10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

þ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 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 no.)
1451 Franklin D. Roosevelt Avenue San Juan, Puerto Rico (Address of principal executive offices)	00920-2717 (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $0.01 par value.	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class
7.00% Noncumulative Monthly Income Preferred Stock, Series A
8.35% Noncumulative Monthly Income Preferred Stock, Series B
7.25% Noncumulative Monthly Income Preferred Stock, Series C

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ

     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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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      Smaller reporting company o

(Do not check if a smaller reporting company)

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

     State the aggregate market value of the voting and non-voting common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

     $126,810,819 approximately, based on the last sale price of $23.60 per share on the New York Stock Exchange on June 29, 2007 (the last business day of the registrant’s most recently completed second fiscal quarter). For the purposes of the foregoing calculation only, all directors and executive officers of the registrant and certain related parties of such persons have been deemed affiliates.

     Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 53,810,110 shares as of March 1, 2008.

Documents Incorporated by Reference:

Part III incorporates certain information by reference to the Proxy Statement for the 2008 Annual Meeting of Shareholders

DORAL FINANCIAL CORPORATION

2007 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

	Page
FORWARD-LOOKING STATEMENTS		1
PART I		2
Item 1. Business		2
Item 1A. Risk Factors		26
Item 1B. Unresolved Staff Comments		30
Item 2. Properties		30
Item 3. Legal Proceedings		30
Item 4. Submission of Matters to a Vote of Security Holders		32
PART II		33
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		33
Item 6. Selected Financial Data		36
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		37
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		108
Item 8. Financial Statements and Supplementary Data		108
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		108
Item 9A. Controls and Procedures		108
Item 9B. Other Information		112
PART III		113
Item 10. Directors, Executive Officers and Corporate Governance		113
Item 11. Executive Compensation		113
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		113
Item 13. Certain Relationships and Related Transactions		113
Item 14. Principal Accounting Fees and Services		113
PART IV		113
Item 15. Exhibits and Financial Statement Schedules		113
EX-3.1(H) CERTIFICATE OF AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION
EX-3.1(J) CERTIFICATE OF INCORPORATION OF DORAL FINANCIAL
EX-4.1 COMMON STOCK CERTIFICATE
EX-10.10 EMPLOYMENT AGREEMENT
EX-10.11 EMPLOYMENT AGREEMENT DATED JUNE 1, 2007
EX-12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EX-12.2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
EX-21 LIST OF SUBSIDIARIES
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

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FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 10-K 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 or commercial credit sectors and its impact in the credit quality of Doral Financial’s loans and other assets;

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

• 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 this Annual Report on Form 10-K.

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PART I

Item 1. Business.

GENERAL

Overview

     Doral Financial Corporation (“Doral Financial” or the “Company”) was organized in 1972 under the laws of the Commonwealth of Puerto Rico and operates as a bank holding company. Doral Financial’s operations are principally conducted in Puerto Rico. The Company also operates in the mainland United States, principally in the New York City metropolitan area. Doral Financial’s principal executive offices are located at 1451 F.D. Roosevelt Avenue, San Juan, Puerto Rico 00920-2717, and its telephone number is (787) 474-6700.

     Doral Financial manages its business through four operating segments that are organized by legal entity and aggregated by line of business: banking (including thrift operations), mortgage banking, insurance agency and institutional securities. For additional information regarding the Company’s segments please refer to “Operating Segments” under Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and to Note 32 of the audited financial statements. Doral Financial primarily conducts operations in the following segments:

     Banking. Through its principal banking subsidiary, Doral Bank, a Puerto Rico commercial bank (“Doral Bank PR”), Doral Financial accepts deposits from the general public and institutions, obtains borrowings, originates and invests in loans (primarily residential real estate mortgage loans), invests in mortgage-backed securities as well as in other investment securities, and offers traditional banking services. Approximately 94% of Doral Bank PR’s loan portfolio is secured by real estate. Doral Bank PR operates 41 branch offices in Puerto Rico. Loans are primarily originated through the branch office network and centralized loan departments. Internal mortgage loan originations are also supplemented by wholesale loan purchasers from third parties. As of December 31, 2007, Doral Bank PR had total assets and total deposits of $7.6 billion and $4.3 billion, respectively.

     Doral Financial also operates a federal savings bank in New York, New York under the name of Doral Bank, FSB (“Doral Bank NY”) which, following the sale of its eleven retail branches in July 2007, operates through a single branch. Doral Bank NY gathers deposits primarily through an internet-based platform and originates and invests in loans, consisting primarily of interim loans secured by multi-family apartment buildings and other commercial properties and also invests in investment securities. As of December 31, 2007, Doral Bank NY had total assets and total deposits of $120.4 million and $101.6 million, respectively.

     Mortgage Banking. This segment relates to the business activities of the holding company (Doral Financial). Prior to 2007, the holding company and various of its subsidiaries were engaged in mortgage originations, securitization and related activities. As part of its business transformation effort, Doral Financial transferred its mortgage origination and servicing platforms, subject to certain exclusions, to Doral Bank PR (including its wholly-owned subsidiary, Doral Mortgage.) The Company’s mortgage origination business is now conducted by Doral Mortgage LLC, now a wholly-owned subsidiary of Doral Bank PR, and the Company’s mortgage servicing business is operated by Doral Bank PR. Prior to July 2007, the origination of residential mortgage loans and the servicing of these loans was principally conducted through an operating division of the holding company and a number of mortgage banking subsidiaries of the holding company. Loans that were not securitized or sold in the secondary market were generally funded by Doral Bank PR under a master production agreement. With the exception of Doral Mortgage, operations of all other mortgage banking subsidiaries were ceased. The holding company, which is considered part of the mortgage bank segment, also held a substantial portfolio of investment securities. Substantially all new loan origination and investment activities at the holding company level were also terminated.

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     Insurance Agency. Doral Financial through its wholly-owned subsidiary, Doral Insurance Agency, Inc., offers property, casualty, life and title insurance as an insurance agency, primarily to its mortgage loan customers. On February 27, 2008, Doral Insurance Agency acquired an insurance portfolio of approximately 11,000 policies from Citiseguros PR Inc., a subsidiary of Citibank, N.A.-Puerto Rico.

     Institutional Securities. 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 of this decision, 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 this contract to Doral Bank PR.

Availability of Information on Website

     Doral Financial’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are available free of charge, through its website, http://www.doralfinancial.com, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. In addition, Doral Financial makes available on its website under the heading “Corporate Governance” its: (i) Code of Business Conduct and Ethics; (ii) Corporate Governance Guidelines; (iii) Information Disclosure Policy; and (iv) the charters of the Audit, Compensation, Corporate Governance and Nominating, and Risk Policy committees, and also intends to disclose any amendments to its Code of Business Conduct and Ethics, or waivers of the Code of Business Conduct and Ethics on behalf of its Chief Executive Officer, Chief Financial Officer, and Controller, on its website or upon written request to the Secretary of the Company at 1451 F.D. Roosevelt Avenue, San Juan, Puerto Rico 00920-2717.

     The public may read and copy any materials Doral Financial files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. In addition, the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including Doral Financial, at its website (http://www.sec.gov).

Holding Company Structure

     Doral Financial is a corporation organized under the laws of the Commonwealth of Puerto Rico. Doral Financial conducts its activities primarily through its wholly-owned subsidiaries, Doral Bank PR, Doral Bank NY, Doral Insurance Agency, Inc. (“Doral Insurance Agency”), Doral Securities, Inc. (“Doral Securities”) and Doral Properties, Inc. (“Doral Properties”). Doral Bank PR operates four wholly-owned subsidiaries: Doral Mortgage LLC (“Doral Mortgage”), Doral Money, Inc. (“Doral Money”), which is engaged in commercial lending in the New York City metropolitan area, Doral International, Inc., a Puerto Rico-based international banking entity, and CB, LLC, an entity formed to manage a residential real estate project that Doral Bank PR received in lieu of foreclosure.

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     On July 19, 2007, Doral Holdings Delaware, LLC (“Doral Holdings”), a newly formed bank holding company in which Bear Stearns Merchant Banking and other investors including funds managed by Marathon Asset Management, Perry Capital, the DE Shaw Group and Tennenbaum Capital purchased 48,412,698 shares of Doral Financial common stock for an aggregate purchase price of $610.0 million (please note that all share and per share information presented in this Annual Report on Form 10-K has been adjusted to reflect a 1-for-20 reverse stock split effective August 17, 2007). As a result of this transaction Doral Holdings owns 90% of the outstanding common stock of Doral Financial. This transaction is referred to in this Annual Report on Form 10-K as the “Recapitalization.”

     Banking Activities

     Doral Financial is engaged in retail banking activities in Puerto Rico through its principal banking subsidiary, Doral Bank PR. Doral Bank PR operates 41 branches in Puerto Rico. Doral Bank PR offers a variety of consumer loan products as well as deposit products and other retail banking services. Doral Bank PR’s strategy is to combine excellent service with an improved sales process to capture new clients and cross-sell additional products to existing clients. As of December 31, 2007, Doral Bank PR had a loan portfolio, classified as loans receivable, of approximately $4.3 billion, of which approximately $4.1 billion consisted of loans secured by residential real estate, including real estate development projects. Also as of December 31, 2007, Doral Bank PR had a portfolio of loans held for sale of approximately $231.9 million, which included loans held for sale by Doral Bank PR’s wholly-owned subsidiaries, Doral Mortgage, Doral Money and Doral International.

     Doral Bank PR’s lending activities have traditionally focused on the origination of residential mortgage loans and were closely integrated with Doral Financial’s mortgage banking units pursuant to master production and master servicing agreements. Under these agreements, most of the loan processing and origination activities were conducted by the mortgage banking subsidiary. As part of its business transformation efforts, commencing in July 2007, all residential mortgage origination activities are now

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conducted by Doral Bank PR through its wholly-owned subsidiary Doral Mortgage. Doral Bank PR also originates (through centralized loan origination units) commercial loans, including construction loans to finance the construction of residential home developments and commercial real estate projects, and commercial loans secured by real estate collateral.

     Doral Financial is also engaged in the banking business in the New York City metropolitan area through its federal savings bank subsidiary, Doral Bank NY. Before July 27, 2007, Doral Bank NY operated through eleven retail branches located in the New York City metropolitan area. On July 27, 2007, Doral Bank NY sold its eleven existing branches in the New York City metropolitan area to New York Commercial Bank, the commercial bank subsidiary of New York Community Bancorp. Doral Financial retained Doral Bank NY’s federal thrift charter and currently operates through a single branch. It gathers deposits through an internet-based platform. Doral Bank NY invests primarily in interim loans secured by multi-family apartment buildings and other commercial properties located in the New York City metropolitan area, as well as in taxi medallion loans and residential mortgages purchased on a whole loan basis from other financial institutions.

     Doral Bank PR and Doral Bank NY complement their lending activities by earning fee income, collecting service charges for deposit accounts and other traditional banking services and, in the case of Doral Bank PR, with income from trading activities conducted through its international banking entity subsidiary. See “Other Investment Activities” below.

     For detailed information regarding the deposit accounts of Doral Financial’s banking subsidiaries please refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, “— Liquidity and Capital Resources” in this report.

Commercial Lending

     The Company provides commercial loans to local businesses, primarily small to middle market clients. Doral Bank PR’s strategy is to develop business relationships by combining excellent service with a well-executed sales process that emphasizes cross-selling additional products to existing customers. Doral Bank PR targets commercial clients in Puerto Rico that generally have financing needs of up to $10.0 million.

     At December 31, 2007, commercial loans totaled $846.1 million, or 19%, of Doral Bank PR’s gross loan and lease portfolio which included $721.4 million in commercial loans secured by real estate. Commercial loans include lines of credit and term facilities to finance business operations and to provide working capital for specific purposes, such as to finance the purchase of assets, equipment or inventory. Since a borrower’s cash flow from operations is generally the primary source of repayment, Doral Bank PR’s analysis of the credit risk focuses heavily on the borrower’s debt repayment capacity.

     Lines of credit are extended to businesses based on an analysis of the financial strength and integrity of the borrowers and are generally secured primarily by real estate, accounts receivable or inventory, and have a maturity of one year or less. Such lines of credit bear an interest rate that floats with a base rate, the prime rate, LIBOR or another established index.

     Commercial term loans are typically made to finance the acquisition of fixed assets, provide permanent working capital or to finance the purchase of businesses. Commercial term loans generally have terms from one to five years. They may be collateralized by the asset being acquired or other available assets and bear interest rates that float with the prime rate, LIBOR or another established index, or are fixed for the term of the loan.

     Doral Financial’s portfolio of commercial loans is subject to certain risks, including: (i) a possible downturn in the Puerto Rico economy; (ii) interest rate increases; (iii) the deterioration of a borrower’s or guarantor’s financial capabilities; and (iv) environmental risks, including natural disasters. Doral Financial attempts to reduce the exposure to such risks by: (i) reviewing each loan request and renewal individually; (ii) utilizing a centralized approval system for all unsecured and secured loans in excess of $100,000; (iii)

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strictly adhering to written loan policies; and (iv) conducting an independent credit review. In addition, loans based on short-term asset values are monitored on a monthly or quarterly basis

Consumer Loans

     Doral Bank PR also provides consumer credit and personal secured loans. At December 31, 2007, consumer loans totaled $88.9 million, or 2.0% of its gross loan and lease portfolio. Doral Bank PR’s consumer loan portfolio is subject to certain risks, including: (i) amount of credit offered to consumers in the market; (ii) interest rate increases; and (iii) consumer bankruptcy laws which allow consumers to discharge certain debts. Doral Bank PR attempts to reduce its exposure to such risks by: (i) individually reviewing each loan request and renewal; (ii) utilizing a centralized approval system for loans in excess of $25,000; (iii) strictly adhering to written credit policies; and (iv) conducting an independent credit review.

Leasing Activities

     Doral Bank PR offers open-ended leases pursuant to which the lessee is responsible for the residual value of the leased unit. At December 31, 2007, Doral Bank PR held $33.5 million in leases, representing 0.8% of its gross loan and lease portfolio. During 2007, approximately 90% of all lease originations were automobile leases. The remaining originations were primarily medical equipment and construction equipment leases. While the granting of leases is governed by many aspects of Doral Financial’s general credit policies and procedures, due to the nature of the exposure, additional credit parameters are applied to leases. Automobile leasing is done by way of finance leases, where the lessee is responsible for any residual value at the end of the lease term. The credit risk associated with this product is generally higher than commercial lending. Doral Bank PR tries to mitigate these risks by making the lessee responsible for the residual value and using a sound credit underwriting process. Credit controls, include but are not limited to, dollar limits amounts on new vehicle leases, maximum amounts on residuals, maximum terms, obligatory insurance, minimum income parameters, maximum debt service-to-income parameters and certain credit history parameters.

Construction Lending

     Under current market conditions in Puerto Rico, the Company has ceased financing new construction of single family residential and commercial real estate projects, including for land development, in Puerto Rico. Doral will continue to evaluate and appraise market conditions to determine if and when it will resume such financing. Doral Bank had traditionally been a leading player in Puerto Rico in providing interim construction loans to finance residential development projects, primarily in the affordable and midrange housing markets. In 2006, the Company reassessed its risk exposure to the sector and made a strategic decision to restrict construction lending to established clients with proven track records. In late 2007, as a result of the continued downturn in the Puerto Rico housing market, the Company decided that it would no longer underwrite new development projects and focus its efforts on collections, including assisting developers in marketing their properties to potential home buyers. As of December 31, 2007, Doral Bank PR had approximately $501.4 million in construction loans.

     Doral Bank NY also extends interim, construction loans and bridge loans secured by multi-family apartment buildings and other commercial properties in the New York City metropolitan area. As of December 31, 2007, Doral Bank NY had a portfolio of $66.2 million in interim and bridge loans.

     Doral Financial’s construction loan portfolio is subject to certain risks, including: (i) a possible downturn in the Puerto Rico economy; (ii) interest rate increases; (iii) deterioration of a borrower’s or guarantor’s financial capabilities; and (iv) environmental risks, including natural disasters. Doral Financial attempts to reduce the exposure to such risks by: (i) individually reviewing each loan request and renewal; (ii) utilizing a centralized approval system for secured loans in excess of $100,000; (iii) strictly adhering to written loan policies; and (iv) conducting an independent credit review. In addition, loans based on short-term asset values are monitored on a monthly or quarterly basis.

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     Residential Mortgage Lending

     Mortgage Loan Products. Doral Bank PR is an approved seller/servicer for the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal National Mortgage Association (“FNMA”), an approved issuer for the Government National Mortgage Association (“GNMA”) and an approved servicer under the GNMA, FNMA and FHLMC mortgage-backed securities programs. Doral Financial is also qualified to originate mortgage loans insured by the Federal Housing Administration (“FHA”) or guaranteed by the Veterans Administration (“VA”) or by the Rural Housing Service (“RHS”).

     Doral Bank PR originates a wide variety of mortgage loan products, some of which are held for investment and others which are held for sale, that are designed to meet consumer needs and competitive conditions. The principal residential mortgage products are 30-year and 15-year fixed rate first mortgage loans secured by single-family residential properties consisting of one-to-four family units. None of Doral Bank’s residential mortgage loans have adjustable interest rate features. Doral Financial generally classifies mortgage loans between those that are guaranteed or insured by FHA, VA or RHS and those that are not. The latter type of loans is referred to as conventional loans. Conventional loans that meet the underwriting requirements for sale or exchange under standard FNMA or FHLMC programs are referred to as conforming loans, while those that do not are referred to as non-conforming loans.

     For additional information on Doral Financial’s mortgage loan originations, refer to Table I — Loan Production included in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this report.

     Mortgage Origination Channels

     Doral Bank PR’s strategy is to increase the size of its mortgage servicing portfolio primarily by internal originations through its retail branch network. Doral Mortgage units are co-located with all of Doral Bank PR’s retail bank branches. Doral Bank PR supplements retail originations with wholesale purchases of loans from third parties. Doral Bank PR maintains a centralized unit for the origination of interim construction loans. The principal origination channels of Doral Financial’s loan origination units are summarized below.

     Retail Channel. Doral Bank PR originates loans through its network of loan officers located inside each of its 41 retail branches throughout Puerto Rico. Customers are sought through advertising campaigns in local newspapers and television, as well as direct mail and telemarketing campaigns. Doral Bank PR emphasizes quality customer service and offers extended operating hours to accommodate the needs of customers.

     Construction Project Channel. Doral Bank PR maintains a centralized unit that works closely with residential housing developers and specializes in originating mortgage loans to provide permanent financing for the purchase of homes in new housing projects.

     Wholesale Correspondent Channel. Doral Bank PR maintains a centralized unit that purchases closed residential mortgage loans from other financial institutions consisting primarily of conventional mortgage loans. Doral Bank PR underwrites each loan prior to purchase. For the years ended December 31, 2007 and 2006, total loan purchases amounted to approximately $82.7 million and $82.1 million, respectively. In the past, Doral Bank PR has also purchased conforming mortgage loans on a wholesale basis from U.S. mainland financial institutions without the related servicing rights and were generally securitized into FNMA or FHLMC securities and sold into secondary market. During the third quarter of 2005, Doral Financial terminated its purchases of whole loans in bulk without the associated servicing rights.

     For more information on Doral Financial’s loan origination channels, refer to Table J — Loan Origination Sources in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this report.

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     Mortgage Loan Underwriting

     Doral Bank PR’s underwriting standards are designed to comply with the relevant guidelines set forth by the Department of Housing and Urban Development (“HUD”), VA, FNMA, FHLMC, Federal and Puerto Rico banking regulatory authorities, private mortgage investment conduits and private mortgage insurers, as applicable.

     Doral Bank PR’s underwriting policies focus primarily on the borrower’s ability to pay and secondarily on collateral value. The maximum loan-to-value ratio on conventional first mortgages generally does not exceeds 80%. Doral Bank PR also offers certain first mortgage products with higher loan-to-value ratios, which may require private mortgage insurance. In conjunction with a first mortgage, Doral Bank PR may also provide a borrower with additional financing through a closed end second mortgage loan, whose combined loan-to-value ratio exceeds 80%. Doral Bank PR does not originate adjustable rate mortgages (“ARM”) or negatively amortizing loans.

     During the first half of 2006, the Company originated loans through various mortgage-banking subsidiaries each of which had different underwriting processes. During the second half of 2006, the Company revamped its underwriting process to achieve a uniform rules-based standard and improve the quality of its non-conforming loan originations. The implementation of these standards contributed to a significant reduction in the Company’s loan originations during the second half of 2006 and the first two quarters of 2007. The Company, however, believes that these changes have allowed it to more efficiently underwrite assets with better credit quality that is consistent with the Company’s goal of retaining a greater portion of its loan production. Doral Bank PR retains the majority of its non-conforming loan originations in portfolio.

     The Company uses external credit scores as a useful measure for assessing the credit quality of a borrower. These scores are supplied by credit information providers, based on statistical models that summarize an individual’s credit record. FICO^® scores, developed by Fair Isaac Corporation, are the most commonly used credit scores. The implementation of the adjustments to the Company’s underwriting standards described above has resulted in loan originations with higher FICO^® scores. Set forth below is additional information about the FICO^® scores (95 % used the latest score available to date updated as of August, 2007) of residential loans serviced by the Company as of December 31, 2007.

(Dollars in thousands)
	Residential		Percentage of
FICO® Scores	Servicing Portfolio		Total Portfolio
Not available	$	82,844		0.6	%
619 or below		3,672,388		28.0	%
620-659		1,695,679		13.0	%
660-719		3,376,557		25.8	%
720 and above		4,268,931		32.6	%
Total(1)	$	13,096,399		100.0	%
Weighted average FICO®(2)		669

(1)	Excludes U.S. servicing. Also excludes commercial, multi-family and construction loans serviced by the Company.
(2)	Weighted average FICO® scores do not include loans for which the FICO® score was not available.

     Mortgage Loan Servicing

     When Doral Financial sells originated or purchased mortgage loans, it generally retains the right to service such loans and to receive the associated servicing fees. Doral Financial’s principal source of servicing rights has traditionally been its mortgage loan production. Doral Financial also seeks to purchase servicing rights in bulk when it can identify attractive opportunities. In July of 2007, all servicing operations were transferred to Doral Bank PR.

     The Company believes that loan servicing for third parties is important to its asset/liability management tool because it provides an asset whose value in general tends to move in the opposite direction to the value

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of its loan and investment portfolio. The asset also provides additional fee income to help offset the cost of its mortgage operations.

     Servicing rights represent a contractual right and not a beneficial ownership interest in the underlying mortgage loans. Failure to service the loans in accordance with contract requirements may lead to the termination of the servicing rights and the loss of future servicing fees. In general, Doral Bank PR’s servicing agreements are terminable by the investors for cause. However, certain servicing arrangements, such as those with FNMA and FHLMC, contain termination provisions that may be triggered by changes in the servicer’s financial condition that materially and adversely affect its ability to provide satisfactory servicing of the loans. As of December 31, 2007, approximately 29% and 21% of Doral Financial’s mortgage loans serviced for others related to mortgage servicing for FNMA and GNMA, respectively. As of December 31, 2007, Doral Bank PR serviced approximately $10.1 billion in mortgage loans on behalf of third parties. Termination of Doral Bank PR’s servicing rights by either of these agencies could have a material adverse effect on Doral Financial’s results of operations and financial condition. In certain instances, the Company also services loans with no contractual servicing fee. The servicing asset or liability associated with this type of servicing arrangement is evaluated solely based on ancillary income, float, late fees, prepayment penalties and costs.

     Doral Bank PR’s mortgage loan servicing portfolio is subject to reduction by reason of normal amortization, prepayments and foreclosure of outstanding mortgage loans. Additionally, Doral Bank PR may sell mortgage loan servicing rights from time to time to other institutions if market conditions are favorable. For additional information regarding the composition of Doral Financial’s servicing portfolio as of each of the Company’s last three fiscal year-ends, refer to Table K — Mortgage Loan Servicing in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this report.

     The degree of credit risk associated with a mortgage loan servicing portfolio is largely dependent on the extent to which the servicing portfolio is non-recourse or recourse. In non-recourse servicing, the principal credit risk to the servicer is the cost of temporary advances of funds. In recourse servicing, the servicer agrees to share credit risk with the owner of the mortgage loans, such as FNMA or FHLMC, or with a private investor, insurer or guarantor. Losses on recourse servicing occur primarily when foreclosure sale proceeds of the property underlying a defaulted mortgage loan are less than the outstanding principal balance and accrued interest of such mortgage loan and the cost of holding and disposing of the underlying property. In the past, Doral Financial often sold non-conforming loans on a partial recourse basis. These recourse obligations were retained by Doral Financial when Doral Bank PR assumed the servicing rights from Doral Financial. For additional information regarding recourse obligations, see Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, “— Off-Balance Sheet Activities” in this report.

     Sale of Loans and Securitization Activities

     Doral Financial sells or securitizes a portion of the residential mortgage loans that it originates and purchases to generate income. These loans are underwritten to investor standards, including that of FNMA, FHLMC, and GNMA. As described below, Doral Financial utilizes various channels to sell its mortgage products. Doral Financial issues GNMA-guaranteed mortgage-backed securities, which involve the packaging of FHA loans, RHS loans or VA loans into pools of $1 million or more for sale primarily to broker-dealers and other institutional investors. During the years ended December 31, 2007 and 2006, Doral Financial issued approximately $155.4 million and $198.1 million, respectively, in GNMA-guaranteed mortgage-backed securities.

     Conforming conventional loans are generally either sold directly to FNMA, FHLMC or private investors for cash, or are grouped into pools of $1 million or more in aggregate principal balance and exchanged for FNMA or FHLMC-issued mortgage-backed securities, which Doral Financial sells to broker-dealers. In connection with such exchanges, Doral Financial pays guarantee fees to FNMA and FHLMC. The issuance of mortgage-backed securities provides Doral Financial with flexibility in selling the mortgage loans that it originates or purchases and also provides income by increasing the value and marketability of such loans.

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     For the years ended December 31, 2007 and 2006, Doral Financial securitized approximately $78.2 million and $53.5 million, respectively, of loans into FNMA and FHLMC mortgage-backed securities. In addition, for the years ended December 31, 2007 and 2006, Doral Financial sold approximately $62.6 million and $177.1 million, respectively, of loans through the FNMA and FHLMC cash window programs.

     Prior to July 2005, the Company also sold mortgage loans that did not conform to GNMA, FNMA or FHLMC requirements (non-conforming loans) as whole loans to local financial institutions or to FNMA or FHLMC and other financial institutions in negotiated transactions. Many of Doral Financial’s whole loan sales to local financial institutions historically were structured similarly to securitization transactions. When Doral Financial sold a pool of loans to an investor, it retained the servicing rights and agreed to pay the purchaser a specified pass-through rate for the entire pool that was below the weighted-average coupon of the underlying mortgage loans. Any amounts received on the mortgages above the pass-through rate were retained by Doral Financial. The pass-through rate paid to the investors was normally a variable rate generally based on a spread over the three-month LIBOR. The present values of the future cash flows retained by Doral Financial above any contractual servicing fees are recognized on the Company’s financial statements as interest-only strips (“IOs”). Since July 2005, Doral Financial no longer structures its whole loan sales in this manner and sold its non-conforming loans in the US secondary market for cash without any retained interest, other than the retained mortgage servicing rights.

     Prior to the fourth quarter of 2005, Doral Financial’s non-conforming loan sales were generally made on a limited recourse basis. Pursuant to the restructuring of several recourse transactions consummated during 2006, the Company’s outstanding principal balance of loans sold subject to recourse decreased by $1.2 billion, from $2.4 billion as of December 31, 2005 to $1.2 billion as of December 31, 2006. As of December 31, 2007 and 2006, Doral Financial’s maximum contractual exposure relating to its portfolio of loans sold with recourse was approximately $1.1 billion and $1.0 billion, respectively, which included recourse obligations to FNMA and FHLMC as of such dates of approximately $1.0 billion and $0.9 billion, respectively. As of December 31, 2007 and 2006, Doral Financial had a recourse liability of $11.8 million and $9.5 million, respectively, to reflect estimated losses from such recourse arrangements.

     Commencing in the fourth quarter of 2005 and continuing throughout 2006, when the Company sold non-conforming loans to major financial institutions in the US mainland it has done so on a non-recourse basis, except recourse for certain early defaults. During 2007, the Company retained all of its non-conforming loan production in its loan receivable portfolio. While the Company currently anticipates that it will continue to retain its non-conforming loan originations in portfolio, in the future, the Company may seek to continue to diversify secondary market outlets for its non-conforming loan products both in the U.S. mainland and Puerto Rico.

     In the ordinary course of business, Doral Financial makes certain representations and warranties to purchasers and insurers of mortgage loans, and in certain circumstances, such as in the event of early or first payment default, the Company retains credit risk exposure on those loans. If there is a breach of a representation or warranty or if there is an early payment default, Doral Financial may be required to repurchase the mortgage loan and bear any subsequent loss related to the loan. Doral Financial works with purchasers to review the claims and correct alleged documentation deficiencies. See Item 1A. Risk Factors, “Risks Relating to Doral Financial’s Business — Defective and repurchased loans may harm Doral Financial and may continue to adversely impact Doral Financial,” and Item 7. Management’s Discussion and Analysis and Results of Operations, “—Liquidity and Capital Resources.”

     Puerto Rico Secondary Mortgage Market and Favorable Tax Treatment

     In general, the Puerto Rico market for mortgage-backed securities is an extension of the U.S. market with respect to pricing, rating of investment instruments, and other matters. However, Doral Financial has benefited historically from certain tax incentives provided to Puerto Rico residents to invest in FHA and VA loans and GNMA securities backed by such loans.

     Under the Puerto Rico Internal Revenue Code of 1994 (the “PR Code”), the interest received on FHA and VA loans used to finance the original purchase of newly constructed housing in Puerto Rico and mortgage-

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backed securities backed by such loans is exempt from Puerto Rico income taxes. This favorable tax treatment allows Doral Financial to sell tax-exempt Puerto Rico GNMA mortgage-backed securities to local investors at higher prices than those at which comparable instruments trade in the U.S. mainland, and reduces its effective tax rate through the receipt of tax-exempt interest.

Insurance Agency Activities

     In order to take advantage of the cross-marketing opportunities provided by financial modernization legislation, enacted in 2000, Doral Financial entered the insurance agency business in Puerto Rico. Doral Insurance Agency currently earns commissions by acting as agent in connection with the sale of insurance policies issued by unaffiliated insurance companies. During 2007, 2006 and 2005, Doral Insurance Agency produced insurance fees and commissions of $8.8 million, $8.8 million and $12.4 million, respectively. Doral Insurance Agency’s activities are closely integrated with the Company’s mortgage loan originations with most policies sold to mortgage customers. Future growth of Doral Insurance Agency’s revenues will be tied to the Company’s level of mortgage originations, its ability to expand the products and services it provides and its ability to cross-market its services to Doral Financial’s existing customer base. On February 27, 2008, Doral Insurance Agency acquired an insurance portfolio of approximately 11,000 policies from Citiseguros P.R. Inc., a subsidiary of Citibank,
N.A.-Puerto Rico.

Institutional Securities Operations

     Doral Financial has been steadily decreasing the operations of this segment. During 2002, Doral Financial sold its retail securities brokerage business to an unaffiliated broker-dealer. As part of the Company’s expense reduction efforts, during the fourth quarter of 2005, the Company terminated its institutional sales and investment banking services. During 2006, the Company sold substantially all of Doral Securities’ investment securities and during the third quarter of 2007, Doral Securities voluntarily withdrew its license as a broker-dealer with the SEC and its membership with the FINRA. 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 this contract to Doral Bank PR.

Branding Strategy

     On February 1, 2008, Doral Financial implemented a new advertising campaign to promote a change to Doral’s branding. This change in branding also coincided with the Company’s business transformation efforts to emphasize a community banking strategy.

Puerto Rico Income Taxes

     The maximum statutory corporate income tax rate in Puerto Rico is 39% for the taxable year ended December 31, 2007. In August 2005, the Government of Puerto Rico approved a legislation that imposed a special transitory income tax of 2.5% on certain corporations and partnerships, including Doral Financial and its Puerto Rico subsidiaries. It increased the maximum statutory income tax rate from 39% to 41.5%. This law was effective for taxable years beginning after December 31, 2004 and ending on or before December 31, 2006. In May 2006, the Government of Puerto Rico approved an additional 2% transitory tax applicable only to banking institutions such as Doral Bank PR which increased the maximum statutory tax rate for banks to 43.5% for taxable years commencing during 2006. For taxable years beginning after December 31, 2006, the maximum statutory tax rate for all corporations, including banks, returned to 39%. Under the PR Code, corporations are not permitted to file consolidated returns with their subsidiaries and affiliates. Doral Financial is entitled to a 100% dividend received deduction on dividends received from Doral Bank PR or any other Puerto Rico subsidiary subject to tax under the PR Code.

     In computing its interest expense deduction, Doral Financial’s interest deduction is reduced in the same proportion that its average exempt obligations (including FHA and VA loans and GNMA securities) bear to its average total assets. Therefore, to the extent that Doral Financial holds FHA loans or VA loans and other tax exempt obligations, part of its interest expense may be disallowed for tax purposes.

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     Doral Financial’s international banking entity subsidiary is generally not subject to Puerto Rico income taxes on interest earned on or gains realized from the sale of non-Puerto Rico assets including certain U.S. government and agency securities.

United States Income Taxes

     Except for Doral Bank NY and Doral Money, Doral Financial and its subsidiaries are corporations organized under the laws of Puerto Rico. Accordingly, Doral Financial and its Puerto Rico subsidiaries are generally only required to pay U.S. federal income tax on their income, if any, derived from the active conduct of a trade or business within the United States (excluding Puerto Rico) or from certain investment income earned from U.S. sources. Doral Bank NY and Doral Money are subject to both federal and state income taxes on the income derived from their operations in the United States. Dividends paid by Doral Bank NY to Doral Financial or by Doral Money to Doral Bank PR are subject to a 10% withholding tax.

Employees

     As of January 31, 2008, Doral Financial employed 1,371 persons compared to 1,435 as of December 31, 2007 and 1,310 as of December 31, 2006. Of the total number of employees 1,351 were employed in Puerto Rico and 20 employed in New York City as of January 31, 2008, compared to 1,416 employed in PR and 19 employed in New York City as of December 31, 2007 and to 1,190 employed in Puerto Rico and 120 employed in New York City as of December 31, 2006. As of January 31, 2008, of the total number of employees, 390 were employed in loan production and servicing activities, 578 were involved in branch operations, and 403 in administrative activities. As of such date, Doral Financial’s banking operations had 1,343 employees. None of Doral Financial’s employees are represented by a labor union and Doral Financial considers its employee relations to be good.

Segment Disclosure

     For information regarding Doral Financial’s operating segments, please refer to Note 32 to Doral Financial’s consolidated financial statements, “Segment Information,” and the information provided under Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation, “Operating Segments” in this report.

     Puerto Rico is the principal market for Doral Financial. Doral Financial’s Puerto Rico-based operations accounted for 99% of Doral Financial’s consolidated assets as of December 31, 2007 and 99% of Doral Financial’s consolidated losses for the year then ended. Approximately 92% of total loan originations were secured by real estate properties located in Puerto Rico. The following table sets forth the geographic composition of Doral Financial’s loan originations:

	Year Ended December 31,
	2007			2006			2005
Puerto Rico		96	%		93	%		95	%
United States		4	%		7	%		5	%

Market Area and Competition

     Puerto Rico is Doral Financial’s primary service area. The competition in Puerto Rico for the origination of loans and attracting of deposits is substantial. Competition comes not only from local commercial banks and credit unions, but also from banking affiliates of banks headquartered in the United States, Spain and Canada. In mortgage lending, the Company also faces competition from independent mortgage banking companies. Doral Financial competes principally by offering loans with competitive features, by emphasizing the quality of its service and by pricing its range of products at competitive rates.

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The Commonwealth of Puerto Rico

     General. The Island of Puerto Rico, located in the Caribbean, is approximately 100 miles long and 35 miles wide, with an area of 3,423 square miles. The United States Census Bureau estimated that the population of Puerto Rico was 3,927,776 as of July 1, 2006. Puerto Rico is the fourth largest and most economically developed of the Caribbean islands. Its capital, San Juan, is located approximately 1,600 miles southeast of New York City and had an estimated population of 434,375 as of 2000.

     Relationship of Puerto Rico with the United States. Puerto Rico has been under the jurisdiction of the United States since 1898. The United States and Puerto Rico share a common defense, market and currency. As a commonwealth of the United States, Puerto Rico exercises virtually the same control over its internal affairs as do the fifty states. There is a federal district court in Puerto Rico and most federal laws are applicable to Puerto Rico. The United States postal service operates in Puerto Rico in the same manner as in the mainland United States. The people of Puerto Rico are citizens of the United States, but do not vote in national elections, and are represented in Congress by a Resident Commissioner who has a voice in the House of Representatives, and has limited voting rights. Most federal taxes, except those, such as social security taxes, which are imposed by mutual consent, are not levied in Puerto Rico. No federal income tax is collected from Puerto Rico residents on ordinary income earned from sources within Puerto Rico, except for certain federal employees who are subject to taxes on their salaries.

     The Economy. The economy of Puerto Rico is closely linked to that of the mainland United States. Most of the external factors that affect the Puerto Rico economy (other than the price of oil) are determined by the policies of, and economic conditions prevailing in, the United States. These external factors include exports, direct investment, the amount of federal transfer payments, the level of interest rates, the rate of inflation, and tourist expenditures. During the fiscal year ended June 30, 2006, approximately 83% of Puerto Rico’s exports went to the US mainland, which was also the source of approximately 51% of Puerto Rico’s imports. In the past, the economy of Puerto Rico has generally followed economic trends in the overall United States economy. However, in recent years, economic growth in Puerto Rico has lagged behind growth in the United States.

     The dominant sectors of the Puerto Rico economy in terms of production and income are manufacturing and services. The manufacturing sector has undergone fundamental changes over the years as a result of an increased emphasis on higher-wage, high-technology industries, such as pharmaceuticals, biotechnology, computers, microprocessors, professional and scientific instruments, and certain high-technology machinery and equipment. The services sector, including finance, insurance, real estate, wholesale and retail trade, and tourism, also plays a major role in the economy. It ranks second to manufacturing in contribution to Puerto Rico’s gross domestic product and leads all sectors in providing employment.

     Preliminary figures for the fiscal year ended June 30, 2006 show that gross national product increased from $45.0 billion (in current dollars) for fiscal year 2002 to $56.7 billion (in current dollars) for fiscal year 2006. In fiscal year 2006, personal income per capita was $12,997. Total average annual employment as measured by, the Puerto Rico Department of Labor and Human Resources Household Employment Survey, increased 6.3% from fiscal year 2003 to fiscal year 2007, reaching 1,262,900. Unemployment, although at relatively low historical levels, remains well above the United States average. The average unemployment rate decreased from the 11.7% reported in fiscal year 2006 to 10.4% in fiscal year 2007. The unemployment rate for the first seven months of fiscal year 2007 was 10.3%, a decrease from 11.7% for the same period of fiscal year 2006. Employment figures for the first three months of fiscal year 2008 show that unemployment is increasing, reaching 11.0% for September 2007. The value of construction permits decreased by 7.3% for the first ten months of 2007 compared to the same period in 2006.

     Future growth of the Puerto Rico economy will depend on several factors including the condition of the United States economy, the relative stability in the price of oil imports, the exchange value of the United States dollar, the level of interest rates and changes to existing tax incentive legislation. Currently, after a number of downward revisions reflecting deterioration in several key economic indicators, the Puerto Rico Planning Board estimated that the real gross national product decreased by 1.4% for the fiscal year ending June 30, 2007. Key economic indicators show that the economy has been contracting since April 2006 and

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this trend is expected to continue through the first half of 2008. The head of the PR Planning Board Economic Research Unit recently stated that forecasted growth for fiscal year 2008 would be revised downward to a negative 1.8%. The major factors currently adversely affecting the economy are the relatively high level of oil prices, the depreciation of the dollar (which affects the value of imports from foreign countries, which account for approximately 50% of total imports to Puerto Rico), and the continuing economic uncertainty generated by the Commonwealth’s fiscal crisis, among others.

     Current Fiscal Situation. On May 25, 2006, the Governor signed a legislation providing for fiscal reform of the Commonwealth government, including, among other things, the reduction of government spending, the elimination or consolidation of redundant agencies and the reduction of government payroll. On July 4, 2006, the Puerto Rico legislature approved legislation amending the PR Code to provide, among other things, for a general sales and use tax of 5.5% and a municipal sales and use tax of 1.5%. Although the tax and fiscal reforms have been adopted, there can be no assurance that such measures will generate the projected revenues or savings. The Secretary of Treasury has publicly stated that governmental revenues are lagging behind projections for the fiscal year ending June 30, 2008. The inability for the government to approve a budget in a timely fashion led to a two-week government shutdown in 2006. The Company cannot predict the impact that the current fiscal situation of the Commonwealth of Puerto Rico will have on the Puerto Rico economy and thus on Doral Financial’s operations.

     Ratings of Commonwealth of Puerto Rico Obligations. On May 22, 2007, S&P lowered its rating on the Commonwealth’s general obligation debt to “BBB-”, changed its ratings outlook to stable and confirmed its BBB- rating on the Commonwealth’s appropriation debt. S&P had placed a negative rating outlook on the Commonwealth’s general obligation debt on March 22, 2006, as a result of the Commonwealth’s anticipated budget deficit for fiscal year 2006, slow progress on tax and fiscal reform and the apparent political impasse regarding these measures. In November 2007, Moody’s confirmed its “Baa3” and “Ba1” rating on the Commonwealth’s general obligation debt and appropriation debt, respectively, but upgraded the outlook of the Commonwealth’s credit ratings to “stable” from “negative”. For more information relating to the Commonwealth’s ratings please refer to www.moodys.com and www.standardandpoors.com.

REGULATION AND SUPERVISION

Mortgage Origination and Servicing Activities

Federal Regulation

     Doral Financial’s mortgage origination and servicing operations are subject to the rules and regulations of FHA, VA, RHS, FNMA, FHLMC, HUD and GNMA with respect to the origination, processing, selling and servicing of mortgage loans and the issuance and sale of mortgage-backed securities. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines which include provisions for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts, and with respect to VA loans, fix maximum interest rates. Moreover, lenders such as Doral Financial are required annually to submit to FHA, VA, RHS, FNMA, FHLMC, GNMA and HUD audited financial statements, and each regulatory entity has its own requirements. Doral Financial’s affairs are also subject to supervision and examination by FHA, VA, RHS, FNMA, FHLMC, GNMA and HUD at all times to ensure compliance with the applicable regulations, policies and procedures. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, the Real Estate Settlement Procedures Act and the regulations promulgated thereunder which, among other things, prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. Doral Financial is also subject to regulation by the Office of the Commissioner of Financial Institutions of Puerto Rico (the “Office of the Commissioner”), with respect to, among other things, licensing requirements and maximum origination fees on certain types of mortgage loan products.

