortgage banking business, Doral Financial is generally at risk for any mortgage loan default from the time it originates the mortgage loan until the time it sells the loan or packages it into a mortgage-backed security. With respect to FHA loans, Doral Financial is fully insured as to principal by the FHA against foreclosure loss. VA loans are guaranteed within a range of 25% to 50% of the principal amount of the loan subject to a maximum, ranging from $22,500 to $50,750, in addition to the mortgage collateral.

In the ordinary course of business, prior to 2006, the Company sold loans on a recourse basis. When the Company sells a loan with recourse, it commits, if the loan defaults, to make payments to remedy the default or to repurchase the defaulted loan. See “Off-Balance Sheet Activities” above for more information regarding recourse obligations. The Company has discontinued the practice of selling mortgage loans with recourse, except for recourse related to early payment defaults. The residential mortgage portfolio includes loans that, at some point were repurchased pursuant to recourse obligations and, as a result, have a higher credit risk. When repurchased from recourse obligations, loans are recorded at their market value, which includes a discount for poor credit performance. The Company did not sell loans on a recourse basis since 2006.

Doral Financial does not hold a significant amount of adjustable interest rate, negative amortization, or other exotic credit features that are common in other parts of the United States. Substantially all residential mortgage loans are fixed rate, regular amortizing loans.

The credit risk of the residential mortgage portfolio is affected by a deteriorating economy to the extent that the borrowers’ spending capacity is decreased and, as a result, may not be able to make their payments as due. A deteriorating economy could also lead to a decline in real estate values and therefore the reduction of the borrowers’ capacity to refinance and increase the exposure to loss upon default.

Doral Financial has historically provided land acquisition, development, and construction financing to developers of residential housing projects and, as a consequence, has a relatively high credit risk exposure to this sector. Construction loans extended to developers are typically adjustable rate loans, indexed to the prime interest rate with terms ranging generally from 12 to 36 months. Doral Financial principally targeted developers of residential construction for single-family primary-home occupancy. As a result of the negative outlook for the Puerto Rico economy and it adverse effect on the construction industry, in the fourth quarter of 2007, the Company ceased financing new housing projects in Puerto Rico. As a result, management expects that the amounts of loans and exposure to the construction industry will continue to decrease throughout 2008 and subsequent years.

Loss Mitigation Strategies

As a result of the increase in non-performing loans, the Company developed several initiatives to mitigate credit losses. During 2007, the Company established a formal Loan Workout function within the Collections group. The function’s main responsibilities are avoiding defaults and minimizing losses upon default of commercial and construction loans. The group utilizes relationship officers, collection specialists and attorneys. In the case of residential construction projects, the workout function monitors project specifics, such as project management and marketing, as deemed necessary.

Doral Financial’s strategy for minimizing losses upon the sale of foreclosed properties is based on minimizing the time it takes to foreclose a property and, therefore, the depreciation in value of vacant properties (for example, due to vandalism) and the cost of improvements prior to the sale. Actions taken to accelerate the foreclosure process included the hiring of attorneys and legal staff to bring the process in-house.

The Company also considers restructuring of the debt of mortgage loan customers who are delinquent due to economic or legal reasons related to their financial condition, if the Company determines that it is in the best interest for both the Company and the borrower to do so. Refer to “Non-performing assets and allowance for loan and lease losses” section for additional information of loan restructurings.

Non-performing assets and allowance for loan and lease losses

Non-performing assets consist of loans on a non-accrual status and other real estate owned. The loans are placed on a non-accrual status after they are delinquent for more than 90 days. On a case by case basis, the Company may decide that a particular loan should be placed in non-accrual status based on the borrower’s financial condition, or, in the case of construction loans, if a given project is considered to be seriously behind schedule or experiencing economic distress. Generally, when the loan is placed on non-accrual, all accrued but unpaid interest to date is reversed. Such interest, if collected, is credited to income in the period of the recovery, and the loan returns to accrual when it becomes current and collectibility is reasonably assured. In January 2008, the Company placed in non-accrual status all residential construction loans classified as substandard if their source of payment was interest reserves funded by Doral Financial. The Company did not place substandard residential construction loans on non-accrual status if their source of repayment came from their own funds, unless these loans became more than 90 days delinquent. For the quarter ended June 30, 2008, Doral Financial would have recognized $7.8 million, in additional interest income had all delinquent loans been accounted for on an accrual basis. This amount also includes interest reversal on loans placed on non-accrual status during the quarter.