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Puerto Rico Regulation

     Doral Mortgage and Doral Financial are licensed by the Office of the Commissioner as mortgage banking institutions. Such authorization to act as mortgage banking institution must be renewed as of December 1 of each year. In the past, Doral Financial and its subsidiaries have not had any difficulty in renewing their authorizations to act as mortgage banking institutions and management is unaware of any existing practices, conditions or violations which would result in Doral Financial being unable to receive such authorization in the future. Doral Financial’s operations in the mainland United States are subject to regulation by state regulators in the states in which it conducts business.

     Section 5 of the Puerto Rico Mortgage Banking Institutions Law (the “Mortgage Banking Law”) requires the prior approval of the Office of the Commissioner for the acquisition of control of any mortgage banking institution licensed under the Mortgage Banking Law. For purposes of the Mortgage Banking Law, the term “control” means the power to direct or influence decisively, directly or indirectly, the management or policies of a mortgage banking institution. The Mortgage Banking Law provides that a transaction that results in the holding of less than 10% of the outstanding voting securities of a mortgage banking institution shall not be considered a change of control. Pursuant to Section 5 of the Mortgage Banking Law, upon receipt of notice of a proposed transaction that may result in a change of control, the Office of the Commissioner is obligated to make such inquiries as it deems necessary to review the transaction. Under the Mortgage Banking Law, the determination of the Office of the Commissioner whether or not to authorize a proposed change of control is final and non-appealable.

Banking Activities

     Federal Regulation

     General

     Doral Financial is a bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956 (the “BHC Act”), as amended by the Gramm-Leach-Bliley Act of 1999 (the “Gramm-Leach-Bliley Act”). As a bank holding company, Doral Financial’s activities and those of its banking and non-banking subsidiaries are limited to banking activities and such other activities the Federal Reserve has determined to be closely related to the business of banking. Under the Gramm-Leach-Bliley Act, financial holding companies can engage in a broader range of financial activities than other holding companies. Given the difficulties faced by Doral Financial following the restatement of its audited financial statements for the period between January 1, 2000 to December 31, 2004, the Company filed a notice with the Federal Reserve withdrawing its election to be treated as a financial holding company, which became effective on January 8, 2008. See “—Financial Modernization Legislation” below for a description of the expanded powers of financial holding companies. The withdrawal of its election to be treated as a financial holding company has not adversely affected and is not expected to adversely affect Doral Financial’s current operations, all of which are permitted for bank holding companies that have not elected to be treated as financial holding companies. Specifically, Doral Financial is authorized to engage in insurance agency activities in Puerto Rico pursuant to Regulation K promulgated under the BHC Act. Under the BHC Act, Doral Financial may not, directly or indirectly, acquire the ownership or control of more than 5% of any class of voting shares of a bank or another bank holding company without the prior approval of the Federal Reserve.

     Doral Bank PR is subject to supervision and examination by applicable federal and state banking agencies, including the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Commissioner. Doral Bank NY is subject to supervision and examination by the Office of Thrift Supervision (“OTS”) and the FDIC. Doral Financial’s banking subsidiaries are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of other investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of Doral Financial’s banking subsidiaries. In addition to the impact of regulation, commercial and savings banks are affected significantly by the actions of the Federal Reserve as it attempts to control the money supply and credit availability in order to influence the economy.

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     On March 17, 2006, the Company and its principal Puerto Rico banking subsidiary, Doral Bank PR, entered into consent orders with the Federal Reserve, the FDIC and the Office of the Commissioner. On January 14, 2008, the FDIC and the Office of the Commissioner jointly released Doral Bank PR from the March 16, 2006 consent order. On February 19, 2008, Doral Bank PR and the FDIC entered into a new consent order related to BSA. For a detailed description of how these orders and certain other regulatory proceedings affect Doral Bank PR, please refer to Part I, Item 3. Legal Proceedings, in this report.

     Doral Financial’s banking subsidiaries are subject to certain regulations promulgated by the Federal Reserve including Regulation B (Equal Credit Opportunity Act), Regulation DD (The Truth in Savings Act), Regulation E (Electronic Funds Transfer Act), Regulation F (Limits on Exposure to Other Banks), Regulation Z (Truth-in-Lending Act), Regulation CC (Expedited Funds Availability Act), Regulation X (Real Estate Settlement Procedures Act), Regulation BB (Community Reinvestment Act) and Regulation C (Home Mortgage Disclosure Act).

     Holding Company Structure

     Doral Bank PR and Doral Bank NY, as well as any other insured depository institution subsidiary organized by Doral Financial in the future, are subject to restrictions under federal law that govern certain transactions with Doral Financial or other non-banking subsidiaries of Doral Financial, whether in the form of loans, other extensions of credit, investments or asset purchases and sales. Such transactions by any depository institution subsidiary with Doral Financial, or with any one of Doral Financial’s non-banking subsidiaries, are limited in amount to 10% of the depository institution’s capital stock and surplus and, with respect to all of its non-banking subsidiaries, to an aggregate of 20% of the transferring institution’s capital stock and surplus. Furthermore, such loans and extensions of credit by the depository institution subsidiary are required to be secured in specified amounts and must be at market rates and on terms and conditions that are consistent with safe and sound banking practices. All other transactions between Doral Financial or any of its non-banking subsidiaries and any of the depository institution subsidiaries, while not subject to quantitative or collateral requirements, are subject to the requirement that they be on terms and conditions no less favorable to the banking subsidiary than would be available to unaffiliated third parties.

     Under Federal Reserve policy, a bank holding company such as Doral Financial is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each such subsidiary bank. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. In addition, any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary depository institution will be assumed by the bankruptcy trustee and entitled to priority of payment.

     As a bank holding company, Doral Financial’s right to participate in the assets of any subsidiary upon the latter’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors (including depositors in the case of depository institution subsidiaries) except to the extent that Doral Financial may itself be a creditor with recognized claims against the subsidiary.

     Under the Federal Deposit Insurance Act (the “FDIA”), a depository institution (which term includes both commercial banks and savings banks), the deposits of which are insured by the FDIC, can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution; or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution “in danger of default.” “Default” is defined generally as the appointment of a conservator or a receiver and “in danger of default” is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. In some circumstances (depending upon the amount of the loss or anticipated loss

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suffered by the FDIC), cross-guarantee liability may result in the ultimate failure or insolvency of one or more insured depository institutions in a holding company structure. Any obligation or liability owned by a subsidiary depository institution to its parent company is subordinated to the subsidiary bank’s cross-guarantee liability with respect to commonly controlled insured depository institutions.

     Financial Modernization Legislation

     On January 8, 2008, Doral Financial withdrew its election to be treated as a financial holding company. Under the Gramm-Leach-Bliley Act, bank holding companies, all of whose depository institutions are “well capitalized” and “well managed,” as defined in the BHC Act, and which obtain satisfactory Community Reinvestment Act ratings, may elect to be treated as financial holding companies (“FHCs”). FHCs are permitted to engage in a broader spectrum of activities than those permitted to other bank holding companies. FHCs can engage in any activities that are “financial” in nature, including insurance underwriting and brokerage, and underwriting and dealing in securities without a revenue limit or other limits applicable to foreign securities affiliates (which include Puerto Rico securities affiliates for these purposes). As noted above, the withdrawal of financial holding company status did not adversely affect Doral Financial’s current operations.

     The Gramm-Leach-Bliley Act also modified other laws, including laws related to financial privacy and community reinvestment. The new financial privacy provisions generally prohibit financial institutions, including Doral Financial’s mortgage banking and banking subsidiaries from disclosing non-public personal financial information to third parties unless customers have the opportunity to “opt out” of the disclosure.

     Capital Adequacy

     Under the Federal Reserve’s risk-based capital guidelines for bank holding companies, the minimum guidelines for the ratio of qualifying total capital (“Total Capital”) to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8%. At least half of Total Capital is to be comprised of common equity, retained earnings, minority interests in unconsolidated subsidiaries, noncumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock, in the case of a bank holding company, less goodwill and certain other intangible assets discussed below (“Tier 1 Capital”). The remainder may consist of a limited amount of subordinated debt, other preferred stock, certain other instruments and a limited amount of loan and lease loss reserves (“Tier 2 Capital”).

     The Federal Reserve has adopted regulations that require most intangibles, including core deposit intangibles, to be deducted from Tier l Capital. The regulations, however, permit the inclusion of a limited amount of intangibles related to readily marketable mortgage servicing rights and purchased credit card relationships and include a “grandfather” provision permitting the continued inclusion of certain existing intangibles.

     In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to total assets, less goodwill and certain other intangible assets discussed below (the “Leverage Ratio”) of 3% for bank holding companies that have the highest regulatory rating or have implemented the Federal Reserve’s market risk capital measure. All other bank holding companies are required to maintain a minimum Leverage Ratio of 4%. The guidelines also provide that banking organizations experiencing significant internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve will continue to consider a “tangible Tier 1 Leverage Ratio” and other indicators of capital strength in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organization’s Tier 1 Capital, less all intangibles, to average total assets, less all intangibles.

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     The FDIC and the OTS have established regulatory capital requirements for state non-member insured banks and federal savings banks, such as Doral Bank PR and Doral Bank NY, respectively, that are substantially similar to those adopted by the Federal Reserve for bank holding companies.

     Set forth below are Doral Financial’s, Doral Bank PR’s and Doral Bank NY’s capital ratios at December 31, 2007, based on existing Federal Reserve, FDIC and OTS guidelines.

				Banking Subsidiaries
										Well
	Doral			Doral			Doral			Capitalized
	Financial(1)			Bank PR			Bank NY			Minimum
Total capital ratio (total capital to risk weighted assets)		17.8	%		12.2	%		13.8	%		10.0	%
Tier 1 capital ratio (Tier 1 capital to risk weighted assets)		16.5	%		10.9	%		13.0	%		6.0	%
Leverage ratio(2)		10.8	%		5.7	%		10.6	%		5.0	%

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

     As of December 31, 2007, 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. See Pat II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, “- Regulatory Capital Ratios” for additional information regarding Doral Financial’s regulatory capital ratios. Both of the Company’s banking subsidiaries are “well capitalized.” Under the consent order entered into with the Federal Reserve, the Company filed a capital plan with the Federal Reserve in which it agreed to maintain a leverage ratio of at least 5.5% for Doral Financial and 6.0% for Doral Bank PR. As a result in the increase in the allowance for loan losses recorded by Doral Bank PR during the fourth quarter of 2007, its leverage ratio dropped to 5.7%. As a result of the completion of the Recapitalization in July 2007, Doral Financial leverage ratio increased well above required levels.

     On February 15, 2008, the Board of Directors of Doral Financial approved a capital infusion of $80.0 million to Doral Bank, PR to raise its leverage ratio above 6.0%.

     Failure to meet capital guidelines could subject a bank holding company or an insured bank to a variety of enforcement remedies, including, with respect to an insured bank or savings bank, the termination of deposit insurance by the FDIC, and to certain restrictions on its business. See “FDICIA” below.

     Basel II Capital Standards

     The minimum risk-based capital requirements adopted by the federal banking agencies follow the Capital Accord of the Basel Committee on Banking Supervision. In 2004, the Basel Committee published its new capital guidelines (“Basel II”) governing the capital adequacy of large, internationally active banking organizations (“core banking organizations”) with at least $250.0 billion in total assets or at least $10.0 billion in foreign exposure. In November 2007, the federal banking agencies adopted final rules to implement Basel II for core banking organizations. Under Basel II, core banking organizations will be required to enhance the measurement and management of their risks, including credit risk and operational risk, through the use of advanced approaches for calculating risk-based capital requirements. The agencies announced they will issue a proposed rule that will provide all non-core banking organizations which are not required to adopt Basel II’s advance approaches, such as Doral Bank PR, with the option to adopt a standardized approach under Basel II. The proposed rule is intended to be finalized before the core banking organizations may start their first transition period under Basel II (December 1, 2009). This new proposal will replace the earlier proposal to adopt the so-called Basel IA option.

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     Until such time as the new rules for non-core banking institutions are adopted, Doral Financial is unable to predict whether it will adopt a standardized approach under Basel II or the effect that the new rules for non-core banking institutions might have on Doral Bank PR’s financial condition or results of its operations.

     Opting into the Basel II Accord standard would require Doral Bank to implement advanced measurement techniques employing internal estimates of certain key risk drivers to derive capital requirements. Opting into the Basel II Accord may also require meeting more onerous computational requirements. Prior to implementation of the new capital regime, a bank holding company will be required to demonstrate to its primary federal regulator that its measurement approaches meet relevant supervisory standards.

     FDICIA

     Under the Federal Deposit Insurance Corporation Improvement Act of 1991 and the regulations promulgated thereunder (“FDICIA”), federal banking regulators must take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. FDICIA and the regulations thereunder, establish five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” A depository institution is deemed to be well capitalized if it maintains a Leverage Ratio of at least 5%, a risk-based Tier 1 capital ratio of at least 6% and a risk-based Total Capital ratio of at least 10%, and is not subject to any written agreement or regulatory directive to meet a specific capital level. A depository institution is deemed to be adequately capitalized if it is not well capitalized but maintains a Leverage Ratio of at least 4% (or at least 3% if given the highest regulatory rating and not experiencing or anticipating significant growth), a risk-based Tier l capital ratio of at least 4% and a risk-based Total Capital ratio of at least 8%. A depository institution is deemed to be undercapitalized if it fails to meet the standards for adequately capitalized institutions (unless it is deemed to be significantly or critically undercapitalized). An institution is deemed to be significantly undercapitalized if it has a Leverage Ratio of less than 3%, a risk-based Tier 1 capital ratio of less than 3% or a risk-based Total Capital ratio of less than 6%. An institution is deemed to be critically undercapitalized if it has tangible equity equal to 2% or less of total assets. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives a less than satisfactory examination rating in any one of four categories.

     At December 31, 2007, Doral Financial’s banking subsidiaries were well capitalized. Doral Financial’s, Doral Bank PR’s and Doral Bank NY’s capital categories, as determined by applying the prompt corrective action provisions of FDICIA, may not constitute an accurate representation of the overall financial condition or prospects of Doral Financial, Doral Bank PR or Doral Bank NY, and should be considered in conjunction with other available information regarding the institutions’ financial condition and results of operations.

     FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution’s holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. If a depository institution fails to submit an acceptable plan, it is treated as if it were significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator.

     The capital-based prompt corrective action provisions of FDICIA and their implementing regulations apply to FDIC-insured depository institutions such as Doral Bank PR and Doral Bank NY, but they are not

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directly applicable to bank holding companies, such as Doral Financial, which control such institutions. However, federal banking agencies have indicated that, in regulating bank holding companies, they may take appropriate action at the holding company level based on their assessment of the effectiveness of supervisory actions imposed upon subsidiary insured depository institutions pursuant to such provisions and regulations.

     Interstate Banking Legislation

     Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”) amended the FDIA and certain other statutes to permit state and national banks with different home states to merge across state lines, with the approval of the appropriate federal banking agency, unless the home state of a participating bank had passed legislation prior to May 31, 1997, expressly prohibiting interstate mergers. Under the Riegle-Neal Act amendments, once a state or national bank has established branches in a state, that bank may establish and acquire additional branches at any location in the state at which any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. If a state opts out of interstate branching within the specified time period, no bank in any other state may establish a branch in the state which has opted out, whether through an acquisition or de novo.

     For purposes of the Riegle-Neal Act amendments to the FDIA, Doral Bank PR is treated as a state bank and is subject to the same restrictions on interstate branching as other state banks. However, for purposes of the International Banking Act (the “IBA”), Doral Bank PR is considered to be a foreign bank and may branch interstate by merger or de novo to the same extent as a domestic bank in Doral Bank PR’s home state. Because Doral Bank PR does not currently operate in the mainland United States, it has not designated a “home state” for purposes of the IBA. It is not yet possible to determine how these statutes will be harmonized, with respect either to which federal agency will approve interstate transactions or with respect to which “home state” determination rules will apply.

     As a federal savings bank, Doral Bank NY is subject to the branching regulations promulgated by the OTS. Such regulations allow Doral Bank NY to branch on an interstate basis without geographic limitations.

     American Jobs Creation Act of 2004

     On October 22, 2004, the President of the United States signed into law the American Jobs Creation Act of 2004, which lowered the withholding tax rate imposed on distributions of U.S.-sourced dividends to a corporation organized under the laws of the Commonwealth of Puerto Rico from 30% to 10%.

     Dividend Restrictions

     The payment of dividends to Doral Financial by its banking subsidiaries may be affected by regulatory requirements and policies, such as the maintenance of adequate capital. If, in the opinion of the applicable regulatory authority, a depository institution under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice that, (depending on the financial condition of the depository institution, could include the payment of dividends), such authority may require, after notice and hearing, that such depository institution cease and desist from such practice. The Federal Reserve has issued a policy statement that provides that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. In addition, all insured depository institutions are subject to the capital-based limitations required by FDICIA. See “-FDICIA” above for additional information.

     On February 9, 2006, the OTS notified Doral Bank NY that, until further notice, it could not pay any dividends to Doral Financial without the prior written approval of the OTS. In connection with the Recapitalization, Doral Bank NY received the approval of the OTS to make a capital distribution to Doral Financial in the amount of $50.0 million of which $45.0 million was made on July 20, 2007. The OTS withdrew this notice on March 6, 2008.

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     On March 17, 2006, Doral Financial and its principal Puerto Rico banking subsidiary, Doral Bank PR, entered into consent orders with the Federal Reserve, the FDIC and the Office of the Commissioner. The mutually agreed upon orders prohibit Doral Bank PR from paying dividends to Doral Financial without obtaining prior written approval from the FDIC and Federal Reserve. The FDIC and the Office of the Commissioner lifted their consent order on January 17, 2008. The consent order with the Federal Reserve remains in effect.

     See “Regulation and Supervision — Banking Activities — Puerto Rico Regulation,” below, for a description of certain restrictions on Doral Bank PR’s ability to pay dividends under Puerto Rico law. See “Regulation and Supervision — Banking Activities — Savings Bank Regulation,” below, for a description of certain restrictions on Doral Bank NY’s ability to pay dividends under OTS regulations.

     FDIC Insurance Assessments

     The deposits of Doral Bank PR and Doral Bank NY are subject to FDIC deposit insurance assessments. On February 8, 2006 the President of the United States signed the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”) which became effective January 1, 2007. The Reform Act provides for the merger of the Bank Insurance Fund (“BIF”) and Savings Association Insurance Fund (“SAIF”) into a single Deposit Insurance Fund (“DIF”), an increase in the maximum amount of insurance coverage for certain retirement accounts, and possible “inflation adjustments” in the maximum amount of coverage available with respect to other insured accounts. In addition, it granted a one-time initial assessment credit (of approximately $4.7 billion) to recognize institutions’ past contributions to the fund.

     Pursuant to FDICIA, the FDIC has adopted a risk-based assessment system, under which the assessment rate for an insured depository institution varies according to the level of risk incurred in its activities. An institution’s risk category is based partly upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution is also assigned to one of the following “supervisory subgroups”: “A,” “B” or “C.” Group “A” institutions are financially sound institutions with only a few minor weaknesses; group “B” institutions are those that demonstrate weaknesses that, if not corrected, could result in significant deterioration; and group “C” institutions are those for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution, unless effective action is taken to correct the areas of weakness.

     For 2007, premiums related to deposits assessed by both the BIF and the SAIF are to be assessed at a rate between 0 cents and 27 cents per $100 of deposits. In recent years, well capitalized and well managed banks have paid no premiums for FDIC insurance. In the future, even well capitalized and well managed banks may be required to pay premiums on deposit insurance. It is not possible to determine when any such premiums will become assessable or the level of such premiums.

     Under the Reform Act, the FDIC made significant changes to its risk-based assessment system so that effective January 1, 2007 the FDIC imposes insurance premiums based upon a matrix that is designed to more closely tie what banks pay for deposit insurance to the risks they pose. The new FDIC risk-based assessment system imposes premiums based upon factors that vary depending upon the size of the bank. These factors are: for banks with less than $10 billion in assets — capital level, supervisory rating, and certain financial ratios; for banks with $10 billion up to $30 billion in assets — capital level, supervisory rating, certain financial ratios and (if at least one is available) debt issuer ratings, and additional risk information; and for banks with over $30 billion in assets — capital level, supervisory rating, debt issuer ratings (unless none are available in which case certain financial ratios are used), and additional risk information. The FDIC has adopted a new base schedule of rates that the FDIC can adjust up or down, depending on the revenue needs of the DIF, and has set initial premiums for 2007 that range from 5 cents per $100 of domestic deposits for the banks in the lowest risk category to 43 cents per $100 of domestic deposits for banks in the highest risk category. The new assessment system is expected to result in increased annual assessments on the deposits of Doral Financial’s banking subsidiaries of 5 to 7 basis points per $100 of deposits. Doral Financial’s banking subsidiaries have available an FDIC credit to offset future assessments. Significant increases in the insurance assessments of our bank subsidiaries will increase our costs once the credit is fully utilized.

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     The Deposit Insurance Funds Act of 1996 also separated the Financing Corporation assessment to service the interest on its bond obligations from the BIF and SAIF assessments. The amount assessed on individual institutions by the Financing Corporation is in addition to the amount, if any, paid for deposit insurance according to the FDIC’s risk-related assessment rate schedules. The current Financing Corporation annual assessment rate is 1.26 cents per $100 of deposits. As of December 31, 2007, Doral Bank PR and Doral Bank NY had a deposit base of approximately $2.4 billion and $117.0 million, respectively.

     Community Reinvestment

     Under the Community Reinvestment Act (“CRA”), each insured depository institution has a continuing and affirmative obligation, consistent with the safe and sound operation of such institution, to help meet the credit needs of its entire community, including low-and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for such institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires each federal banking agency, in connection with its examination of an insured depository institution, to assess and assign one of four ratings to the institution’s record of meeting the credit needs of its community and to take such records into account in its evaluation of certain applications by the institution, including application for charters, branches and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities and savings and loan holding company acquisitions. The CRA also requires that all institutions make public disclosure of their CRA ratings. Doral Bank PR received a rating of high satisfactory as of the most recent CRA report of the FDIC.

     Brokered Deposits

     FDIC regulations adopted under FDICIA govern the receipt of brokered deposits. Under these regulations, a bank cannot accept, roll over or renew brokered deposits (which term is defined also to include any deposit with an interest rate more than 75 basis points above prevailing rates) unless (i) it is well capitalized, or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank that is adequately capitalized may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates specified by regulation. There are no such restrictions on a bank that is well capitalized. Doral Financial does not believe the brokered deposits regulation has had or will have a material effect on the funding or liquidity of its banking subsidiaries, which are currently well capitalized institutions.

     As of December 31, 2007, Doral Bank PR had a total of approximately $2.5 billion of brokered deposits, compared to approximately $2.0 billion as of December 31, 2006. Doral Bank PR uses brokered deposits as a source of inexpensive funding. While, Doral Bank NY did not have any brokered deposits as of December 31, 2007, it has had brokered deposits in the past. As of June 30, 2007, Doral Bank NY had approximately $17.7 million of brokered deposits. The brokered deposits were sold in the third quarter of 2007 in connection with the sale of Doral Bank NY’s branch network and related assets.

     USA Patriot Act of 2001

     On October 26, 2001, the President of the United States signed into law comprehensive anti-terrorism legislation known as the USA PATRIOT Act of 2001 (the “USA Patriot Act”). Title III of the USA Patriot Act substantially broadened the scope of US anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States.

     The US Treasury Department (“Treasury”) has issued a number of regulations implementing the USA Patriot Act that apply certain of its requirements on financial institutions, including Doral Financial’s banking subsidiaries. The regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.

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     Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal and reputational consequences for the institution. Doral Financial believes that the cost of complying with Title III of the USA Patriot Act is not likely to be material to Doral Financial. Please refer to Item 3. Legal Proceedings — Banking Regulatory Matters, for a description of a consent order entered into by Doral Bank PR on February 19, 2008 with the FDIC regarding compliance with various provisions of the Bank Secrecy Act.

     Puerto Rico Regulation

     General

     As a commercial bank organized under the laws of the Commonwealth of Puerto Rico, Doral Bank PR is subject to supervision, examination and regulation by the Office of the Commissioner, pursuant to the Puerto Rico Banking Act of 1933, as amended (the “Banking Law”).

     Section 27 of the Banking Law requires that at least 10% of the yearly net income of Doral Bank PR be credited annually to a reserve fund until such fund equals 100% of total paid-in capital (preferred and common). As of December 31, 2007, Doral Bank PR’s reserve fund complied with the legal requirement.

     Section 27 of the Banking Law also provides that when a bank suffers a loss, the loss must first be charged against retained earnings, and the balance, if any, must be charged against the reserve fund. If the balance of the reserve fund is not sufficient to cover the loss, the difference shall be charged against the capital account of the bank and no dividend may be declared until the capital has been restored to its original amount and the reserve fund to 20% of the original capital of the institution. This reserve fund is reflected in Doral Financial’s consolidated financial statements as “Legal Surplus.”

     Section 16 of the Banking Law requires every bank to maintain a reserve requirement which shall not be less than 20% of its demand liabilities, other than government deposits (federal, state and municipal) secured by actual collateral. The Office of the Commissioner can, by regulation, increase the reserve requirement to 30% of demand deposits.

     Section 17 of the Banking Law generally permits Doral Bank PR to make loans on an unsecured basis to any person, firm, partnership or corporation, up to an aggregate amount of 15% of the paid-in capital and reserve fund of the bank and of such other components as the Office of the Commissioner may permit from time to time. The Office of the Commissioner has permitted the inclusion of up to 50% of retained earnings. As of December 31, 2007, the legal lending limit for Doral Bank PR under this provision based solely on its paid-in capital and reserve fund was approximately $70.9 million. If such loans are secured by collateral worth at least 25% more than the amount of the loan, the aggregate maximum amount may reach one third of the paid-in capital of the bank, plus its reserve fund and such other components as the Office of Commissioner may permit from time to time. As of December 31, 2007, the lending limit for loans secured by collateral worth at least 25% more than the amount of the loan was $118.2 million. There are no restrictions under Section 17 on the amount of loans that are wholly secured by bonds, securities and other evidences of indebtedness of the Government of the United States or the Commonwealth, or by current debt bonds, not in default, of municipalities or instrumentalities of the Commonwealth.

     Section 14 of the Banking Law authorizes Doral Bank PR to conduct certain financial and related activities directly or through subsidiaries, including finance leasing of personal property, making and servicing mortgage loans and operating a small-loan company. Doral Bank PR currently operates four subsidiaries, Doral Mortgage LLC, which engages in mortgage originations and related activities, Doral Money, Inc., which engages in mortgage banking activities in the mainland United States, Doral International, Inc., which is licensed as an international banking entity under the International Banking Center Regulatory Act of Puerto Rico, and CB, LLC, a Puerto Rico limited liability company organized in connection with the receipt, in lieu of foreclosure, of the real property securing an interim construction loan and the Company’s decision to continue the development of the residential housing project on a temporary basis.

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     The Finance Board, which is a part of the Office of the Commissioner, but also includes as its members the Secretary of the Treasury, the Secretary of Commerce, the Secretary of Consumer Affairs, the President of the Planning Board, and the President of the Government Development Bank for Puerto Rico, has the authority to regulate the maximum interest rates and finance charges that may be charged on loans to individuals and unincorporated businesses in the Commonwealth. The current regulations of the Finance Board provide that the applicable interest rate on loans to individuals and unincorporated businesses is to be determined by free competition. The Finance Board also has the authority to regulate the maximum finance charges on retail installment sales contracts and credit cards. Currently, there is no maximum rate set for installment sales contracts or credit cards.

     On March 17, 2006, Doral Financial and its principal Puerto Rico Banking subsidiary, Doral Bank PR, entered into consent orders with the Federal Reserve, the FDIC and the Office of the Commissioner. The mutually agreed upon orders require Doral Financial and Doral Bank PR to conduct reviews of their mortgage portfolios, and to submit plans regarding the maintenance of capital adequacy and liquidity. The consent orders also prohibit Doral Financial and any of its non-banking affiliates, directly or indirectly, from entering into, participating, or in any other manner engaging in any covered transactions with its subsidiary banks, Doral Bank PR and Doral Bank NY. The consent order from the Office of the Commissioner was lifted on January 17, 2008, in a joint action with the FDIC.

     Savings Bank Regulation

     As a federal savings bank, Doral Bank NY’s investments, borrowings, lending, issuance of securities, establishment of branch offices and all other aspects of its operations are subject to the jurisdiction of the OTS.

     Doral Bank NY’s payment of dividends is subject to the limitations of the capital distribution regulation promulgated by the OTS. The OTS’ regulation determines a savings bank’s ability to pay dividends, make stock repurchases, or make other types of capital distributions, according to the institution’s capital position. The rule establishes amounts of capital distributions that institutions can make after providing notice to the OTS, without constituting an unsafe or unsound practice. Institutions that do not meet their capital requirements can make distributions only with the prior approval of the OTS.

     Savings banks, such as Doral Bank NY, that meet all applicable capital requirements may make a distribution without an application in an amount equal to the sum of (i) the current year’s net income, and (ii) the retained net income (net income less capital distributions) from the preceding two years; so long as the association continues to satisfy applicable capital requirements after the distribution. If such a distribution would cause Doral Bank NY to fall below the well-capitalized requirement, a prior 30-day notice to the OTS would be required.

     OTS regulations generally permit Doral Bank NY to make total loans and extensions of credit to one borrower up to 15% of its unimpaired capital and surplus. As of December 31, 2007, the legal lending limit for Doral Bank NY under this regulation was approximately $2.0 million. Doral Bank NY’s legal lending limit may be increased by an additional 10% of its unimpaired capital and surplus if such additional extension of credit is fully secured by readily marketable collateral having a market value as determined by reliable and continuously available price quotations. Doral Bank NY’s expanded aggregate legal lending limit under this provision was approximately $2.2 million as of December 31, 2007.

     On February 9, 2006, the OTS notified Doral Bank NY that, until further notice, it could not pay any dividend to Doral Financial without the prior approval of the OTS. The OTS also directed Doral Bank NY not to make any extensions of credit to Doral Financial, purchases of assets or similar transactions, without the prior written consent of the OTS. In connection with the Recapitalization, Doral Bank NY received the approval of the OTS to make a capital distribution to Doral Financial in the amount of $50.0 million, of which $45.0 million was made on July 20, 2007. On March 6, 2008, the OTS lifted this notice.

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     IBC Act

     Doral International, Inc., an international banking entity (“IBE”), is subject to supervision and regulation by the Commissioner of Financial Institutions under the International Banking Center Regulatory Act (the “IBC Act”). Under the IBC Act, no sale, encumbrance, assignment, merger, exchange or transfer of shares, interest or participation in the capital of an IBE may be initiated without the prior approval of the Commissioner, if by such transaction a person would acquire, directly or indirectly, control of 10% or more of any class of stock, interest or participation in the capital of the IBE. The IBC Act and the regulations issued thereunder by the Commissioner (the IBC Regulator) limit the business activities that may be carried out in an IBE. Such activities are generally limited to persons and assets located outside of Puerto Rico. The IBC Act provide that every IBE must have not less than $300,000 on unencumbered assets or acceptable financial securities in Puerto Rico.

     Certain Regulatory Restrictions on Investments in Common Stock

     Because of Doral Financial’s status as a bank holding company, owners of Doral Financial’s common stock are subject to certain restrictions and disclosure obligations under various federal laws, including the BHC Act. Regulations pursuant to the BHC Act generally require prior Federal Reserve approval for an acquisition of control of an insured institution (as defined) or holding company thereof by any person (or persons acting in concert). Control is deemed to exist if, among other things, a person (or persons acting in concert) acquires more than 25% of any class of voting stock of an insured institution or holding company thereof. Control is presumed to exist subject to rebuttal, if a person (or persons acting in concert) acquires more than 10% of any class of voting stock and either (i) the company has registered securities under Section 12 of the Exchange Act, or (ii) no person will own, control or hold the power to vote a greater percentage of that class of voting securities immediately after the transaction. The concept of acting in concert is very broad and also is subject to certain rebuttable presumptions, including among others, that relatives, business partners, management officials, affiliates and others are presumed to be acting in concert with each other and their businesses.

     Section 12 of the Banking Law requires the prior approval of the Office of the Commissioner with respect to a transfer of voting stock of a bank that results in a change of control of the bank. Under Section 12, a change of control is presumed to occur if a person or group of persons acting in concert, directly or indirectly, acquires more than 5% of the outstanding voting capital stock of the bank. The Office of the Commissioner has interpreted the restrictions of Section 12 as applying to acquisitions of voting securities of entities controlling a bank, such as a bank holding company. Under the Banking Law, the determination of the Office of the Commissioner whether to approve a change of control filing is final and non-appealable.

     The provisions of the Mortgage Banking Law also require regulatory approval for the acquisition of more than 10% of Doral Financial’s outstanding voting securities. See “-Regulation and Supervision—Mortgage Origination and Servicing” above.

     The above regulatory restrictions relating to investment in Doral Financial may have the effect of discouraging takeover attempts against Doral Financial and may limit the ability of persons, other than Doral Financial directors duly authorized by Doral Financial’s board of directors, to solicit or exercise proxies, or otherwise exercise voting rights, in connection with matters submitted to a vote of Doral Financial’s stockholders.

Insurance Operations

     Doral Insurance Agency is registered as a corporate agent and general agency with the Office of the Commissioner of Insurance of Puerto Rico (the “Commissioner of Insurance”). Doral Insurance Agency is subject to regulation by the Commissioner of Insurance relating to, among other things, licensing of employees, sales practices, charging of commissions and obligations to customers.

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Item 1A. Risk Factors.

     Some of the factors that could cause Doral Financial’s actual results for future periods to differ materially from those anticipated are discussed below.

Risks Relating to Doral Financial’s Business

Doral Financial’s business is concentrated in Puerto Rico and continued weakness of PR economy may continue to adversely affect Doral Financial.

     Doral Financial’s business activities and credit exposure are concentrated in Puerto Rico. Consequently, its financial condition and results of operations are highly dependent on economic conditions in Puerto Rico. Adverse political or economic developments, decreases in housing values or natural disasters, such as hurricanes, could result in a downturn in loan originations, an increase in the level of non-performing assets, an increase in the rate of foreclosure loss on mortgage loans and a reduction in the value of Doral Financial’s loans and loan servicing portfolio.

     Since 2006, the PR economy has been experiencing declining growth. The Puerto Rico Planning Board estimates that real gross national product decreased by approximately 1.4% for the fiscal year ended June 30, 2008 and after projecting nominal growth of 0.8% for the fiscal year ending June 30, 2008 the head of Planning Board Economic Research Unit publicly stated that this projection would be revised downward to a decrease of approximately 1.8%.

     The adverse economic conditions in Puerto Rico, the possibility of a recession in the United States, as well as increased uncertainty in the credit and real estate markets may also have an adverse effect on the credit quality of the Company’s loan portfolios, as delinquency rates are expected to increase in the short-term, until the economy stabilizes. Also, a potential reduction in consumer spending may also impact growth in other interest and non-interest revenue sources of the Company.

Deteriorating credit quality particularly in real estate loans has adversely impacted Doral Financial and may continue to adversely impact Doral Financial.

     Doral Financial has experienced a downturn in credit performances during 2007, and Doral Financial expects credit conditions and the performance of its loan portfolio to continue to deteriorate in the near future. The deterioration in credit conditions caused Doral Financial to increase its allowance for loan and lease losses in 2007 by 86%, driven primarily by higher allocations related to construction commercial real estate loans, residential mortgage loans and land loans. Construction loans to finance residential or commercial project loans involve greater credit risk than residential mortgage loans because they are larger in size, concentrate more risk in a single borrower and are generally more sensitive to economic conditions. The properties securing these loans are also harder to dispose of in foreclosure. Additional increases in the allowance for loan and lease losses may be necessary in the future. Accordingly, a decrease in the quality of Doral Financial’s credit portfolio could have a material adverse effect on Doral Financial’s earnings and results of operations.

Changes in interest rates could affect Doral Financial’s income and cash flows.

     Doral Financial’s income and cash flows depend to a great extent on the difference between the interest rates earned on interest-earning assets such as loans and investment securities, and the interest rates paid on interest-bearing liabilities such as deposits and borrowings. These rates are highly sensitive to many factors that are beyond Doral Financial’s control, including general economic conditions and the policies of various governmental and regulatory agencies (in particular, the Federal Reserve Board). Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the prepayment speed of loans, the value of loans, investment securities and mortgage servicing assets, the purchase of investments, the generation of deposits and the rates received on loans and investment securities and paid on deposits or other sources of funding.

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The preparation of Doral Financial’s financial statements requires the use of estimates that may vary from actual results.

     The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates that affect Doral Financial’s financial statements. Three of Doral Financial’s most critical estimates are the level of the allowance for loan and lease losses, the valuation of mortgage servicing rights and the amount of its deferred tax asset. Due to the inherent nature of these estimates Doral Financial cannot provide absolute assurance that it will not significantly increase the allowance for loan and lease losses and/or sustain credit losses that are significantly higher than the provided allowance, nor that it will not recognize a significant provision for impairment of its mortgage servicing rights. If Doral Financial’s allowance for loan and lease losses is not adequate, Doral Financial’s business, financial condition, including its liquidity and capital, and results of operations could be materially adversely affected. Additionally, in the future, Doral Financial may increase its allowance for loan and lease losses, which could have a material adverse effect on its capital and results of operations. For more information on the sensitivity of these estimates, please refer to the Critical Accounting Policies section in the Management’s Discussion and Analysis of Financial Condition and Results of Operations Section.

     As of December 31, 2007 Doral Financial had a deferred tax asset of approximately $392.9 million. The deferred tax asset is net of a valuation allowance of $87.3 million. The realization of Doral Financial’s deferred tax asset ultimately depends on the existence of sufficient taxable income to realize the value of this asset. Due to significant estimates utilized in establishing the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that Doral Financial will be required to record adjustments to the valuation allowance in future reporting periods. Doral Financial’s results of operations would be negatively impacted if it determines that increases to its deferred tax asset valuation allowance are required in a future reporting period. For additional information on Doral Financial’s deferred tax asset please refer to the information under the Caption “Income Taxes” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations Section” of its Annual Report on Form 10-K.

Defective and repurchased loans may harm Doral Financial’s business and financial condition.

     In connection with the sale and securitization of mortgage loans, Doral Financial is required to make a variety of customary representations and warranties regarding the Company and the loans being sold or securitized. Doral Financial’s obligations with respect to these representations and warranties are generally outstanding for the life of the loan, and they relate to, among other things:

• compliance with laws and regulations;

• underwriting standards;

• the accuracy of information in the loan documents and loan file; and

• the characteristics and enforceability of the loan.

     A loan that does not comply with these representations and warranties may take longer to sell, may impact Doral Financial’s ability to obtain third-party financing for the loan, and be unsaleable or saleable only at a significant discount. If such a loan is sold before Doral Financial detects a non-compliance, Doral Financial may be obligated to repurchase the loan and bear any associated loss directly, or Doral Financial may be obligated to indemnify the purchaser against any such loss, either of which could reduce Doral Financial’s cash available for operations and liquidity. The Company’s current management team believes that it has established controls to ensure that loans are originated in accordance with the secondary market’s requirements, but no assurance can be given that mistakes will not be made, or that certain employees will not deliberately violate the Company’s lending policies. Doral Financial seeks to minimize repurchases and losses from defective loans by correcting flaws, if possible, and selling or re-selling such loans. Doral Financial does not have a reserve on its financial statements for possible losses related to repurchases

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resulting from representation and warranty violations because it does not expect any such losses to be significant. Doral Financial cannot assure however, that losses associated with defective loans will not adversely impact its results of operations or financial condition. Please refer to “Liquidity and Capital Resources” under Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this report.

Doral Financial is exposed to credit risk from mortgage loans held pending sale and mortgage loans that have been sold subject to recourse arrangements.

     Doral Financial is generally at risk for mortgage loan defaults from the time it funds a loan until the time the loan is sold or securitized into a mortgage-backed security. Doral Financial also often retains, through recourse arrangements, part of the credit risk on sales of mortgage loans that do not qualify for GNMA, FNMA or FHLMC sale or exchange programs and consequently may suffer losses on these loans. Doral Financial suffers losses on these loans when the proceeds from a foreclosure sale of the property underlying a defaulted mortgage loan are less than the outstanding principal balance of the loan and the costs of holding and disposing of the related property.

Doral Financial is subject to risks in servicing loans for others.

     Doral Financial’s profitability may also be adversely affected by mortgage loan delinquencies and defaults on mortgage loans that it services for third parties. Under many of its servicing contracts, Doral Financial must advance all or part of the scheduled payments to the owner of an outstanding mortgage loan, even when mortgage loan payments are delinquent. In addition, in order to protect their liens on mortgaged properties, owners of mortgage loans usually require that Doral Financial, as servicer, pay mortgage and hazard insurance and tax payments on schedule even if sufficient escrow funds are not available. Doral Financial generally recovers its advances from the mortgage owner or from liquidation proceeds when the mortgage loan is foreclosed. However, in the interim, Doral Financial must absorb the cost of the funds it advances during the time the advance is outstanding. Doral Financial must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a default is not cured, the mortgage loan will be canceled as part of the foreclosure proceedings and Doral Financial will not receive any future servicing income with respect to that loan.

Doral Financial may fail to retain and attract key employees and management personnel.

     Doral Financial’s success has been and will continue to be influenced by its ability to retain and attract key employees and management personnel, including senior and middle management. Doral Financial’s ability to attract and retain key employees and management personnel may be adversely affected as a result of the workload and stress associated with the resolution of legacy issues and business transformation efforts, and related risks and uncertainties.

Management has identified several material weaknesses in Doral Financial’s internal control over financial reporting.

     Doral Financial’s management has concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2007, due to several material weaknesses described in this Annual Report on Form 10-K. A discussion of the material weaknesses that have been identified by management can be found in Item 9A of Part II of this Annual Report on Form 10-K. Each material weakness results in more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected.

     Doral Financial has devoted substantial internal and external resources to addressing the material weaknesses in its internal controls over financial reporting over the last two years. Doral Financial expects to continue spending significant resources until it remedies all the material weaknesses in its internal control over financial reporting.

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Competition with other financial institutions could adversely affect the profitability of Doral Financial’s operations.

     Doral Financial faces significant competition from other financial institutions, many of which have significantly greater assets, capital and other resources. As a result, many of Doral Financial’s competitors have advantages in conducting certain businesses and providing certain services. This competitive environment could force Doral Financial to increase the rates it offers on deposits or lower the rates it charges on loans and, consequently, could adversely affect the profitability of Doral Financial’s operations.

Changes in statutes and regulations could adversely affect Doral Financial.

     As a financial institution, Doral Financial is subject to extensive federal and local governmental supervision and regulation. Any change in regulation, whether by regulators or as a result of legislation enacted by the United States Congress or by the local legislature, could have a substantial impact on Doral Financial’s operations and profitability.

Doral Financial and its banking subsidiaries are subject to the supervision and regulation of various banking regulators and have entered into consent orders with these regulators, and these regulators could take action against the Company or its banking subsidiaries.

     As a regulated financial services firm, Doral Financial’s good standing with its regulators is of fundamental importance to the continuation and growth of its businesses. Doral Financial is subject to supervision and regulation by the Federal Reserve, Doral Bank PR is subject to supervision and regulation by the FDIC and the Office of the Commissioner and Doral Bank NY is subject to supervision and regulation by the OTS and the FDIC.

     Federal banking regulators, in the performance of their supervisory and enforcement duties, have significant discretion and power to initiate enforcement actions for violations of laws and regulations and unsafe or unsound practices. The enforcement powers available to federal banking regulators include, among others, the ability to assess civil monetary penalties, to issue cease-and-desist or removal orders, to require written agreements and to initiate injunctive actions. As discussed in Part I, Item 3. Legal Proceedings, Banking Regulatory Matters in this Annual Report on Form 10-K, Doral Financial and Doral Bank PR have entered into consent orders with the Federal Reserve, the FDIC and the Office of the Commissioner, which, among other things, prohibit the Company’s banking subsidiaries from paying dividends to the parent company, and prohibit Doral Financial from paying dividends to its common and preferred shareholders, without regulatory approval and require Doral Bank PR to take various actions to ensure compliance with the provisions of the Bank Secrecy Act. While the FDIC and the Office of the Commissioner have lifted their consent orders, Doral Financial cannot predict whether any of these banking regulators will take any further action with respect to Doral Financial or its banking subsidiaries, or, if any such further action were taken, whether such action would have a material adverse effect on Doral Financial. The Company’s banking regulators could take additional actions to protect the Company’s banking subsidiaries or to ensure that the holding company remains as a source of financial and managerial strength to its banking subsidiaries, and such actions could have adverse effects on one or more of the Company’s stockholders.

Risk relating to Legacy Issues

Doral Financial has been the subject of an investigation by the U.S. Attorney’s Office for the Southern District of New York, which could require it to pay substantial fines or penalties.

     On August 24, 2005, Doral Financial received a grand jury subpoena from the U.S. Attorney’s Office for the Southern District of New York regarding the production of certain documents, including financial statements and corporate, auditing and accounting records prepared during the period relating to the restatement of Doral Financial’s financial statements. Doral Financial cannot predict when this investigation will be completed or what the results of this investigation will be. The effects and results of this investigation could have a material adverse effect on Doral Financial’s business, results of operations, financial condition and liquidity. Adverse developments related to this investigation, including any expansion of its scope, could negatively impact the Company and could divert efforts and attention of its management team from Doral Financial’s ordinary business operations. Doral Financial may be required to pay material fines, judgments or settlements or suffer other penalties, each of which could have a material adverse effect on its business, results of operations, financial condition and liquidity. This investigation could adversely affect Doral Financial’s ability to obtain, and/or increase the cost of obtaining, directors’ and officers’ liability insurance and/or other types of insurance, which could have a material adverse effect on Doral Financial’s businesses, results of operations and financial condition.

Doral Financial may be required to advance significant amounts to cover the legal expenses of its former officers and directors.

     Under Doral Financial’s by-laws, Doral Financial is obligated to pay in advance the reasonable expenses incurred by former officers and directors in defending civil or criminal actions or proceedings pending final disposition of such actions. Since 2005, Doral Financial has been advancing funds on behalf of various former officers and directors in connection with the grand jury proceeding referred to above and ongoing investigations by the Securities and Exchange Commission relating to the restatement of Doral Financial’s financial statements. On March 6, 2008, a former treasurer of Doral Financial was indicted for alleged criminal violations involving securities and wire fraud. While Doral Financial may be able to recover amounts advanced following a final disposition of the matter and may contest the reasonableness of the amounts requested to be advanced, the amounts required to be advanced in a lengthy criminal proceeding could be substantial and could materially adversely affect Doral Financial’s results from operations.

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Item 1B. Unresolved Staff Comments.

     None.

Item 2. Properties.

     Doral Financial maintains its principal administrative and executive offices in an office building known as the Doral Financial Plaza, located at 1451 Franklin D. Roosevelt Avenue in San Juan, Puerto Rico. The Doral Financial Plaza is owned in fee simple by Doral Properties, Inc., a wholly-owned subsidiary of Doral Financial, and has approximately 200,000 square feet of office and administrative space. The cost of the building, related improvements and land was approximately $48.4 million. The building is subject to a mortgage in the amount of $41.2 million.

     During 2007, Doral Financial consolidated its operations, including the administrative offices of Doral Bank PR, in the Doral Financial Plaza. Prior to the consolidation of operations in the Doral Financial Plaza, Doral Bank PR maintained its administrative offices on three floors owned by Doral Bank PR in a commercial office condominium known as the Doral Bank Plaza, located at 33 Resolution Street in San Juan, Puerto Rico adjacent to the Doral Financial Plaza. The three floors consisted of approximately 18,000 square feet per floor at an aggregate total cost of approximately $13.0 million. During the fourth quarter of 2007, Doral Bank PR sold approximately 32% of the three floors total area at an aggregate cost of $3.9 million for the price of $5.8 million. Doral Financial expects the sale of the remaining space of the three floors to be completed during 2008.

     In addition, Doral Financial maintains 41 retail banking branches in Puerto Rico at which mortgage origination offices are co-located.

     On July 27, 2007, Doral Financial completed the sale of Doral Bank NY’s eleven branches in the New York City Metropolitan Area to the commercial bank subsidiary of New York Community Bancorp. Doral Bank NY relocated its administrative and executive office to an office building located at 623 Fifth Avenue in New York, New York, where it leases approximately 13,200 square feet.

     Doral Financial considers that its properties are generally in good condition, are well maintained and are generally suitable and adequate to carry on Doral Financial’s business.

Item 3. Legal Proceedings.

     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 subject to various legal proceedings, including regulatory and judicial investigations and civil litigation, arising as a result of the Company’s restatement.

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Lawsuits

     On June 21, 2005, a lawsuit was filed against Doral Financial and certain of its former officers and directors in the U.S. District Court for the District of Puerto Rico. Between June 29, 2005 and August 20, 2005, plaintiff filed three amended complaints. The suit as amended concerns a divorce settlement entered by a former chairman and chief executive officer of Doral Financial and also alleges, among other things, violations of federal securities laws, Racketeer Influenced and Corrupt Organizations (“RICO”) Act violations, as well as fraud and breach of contract under Puerto Rico law, some of which are stated in the alternative as derivative claims on behalf of Doral Financial. Plaintiff seeks an award of damages, costs and expenses. All defendants have moved to dismiss the complaint as amended, and such motions have not been decided. On March 6, 2008, the plaintiff and the defendants entered into a settlement agreement to dismiss the case in exchange for the defendants agreeing not to seek attorneys’ fees and costs from the plaintiff. The case was dismissed with prejudice on March 14, 2008.

     In addition, on October 14, 2005, the Company and certain former officers and directors of the Company were named as defendants in an action brought by an individual plaintiff filed in the U.S. District Court for the Southern District of New York, alleging violations of federal securities laws and various Kentucky state laws based on making allegedly materially false and misleading statements concerning Doral’s financial results, allegedly failing to disclose material information concerning the valuation of the company’s lOs, and allegedly misleading the plaintiff as to the Company’s vulnerability to interest rate increases. Plaintiff seeks compensatory damages in the amount of $292,000 for losses the plaintiff allegedly incurred in connection with Doral Financial securities purchased between January 19, 2005 and March 18, 2005, as well as unspecified punitive damages, interest, costs and other expenses. On March 11, 2008, Doral and the plaintiff entered into an agreement to settle all claims in the case, and on March 13, 2008, the plaintiff filed with the court a notice of voluntary dismissal with prejudice of all claims against all defendents.

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.

     Effective January 14, 2008 and in recognition of the corrective actions taken, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of Commissioner terminated on March 16, 2006 the Cease and Desist Order (the “Former Order”) applicable to the Company’s Puerto Rico banking subsidiary, Doral Bank PR. The Former Order was similar to the consent order between Doral Financial and the Federal Reserve and related to safety and soundness issues in connection with the announcement by the Company in April 2005

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of the need to restate its financial statements for the period from January 1, 2000 to December 31, 2004. Under the terms of the Former Order, Doral Bank PR could not pay a dividend or extend credit to, or enter into certain asset purchase and sale transactions with Doral Financial or its subsidiaries, without the prior approval of the FDIC and the Office of the Commissioner.

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

     On February 19, 2008, Doral Bank PR entered into a consent order with the FDIC relating to failure to comply with certain requirements of the Bank Secrecy Act (“BSA”). The regulatory findings that resulted in the order were based on an examination conducted for the period ended December 31, 2006, and were related to findings that had initially occurred in 2005 prior to the Company’s change in management and recapitalization. The order replaces the Memorandum of Understanding with the FDIC and the Office of the Commissioner dated August 23, 2006. Doral Bank PR was not required to pay any civil monetary penalties in connection with this order. The order requires Doral Bank PR to correct certain violations of law, within the timeframes set forth in the order (generally 120 days) including certain violations regarding the BSA, failure to maintain an adequate BSA/Anti-Money Laundering Compliance Program (a “BSA/AML Compliance Program”) and failure to operate with an effective compliance program to ensure compliance with the regulations promulgated by the United States Department of Treasury’s Office of Foreign Asset Control (“OFAC”). The order requires Doral Bank PR to, among other things, amend its policies, procedures and processes and training programs to ensure full compliance with the BSA and OFAC; conduct an expanded BSA/AML risk assessment of its operations, enhance its due diligence and account monitoring procedures, review its BSA/AML staffing and resource needs, amend its policies and procedures for internal and external audits to include periodic reviews for BSA/AML compliance. OFAC compliance and perform annual independent testing programs for BSA/AML and OFAC requirements. The order also requires Doral Bank PR to engage an independent consultant to review account and transaction activity from April 1, 2006 through March 31, 2007 to determine compliance with suspicious activity reporting requirements. Doral Financial expects that Doral Bank PR will comply with the requirements of the order within the required timeframes. A copy of the order was filed as an exhibit to Doral Financial’s Current Report on Form 8-K filed on February 22, 2008.

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

Item 4. Submission of Matters to a Vote of Security Holders.

There were no matters submitted to a vote of security holders during the quarter ended December 31, 2007.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

     Doral Financial’s common stock, $0.01 par value per share (the “Common Stock”), is traded and quoted on the New York Stock Exchange (“NYSE”) under the symbol “DRL.”

     The table below sets forth, for the calendar quarters indicated, the high and low closing sales prices and the cash dividends declared on the Common Stock during such periods. All share price and dividend per share information has been adjusted to reflect a l-for-20 reverse stock split effective August 17,2007.

	Calendar	Price Range				Dividends
Year	Quarter	High		Low		Per Share
2007	4th	$	24.88	$	15.50	$	—
	3rd		32.35		12.78		—
	2nd		37.80		20.00		—
	1st		55.80		24.20		—
2006	4th	$	129.00	$	57.40	$	—
	3rd		136.20		90.80		—
	2nd		233.80		124.00		—
	1st		239.40		202.80		1.60

     As of March 10, 2008, the approximate number of record holders of Doral Financial’s Common Stock was 162, which does not include beneficial owners whose shares are held in record names of brokers and nominees. The last sales price for the Common Stock as quoted on the NYSE on such date was $17.53 per share.

     Doral Financial has not declared or paid dividends on its common stock since the first quarter of 2006.

     Doral Financial has three outstanding series of nonconvertible preferred stock: 7.25% noncumulative monthly income preferred stock, Series C (liquidation preference $25 per share); 8.35% noncumulative monthly income preferred stock, Series B (liquidation preference $25 per share); and 7% noncumulative monthly income preferred stock, Series A (liquidation preference $50 per share) (collectively, the “Preferred Stock”).

     During 2003, Doral Financial issued 1,380,000 shares of its 4.75% perpetual cumulative convertible preferred stock (the “Convertible Preferred Stock”) having a liquidation preference of $250 per share in a private offering to qualified institutional buyers pursuant to Rule 144A. Each share of the Convertible Preferred Stock is currently convertible into 0.31428 shares of common stock, subject to adjustment under specific conditions. The Convertible Preferred Stock ranks on parity with Doral Financial’s other outstanding Preferred Stock with respect to dividend rights and rights upon liquidation, winding up or dissolution.

     The terms of Doral Financial’s preferred stock do not permit Doral Financial to declare, set apart or pay any dividends or make any other distribution of assets, or redeem, purchase, set apart or otherwise acquire shares of the Common Stock, or any other class of Doral Financial’s stock ranking junior to the preferred stock, unless all accrued and unpaid dividends on the preferred stock and any parity stock, at the time those dividends are payable, have been paid and the full dividend on the preferred stock for the current dividend period is contemporaneously declared and paid or set aside for payment. The terms of the preferred stock provide that if Doral Financial is unable to pay in full dividends on the preferred stock and other shares of stock of equal rank as to the payment of dividends, all dividends declared upon the preferred stock and such other shares of stock be declared pro rata.

     On April 25, 2006, Doral Financial announced that, as a prudent capital management decision designed to preserve and strengthen the Company’s capital, the Board of Directors had suspended the quarterly dividend on the Common Stock.

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     Doral Financial’s ability to pay dividends in the future is limited by various regulatory requirements and policies of bank regulatory agencies having jurisdiction over Doral Financial and its banking subsidiaries, its earnings, cash resources and capital needs, general business conditions and other factors deemed relevant by Doral Financial’s Board of Directors.

     Under an existing consent order with the Federal Reserve, Doral Financial is restricted from paying dividends on its capital stock without the prior written approval of the Federal Reserve. Doral Financial is required to request permission for the payment of dividends on its common stock and preferred stock no less than 30 days prior to a proposed dividend declaration date. During 2007 and for the first quarter of 2008, Doral Financial received permission from the Federal Reserve to pay all of the regular monthly cash dividends on the Preferred Stock and the quarterly cash dividends on the Convertible Preferred Stock, but cannot provide assurance that it will receive approval for the payment of such dividends in the future.

     On February 9, 2006, the OTS notified Doral Bank NY that, until further notice, it could not pay any dividend to Doral Financial without prior approval of the OTS. The OTS also directed Doral Bank NY not to make any extensions of credit to Doral Financial, purchases of assets or similar transactions, without the prior written consent of the OTS. On March 6, 2008, the OTS lifted this notice.

     The PR Code generally imposes a 10% withholding tax on the amount of any dividends paid by Doral Financial to individuals, whether residents of Puerto Rico or not, trusts, estates, special partnerships and non-resident foreign corporations and partnerships. Prior to the first dividend distribution for the taxable year, individuals who are residents of Puerto Rico may elect to be taxed on the dividends at the regular graduated rates, in which case the special 10% tax will not be withheld from such year’s distributions.

     United States citizens who are not residents of Puerto Rico may also make such an election except that notwithstanding the making of such election, a 10% withholding will still apply to the amount of any dividend distribution unless the individual files with Doral Financial’s transfer agent, prior to the first distribution date for the taxable year, a certificate to the effect that said individual’s gross income from sources within Puerto Rico during the taxable year does not exceed $1,300 if single, or $3,000 if married, in which case dividend distributions will not be subject to Puerto Rico income taxes.

     U.S. income tax law permits a credit against U.S. income tax liability, subject to certain limitations, for Puerto Rico income taxes paid or deemed paid with respect to such dividends.

     Special U.S. federal income tax rules apply to distributions received by U.S. citizens on stock of a passive foreign investment company (“PFIC”) as well as amounts retained from the sale or exchange of stock of a PFIC. Based upon certain provisions of the Internal Revenue Code of 1986, as amended (the “Code”) and proposed Treasury Regulations promulgated thereunder, Doral Financial understands that it has not been a PFIC for any of its prior taxable years.

     For information regarding securities authorized for issuance under Doral Financial’s stock-based compensation plans, refer to Part III, Item 12, which is incorporated by reference from the 2008 Proxy Statement.

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STOCK PERFORMANCE GRAPH

     The following Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act, except to the extent that Doral Financial specifically incorporates this information by reference, and shall not otherwise be deemed filed under these Acts.

     The following performance graph compares the yearly percentage change in Doral Financial’s cumulative total stockholder return on its common stock to that of the Center for Research in Security Prices, Graduate School of Business, the University of Chicago (“CRSP”) NYSE Market Index (U.S. Companies) and the CRSP Index for NYSE Depository Institution Stocks (SIC 6000-6099 U.S. Companies) (the “Peer Group”). The Performance Graph assumes that $100 was invested on December 31, 2001 in each of Doral Financial’s common stock, the NYSE Market Index (U.S. Companies) and the Peer Group. The comparisons in this table are set forth in response to SEC disclosure requirements, and are therefore not intended to forecast or be indicative of future performance of Doral Financial’s common stock.

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Item 6. Selected Financial Data.

     The following table sets forth certain selected consolidated financial data for each of the five years in the period ended December 31, 2007. This information should be read in conjunction with Doral Financial’s consolidated financial statements and the related notes thereto.

	Year ended December31,
(Dollars In thousands, except for share data)	2007			2006			2005			2004			2003
Selected Income Statement Data:
Interest income	$	578,960		$	821,895		$	947,779		$	722,709		$	557,705
Interest expense		424,619			620,505			667,182			385,086			320,246
Net interest income		154,341			201,390			280,597			337,623			237,459
Provision for loan and lease losses		78,214			39,829			22,369			10,384			11,579
Net interest income after provision for loan and lease losses		76,127			161,561			258,228			327,239			225,880
Net gain (loss) on mortgage loan sales and fees.		2,223			(34,456	)		52,131			83,585			94,709
Investment activities		(125,205	)		(64,896	)		(44,204	)		(99,722	)		(23,199	)
(Loss) gain on extinguishment of liabilities		(14,806	)		(4,157	)		2,000			—			—
Servicing income (loss)		20,687			6,904			16,715			(18	)		24,486
Commissions, fees and other income		41,704			37,378			35,906			32,333			22,809
Total non-interest (loss) income		(75,397	)		(59,227	)		62,548			16,178			118,805
Non-interest expenses		303,492			374,342			288,493			214,114			178,631
(Loss) income before income taxes and cumulative effect of change in accounting principle		(302,762	)		(272,008	)		32,283			129,303			166,054
Income tax (benefit) expense(1)		(131,854	)		(48,107	)		19,091			(85,491	)		23,916
Net (loss) income	$	(170,908	)	$	(223,901	)	$	13,192		$	214,794		$	142,138
Net (loss) income attributable to common shareholders	$	(204,207	)	$	(257,200	)	$	(20,107	)	$	181,495		$	121,050
Cash Dividends Declared:
Common stock	$	—		$	8,634		$	66,914		$	64,744		$	43,218
Preferred stock	$	33,299		$	33,299		$	33,299		$	33,299		$	21,088
Per Common Share Data:
Basic:
Net (loss) income	$	(7.45	)	$	(47.66	)	$	(3.73	)	$	33.64		$	22.45
Diluted:
Net (loss) income	$	(7.45	)	$	(47.66	)	$	(3.73	)	$	32.68		$	21.92
Dividends per common share	$	0.00		$	1.60		$	12.40		$	12.00		$	8.00
Book value per common share	$	14.37		$	61.17		$	106.86		$	131.85		$	112.90
Weighted — Average Common Shares Outstanding:
Basic		27,415,242			5,397,057			5,396,351			5,395,385			5,393,071
Diluted		27,415,242			5,397,057			5,396,352			5,553,502			5,521,708
Common shares outstanding at end of period		53,810,110			5,397,412			5,395,512			5,395,443			5,395,196
Selected Balance Sheet Data:
Cash and cash equivalents	$	789,169		$	1,145,861		$	1,546,502		$	2,535,726		$	954,722
Securities held for trading		276,462			183,805			388,676			489,070			494,717
Securities available for sale		1,921,940			2,408,686			4,631,573			4,982,508			2,850,598
Securities held to maturity		—			2,082,937			2,099,694			2,301,695			1,641,435
Total loans(2)		5,344,756			5,159,027			7,800,155			6,670,206			5,172,223
Servicing assets, net		150,238			176,367			150,576			123,586			128,920
Total assets		9,304,378			11,856,424			17,298,749			17,839,376			11,761,548
Deposit accounts		4,268,024			4,250,760			4,237,269			3,643,080			2,971,272
Securities sold under agreements to repurchase		1,444,363			3,899,365			6,054,598			6,305,163			3,602,942
Advances from the Federal Home Loan Bank of NY (FHLB)		1,234,000			1,034,500			969,500			1,294,500			1,206,500
Loans payable		402,701			444,443			3,578,230			3,638,507			2,014,183
Notes payable		282,458			923,913			965,621			1,095,977			561,373
Total liabilities		7,957,671			10,953,020			16,148,940			16,554,759			10,579,186
Stockholders’ equity		1,346,707			903,404			1,149,809			1,284,617			1,182,362
Operating Data:
Loan production	$	1,332,000		$	2,017,000		$	5,480,000		$	5,466,000		$	4,901,000
Loan servicing portfolio (3)	$	13,769,000		$	15,287,000		$	15,728,000		$	14,264,000		$	12,690,000

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	Year ended December 31,
(Dollars in thousands, except for share data)	2007			2006			2005			2004			2003
Selected Financial Ratios:(4)
Return on average assets		(1.63	%)		(1.47	%)		0.07	%		1.50	%		1.37	%
Return on average common equity		(40.25	%)		(59.25	%)		(3.04	%)		30.20	%		34.67	%
Dividend payout ratio for common stock		—			(3.36	%)		(332.44	%)		36.72	%		36.50	%
Average equity to average assets		10.29	%		6.59	%		6.56	%		8.22	%		8.91	%

(1)	See Note 22 of the consolidated financial statements for an explanation of the computation of income tax benefit and expense.
(2)	Includes loans held for sale.
(3)	Includes $3.7 billion, 3.3 billion, $5.9 billion, $5.2 billion and $4.3 billion of loans owned by Doral Financial at December 31, 2007, 2006, 2005, 2004 and 2003, respectively, which represented 27%, 22%, 38%, 37% and 34%, respectively, of the total servicing portfolio as of such dates.
(4)	Average balances are computed on a daily basis.

     Doral Financial’s ratios of earnings to fixed charges and earnings to fixed charges and preferred stock dividends on a consolidated basis for each of the five years in the period ended December 31, 2007 are as follows:

Year ended December 31,

2007

2006

2005

2004

2003

Ratio of Earnings to Fixed Charges

Including Interest on Deposits

(A

)

(A

)

1.05x

1.33x

1.51x

Excluding Interest on Deposits

(A

)

(A

)

1.06x

1.42x

1.66x

Ratio of Earnings to Combined Fixed Charges and Preferred Stock      Dividends

Including Interest on Deposits

(A

)

(A

)

(B

)

1.27x

1.41x

Excluding Interest on Deposits

(A

)

(A

)

(B

)

1.33x

1.51x

(A)	During 2007 and 2006, earnings were not sufficient to cover fixed charges or preferred dividends and the ratios were less than 1:1. The Company would have had to generate additional earnings of $243.8 million and $312.5 million, to achieve ratios of 1:1 in 2007 and 2006, respectively.
(B)	During 2005, earnings were not sufficient to cover preferred dividends and the ratio was less than 1:1. The Company would have had to generate additional earnings of $21.8 million to achieve a ratio of 1:1 in 2005.

     For purposes of computing these consolidated ratios, earnings consist of pre-tax income from continuing operations plus fixed charges and amortization of capitalized interest, less interest capitalized. Fixed charges consist of interest expensed and capitalized, amortization of debt issuance costs, and Doral Financial’s estimate of the interest component of rental expense. Ratios are presented both including and excluding interest on deposits. The term “preferred stock dividends” is the amount of pre-tax earnings that is required to pay dividends on Doral Financial’s outstanding preferred stock.

     The principal balance of Doral Financial’s long-term obligations (excluding deposits) and the aggregate liquidation preference of its outstanding preferred stock on a consolidated basis as of December 31 of each of the five years in the period ended December 31, 2007 is set forth below.

	Year ended December 31,
(In thousands)	2007		2006		2005		2004		2003
Long-term obligations	$	2,885,164	$	4,834,163	$	9,774,714	$	7,636,373	$	5,126,788
Cumulative preferred stock	$	345,000	$	345,000	$	345,000	$	345,000	$	345,000
Non-Cumulative preferred stock.	$	228,250	$	228,250	$	228,250	$	228,250	$	228,250

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand Doral Financial and its subsidiaries. This MD&A is provided as a supplement to and should be read in conjunction with Doral Financial’s consolidated financial statements and the accompanying notes. The MD&A includes the following sections:

OVERVIEW OF RESULTS OF OPERATIONS: Provides a brief summary of the most significant events and drivers affecting Doral Financial’s results of operations during 2007.

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INTERNAL CONTROL OVER FINANCIAL REPORTING: Provides a description of the status of Doral Financial’s internal control over financial reporting. For additional information, see Part II, Item 9A. Controls and Procedures, in this Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES: Provides a discussion of Doral Financial’s accounting policies that require critical judgment, assumptions and estimates.

CONSOLIDATED RESULTS: Provides an analysis of the consolidated results of operations for 2007 compared to 2006, and 2006 compared to 2005.

OPERATING SEGMENTS: Provides a description of Doral Financial’s four operating segments and an analysis of the results of operations for each of these segments.

BALANCE SHEET AND OPERATING DATA ANALYSIS: Provides an analysis of the most significant balance sheet items and operational data that impact Doral Financial’s financial statements and business. This section includes a discussion of the Company’s liquidity and capital resources, regulatory capital ratios, off-balance sheet activities and contractual obligations.

RISK MANAGEMENT: Provides an analysis of the most significant risks to which Doral Financial is exposed, specifically interest rate risk, credit risk, operational risks and liquidity risk.

MISCELLANEOUS: Provides disclosure about various matters, including changes in accounting standards and recently issued accounting standards.

Investors are encouraged to carefully read this MD&A together with Doral Financial’s consolidated financial statements, including the Notes to the consolidated financial statements.

As used in this report, references to “the Company” or “Doral Financial” refer to Doral Financial Corporation and its consolidated subsidiaries unless otherwise indicated.

OVERVIEW OF RESULTS OF OPERATIONS

On July 19, 2007, Doral Financial completed its Recapitalization through, the private sale of 48,412,698 newly issued shares of common stock to Doral Holdings, a newly formed entity in which Bear Stearns Merchant Banking and other investors including funds managed by Marathon Asset Management, Perry Capital, the DE Shaw Group and Tennenbaum Capital invested, for an aggregate purchase price of $610.0 million. Doral Financial also transferred its mortgage servicing and mortgage origination operations to Doral Bank PR, its principal banking subsidiary, contributed its mortgage servicing and related assets to Doral Bank PR in the form of additional equity. On July 26, 2007, the Company sold the branch network of Doral Bank NY. In connection with these transactions, Doral Bank PR obtained regulatory approval to pay a $155.0 million cash dividend to the holding company and Doral Bank NY received regulatory approval to effect a capital distribution to the holding company in the amount of $50.0 million, of which $45.0 million was paid on July 30, 2007.

The transactions described above resulted in the significant recapitalization of the holding company and provided the holding company with sufficient funds to repay in full its $625.0 million floating rate senior notes that matured on July 20, 2007, to fund in August 2007 the settlement of the restatement-related consolidated class action and derivative shareholder litigation, and to pay related transaction expenses. The Recapitalization also greatly improved the liquidity and capital position of the Company and allowed the Company to restructure its balance sheet and operating structure.

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During the third quarter of 2007, after the completion of the recapitalization, in order to reduce interest rate risk, and based on existing market conditions, Doral Financial’s newly constituted Board of Directors reassessed (the “Third Quarter Reassessment”) the Company’s intent of holding available for sale securities until maturity or recovery of losses and approved the sale of approximately $1.9 billion in available for sale investment securities.

During the fourth quarter of 2007, the Board of Directors reassessed (the “Fourth Quarter Reassessment”) the Company’s intent of holding held to maturity securities until maturity and approved the transfer of $1.8 billion in investment securities from the held to maturity portfolio to the available for sale portfolio. The decision was made, based on existing market conditions, to provide the Company with a greater ability to manage interest rate risk. The Company still had the ability and intent to hold these securities for a sufficient period of time to allow for the recovery of market value, but not necessarily until maturity. Subsequently, the Company sold $437.5 million of long dated US Treasury securities for a gain.

Net loss for the year ended December 31, 2007 amounted to $170.9 million, compared to net loss of $223.9 million and net income of $13.2 million for the years 2006 and 2005, respectively. Compared to 2006, Doral Financial’s 2007 financial performance was principally impacted by (1) lower net interest income as a result of a decrease in interest earnings assets, primarily investment securities; (2) an increase in the provision for loan and lease losses due to the continued deterioration of the construction loan portfolio and the general rise in delinquencies; (3) significant non-interest losses driven primarily by (i) losses on the sale of investment securities, and (ii) a loss on extinguishment of liabilities, related to losses on the sale of investment securities; and (4) partially offset by a reduction in non-interest expense. These resulted in a slight increase in the net loss before tax which was partially offset by an income tax benefit principally related to a decrease in the valuation allowance of the Company’s deferred tax assets.

Important factors impacting the Company’s financial results for the year ended December 31, 2007 included the following:

• The net loss for the year ended December 31, 2007 was $170.9 million, compared to net loss of $223.9 million and a net income of $13.2 million for the years 2006 and 2005, respectively. After the payment of preferred stock dividends, there was a net loss attributable to common shareholders of $204.2 million for the year ended December 31, 2007, compared to a net loss attributable to common shareholders of $257.2 million and $20.1 million for the years ended December 31, 2006 and 2005, respectively.

• The diluted loss per share for the year ended December 31,2007 was $7.45, compared to a diluted loss per share of $47.66 and $3.73 for the years ended December 31,2006 and 2005, respectively.

• Net interest income for the year ended December 31, 2007 was $154.3 million, compared to $201.4 million and $280.6 million for the years ended December 31, 2006 and 2005, respectively. The decrease in net interest income for 2007, compared to 2006, is principally related to the decrease in interest income due to the sale of $2.4 billion in available for sale investment securities. This was partially offset by the reduction in interest expense related to the termination of the funding associated with the investment securities sold and to the repayment of $625.0 million in senior notes on July 20, 2007 which was funded primarily from the $610.0 million equity investment by Doral Holdings on July 19, 2007, reducing the leverage of Doral Financial. This reduction in leverage also resulted in an increase in the net interest margin from 1.41% for 2006 to 1.60% for 2007 (see Tables A and B below for information regarding the Company’s net interest income). Average interest-earning assets decreased from $14.3 billion for 2006 to $9.6 billion for 2007. The decrease in assets was offset by a decrease in interest bearing liabilities from $13.4 billion for 2006 to $8.7 billion for 2007.

• The provision for loan and lease losses for the year ended December 31, 2007 was $78.2 million, compared to $39.8 million and $22.4 million for 2006 and 2005, respectively. The increase in the provision for loan and lease losses reflects principally an increase in reserves related to the

39

	allowance for the Company’s construction loan portfolio, as well as increases in the provision to reflect delinquency trends in the residential mortgage, commercial and consumer loan portfolios.
•	Non-interest loss for the year ended December 31, 2007 was $75.4 million, compared to non-interest loss of $59.2 million and non-interest income of $62.5 million in 2006 and 2005, respectively. The non-interest loss for 2007, compared to 2006, was principally driven by a significant loss related to the third quarter sale of $1.9 billion in available for sale investment securities and related transactions at a pre-tax loss totaling approximately $128.0 million, consisting of a loss of $16.4 million on economic hedging transactions, a net loss on extinguishment of liabilities of $14.8 million and a loss on sale of investment securities of $96.8 million. The sale of Doral Bank NY’s branch network and a loss on related assets during the third quarter of 2007 also contributed to a charge of $4.1 million, net of the $9.5 million premium received on deposits sold. Commissions, fees and other income decreased by $5.2 million primarily due to reduced income from a residential housing project in possession of the Company.
•	Non-interest expense for the year ended December 31, 2007 was $303.5 million, compared to $374.3 million and $288.5 million for the years ended December 31, 2006 and 2005 respectively. Compared to 2006, non-interest expenses for 2007 decreased by $70.8 million, principally due to the accrual of $95.0 million during 2006 in connection with the settlement of the securities class action and shareholders’ derivative litigation related to the restatement of prior-period financial statements. Non-interest expenses for 2007, increased by $24.2 million compared to non-interest expense for 2006, adjusted for the $95.0 million charge. The Company’s expenses for 2007 were principally driven by charges related to its recapitalization and reorganization efforts, including: (i) $33.3 million in compensation and benefit expenses related to the termination of the stock options, payment of an escrow account maintained on behalf of the Company’s Chief Executive Officer pursuant to the terms of his employment agreement, payment of the Key Employee Incentive Plan, and severance payments; (ii) $8.5 million in professional services related to remediation of legacy issues; (iii) $6.1 million in professional services for investment banking and other services; and (iv) $6.6 million in legal expenses. In addition, the Company paid $1.9 million in professional services related to Doral Holdings and incurred advertising and marketing expenses of $2.5 million associated with Doral’s refreshed branding program.
•	For the year ended December 31, 2007, Doral Financial reported an income tax benefit of $131.9 million, compared to a tax benefit of $48.1 million for the comparable 2006 period. The recognition of an income tax benefit reflects the release of the valuation allowance of the deferred tax asset, primarily as a result of higher forecasted taxable income due to the recapitalization of the Company and the implementation of certain strategies to generate future taxable income.
•	During the year ended December 31, 2007, the Company had other comprehensive income of approximately $73.8 million, compared to other comprehensive income of $18.5 million and other comprehensive loss of $51.8 million for the years ended December 31, 2006 and 2005, respectively. During 2007, the Company incurred other comprehensive income due to the realization of the losses reflected in its accumulated other comprehensive loss (net of income tax benefit) of $33.1 million at December 31, 2007 as a result of the sale of the $1.9 billion in available for sale investment securities during the third quarter of 2007. As of December 31, 2007, the Company’s accumulated other comprehensive loss (net of income tax benefit) was $33.1 million, compared to $106.9 million as of December 31, 2006.
•	Doral Financial’s loan production for 2007 was $1.3 billion, compared to $2.0 billion for 2006, a decrease of approximately 35%. The decrease in Doral Financial’s loan production was due to a number of factors, including changes in underwriting standards to reflect the deteriorating economic conditions in Puerto Rico, competition from other financial institutions and a general slow down in borrowing activity in Puerto Rico. The Company anticipates that, for the foreseeable future, these same factors will keep loan production below historical levels.
•	Total assets as of December 31, 2007 were $9.3 billion, a decrease of 22%, compared to $11.9 billion as of December 31, 2006. The decrease in total assets during 2007 was due primarily to a decrease in the Company’s securities portfolio of $2.4 billion, as a result of the sales of $1.9

40

billion and $437.5 million in available for sale investment securities during the third and fourth quarters of 2007, respectively. The sale and the cancellation of related borrowings used to finance these securities were completed on August 8, 2007. The decrease in total liabilities of $3.0 billion was also driven by the repayment of the $625.0 million in senior notes on July 20, 2007, largely from the proceeds of the issuance of common stock amounting to $610.0 million.

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 as of December 31, 2007. Doral Financial’s remediation efforts are outlined in “- Remediation of Material Weaknesses” under Item 9A, Controls and Procedures, of this Annual Report on Form 10-K and are specifically designed to address the material weaknesses identified by Doral Financial’s management and to enhance the Company’s overall corporate governance. Doral Financial will disclose any significant developments arising as a result of its remediation efforts in future filings with the SEC.

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 December 31, 2007.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in Doral Financial’s consolidated financial statements and accompanying notes. Certain of these estimates are critical to the presentation of Doral Financial’s financial condition since they are particularly sensitive to the Company’s judgment and are highly complex in nature. Doral Financial believes that the judgments, estimates and assumptions used in the preparation of its consolidated financial statements are appropriate given the factual circumstances as of December 31, 2007. 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 Doral Financial’s results of operations or financial condition.

Various elements of Doral Financial’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Note 2 to Doral Financial’s consolidated financial statements contains a summary of the most significant accounting policies followed by Doral Financial in the preparation of its financial statements. The accounting policies that have a significant impact on Doral Financial’s statements and that require the most judgment are set forth below.

Fair Value Measurement

The measurement of fair value is fundamental to the presentation of Doral Financial’s financial condition and results of operations. Fair value is defined under GAAP as the amount at which an instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. GAAP indicates that fair value must be based on observable (for example, quoted) market prices. If observable market prices are not available, the techniques management uses for estimating fair value measurements should incorporate assumptions that individuals in the market would use. If that information is not available, then GAAP permits an entity to use its own assumptions, as long as there is no indication that the market would use a different assumption. Doral Financial recognizes many of its financial instruments at fair value in the Consolidated Statements of Financial Condition, with changes in these fair values

41

recognized as gains and losses in the Consolidated Statements of (Loss) Income or deferred, net of tax, in Accumulated Other Comprehensive Income (“AOCI”).

Set forth below is a summary of Doral Financial’s sources of fair value for its investment securities, held in the securities held for trading and available for sale portfolios as well as its derivatives, retained interests and loans held for sale as of December 31, 2007:

	Carrying Amount
				Prices
				Provided
	Prices			By Other			Internal		External
	Actively			External			Valuation		Valuation
(In thousands)	Quoted			Sources			Models		Models
Tax-exempt GNMAs	$	—		$	36,161		$	—	$	—
Collateralized Mortgage Obligations		—			523,410			1,707		—
Puerto Rico government obligations		—			24,650			—		—
Mortgage-backed securities		276,998			9,241			—		—
US Treasury securities		378,288			—			—		—
US government sponsored agency securities		894,518			—			—		—
Derivative instruments		(6	)		(1,407	)		—		—
Other investment securities		—			25			—		—
Interest-only strips		—			—			51,928		—
Servicing assets (“MSRs”)		—			—			—		150,238
Loans held for sale(1)		—			—			418,556		—

⁽¹⁾ The market value of loans held for sale is generally based on quoted market prices for mortgage-backed securities, adjusted to reflect particular characteristics such as guarantee fees, actual delinquency and credit risk associated with the individual loans.

Fair value affects Doral Financial’s earnings in a variety of ways. For certain financial instruments that are carried at fair value (such as securities held for trading, including IOs and derivative instruments), changes in fair value are recognized in current period earnings as net gain (loss) on securities held for trading. For securities available for sale, changes in fair value are generally deferred, net of tax, in AOCI, a component of stockholders’ equity. The deferred gains and losses in AOCI, initially measured at fair value, are recognized in earnings over time when the securities are sold or when impairment is recognized. In addition, impairment of loans held for sale is recognized in earnings through lower-of-cost-or-market valuation adjustments. Finally, changes in fair value of MSRs are recognized in earnings as part of servicing income.

The estimation of fair values reflects Doral Financial’s judgment regarding appropriate valuation methods and assumptions. The selection of a method to estimate fair value for each type of financial instrument depends on both the reliability and availability of relevant market data. The amount of judgment involved in estimating the fair value of a financial instrument is affected by a number of factors, such as type of instrument, the liquidity of the market for the instrument and the contractual characteristics of the instrument.

Trading in the bond market is experiencing a disruption because of liquidity issues. At the current time, Doral Financial believes that it has adequate liquidity resources to hold its available for sale securities until recovery of their value.

For financial instruments with active markets and readily available market prices, Doral Financial estimates fair values based on independent price quotations obtained from third parties, including dealer quotes or direct market observations. Dealer quotes are prices that are obtained from third-party dealers that generally make markets in the relevant products. The quoted price is an indication of the price at which the dealer would consider transacting in current market conditions. Direct market observations are prices that are retrieved from sources in which market trades are executed, such as electronic trading platforms.

Certain instruments, such as the Company’s portfolio of lOs, are less actively traded and, therefore, fair value is based on valuation models using market data inputs adjusted by the Company’s particular characteristics, when appropriate. See “Retained Interest Valuation” below for additional information.

42

Gain or Loss on Mortgage Loan Sales

The Company generally securitizes a portion of the residential mortgage loans that it originates. FHA and VA loans are generally securitized into GNMA mortgage-backed securities and held as trading securities. After holding these securities for a period of time, Doral Financial sells these securities for cash. Conforming conventional loans are generally sold directly to FNMA, FHLMC or institutional investors or exchanged for FNMA or FHLMC-issued mortgage-backed securities, which Doral Financial sells for cash through broker-dealers. Prior to 2007, the Company sold mortgage loans that did not conform to GNMA, FNMA or FHLMC requirements (non-conforming loans) as whole loan pools to financial institutions.

As part of its mortgage loan sale and securitization activities, Doral Financial generally retains the right to service the mortgage loans it sells. In connection with the sale of loans, generally non-conforming mortgage loan pools, Doral Financial may also retain certain interests in the loans sold, such as the right to receive any interest payments on such loans above the contractual pass-through rate payable to the investor. Doral Financial determines the gain on sale of a mortgage-backed security or loan pool by allocating the carrying value of the underlying mortgage loans between the mortgage-backed security or mortgage loan pool sold and its retained interests, based on their relative estimated fair values. The gain on sale reported by Doral Financial is the difference between the proceeds received from the sale and the cost allocated to the loans sold. The proceeds include cash and other assets received in the transaction (primarily MSRs) less any liabilities incurred (i.e., representations and warranty provisions). The reported gain or loss is the difference between the proceeds from the sale of the security or mortgage loan pool and its allocated cost. The amount of gain on sale is therefore influenced by the values of the MSRs and retained interest recorded at the time of sale. See “-Retained Interest Valuation” below for additional information.

If in a transfer of financial assets in exchange for cash or other consideration (other than beneficial interests in transferred assets), Doral Financial has not surrendered control over the transferred assets according to the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”), Doral Financial accounts for the transfer as a secured borrowing (loan payable) with a pledge of collateral.

Retained Interest Valuation

In the past, Doral Financial’s sale and securitization activities generally result in the recording of one or two types of retained interests; MSRs and IOs. During 2007, the Company’s sale and securitization activities resulted in the recording of only one type of retained interest; MSRs. MSRs represent the estimated present value of the normal servicing fees (net of related servicing costs) expected to be received on a loan being serviced over the expected term of the loan. MSRs entitle Doral Financial to a future stream of cash flows based on the outstanding principal balance of the loans serviced and the contractual servicing fee. The annual servicing fees generally range between 25 and 50 basis points, less, in certain cases, any corresponding guarantee fee. In addition, MSRs may entitle Doral Financial, depending on the contract language, to ancillary income including late charges, float income, and prepayment penalties net of the appropriate expenses incurred for performing the servicing functions. In certain instances, the Company also services loans with no contractual servicing fee. The servicing asset or liability associated with such loans is evaluated based on ancillary income, including float, late fees, prepayment penalties and costs. MSRs are classified as servicing assets in Doral Financial’s Consolidated Statements of Financial Condition. Any servicing liability recognized is included as part of accrued expenses and other liabilities in Doral Financial’s Consolidated Statements of Financial Condition.