The following table sets forth information with respect to Doral Financial’s non-accrual loans, other real estate-owned (“OREO”) and other non-performing assets as of the dates indicated.

TABLE X
NON-PERFORMING ASSETS


	AS OF			AS OF
(Dollars in thousands)	JUNE 30, 2008			DECEMBER 31, 2007
Non-performing loans:

Residential mortgage loans — held for sale ⁽¹⁾	$	5,445		$	4,603
Residential mortgage loans — held for investment		291,987			256,949


Total non-performing residential mortgage loans⁽²⁾		297,432			261,552


Other lending activities:
Construction and land loans, classified as substandard but accruing		—			113,254
Construction loans in non-performing status		238,100			152,021
Commercial real estate loans		105,874			86,590
Consumer loans		2,758			4,303
Commercial non-real estate loans		3,842			3,040
Lease financing receivable		918			1,032
Land loans		25,210			14,507


Total non-performing other lending activities		376,702			374,747


Total non-performing loans		674,134			636,299

Repossessed assets		213			419

OREO⁽³⁾		53,731			38,154


Total NPAs of Doral Financial (consolidated)	$	728,078		$	674,872


Total NPAs as a percentage of the loan portfolio, net, and OREO (excluding GNMA defaulted loans)		14.63	%		12.93	%

Total NPAs of Doral Financial as a percentage of consolidated total assets		6.97	%		7.25	%

Total non-performing loans to total loans (excluding GNMA defaulted loans)		12.31	%		11.91	%

Ratio of allowance for loan and lease losses to total non-performing loans (excluding loans held for sale) at end of period		18.26	%		19.75	%

Ratio of allowance for loan and lease losses to total non-performing loans (excluding non-performing residential mortgage loans and other non-performing loans held for sale) at end of period⁽⁴⁾		25.30	%		27.66	%


⁽¹⁾		Does not include approximately $131.7 million and $126.0 million of GNMA defaulted loans (for which the Company has the option, but not an obligation, to buy-back from the pools serviced), included as part of the loans held for sale portfolio as of June 30, 2008 and December 31, 2007, respectively.

⁽²⁾		Includes approximately $4.9 million and $2.1 million of FHA/VA loans where the principal balance of these loans is insured or guaranteed under applicable programs and interest is, in most loses, fully recovered in foreclosure proceedings.

⁽³⁾		Excludes FHA/VA claims amounting to $18.0 million and $16.4 million as of June 30, 2008 and December 31, 2007, respectively.

⁽⁴⁾		The proportion of the allowance for loan and leases allocated to residential mortgage loan portfolio historically has been lower than in other lending portfolios. A substantial part of the amounts due on delinquent residential mortgage loans has been historically recovered through sale of property after foreclosure or negotiated settlements with borrowers. For purposes of comparability with the industry, the ratio of allowance for loan and lease losses to total non-performing loans excludes the allowance allocated to residential mortgage loans from the numerator and the total residential mortgage loans portfolio and other non-performing loans held for sale from the denominator.

For the first half of 2008, non-performing assets increased as a percentage of the loan portfolio. The increase in non-performing assets reflected increased delinquency in the residential mortgages and commercial loan portfolios. These portfolios were affected by the overall deterioration of economic conditions in Puerto Rico, especially in the housing market.

Non-performing residential mortgage loans increased by $35.9 million, or 14%. The increase was largely driven by the seasoning of loans made in 2005 and the impact of the economic conditions in Puerto Rico.

During the fourth quarter of 2007, the Company started a Loan Restructuring Program (“the Program”) with the purpose of aiding borrowers with seriously delinquent mortgage loans to get back into financial stability. Under the Program, borrowers prove future payment capacity by making three consecutive monthly payments. The Company is not reducing rates or forgiving principal or interest. The Program was designed to comply with all laws and regulations. As of the end of the first half of 2008, the Company had fully restructured and processed into the system $103.6 million of mortgage loans, of which $3.3 million were included as non-performing loans as of June 30, 2008. The Company has made the determination that the loans restructured under the Program, fit the definition of Troubled Debt Restructurings (“TDR”) as defined by the Standard of Financial Accounting 15 “Accounting by Debtors and Creditors of Troubled Debt Restructurings”. As long as they continue to perform, such loans are excluded from Table X above.

Doral Financial believes that the value of the OREO reflected on its Consolidated Statements of Financial Condition represents a reasonable estimate of the properties’ fair values, net of disposition costs. The fair value of the OREO is normally determined on the basis of internal and external appraisals and physical inspections.

Non-performing commercial real estate loans increased during the first half of 2008 by $19.3 million, or 22%. Half the increase occurred in the second quarter due to the delinquency of a single large relationship that had been anticipated and reserved in the first quarter of 2008.

During the first half of 2008, non-performing construction loans decreased by $27.2 million, or 10%, compared to December 31, 2007. The construction loan portfolio decreased by 8% during the first half of 2008 as a result of an increased number of unit sales underlying the portfolio projects and regular portfolio run-off. During the first half of 2008, several residential construction projects financed by the Company experienced increased levels of unit sales, representing an aggregate repayment of $139.7 million of principal. The pick up in sales volume was mainly attributable to the incentives established by the government of Puerto Rico for buyers of newly constructed homes, in the form of a $25,000 down payment assistance and the Company’s own programs to assist builders to market and sell finished units.

Despite favorable activity during the first half of 2008, the construction loan portfolio has been directly affected by the deterioration in the overall Puerto Rico economy because the underlying loans’ repayment capacity is dependent on the ability to attract home-purchasers and maintain housing prices. During most of the past two years, but especially during the latter part of 2007, the Company’s portfolio experienced a significant increase in default rates resulting from borrowers not being able to sell finished units within the loan term. At June 30, 2008 and December 31, 2007, 44% and 45%, respectively, of the loans within the construction portfolio were considered non-performing loans. Although the Company is taking steps to mitigate the credit risk underlying these loans, their ultimate performance will be affected by each borrower’s ability to complete the project, maintain the pricing level of the housing units within the project, and sell the inventory of units within a reasonable timeframe.

During the first half of 2008, Doral Financial did not enter into new commitments to fund construction loans in Puerto Rico for residential housing projects. New commitments to fund construction loans in New York amounted to $17.8 million and $42.5 million for the quarter and six month period ended June 30, 2008. The following table presents further information on the Company’s construction portfolio.


	As of			As of
(Dollars in thousands)	June 30, 2008			December 31, 2007

Construction loans⁽¹⁾	$	539,076		$	588,174

Total undisbursed funds under existing commitments	$	99,571		$	139,172


Construction loans on non-performing status	$	238,100		$	152,021
Construction and land loans, classified as substandard but accruing⁽²⁾		—			113,254

Total non-performing construction loans	$	238,100		$	265,275

Net charge offs — Construction loans	$	8,333		$	6,060

Allowance for loan losses — Construction loans	$	48,549		$	56,776


Non-performing construction loans to total construction loans		44.17	%		45.10	%
Allowance for loan losses — construction loans to total construction loans		9.01	%		9.65	%
Net charge-offs to total construction loans		1.55	%		1.03	%


⁽¹⁾		Includes $414.4 million and $422.4 million of construction loans for residential housing projects as of June 30, 2008 and December 31, 2007, respectively. Also includes $124.7 million and $165.8 million of construction loans for commercial, condominiums and multi-family projects as of June 30, 2008 and December 31, 2007, respectively.