Unlike U.S. Treasury and agency mortgage-backed securities, the fair value of MSRs and IOs cannot be readily determined because they are not traded in active securities markets. Doral Financial determined the initial fair value of its MSRs based on a market valuation received from a third party. The market valuation received for the Company’s entire servicing portfolio (governmental, conforming and non-conforming portfolios) is calculated by stratifying the portfolio by predominant risk characteristics — loan type and coupon. Under a market valuation approach, the fair value of the servicing assets is determined based on a combination of market information on trading activity (MSR trades and broker valuations), benchmarking of servicing assets (valuation surveys) and cash-flow modeling. The valuation of the Company’s MSRs

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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. For the year ended December 31, 2007, the MSRs fair value declined $20.8 million.

The Company, upon remeasurement of the MSRs at fair value in accordance with SFAS No. 156 “Accounting for Servicing of Financial Assets”, recorded a cumulative effect adjustment to retained earnings (net of tax) on January 1, 2007 for the difference between the fair value and the carrying amount to bring the December 31, 2006 MSR balance to the fair value.

Prior to the adoption of SFAS No. 156 in 2007, impairment charges were recognized through a valuation allowance for each individual stratum of servicing assets. The valuation allowance was adjusted to reflect the amount, if any, by which the cost basis of the servicing asset for a given stratum of loans being serviced exceeded its fair value. Any fair value in excess of the cost basis of the servicing asset for a given stratum was not recognized. Other-than-temporary impairment, if any, was recognized as a direct write-down of the servicing asset, and the valuation allowance was applied to reduce the cost basis of the servicing asset.

The amortization of the MSRs was based on an income forecast cash-flow method. The income forecast method was based on the forecasted cash flows determined by the third-party market valuation and the amortization was calculated by applying to the carrying amount of the MSRs the ratio of the cash flows projected for the current period to total remaining forecasted cash flow.

IOs represent the estimated present value of the cash flows retained by the Company that are generated by the underlying fixed rate mortgages (as adjusted for expected losses and prepayments, as well as by the estimated market value of any embedded cap, if applicable) after subtracting: (1) the interest rate payable to the investor; and (2) a contractual servicing fee. As of December 31, 2007, the carrying value of the IOs of $51.9 million is related to $401.5 million of outstanding principal balance of mortgage loans sold to investors. IOs are classified as securities held for trading in Doral Financial’s Consolidated Statements of Financial Condition.

To determine the value of its portfolio of variable IOs, Doral Financial uses an internal valuation model that forecasts expected cash flows using forward LIBOR rates derived from the LIBOR/Swap yield curve at the date of the valuation. Prepayment assumptions and discount rates incorporated into the valuation model for variable and fixed IOs are based on publicly available, independently verifiable, market data and statistically derived relationships between the Company’s and the FNMA’s U.S. mainland mortgage pool prepayment experiences.

To determine prepayment assumptions, Doral Financial calculates its prepayment forecasts based on the median of 14 static prepayment forecasts by mortgage-backed securities dealers obtained from Bloomberg. This median is then adjusted using a regression analysis that correlates the prepayment experiences of the Company’s non-conforming loan portfolio with that of US mainland FNMA mortgages. To estimate the adjustment equation between the U.S. mainland and the Company’s portfolio, the Company calculates a quarterly constant prepayment rate (“CPR”) for each pool of its non-conforming loan portfolio and compares it to that of a generic FNMA pool with similar coupon and seasonality. To mitigate risks of misestimating the equation, the Company updates its regression analysis on a quarterly basis as new data become available.

This methodology resulted in a CPR of 9.81% for 2007, 13.73% for 2006 and 12.17% for 2005. The change in the CPR between 2007 and 2006 was principally attributable to a slowdown in prepayments experienced throughout 2007 as a result of less refinancing activity in Puerto Rico given higher rates and the recessionary environments. The change in the CPR between 2006 and 2005 was principally attributable to a change in the composition of the variable IO portfolio.

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

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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. The spread was increased by 200 basis points versus the 2006 inputs, principally reflecting the current conditions of the mortgage capital markets. Doral Financial obtains the Z-spread from major investment banking firms. This methodology resulted in a discount rate of 12.11% for 2007, 12.22% for 2006 and 10.91% for 2005.

For IOs, Doral Financial recognizes as interest income (through the life of the IO) the excess of all estimated cash flows attributable to these interests over their recorded balance using the effective yield method in accordance with Emerging Issue Task Force (“EITF”) Issue No. 99-20 “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.” Doral Financial recognizes as interest income the excess of the cash collected from the borrowers over the yield payable to investors, less a servicing fee (“retained spread”), up to an amount equal to the yield on the IOs that equals the discount rate used in the internal valuation model. Doral Financial accounts for any excess retained spread as amortization to the gross IO capitalized at inception. The Company updates its estimates of expected cash flows periodically and recognizes changes in calculated effective yield on a prospective basis. The following table presents a detail of the cash flows received and the losses on the valuation of Doral Financial’s portfolio of IDs for 2007, 2006 and 2005 based on the internal valuation model:

	Year ended December31,
(In thousands)	2007			2006			2005
Total cash flows received on IO portfolio	$	12,533		$	23,042		$	62,639
Amortization of IOs, as offset to cash flows		(6,552	)		(16,520	)		(51,785	)
Net cash flows recognized as interest income	$	5,981		$	6,522		$	10,854
Gain (loss) on the value of the IOs	$	8,554		$	(41,967	)	$	(12,523	)

As discussed above, Doral Financial classifies its IOs as securities held for trading with changes in the fair value recognized in current earnings as a component of net gain (loss) on securities held for trading.

The following table shows the weighted averages of the key economic assumptions used by the Company in its external and internal 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 December 31, 2007:

	Servicing			Interest-Only
(Dollars in thousands)	Assets			Strips
Carrying amount of retained interest	$	150,238		$	51,928
Weighted-average expected life (in years)		7.0			5.7
Constant Prepayment Rate (weighted-average annual rate)		11.50	%		9.81	%
Decrease in fair value due to 10% adverse change	$	(4,762	)	$	(1,808	)
Decrease in fair value due to 20% adverse change	$	(9,189	)	$	(3,519	)
Residual cash flow discount rate (weighted-average annual rate)		11.44	%		12.11	%
Decrease in fair value due to 10% adverse change	$	(5,889	)	$	(1,158	)
Decrease in fair value due to 20% adverse change	$	(11,349	)	$	(2,263	)

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

45

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 December 31, 2007, all of the mortgage loan sale 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)

	Constant			Weighted-average		Change in Fair
Change in interest	Prepayment			expected life		Value of Interest-
rates (basis points)	Rate			(years)		Only Strips			% Change
+ 200		6.99	%		6.8	$	(4,110	)		(7.9	)%
+ 100		7.89	%		6.4		(1,585	)		(3.1	)%
+ 50		8.59	%		6.2		(387	)		(0.7	)%
Base		9.81	%		5.7		0			0.0	%
- 50		11.66	%		5.1		(360	)		(0.7	)%
-100		13.52	%		4.7		(142	)		(0.3	)%
-200		15.80	%		4.2		4,203			8.1	%

The Company’s IOs included in the table above are primarily variable rate IOs, subject to interest rate caps. Accordingly, in a declining interest rate scenario (as shown in the table), decreases in the fair value of the interest rate caps more than offset the otherwise positive impact that declining interest rates would have on the fair values of the IOs. This results in a net reduction in the fair values of the IOs.

Valuation of Trading Securities and Derivatives

Doral Financial’s net gain (loss) on securities held for trading includes gains and losses, whether realized or unrealized, on securities accounted for as held for trading, including IOs, as well as various other financial instruments, including derivative contracts, that Doral Financial uses to manage its interest rate risk. Securities held for trading and derivatives are recorded at fair values with increases or decreases in such values reflected in current earnings. The fair values of many of Doral Financial’s trading securities (other than IOs) and derivative instruments are based on dealer quotations from recognized markets. For instruments not traded on a recognized market, Doral Financial generally determines fair value by reference to quoted market prices for similar instruments.

As of December 31, 2007, Doral Financial held $33.7 million in Puerto Rico tax-exempt GNMA securities included in its securities held for trading portfolio. Because of their preferential tax status in Puerto Rico, these securities cannot be valued directly by reference to market quotations for U.S. GNMA securities with similar characteristics. Doral Financial determines the fair value of its portfolio of tax-exempt GNMA securities, based on quotations from various dealers.

Generally, derivatives are financial instruments with little or no initial net investment in comparison to their notional amount and whose value is based on the value of an underlying asset, index, reference rate or other variable. They may be standardized contracts executed through organized exchanges or privately negotiated contractual agreements that can be customized to meet specific needs, including certain commitments to purchase and sell mortgage loans and mortgage-backed securities. The fair value of derivatives is generally reported net by counterparty, provided that a legally enforceable master netting agreement exists. Derivatives in a net asset position are reported as part of securities held for trading, at fair value. Similarly, derivatives in a net liability position are reported as part of accrued expenses and other liabilities, at fair value.

For those derivatives not designated as an accounting hedge, fair value gains and losses are reported as part of net gain (loss) on securities held for trading in the Consolidated Statements of (Loss) Income.

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Other Income Recognition Policies

Interest income on loans is accrued by Doral Financial when earned. Loans are placed on a non-accrual basis when any portion of principal or interest is more than 90 days past due, or earlier if concern exists as to the ultimate collectibility of principal or interest. When a loan is placed on non-accrual status, all accrued but unpaid interest to date is fully reversed. Such interest, if collected, is credited to income in the period of recovery. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

Loan origination fees, as well as discount points and certain direct origination costs for loans held for sale, are initially recorded as an adjustment to the cost of the loan and reflected in Doral Financial’s earnings as part of the net gain on mortgage loan sales and fees when the loan is sold or securitized into a mortgage-backed security. In the case of loans receivable held for investment, such fees and costs are deferred and amortized to income as adjustments to the yield of the loan in accordance with SFAS No. 91 “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.”

Allowance for Loan and Lease Losses

Doral Financial maintains an allowance for loan and lease losses to absorb probable credit-related losses on its loans receivable portfolio. The allowance consists of specific and general components and is based on Doral Financial’s assessment of 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 risks inherent in the loans receivable portfolio. The allowance is maintained at a level that Doral Financial considers to be adequate to absorb probable losses. Credit losses are charged and recoveries are credited to the allowance, while increases to the allowance are charged to operations. Unanticipated increases in the allowance for loan and lease losses could adversely impact Doral Financial’s net income in the future.

Commercial and construction loans over $2.0 million that are classified as substandard are evaluated individually for impairment. The Company evaluates impaired loans and the related valuation allowance based on SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” Doral Financial measures impaired loans at their estimated realizable values determined by discounting the expected future cash flows discounted at the loan’s effective interest rate or, if practical, at the fair value of the collateral, if the loan is collateral dependent. In assessing the reserves under the discounted cash flows, the Company considers the estimate of future cash flows based on reasonable and supportable assumptions and projections. All available evidence, including estimated costs to sell if those costs are expected to reduce the cash flows available to repay or otherwise satisfy the loan, are considered in developing those estimates. The likelihood of the possible outcomes is considered in determining the best estimate of expected future cash flows.

Doral Financial’s mortgage loan portfolio consists primarily of homogeneous loans that are secured by residential real estate and are made to consumers. Doral Financial does not evaluate individual homogeneous loans for impairment. Instead, it records an allowance (including residential mortgages, consumer, commercial and construction loans under $2.0 million) on an aggregate 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 and trends, as well as charge-off and economic data, such as interest rate levels, inflation and the strength of the housing market in the areas where the Company operates.

Estimated Recourse Obligation

Prior to 2006, the Company normally sold mortgage loans and mortgage-backed securities subject to recourse provisions. Pursuant to these recourse arrangements, the Company agreed to retain or share the credit risk with the purchaser of such mortgage loans for a specified period or up to a certain percentage of the total amount in loans sold. The Company estimates the fair value of the retained recourse obligation or

47

any liability incurred at the time of sale and includes such obligation with the net proceeds from the sale, resulting in lower gain on sale recognition. Doral Financial recognizes the fair value of its recourse obligation by estimating the amount that the Company would be required to pay for mortgage insurance from a third party in order to be relieved of its estimated recourse exposure on these loans. The Company believes that this method resulted in an adequate valuation of its recourse allowance as of December 31, 2007, but actual future recourse obligations may be different and a different result may have been obtained if the Company had used another method for estimating this liability, such as one requiring management to estimate this liability based on actual historical losses incurred by the Company.

Income Taxes

     The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities based on current tax laws. To the extent tax laws change, deferred tax assets and liabilities are adjusted, to the extent necessary, in the period that the tax change is enacted. The Company recognizes income tax benefits when the realization of such benefits is probable. A valuation allowance is recognized for any deferred tax asset which, based on management’s evaluation, is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. Significant management judgment is required in determining the provision for income taxes and, in particular, any valuation allowance recorded against our deferred tax assets. The amount of the valuation allowance has been determined based on our estimates of taxable income over the periods in which the deferred tax assets will be recoverable. Our methodology for determining the realizability of deferred tax assets involves estimates of future taxable income for the Company and of estimated operating expenses to support that anticipated level of business, as well as the expiration dates and amounts of net operating loss carryforwards. These estimates are projected through the life of the related deferred tax assets based on assumptions that we believe to be reasonable and consistent with current operating results. Changes in future operating results not currently forecasted may have a significant impact on the realization of deferred tax assets.

Income tax benefit or expense includes (i) deferred tax expense or benefit, which represents the net change in the deferred tax assets or liability balance during the year plus any change in the valuation allowance, if any; and (ii) current tax expense.

CONSOLIDATED RESULTS

Net (Loss) Income

     Doral Financial incurred a net loss of $170.9 million for the year ended December 31, 2007, compared to a net loss of $223.9 million and net income of $13.2 million for the years ended December 31, 2006 and 2005, respectively. Diluted loss per common share for the year ended December 31, 2007 was $7.45, compared to a diluted loss per common share of $47.66 and $3.73 for the years ended December 31, 2006 and 2005, respectively. For 2007 as compared to 2006, the decrease in the diluted loss per share was disproportionate to the decrease in the net loss due to the significant number of shares issued in connection with the Company’s recapitalization.

     2007 compared to 2006. Doral Financial incurred a net loss of $170.9 million for the year ended December 31, 2007, compared to net loss of $223.9 million for the year ended December 31, 2006. The results for 2007 reflect decreases in net income related primarily to the following factors:

• A decrease in net interest income of $47.1 million or 23% in 2007 compared to the same period in 2006, related primarily to a decrease in the average balance of interest-earning assets, primarily related to the sale of $2.4 billion of available for sale securities during the second half of 2007, partially offset by a decrease in the average balance of interest-earnings liabilities primarily related to the termination of the funding associated with the investment securities sold and to the repayment of the $625.0 million in senior notes.

• An increase of $38.4 million in the provision for loan and lease losses as a result of increases in reserves related to the allowance for the Company’s construction loan portfolio, as well as increases in the provision to reflect delinquency trends in the residential mortgage, commercial and consumer loan portfolios.

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• A non-interest loss attributable principally to a significant loss related to the third quarter sale of $1.9 billion in available for sale investment securities and related transactions at a pre-tax loss of approximately $128.0 million, consisting of a loss of $16.4 million on economic hedging transactions, a net loss on extinguishment of liabilities of $14.8 million and a loss on sale of investment securities of $96.8 million. The sale of Doral Bank NY’s branch network and related assets during the third quarter of 2007 also contributed to a charge of $4.1 million, net of the $9.5 million premium received on deposits sold. Commissions, fees and other income decreased by $5.2 million primarily due to reduced income from a residential housing project in possession of the Company.

• A decrease in non-interest expense of $70.8 million, or 19%, in 2007 compared to the same period in 2006, principally related to the decrease in other expenses related to a contingency provision of $95.0 million recorded in 2006 in connection with an agreement to settle the Company’s consolidated securities class action and shareholder derivative litigation related to the restatement of prior-period financial statements. The Company’s expenses for 2007 were principally driven by charges related to its recapitalization and reorganization efforts, including: (i) $33.3 million in compensation and benefit expenses related to the termination of the stock options, payment of an escrow account maintained on behalf of the Company’s Chief Executive Officer pursuant to the terms of his employment agreement, payment of the Key Employee Incentive Plan, and severance payments; (ii) $8.5 million in professional services related to remediation of legacy issues; (iii) $6.1 million in professional services for investment banking and other services; and (iv) $6.6 million in legal expenses. In addition, the Company paid $1.9 million in professional services related to Doral Holdings and incurred advertising and marketing expenses of $2.5 million associated with Doral’s refreshed branding program.

• The decrease in interest income and the increase in non-interest loss were offset in part by a tax benefit of $131.9 million for 2007, compared to $48.1 million for the comparable 2006 period. The recognition of an income tax benefit reflects the release of the valuation allowance of the deferred tax asset, primarily as a result of higher forecasted taxable income due to the recapitalization of the Company and the implementation of certain strategies to generate future taxable income.

     2006 compared to 2005. Doral Financial incurred a net loss of $223.9 for the year ended December 31, 2006, compared to net income of $13.2 million for the year ended December 31, 2005. The results for 2006 reflected decreases in net income related primarily to the following factors:

• A compression in the Company’s net interest margin, which resulted in a $79.2 million, or 28%, decrease in net interest income in 2006 compared to 2005.

• An increase in the provision for loan and lease losses as a result of increases in specific reserves related to the allowance for the Company’s construction loan portfolio, as well as a deterioration in the delinquency trends of the overall loan portfolio, particularly in the Company’s construction and commercial portfolios.

• A reduction in non-interest income attributable to (i) a $42.0 million loss on IO valuation principally related to losses suffered during the first half of 2006 from the impact of increases in short-term interest rates on IOs that did not have caps on the pass-through interest payable to investors; (ii) a loss of approximately $27.7 million related to the sale of investment securities designed to reduce the Company’s exposure to interest rate risk; and (iii) losses of $34.5 million on mortgage loan sales and fees principally attributable to a market value adjustment of $27.2 million taken during the year in connection with the transfer of certain mortgage loans from the held for sale category to loans receivable. Mortgage loan sales and fees were also adversely impacted by a net loss of approximately $8.2 million incurred in connection with the restructuring of certain mortgage loan transfer transactions with local institutions.

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• An increase in non-interest expense, principally related to (i) a contingency provision of $95.0 million recorded in connection with an agreement to settle the Company’s consolidated securities class action and shareholder derivative litigation related to the restatement of prior-period financial statements; (ii) increases in professional fees related to the resolution of ongoing legacy issues and the Company’s business transformation and recapitalization efforts; and (iii) severance payments associated with a reduction in headcount.

• The decreases in interest income and in non-interest income were offset in part by a tax benefit of $48.1 million for 2006, compared to a tax expense of $19.1 million for 2005. Such tax benefit results from the Company’s loss position and from agreements signed during 2006 with the Puerto Rico Treasury Department.

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 and higher net interest income in periods of declining 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 years 2007, 2006 and 2005, was $154.3 million, $201.4 million, and $280.6 million, respectively.

     2007 compared to 2006. Doral Financial’s net interest income for the year ended December 31, 2007, decreased by $47.1 million, or 23%, compared to 2006. The decrease in net interest income was principally due to a reduction in interest-earning assets, partially offset by a decrease in interest-bearing liabilities. Net interest margin increased from 1.41% for the year ended December 31, 2006 to 1.60% for the year ended December 31, 2007.

     The reduction in average earning assets was principally related to the sale of $2.4 billion in available for sale investment securities during 2007 as a result of the Third and Fourth Quarters Reassessments. This reduction was partially offset by a decrease in the average balance of interest-bearing liabilities related to the termination of the funding associated with the investment securities sold and to the repayment of $625.0 million in senior notes on July 20, 2007. The repayment of the senior notes was funded primarily from the $610.0 million equity investment by Doral Holdings on July 19, 2007. This transaction caused a reduction in Doral Financial’s leverage and resulted in the increase in the net interest margin.

     The increase in net interest margin during 2007, compared to 2006, was due primarily to the recapitalization of the Company and the sale of available for sale investment securities. The recapitalization had the effect of replacing debt for equity therefore increasing the net interest margin. The sale of available for sale investment securities also had the effect of increasing the net interest margin because the net spread between the assets and liabilities funding the assets was dilutive to the net interest margin and therefore the sale contributed positively to increasing the margin.

     The decrease in interest-earning assets reflects a decrease in the average balance of loans as a result of the sale, during the second quarter of 2006, of approximately $3.1 billion in mortgage loans as part of the restructuring of prior mortgage loan transfers that were recharacterized as secured borrowings as part of the

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restatement. This sale also impacted the decrease in the interest-bearing liabilities reflected in the average balance of the loans payable as a result of the repayment of the secured borrowings.

     2006 compared to 2005. Doral Financial’s net interest income for the year ended December 31, 2006, decreased by $79.2 million, or 28%, compared to 2005. The decrease in net interest income was principally due to the continued compression of the Company’s net interest spread and a reduction in the average balance of the Company’s interest earning assets. Doral Financial’s net interest spread and margin for the year ended December 31, 2006 were 1.10% and 1.41%, respectively, compared to 1.32% and 1.56%, respectively, for the year ended December 31, 2005. The reduction in average earning assets reflects a decrease in mortgage loans held for sale as a result of sales during 2006 of approximately $3.1 billion in mortgage loans as part of the restructuring of prior mortgage loan transfers that were recharacterized as secured borrowings as part of the restatement. The decrease in average earning assets also reflects a decrease in the average balance of investment securities. The Company’s current strategy is to gradually de-emphasize investment securities from the Company’s balance sheet and retain more loans in its balance sheet. This strategy is designed to reduce interest rate risk by reducing the gap between the repricing of its assets and its liabilities. As part of this strategy, the Company sold $1.2 billion of lower-yielding securities from its available for sale portfolio during the fourth quarter of 2005 and $1.7 billion in available for sale securities during the fourth quarter of 2006, of which $231.0 million settled during the first quarter of 2007. The decrease in average earning assets also reflects the Company’s decision in August of 2005 to discontinue the practice of purchasing whole loans without the associated servicing rights for subsequent securitization into mortgage-backed securities.

     The decrease in net interest rate spread and margin for the year ended December 31, 2006, as compared with 2005, was due primarily to increases in short-term interest rates, at which liabilities re-priced, that outpaced the increase in yield on interest-earning assets. The decrease in net interest rate spread was caused primarily by the following factors:

• The higher cost of short-term borrowings as a result of the Federal Reserve’s tightening monetary policy, raising the federal funds target rate by 150 basis points from October 1, 2005 to June 30, 2006, and leaving it at 5.25% for the remainder of 2006.

• The compressed margin on the Company’s large portfolio of investment securities. Assuming a funding cost equal to the weighted-average cost of the Company’s repurchase agreements, the average interest rate spread on the Company’s investment securities for the year ended December 31, 2006 was 4.23%, compared to 3.99% for the year ended December 31, 2005.

• A decrease in the current mismatch in the duration of the Company’s assets and liabilities. This mismatch exposes the Company to significant interest rate risk in a rising rate environment because, as these short-term or callable liabilities re-price at higher market rates, the Company’s interest rate margin is further compressed. The Company’s interest rate exposure is further complicated by the negative convexity (i.e., the tendency for the average life of the Company’s assets to decrease through prepayments as interest rates decline) inherent in the Company’s portfolio of fixed rate mortgage-backed securities and mortgage loans. The combination of this negative convexity and the current composition of the Company’s liabilities exposes the Company to margin compression risks even in certain declining interest rate environments.

• The decrease in interest income on IOs, which was principally attributable to a significant decrease in the average principal balance of the mortgage loans underlying the outstanding IOs as a result of the restructuring of certain mortgage loan sales during the first half of 2006 and, to a lesser extent, to increases in short-term interest rates compared to 2005.

• Increased deposits at Doral Financial’s banking subsidiaries, including brokered deposits, coupled with a more competitive deposit environment, as well as increased costs of its repurchase agreements and notes payable. The increase in cost of notes payable reflects the re-pricing nature of most of the Company’s notes payable, which are floating rate notes indexed to 3-month LIBOR.

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      The following table presents Doral Financial’s average balance sheet for the years indicated, 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. The table does not reflect any effect of income taxes. Average balances are based on average daily balances.

Table A — Average Balance Sheet and Summary of Net Interest Income

	2007							2006							2005
	Average				Average			Average				Average			Average				Average
(Dollars in thousands)	Balance		Interest		Yield/Rate			Balance		Interest		Yield/Rate			Balance		Interest		Yield/Rate
Assets:
Interest-Earning Assets:
Total loans (1)(2)	$	5,156,667	$	353,202		6.85	%	$	6,707,339	$	458,307		6.83	%	$	7,196,617	$	496,806		6.90	%
Mortgage-backed securities		1,259,398		69,914		5.55	%		3,639,618		186,697		5.13	%		4,727,622		224,930		4.76	%
Interest-only strips		52,557		5,981		11.38	%		51,476		6,522		12.67	%		103,767		10,854		10.46	%
Investment securities		2,141,932		97,598		4.56	%		2,824,931		119,415		4.23	%		3,578,327		142,601		3.99	%
Other interest-earning assets		1,012,527		52,265		5.16	%		1,086,178		50,954		4.69	%		2,357,348		72,588		3.08	%
Total interest-earning assets/interest income		9,623,081	$	578,960		6.02	%		14,309,542	$	821,895		5.74	%		17,963,681	$	947,779		5.28	%
Total non-interest-earning assets		873,701							967,495							854,302
Total assets	$	10,496,782						$	15,277,037						$	18,817,983
Liabilities and Stockholders’ Equity :
Interest-Bearing Liabilities:
Deposits	$	3,772,111	$	171,232		4.54	%	$	3,922,793	$	155,418		3.96	%	$	3,398,820	$	106,164		3.12	%
Repurchase agreements		2,788,039		124,983		4.48	%		5,540,978		240,787		4.35	%		7,179,834		256,542		3.57	%
Advances from the FHLB		1,097,978		55,636		5.07	%		1,036,007		46,455		4.48	%		1,181,804		48,631		4.11	%
Loans payable		425,375		28,834		6.78	%		1,993,303		118,491		5.94	%		3,998,461		197,902		4.95	%
Notes payable		634,445		43,934		6.92	%		893,805		59,354		6.64	%		1,079,831		57,943		5.37	%
Total interest-bearing liabilities/interest expense		8,717,948	$	424,619		4.87	%		13,386,886	$	620,505		4.64	%		16,838,750	$	667,182		3.96	%
Total non-interest-bearing liabilities		698,265							882,823							745,340
Total liabilities		9,416,213							14,269,709							17,584,090
Stockholders’ equity		1,080,569							1,007,328							1,233,893
Total liabilities and stockholders’ equity	$	10,496,782						$	15,277,037						$	18,817,983
Net interest-earning assets	$	905,133						$	922,656						$	1,124,931
Net interest income on a non-taxable equivalent basis			$	154,341						$	201,390						$	280,597
Interest rate spread(3)						1.15	%						1.10	%						1.32	%
Interest rate margin(4)						1.60	%						1.41	%						1.56	%
Net interest-earning assets ratio						110.38	%						106.89	%						106.68	%

(1)	Average loan balances include the average balance of non-accruing loans, on which interest income is recognized when collected. Also includes the average balance of GNMA defaulted loans for which the Company has an unconditional buy-back option.
(2)	Interest income on loans includes $2.5 million, $3.0 million and $4.9 million for 2007, 2006 and 2005, 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.

The following table describes 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 years 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.

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Table B — Net Interest Income Variance Analysis

	2007 compared to 2006									2006 compared to 2005
	Increase/(Decrease)									Increase/(Decrease)
				Due to:									Due to:
(In thousands)	Volume			Rate			Total			Volume			Rate			Total
Interest Income Variance
Total loans	$	(106,105	)	$	1,000		$	(105,105	)	$	(33,972	)	$	(4,527	)	$	(38,499	)
Mortgage-backed securities		(122,091	)		5,308			(116,783	)		(51,706	)		13,473			(38,233	)
Interest-only strips		137			(678	)		(541	)		(5,470	)		1,138			(4,332	)
Investment securities		(28,826	)		7,009			(21,817	)		(29,917	)		6,731			(23,186	)
Other interest-earning assets		(3,459	)		4,770			1,311			(39,140	)		17,506			(21,634	)
Total interest income variance		(260,344	)		17,409			(242,935	)		(160,205	)		34,321			(125,884	)
Interest Expense Variance
Deposits	$	(5,983	)	$	21,797		$	15,814		$	16,319		$	32,935		$	49,254
Repurchase agreements		(119,514	)		3,710			(115,804	)		(58,635	)		42,880			(15,755	)
Advances from the FHLB		2,764			6,417			9,181			(6,028	)		3,852			(2,176	)
Loans payable		(93,221	)		3,564			(89,657	)		(99,237	)		19,826			(79,411	)
Notes payable		(17,227	)		1,807			(15,420	)		(9,969	)		11,380			1,411
Total interest expense variance		(233,181	)		37,295			(195,886	)		(157,550	)		110,873			(46,677	)
Net interest income variance	$	(27,163	)	$	(19,886	)	$	(47,049	)	$	(2,655	)	$	(76,552	)	$	(79,207	)

Interest Income

     Total interest income for the years 2007, 2006 and 2005, was $579.0 million, $821.9 million and $947.8 million, respectively.

     2007 compared to 2006. Interest income decreased by approximately $242.9 million, or 30%, for the year ended December 31, 2007 compared to 2006. The decrease in interest income during 2007 was primarily related to the decrease in Doral Financial’s total average balance of interest-earning assets, which decreased from $14.3 billion for the year ended December 31, 2006 to $9.6 billion for 2007.

     Interest income on loans decreased by approximately $105.1 million, or 23%, for the year ended December 31, 2007, compared to 2006. The average rate earned on the Company’s loans increased by two basis points for the year ended December 31, 2007, compared to 2006, and the average balance of loans decreased by $1.6 billion or 23%, compared to 2006. The decrease in the average balance of loans was the result of the sale, during the second quarter of 2006, of approximately $3.1 billion in mortgage loans as part of the restructuring of prior mortgage loan transfers that were recharacterized as secured borrowings as part of the restatement.

     Interest income on mortgage-backed securities and investment securities for the year ended December 31, 2007 decreased by approximately $116.8 million and $21.8 million, or 63% and 18%, respectively, compared to 2006. The results for 2007 reflects a decrease in the average balance of mortgage-backed securities and average investment securities, which decreased by 65% and 24%, respectively, from 2006 to 2007, offset in part by an increase in the average rate earned on mortgage-backed securities of 42 basis points and in the average rate of the investment securities of 33 basis points. The decrease in the average balance of mortgage-backed and investment securities reflects the strategy adopted by the Company’s current management to gradually de-emphasize investments from the Company’s balance sheet and retain more loans in its balance sheet, together with the efforts to reduce the gap between the repricing of its assets and liabilities. As part of this strategy, the Company sold $2.4 billion from its available for sale investment securities portfolio during the second half of 2007.

     Interest income on IOs for the year ended December 31, 2007 decreased by $0.5 million, or 8%, compared to 2006. The decrease in interest income on IOs was principally attributable to higher average short-term interest rates as compared to 2006. The impact of the increase in the average balance of outstanding IOs was offset in part by a decrease of 129 basis points in the average yield of the IOs, which equals the

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average discount rate used in the internal valuation model. The actual cash flow received on Doral Financial’s portfolio of IOs, particularly its floating rate IOs, decreased to $12.5 million for 2007, compared to $23.0 million for 2006. See “Critical Accounting Policies - Retained Interest Valuation” for additional information regarding the cash flows of the IO portfolio.

     Interest income on other interest-earning assets for the year ended December 31, 2007 decreased by approximately $1.3 million, or 3%, compared to 2006. Other interest-earning assets consist primarily of fixed income money market investments whose original maturity is less than three months, including overnight deposits, term deposits and reverse repurchase agreements. An increase of 47 basis points for the year ended December 31, 2007 in the average yield on other interest-earning assets was due to higher short-term interest rates, compared to 2006. The average balance of other interest-earning assets during 2007 decreased by $73.7 million, or 7%, compared to 2006 relating primarily to the decrease in the use of money market instruments for liquidity purposes.

     2006 compared to 2005. Interest income decreased by approximately $125.9 million, or 13%, for the year ended December 31, 2006 compared to 2005. The decrease in interest income during 2006 was primarily related to the decrease in Doral Financial’s total average balance of interest-earning assets, which decreased from $18.0 billion for the year ended December 31, 2005 to $14.3 billion for 2006.

      Interest income on loans decreased by approximately $38.5 million, or 8%, for the year ended December 31, 2006, compared to 2005. The average rate earned on the Company’s loans decreased by seven basis points for the year ended December 31, 2006, compared to 2005, and the average balance of loans decreased by $489.3 million or 7% for the year ended December 31, 2006, compared to 2005.

     Interest income on mortgage-backed securities for the year ended December 31, 2006 decreased by approximately $38.2 million, or 17%, compared to 2005. The result for 2006 reflected a decrease in the average balance of mortgage-backed securities, which decreased by 23% from 2005 to 2006, offset in part by an increase in the average rate earned on mortgage-backed securities of 37 basis points. The decrease in the average balance of mortgage-backed and investment securities reflects the strategy adopted by the Company’s current management to gradually de-emphasize investments from the Company’s balance sheet and retain more loans in its balance sheet, together with the efforts to reduce the gap between the repricing of its assets and liabilities. As part of this strategy, the Company sold $1.2 billion of lower-yielding securities from its available for sale portfolio during 2005 and sold an additional $1.7 billion in available for sale securities during the fourth quarter of 2006, of which $231.0 million settled during the first quarter of 2007. The results for the 2006 periods also reflect the Company’s decision in August of 2005 to discontinue the practice of purchasing whole loans without the associated servicing rights for subsequent securitization to mortgage-backed securities.

     Interest income on IOs for the year ended December 31, 2006 decreased by $4.3 million, or 40%, compared to 2005. The decrease in interest income on IOs was principally attributable to a significant decrease in the average balance of outstanding IOs (by approximately 50%) as a result of a restructuring of certain mortgage loan sales during the first half of 2006 and, to a lesser extent, to increases in short-term interest rates as compared to 2005. The impact of the decrease in the average balance of outstanding IOs was offset in part by an increase of 221 basis points in the average yield of the IOs, which equals the average discount rate used in the internal valuation model. The actual cash flow received on Doral Financial’s portfolio of IOs, particularly its floating rate IOs, decreased to $23.0 million for 2006, compared to $62.6 million for 2005. See “Critical Accounting Policies — Retained Interest Valuation” for additional information regarding the cash flows of the IO portfolio.

     Interest income on investment securities for the year ended December 31, 2006 decreased by $23.2 million, or 16%, compared to 2005. The decrease in interest income on investment securities was principally driven by a decrease in the average balance of investment securities, which decreased by $753.4 million, or 21%, from 2005 to 2006, offset in part by an increase in the average yield of 24 basis points.

     Interest income on other interest-earning assets for the year ended December 31, 2006 decreased by approximately $21.6 million, or 30%, compared to 2005. Other interest-earning assets consist primarily of

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fixed income money market investments whose original maturity is less than three months, including overnight deposits, term deposits and reverse repurchase agreements. An increase of 161 basis points for the year ended December 31, 2006 in the average yield on other interest-earning assets was due to higher short-term interest rates, compared to 2005. The average balance of other interest-earning assets during 2006 decreased by $1.3 billion, or 54%, compared to 2005 relating primarily to the decrease in the use of money market instruments for liquidity purposes.

Interest Expense

     Total interest expense for the years 2007, 2006 and 2005, was $424.6 million, $620.5 million and $667.2 million, respectively. The decrease in interest expense experienced during 2007 was principally due to a reduction in the average balance of Doral Financial’s interest-bearing liabilities.

     2007 compared to 2006. Total interest expense for the year ended December 31, 2007 decreased by $195.9 million, or 32%, compared to 2006. The decrease in interest expense for 2007 was primarily due to a decreased in the average balance of interest-bearing liabilities. The decrease in the average balance of interest-bearing liabilities was due to the cancellation of borrowings related to the $2.4 billion investment securities sale and the repayment of the $625.0 million in senior notes. The average balance of interest-bearing liabilities during 2007 decreased by $4.7 billion, or 35%, compared to 2006, and the average cost of borrowings increased during 2007 by 23 basis points, compared to 2006.

     Interest expense on deposits for the year ended December 31, 2007 increased by $15.8 million, or 10%, compared to 2006. The increase in interest expense on deposits reflects an increase in the average cost of deposits held at Doral Financial’s banking subsidiaries. The average balance of deposits during 2007 decreased by $150.7 million, or 4%, compared to 2006. The decrease in the average balance of deposits was primarily related to the sale of deposits of $377.5 million in connection with the sale of Doral Bank NY’s branch network and related assets during the third quarter of 2007. The average interest cost on deposits during 2007 increased by 58 basis points, compared to 2006.

     Interest expense related to securities sold under agreements to repurchase for the year ended December 31, 2007 decreased by $115.8 million, or 48%, compared to 2006. The decrease in interest expense on securities sold under agreements to repurchase during 2007 reflects decreased borrowings to finance mortgage-backed securities and other investment securities, as compared to 2006. The average balance of borrowings under repurchase agreements for 2007 decreased by $2.8 billion, or 50%, compared to 2006, the cancellation of borrowings used to finance mortgage-backed securities and other investment securities as a result of the sale of $2.4 billion of available for sale securities during the second half of 2007. The average cost of securities sold under agreements to repurchase increased by 13 basis points from 2006 to 2007.

     Interest expense on advances from the FHLB for the year ended December 31, 2007 increased by approximately $9.2 million, or 20%, compared to 2006. The average balance of advances from FHLB during 2007 increased by $62.0 million, or 6%, compared to 2006. The average interest cost on advances from the FHLB increased by 59 basis points from 2006 to 2007.

     Interest expense related to loans payable for the year ended December 31, 2007 decreased by approximately $89.7 million, or 76%, compared to 2006. This decrease was due to a decrease in the average balance of loans payable, partially offset by higher average cost of loans payable. The average balance of loans payable during 2007 decreased by $1.6 billion, or 79%, compared to 2006. This reduction was related to the restructuring of prior loan transfer transactions that had been characterized as secured borrowings with local financial institutions during 2006. The average interest cost on loans payable during 2007 increased by 84 basis points compared to 2006.

     Interest expense on notes payable for the year ended December 31, 2007 decreased by $15.4 million, or 26%, compared to 2006. The average balance of notes payable during 2007 decreased by $259.4 million, or 29%, compared to 2006. This decrease was principally related to the repayment of $625.0 million in senior notes on July 20, 2007 which was funded primarily from the $610.0 million equity investment by Doral Holdings on July 19, 2007. The average interest cost on notes payable during 2007 increased by 28 basis points compared to 2006, which reflects the re-pricing nature of most of the Company’s notes payable, which are floating rate notes indexed to the 3-month LIBOR

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     2006 compared to 2005. Total interest expense for the year ended December 31, 2006 decreased by $46.7 million, or 7%, compared to 2005. The decrease in interest expense for 2006 was due to a decreased volume of borrowings to finance Doral Financial’s loan production and investment activities. During 2006 the average balance of interest-bearing liabilities decreased by $3.5 billion, or 20%, compared to 2005, and the average cost of borrowings increased during 2006 by 68 basis points, compared to 2005.

     Interest expense on deposits for the year ended December 31, 2006 increased by $49.3 million, or 46%, compared to 2005. The increase in interest expense on deposits reflects an increase in the average cost of deposits and a larger deposit base held at Doral Financial’s banking subsidiaries. The average balance of deposits during 2006 increased by $524.0 million, or 15%, compared to 2005. The average interest cost on deposits during 2006 increased by 84 basis points, compared to 2005.

     Interest expense related to securities sold under agreements to repurchase for the year ended December 31, 2006 decreased by $15.8 million, or 6%, compared to 2005. The decrease in interest expense on securities sold under agreements to repurchase during 2006 reflects a decrease in borrowings to finance mortgage-backed securities and other investment securities, as compared to 2005. The average balance of borrowings under repurchase agreements for 2006 decreased by $1.6 billion, or 23%, compared to 2005. The average cost of securities sold under agreements to repurchase increased by 78 basis points from 2005 to 2006.

     Interest expense on advances from the FHLB for the year ended December 31, 2006 decreased by approximately $2.2 million, or 4%, compared to 2005. The decrease in interest expense on FHLB advances during 2006 reflects a decrease in the average balance of advances from FHLB, partially offset by higher average interest cost.

     Interest expense related to loans payable for the year ended December 31, 2006 decreased by approximately $79.4 million, or 40%, compared to 2005. The decrease in interest expense on loans payable reflects a decrease in the average balance of loans payable, partially offset by higher average cost of loans payable. The average balance of loans payable during 2006 decreased by $2.0 billion, or 50%, compared to 2005. The reduction in the average balance of loans payable relates to the restructuring of prior loan transfer transactions with local financial institutions during 2006. The average interest cost on loans payable during 2006 increased by 99 basis points compared to 2005.

     Interest expense on notes payable for the year ended December 31, 2006 increased by $1.4 million, or 2%, compared to 2005. The increase in cost of notes payable reflects the re-pricing nature of most of the Company’s notes payable, which are floating rate notes indexed to 3-month LIBOR. The average balance of notes payable during 2006 decreased by $186.0 million, or 17%, compared to 2005. The average interest cost on notes payable during 2006 increased by 127 basis points compared to 2005.

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 forecasted 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.

     2007 compared to 2006. Doral Financial’s provision for loan and lease losses for the year ended December 31, 2007 increased by $38.4 million, or 96%, compared to 2006. The increase in the provision

56

for loan and lease losses reflects principally an increase in reserves related to the allowance for the Company’s construction, residential mortgages, commercial real estate and consumer loans portfolios, as well as a deterioration in the delinquency trends of the overall loan portfolio, particularly in the construction and residential mortgages portfolios. The Company believes that this deterioration reflects the overall decline in the Puerto Rico real estate market resulting in worsening macroeconomic conditions in Puerto Rico. This decline had a major impact on the provision for the quarter ended December 31, 2007 as collateral values of some of the loans within the construction portfolio fell sharply resulting in the need for additional reserves. As of December 31, 2007, the allowance for loan and lease losses was 2.47% of total loans receivable compared to 1.94% as of December 31, 2006. Refer to the discussions under “Non-performing assets and allowance for loan and lease losses” and “Credit Risk” for further analysis of the allowance for loan and lease losses and non-performing assets and related ratios.

     During 2007, the Company increased the allowance for loan losses for its construction loans portfolio from $37.6 million or 4.60% of the total construction portfolio as of December 31, 2006 to $56.8 million or 9.65% as of December 31, 2007. Doral Financial recognized total provisions for loan and lease losses of $78.2 million, $39.8 million and $22.4 million for the years ended December 31, 2007, 2006 and 2005, respectively.

     2006 compared to 2005. Doral Financial’s provisions for loan and lease losses for the year ended December 31, 2006 increased by $17.5 million, or 78%, compared to 2005. The increase in the provision for loan and lease losses reflected principally an increase in specific reserves related to the allowance for the Company’s construction loan portfolio, as well as a deterioration in the delinquency trends of the overall loan portfolio, particularly in the construction and commercial portfolios. The Company believes that this deterioration reflects the overall decline in the Puerto Rico real estate market resulting in worsening macroeconomic conditions in Puerto Rico. As of December 31, 2006, the allowance for loan and lease losses was 1.94% of total loans receivable compared to 1.39% as of December 31, 2005. Refer to the discussions under “Non-performing assets and allowance for loan and lease losses” and “Credit Risk” for further analysis of the allowance for loan and lease losses and non-performing assets and related ratios.

     During 2006, the Company increased the allowance for loan losses for its construction loans portfolio from $20.7 million or 2.61% of the total portfolio as of December 31, 2005 to $37.6 million or 4.60% as of December 31, 2006. Doral Financial recognized total provisions for loan and lease losses of $39.8 million and $22.4 million for the years ended December 31, 2006 and 2005, respectively.

Non-Interest (Loss) Income

     Non-interest (loss) income consists of net gain on mortgage loan sales and fees, trading activities, net loss on sale of investment securities, net (loss) gain on extinguishment of liabilities, net servicing income, commissions, fees, and other income and net premiums on deposits sold.

	For the year ended December 31,
(In thousands)	2007			2006			2005
Non-interest (loss) income:
Net gain (loss) on mortgage loan sales and fees	$	2,223		$	(34,456	)	$	52,131
Net loss on securities held for trading, including gains and losses on the fair value of IOs		(27,725	)		(37,228	)		(3,406	)
Net loss on sale of investment securities		(97,480	)		(27,668	)		(40,798	)
Net (loss) gain on extinguishment of liabilities		(14,806	)		(4,157	)		2,000
Servicing income (net of mark-to-market adjustment for 2007, and net of amortization and impairment/recovery for 2006 and 2005)		20,687			6,904			16,715
Commissions, fees and other income		32,183			37,378			35,906
Net premium on deposits sold		9,521			—			—
Total non-interest (loss) income	$	(75,397	)	$	(59,227	)	$	62,548

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     Net Gain (Loss) on Mortgage Loan Sales and Fees. Set forth below is certain information regarding the Company’s loan sale and securitization activities and resulting IO and MSR capitalization for the years ended December 31, 2007, 2006, and 2005.

	For the year ended December 31,
(In thousands)	2007		2006			2005
Total loan sales and securitizations	$	296,091	$	4,191,364		$	2,686,935
Total loan sales and securitization (excluding sales relating to restructuring of prior mortgage loan transfers)	$	296,091	$	1,053,504		$	2,686,935
Total loans sales resulting in the recording of IOs	$	—	$	—		$	732,650
Net gain (loss) on mortgage loan sales and fees	$	2,223	$	(34,456	)	$	52,131
IOs capitalized	$	—	$	—		$	10,981
MSRs capitalized	$	5,305	$	55,394		$	45,433

     2007 compared to 2006. Net gain from mortgage loan sales and fees increased by 106% from a net loss of $34.5 million during the year ended December 31, 2006 to a net gain of $2.2 million for 2007. Gains from mortgage loan sales and fees during 2007 were adversely impacted by a lower-of-cost-or-market adjustment of $2.1 million at Doral Bank NY related to the sale of loans in connection with the sale of Doral Bank NY’s branch network during the third quarter of 2007. The net loss on mortgage loan sales and fees for the comparable 2006 period was principally due to the amount charged against earnings related to the loans transferred from the held for sale portfolio to the loans receivable portfolio. During 2006, the Company reassessed its plan to sell certain of its mortgage loan portfolio classified as held for sale, specifically loans with a low FICO score or with documentation and compliance issues, and transferred $961.5 million from its portfolio of loans held for sale to its loans receivable portfolio. This transfer resulted in a $27.2 million charge against earnings for the year ended December 31, 2006, compared to $2.1 million charge against earnings for 2007.

     Net gain from mortgage loan sales and fees was also adversely impacted by the reduced activity of loan sales and securitizations (excluding sales related to the restructuring of prior mortgage loan transfers) during 2007. The reduction in the volume of sales and securitizations was tied to the reduction of the Company’s loan production during the year. See “-Critical Accounting Policies — Gain on Mortgage Loan Sales and Retained Interest Valuation.”

     2006 compared to 2005. Net gain from mortgage loan sales and fees decreased by 166% to a net loss of $34.5 million during the year ended December 31, 2006 compared to a net gain of $52.1 million for 2005. The net loss on mortgage loan sales and fees during 2006 was principally due to charges incurred in connection with the Company’s transfer of certain mortgage loans from its held for sale portfolio to its loans receivable portfolio. In particular, during the year ended December 31, 2006, the Company reassessed its plan to sell certain of its mortgage loan portfolio classified as held for sale, specifically loans with a low FICO score or with documentation and compliance issues, and transferred $961.5 million from its portfolio of mortgage loans held for sale to its loans receivable portfolio. This transfer resulted in a $27.2 million charge against earnings for the year ended December 31, 2006.

     During the year ended December 31, 2006, losses on sales of mortgage loans also included the impact of the Company’s decision to restructure certain previous mortgage loan transfers to local financial institutions. The previously reported restructuring of various loan transfer transactions with local financial institutions resulted in a net loss of approximately $8.2 million during the year ended December 31, 2006, consisting of a loss of $11.8 million in mortgage loan sales, partially offset by a gain of $3.6 million recognized as part of Other Income related to these transactions.

     Net gain from mortgage loan sales and fees was also adversely impacted by a reduction in the volume of loan sales and securitizations (excluding sales related to the restructuring of prior mortgage loan transfers). The reduction in the volume of sales and securitizations was tied to the reduction of the Company’s loan production during the year.

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     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 for the years ended December 31, 2007, 2006, and 2005.

Table C — Components of Trading Activities

	Year ended December 31,
(In thousands)	2007			2006			2005
Net realized (losses) gains on sales of securities held for trading	$	(25,935	)	$	(8,554	)	$	13,315
Gain (loss) on the IO valuation		8,554			(41,967	)		(12,523	)
Net unrealized loss on trading securities, excluding IOs		(8,557	)		(2,662	)		(4,530	)
Net realized and unrealized (losses) gains on derivative instruments		(1,787	)		15,955			332
Total	$	(27,725	)	$	(37,228	)	$	(3,406	)

     2007 compared to 2006. Net losses on securities held for trading for the year ended December 31, 2007 decreased by $9.5 million, compared to 2006. The net loss on trading activities was primarily related to a loss of $19.3 million resulting from the termination of economic hedging transactions associated with the sale of $1.9 billion of available for sale securities during the third quarter of 2007.

     The Company had net realized losses on sales of securities held for trading for the year ended December 31, 2007 of $25.9 million, compared to losses of $8.6 million during 2006. The loss on sale of securities held for trading during 2007 reflects a realized loss of $19.3 million resulting from the termination of economic hedging transactions associated with the sale of $1.9 billion of available for sale securities during the third quarter of 2007 and a loss of $2.7 million principally related to the sale of securities transferred from the held to maturity portfolio to trading portfolio in connection with the sale of certain assets of Doral Bank NY. The net realized loss on sale of securities held for trading during 2006 was primarily associated with the increase of the price of the underlying securities in certain forward FNMA contracts that affected the sale at the time of the settlement.

     The net loss on trading activities was partially offset by a gain of $8.6 million in the IO valuation. The gain in the value of the IOs for 2007 was primarily related to a decline in interest rates during 2007. The floating IO’s value is inversely related to the level of short-term rates, thus the value will increase when short-term rates fall. This change in rates resulted in a gain of $8.6 million compared to a loss of $42.0 million during 2006. The discount rate on the IOs based on the Company’s internal valuation model was 12.11% at December 31, 2007 compared to 12.22% at December 31, 2006.

     Net loss on derivative instruments for the period ended December 31, 2007 amounted to $1.8 million compared to a gain of $16.0 million for the comparable period of 2006. The loss on derivative instruments was primarily related to fewer positions in derivatives and the drop in rates experienced in the fourth quarter of 2007. For an overview of the Company’s new risk management practices, as well as current exposure to changes in interest rates, see “-Risk Management” below.

     2006 compared to 2005. Net losses on securities held for trading for the year ended December 31, 2006 increased by $33.8 million, compared to 2005. The negative variance was principally due to losses on the value of the IO portfolio. Net losses on the value of the Company’s IOs for the period ended December 31, 2006 increased by $29.4 million, compared to 2005. Losses on the value of the Company’s IOs during 2006 were primarily related to losses suffered during the first half of 2006 from the impact of increases in short-term interest rates on IOs that did not have caps on the pass-through interest payable to investors. As interest rates increase during 2006, the interest rate payable to investors on the mortgage loans underlying the floating rate IOs exceeded the weighted-average coupon on such mortgage loans, which resulted in a loss on the IO valuation. The discount rate on the IOs based on the Company’s internal valuation model was 12.22% at December 31, 2006 compared to 10.91% at December 31, 2005.

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     The Company had net realized losses on sales of securities held for trading for the year ended December 31, 2006 of $8.6 million compared to gains of $13.3 million during 2005. During 2006, sales of trading securities were $423.7 million, compared to $2.9 billion in 2005. The sale of securities was part of Doral Financial’s strategy to de-leverage its balance sheet.

     Net losses on securities held for trading for 2006 and 2005 also included $2.7 million and $4.5 million, respectively, of net unrealized losses on the value of Doral Financial’s securities held for trading, excluding IOs.

     Net gain on derivative instruments for the period ended December 31, 2006 increased by $15.6 million, compared to 2005. The gain on derivative instruments was primarily related to increases in the market value of interest rate swaps as long-term interest rates increased during 2006. The gain on derivative instruments includes a net unrealized gain of $1.0 million from derivatives resulting from certain gain sharing agreements created in connection with the previously reported restructuring of various loan transfer transactions. Pursuant to the agreements executed in connection with certain of those sales, the Company had the right to share, on a limited basis, the gains or losses realized by the buyers of such loans within specified time periods from subsequent sales or securitizations.

     During the year ended December 31, 2006, the Company entered into certain forward FNMA contracts in connection with its mortgage warehouse activities. As the price of the underlying securities on those forward contracts increased during the year, the Company realized a gain of approximately $3.1 million during 2006.

     Net Loss on Sale of Investment Securities. Net loss on sales of investment securities represents the impact on Doral Financial’s income of transactions involving the sale of securities classified as available for sale.

     2007 compared to 2006. For the year ended December 31, 2007, the Company experienced a net loss on sales of investment securities of $97.5 million, compared to a net loss of $27.7 million for 2006. The net loss experienced during 2007 was primarily related to the sale of $1.9 billion of available for sale investment securities. As a result of the Third Quarter Reassessment, based on existing market conditions, in order to reduce interest rate risk, the Company sold $1.9 billion, and realized a total loss of $96.7 million. During 2006, the net loss was principally driven by the Company’s decision to sell $1.7 billion from its available for sale portfolio (of which $231.0 million settled during the first quarter of 2007) at a loss of $22.7 million, during the fourth quarter of 2006. The Company’s decision was designed as a measure to decrease interest rate risk, increase liquidity and strengthen its capital ratios.

     Net loss on sale of investment securities also includes a gain of $45,000 on securities called during 2007.

     2006 compared to 2005. For the year ended December 31, 2006 the Company experienced a net loss on sales of investment securities of $27.7 million, compared to a net loss of $40.8 million for 2005. The net loss during 2006 was principally driven by the Company’s decision to sell $1.7 billion from its available for sale portfolio (of which $231.0 million settled during the first quarter of 2007) at a loss of $22.7 million, during the fourth quarter of 2006. The Company’s decision was designed as a measure to decrease interest rate risk, increase liquidity and strengthen its capital ratios.

     Net (Loss) Gain on Extinguishment. Net loss on extinguishment represents the cancellation fees on the early extinguishment of certain securities sold under agreements to repurchase and a net gain on the mortgage servicing rights recognized on the restructuring of a loan sale transaction with a local financial institution in 2006. The transaction, which was previously reported as a secured borrowing, was restructured and recognized as a sale in accordance with SFAS 140.

     2007 compared to 2006. For the year ended December 31, 2007, net loss on extinguishment amounted to $14.8 million compared to a loss of $4.2 million at December 31, 2006. The loss recognized during 2007 was driven by the Company’s reassessment, based on existing market conditions, which resulted in the sale of $1.9 billion on available for sale securities and the cancellation of the related borrowings used to finance

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these securities. During 2006, the Company sold $1.7 billion from its available for sale securities resulting in a net loss of $4.2 million that was the result of a loss of $6.9 million related to early extinguishment on certain securities sold under agreements to repurchase and a $2.7 million gain on the restructuring of a loan sale transaction with a local financial institution.

     2006 compared to 2005. For the year ended December 31, 2006, net loss on extinguishment amounted to $4.2 million compared to a gain of $2.0 million at December 31, 2005. The loss recognized during 2006 was driven mainly by the Company’s decision to sell $1.7 billion from its available for sale securities portfolio during the fourth quarter of 2006. The net loss of $4.2 million includes a loss of $6.9 million related to early extinguishment on certain securities sold under agreements to repurchase and a gain of $2.7 million on the restructuring of a loan sale transaction with a local financial institution.

     Net Servicing Income. Servicing income represents revenues earned for administering mortgage loans for others. 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 December 31, 2007, the weighted-average gross servicing fee rate for the entire portfolio was 0.39%. Other components of net servicing income include late charges, prepayment penalties, interest loss, and changes in fair value (since the adoption of SFAS No. 156) or amortization and impairment of servicing assets (prior to 2007).

Set forth below is a summary of the components of net servicing income using the fair value method for the year ended December 31, 2007.

Table D — Components of Net Servicing Income

	Year ended
(In thousands)	December 31,2007
Servicing fees (net of guarantee fees)	$	35,378
Late charges		9,057
Prepayment penalties		635
Interest loss		(3,969	)
Other servicing fees		386
Servicing income, gross		41,487
Changes in fair value of mortgage servicing rights(1)		(20,800	)
Total net servicing income	$	20,687

(1)  Change in fair value was the result of the prepayment speed and normal run-off.

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     Set forth below is a summary of the components of net servicing income for the years ended December 31, 2006 and 2005.

Table E — Components of Net Servicing Income

	Year ended December 31,
(In thousands)	2006			2005
Servicing fees (net of guarantee fees)	$	36,557		$	31,330
Late charges		9,470			8,860
Prepayment penalties		1,024			2,502
Interest loss		(4,601	)		(3,551	)
Other servicing fees		251			438
Servicing income, gross		42,701			39,579
Amortization of servicing assets		(31,211	)		(26,846	)
Net (impairment) recovery of servicing assets		(4,586	)		3,982
Servicing income, net	$	6,904		$	16,715

     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 (“MSR”). The Company, upon valuation of the MSR’s at fair value in accordance with SFAS No. 156, recorded a cumulative effect adjustment to retained earnings (net of tax) of $926,000 as of January 1, 2007 for the difference between fair value and the carrying amount to bring the MSR balance as of December 31, 2006 to fair value.

     Upon the adoption of SFAS No. 156, the Company recorded a cumulative effect adjustment to retained earnings (net of tax) as of January 1, 2007 for the difference between the fair value and the carrying amount to bring the December 31, 2006 MSR balance to the fair value. The table below reconciles the balance of MSRs as of December 31, 2006 and January 1, 2007.

(In thousands)
Balance at December 31, 2006	$	176,367
Adjustment upon adoption of SFAS No.156		1,517
Balance at January 1, 2007	$	177,884

     The change in servicing assets measured using the fair value method for the year ended December 31, 2007 are described in Table F below. For a discussion of the assumptions used to value MSRs refer to “Critical Accounting Policies-Retained Interest Valuation.”

     The following table shows the changes in Doral Financial’s MSRs for the years ended December 31, 2007, 2006 and 2005:

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Table F — Change in Mortgage-Servicing Assets

	Year ended December 31,
(In thousands)	2007			2006			2005
Balance at beginning of year	$	177,884		$	156,812		$	136,024
Capitalization of servicing assets		5,305			50,028			45,433
Sales of servicing assets(1)		(9,581	)		—			—
MSRs reversal on loans purchased(2)		(2,570	)		—			—
Net servicing assets recognized as part of the restructured mortgage loan sale transactions		—			11,351			—
Rights purchased		—			209			4,421
Amortization		—			(31,211	)		(26,846	)
Application of valuation allowance to write-down permanently impaired servicing assets		—			(410	)		(2,220	)
Balance before valuation allowance at end of year		171,038			186,779			156,812
Change in fair value (2007), valuation allowance for temporary impairment (2006 and 2005)		(20,800	)		(10,412	)		(6,236	)
Balance at end of year(3)	$	150,238		$	176,367		$	150,576

(1)	Amount represents MSR sales related to $693.9 million in principal balance of mortgage loans.
(2)	MSR value related to loans purchased from a financial institution with a balance of $276.8 million as of October 31, 2007, where the Company owned the MSR.
(3)	Outstanding balance of loans serviced for third parties amounted to $10.1 billion as of December 31, 2007.

     2007 compared to 2006. For the year ended December 31, 2007, net servicing income amounted to $20.7 million, compared to $6.9 million for 2006. The increase in net servicing income for 2007 was principally the result of the adoption of the fair value method of valuation for the Company’s MSR in accordance with SFAS No. 156. For the year ended December 31, 2007, the Company recognized as part of net servicing income a change in fair value of $20.8 million, compared to a net amount of $35.8 million recognized for the corresponding 2006 period as amortization and impairment of servicing asset.

     Loan servicing fees, net of guarantee fees, decreased by $1.2 million, or 3%, for the year ended December 31, 2007, compared to 2006, principally due to a decrease in the average servicing portfolio (excluding the Company’s owned portfolio). Doral Financial’s mortgage-servicing portfolio, including its own loan portfolio of $3.7 billion at December 31, 2007 and $3.3 billion at December 31, 2006, was approximately $13.8 billion at December 31, 2007, compared to $15.3 billion at December 31, 2006. The decrease in the Company’s servicing portfolio was principally related to the decrease in loan production during 2007 and to the sale of $682.1 million of loans subserviced by the Company during the second quarter of 2007.

     2006 compared to 2005. For the year ended December 31, 2006, net servicing income amounted to $6.9 million, compared to $16.7 million for 2005. The decrease in net servicing income for 2006 was principally the result of increased impairment charges of mortgage-servicing assets of $4.6 million, mainly attributable to a decrease in mortgage interest rates and consequent increases in forecasted mortgage prepayment speeds at December 31, 2006. In contrast, Doral Financial recognized a net recovery in value of $4.0 million for 2005.

     Loan servicing fees, net of guarantee fees, increased by $5.2 million, or 17%, for the year ended December 31, 2006, compared to 2005. The increase in servicing fees, net of guarantee fees, was principally due to an increase in the average servicing portfolio (excluding the Company’s owned portfolio). Doral Financial’s mortgage-servicing portfolio, including its own loan portfolio of $3.3 billion at December 31, 2006 and $5.9 billion at December 31, 2005, was approximately $15.3 billion at December 31, 2006, compared to $15.7 billion at December 31, 2005.

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     Other servicing-related income for the year ended December 31, 2006 decreased by $2.1 million, or 26%, compared to 2005. Late fees for the year ended December 31, 2006 increased by approximately $610,000 compared to 2005, primarily because of increased delinquencies. Prepayment penalties decreased by approximately $1.5 million primarily because, during 2006, the Company sold loans on a servicing-retained basis to U.S. institutions in sales in which the Company did not retain the right to receive prepayment penalties as part of its servicing rights.

     Capitalization of MSR. The value of the servicing asset retained in the sale of a mortgage loan reduces the basis of the mortgage loan and thereby results in increased “Net Gain on Mortgage Loan Sales and Fees” at the time of sale. See “-Critical Accounting Policies - - Gain on Mortgage Loan Sales”. During 2007, 2006 and 2005, Doral Financial recognized servicing assets of $5.3 million, $50.0 million and $45.4 million, respectively, in connection with the sale of loans to third parties, including sales, during 2006, related to the restructuring of prior mortgage loan transfers that had been classified as secured borrowings as part of the restatement.

     Commissions, Fees and Other Income. Set forth below is a summary of Doral Financial’s principal sources of commissions, fees and other income for the year ended December 31, 2007, 2006, and 2005:

Table G — Commissions, Fees and Other Income

	Year ended December 31,
(In thousands)	2007		2006		2005
Retail banking fees	$	21,131	$	19,323	$	17,656
Insurance agency commissions		8,834		8,813		12,396
Asset management fees and commissions		572		1,011		1,208
Other income		1,646		8,231		4,646
Net premium on deposits sold		9,521		—		—
Total	$	41,704	$	37,378	$	35,906

     2007 compared to 2006. Commissions, fees and other income for the year ended December 31, 2007 increased by $4.3 million, or 12%, compared to 2006. Doral Financial’s banking fees increased by $1.8 million, or 9%, compared to 2006, due to higher number of checking accounts as well as higher service fees associated with these accounts.

     Doral Financial’s insurance agency business is closely integrated with its mortgage origination business and insurance agency commissions are comprised principally of commissions on dwelling and title insurance policies sold to borrowers who obtain residential mortgage loans through Doral Bank PR. Insurance agency commissions amounted to $8.8 million for the year ended December 31, 2007, compared to $8.8 million for 2006.

     Doral Financial’s asset management fees and commissions decreased by $0.4 million, or 43%, compared to 2006. The decrease experienced during 2007 was attributable to a substantial reduction in Doral Securities’ operations that was limited to acting as a co-investment manager to a local fixed-income investment company. During the third quarter of 2007, Doral Securities voluntarily withdrew its license as a broker dealer with the SEC and its membership with FINRA.

     Doral Financial’s other income decreased by $6.6 million, or 80%, compared to 2006. The reduced income for 2007 compared to the 2006 period was related to a gain of $3.6 million, during the second quarter of 2006, that was included as part of Other Income in connection with an agreement with a local financial institution to restructure all outstanding mortgage loan sale transactions between the parties. In addition, the Company sold certain residential units within a residential housing project that the Company took possession in 2005, resulting in revenues of approximately $3.1 million in 2006 compared to $1.1 million for 2007, also included as part of Other Income.

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     Net premium on deposits sold. As a result of the sale of deposits and certain assets of Doral Bank NY a net premium on deposits sold was received amounting to $9.5 million during the third quarter of 2007.

     2006 compared to 2005. Commissions, fees and other income for the year ended December 31, 2006 increased by $1.5 million, or 4%, compared to 2005. Doral Financial’s banking fees increased by $1.7 million, or 9%, compared to 2005, due to higher debit and credit card fees as well as higher service charges on checking accounts.

     Doral Financial’s insurance agency business is closely integrated with its mortgage origination business and insurance agency commissions are comprised principally of commissions on dwelling and title insurance policies sold to borrowers who obtain residential mortgage loans through Doral Financial. The decrease in insurance commissions was directly related to the mortgage loan production during 2006. Loan production decreased from $5.5 billion for 2005 to $2.0 billion for 2006.

     Doral Financial’s other income increased by $3.6 million, or 77%, compared to 2005. During the second quarter of 2006, Doral Financial entered into an agreement with a local financial institution to restructure all outstanding mortgage loan sale transaction between the parties. The restructuring resulted in a gain of $3.6 million that was included as part of Other Income for the year ended December 31, 2006. In addition, the Company sold certain residential units within a residential housing project that the Company took possession in 2005, resulting in revenues of approximately $3.1 million in 2006 and $2.2 million in 2005 that also were included as part of Other Income.

Non-Interest Expenses

     A summary of non-interest expenses for the years ended December 31, 2007, 2006, and 2005 is provided below.

Table H — Non-Interest Expenses

	Year ended December 31,
(In thousands)	2007		2006		2005
Compensation and employee benefits	$	118,709	$	96,342	$	92,955
Taxes, other than payroll and income taxes		11,312		12,552		10,918
Advertising		11,378		9,849		16,588
Professional services		59,542		63,258		43,016
Communication and information systems		18,695		18,870		18,648
Occupancy and other office expenses		24,996		27,430		31,548
Depreciation and amortization		17,586		22,028		20,923
Provision for contingencies		—		95,000		25,000
Other		41,274		29,013		28,897
Total non-interest expenses	$	303,492	$	374,342	$	288,493

     2007 compared to 2006. Non-interest expense for the year ended December 31, 2007 decreased by $70.9 million, or 19%, compared to 2006. The decrease in 2007 was primarily due to an accrual recorded in 2006, in connection with an agreement to settle the Company’s consolidated securities class action and shareholder derivative litigation related to the restatement.

     Compensation and employee benefits during 2007 increased by $22.4 million, or 23%, compared to 2006. The increase in compensation and employee benefits during 2007 was primarily due to (i) the payment of $17.0 million in cash bonuses pursuant to the Key Employee Incentive Plan; (ii) $7.4 million primarily related to the accrual of severance payments in connection with the separation of approximately 40 highly compensated employees in January 2008; (iii) the payment of $5.1 million remaining in an escrow account maintained on behalf of the Company’s Chief Executive Officer pursuant to the terms of his employment agreement; and (iv) the recognition of $3.8 million of stock-based compensation related to the termination of stock options.

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     Advertising expense for 2007 increased by $1.5 million, or 16%, compared to 2006. The increase in advertising expense for 2007 was principally due to $1.8 million related to the expenses associated with Doral’s refreshed branding.

     Professional services fees for 2007 decreased by $3.7 million, or 6%, compared to 2006. The decrease in professional services fees is primarily related to the decrease in the restatement-related expenses during 2007. During 2006, the Company incurred $24.0 million associated to restatement-related expenses, compared to $8.5 million in professional services related to remediation of legacy issues and to $6.6 million in other legal expenses for 2007. Also, professional services expenses for 2007 included an expense of $6.1 million in professional services for investment banking and other services, and $1.9 million in professional services related to Doral Holdings.

     Occupancy and other office expenses for 2007 decreased by $2.4 million, or 9%, compared to 2006. The decrease during 2007 was primarily due to decreased costs associated with Doral Financial’s decision to consolidate marketing brands and close non-strategic branches during 2006. As of December 31, 2007, the Company conducted its business through 41 retail banking offices, at which mortgage offices are co-located within Puerto Rico and one office at New York City, compared to 44 retail banking offices, at which mortgage offices were co-located within Puerto Rico and eleven offices at New York City as of December 31, 2006.

     Depreciation and amortization expense during 2007 decreased by $4.4 million, or 20%, compared to 2006. The decrease in depreciation was principally related to the acceleration in 2006 of leasehold improvements on vacated properties.

     Other expenses for the year ended December 31, 2007 increased by $12.3 million, or 42%, compared to 2006. The increase in other expenses was principally related to a net increase in the recourse liability of $2.3 million, write offs of certain uncollectible commissions of approximately $1.5 million, and expenses related to foreclosure claims of approximately $4.1 million.

     2006 compared to 2005. Non-interest expense for the year ended December 31, 2006 increased by $85.8 million, or 30%, compared to 2005. The increase in 2006 was primarily due to the establishment of a reserve of $95.0 million in connection with an agreement to settle the Company’s consolidated securities class action and shareholder derivative litigation related to the restatement. During 2005, the Company recorded a $25.0 million expense related to the settlement of the SEC’s investigation of the Company. The increase also reflects increases in professional services related to the resolution of legacy issues related to the restatement and the Company’s business transformation initiatives.

     Compensation and employee benefits during 2006 increased by $3.4 million, or 4%, compared to 2005. The increase in compensation and employee benefits was primarily due to increases in severance payments, offset in part by a decrease of 48% in headcount, which decreased from 2,522 as of December 31, 2005 to 1,310 employees as of December 31, 2006, with most of the reduction occurring in the late part of 2006. For the year ended December 31, 2006, compensation expense includes $20.4 million in severance payments associated with the reduction in headcount and $0.8 million associated with the expensing of stock-based compensation.

     Professional services fees for 2006 increased by $20.2 million, or 47%, compared to 2005. The increase for 2006 was primarily due to consulting fees related to the Company’s non-restatement-related expenses. The increase primarily reflects fees incurred in connection with the resolution of ongoing legacy issues and the Company’s ongoing business transformation initiatives and recapitalization efforts. The increase was slightly offset by a decrease of $5.4 million in restatement-related expenses.

     Occupancy and other office expenses for 2006 decreased by $4.1 million, or 13%, compared to 2005. The decrease during 2006 was primarily due to decreased costs associated with Doral Financial’s decision to consolidate marketing brands and close non-strategic branches during 2006. As of December 31, 2006, the Company conducted its business through 44 retail banking offices, at which mortgage offices were co-

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located within Puerto Rico, and eleven offices at New York City, compared to 108 offices as of December 31, 2005.

     Depreciation and amortization expense during 2006 increased by $1.1 million, or 5%, compared to 2005. The increase in depreciation was principally related to the acceleration of leasehold improvements on vacated properties, increases in building depreciation and the purchase of software and computer systems upgrades.

     Doral Financial established a litigation reserve and recorded a charge to its full-year financial results for 2006 of $95.0 million in connection with an agreement to settle all claims in the consolidated securities class action and shareholder derivative litigation filed against the Company following the announcement in April 2005 of the need to restate its financial statements for the periods from January 1, 2000 to December 31, 2004. During 2005, the Company recorded a $25.0 million expense related to the settlement of the SEC’s investigation of the Company.

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 US 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 US corporations and are subject to US income-tax on their income derived from all sources.

     The maximum statutory corporate income tax rate in Puerto Rico was 39.0% for the taxable year ending December 31, 2007. In August 2005, the Government of Puerto Rico approved an increase in the maximum statutory tax rate from 39.0% to 41.5% for corporations and partnerships for a two-year period. The tax rate was applied retroactively effective January 1, 2005 to all of the Company’s subsidiaries doing business in Puerto Rico. The additional tax related to the income earned from January 1 to the date of enactment of the law was fully recorded in the third quarter of 2005, net of the impact in the deferred taxes. In addition, in May 2006, the Government of Puerto Rico approved an additional one year transitory tax applicable only to the banking industry that raised the maximum statutory tax rate to 43.5% for taxable years commenced during calendar year 2006. For taxable years beginning after December 31, 2006, the maximum statutory tax rate will be 39.0%.

     Doral Financial enjoys an 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 US 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 US securities and US mortgage-backed securities, which interest income and gain on sale, if any, is exempt from Puerto Rico income taxation and excluded from federal income taxation on the basis of the portfolio interest deduction in the case of interest, and, in the case of capital gains, because the gains are sourced outside the United States. During 2008, the Company will be transferring substantially all of the assets at the international banking entity to Doral Bank PR as part of the tax planning actions described below.

     Under the PR Code, the statutory corporate tax rates ranges from 15% for capital gain transactions to a maximum of 39.0% for regular income. The PR Code also includes an alternative minimum tax of 22% that applies if the Company’s regular income tax liability is less than the alternative minimum tax requirements. The provision for income taxes of the Company differs from amounts computed by applying the applicable Puerto Rico statutory rate to income before taxes. A reconciliation of the difference follows:

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	Year Ended December 31,
(Dollars in thousands)	2007						2006						2005
(Loss) income before income taxes	$(302,762)						$(272,008)						$32,283
				% of						% of						% of
				Pre-tax						Pre-tax						Pre-tax
	Amount			Income			Amount			Income			Amount			Income
Tax benefit (expense) at statutory rates	$	118,077			39.0		$	112,883			41.5		$	(13,397	)		(41.5	)
Tax effect of exempt income, net of expense disallowance		2,794			0.9			5,365			2.0			6,851			21.2
Net (loss) income from international banking entity		(27,583	)		(9.1	)		11,732			4.3			35,378			109.6
Net tax (expense) benefit from capital gain transactions		(4,408	)		(1.5	)		—			—			706			2.2
Effect of net operating losses not used		(44,452	)		(14.6	)		(29,881	)		(11.0	)		(30,420	)		(94.2	)
Net change in IOs tax differential basis		(25,300	)		(8.3	)		70,541			25.9			—			—
Deferred tax valuation allowance decrease (increase)		121,179			40.0			(125,923	)		(46.2	)		(4,440	)		(13.8	)
Non-tax deductible expenses		—			—			—			—			(12,311	)		(38.1	)
Other, net		(8,453	)		(2.8	)		3,390			1.2			(1,458	)		(4.5	)
Income tax benefit (expense)	$	131,854			43.6		$	48,107			17.7		$	(19,091	)		(59.1	)

     2007 compared to 2006. For the year ended December 31, 2007, Doral Financial recognized an income tax benefit of $131.9 million, compared to $48.1 million for the comparable 2006 period. The decrease in the tax provision for the year ended December 31, 2007 is principally related to the release of the valuation allowance of the deferred tax assets described below.

     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 $87.3 million of its deferred tax asset, related primarily related to net operating losses, will not be realized 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 year ended December 31, 2007, net operating losses of $114.0 million were created. Based on the forecasted future taxable income the Company will not be able to obtain the full benefit of these net operating losses.

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

     The realization of the deferred tax asset is dependent upon the existence of, or generation of, taxable income during the remaining 12 (15 year amortization period) years period in which the amortization deduction of the IO tax asset is available. In determining the valuation allowance recorded, the Company considered both the positive and negative evidence regarding the Company’s ability to generate sufficient taxable income to realize its deferred tax assets. Positive evidence included projected earnings attributable to the core business through the projection period, repayment of the $625.0 million in senior notes due to the recapitalization and which served to significantly reduce interest expense, results of the leveraging program, which includes loan growth of approximately $0.5 billion through purchases of single-family loans and the purchase of approximately $1.0 billion in securities. Further positive evidence included the ability to isolate verifiable nonrecurring charges in historical losses, the core earnings of the business absent these nonrecurring items and the flexibility to move the IO tax asset amortization to profitable entities according to Doral Financial’s agreements with the Puerto Rico Treasury Department. During the fourth quarter of 2007, the Company implemented certain tax planning actions in order to generate future taxable income that contributed to the reduction in its valuation allowance. These include the transfer of substantially all of the assets from Doral International to Doral Bank PR. Negative evidence included the Company’s recorded losses for the year ended December 31, 2007 and 2006 and the net short 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 this Annual Report on Form 10-K.

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     In weighing the positive and negative evidence above, we considered the more likely than not criteria pursuant to SFAS 109 as well as the risk factors related to its future business described above. Based on this analysis we concluded that it was more likely than not that a portion of the Company’s gross deferred tax assets of $480.2 million would not be realized. As a result, the Company recorded a valuation allowance. At December 31, 2007, the deferred tax asset, net of its valuation allowance of $87.3 million, amounted to approximately $392.9 million compared to $261.6 million at December 31, 2006.

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

     During 2007, Doral Financial’s international banking entity subsidiary had a pre-tax loss of $70.7 million, compared to a pre-tax benefit of $28.3 million for 2006. This reduction was to due the sale of investment securities during 2007 as a result of the third quarter reassessment.

     The Company adopted FIN 48 effective January 1, 2007. As a result of the adoption, the Company recorded an adjustment to retained earnings amounting to $2.4 million. The Company classifies all interest and penalties related to tax uncertainties as income tax expense. For the period ended December 31, 2007, the Company recognized approximately $1.4 million in interest and penalties.

     Unrecognized tax benefits as of December 31, 2007 amounted to $17.2 million. The amount of unrecognized tax benefits or liabilities may increase or decrease in the future for various reasons, including changes in the 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. The Company does not anticipate any significant changes to its unrecognized tax benefits within the next 12 months.

     The Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to our liability for income taxes. Any such adjustment could be material to our results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of December 31, 2007, the statute of limitations for the years ended December 2003, 2004, 2005 and 2006 remained open.

     2006 compared to 2005. For the year ended December 31, 2006, Doral Financial recognized an income tax benefit of $48.1 million, compared to an income tax expense of $19.1 million for the comparable 2005 period. The decrease in the tax provision for the year ended December 31, 2006 was principally due to pre-tax losses recognized during 2006, combined with an increase in the Company’s net deferred tax asset as a result of agreements entered into with the Puerto Rico Treasury Department, which are described below.

     During 2006, the Company entered into two separate agreements with the Puerto Rico Treasury Department regarding the Company’s deferred tax asset related to prior intercompany transfers of IOs (the “IO Tax Asset”). The first agreement, executed during the first quarter, confirmed the previously established tax basis of all of the IO transfers within the Doral Financial corporate group. The second agreement, executed during the third quarter of 2006, 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 may be transferred to any entity within the Doral Financial corporate group, including the Puerto Rico banking subsidiary. The confirmation of the previously established tax basis of all IO transfers within the Doral Financial corporate group and the ability to use the IO Tax Asset in the Company’s profitable subsidiaries resulted in an increase in the deferred tax asset, net of the valuation allowance, and in a net tax benefit, for the year ended December 31, 2006.

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     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, and tax planning strategies in making this assessment. In assessing such projections, the Company did not consider the effects of the proposed transaction, as part of the plans to pay its $625.0 million floating senior notes that mature on July 20, 2007, as detailed in Note 2 to the Financial Statements. The effects that the proposed transaction would have on the projections would be considered after the conclusion of the transactions leading to the payment of the senior notes. In the case of the IOs Tax Asset, the realization of the deferred tax asset is dependent upon the existence of, or generation of, taxable income during the 15 year period in which the amortization deduction is available.

     In determining the valuation allowance recorded, the Company considered both the positive and negative evidence regarding our ability to generate sufficient taxable income to realize our deferred tax assets. Positive evidence included projected earnings attributable to the core business through the projection period. Further positive evidence included the ability to isolate nonrecurring charges in historical losses and that it is objectively verifiable that such charges will not recur, core earnings of the business absent these nonrecurring items and the flexibility to move IO amortization to profitable entities according to our agreements with the Puerto Rico Treasury Department. Negative evidence included our recorded loss for the year ended December 31, 2006, the net operating loss short carry-forward period of 7 years and the uncertainties surrounding the Company’s ability to continue as a going concern which at that moment was dependent on the ability to secure the needed outside financing for the payment of the $625.0 million floating senior notes.

     In weighing the positive and negative evidence above, we considered the more likely than not criteria pursuant to SFAS 109 as well as the risk factors related to its future business described above. Based on this analysis we concluded that it was more likely than not that the net deferred tax assets of $262.0 million would be realized.

     Under the PR Code, Doral Financial is not permitted to file consolidated tax returns, thus, Doral Financial is not able to utilize losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from a net operating loss, a particular subsidiary must be able to demonstrate sufficient taxable income within the applicable carry-forward period (seven years under the PR Code). As of December 31, 2006, net operating losses of $223.0 million were recognized at the subsidiary level that, based on the forecasted future taxable income, such subsidiaries could not utilize to offset future income. This resulted in an increase of the valuation allowance. At December 31, 2006, the deferred tax asset, net of its valuation allowance of $201.6 million, amounted to approximately $261.6 million, compared to $213.2 million at December 31, 2005.

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

      During 2006, pre-tax income from Doral Financial’s international banking entity subsidiary amounted to $28.3 million, compared to $85.2 million for 2005.

     Refer to Note 22 to the consolidated financial statements for additional information on income taxes.

OPERATING SEGMENTS

     Doral Financial manages its business in four operating 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.

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     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 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, the financial information related to the operating segments presented below use the old reportable segment structure. In establishing the old reportable segment structure for the year ended December 31, 2007, the servicing assets and related income and expenses that were transferred during the third quarter of 2007 to Doral Bank PR have been reclassified to the mortgage banking segment including the elimination of the dividend paid by Doral Bank PR to the Company as a result of the transfer. Refer to Note 32 of to the consolidated financial statements accompanying this Annual Report on Form 10-K for summarized financial information regarding these operating segments. 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.

Banking

     The banking segment includes Doral Financial’s banking operations in Puerto Rico, currently operating through 41 retail bank branches, and in the mainland United States, principally in the New York City metropolitan area. Doral Financial accepts deposits from the general public and institutions, obtains borrowings, originates and invests in loans, and invests in mortgage-backed securities as well as in other investment securities and offers traditional banking services. Net loss for the banking segment amounted to $153.7 million during 2007, compared to net income of $22.4 million during 2006 and $97.0 million during 2005, respectively. On July 27, 2007, Doral Financial completed the sale of its 11 branches in the New York City Metropolitan Area and certain related assets to New York Commercial Bank, subsidiary of New York Community Bancorp. Doral Financial retained Doral Bank NY’s federal thrift charter.

     Net interest income for the banking segment was $153.0 million for 2007, compared to $192.9 million for 2006 and $191.2 million for 2005, respectively. The decrease in net interest income was principally due to a reduction in interest-earning assets, partially offset by a decrease in interest-bearing liabilities, resulting in an increase in the net interest margin from 1.74% and 1.71% for the years ended December 31, 2006 and 2005, respectively, to 1.86% for the year ended December 31, 2007. Total average interest-earning assets for the banking segment for 2007 was $8.2 billion, compared to $11.1 billion for 2006 and $11.2 billion for 2005. The reduction in the average balance of the interest-earning assets is primarily related to the sale of $2.2 billion of available for sale investment securities during 2007.

     Non-interest loss for the banking segment was $103.8 million for 2007, compared to a loss of $9.1 million in 2006 and income of $56.8 million in 2005. The non-interest loss during 2007 was principally driven by the Company’s decision to sell $2.4 billion of available for sale investment securities, of which $2.2 billion relates to the banking subsidiaries, during the second half of 2007, as a result of the Third and Fourth Quarter Reassessments. The non-interest loss for 2006 was principally related to the Company’s decision to sell $1.7 billion from its available for sale portfolio at a loss of approximately $25.4 million during the fourth quarter of 2006, of which $231.0 million settled during the first quarter of 2007. The Company’s decision was designed as a measure to increase future net interest income and liquidity, as well as to strengthen its capital ratios.

     Non-interest expenses for this segment increased to $127.2 million compared to $127.0 million in 2006 and $122.2 million in 2005. Total non-interest expenses during 2007 includes increases in compensation and benefits expenses principally related to $2.7 million of severance payments and marketing expenses associated with Doral’s new branding campaign amounting to $2.5 million. Non-interest expense for 2006 was driven principally by increases in professional services fees associated with the reengineering and recapitalization efforts.

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Mortgage Banking

     This segment relates to the business activities of the holding company. Prior to 2007, the holding company and various of its subsidiaries were engaged in mortgage originations, securitizations and related activities. As part of the business transformation effort, Doral Financial transferred its mortgage origination and servicing platforms, subject to certain exclusions, to Doral Bank PR, including its wholly-owned subsidiary, Doral Mortgage. The Company’s mortgage origination business is now conducted by Doral Mortgage LLC, now a wholly-owned subsidiary of Doral Bank PR, and the Company’s mortgage servicing business is operated by Doral Bank PR. Prior to July 2007, the origination of residential mortgage loans and the servicing of these loans was principally conducted through an operating division of the holding company and a number of mortgage banking subsidiaries of the holding company. With the exception of Doral Mortgage, operations of all other mortgage banking subsidiaries were ceased. Loans that were not securitized or sold in the secondary market were generally funded by Doral Bank PR under a master production agreement. The holding company, which is considered part of the mortgage bank segment, also held a substantial portfolio of investment securities. Substantially all new loan origination and investment activities at the holding company level were also terminated.