⁽²⁾		Since January l, 2008, the Company placed in non-accrual all residential construction loans classified as substandard if their source of payment was interest reserves funded by Doral Financial.

The following table summarizes certain information regarding Doral Financial’s allowance for loan and lease losses for the periods indicated.


TABLE Y	QUARTERS ENDED						SIX MONTH PERIODS
ALLOWANCE FOR LOAN AND LEASE LOSSES	JUNE 30,						ENDED JUNE 30,
(Dollars in thousands)	2008			2007			2008			2007
Allowance for Loan and Lease Losses:
Balance at beginning of period	$	121,182		$	70,963		$	124,733		$	67,233
Provision (recovery) for loan and lease losses:
Construction loans		3,598			1,861			116			1,898
Residential mortgage loans		4,375			11,901			6,924			12,742
Commercial real estate loans		25			1,378			3,101			3,298
Consumer loans		1,829			3,589			3,926			5,313
Lease financing		204			(136	)		237			191
Commercial non-real estate loans		(63	)		796			1,078			1,536
Land secured loans		715			(140	)		87			(140	)
Other⁽¹⁾		—			73			—			473


Total provision for loan and lease losses		10,683			19,322			15,469			25,311


Charge — offs:
Construction loans		(3,780	)		—			(8,333	)		(513	)
Residential mortgage loans		(773	)		—			(1,199	)		—
Commercial real estate loans		(2,994	)		(879	)		(4,027	)		(879	)
Consumer loans		(1,746	)		(1,900	)		(4,166	)		(3,179	)
Lease financing		(289	)		(385	)		(467	)		(385	)
Commercial non-real estate loans		(210	)		(1,357	)		(653	)		(1,486	)


Total charge-offs		(9,792	)		(4,521	)		(18,845	)		(6,442	)


Recoveries:
Commercial real estate loans		64			—			77			—
Consumer loans		(68	)		173			433			227
Lease financing		42			—			201			—
Commercial non-real estate loans		(12	)		11			31			19


Total recoveries		26			184			742			246


Net charge-offs		(9,766	)		(4,337	)		(18,103	)		(6,196	)


Other⁽¹⁾		—			(73	)		—			(473	)


Balance at end of period	$	122,099		$	85,875		$	122,099		$	85,875

Allowance for loan losses as a percentage of loans receivable outstanding, at the end of period		2.33	%		1.95	%		2.33	%		1.95	%
Provision for loan losses to net charge-offs on an annualized basis		109.39	%		445.52	%		85.45	%		408.51	%
Net charge-offs to average loans receivable outstanding on an annualized basis		0.76	%		0.47	%		0.71	%		0.35	%


(1)		Represents the portion of allowance for loans transferred from the loans receivable portfolio to the loans held for sale portfolio, in connection to the sale of certain assets of Doral Bank NY during the third quarter of 2007.

The following table sets forth information concerning the allocation of Doral Financial’s allowance for loan and lease losses by loan category and the percentage of loans in each category to total loans as of the dates indicated:


TABLE Z
ALLOCATION OF ALLOWANCE FOR LOAN
AND LEASE LOSSES	June 30, 2008					December 31, 2007
(Dollars in thousands)	Amount		Percent			Amount		Percent
Loans receivable:
Construction	$	48,549		10	%	$	56,766		12	%
Residential mortgage loans		26,789		67	%		21,064		66	%
Commercial — secured by real estate		22,550		15	%		23,399		15	%
Consumer		7,354		2	%		7,161		2	%
Lease financing receivable		1,474		1	%		1,503		1	%
Commercial non-real estate		3,524		3	%		3,068		2	%
Land secured		11,859		2	%		11,772		2	%


Total	$	122,099		100	%	$	124,733		100	%

Starting in the second half of 2006 and throughout 2007, Doral Financial experienced higher levels of delinquencies and noted worsening trends in the Puerto Rico economy that suggested increased credit risk. As a result, the Company increased its loan loss provisions to account for the increased levels of risk and their effect on the portfolio. The Company’s allowance for loan and lease losses increased by $80.6 million or 183% between June 30, 2006 and December 31, 2007, including a charge of $8.8 million for the reclassification of $1.4 billion of loans from the held for sale portfolio to the loans receivable portfolio. As a result of the increase, the allowance for loan and lease losses as a percentage of loans receivable increased from 1.27% to 2.47% between June 30, 2006 and December 31, 2007.

Doral Financial’s provision for loan and lease losses for the quarter and six month period ended June 30, 2008, amounted to $10.7 million and $15.5 million, respectively, compared to $19.3 million and $25.3 million, respectively, for the corresponding periods in 2007. The decrease in the provision is mostly due to a better than expected performance of the construction loan portfolio related to better than anticipated sales of housing units, as explained above, resulting in better project economics and decreases in specific reserves. The construction portfolio

was also affected by favorable developments in loan workout activities. Charge-offs for the non-consumer portfolios for the first quarter of 2008 were mostly due to loans whose credit risk was identified in previous quarters and, as a result, were fully provided for before the start of the present quarter. Although the Company expects a continued pressure on asset quality during the next several quarters due to the continued weakness of the Puerto Rico economy, and as a result the possibility of higher provisions exists, it is possible that charge-offs from loans with previously assigned loss reserves could be higher than current provisions.

The Company evaluates impaired loans and the related valuation allowance based on SFAS No. 114, "Accounting by Creditors for Impairment of a Loan.” Commercial and construction loans over $2.0 million that are classified as substandard are evaluated individually for impairment. Loans are considered impaired when, based on current information and events, it is probable that the borrower will not be able to fulfill its obligation according to the contractual terms of the loan agreement. The impairment loss, if any, on each individual loan identified as impaired is generally measured based on the present value of expected cash flows discounted at the loan’s effective interest rate. As a practical expedient, impairment may be measured based on the loan’s observable market price, or the fair value of the collateral, if the loan is collateral dependent. If foreclosure is probable, the Company is required to measure the impairment based on the fair value of the collateral. The fair value of the collateral is generally obtained from appraisals. Should the appraisal show a deficiency, the Company records a specific reserve for the underlying loan. As of June 30, 2008, Doral Financial had an allowance amounting to approximately $47.9 million, with respect to $235.7 million in outstanding balances of construction and commercial loans, which were impaired.

Doral Financial records an allowance for small-balance homogeneous loans (including residential mortgages, consumer, commercial and construction loans under $2.0 million) on a group basis under the provisions of SFAS No. 5 “Accounting for Contingencies”. For such loans, the allowance is determined considering the historical charge-off experience of each loan category and delinquency levels as well as charge-off and delinquency trends and economic data, such as interest rate levels, inflation and the strength of the housing market in the areas where the Company operates.

Generally, the percentage of the allowance for loan and lease losses to non-performing loans will not remain constant due to the nature of Doral Financial’s portfolio of loans, which are primarily collateralized by real estate. The collateral for each non-performing mortgage loan is analyzed to determine potential loss exposure, and, in conjunction with other factors, this loss exposure contributes to the overall assessment of the adequacy of the allowance for loan and lease losses. On an ongoing basis, management monitors the loan portfolio and evaluates the adequacy of the allowance for loan and lease losses. In determining the adequacy of the allowance, management considers such factors as default probabilities, internal risk ratings (based on borrowers’ financial stability, external credit ratings, management strength, earnings and operating environment) probable loss and recovery rates, and the degree of risk inherent in the loan portfolios. Allocated specific and general reserves are supplemented by a macroeconomic or emerging risk reserve. This portion of the total allowance for loan and lease losses reflects management’s evaluation of conditions that are not directly reflected in the loss factors used in the determination of the allowance. The conditions evaluated in connection with the macroeconomic and emerging risk allowance include national and local economic trends, industry conditions within the portfolios, recent loan portfolio performance, loan growth, changes in underwriting criteria and the regulatory and public policy environment.