     During 2006, the Company decided to consolidate its activities in this area that were previously conducted through four mortgage banking units — HF Mortgage Bankers, an operating division within the parent company, and three wholly owned subsidiaries, Doral Mortgage, Centro Hipotecario de Puerto Rico, Inc. and Sana Mortgage — under a single Doral brand. The result was the elimination of Sana Mortgage, Centro Hipotecatio and HF Mortgage Bankers and the transfer of Doral Mortgage to Doral Bank PR, as its wholly-owned subsidiary.

     Net interest loss for the mortgage banking segment amounted to $2.4 million for 2007, compared to interest income of $3.5 million and $82.9 million for the comparable periods of 2006 and 2005, respectively. The net interest loss was driven by loss of interest income due to the sale of $3.1 billion in mortgage loans. The decrease in net interest income in 2006 was due to a significant reduction in net interest margin caused by an increase in interest expense, coupled with a 48% reduction in the average balance of interest-earning assets. Interest rate spread and margin for the mortgage banking segment for 2006 was (0.01%) and 0.11%, respectively, compared to 1.22% and 1.32%, respectively, for 2005. The average balance of interest-earning assets for the segment was $1.5 billion, $3.3 billion and $6.3 billion for 2007, 2006 and 2005 respectively.

     Non-interest income for the mortgage banking segment amounted to $39.9 million for 2007, compared to a loss of $40.1 million and an income of $28.3 million for the corresponding periods of 2006 and 2005. Non-interest income for 2007 was primarily related to $24.3 million of net servicing income and $9.7 million on gain on sale of mortgage loans. During 2006, this segment experienced a non-interest loss of $40.1 million for 2006 compared to non-interest income of $28.3 million for 2005. This change was principally related to a $42.0 million loss on the IOs valuation, which, in turn, was principally related to losses suffered during the first half of 2006 from the impact of increases in short-term interest rates on IOs that did not have caps on the pass-through interest payable to investors and an $8.2 million net loss in connection with the previously announced restructurings of prior loan sale transactions with local financial institutions.

     Non-interest expenses for this segment amounted to $145.5 million compared to $247.2 million in 2006 and to $166.1 million in 2005. Non-interest expense for 2007 was impacted by (i) the payment of $4.4 million remaining in an escrow account maintained on behalf of the Company’ s Chief Executive Officer pursuant to the terms of his employment agreement; (ii) the recognition of $3.8 million of stock-based compensation related to the termination of stock options; (iii) $3.6 million related to severance payments; and (iv) $1.6 million of professional services related to accounting matters of Doral Holding GP, ultimate holding company. The increase in non-interest expenses for this segment in 2006 was driven principally by a $95.0 million reserve established in connection with an agreement to settle the Company’s consolidated securities class action and shareholder derivative litigation related to the restatement and increases in professional services fees associated with the ongoing legacy and transformation process. Also, during 2005, the Company’s reserve of $25.0 million established in connection with the settlement of the SEC’s investigation of the Company was recognized in the mortgage-banking segment operations, as well as a goodwill write-off of $4.7 million associated with the acquisition of Sana Mortgage Corporation based on management’s analysis of the future profitability and prospects of this subsidiary.

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Institutional Securities Operations

     Doral Financial has been steadily decreasing the operations of this segment. During 2002, Doral Financial sold its retail securities brokerage business to an unaffiliated broker-dealer. As part of the Company’s expense reduction efforts, during the fourth quarter of 2005, the Company terminated its institutional sales and investment banking services. During 2006, the Company sold substantially all of Doral Securities’ investment securities and during the third quarter of 2007, Doral Securities voluntarily withdrew its license as a broker-dealer with the SEC and its membership with the FINRA. 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 this contract to Doral Bank PR.

     Net income for this segment amounted to approximately $0.4 million for 2007, compared to a loss $0.3 million for 2006 and income of $2.1 million for 2005. The net loss for 2006, compared to net income for the corresponding period of 2007, was primarily related to a loss of $1.3 million on trading activities during 2006.

Insurance Agency

     Doral Financial operates its insurance agency activities through its wholly-owned subsidiary Doral Insurance Agency. Doral Insurance Agency’s principal insurance products are hazard, title and flood insurance, which are sold primarily to Doral Financial’s mortgage customers. Doral Insurance Agency is diversifying its range of products to include other forms of insurance products such as auto, life and disability. Net income for this segment amounted to $3.2 million during 2007, compared to $4.2 million for 2006 and $8.4 million for 2005. The decrease in net income is the result of a decrease in the Company’s mortgage loan production during 2007, which directly affects the revenues of the insurance business. As noted in Table I, production decreased from 15,548 loans during 2006 to 13,544 loans during 2007. For the year ended December 31, 2007, insurance fees and commissions amounted to $8.8 million, compared to $8.8 million and $12.4 million in 2006 and 2005, respectively.

     BALANCE SHEET AND OPERATING DATA ANALYSIS

Loan Production

     Loan production includes loans internally originated by Doral Financial as well as residential mortgage loans purchased from third parties with the related servicing rights. Purchases of mortgage loans from third parties were $85.1 million, $88.7 million and $483.1 million for the years ended December 31, 2007, 2006 and 2005, respectively. The following table sets forth the number and dollar amount of Doral Financial’s loan production for the years indicated:

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Table I — Loan Production

	Year ended December 31,
(Dollars in thousands, except for average initial loan balance)	2007			2006			2005
FHA/VA mortgage loans
Number of loans		1,392			2,001			3,881
Volume of loans	$	143,714		$	200,495		$	332,409
Percent of total volume		11	%		10	%		6	%
Average initial loan balance	$	103,243		$	101,197		$	85,650
Conventional conforming mortgage loans
Number of loans		1,268			1,564			11,357
Volume of loans	$	145,079		$	187,480		$	1,355,136
Percent of total volume		11	%		9	%		25	%
Average initial loan balance	$	114,416		$	119,872		$	119,322
Conventional non-conforming mortgage loans(1)
Number of loans		3,598			8,751			24,744
Volume of loans	$	461,432		$	925,232		$	2,671,846
Percent of total volume		34	%		46	%		49	%
Average initial loan balance	$	128,247		$	105,729		$	107,980
Construction developments loans
Number of loans		24			115			249
Volume of loans	$	64,661		$	66,199		$	253,774
Percent of total volume		5	%		3	%		4	%
Average initial loan balance	$	2,694,208		$	624,519		$	1,031,602
Disbursements of construction development loans
Volume of loans	$	229,634		$	414,660		$	430,249
Percent of total volume		17	%		21	%		8	%
Commercial loans(2)
Number of loans		384			621			849
Volume of loans	$	235,761		$	178,596		$	318,962
Percent of total volume		18	%		9	%		6	%
Average initial loan balance	$	613,960		$	287,594		$	375,691
Consumer loans(2)
Number of loans		6,876			2,491			10,405
Volume of loans	$	49,300		$	34,991		$	114,238
Percent of total volume		4	%		2	%		2	%
Average initial loan balance	$	7,170		$	14,047		$	10,979
Other(3)
Number of loans		2			5			3
Volume of loans	$	2,188		$	9,553		$	3,400
Percent of total volume		—			—			—
Total loans
Number of loans		13,544			15,548			51,488
Volume of loans	$	1,331,769		$	2,017,206		$	5,480,014

(1)	Includes $29.0 million, $73.4 million and $224.3 million, in second mortgages for the years ended December 31, 2007, 2006 and 2005, respectively.
(2)	Commercial and consumer lines of credit are included in the loan production according to the credit limit approved.
(3)	Consists of multifamily loans.

          The decrease in Doral Financial’s loan production is due to a number of factors including changes in underwriting standards, deteriorating economic conditions in Puerto Rico and competition from other financial institutions. During the second half of 2006, Doral Financial decided to make certain adjustments to its underwriting standards designed to achieve uniform, automated and rules-based underwriting standards, as well as to take into consideration the worsening macroeconomic conditions in Puerto Rico.

          A substantial portion of Doral Financial’s total residential mortgage loan originations has consistently been composed of refinancing transactions. For the years ended December 31, 2007, 2006, and 2005, refinancing

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transactions represented approximately 54%, 55% and 53%, 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.

Loan Origination Channels

     In Puerto Rico, Doral Financial relies primarily on Doral Bank PR’s extensive branch network to originate loans. It supplements these originations with wholesale purchases from other financial institutions. Purchases generally consist of conventional mortgage loans. Doral Financial also originates consumer, commercial, construction and land loans primarily through its banking subsidiaries. In Puerto Rico, Doral Financial maintains a specialized unit that works closely with housing project developers and originates mortgage loans to finance the acquisition of homes in new residential developments.

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

Table J — Loan Origination Sources

	Year ended December 31,
	2007									2006									2005
	Puerto Rico			U.S.			Total			Puerto Rico			U.S.			Total			Total
Retail		50	%		—			50	%		60	%		—			60	%		71	%
Wholesale(1)		6	%		—			6	%		4	%		—			4	%		8	%
New Housing Developments		20	%		2	%		22	%		21	%		3	%		24	%		12	%
Other(2)		20	%		2	%		22	%		8	%		4	%		12	%		9	%

(1)	Refers to purchases of mortgage loans from other financial institutions and mortgage lenders.
(2)	Refers to commercial, consumer and land loans originated through the banking subsidiaries and other specialized units.

Mortgage Loan Servicing

     Doral Financial’s principal source of servicing rights has traditionally been sales of loans from its internal mortgage loan production. However, Doral Financial also purchases mortgage loans on a servicing-released basis as well as servicing rights in bulk. During 2007, the Company did not purchase servicing rights, as compared to approximately $16.4 million and $229.0 million of purchased servicing right for the years ended December 31, 2006 and 2005, respectively, in principal amount of mortgage loans. 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:

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Table K — Mortgage Loan Servicing

	Year ended December 31,
(Dollars in thousands, except for average size of loans serviced)	2007			2006			2005
Composition of Servicing Portfolio at Year End:
GNMA	$	2,115,760		$	2,154,476		$	2,193,541
FHLMC/FNMA		3,756,019			4,041,920			4,209,561
Other conventional mortgage loans(1)(2)		7,897,070			9,090,724			9,324,502
Total servicing portfolio	$	13,768,849		$	15,287,120		$	15,727,604
Servicing Portfolio Activity:
Beginning servicing portfolio	$	15,287,120		$	15,727,604		$	14,264,367
Add:
Loans funded and purchased(3)		752,414			1,315,930			4,224,348
Bulk servicing acquired		—			16,376			229,022
Less:
Servicing release sales and transferred(4)		738,699			40,924			15,032
Run-off(5)		1,531,986			1,731,866			2,975,101
Ending servicing portfolio	$	13,768,849		$	15,287,120		$	15,727,604
Selected Data Regarding Mortgage Loans Serviced:
Number of loans		154,378			168,717			173,956
Weighted-average interest rate		6.80	%		6.59	%		7.02	%
Weighted-average remaining maturity (months)		248			252			257
Weighted-average gross servicing fee rate — loans serviced to others		0.3917	%		0.3854	%		0.4026	%
Average-servicing portfolio(6)	$	14,158,070		$	15,598,967		$	15,168,446
Principal prepayments	$	1,306,739		$	1,401,001		$	2,348,000
Constant prepayment rate		8	%		8	%		13	%
Average size of loans	$	89,189		$	90,608		$	90,411
Servicing assets, net	$	150,238		$	176,367		$	150,576
Delinquent Mortgage Loans and Pending Foreclosures at Year End:
60-89 days past due		1.83	%		1.69	%		1.24	%
90 days or more past due		2.53	%		1.75	%		1.71	%
Total delinquencies excluding foreclosures		4.36	%		3.44	%		2.95	%
Foreclosures pending		2.71	%		2.46	%		1.64	%

(1)	Includes $3.7 billion, $3.3 billion and $5.9 billion of loans owned by Doral Financial at December 31, 2007, 2006 and 2005, respectively, which represented 27%, 22% and 38%, respectively, of the total servicing portfolio as of such dates.
(2)	Includes portfolios of $201.7, $242.2 million and $286.1 million at December 31, 2007, 2006 and 2005, respectively, of delinquent FHA/VA and conventional mortgage loans sold to third parties.
(3)	Excludes approximately $579.4 million, $701.3 million and $1.3 billion for the years ended December 31, 2007, 2006 and 2005, respectively, of commercial, consumer, construction and other non-mortgage loans originated by Doral Financial but not considered part of the mortgage servicing portfolio.
(4)	Includes $682.1 million of principal balance of loans subserviced by the Company and transferred to a third party during the second quarter of 2007.
(5)	Run-off refers to regular amortization of loans, prepayments and foreclosures.
(6)	Includes the average balance of loans owned by Doral Financial of $3.4 billion, $4.2 billion and $4.5 billion at December 31, 2007, 2006 and 2005, respectively.

     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 December 31, 2007 less than one percent of Doral Financial’s mortgage-servicing portfolio was related to mortgages secured by real property located on the U.S. mainland, compared to approximately 1% for the corresponding period in 2006 and 2005.

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     The amount of principal prepayments on mortgage loans serviced by Doral Financial was $1.3 billion, $1.4 billion, and $2.3 billion for the years ended December 31, 2007, 2006 and 2005, respectively. In the past, Doral Financial attempted to mitigate the sensitivity of its servicing income to increases in prepayment rates by maintaining a strong retail origination network.

     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 the MSRs. The Company executed this 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 hedge, they will offset the general movements in market of the Company’s MSRs.

Loans Held for Sale

     Loans held for sale are carried on Doral Financial’s Consolidated Statements of Financial Condition at the lower of net cost or market value on an aggregate portfolio basis. Market values are determined by reference to market prices for comparable mortgage loans, adjusted by the portfolio credit risk. The amount by which costs exceed market value, if any, is accounted for as a loss during the period in which the change in valuation occurs. Given traditional consumer preferences in Puerto Rico, substantially all of Doral Financial’s residential loans held for sale are fixed-rate loans. Note 9 to the consolidated financial statements accompanying this Annual Report on Form 10-K contains additional information with respect to Doral Financial’s portfolio of loans held for sale.

     As of December 31, 2007, Doral Financial owned approximately $418.6 million in loans held for sale, of which approximately $331.7 million consisted of residential mortgage loans.

     During 2007, the Company performed a review of its loans held for sale portfolio. As a result of this review, the Company reassessed its plan to sell certain of its mortgage portfolio classified as held for sale and transferred a total amount of $1.4 billion of loans from the held for sale portfolio to its loan receivable portfolio, at lower-of-cost-or-market on an aggregated basis and no charge resulted .

     GNMA programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the Company provides servicing. At the Company’s option and without GNMA prior authorization, Doral Financial may repurchase such delinquent loans for an amount equal to 100% of the loan’s remaining principal balance. This buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional (but not an obligation). When the loans backing a GNMA security are initially securitized, the Company treats the transaction as a sale for accounting purposes and the loans are removed from the balance sheet because the conditional nature of the buy-back option means that the Company does not maintain effective control over the loans. When individual loans later meet GNMA’s specified delinquency criteria and are eligible for repurchase, Doral Financial is deemed to have regained effective control over these loans. In such case, for financial reporting purposes, the delinquent GNMA loans are brought back into the Company’s portfolio of loans held for sale, regardless of whether the Company intends to exercise the buy-back option. An offsetting liability is also recorded. As of December 31, 2007, the portfolio of loans held for sale includes $126.0 million related to GNMA defaulted loans, compared to $100.3 million as of December 31, 2006.

Loans Receivable

     Doral Financial originates mortgage loans secured by income-producing residential and commercial properties, construction loans, land loans, certain residential mortgage loans and other commercial and consumer loans that are held for investment and classified as loans receivable. Loans receivable are originated primarily through Doral Financial’s banking subsidiary. During 2007, the Company experienced a significant increase in loans receivable due principally to the reclassification of $1.4 billion of loans from the loans held for sale portfolio to the loans receivable portfolio. A significant portion of Doral Financial’s loans receivable consists of loans made to entities or individuals located in Puerto Rico.

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     The maximum aggregate amount in unsecured loans that Doral Bank PR could make to a single borrower under Puerto Rico banking regulations as of December 31, 2007, was approximately $70.9 million. Puerto Rico banking regulations permit larger loans to a single borrower to the extent secured by qualifying collateral. The maximum aggregate amount in loans that Doral Bank NY could make to a single borrower under the OTS banking regulations as of December 31, 2007, was $2.0 million. Doral Financial’s largest aggregated indebtedness to a single borrower or a group of related borrowers as of December 31, 2007 was $47.5 million.

     The following table sets forth certain information regarding Doral Financial’s loans receivable:

Table L — Loans Receivable, Net

	As of December 31,
(In thousands)	2007			2006			2005			2004			2003
Construction loans	$	588,175		$	817,352		$	795,848		$	629,913		$	603,909
Residential mortgage loans		3,340,162			1,785,454			514,164			409,005			529,147
Commercial – secured by real estate		767,441			541,891			891,795			568,842			152,016
Consumer – secured by real estate		—			—			—			320			375
Consumer – other		91,157			86,961			81,464			70,579			66,516
Lease financing receivable		33,457			43,565			44,636			7,488			—
Commercial non-real estate		126,484			158,963			142,909			36,848			22,006
Loans on savings deposits		11,037			16,811			15,082			9,354			8,769
Land secured		119,232			42,769			50,358			51,853			65,818
Loans receivable, gross		5,077,145			3,493,766			2,536,256			1,784,202			1,448,556
Less:
Discount on loans		(17,615	)		(22,016	)		—			—			—
Unearned interest and deferred loan fees, net		(8,597	)		(14,580	)		(23,252	)		(15,622	)		(21,052	)
Allowance for loan and lease losses		(124,733	)		(67,233	)		(35,044	)		(20,881	)		(14,919	)
		(150,945	)		(103,829	)		(58,296	)		(36,503	)		(35,971	)
Loans receivable, net	$	4,926,200		$	3,389,937		$	2,477,960		$	1,747,699		$	1,412,585

     The following table sets forth certain information as of December 31, 2007, regarding the dollar amount of Doral Financial’s loans receivable portfolio based on the remaining contractual maturity. Expected maturities may differ from contractual maturities because of prepayments and other market factors. Loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.

Table M — Loans Receivable by Contractual Maturities

	As of December 31, 2007
	1 year		1 to 5		Over 5
(In thousands)	or Less		Years		Years		Total
Construction loans	$	405,665	$	154,849	$	27,661	$	588,175
Residential mortgage loans		18,859		152,241		3,169,062		3,340,162
Commercial – secured by real estate		140,263		311,318		315,860		767,441
Consumer – other		48,825		41,681		651		91,157
Lease financing receivable		390		32,516		551		33,457
Commercial non-real estate		52,099		73,359		1,026		126,484
Loans on savings deposits		5,828		5,175		34		11,037
Land secured		66,091		32,167		20,974		119,232
Loans receivable, gross	$	738,020	$	803,306	$	3,535,819	$	5,077,145

     Scheduled contractual amortization of loans receivable does not reflect the expected life of Doral Financial’s loans receivable portfolio. The average life of these loans is substantially less than their contractual terms because of prepayments and, with respect to conventional mortgage loans, due-on-sale

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clauses, which give Doral Financial the right to declare a conventional mortgage loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan rates are higher than rates on existing mortgage loans and, conversely, decrease when current mortgage loan rates are lower than rates on existing mortgage loans. Under the latter circumstance, the weighted-average yield on loans decreases as higher-yielding loans are repaid or refinanced at lower rates.

     The following table sets forth the dollar amount of total loans receivable at December 31, 2007, as shown in the preceding table, which have fixed interest rates or which have floating or adjustable interest rates that have a contractual maturity of more than one year.

Table N — Loans Receivable by Fixed and Floating or Adjustable Rates

			Due After One Year
					Floating or
	1 Year				Adjustable-
(In thousands)	or Less		Fixed-Rate		Rate		Total
Construction loans	$	405,665	$	29,911	$	152,599	$	588,175
Residential mortgage loans		18,859		3,321,303		—		3,340,162
Commercial – secured by real estate		140,263		533,489		93,689		767,441
Consumer – other		48,825		42,326		6		91,157
Lease financing receivable		390		33,067		—		33,457
Commercial non-real estate		52,099		73,099		1,286		126,484
Loans on savings deposits		5,828		4,559		650		11,037
Land secured		66,091		51,236		1,905		119,232
Loans receivable, gross	$	738,020	$	4,088,990	$	250,135	$	5,077,145

     Doral Financial’s banking subsidiaries originate floating or adjustable and fixed interest-rate loans. Unlike its portfolio of residential mortgage loans, which is comprised almost entirely of fixed rate mortgage loans, a significant portion of Doral Financial’s construction, land, and other commercial loans classified as loans receivable carry adjustable rates. At December 31, 2007, 2006 and 2005, approximately 17%, 26% and 44%, respectively, of Doral Financial’s gross loans receivable were adjustable rate loans. The decrease in the percentage of adjustable rate loans over the years was the result of the transfers of $1.4 billion and $961.5 million of residential mortgage loans from the held for sale portfolio to the loans receivable portfolio during 2007 and 2006, respectively, resulting in the increase of the Company’s fixed-rate portfolio. Also, the decrease in adjustable rate loans in the portfolio relates to the decrease in the construction loans portfolio. The adjustable rate construction, commercial and land loans have interest rate adjustment limitations and are generally tied to the prime rate, and often provide for a maximum and minimum rate beyond which the applicable interest rate will not fluctuate. Future market factors may affect the correlation of the interest rate adjustment with the rate Doral Financial pays on the different funding sources used to finance these loans. Note 10 to the consolidated financial statements accompanying this Annual Report on Form 10-K contains additional information with respect to Doral Financial’s portfolio of loans receivable.

Investment and Trading Activities

     As part of its mortgage securitization activities, Doral Financial is involved in the purchase and sale of mortgage-backed securities. In the past, Doral Financial was also engaged in purchases and sales of whole loans and securities primarily through its international banking entity subsidiary. During the third quarter of 2005, Doral Financial made the determination to terminate its program of purchasing loans in bulk without the associated servicing rights. At December 31, 2007, Doral Financial, principally through its banking subsidiaries, held securities for trading with a fair market value of $276.5 million, approximately $33.7 million of which consisted of Puerto Rico tax-exempt GNMA securities. These tax-exempt securities are generally held by Doral Financial for longer periods prior to sale in order to maximize the tax-exempt interest received thereon. Securities held for trading are reflected on Doral Financial’s consolidated

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financial statements at their fair market value with resulting gains or losses included in current period earnings as part of net gain (loss) on securities held for trading. The fair values of Doral Financial’s tax-exempt GNMA securities are based on quotes obtained from local broker-dealers. See “Critical Accounting Policies — Valuation of Trading Securities and Derivatives” above for additional information on how Doral Financial determines the fair values of its trading securities.

     As part of its strategy to diversify its revenue sources and maximize net interest income, Doral Financial also invests in securities that are classified as available for sale, or prior to December 31, 2007 held to maturity. As of December 31, 2007, Doral Financial, principally through its banking subsidiaries, held $1.9 billion of investment securities that were classified as available for sale and reported at fair value based on quoted market prices, with unrealized gains or losses included in stockholders’ equity and reported as accumulated other comprehensive income (loss), net of income tax (expense) benefit in Doral Financial’s consolidated financial statements. Of this amount, approximately 97% was held at Doral Financial’s banking subsidiaries. At December 31, 2007, Doral Financial had unrealized losses in AOCI of $33.1 million, compared to unrealized losses of $106.9 million at December 31, 2006 related to its available for sale portfolio. The Company evaluates for impairment its investment securities at least quarterly or earlier if other factors indicative of potential impairment exist. An impairment charge in the consolidated statements of income is recognized when the decline in the fair value of the securities below their cost basis is judged to be other than temporary. The Company evaluates for other than temporary impairment in accordance with FASB Staff Position FAS115-1/124-1: “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” which requires that the Company consider various factors in determining whether it should recognize an impairment charge, including, but not limited to, the length of time and extent to which the fair value has been below cost basis, the expectations for the security’s performance, the creditworthiness of the issuer, and the Company’s intention and ability to hold the security until maturity. The unrealized losses in the Company’s investment securities are related to increases in interest rates and to adverse market conditions. Most of the Company’s securities are either U.S government agency or mortgage-backed securities that are highly rated. Moreover, the Company understands that it has adequate liquidity at its banking subsidiaries, where most of the securities are held, to continue to hold these securities. Based on these factors, management has concluded that the existing impairments as of December 31, 2007 were temporary and no impairment charge was reported in the Consolidated Statements of Income.

     During the third quarter of 2007, as a result of a reassessment, based on existing market conditions, the Company sold $1.9 billion in available for sale securities at a loss of $96.8 million. As part of this transaction, the related borrowings used to finance these securities were cancelled and losses of $16.4 million on economic hedging transactions and of $14.8 million on extinguishment of liabilities were recognized.

     During the fourth quarter of 2007, the Company transferred its held to maturity portfolio, amounting to approximately $1.8 billion, to the available for sale portfolio and subsequently sold $437.5 million in long dated U.S. Treasury securities for a gain. The sale was executed to reduce the Company’s interest rate risk exposure. Management weighed certain factors in making the decision to transfer the securities from held to maturity to available for sale, and determined its revised interest rate risk parameters required greater flexibility in asset/liability management. Since the transfer did not qualify under the exemption provisions for the sale or transfer of held to maturity securities under SFAS 115, the reclassification decision by the Company is deemed to have “tainted” the held to maturity category and it will not be permitted to classify prospectively any investment securities scoped under SFAS 115 as held to maturity for a period of two years. The Company recognized at the time of the transfer the unrealized loss on available for sale securities, net of taxes. Under current conditions, based on credit characteristics of investment portfolio, management’s assessment is that the Company has the intent and ability to retain its portfolio of investment securities until market recovery.

     During the fourth quarter of 2007, the Company entered into various interest rate cap transactions to hedge part of the interest rate risk associated with some assets purchases. These transactions are intended to be economic hedges, but will be accounted for as trading account instruments.

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     The following table summarizes Doral Financial’s securities holdings as of December 31, 2007.

Table O — Investment Securities

					Total
	Held for		Available		Investment
(In thousands)	Trading		For Sale		Securities
Mortgage-backed securities	$	70,363	$	777,154	$	847,517
Variable interest-only strips		51,074		—		51,074
Fixed interest-only strips		854		—		854
U.S. Treasury		152,695		225,593		378,288
U.S. government sponsored agency obligation		—		894,518		894,518
Puerto Rico government obligations		—		24,650		24,650
Other		1,476		25		1,501
Total	$	276,462	$	1,921,940	$	2,198,402

     For additional information regarding the composition of Doral Financial’s investment securities, please refer to Notes 5, 6 and 7 to the consolidated financial statements accompanying this Annual Report on Form 10-K.

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. 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 48,412,698 newly issued shares of common stock to Doral Holdings for an aggregate purchase price of $610.0 million (the “Recapitalization”). In connection with the Recapitalization, on July 19, 2007, Doral Financial also transferred its mortgage servicing and mortgage origination operations to Doral Bank PR, its principal banking subsidiary, and on July 26, 2007, sold the branch network of Doral Bank NY. In connection with these transactions, Doral Bank PR obtained regulatory approval to pay a $155.0 million cash dividend to the holding company and Doral Bank NY received regulatory approval to effect a capital distribution to the holding company in the amount of $50.0 million, of which $45.0 million was paid on July 30, 2007.

     The transactions described above resulted in the significant recapitalization of the holding company and provided the holding company with sufficient funds to repay in full its $625.0 million floating rate senior notes that matured on July 20, 2007, and to fund in August 2007 the settlement of the restatement-related consolidated class action and derivative shareholder litigation and to pay related transaction expenses.

     The transfer of the mortgage operation to Doral Bank PR has resulted in a more traditional operating structure in which most of the Company’s operational liquidity needs will be at the bank subsidiary level. Following the recapitalization and the related transactions described above, the holding company’s principal uses of funds will be the payment of its obligations, primarily the payment of principal and interest on its debt obligations, and the payment of dividends on its preferred stock. The holding company no longer directly funds any mortgage originating activities. The principal sources of funds for the holding company are the interest income on the portfolio of mortgage loans and securities retained by the holding company and dividends from its subsidiaries, including Doral Bank PR and Doral Insurance Agency. The

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existing consent order with the Federal Reserve prohibits Doral Financial from receiving any dividends from Doral Bank PR without the prior written approval of the FDIC. 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.

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, short-term 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 adversely impacted by the development of adverse 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. For the year ended December 31, 2007, the monthly average amount of funds advanced by Doral Financial under such servicing agreements was approximately $34.7 million, compared to $47.9 million for 2006. The decrease during 2007 was mainly related to the previously reported restructuring of various loan transfer transactions with local financial institutions during the second quarter of 2006 and new terms with respect to remittance schedules. 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 recent years, Doral Financial has 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 December 31, 2007 and 2006, the outstanding principal balance of such delinquent loans was $201.7 million and $242.2 million, respectively, and the aggregate monthly amount of funds advanced by Doral Financial was $17.3 million and $20.2 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 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 December 31, 2007, Doral Financial’s maximum recourse exposure with FNMA amounted to $953.3 million and required the posting of a minimum of $44.0 million in collateral to secure 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.

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Sources of Cash

     The following table shows Doral Financial’s sources of borrowings and the related average interest rates as of December 31, 2007 and 2006:

Table P — Sources of Borrowings

	As of December 31,
	2007					2006
	Outstanding		Average			Outstanding		Average
(Dollars in thousands)	Balance		Rate			Balance		Rate
Deposits	$	4,268,024		4.11	%	$	4,250,760		3.90	%
Repurchase agreements		1,444,363		4.97	%		3,899,365		4.25	%
Advances from the FHLB		1,234,000		4.94	%		1,034,500		4.78	%
Loans payable		402,701		6.88	%		444,443		6.92	%
Notes payable		282,458		7.31	%		923,913		6.57	%

     Doral Financial’s banking subsidiaries obtain funding for their lending activities through the receipt of deposits, through advances from the 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 December 31, 2007, Doral Financial’s banking subsidiaries held approximately $4.0 billion in interest-bearing deposits at a weighted-average interest rate of 4.43%. For additional information regarding deposit accounts and advances from the FHLB, see Notes 16 and 18 to the consolidated financial statements accompanying this Annual Report on Form 10-K.

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

Table Q — Average Deposit Balance

	Year ended December 31,
(Dollars in thousands)	2007					2006					2005
	Average		Average			Average		Average			Average		Average
	Balance		Rate			Balance		Rate			Balance		Rate
Certificates of deposit	$	2,782,709		4.94	%	$	2,945,898		4.27	%	$	2,248,465		3.56	%
Regular passbook savings		380,710		3.56	%		449,732		3.28	%		476,600		2.34	%
NOW accounts		457,128		3.06	%		527,163		2.80	%		673,755		2.22	%
Money Market accounts		151,564		4.13	%		—		—			—		—
Total interest-bearing		3,772,111		4.54	%		3,922,793		3.96	%		3,398,820		3.12	%
Non-interest bearing		309,482		—			340,794		—			443,005		—
Total deposits	$	4,081,593		4.20	%	$	4,263,587		3.65	%	$	3,841,825		2.76	%

     The following table sets forth the maturities of certificates of deposit having principal amounts of $100,000 or more at December 31, 2007.

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Table R – Certificates of Deposit Maturities

(In thousands)	Amount
Certificates of deposit maturing:
Three months or less	$	825,407
Over three through six months		586,884
Over six through twelve months		695,886
Over twelve months		583,303
Total	$	2,691,480

     As of December 31, 2007 and 2006, Doral Financial’s retail banking subsidiaries had approximately $2.5 billion and $2.0 billion, respectively, in brokered deposits obtained through broker-dealers. Brokered deposits are used by Doral Financial’s banking subsidiaries as a source of long-term funds. 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. Advances and reimbursement obligations with respect to letters of credit must be secured by qualifying assets with a market value of 110% of the advances or reimbursement obligations. At December 31, 2007, Doral Financial’s banking subsidiaries had $1.2 billion in outstanding advances from the FHLB-NY at a weighted-average interest rate cost of 4.94%. See Note 18 to the consolidated financial statements accompanying this Annual Report on Form 10-K 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 market. 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 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 materially adversely affected.

Regulatory Capital Ratios

     As of December 31, 2007, 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 a consent order pursuant to which it has submitted a capital plan in which it has agreed to maintain higher leverage capital ratio. Also, as a result of the change in control, 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 December 31, 2007, 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.

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Table S — Regulatory Capital Ratios

				Banking Subsidiaries
										Well-
	Doral			Doral			Doral			Capitalized
	Financial(2)			Bank-PR			Bank NY			Minimum
Total capital ratio (Total capital to risk-weighted assets)		17.8	%		12.2	%		13.8	%		10.0	%
Tier 1 capital ratio (Tier 1 capital to risk-weighted assets)		16.5	%		10.9	%		13.0	%		6.0	%
Leverage ratio(1)		10.8	%		5.7	%		10.6	%		5.0	%

(1)	Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR and Tier 1 capital to adjusted total assets in the case of Doral Bank NY.
(2)	Doral Financial is not subject to regulatory capital requirements as of December 31, 2007. Ratios were prepared as if the company were subject to the requirement for comparability purposes.

     As of December 31, 2007, 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 and its principal Puerto Rico Banking subsidiary, Doral Bank PR, entered into consent orders with the Federal Reserve, pursuant to which the Company submitted a capital plan in which it established a target minimum leverage ratio of 5.5% for Doral Financial and 6.0% for Doral Bank PR. As a result of the increase in the allowance for loan and lease losses recorded by Doral Bank PR during the fourth quarter of 2007, its leverage ratio dropped to 5.7%. For a detailed description of this order, please refer to Part I, Item 3. Legal Proceedings, in this Annual Report on Form 10-K. 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 December 31, 2007, the Doral Financial’s banking subsidiaries were in compliance with all capital requirements. See “Recent Significant Events - - Recapitalization Process” in Part I, Item 1. Business, in this report.

      On February 15, 2008, the Board of Directors of Doral Financial approved a capital infusion of $80.0 million to Doral Bank PR to raise its leverage ratio above 60%.

     Doral Financial’s regulatory capital ratios as of December 31, 2007 increased as a result of the issuance of common stock in connection with the recapitalization.

Assets and Liabilities

     At December 31, 2007, Doral Financial’s total assets were $9.3 billion compared to $11.9 billion at December 31, 2006. The reduction in assets during 2007 was principally related to the sale of approximately $2.4 billion in available for sale investment securities during the second half of 2007. Total liabilities were $8.0 billion at December 31, 2007, compared to $11.0 billion at December 31, 2006. The decrease in liabilities was largely the result of the unwinding of repurchase agreements related to the sale of securities during the third quarter of 2007 and the decrease on notes payable related to the payment in full of the Company’s $625.0 million floating rate senior notes on July 20, 2007.

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

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$11.8 million, as of December 31, 2007, 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 recourse 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 December 31, 2007, commitments to extend credit and commercial and financial standby letters of credit amounted to approximately $210.5 million and $4.9 million, respectively, and commitments to sell mortgage-backed securities and loans at fair value amounted to approximately $221.0 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.”

Contractual Obligations and Other Commercial Commitments

     The following tables 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 December 31, 2007.

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Table T — Contractual Obligations

(In thousands)	Payments Due by Period
			Less than						After 5
Contractual Obligations(1)	Total		1 Year		1-3 Years		3-5 Years		Years
Deposits	$	4,268,024	$	3,649,764	$	562,500	$	51,733	$	4,027
Repurchase agreements(2) (3)		1,444,363		894,363		550,000		—		—
Advances from the FHLB(2) (3)		1,234,000		619,000		356,000		259,000		—
Loans payable(4)		402,701		46,316		79,530		64,686		212,169
Notes payable		282,458		5,207		8,587		36,112		232,552
Other liabilities		210,694		209,694		1,000		—		—
Non-cancelable operating leases		46,324		5,937		10,814		7,162		22,411
Total Contractual Cash Obligations	$	7,888,564	$	5,430,281	$	1,568,431	$	418,693	$	471,159

(1)	A tax liability of $17.0 million, including accrued interest of $1.4 million, associated with unrecognized tax benefits under FIN 48 has been excluded due to the high degree of uncertainty regarding the timing of future cash outflows associated with such obligations.
(2)	Amounts included in the table above do not include interest.
(3)	Includes $782.5 million of repurchase agreements with an average rate of 5.50% and $304.0 million in advances from the 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 the 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 February 2014. 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.
(4)	Secured borrowings with local financial institutions, collateralized by real estate mortgage loans at fixed and variable interest rates tied to 3-month LIBOR. These loans are not subject to scheduled payments, but are expected to be repaid according to the regular amortization and prepayments of the underlying mortgage loans. For purposes of the table above, the Company used a CPR of 6.88% to estimate the repayments.

Table U — Other Commercial Commitments(1)

(In thousands)	Amount of Commitment Expiration Per Period
	Total Amount		Less than						After 5
Other Commercial Commitments	Committed		1 year		1-3 years		3-5 years		Years
Commitments to extend credit	$	210,473	$	137,096	$	72,369	$	8	$	1,000
Commitments to sell mortgage-backed securities and loans		221,024		221,024		—		—		—
Commercial and financial standby letters of credit		4,881		273		4,608		—		—
Maximum contractual recourse exposure		1,120,612		—		—		—		1,120,612
Total	$	1,556,990	$	358,393	$	76,977	$	8	$	1,121,612

(1) Refer to “Off-Balance Sheet Activities” 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.

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Interest Rate Risk Management

     Interest rate risk includes the risk that changes in interest rates may adversely affect the value of Doral Financial’s assets and liabilities. Interest rate risk also includes the risk that Doral Financial’s net interest income from its loan and investment portfolio will change in response to changes in interest rates.

     Doral Financial’s risk management policies are designed with the goal of maximizing long-term shareholder value and minimizing the impact of interest rate volatility. These policies are also designed to ensure the maintenance of adequate capitalization, liquidity, and other regulatory requirements. The objectives of Doral Financial’s risk management policies are pursued within the limits established by the Board of Directors of the Company. The Board of Directors has delegated the monitoring of interest rate and market risk to its Risk Policy Committee.

     Doral Financial’s Asset/Liability Management Committee (“ALCO”) has been created under the authority of the Board of Directors to manage the Company’s interest rate and market risk. The ALCO is primarily responsible for ensuring that Doral Financial operates within the Company’s established asset/liability management policy guidelines and procedures. The ALCO reports directly to the Risk Policy Committee of the Board of Directors.

     The ALCO is responsible for:

• developing the Company’s asset/liability management and liquidity strategy;

• recommending for Board approval asset/liability and liquidity risk limits that are consistent with the Company’s policies;

• overseeing product pricing and volume objectives for customer-related activities;

• overseeing the Company’s secondary sales activities;

• monitoring compliance with risk limits and judging adequacy of the execution of tactics by the Funds Management Group; and

• overseeing the maintenance of management information systems that supply, on a timely basis, the information and data necessary for the ALCO to fulfill its role as the Company’s asset/liability manager.

Risk Identification and Measurement

     Doral Financial manages interest rate exposure related to its assets and liabilities on a consolidated basis. Changes in interest rates can affect the volume of Doral Financial’s mortgage loan originations, the net interest income earned on Doral Financial’s portfolio of loans and securities, the amount of gain on the sale of loans and the value of Doral Financial’s servicing assets, IOs, and loans and securities holdings.

     As part of its interest rate risk management practices, Doral Financial has implemented measures to better identify the interest rate risk associated with the Company’s assets and liabilities and sources of income, and has developed policies and procedures to better manage these risks. Doral Financial continues to explore ways to improve its interest rate risk management practices. The Company currently manages its interest rate risk by principally focusing on the following metrics:

• Net Interest Income Sensitivity. In determining the appropriate measure of Doral Financial’s exposure to net interest income sensitivity, the Company uses simulations to measure the risk of changes in interest rates on the Company’s net interest income. These simulations assume a static balance sheet, in which every maturing asset or liability is reinvested or refunded in the same type of instrument with the same tenor. Simulation modeling includes “what if” analyses to determine the effect of different interest scenarios on Doral Financial’s risk profile and profitability. The

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	primary scenario used for risk measurement purposes is based on instantaneous changes in interest rates across contractual maturities.
	In using these simulations, the Company considers the impact of changes in interest rates on the interest rate spreads between deposits, CD rates, loans and investments, among others. The impact of prepayment rates on loans and mortgage securities, interest rate caps and floors, and other options are also taken into account.
•	Market Value of Equity. While simulations can adequately assess short-term interest rate risk, Doral Financial does not rely entirely on this tool to capture and identify the risks associated with longer-term re-pricing imbalances. To complement and broaden the risk analysis, the Company uses duration and convexity analysis to measure the sensitivity of the market value of equity to changes in interest rates. Duration measures the linear change in market value of equity caused by changes in interest rates, while, convexity measures the non-linear change in market value of equity caused by changes in interest rates. The analysis of duration and convexity combined provide a better understanding of the sensitivity of the market value of equity to changes in interest rates.
•	Leverage. The Company measures and monitors the Company’s leverage by targeting and setting limits to the following two ratios: (1) Tangible Equity to Tangible Assets, and (2) Risk-Based Capital Ratio.
•	Yield Curve Twist. Under a “normal yield curve,” longer term interest rates are higher than shorter term rates. A change of interest rates by the same amount along all maturities of the curve is called a “parallel shift” in the yield curve, since the shape of the curve stays the same, even though rates might be higher or lower across the curve. A change in the yield curve where interest rates change differently for different terms of the curve is called a “twist.” Yield curve twist, also called rotation risk or yield curve risk, is the risk associated with non-parallel rate shifts in the yield curve. These changes in the shape of the yield curve are more commonly known as flattening or steepening.

Interest Rate Risk Management Strategy

     Doral Financial’s current interest rate management strategy is implemented by the ALCO and is designed to reduce the volatility of the Company’s net interest income and to protect the market value of equity. While the current strategy will also use a combination of derivatives and balance sheet management, more emphasis is being placed on balance sheet management. At December 31, 2007, under the Company’s risk management strategy, the Company’s outstanding open derivative positions had decreased from to $5.1 billion at December 31, 2006 to $494.0 million at December 31, 2007.

     Net Interest Income Risk. In order to protect net interest income against interest rate risk, the ALCO employs a number of strategies, which are adjusted in relation to prevailing market conditions.

     Internal balance sheet management practices are designed to reduce the re-pricing gaps of the Company’s assets and liabilities. These techniques seek longer term funds through the use of long-term repurchase agreements, FHLB-NY advances and brokered deposits.

     Currently, the Company mainly uses interest rate swaps as part of its interest rate risk management activities. Interest rate swaps represent a mutual agreement to exchange interest rate payments; one party pays fixed rate and the other pays a floating rate. For net interest income protection, Doral Financial typically pays a fixed rate of interest and receives a floating rate of interest.