Loans deemed by management to be uncollectible are charged to the allowance for loan and lease losses. Recoveries on loans previously charged off are credited to the allowance. Provisions for loan and lease losses are charged to expenses and credited to the allowance in amounts deemed appropriate by management based upon its evaluation of the known and inherent risks in the loan portfolio. While management believes that the current allowance for loan and lease losses is adequate, future additions to the allowance will be necessary. If economic conditions change substantially from the assumptions used by Doral Financial in determining the allowance for loan and lease losses further increases in the allowance may be required.

Operational Risk

Operational risk includes the potential for financial losses resulting from failed or inadequate controls. Operational risk is inherent in every aspect of business operations, and can result from a range of factors including human judgment, process or system failures, or business interruptions. Operational risk is present in all of Doral Financial’s business processes, including financial reporting.

Overview of Operational Risk Management

Doral Financial has a corporate-wide Chief Risk Officer, who is responsible for implementing the process of managing the risks faced by the Company. The Chief Risk Officer is responsible for coordinating with the Company’s Internal Audit group, risk identification and monitoring throughout Doral Financial. In addition, the Internal Audit function will provide support to ensure compliance with Doral Financial’s system of policies and controls and to ensure that adequate attention is given to correct issues identified.

Internal Control Over Financial Reporting

Doral Financial’s management has identified several material weaknesses in Doral Financial’s internal control over financial reporting. For a detailed discussion of the material weaknesses that have been identified by management, please refer to Part II, Item 9A. Controls and Procedures, of the Company’s 2007 Annual Report on Form 10-K.

Liquidity Risk

For a discussion of the risks associated with Doral Financial’s ongoing need for capital to finance its lending, servicing and investing activities, please refer to “— Liquidity and Capital Resources” above.

General Business, Economic and Political Conditions

The Company’s business and earnings are sensitive to general business and economic conditions in Puerto Rico and the United States. Significant business and economic conditions include short-and long-term interest rates, inflation and the strength of the Puerto Rico and U.S. economies and housing markets. If any of these conditions deteriorate, the Company’s business and earnings could be adversely affected. For example, business and economic conditions that negatively impact household income could decrease the demand for residential mortgage loans and increase the number of customers who become delinquent or default on their loans; or, a dramatically rising interest rate environment could decrease the demand for loans.

The economy of Puerto Rico appears to continue to underperform the U.S. economy. Furthermore, the Commonwealth’s fiscal situation still poses challenges for growth. In particular, general fund revenue and sales tax receipts are below projections, increasing the risk that additional revenue raising initiatives will be required to balance the budget. For more information on the current fiscal situation of the Commonwealth of Puerto Rico, please refer to Part I, Item 1. Business, “The Commonwealth of Puerto Rico — Current Fiscal Situation” and Item 1A. Risk Factors, in Part I of the Company’s 2007 Annual Report on Form 10-K.

Inflation also generally results in increases in general and administrative expenses. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. See “Risk Management” above for a discussion of the effects of changes of interest rates on Doral Financial’s operations.

The Company operates in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory and technological changes. The Company faces competition in such areas as mortgage and banking product offerings, rates and fees, and customer service. In addition, technological advances and increased e-commerce activities have, generally, increased accessibility to products and services for customers which has intensified competition among banking and non-banking companies in the offering of financial products and services, with or without the need for a physical presence.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding market risk to which the Company is exposed, see the information contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management.”

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Control and Procedures

Doral Financial’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) as of June 30, 2008. Disclosure controls and procedures are defined under SEC rules as controls and other procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

The Company’s management identified certain material weaknesses in Doral Financial’s internal control over financial reporting as of December 31, 2007, as set forth under “—Management’s Report on Internal Control Over Financial Reporting,” in Item 9A, Controls and Procedures, in the Company’s 2007 Annual Report on Form 10-K. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course of their assigned functions. Material weaknesses in internal controls may also constitute deficiencies in the Company’s disclosure controls. Based on an evaluation of these material weaknesses, Doral Financial’s current Chief Executive Officer and its current Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2008.

As of the end of the second quarter of 2008, Doral Financial completed the evaluation of the internal controls over the completeness and valuation of its allowance for loan and leases losses and the related provision for loan and lease losses accounts and concluded that the material weakness over the valuation of its allowance for loan and lease losses and the related provision for loan and lease losses accounts had been remediated.

Doral Financial is engaged in the implementation of remediation efforts to address the remaining material weakness in the Company’s internal control over financial reporting as of December 31, 2007. Doral Financial’s remediation efforts related to the financial close and reporting process are outlined in “— Remediation of Material Weaknesses” under Item 9A, Controls and Procedures, of Doral Financial’s Annual Report on Form 10-K for the year ended December 31, 2007 and are specifically designed to address the material weakness identified by Doral Financial’s management. Doral Financial will disclose any significant further developments arising as a result of its remediation efforts in future filings with the SEC.

Changes in Internal Control Over Financial Reporting

As described in Doral Financial’s Annual Report on Form 10-K for the year ended December 31, 2007, and the Form 10-Q for the quarter ended March 31, 2008, the Company outlined certain steps to address the material weaknesses in internal control over financial reporting that were identified as of December 31, 2007. The Company continued these remediation efforts during the quarter ended June 30, 2008. Specifically, a recently prepared accounting policy was disseminated throughout the organization with emphasis on the accurate execution of account level analyses, standard reconciliation processes, and the maintenance of an aging of reconciling items. Also, a Controllership Committee was created in order to ascertain that there is timely communication of non-recurring transactions from the business units to the Controllers department.

Although there have not been any changes in internal control over financial reporting for the completeness and valuation of its allowance for loan and leases losses and the related provision for loan and lease losses accounts

during this quarter, management completed the evaluation of the effectiveness of the internal controls and concluded that the material weakness over the valuation of its allowance for loan and leases losses and the related provision for loan and lease losses accounts had been remediated.

Except for these remediation efforts, there were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2008 that have materially affected, or are reasonably likely to materially affect, Doral Financial’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For information on certain legal proceedings, please refer to note “w” to the unaudited interim financial statements included in Item 1. Financial Statements, of this Quarterly Report involving Doral Financial Form 10-Q.

ITEM 1A. RISK FACTORS

For a detailed discussion of certain risk factors that could affect Doral Financial’s results for future periods see Item 1A, Risk Factors, in Doral Financial’s 2007 Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Stockholders Meeting of the Company was held on May 7, 2008. A quorum was obtained with 52,533,436 votes represented in person or by proxy, which represented 97.63% of all votes eligible to be cast at the meeting. At the meeting, the shareholders voted on the following matters:

	1.		The election of 10 directors of Doral Financial;

	2.		The adoption of the Doral Financial 2008 Stock Incentive Plan; and

	3.		The ratification of the selection of PricewaterhouseCoopers LLP as Doral Financial’s independent registered public accounting firm for the fiscal year ending December 31, 2008.

The results of the voting for each of the proposals is set forth below:

Election of Directors


Nominees for One-Year Term	Votes For		Votes Withheld		Broker Non-Votes

Frank W. Baier		52,351,177		182,259		9,081
Dennis G. Buchert		52,349,472		183,964		10,786
James E. Gilleran		52,350,956		182,480		9,302
David E. King		51,952,508		580,928		407,750
Howard M. Levkowitz		52,358,323		175,113		1,935
Michael J. O’Hanlon		51,950,913		582,523		409,345
Raymond J. Quinlan		52,360,178		173,258		80
Ramesh N. Shah		52,356,195		177,241		4,063
Kevin M. Twomey		52,350,619		182,817		9,639
Glen R. Wakeman		52,358,427		175,009		1,831

Adoption of Doral Financial 2008 Stock Incentive Plan


For:			49,413,362
Against:			394,764
Abstain:			22,315
Broker Non-Votes:			3,979,670

Ratification of the Appointment of PricewaterhouseCoopers LLP as the Company’s Independent Registered Public Accounting Firm for 2008


For:			52,319,360
Against:			170,647
Abstain:			43,426
Broker Non-Votes:			1,376,678

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a)

Exhibits

The exhibits accompanying this Quarterly Report on Form 10-Q are listed on the accompanying Exhibit Index.