     Market Value of Equity Hedging Strategies. Due to the composition of Doral Financial’s assets and liabilities, the Company has exposure to rising rates. The Company measures the market value of all rate sensitive assets and liabilities; the difference is what is termed market value of equity. The Company measures how this market value of equity fluctuates with different rate scenarios. Currently, the Company’s

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market value of equity drops when rates rise which is consistent with liability sensitive institutions. Management uses duration matching strategies to manage the fluctuations of market value of equity within the long-term targets established by the Board of Directors of the Company.

     Duration Risk. In order to bring duration measures within the long-term target of the Company, management may use a combination of internal liabilities management techniques and derivative instruments. Doral Financial primarily uses the following derivatives for such purposes:

• Interest rate swaps

• Swaptions

• Eurodollar futures

• Treasury futures

     Doral Financial also enters into forward commitments to sell mortgage-backed securities by setting the price in advance to protect the Company against increases in interest rates and concurrent reductions in the price of mortgage-backed securities.

     Convexity Risk. Convexity is a measure of how much duration changes as interest rates change. For Doral Financial, convexity risk primarily results from mortgage prepayment risk. In order to bring convexity measures within the long-term targets of the Company, management primarily uses a combination of internal balance sheet management and the following derivatives:

• Swaptions

• Call and put options on eurodollar futures

• Put and call options on agency mortgage-backed securities

• Put and call options on Treasury futures

     Call options represent the right to buy a specified security at a specified price in the future. Their value generally increases as interest rates fall. Put options represent the right to sell a specified security in the future. Their value generally increases as interest rates rise. These instruments enable the Company to hedge against adverse changes in market value of equity due to unexpected movements in interest rates, taking into consideration the duration and interest rate sensitivity of the Company’s loan and investment portfolio.

Doral Financial’s Risk Profile

     Doral Financial’s goal is to manage market and interest rate risk within targeted levels established and is periodically reviewed by the Board of Directors. Management manages the interest risk profile of the Company 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 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 swaps and term funding. 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

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active risk management strategies involving the use of derivatives, including the forward sale of mortgage-backed securities.

     The tables below show 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 December 31, 2007 and 2006.

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

	Market Value			Net Interest
As of December 31, 2006	of Equity Risk			Income Risk(1)
+ 100 BPS		(24.0	)%		5.3	%
– 100 BPS		7.8	%		(7.5	)%

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

     The reduced earnings volatility in both the sensitivity measures from December 31, 2006 to December 31, 2007, is due primarily to the active management of the balance sheet. During the third quarter of 2007, the Company sold $1.9 billion in available for sale investment securities and unwound the associated wholesale funding. During the fourth quarter of 2007, the Company sold $437.5 million in long dated U.S. Treasury securities and reinvested the proceeds in shorter term instruments. The combination of these actions with the reduction in leverage due to the repayment of the $625.0 million senior notes on July 20, 2007 from the proceeds of the recapitalization transaction has helped reduce interest rate risk The recapitalization also had the effect of reducing a substantial amount of floating rate debt which played a major part in the sensitivity of the net interest income to movements in interest rates.

     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 December 31, 2007 and December 31, 2006.

(In thousands)	As of December 31, 2007					As of December 31, 2006
	Change in Fair			Change in		Change in Fair			Change in
	Value of			Fair Value of		Value of			Fair Value of
	Available for			Held to		Available for			Held to
Change in yield	Sale Securities			Maturity		Sale Securities			Maturity
curve (basis points)	and FHLB Stock			Securities		and FHLB Stock			Securities
+200	$	(223,737	)	$		$	(200,632	)	$	(329,435	)
+100		(102,851	)		—		(97,882	)		(152,734	)
+50		(49,022	)		—		(47,546	)		(73,206	)
Base		—			—		—			—
–50		39,355			—		43,007			64,452
–100		70,755			—		78,189			121,483
–200		129,464			—		131,641			219,065

     Doral Financial’s balance sheet includes a $1.7 billion portfolio of long-term investment securities with fixed interest rates, mostly mortgage-backed and U.S. Treasury securities. 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.

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     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 or 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 the Company’s liabilities, the duration of the Company’s callable liabilities would shorten and the Company would have to refinance its 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 refinancings increased (this tendency is referred to as negative convexity) and the Company would have to reinvest principal prepayments at lower rates. Conversely, the duration of the Company’s callable liabilities would extend, as lenders would not exercise such options, and the Company would be locked into higher borrowing rates. The Company, with the help of financial advisers, is examining alternatives to restructure its balance sheet in order to enhance the Company’s future earnings potential and to reduce the high level of interest risk and volatility inherent in its balance sheet. The Company sold $2.4 billion in available for sale investment securities during the second half of 2007 as part of its efforts to reduce its interest rate risk.

     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 caps agreements to manage its interest rate exposure. Interest rate caps 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 December 31, 2007.

Table V — Interest Rate Caps

(Dollars in thousands)

NOTIONAL	MATURITY	ENTITLED PAYMENT	PREMIUM		FAIR
AMOUNT	DATE	CONDITIONS	PAID		VALUE
$25,000	September, 2010	1-month LIBOR at 5.00%	$	205	$	75
$15,000	September, 2011	1-month LIBOR at 5.50%	$	134	$	73
$15,000	September, 2012	1-month LIBOR at 6.00%	$	143	$	93
$35,000	October, 2010	1-month LIBOR at 5.00%	$	199	$	99
$15,000	October, 2011	1-month LIBOR at 5.00%	$	172	$	110
$15,000	October, 2012	1-month LIBOR at 5.50%	$	182	$	130
$50,000	November, 2012	1-month LIBOR at 6.50%	$	228	$	179
$50,000	November, 2012	1-month LIBOR at 5.50%	$	545	$	439
$50,000	November, 2012	1-month LIBOR at 6.00%	$	350	$	283

     The Company is subject to various interest rate swaps agreements to manage its interest rate exposure. 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. In the future, the Company will seek hedge accounting treatment for these transactions in order to minimize mark-to-market volatility. The following table summarizes the Company’s interest rate swaps outstanding at December 31, 2007.

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Table W — Interest Rate Swaps

(Dollars in thousands)

NOTIONAL	MATURITY				FLOATING RATE	FAIR
AMOUNT	DATE	FIXED RATE			CALCULATION	VALUE
CASH FLOW HEDGE
$15,000	September, 2008		4.70	%	1-month LIBOR minus 0.03%	$	(63	)
$10,000	September, 2009		4.57	%	1-month LIBOR plus 0.02%	$	(138	)
$8,000	September, 2010		4.62	%	1-month LIBOR plus 0.02%	$	(171	)
$3,000	September, 2011		4.69	%	1-month LIBOR plus 0.02%	$	(79	)
$15,000	October, 2008		4.44	%	1-month LIBOR plus 0.06%	$	(39	)
$10,000	October, 2009		4.30	%	1-month LIBOR plus 0.04%	$	(97	)
$8,000	October, 2010		4.37	%	1-month LIBOR plus 0.02%	$	(123	)
$6,000	October, 2011		4.51	%	1-month LIBOR plus 0.05%	$	(114	)
$5,000	October, 2012		4.62	%	1-month LIBOR plus 0.05%	$	(113	)
OTHER DERIVATIVES
$20,000	November, 2008		4.43	%	1-month LIBOR plus 0.03%	$	(67	)
$20,000	November, 2009		4.35	%	1-month LIBOR plus 0.02%	$	(227	)
$15,000	November, 2010		4.42	%	1-month LIBOR	$	(258	)
$15,000	November, 2011		4.55	%	1-month LIBOR plus 0.02%	$	(318	)
$45,000	November, 2012		4.62	%	1-month LIBOR plus 0.02%	$	(1,081	)

     Freestanding Derivatives. Doral Financial uses derivatives to manage its market risk and generally accounts for them 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 freestanding derivatives totaled $414.0 million and $5.1 billion, respectively, as of December 31, 2007 and 2006. 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 smaller 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 amounts for swaps treated under hedge accounting totaled $80.0 million as of December 31, 2007. There were no derivatives treated under hedge accounting as of December 31, 2006. Typically the Company uses interest rate swaps to convert floating rate FHLB advances to fixed rate by entering into pay fixed receive floating swaps. In these cases the Company matches all of the terms in the FHLB advance to the floating leg in the interest rate swap. Since both transactions are symmetrically opposite the effectiveness of the hedging relationship is high.

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     The following table summarizes the total derivatives positions at December 31, 2007 and their different designations.

(In thousands)	Notional Amount		Fair Value
Cash flow Hedges
Interest rate swaps	$	80,000	$	(937	)
Other derivatives
Interest rate swaps		115,000		(1,951	)
Interest rate caps		270,000		1,481
Forward contracts		29,000		(6	)
		414,000		(476	)
	$	494,000	$	(1,413	)

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

Table X — Fair Value Reconciliation

	Year ended
(In thousands)	December 31, 2007
Fair value of contracts outstanding at the beginning of the year	$	26,282
Contracts realized or otherwise settled during the year		(12,703	)
Fair value of new contracts entered into during the year		14,861
Changes in fair values during the year		(28,916	)
Fair value of contracts outstanding at the end of the year	$	(476	)

TABLE Y — Source of Fair Value

(In thousands)	Payment Due by Period
	Maturity									Maturity
	less than			Maturity			Maturity			in excess of
As of December 31, 2007	1 Year			1-3 Years			3-5 Years			5 Years		Total Fair Value
Source of Fair Value
Prices actively quoted	$	(6	)	$	—		$	—		$	—	$	(6	)
Prices provided by other external sources		(67	)		(311	)		(92	)		—		(470	)
	$	(73	)	$	(311	)	$	(92	)	$	—	$	(476	)

     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 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 also 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.

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Table Z— Derivative Counterparty Credit Exposure

(Dollars in thousands)	December 31, 2007
													Weighted Average
	Number of				Total Exposure		Negative						Contractual Maturity
Rating(1)	Counterparties(2)		Notional		At Fair Value		Fair 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
Total derivatives		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.

(Dollars in thousands)	December 31, 2006
												Weighted Average
	Number of				Total Exposure		Negative					Contractual Maturity
Rating(1)	Counterparties(2)		Notional		At Fair Value(3)		Fair Values			Total Fair Value		(in years)
AA-		2	$	1,428,649	$	15,763	$	(2,080	)	$	13,683		1.15
A+		3		1,202,764		3,938		(2,262	)		1,676		0.30
Subtotal		5		2,631,413	$	19,701	$	(4,342	)	$	15,359		0.76
Other derivatives(4)				2,500,000
Total Derivatives			$	5,131,413

(1)	Based on the S&P Long-Term Issuer Credit Ratings.
(2)	Based on legal entities. Affiliated legal entities are reported separately.
(3)	For each counterparty, this amount includes derivatives with a positive fair value including the related accrued interest receivable/payable (net).
(4)	For the year ended December 31, 2006, the Company recognized a realized gain of $2.5 million and an unrealized loss of $1.0 million from a derivative resulting from certain gain-sharing agreements created in connection with certain mortgage loan sales. The Company has the right to share, on a limited basis, the gains realized by the buyers of such loans within specified time periods from subsequent sales or securitizations.

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. Loans secured by income-producing residential and commercial properties involve greater credit risk because they are larger in size and more risk is concentrated in a single borrower. The properties securing these loans are also more difficult to liquidate in foreclosure.

     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. Loan-to-value ratios for residential mortgage loans, excluding FHA/VA loans, generally do not exceed 80% (100% for certain qualifying home purchase transactions), unless private mortgage insurance is obtained.

     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 generally discontinued the practice of selling mortgage loans with recourse, except for recourse related to early payment defaults.

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     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 in 2006 and a further slowdown in 2007, as a result of, among other things, high levels of oil prices, the depreciation of the dollar and the deceleration of public investment due to the Commonwealth’s current fiscal situation. Doral Financial expects that the economy will not recover during 2008, but rather continue to deteriorate. The macroeconomics in Puerto Rico has and is expected to continue to affect the Company’s credit quality and delinquency trends.

     Doral Financial has historically provided land acquisition, development, and construction financing to developers for residential housing projects. 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.

     During the year ended December 31, 2007, Doral Financial entered into $414.3 million of commitments to disburse construction loans, compared to $481.9 million for 2006. The following table presents further information on the Company’s construction portfolio.

(In thousands)	As of December 31
	2007			2006
Construction loans(1)	$	588,174		$	817,352
Total undisbursed funds under existing commitments	$	139,172		$	250,422
Construction loans, past due more than 90 days	$	165,797		$	75,868
Construction loans, classified as substandard, but not more than 90 days in arrears		114,426			65,270
Total non-performing construction loans	$	280,223		$	141,138
Net charge offs — Construction loans	$	6,060		$	826
Allowance for loan losses — Construction loans	$	56,776		$	37,829
Non-performing construction loans to total construction loans		47.64	%		17.27	%
Allowance for loan losses — construction loans to total construction loans		9.65	%		4.63	%
Net charge-offs to total construction loans		1.03	%		0.10	%

⁽¹⁾ Includes $422.4 million and $680.6 million of construction loans for residential housing projects as of December 31, 2007 and 2006, respectively. Also includes $165.8 million and $136.8 million of construction loans for commercial, condominiums and multi-family projects as of December 31, 2007 and 2006, respectively.

     The construction loan portfolio decreased by 28% during 2007 as a result of the incorporation of stricter standards during the second half of the year and the regular portfolio run-off. The construction loan portfolio is 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. The construction industry in Puerto Rico has been greatly affected by the negative macro-economic trends. Specifically, it has been adversely affected by a slowdown in the demand for new housing. During 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. Non-performing construction loans increased by $139.1 million for 2007 compared to 2006 period. At December 31, 2007 and 2006, 48% and 17% of the loans within the construction portfolio were considered non-performing loans, respectively. Although the Company is taking several 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.

     As a result of the negative outlook on the Puerto Rico economy and especially how it affects the construction industry, the Company has ceased financing new construction of single family residential and commercial real estate

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projects, including for land development, in Puerto Rico. As a result, management expects that the amount of loans and exposure to the construction industry will continue to decrease throughout 2008 and subsequent years.

     The residential mortgage portfolio increased by $1.6 billion in 2007. This increase is principally related to the transfer of $1.4 billion of loans from the mortgage loans held for sale portfolio to the loans receivable portfolio during 2007.

     The residential mortgage portfolio is affected by the deterioration in the Puerto Rico economy but to a lesser extent than the construction portfolio. Doral Financial does not hold a significant amount of adjustable interest rate, negative amortization, or other exotic credit facilities 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 the exposure to loss upon default.

Loss Mitigation Strategies

     As a result of the increase in non-performing loans during 2007, the Company developed several initiatives to mitigate credit losses. Mitigation strategies were rooted on the transfer of the collection function to the Risk Management organization reporting directly to the Chief Risk Officer.

     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.

     As part of its credit losses mitigation strategy, the Company has made a significant effort to speed the residential mortgage foreclosure process. 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 property (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.

Non-performing Assets and Allowance for Loan and Lease Losses

     Non-performing assets consist of loans on a non-accrual basis and other real estate owned. Loans are placed on a non-accrual basis after they are delinquent for more than 90 days, or if the loan is classified substandard. 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 the principal and interest income become current and collectibility is reasonably assured. For the year ended December 31, 2007, 2006 and 2005, Doral Financial would have recognized $22.8 million, $7.2 million and $9.8 million, respectively, in additional interest income had all delinquent loans been accounted for on an accrual basis.

     The increase in non-performing loans during 2007 was driven by the deterioration of economic conditions in Puerto Rico. Non-performing residential mortgage loans increased by $88.8 million or 51%. The delinquency in the residential mortgage portfolio is affected by Doral Financial’s recourse obligations. The portfolio includes loans that, at some point were repurchased pursuant to recourse obligations and, as a result, have a higher credit risk.

     The increase in the delinquency of construction loans portfolio was mainly driven by delays in the underlying projects. These were partially due to delays in construction and the process of obtaining

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governmental permits; but primarily by weaker sales of the housing units. During 2007, the Company noticed a marked reduction in the demand for new housing. The increase in construction non-performing loans included the downgrade of 2 key relationships with an aggregate $58.7 million in unpaid balance during December 2007. The facilities, in both cases, were granted for projects that experienced worse than expected demand, and were therefore, reduced in size.

     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.

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Table AA — Non-performing Assets

	As of December 31,
(Dollars in thousands)	2007			2006			2005			2004			2003
Non-accrual loans:
Residential mortgage loans — held for sale(1)	$	4,603		$	62,466		$	171,298		$	14,537		$	28,206
Residential mortgage loans — held for sale past due 90 days and still accruing(1)(2)		—			—			—			85,075			97,816
Residential mortgage loans — held for investment(3)		256,949			110,332			3,904			3,644			4,691
Total non-performing residential mortgage loans		261,552			172,798			175,202			103,256			130,713
Other lending activities:
Construction and commercial loans, classified as substandard, but not more than 90 days in arrears		138,877			68,770			—			—			—
Construction loans		165,797			75,868			9,042			16,639			4,404
Commercial real estate loans		86,590			47,162			8,594			4,786			2,582
Commercial real estate loans — held for sale		—			3,384			2,923			3,749			2,584
Consumer loans		4,303			2,813			1,932			1,457			1,681
Commercial non-real estate loans		3,040			5,571			1,056			512			586
Lease financing receivable		1,032			1,075			158			—			—
Land loans		731			—			—			—			—
Total non-performing other lending activities		400,370			204,643			23,705			27,143			11,837
Construction loans past due 90 days and still accruing		—			—			170			128			—
Repossessed Units		419			577			—			—			—
OREO		38,154			33,197			17,662			20,072			19,253
Total NPAs of Doral Financial (consolidated)	$	700,495		$	411,215		$	216,739		$	150,599		$	161,803
Total NPAs as a percentage of the loans portfolio, net and OREO		13.42	%		8.13	%		2.77	%		2.26	%		3.13	%
Total NPAs of Doral Financial as a percentage of consolidated total assets		7.53	%		3.47	%		1.25	%		0.84	%		1.38	%
Total non-performing loans to total loans (excluding GNMA defaulted loans)		12.39	%		7.36	%		2.57	%		1.97	%		2.75	%
Ratio of allowance for loan and lease losses to total non-performing loans (excluding non-performing residential mortgage loan and other non-performing loans held for sale) at end of period(4)(5)		25.89	%		30.73	%		162.18	%		84.63	%		146.80	%

(1)	Does not include approximately $126.0 million, $100.3 million, $74.0 million and $71.2 million of GNMA defaulted loans (for which the Company has the option to buy-back, but not an obligation, from the pools serviced), included as part of the loans held for sale portfolio as of December 31, 2007, 2006, 2005 and 2004, respectively. Also excludes $10.2 million, of 90-days-past-due FHA/VA loans as of December 31, 2004, which were not considered non-performing assets by Doral Financial because the principal balance of these loans is insured or guaranteed under applicable FHA and VA programs and interest is, in most cases, fully recovered in foreclosure proceedings. Under the new estimates, which were modified during the first quarter of 2005, all FHA/VA loans 90 days past due are placed in non-accrual and therefore considered non-performing assets.
(2)	During the first quarter of 2005, the Company changed its estimates for non-accrual loans as a result of conforming the non-accrual policies of its mortgage banking units to that of its banking subsidiaries, pursuant to which mortgage loans held for sale are placed on a non-accrual basis after they are delinquent for more than 90 days. Prior to 2005, mortgage loans held for sale by Doral Financial’s mortgage banking units were placed on a non-accrual status if they had been delinquent for more than 180 days to the extent that the loan-to-value ratio indicated concern as to the collectibility of the loan. From the second quarter of 2002 until 2004, loans held for sale by the Company’s mortgage banking units were placed on a non-accrual basis after they were delinquent for more than 180 days to the extent that the loan-to-value ratio indicated that there was a concern as to ultimate collectibility of the loan.
(3)	During 2007 and 2006, the Company reclassified $1.4 billion and $961.5 million, respectively, from its loans held for sale portfolio to its loans receivable portfolio.
(4)	Refer to non-performing asset and allowance for loan and lease losses above for additional information regarding the Company’s methodology for assessing the adequacy of the allowance for loan and lease losses.
(5)	The proportion of the allowance for loan losses allocated to the residential mortgage loans portfolio historically has been lower than in other lending portfolios. A substantial part of the amounts due on delinquent residential mortgage loans has been historically recovered through

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sale of the property after foreclosure or negotiated settlements with borrowers. For purposes of comparability with the industry, the ratio of allowance for loan and lease losses to total non-performing loans excludes the allowance allocated to residential mortgage loans from the numerator and the total residential mortgage loans portfolio and other non-performing loans held for sale from the denominator.

     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.

     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 years indicated.

Table BB — Allowance for Loan and Lease Losses

	As of December 31,
(Dollars in thousands)	2007			2006			2005			2004			2003
Allowance for loan and lease losses:
Balance at beginning of year	$	67,233		$	35,044		$	20,881		$	14,919		$	7,364
Provision (recovery) for loan and lease losses:
Construction loans		25,240			17,907			13,212			5,364			5,530
Residential mortgage loans		17,127			4,298			368			332			511
Commercial real estate loans		11,065			8,703			2,557			1,834			955
Consumer loans — secured by mortgage		—			—			—			(4	)		4
Consumer loans		10,510			5,810			4,729			2,060			3,141
Lease financing		464			1,022			788			150			—
Commercial non-real estate loans		2,642			1,839			775			933			634
Land secured loans		11,166			250			(60	)		(285	)		804
Total provision for loan and lease losses		78,214			39,829			22,369			10,384			11,579
Charge-offs:
Construction loans		(6,060	)		(1,050	)		(4,938	)		(831	)		—
Residential mortgage loans		(1,444	)		—			(223	)		(20	)		(13	)
Commercial real estate loans		(2,379	)		(965	)		(29	)		—			(699	)
Consumer loans		(7,931	)		(4,612	)		(2,744	)		(2,521	)		(2,956	)
Commercial non-real estate loans		(2,542	)		(1,665	)		(827	)		(723	)		(417	)
Lease financing receivable		(1,160	)
Land secured loans		—			(170	)		—			—			—
Total charge-offs		(21,516	)		(8,462	)		(8,761	)		(4,095	)		(4,085	)
Recoveries:
Construction loans		—			224			—			100			—
Commercial real estate loans		7			14			173			—			2
Consumer loans		454			260			255			202			234
Commercial non-real estate loans		102			324			219			45			8
Leasing financing receivable		239			—			—			—			—
Total recoveries		802			822			647			347			244
Net charge-offs		(20,714	)		(7,640	)		(8,114	)		(3,748	)		(3,841	)
Other		—			—			(92	)		(674	)		(183	)
Balance at end of year	$	124,733		$	67,233		$	35,044		$	20,881		$	14,919
Allowance for loan and lease losses as a percentage of loans receivable outstanding, at the end of year (1)(2)		2.47	%		1.94	%		1.39	%		1.18	%		1.05	%
Provision for loan losses to net charge- offs on an annualized basis		377.60	%		521.31	%		275.68	%		298.56	%		301.46	%
Net charge-offs to average loans receivable outstanding on an annualized basis		0.50	%		0.23	%		0.39	%		0.23	%		0.31	%

(1)	For purpose of this ratio, the denominator includes loans secured by real estate of $448.0 million and $200.1 million as of December 31, 2005 and 2004, respectively, resulting from mortgage transfers from local institutions that were recharacterized as commercial loans for accounting and financial reporting purposes and for which no allowance for loan losses was provided.
(2)	During 2007 and 2006, the Company transferred $1.4 billion and $961.5 million from loans held for sale to the loans receivable portfolio. The loans transferred were recognized in the Company’s loans receivable portfolio discounted at its market value.

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:

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Table CC — Allocation of Allowance for Loan and Lease Losses

	2007					2006					2005					2004					2003
(Dollars in thousands)	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Loans receivable:
Construction	$	56,766		12	%	$	37,586		24	%	$	20,748		31	%	$	12,510		35	%	$	7,877		42	%
Residential mortgage loans		21,064		66	%		5,381		52	%		1,063		20	%		974		23	%		1,336		36	%
Commercial — secured by real estate		23,399		15	%		14,706		16	%		6,798		35	%		4,097		32	%		2,263		10	%
Consumer — secured by mortgage		—		0	%		—		0	%		—		0	%		—		0	%		4		0	%
Consumer — other		7,161		1	%		4,128		1	%		4,272		3	%		2,032		4	%		2,291		5	%
Lease financing receivable		1,503		1	%		1,960		1	%		938		2	%		150		0	%		—		0	%
Commercial non-real estate		3,068		3	%		2,866		5	%		766		6	%		599		2	%		344		2	%
Loans on savings deposits		—		0	%		—		0	%		—		1	%		—		1	%		—		0	%
Land secured		11,772		2	%		606		1	%		459		2	%		519		3	%		804		5	%
Total	$	124,733		100	%	$	67,233		100	%	$	35,044		100	%	$	20,881		100	%	$	14,919		100	%

     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 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. Updated appraisals are obtained when the Company determines that loans are impaired. Should the appraisal show a deficiency, the Company records a specific reserve for the underlying loan.

     During 2007, the Company requested and received several appraisals of real estate properties used as collateral on several of the portfolio’s construction and commercial loans. In general, the appraisals disclosed values lower than the values previously disclosed by earlier appraisals. The loan loss provision for 2007 includes the incorporation of such appraisals in the calculation of the specific reserves as well as an estimate of the depreciation in value of the real estate collateral in the rest of the portfolios’ impaired collateral dependent loans. The majority of the decrease in collateral values occurred during the fourth quarter of 2007 as the supply of housing units in construction is perceived to be greater than the demand. This decline had a major impact on the provision for the quarter ended December 31, 2007 as collateral values of some of the loan within the construction portfolio fell sharply resulting in the need for additional reserves.

     During the year ended December 31, 2007, Doral Financial evaluated a total of approximately $297.6 million of construction and commercial loans for impairment for which there are specific allowances amounting to approximately $54.0 million.

     Doral Financial records an allowance for small-balance homogeneous loans (including residential mortgages, consumer, commercial and construction loans under $2.0 million) on an aggregated 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.

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     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 sufficient, future additions to the allowance may be necessary if economic conditions change substantially from the expectations used by Doral Financial in determining the allowance for loan and lease losses.

Operational Risk

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

Overview of Operational Risk Management

     Doral Financial is in the process of instituting an operational risk management program which will encompass the use of a more structured approach for the identification, assessment, measurement, mitigation, monitoring and reporting of events that may have an impact on Doral Financial’s exposure to operational risk. The proposed framework defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people, systems, or from external events.

     On July 24, 2007, Doral Financial announced the appointment of 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 will coordinate with the Company’s Internal Audit group on 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 this Annual Report on Form 10-K.

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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. In its monthly Index of Economic Activity, the Puerto Rico Planning Board registered a 0.22% decrease on a monthly basis in June 2007. 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 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 this report.

     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.

MISCELLANEOUS

     Changes in Accounting Standards Adopted in the 2007 Financial Statements

Accounting for Servicing of Financial Assets. In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”). This statement amends SFAS 140 with respect to the accounting for separately recognized servicing assets and liabilities. This statement: (1) requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract; (2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; (3) permits en entity to choose between an amortization method or a fair value measure for subsequent recognition for each class of separately recognized servicing assets and servicing liabilities; (4) at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position, and additional disclosures. SFAS 156 is effective as of the beginning of the Company’s first fiscal year that begins after September 16, 2006.

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Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year.

     The adoption of this statement on January 1, 2007 did not have a material effect on the Company’s Consolidated Financial Statements. The Company, upon the valuation of the MSRs at fair value in accordance with SFAS No. 156, recorded a cumulative effect adjustment to retained earnings (net of tax) of $926,000 as of the beginning of the fiscal year for the difference between the fair value and the carrying amount to bring the MSR balance as of December 31, 2006 to fair value.

     Accounting for Uncertainty in Income Taxes. In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109” (“FIN 48”), which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). Under the Interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts, but without considering time values. FIN 48 is applicable to all uncertain positions for taxes accounted for under SFAS 109, “Accounting for Income Taxes,” and is not intended to be applied by analogy to other taxes, such as sales taxes, value-added taxes, or property taxes. Significant elements of the new guidance include the following:

• Recognition: A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits.

• Measurement: The tax benefit of a qualifying position is the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information.

• Change in judgment: The assessment of the recognition threshold and the measurement of the associated tax benefit might change as new information becomes available. Unrecognized tax benefits should be recognized in the period that the position reaches the recognition threshold, which might occur prior to absolute finality of the matter. Similarly, recognized tax benefits should be derecognized in the period in which the position falls below the threshold.

• Interest/Penalties: A taxpayer is required to accrue interest and penalties that, under relevant tax law, the taxpayer would be regarded as having incurred. Accordingly, under FIN 48, interest would start to accrue in the period that it would begin accruing under the relevant tax law, and penalties should be accrued in the first period for which a position is taken (or is expected to be taken) on a tax return that would give rise to the penalty. How a company classifies interest and penalties in the income statement is an accounting policy decision. The company should disclose that policy and the amounts recognized.

• Disclosures: FIN 48 requires qualitative and quantitative disclosures, including discussion of reasonably possible changes that might occur in the recognized tax benefits over the next 12 months; a description of open tax years by major jurisdictions; and a roll-forward of all unrecognized tax benefits, presented as a reconciliation of the beginning and ending balances of the unrecognized tax benefits on a worldwide aggregated basis.

After considering other applicable guidance (such as the guidance that the Emerging Issues Task Force specifies in Issue 93-7, “Uncertainties Related to Income Taxes in a Purchase Business Combination”), a company should record the change in net assets that results from the application of FIN 48 as an adjustment to retained earnings.

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The Company adopted FIN 48 effective January 1, 2007. As a result of the adoption, the Company recorded an adjustment to retained earnings amounting to $2.4 million. The Company classifies all interest and penalties related to tax uncertainties as income tax expense. For the period ended December 31, 2007, the Company recognized approximately $1.4 million in interest and penalties.

Taxes Collected from Customers and Remitted to Governmental Authorities. In June 2006, the Emerging Issues Tax Force (“EITF”) reached a consensus on EITF Issue No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06-03”). EITF 06-03 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The provisions of EITF 06-03 will be effective for the Company as of January 1, 2007. The adoption of EITF 06-03 did not have a material impact on the Company’s consolidated financial statements.

Accounting for Certain Hybrid Financial Instruments. On February 16, 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140” (“SFAS 155”), which resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets (“DIG Issue D1”). SFAS 155 amends SFAS 133 to simplify the accounting for certain derivatives embedded in other financial instruments (a hybrid financial instrument) by permitting fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise required bifurcation, provided that the entire hybrid financial instrument is accounted for on a fair value basis. SFAS 155 also establishes the requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, which replaces the interim guidance in DIG Issue D1. SFAS 155 amends SFAS 140 to allow a qualifying special-purpose entity to hold a derivative financial instrument that pertains to beneficial interests other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements for any period of the fiscal year. The adoption of the provision of SFAS 155 did not have material impact on the Company’s financial statements.

Noncontrolling Interest in Consolidated Financial Statements. In December 2007, the FASB issued FAS 160, “Noncontrolling Interest in Consolidated Financial Statements an amended of ARB No. 51”, which establish accounting and reporting standards for the noncontrolling interest in a subsidiary

Recently Issued Accounting Standards Not Yet Adopted

Noncontrolling Interests in Consolidated Financial Statements. On December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations.

The significant changes upon adoption of SFAS 160 are the definition, classification and measurement of Noncontrolling Interest (previously referred to as minority interest). SFAS 160 define Noncontrolling interest as the portion of equity (net assets) in a subsidiary not attributable to a parent. Further establish 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.

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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 fist quarter of 2009. Earlier application in not permitted. The Company is currently evaluating the effect, if any, of the adoption of this Statement on its financial statements, commencing on January 1, 2009.

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

SFAS 141 (revised) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity at the acquisition date, measured at their fair values as of that date. In addition, this statement expands and improves the information reported about assets acquired and liabilities assumed arising from contingencies. Contingencies arising from a business combination should be recognized as of the acquisition date, 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 in not permitted. The effective date of this Statement is the same as that of the related SFAS Statement No. 160, Noncontrolling Interest in Consolidated Financial Statements. The Company is currently evaluating the effect, if any, of the adoption of this Statement on its financial statements, commencing on January 1, 2009.

Fair Value Measurements. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements.

The definition of fair value retains the exchange price notion in earlier definitions of fair value. This Statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the principal (or most advantageous) market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. Therefore, the definition focuses on the price that would be received to sell the asset or paid to transfer the liability at the measurement date (an exit price), not the price that would be paid to acquire the asset or received to assume the liability at the measurement date (an entry price).

This Statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, this Statement establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The notion of unobservable inputs is intended to allow for situations in which there is little, if any, market activity for the asset or liability at the measurement date. In those situations, the reporting entity need not undertake all possible efforts to obtain information about market participant assumptions. However, the reporting entity must not ignore information about market participant assumptions that is reasonably available without undue cost and effort.

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This Statement expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. The disclosures focus on the inputs used to measure fair value and for recurring fair value measurements using significant unobservable inputs (within Level 3 of the fair value hierarchy), the effect of the measurements on earnings (or changes in net assets) for the period. This Statement encourages entities to combine the fair value information disclosed under this Statement with the fair value information disclosed under other accounting pronouncements, including FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” where practicable.

This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The Company is currently evaluating the effect, if any, of the adoption of this Statement on its financial statements, commencing on January 1, 2008.

Issuer’s Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument. In November 2006, the FASB ratified the consensus reached by the EITF on EITF Issue No. 06-7, “Issuer’s Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities” (“EITF 06-07”). The consensus provides that a previously bifurcated conversion option in a convertible debt instrument for which the embedded conversion option no longer meets the bifurcation criteria in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), should be reclassified (at its fair value on the date of reclassification) to stockholders’ equity. Any debt discount recognized when the conversion option was bifurcated from the convertible debt instrument should continue to be amortized. EITF 06-07 should be applied to all previously bifurcated conversion options in convertible debt instruments that no longer meet the bifurcation criteria in SFAS 133, in interim or annual periods beginning after December 15, 2006. As of December 31, 2007, the Company did not have any convertible debt instruments.

SFAS No. 159 “Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.” In February 2007, the FASB issued SFAS No. 159, which provides companies with an option to report selected financial assets and liabilities at fair value. The statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The new statement does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in FASB Statements No. 157, Fair Value Measurements, and No. 107, Disclosures about Fair Value of Financial Instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157. Management will be evaluating the impact that this recently issued accounting standard may have on its consolidated financial statements.

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 of Financial Assets and 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 Company will be evaluating the effect, if any, of the adoption of this recently issued accounting bulletin on its consolidated financial statements commencing on January 1, 2008.

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CEO and CFO Certifications

     Doral Financial’s Chief Executive Officer and Chief Financial Officer have filed with the Securities and Exchange Commission the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K.

     In addition, in 2007, Doral Financial’s Chief Executive Officer certified to the New York Stock Exchange that he was not aware of any violation by the Company of the NYSE corporate governance listing standards.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

     The information required by this Item is incorporated by reference to the information included under the subcaption “Risk Management” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in this Form 10-K.

Item 8. Financial Statements and Supplementary Data.

     The consolidated financial statements of Doral Financial, together with the report thereon of PricewaterhouseCoopers LLP, Doral Financial’s independent registered public accounting firm, are included herein beginning on page F-1 of this Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

     None.

Item 9A. Controls and Procedures.

Disclosure Controls 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 of December 31, 2007. 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.

     Based on the identification of the material weaknesses in the Company’s internal control over financial reporting described below, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2007.

Management’s Report on Internal Control Over Financial Reporting

     The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, and for the assessment of the effectiveness of internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the

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reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”) and includes controls over the preparation of financial statements to comply with the reporting requirements of Section 112 of FDICIA.

     A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     In making its assessment, management, including the Chief Executive Officer and Chief Financial Officer, used the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

     A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility, that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. As of December 31, 2007, Doral Financial’s management has identified the following material weaknesses in the Company’s internal control over financial reporting.

1. The Company did not design and maintain effective controls, including monitoring controls, over its financial close and reporting process. Specifically, the following material weaknesses were identified:

• The Company did not design effective controls to ensure the systematic and accurate execution of account - level analyses and reconciliations.

• The Company did not maintain or adequately disseminate general accounting policies and procedures in order to have consistent account level analyses and reconciliations throughout the organization.

• The Company did not maintain effective controls for the communication of information regarding non-recurring transactions from the business units to the accounting and financial reporting units.

     These material weaknesses did not result in any material audit adjustments to the Company’s 2007 consolidated financial statements but could result in misstatements of any of the Company’s financial statements accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.

2. The Company did not maintain effective controls over the completeness and valuation for its allowance for loan and lease losses and the related provision for loan and lease losses accounts. Specifically, the Company had not fully implemented effective controls over the analysis of impaired loans in order to determine that probable losses were completely and accurately estimated in accordance with GAAP.

     The material weakness described above relating to the allowance for loan and leases losses did not result in any audit adjustments to the Company’s 2007 consolidated financial statements but could result in misstatements of the Company’s financial statement accounts and disclosures, relating to the allowance for

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loan and lease losses and the related provision for loan and lease losses, that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.

     As a result of the existence of the material weaknesses discussed above as of December 31, 2007, management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the COSO.

     The effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 has been audited by Pricewaterhouse Coopers LLP, an independent registered public accounting firm, as stated in their report which appears under Item 8 of this Annual Report on Form 10-K.

Remediation of Material Weaknesses

     In connection with the process of becoming current with the SEC filings during 2007, and re-filing the regulatory reports for each of the four quarters of 2004, 2003, 2002, and 2001, Doral Financial was not able to prepare reporting packages for the review by management and the Board of Directors until the second half of 2007.

     Doral Financial is actively engaged in the implementation of remediation efforts to improve its internal control over financial reporting and disclosure controls and procedures. With the completion of its delayed financial statements and filings with the SEC during 2007, the Company was able to devote its resources to enhancing its internal control over financial reporting, including the monthly closings of the books with financial reports to management and the Board of Directors.

     Notwithstanding the material weakness described herein, the Company believes that its consolidated financial statements presented in this Form 10-K fairly present, in all material respects, the Company’s financial position, results of operations and cash flows for all periods presented.

     Remediation Efforts of Material Weaknesses that Existed as of December 31, 2006

     The following paragraphs describe the ongoing changes to Doral Financial’s internal control over financial reporting subsequent to December 31, 2006 related to the Company’s remediation efforts of the material weaknesses that existed as of December 31, 2006, that affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

1. While Doral Financial has not fully remediated the weaknesses related to its controls over the financial close and reporting process, Doral Financial has improved the internal controls over its financial close and reporting process. Specifically, Doral Financial transitioned from a quarterly closing process to a monthly closing process, which has improved the quality of the closing process. Further, this allowed management to report the Company’s financial results to the Board of Directors on a recurring basis. In addition, management strengthened the overall control environment by performing the following:

a.

The Principal Accounting Officer changed the role of the Corporate Accounting department to a Controllership function. The responsibility over the day to day accounting activities was assigned to the business units while the Controllership department monitors the general ledger accounts and verifies that transactions are recorded in accordance with GAAP and the Company’s accounting policies. This contributed to the adequate distribution of accounting and reporting tasks by functionality and expertise.

b.

Subsequent to becoming current with the SEC filings, the Company began preparing condensed monthly reporting packages. These were disseminated by the Chief Financial Officer to the top management team and the Board of Directors in order to discuss and analyze the financial results, and provide explanations on significant variances.

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c.	The technical accounting and process enhancement team was responsible for the preparation of complex accounting analyses and estimates. This team, which was created during 2006, also provided oversight over the accounting treatment of non-recurring transactions. Although additional resources are still in process of being recruited, this group has lessened the day to day involvement of the Principal Accounting Officer in the analysis and research of technical accounting matters.
d.	The documentation over critical accounting estimates was enhanced. Estimates used for the determination of the allowance for loan and lease losses and the income forecasts used for the valuation of the deferred tax assets, among others, are now properly documented and supported.
e.	The Company established new procedures and in some instances realigned reporting lines to ensure adequate communication and discussion of recurring and non-recurring transactions.

2. As of the date of this filing, the Company has taken the following steps to strengthen the internal control over the completeness and valuation of its allowance for loan and lease losses. Despite such efforts, the material weakness described herein will not be remediated until these controls are operating for a sufficient period of time and are tested (in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act) to enable management to conclude that the controls are operating effectively:

a.	The Company hired an enterprise risk officer and transferred oversight of the loan collection and loan review functions to this officer.
b.	The Company appointed a risk administrator, who reports to the enterprise risk officer, with specific oversight and review responsibilities over the determination of the allowance for loan and lease losses.
c.	Under the direction of the enterprise risk officer, new policies and procedures were designed to improve the quality of the impairment analysis, including procedures to ensure that appropriate risk rating analysis was being performed at the level of relationship officers, who maintain direct communication with commercial and construction loan clients.

     Plan for Remediation of Material Weaknesses that Existed as of December 31, 2007

     The following describes the continuing remediation efforts that are being undertaken by Doral Financial, in addition to the measures described above, to address the material weaknesses in the Company’s internal control over financial reporting that existed as of December 31, 2007.

1.

Doral Financial is in the process of establishing automated controls in order to perform daily closings, therefore further improving its financial close and reporting process. As part of this process, the Company is strengthening its current controls over the financial close and reporting process and using process-reengineering techniques and technology to simplify the accounting closing process and implement additional controls.

2.

Doral Financial is in the process of preparing a centralized database that obtains financial data from the Company’s subsystems feeding the general ledger in order to be able to prepare automatically the reporting packages to be used by management and the Board of Directors. Pending completion of this project, manual reporting packages will be prepared on a monthly basis with all the necessary data required for the ongoing analysis of the company’s financial results.

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3.	During the first quarter of 2008, the controllership department prepared a revised accounting policy that will be disseminated throughout the organization in order to ascertain consistency in the application of the accounting policies.
4.	Additional resources will be added to the technical accounting and process enhancement team in order to provide for more robust analyses and review layers over recurring complex accounting analyses and estimates, and oversight of non-recurrent transactions.
5.	The enterprise risk officer and risk administrator will continue to monitor the new controls over the completeness and valuation of its allowance for loan and lease losses to ensure that the controls are executed effectively during 2008 and thereafter.

     Doral Financial believes that the remediation efforts described above have improved and will continue to improve Doral Financial’s internal control over financial reporting and its disclosure controls and procedures. During 2008, Doral Financial’s management, with the oversight of the Audit Committee, will continue to take steps to remedy the identified material weaknesses in the Company’s internal control over financial reporting as expeditiously as possible and expects that these material weaknesses will be remedied by the end of 2008.

Changes in Internal Control Over Financial Reporting

     There have been no changes to our internal control over financial reporting during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information.

     On January 17, 2008, Doral Financial issued a press release announcing that the Federal Deposit Insurance Corporation had terminated the Cease and Desist Order (the “Order”) dated March 16, 2006, applicable to its Puerto Rico banking subsidiary, Doral Bank, related to financial safety and soundness issues. The Order was put in place in connection with the announcement by the Company in April 2005 of the need to restate its financial statements for the period from January 1, 2000 to December 31, 2004.