The Company has not filed as exhibits certain instruments defining the rights of holders of debt of the Company not exceeding 10% of the total assets of the Company and its consolidated subsidiaries. The Company will furnish copies of any such instruments to the Securities and Exchange Commission upon request.


		PAGE

PART I — FINANCIAL INFORMATION

Item 1 —	Financial Statements

	Consolidated Statements of Financial Condition (Unaudited) as of June 30, 2008 and December 31, 2007		3

	Consolidated Statements of Income (Loss) (Unaudited) — Quarters ended June 30, 2008 and June 30, 2007 and Six month periods ended June 30, 2008 and June 30, 2007		4

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) — Six month periods ended June 30, 2008 and June 30, 2007		5

	Consolidated Statements of Comprehensive Income (Loss) (Unaudited) — Quarters ended June 30, 2008 and June 30, 2007 and Six month periods ended June 30, 2008 and June 30, 2007		6

	Consolidated Statements of Cash Flows (Unaudited) — Six month periods ended June 30, 2008 and June 30, 2007		7

	Notes to Consolidated Financial Statements (Unaudited)		8

Item 2 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations		39

Item 3 —	Quantitative and Qualitative Disclosures about Market Risk		76

Item 4 —	Controls and Procedures		77

PART II — OTHER INFORMATION			78

Item 1 —	Legal Proceedings		78

Item 1A —	Risk Factors		78

Item 2 —	Unregistered Sales of Equity Securities and Use of Proceeds		78

Item 3 —	Defaults Upon Senior Securities		78

Item 4 —	Submission of Matters to a Vote of Security Holders		79

Item 5 —	Other Information		79

Item 6 —	Exhibits		79

SIGNATURES			80
EX-12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EX-12.2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO


	DORAL FINANCIAL CORPORATION (Registrant)
Date: August 8, 2008	/s/ Glen R. Wakeman
	Glen R. Wakeman
	Chief Executive Officer and President


Date: August 8, 2008	/s/ Marangal I. Domingo
	Marangal I. Domingo
	Executive Vice President and Chief Financial Officer


Exhibit
Number		Description

12.1	—	Computation of Ratio of Earnings to Fixed Charges.

12.2	—	Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.

31.1	—	CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	—	CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	—	CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	—	CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	For the six month period
	ended June 30, 2008
Including Interest on Deposits	$	4,515
Pre-tax income from continuing operations
Plus:		177,069
Fixed Charges:

Total Earnings	$	181,584

Fixed Charges:
Interest expensed and capitalized	$	175,759
Amortized premiums, discounts, and capitalized expenses related to indebtedness		96
An estimate of interest component within rental expense		1,214

Total Fixed Charges	$	177,069

Ratio of Earnings to Fixed Charges		1.03

Excluding Interest on Deposits Earnings:
Pre-tax income from continuing operations	$	4,515
Plus:
Fixed Charges (excluding capitalized interest)		97,153

Total Earnings	$	101,668

Fixed Charges:
Interest expensed and capitalized	$	95,813
Amortized premiums, discounts, and capitalized expenses related to indebtedness		96
An estimate of interest component within rental expense		1,214

Total Fixed Charges	$	97,153

Ratio of Earnings to Fixed Charges		1.05

	1.		I have reviewed this Form 10-Q of Doral Financial Corporation;

	2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	(a)		All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



By:	/s/ Glen R. Wakeman
	Name:	Glen R. Wakeman
	Title:	Chief Executive Officer and President