     On February 19, 2008, Doral Financial entered into a consent order with the FDIC regarding its failure to comply with various provisions of the Bank Secrecy Act. See Item 3. Legal Proceedings — Banking Regulatory Matters.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

     The information required by this Item 10 is hereby incorporated by reference to Doral Financial’s proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of the 2007 fiscal year.

Item 11. Executive Compensation.

     The information required by this Item 11 is hereby incorporated by reference to Doral Financial’s proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of the 2007 fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

     The information required by this Item 12 is hereby incorporated by reference to Doral Financial’s proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of the 2007 fiscal year.

Item 13. Certain Relationships and Related Transactions.

     The information required by this Item 13 is hereby incorporated by reference to Doral Financial’s proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of the 2007 fiscal year.

Item 14. Principal Accounting Fees and Services.

     The information required by this Item 14 is hereby incorporated by reference to Doral Financial’s proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of the 2007 fiscal year.

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) List of documents filed as part of this report.

(1) Financial Statements.

     The following consolidated financial statements of Doral Financial, together with the report thereon of Doral Financial’s independent registered public accounting firm, PricewaterhouseCoopers LLP, dated March 12, 2008, are included herein beginning on page F-1:

• Report of Independent Registered Public Accounting Firm

• Consolidated Statements of Financial Condition as of December 31, 2007 and 2006

• Consolidated Statements of Income for each of the three years in the period ended December 31, 2007

• Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period ended December 31, 2007

• Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2007

• Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2007

113

• Notes to consolidated financial statements

(2)	Financial Statement Schedules.
	All financial schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

(3)	Exhibits.
	The exhibits to this Annual Report on Form 10-K are listed in the exhibit index below.

          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.

Exhibit
Number	Description
3.1(a)	Second Restated Certificate of Incorporation of Doral Financial as in effect on the date of this report. (Incorporated herein by reference to exhibit number 3.1(c) of Doral Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.)
3.1(b)	Certificate of Designation creating the 7% Noncumulative Monthly Income Preferred Stock, Series A (Incorporated herein by reference to exhibit number 3.4 of Doral Financial’s Registration Statement on Form 8-A filed with the Commission on February 17, 1999.)
3.1(c)	Certificate of Amendment, dated May 13, 1999, to Restated Certificate of Incorporation. (Incorporated herein by reference to exhibit number 3.1(f) of Doral Financial’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.)
3.1(d)	Certificate of Designation creating the 8.35% Noncumulative Monthly Income Preferred Stock, Series B, (Incorporated herein by reference to exhibit number 3.3 of Doral Financial’s Registration Statement on Form 8-A filed with the Commission on August 30, 2000.)
3.1(e)	Certificate of Designation creating the 7.25% Noncumulative Monthly Income Preferred Stock, Series C. (Incorporated herein by reference to exhibit number 3.3 of Doral Financial’s Registration Statement on Form 8-A filed with the Commission on May 30, 2002.)
3.1(f)	Certificate of Designation creating the 4.75% Perpetual Cumulative Convertible Preferred Stock, including form of stock certificate (Incorporated herein by reference to Exhibit 4 to Doral Financial’s Current Report on Form 8-K filed with the Commission on September 30, 2003.)
3.1(g)	Certificate of Amendment, dated April 27, 2004, to Second Restated Certificate of Incorporation. (Incorporated herein by reference to the exhibit number 3(a) of Doral Financial’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.)
3.1(h)	Certificate of Amendment to the restated Certificate of Incorporation, effective July 18, 2007.
3.1(i)	Certificate of Amendment to the Restated Certificate of Incorporation, dated August 17, 2007 (Incorporated by reference to exhibit number 3.1 of Doral Financial’s current report on Form 8-K filed with the Commission of August 20, 2007.)
3.1(j)	Certificate of Incorporation of Doral Financial, as currently in effect.

114

Exhibit
Number	Description
3.2	Bylaws of Doral Financial Corporation, as amended on August 2, 2007. (Incorporated by reference to exhibit number 3.1 of Doral Financial’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.)
4.1	Common Stock Certificate.
4.2	Loan and Guaranty Agreement among Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (“AFICA”), Doral Properties, Inc. and Doral Financial. (Incorporated herein by reference to exhibit number 4.1 of Doral Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.)
4.3	Trust Agreement between AFICA and Citibank, N.A. (Incorporated herein by reference to exhibit number 4.2 of Doral Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.)
4.4	Form of Serial and Term Bond (included in Exhibit 4.3 hereof).
4.5	Deed of Constitution of First Mortgage over Doral Financial Plaza. (Incorporated herein by reference to exhibit number 4.4 of Doral Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.)
4.6	Mortgage Note secured by First Mortgage referred to in Exhibit 4.5 hereto (included in Exhibit 4.5 hereof).
4.7	Pledge and Security Agreement. (Incorporated herein by reference to exhibit number 4.6 of Doral Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.)
4.8	Indenture, dated May 14, 1999, between Doral Financial and U.S. Bank National Association, as trustee, pertaining to senior debt securities. (Incorporated by reference to exhibit number 4.1 of Doral Financial’s Current Report on Form 8-K filed with the Commission on May 21, 1999.)
4.9	Indenture, dated May 14, 1999, between Doral Financial and Bankers Trust Company, as trustee, pertaining to subordinated debt securities. (Incorporated by reference to exhibit number 4.3 of Doral Financial’s Current Report on Form 8-K filed with the Commission on May 21, 1999.)
4.10	Form of Stock Certificate for 7% Noncumulative Monthly Income Preferred Stock, Series A. (Incorporated herein by reference to exhibit number 4.1 of Doral Financial’s Registration Statement on Form 8-A filed with the Commission on February 17, 1999.)
4.11	Form of Stock Certificate for 8.35% Noncumulative Monthly Income Preferred Stock, Series B. (Incorporated herein by reference to exhibit number 4.1 of Doral Financial’s Registration Statement on Form 8-A filed with the Commission on August 30, 2000.)
4.12	First Supplemental Indenture, dated as of March 30, 2001, between Doral Financial and Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company), as trustee. (Incorporated herein by reference to exhibit number 4.9 to Doral Financial’s Current Report on Form 8-K filed with the Commission on April 2, 2001.)
4.14	Form of Stock Certificate for 7.25% Noncumulative Monthly Income Preferred Stock, Series C. (Incorporated herein by reference to exhibit number 4.1 of Doral Financial’s Registration Statement on Form 8-A filed with the Commission on May 30, 2002.)

115

Exhibit
Number	Description
4.15	Form of Stock Certificate for 4.75% Perpetual Cumulative Convertible Preferred Stock. (Included in Exhibit 3.1(f) hereof.)
10.1	Stipulation and Agreement of Partial Settlement, dated as of April 27, 2007. (Incorporated by reference to same exhibit number of Doral Financial’s Annual Report on Form 10-K for the year ended December 31, 2006.)
10.2	Order to Cease and Desist issued by the Federal Deposit Insurance Corporation, dated February 19, 2008. (Incorporated by reference to exhibit number 99-2 of Doral Financial’s Current Report of Form 8-K filed with the Commission on February 21, 2008.)
10.3	Purchase Agreement, dated September 23, 2003, between Doral Financial Corporation and Wachovia Securities LLC, as Representative of the Initial Purchasers of Doral Financial’s 4.75% Perpetual Cumulative Convertible Preferred Stock named therein. (Incorporated by reference to Exhibit 1 to Doral Financial’s Current Report on Form 8-K filed with the Commission on September 30, 2003.)
10.4	Employment Agreement, dated as of May 23, 2006, between Doral Financial and Glen Wakeman. (Incorporated herein by reference to Exhibit 10.1 to Doral Financial’s Current Report on Form 8-K filed with the Commission on May 30, 2006.)
10.5	Employment Agreement, dated as of August 14, 2006, between Doral Financial Corporation and Lesbia Blanco. (Incorporated herein by reference to Exhibit 10.1 to Doral Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the Commission on December 29, 2006.)
10.6	Employment Agreement, dated as of August 21, 2006, between Doral Financial Corporation and Calixto García-Vélez. (Incorporated herein by reference to Exhibit 10.2 to Doral Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the Commission on December 29, 2006.)
10.7	Employment Agreement, dated as of September 25, 2006, between Doral Financial Corporation and Marangal I. Domingo. (Incorporated herein by reference to Exhibit 10.3 to Doral Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the Commission on December 29, 2006.)
10.8	Employment Agreement, dated as of October 16, 2006, between Doral Financial Corporation and Gerardo Leiva. (Incorporated herein by reference to Exhibit 10.5 to Doral Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the Commission on December 29, 2006.)
10.9	Employment Agreement, dated as of October 2, 2006, between Doral Financial Corporation and Enrique R. Ubarri, Esq. (Incorporated herein by reference to Exhibit 10.6 to Doral Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the Commission on December 29, 2006.)
10.10	Employment Agreement, dated as of June 25, 2007, between Doral Financial Corporation and Paul Makowski.
10.11	Employment Agreement, dated as of June 1, 2007, between Doral Financial Corporation and Christopher Poulton.
10.12	Securityholders Registration Rights Agreement dated as of July 19, 2007, between Doral Financial Corporation and Doral Holding Delaware, LLC (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on July 26, 2007.)
10.13	Advisory Services Agreements, dated as of July 19, 2007, between Doral Financial Corporation and

116

Exhibit
Number	Description
	Bear Sterns Merchant Manager III, L.P. (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Commission on July 26, 2007.)
12.1	Computation of Ratio of Earnings to Fixed Charges.
12.2	Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.
21	List of Doral Financial’s subsidiaries.
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 the Sarbanes-Oxley Act of 2002.
32.2	CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.

117

SIGNATURES

     Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, Doral Financial Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DORAL FINANCIAL CORPORATION
By:	/s/ Glen R. Wakeman Glen R. Wakeman
	President and Chief Executive Officer

Date: March 19, 2008

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

/s/ Glen R. Wakeman Glen R. Wakeman	President, Chief Executive Officer and Director	March 19, 2008
/s/ Marangal I. Domingo Marangal I. Domingo	Executive Vice President and Chief Financial Officer	March 19, 2008
/s/ Dennis G. Buchert	Director	March 19, 2008
Dennis G. Buchert
/s/ Frank W. Baier	Director	March 19, 2008
Frank W. Baier
/s/ James E. Gilleran	Director	March 19, 2008
James E. Gilleran
/s/ David E. King	Director	March 19, 2008
David E. King
/s/ Howard M. Levkowitz	Director	March 19, 2008
Howard M. Levkowitz
/s/ Michael J. O’ Hanlon	Director	March 19, 2008
Michael J. O’ Hanlon
/s/ Ramesh N. Shah	Director	March 19, 2008
Ramesh N. Shah
/s/ Kevin M. Twomey	Director	March 19, 2008
Kevin M. Twomey
/s/ Ori Uziel	Director	March 19, 2008
Ori Uziel
/s/ Laura Vazquez	Controller and	March 19, 2008
Laura Vazquez	Principal Accounting Officer

118

     Doral Financial Corporation Index to Consolidated Financial Statements

	Page
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Statements of Financial Condition		F-2
Consolidated Statements of (Loss) Income		F-3
Consolidated Statements of Changes in Stockholder’s Equity		F-4
Consolidated Statements of Comprehensive Loss		F-5
Consolidated Statements of Cash Flow		F-6
Notes to Consolidated Financial Statements		F-8

Report of Independent Registered Public Accounting Firm

To the Board of Directors and
Shareholders of Doral Financial Corporation:

In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Doral Financial Corporation and its subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because material weaknesses in internal control over financial reporting related to 1) the Company not designing and maintaining effective controls, including monitoring controls, over its financial close and reporting process; and 2) the Company not maintaining effective controls over the completeness and valuation of its allowance for loan and lease losses and the related provision for loan and lease losses accounts existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2007 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management’s report referred to above. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for the servicing of financial assets and for uncertain tax positions in 2007.

A company’s internal control over financial reporting is a process designed 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. Management’s assessment and our audit of Doral Financial Corporation’s internal control over financial reporting also included controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

San Juan, Puerto Rico
March 12, 2008

CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires Dec. 1, 2010
Stamp 2287641 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report

F-1

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	December 31,
(Dollars in thousands, except per share information)	2007			2006
ASSETS
Cash and due from banks	$	67,884		$	227,127
Money market investments:
Money market investments with creditors’ right to repledge		199,795			234,296
Other money market investments		317,490			684,438
Total money market investments		517,285			918,734
Securities purchased under agreements to resell		204,000			—
Pledged investment securities that can be repledged:
Securities held for trading, at fair value		14,070			71,156
Securities available for sale, at fair value		891,961			2,209,439
Securities held to maturity, at amortized cost (market value of $1,746,760 in 2006)		—			1,823,661
Total pledged investment securities that can be repledged		906,031			4,104,256
Other investment securities:
Securities held for trading, at fair value		262,392			112,649
Securities available for sale, at fair value		1,029,979			199,247
Securities held to maturity, at amortized cost (market value of $254,592 in 2006)		—			259,276
Federal Home Loan Bank of NY (FHLB) stock, at cost		73,867			70,533
Total other investment securities		1,366,238			641,705
Total investment securities		2,272,269			4,745,961
Loans:
Loans held for sale, at lower of cost or market		418,556			1,769,090
Loans receivable, net of allowance for loan and lease losses (2007-$124,733; 2006-$67,233)		4,926,200			3,389,937
Total loans		5,344,756			5,159,027
Receivables and mortgage-servicing advances		62,098			58,187
Accrued interest receivable		42,434			64,363
Servicing assets, net		150,238			176,367
Premises and equipment, net		106,317			138,805
Real estate held for sale, net		38,154			33,197
Assets to be disposed of by sale		8,970			—
Deferred tax asset		392,860			261,645
Other assets		97,113			73,011
Total assets	$	9,304,378		$	11,856,424
LIABILITIES
Deposits:
Non-interest-bearing deposits	$	242,821		$	327,186
Interest-bearing deposits		4,025,203			3,923,574
Total Deposits		4,268,024			4,250,760
Securities sold under agreements to repurchase		1,444,363			3,899,365
Advances from FHLB		1,234,000			1,034,500
Loans payable		402,701			444,443
Notes payable		282,458			923,913
Accrued expenses and other liabilities		326,125			400,039
Total liabilities		7,957,671			10,953,020
STOCKHOLDERS’ EQUITY
Preferred stock, $1 par value; 40,000,000 shares authorized; 9,015,000 shares issued and outstanding in 2007 and 2006, respectively, 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 (includes a reduction of 1,852,500,000 shares authorized; 1,022,392,000 shares issued and outstanding as a result of the 1-for-20 reverse stock split effective on August 17, 2007); and Common stock, $1 par value; 500,000,000 shares authorized; 107,948,236 shares issued and outstanding in 2006		538			107,948
Additional paid-in capital		849,081			166,495
Legal surplus		23,596			23,596
(Accumulated deficit) retained earnings		(66,610	)		139,051
Accumulated other comprehensive loss, net of income tax benefit of $6,075 in 2007 and $1,129 in 2006		(33,148	)		(106,936	)
Total stockholders’ equity		1,346,707			903,404
Total liabilities and stockholders’ equity	$	9,304,378		$	11,856,424

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

F-2

CONSOLIDATED STATEMENTS OF (LOSS) INCOME

	Year ended December 31,
(Dollars in thousands, except per share information)	2007			2006			2005
Interest income:
Loans	$	353,202		$	458,307		$	496,806
Mortgage-backed securities		69,914			186,697			224,930
Interest-only strips (“IOs”)		5,981			6,522			10,854
Investment securities		97,598			119,415			142,601
Other interest-earning assets		52,265			50,954			72,588
Total interest income		578,960			821,895			947,779
Interest expense:
Deposits		171,232			155,418			106,164
Securities sold under agreements to repurchase		124,983			240,787			256,542
Advances from FHLB		55,636			46,455			48,631
Loans payable		28,834			118,491			197,902
Notes payable		43,934			59,354			57,943
Total interest expense		424,619			620,505			667,182
Net interest income		154,341			201,390			280,597
Provision for loan and lease losses		78,214			39,829			22,369
Net interest income after provision for loan and lease losses		76,127			161,561			258,228
Non-interest (loss) income:
Net gain (loss) on mortgage loan sales and fees		2,223			(34,456	)		52,131
Net loss on securities held for trading, including gains and losses on the fair value of IOs		(27,725	)		(37,228	)		(3,406	)
Net loss on sale of investment securities		(97,480	)		(27,668	)		(40,798	)
Net (loss) gain on extinguishment of liabilities		(14,806	)		(4,157	)		2,000
Servicing income (net of mark-to-market adjustment for 2007, and net of amortization and impairment/ recovery for 2006 and 2005)		20,687			6,904			16,715
Commissions, fees and other income		32,183			37,378			35,906
Net premium on deposits sold		9,521			—			—
Total non-interest (loss) income		(75,397	)		(59,227	)		62,548
Non-interest expenses:
Compensation and benefits		118,709			96,342			92,955
Taxes, other than payroll and income taxes		11,312			12,552			10,918
Advertising		11,378			9,849			16,588
Professional services		59,542			63,258			43,016
Communication and information systems		18,695			18,870			18,648
Occupancy and other office expenses		24,996			27,430			31,548
Depreciation and amortization		17,586			22,028			20,923
Provision for contingency		—			95,000			25,000
Other		41,274			29,013			28,897
Total non-interest expenses		303,492			374,342			288,493
(Loss) income before income taxes		(302,762	)		(272,008	)		32,283
Income tax (benefit) expense		(131,854	)		(48,107	)		19,091
Net (loss) income	$	(170,908	)	$	(223,901	)	$	13,192
Net loss attributable to common shareholders	$	(204,207	)	$	(257,200	)	$	(20,107	)
Net loss per common share:
Basic	$	(7.45	)	$	(47.66	)	$	(3.73	)
Diluted	$	(7.45	)	$	(47.66	)	$	(3.73	)
Dividends per common share	$	0.00		$	1.60		$	12.40

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

F-3

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

	Year ended December 31,
(In thousands)	2007			2006			2005
Preferred stock	$	573,250		$	573,250		$	573,250
Common stock:
Balance at beginning of year		107,948			107,930			107,909
Change in par value $1 to $0.01		(106,869	)		—			—
Issuance of common stock		9,683			—			—
Shares reduced as a result of 1-for-20 reverse stock split		(10,224	)		—			—
Shares issued under stock option plan		—			18			21
Balance at end of year		538			107,948			107,930
Additional paid-in capital:
Balance at beginning of year		166,495			165,609			161,639
Change in par value $1 to $0.01		106,869			—			—
Issuance of common stock		600,317			—			—
Cost of issuance of common stock		(39,307	)		—			—
Shares converted as a result of 1-for-20 reverse stock split		10,224			—			—
Shares issued under stock option plan		—			77			98
Stock-based compensation recognized		685			872			8,118
Stock-based compensation reversed due to pre-vesting forfeitures		(25	)		(63	)		(4,246	)
Stock-based compensation recognized on termination of option plan		3,823			—			—
Balance at end of year		849,081			166,495			165,609
Legal surplus:
Balance at beginning of year		23,596			23,596			22,716
Transfer from retained earnings		—			—			880
Balance at end of year		23,596			23,596			23,596
(Accumulated deficit) retained earnings:
Balance at beginning of year		139,051			404,885			492,786
Net (loss) income		(170,908	)		(223,901	)		13,192
Cash dividends declared on common stock		—			(8,634	)		(66,914	)
Cash dividends declared on preferred stock		(33,299	)		(33,299	)		(33,299	)
Cumulative effect of accounting change (adoption of SFAS No. 156)		926			—			—
Cumulative effect of accounting change (adoption of FIN 48)		(2,380	)		—			—
Transfer to legal surplus		—			—			(880	)
Balance at end of year		(66,610	)		139,051			404,885
Accumulated other comprehensive loss, net of tax:
Balance at beginning of year		(106,936	)		(125,461	)		(73,683	)
Other comprehensive income (loss), net of deferred tax		73,788			18,525			(51,778	)
Balance at end of year		(33,148	)		(106,936	)		(125,461	)
Total stockholders’ equity	$	1,346,707		$	903,404		$	1,149,809

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

F-4

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

	Year ended December 31,
(In thousands)	2007			2006			2005
Net (loss) income	$	(170,908	)	$	(223,901	)	$	13,192
Other comprehensive income (loss), before tax:
Unrealized losses on securities arising during the period		(47,492	)		(6,506	)		(91,837	)
Amortization of unrealized loss on securities reclassified to held to maturity		40			43			43
Reclassification of realized losses included in net (loss) income		116,866			27,668			40,798
Other comprehensive income (loss) on investment securities, before tax		69,414			21,205			(50,996	)
Income tax benefit (expense) related to investment securities		4,946			(2,680	)		(782	)
Other comprehensive income (loss) on investment securities		74,360			18,525			(51,778	)
Other comprehensive loss on cash flow hedge		(572	)		—			—
Other comprehensive income (loss)		73,788			18,525			(51,778	)
Comprehensive loss, net of tax	$	(97,120	)	$	(205,376	)	$	(38,586	)
Accumulated other comprehensive loss, net of tax
Other comprehensive loss on investment securities	$	(32,576	)	$	(106,936	)	$	(125,461	)
Other comprehensive loss on cash flow hedge		(572	)		—			—
Total accumulated other comprehensive loss, net of tax	$	(33,148	)	$	(106,936	)	$	(125,461	)

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

F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31,
(In thousands)	2007			2006			2005
Cash flows from operating activities:
Net (loss) income	$	(170,908	)	$	(223,901	)	$	13,192
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Stock-based compensation		4,483			809			3,872
Depreciation and amortization		17,586			22,028			20,923
Mark-to-market adjustment (2007) and amortization and impairment (2006) of servicing assets		20,800			35,797			22,864
Deferred tax (benefit) provision		(135,790	)		(51,995	)		1,371
Provision for loan and lease losses		78,214			39,829			22,369
Net premium on deposits sold		(9,521	)		—			—
Net gain on assets to be disposed of by sale		(501	)		—			—
(Accretion of discount) amortization of premium on loans, investment securities and debt		(12,567	)		3,827			21,303
Unrealized loss on loans held for sale		2,068			27,243			—
Net (increase) decrease in loans held for sale		(77,022	)		2,502,488			(1,872,263	)
Loss on sale of securities		104,073			36,222			27,483
Unrealized loss on securities held for trading		8,557			2,661			4,530
Decrease in securities held for trading		105,064			388,834			1,120,285
Amortization and net loss in the fair value of IOs		2,002			58,487			64,308
Decrease (increase) in derivative instruments		26,758			(1,041	)		(19,569	)
Decrease (increase) in receivables and mortgage servicing advances		2,718			(3,468	)		32,818
Decrease (increase) in accrued interest receivable		19,856			20,975			(11,791	)
(Increase) decrease in other assets		(52,943	)		4,537			(19,826	)
(Decrease) increase in accrued expenses and other liabilities		(98,740	)		29,085			97,042
Total adjustments		5,095			3,116,318			(484,281	)
Net cash (used in) provided by operating activities		(165,813	)		2,892,417			(471,089	)
Cash flows from investing activities:
Purchases of securities available for sale		(535,377	)		(46,023	)		(5,595,630	)
Principal repayments and sales of securities available for sale		2,741,110			2,244,280			5,818,821
Purchases of securities held to maturity		—			(13,000	)		(100,000	)
Principal repayment, sales and maturities of securities held to maturity		182,579			44,578			317,245
(Increase) decrease in FHLB stock		(3,334	)		1,672			13,915
Net increase of loans receivable		(621,618	)		(231,797	)		(715,455	)
Proceeds from sale of servicing assets		7,000			—			—
Purchase of servicing assets		—			(209	)		(4,421	)
Purchases of premises and equipment		(8,770	)		(10,382	)		(24,822	)
Proceeds from assets disposed of by sale		5,801
Payment in connection with the sale of certain assets and liabilities of Doral Bank NY, including cash delivered		(121,824	)		—			—
Proceeds from sales of real estate held for sale		7,070			12,601			44,315
Net cash provided by (used in) investing activities		1,652,637			2,001,720			(246,032	)
Cash flows from financing activities:
Net increase in deposits		394,755			13,491			594,189
Decrease in securities sold under agreements to repurchase		(2,445,052	)		(2,155,233	)		(250,565	)
Proceeds from advances from FHLB		2,690,790			500,000			50,000
Repayment of advances from FHLB		(2,377,000	)		(435,000	)		(375,000	)
Net decrease in loans payable:
Decrease in warehousing lines and other credit facilities		—			—			(279,560	)
Proceeds from secured borrowings		—			—			880,746
Repayment of secured borrowings		(41,742	)		(3,092,141	)		(661,463	)
Repayment of notes payable		(641,968	)		(82,760	)		(130,356	)
Payment of consent solicitation to bondholders		—			(1,297	)		—
Issuance of common stock, net		610,000			95			119
Dividends paid		(33,299	)		(41,933	)		(100,213	)
Net cash used in financing activities		(1,843,516	)		(5,294,778	)		(272,103	)
Net decrease in cash and cash equivalents		(356,692	)		(400,641	)		(989,224	)
Cash and cash equivalents at beginning of year		1,145,861			1,546,502			2,535,726
Cash and cash equivalents at end of year	$	789,169		$	1,145,861		$	1,546,502
Cash and cash equivalents includes:
Cash and due from banks	$	67,884		$	227,127		$	192,141
Money market investments and securities purchased under agreement to resell		721,285			918,734			1,354,361
	$	789,169		$	1,145,861		$	1,546,502

F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

	Year ended December 31,
(In thousands)	2007			2006		2005
Supplemental schedule of non-cash activities:
Loan securitizations	$	232,282		$	251,626	$	1,338,939
Loans foreclosed	$	20,181		$	16,816	$	42,728
Reclassification of securities held to maturity to held for trading in connection with the sale of certain assets of Doral Bank NY	$	91,045		$	—	$	—
Reclassification of loans receivable to loans held for sale in connection with the sale of certain assets of Doral Bank NY	$	205,629		$	—	$	—
Reclassification of premises and equipment to assets to be disposed of by sale	$	23,680		$	—	$	—
Reclassification of securities held to maturity to held for sale	$	1,822,963		$	—	$	—
Reclassification of loans held for sale to loans receivable	$	1,382,734		$	961,459	$	86,294
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		$	—	$	—
Capitalization of servicing assets	$	5,305		$	61,379	$	45,433
Capitalization of IOs from loan sales	$	—		$	—	$	10,981
Supplemental Information for Cash Flows:
Cash used to pay interest	$	440,905		$	635,560	$	650,733
Cash used to pay income taxes	$	4,653		$	5,015	$	60,697
The Company sold certain assets and liabilities of Doral Bank NY to New York Commercial Bank. The assets and liabilities values as of the sale date were as follow:
Assets:
Loans	$	206,074
Securities		155,264
Property, leasehold improvements and equipment		9,400
Other assets		2,321
Total assets sold	$	373,059
Liabilities:
Securities sold under agreement to repurchase	$	9,950
Deposits		377,491
Advances from FHLB		114,290
Other liabilities		2,673
Total liabilities sold	$	504,404
Excess of liabilities over assets sold	$	(131,345	)
Net premium on deposits sold	$	9,521
Payment in connection with the sale of certain assets and liabilities of Doral Bank NY, including cash delivered	$	(121,824	)

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

F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR DORAL FINANCIAL CORPORATION
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

1. Reporting Entity

Doral Financial Corporation (“Doral,” “Doral Financial” or the “Company”) is a financial holding company engaged in banking (including thrift operations), mortgage banking, institutional securities operations and insurance agency activities through its wholly-owned subsidiaries Doral Bank (“Doral Bank PR”), Doral Bank, FSB (“Doral Bank NY”), Doral Insurance Agency, Inc. (“Doral Insurance Agency”), Doral Securities, Inc. (“Doral Securities”) and Doral Properties, Inc. (“Doral Properties”). In July 2007, Doral Financial transferred its mortgage origination and servicing platforms, subject to certain exclusion to Doral Bank PR (including its wholly-owned subsidiary, Doral Mortgage). Doral Bank PR in turn operates four wholly-owned subsidiaries Doral Mortgage LLC (“Doral Mortgage”), Doral Money, Inc. (“Doral Money”), engaged in commercial lending in the New York metropolitan area, Doral International, Inc., a Puerto Rico based international banking entity, and CB, LLC, an entity formed to dispose of a real estate project of which Doral Bank PR took possession during 2005. 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, as tax free reorganizations.

In addition to providing various loan and banking services, the Company services FHA-insured, VA-guaranteed and conventional mortgage loans pooled for the issuance of GNMA, FNMA and FHLMC mortgage-backed securities and CMO certificates issued by grantor trusts established by the Company.

On July 17, 2007, Doral Financial amended its Restated Certificate of Incorporation to decrease the par value of the Company’s common stock from $1.00 to $0.01 per share (see Note 26).

On July 19, 2007, Doral Financial completed the private sale of 48,412,698 newly issued shares of common stock to Doral Holdings for an aggregate purchase price of $610.0 million (the “Recapitalization”). In connection with the Recapitalization, on July 19, 2007, Doral Financial also transferred its mortgage servicing and mortgage origination operations to Doral Bank PR, its principal banking subsidiary, and on July 26, 2007, sold the branch network of Doral Bank NY. In connection with these transactions, Doral Bank PR obtained regulatory approval to pay a $155.0 million cash dividend to the holding company and Doral Bank NY received regulatory approval to effect a capital distribution to the holding company in the amount of $50.0 million, of which $45.0 million was paid on July 30, 2007.

The transactions described above resulted in the significant recapitalization of the holding company and provided the holding company with sufficient funds to repay in full its $625.0 million floating rate senior notes that matured on July 20, 2007, and to fund in August 2007 the settlement of the restatement-related consolidated class action and derivative shareholder litigation and to pay related transaction expenses.

On July 27, 2007, Doral Financial completed the sale of its eleven branches in the New York City Metropolitan Area. The transaction yielded the following results:

(In thousands)
Net deposit premium earned	$	9,521
Loss on sale of assets and disposition of liabilities:
Securities sold		(10,742	)
Loans sold		(2,068	)
Repurchase agreements and advances from FHLB disposed of		(790	)
Total loss on sale of assets and liabilities		(13,600	)
Net loss related to Doral Bank NY branch sale	$	(4,079	)

On August 17, 2007, Doral Financial effected a 1-for-20 reverse split of its common stock previously approved by Doral Financial’s stockholders on July 17, 2007. Upon the effectiveness of the reverse split, each 20 shares of authorized and outstanding common stock were reclassified and combined into one new share of common stock.

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Doral Financial’s common stock began trading on a split-adjusted basis on August 20, 2007. All share and dividend per share information in the Consolidated Financial Statements has been adjusted to reflect a 1-for-20 reverse stock split effective August 17, 2007.

2. Summary of Significant Accounting Policies

The accompanying Consolidated Financial Statements include the accounts of Doral Financial Corporation and its wholly-owned subsidiaries. The Company’s accounting and reporting policies conform with the generally accepted accounting principles in the United States of America (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation.

The following summarizes the most significant accounting policies followed in the preparation of the accompanying Consolidated Financial Statements:

Use of Estimates in the Preparation of Financial Statements

The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements as well as the reported amounts of revenues and expenses during the reporting periods. Because of uncertainties inherent in the estimation process, it is possible that actual results could differ from those estimates.

A significant estimate that is prevalent in the Company’s financial statements is the estimation of fair value for financial instruments, including derivative instruments, required to be recorded at fair value under GAAP. The measurement of fair value is fundamental to the presentation of Doral Financial’s financial condition and results of operations and, in many instances, requires management to make complex judgments. In general, Doral Financial records financial instruments at an estimate of the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value is generally based on quoted prices, including dealer marks or direct market observations. If quoted prices or market parameters are not available, fair value is based on internal and external valuation models using market data inputs adjusted by the Company’s particular characteristics, when appropriate. The use of different models and assumptions could produce materially different estimates of fair value. The accounting policies that have a significant impact on Doral Financial’s statements and that require the most judgment are those relating to the assumptions underlying the valuation of its MSRs, IOs, income taxes and the allowance for loan and lease losses.

Money Market Investments and Securities Purchased Under Agreements to Resell

Money market investments consist of fixed-income securities whose original maturity is less than three months. These investments are carried at cost, which approximates fair value due to their short-term nature. In the case of securities purchased under agreements to resell, it is the Company’s policy to require and take possession of collateral whose fair value exceeds the balance of the related receivable. Collateral is valued daily, and the Company may require counterparties to deposit additional collateral or return collateral pledged when appropriate. The securities underlying the agreements are not recorded in the asset accounts of the Company since the counterparties retain effective control of such securities.

Investment Securities

Investment securities transactions are recorded on the trade date basis, except for securities underlying forward purchases and sales contracts that are not exempt from the requirements of Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) which are recorded on contractual settlement date. At the end of the period, unsettled purchase transactions exempt from the requirements of SFAS 133 are recorded as part of the Company’s investments portfolio and as a liability, while unsettled sale transactions are deducted from the Company’s investments portfolio and recorded as an asset. Investment securities are classified as follows:

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Securities Held for Trading: Securities that are bought and held principally for the purpose of selling them in the near term are classified as securities held for trading and reported at fair value generally based on quoted market prices. For securities without quoted prices, fair value represents quoted market prices for comparable instruments. In certain other cases, fair values have been estimated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting appropriate degrees of risk. Realized and unrealized changes in market value are recorded in the securities trading activities as a part of net gain or loss on securities held for trading in the period in which the changes occur. Interest income and expense arising from trading instruments are included in the Consolidated Statements of Income as part of net interest income.

Forward, cap and swap contracts that are not exempt from the requirements of SFAS 133 are accounted for as derivate instruments. Doral recognizes the creation of the derivative at the time of the execution of the contract and marks to market the contracts against current operations until settlement as part of its trading activities. The securities underlying the forward contracts are recorded at settlement at their market value and generally classified as available for sale.

For residual CMO certificates, the Company uses a cash flow model to value the securities. Doral utilizes the collateral’s historical statistics available on Bloomberg such as forecasted prepayment speed, weighted-average remaining maturity, weighted-average coupon and age. Based on the Bloomberg information, the Company forecasts the cash flow and then discounts it at the discount rate used for the period. For purposes of discounting, the Company uses the same Z-spread methodology used for the valuations of Doral’s floating rate IOs.

Securities Held to Maturity: Securities that the Company has the ability and intent to hold until their maturities are classified as held to maturity and reported at amortized cost.

When securities are transferred from the held to maturity portfolio to the held for sale portfolio, and transfer does not qualify under the exemption provisions for the sale or transfer of held to maturity securities under SFAS 115, the classification decision is deemed to have “tainted” the held to maturity category and it will not be permitted to prospectively classify any investment securities scoped under SFAS 115 as held to maturity for a period of two years.

Securities Available for Sale: Securities not classified as either securities held to maturity or securities held for trading are classified as available for sale and reported at fair value based on quoted market prices, with unrealized gains and losses excluded from net income and reported, net of tax, in other comprehensive income, which is a separate component of stockholders’ equity. Cost of securities sold is determined on the specific identification method.

When securities are transferred from the available for sale portfolio to the held to maturity portfolio, any unrealized gain or loss at the time of transfer remains in accumulated other comprehensive income and is amortized over the remaining term of the securities.

For most of the Company’s investment securities, deferred items, including premiums, and discounts, are amortized into interest income over the contractual life of the securities adjusted for actual prepayments using the effective interest method.

Doral Financial reviews securities for other-than-temporary impairment whenever the security’s fair value is less than its amortized cost. Impairment is evaluated considering a number of indicators which include the severity of the decline in fair value, credit ratings and the length of time the investment has been in an unrealized loss position. In addition, Doral Financial may recognize impairment when qualitative factors indicate that the Company may not recover the unrealized loss. When evaluating the impairment indicators and qualitative factors, Doral Financial considers its intent and ability to hold the investments until a point in time at which recovery can be reasonably expected to occur. When a security is deemed to be impaired the cost basis of the security is written down to fair value, with the loss recorded in the Consolidated Statements of Income in the period that the other-than-temporary impairment is determined. The security cost basis is not changed to reflect subsequent recoveries in fair value.

Other Investment Securities: Investment in debt, equity and other securities that do not have readily determinable fair values, are classified as other securities in the Consolidated Statement of Financial Condition. These securities are stated at cost. Stock that is owned by the Company to comply with regulatory requirements, such as Federal Home Loan Bank (“FHLB”) stock, is included in this category.

F-10

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. Changes in the valuation allowance are included in the determination of income in the period in which those changes occur and are reported under net gain on mortgage loan sales and fees in the Consolidated Statements of Income. Loan origination fees and direct loan origination costs related to loans held for sale are deferred as an adjustment to the carrying basis of such loans until these are sold or securitized. Premiums and discounts on loans classified as held for sale are not amortized as interest income while such loans are classified as held for sale. See “Servicing Assets and Servicing Activities,” below for a description of the sales and securitization process. 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.

The Company recognizes interest income on loans on an accrual basis, except when management believes the collection of principal or interest is doubtful. Loans held for sale are placed on a non-accrual basis after they have been delinquent for more than 90 days. When the loan is placed on non-accrual, all accrued but unpaid interest to date is reversed against interest income. Such interest, if collected, is credited to income in the period of the recovery. Loans return to accrual status when principal and interest become current.

The Company regularly reviews its loans held for sale portfolio and may transfer loans from the loans held for sale portfolio to its loan receivable portfolio. For such transfers, the Company recognizes a market value adjustment charged against earnings based on the lower of aggregate cost or market value.

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. These items, except for the undisbursed portion of construction loans and the allowance for loan and lease losses, are deferred at inception and amortized into interest income throughout the lives of the underlying loans using the effective interest method.

The Company recognizes interest income on loans receivable on an accrual basis, except when management believes the collection of principal or interest is doubtful. Loans receivable are placed on a non-accrual basis after they have been delinquent for more than 90 days. When the loan is placed on non-accrual, all accrued but unpaid interest to date is reversed against interest income. Such interest, if collected, is credited to income in the period of the recovery. Loans return to accrual status when principal and interest become current.

Certain construction and commercial loans, classified as substandard, are placed on a non-accrual status even when these loans are not more than 90 days in delinquent.

Allowance for Loan and Lease Losses

An allowance for loan and lease losses is established to provide for probable credit losses inherent in the portfolio of loans receivable as of the balance sheet date. The allowance for loan and lease losses is established based on management’s assessment of probabilities of default, internal risk ratings (based on the 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 portfolio. Loan losses are charged and recoveries are credited to the allowance for loan and lease losses, while increases to the allowance are charged to operations.

The Company evaluates impaired loans and their related valuation allowance based on SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” Commercial and construction loans over $2.0 million, classified as

F-11

substandard, are evaluated individually for impairment. Loans are considered impaired when, based on management’s evaluation, it is likely that the borrower will not be able to fulfill its obligation under the original terms of the loan. Impaired loans are valued either based on the present value of expected future cash flows discounted at the loan’s effective interest rate, based on the loan’s observable market price or based on the fair value of the collateral, if the loan is collateral dependent. In assessing the reserves under the discounted cash flows, the Company considers the estimate of future cash flows based on reasonable and supportable assumptions and projections. All available evidence, including estimated costs to sell if those costs are expected to reduce the cash flows available to repay or otherwise satisfy the loan, are considered in developing those estimates. The likelihood of the possible outcomes is considered in determining the best estimate of expected future cash flows.

Doral Financial also provides an allowance for small-balance homogeneous loans (including residential mortgage, auto, personal, credit cards, construction and commercial loans under $2.0 million, among others) on an aggregated basis under the provisions of SFAS No. 5 “Accounting for Contingencies.” For such loans, an 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 levels, inflation and the strength of the housing market in the areas where the Company operates. Allowances on these loans are periodically reviewed and, when deemed necessary, adjusted to reflect changes in trends and shifts in the inherent risks within the portfolio.

Servicing Assets and Servicing Activities

The Company pools FHA-insured and VA-guaranteed mortgages for issuance of GNMA mortgage-backed securities. Conforming loans are pooled and issued as FNMA or FHLMC mortgage-backed securities and CMO certificates as well as sold in bulk to investors with servicing retained.

Prior adoption of SFAS No. 156, the Company securitized or sold mortgage loans, and allocated the cost of the mortgage loans between the mortgage-backed security or mortgage loan pool sold and the retained interests, based on their relative fair values. The reported gain is the difference between the proceeds from the sale of the security or mortgage loan pool, the cost allocated to the security or loans sold (after allocating a portion of the cost to the retained interests) and the fair value of any recourse assumed by the Company.

Servicing rights (“MSRs” or “servicing assets”) retained in a sale or securitization arise from contractual agreements between the Company and investors in mortgage securities and mortgage loans. The value of MSRs is derived from the net positive cash flows associated with the servicing contracts. Under these contracts, the Company performs loan servicing functions in exchange for fees and other remuneration. The servicing function typically includes: collecting and remitting loan payments, responding to borrower inquiries, accounting for principal and interest, holding custodial funds for payment of property taxes and insurance premiums, supervising foreclosures and property dispositions, and generally administering the loans. The servicing rights entitle the Company to annual servicing fees based on the outstanding principal balance of the mortgage loans and the contractual servicing rate. The annual servicing fees generally fluctuate between 25 and 50 basis points. The servicing fees are credited to income on a monthly basis when collected. In addition, the Company generally receives other remuneration consisting of mortgagor-contracted fees as late charges and prepayment penalties, which are credited to income when collected.

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 initial carrying value of the servicing assets is generally determined based on an allocation of the carrying amount of the loans sold (adjusted for deferred fees and costs related to loan origination activities) and the retained interest (MSRs) based on their relative fair value.

Effective, January 1, 2007, under SFAS No. 156 “Accounting for Servicing of Financial Assets”, the Company elected to apply fair value accounting to its 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 (MSR trades and broker valuations), benchmarking of servicing assets (valuation surveys) and cash flow modeling. The valuation of the Company’s MSRs incorporates two sets of assumptions: (1) market derived assumptions for discount rates,

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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.

Prior to the adoption of SFAS No. 156, once recorded, MSRs were periodically evaluated for impairment. Impairment occurred when the current fair value of the MSR was less than its carrying value. If MSRs were impaired, the impairment was recognized in current-period earnings and the carrying value of the MSRs was adjusted through a valuation allowance. If the value of the MSRs subsequently increased, the recovery in value was recognized in current period earnings and the carrying value of the MSRs was adjusted through a reduction in the valuation allowance. For purposes of performing the MSR impairment evaluation, the servicing portfolio was stratified on the basis of certain risk characteristics including loan type (e.g., governmental and conventional loans) and coupon. An other-than-temporary impairment analysis was prepared to evaluate whether a loss in the value of the MSRs, if any, was other than temporary or not. When the recovery of the value was unlikely in the foreseeable future, a write-down of the MSRs in the stratum to its estimated recoverable value was charged to the valuation allowance. MSRs could not be carried above their amortized cost.

The servicing assets were amortized over the estimated life of the underlying loans based on an income forecast method as a reduction of servicing income. The income forecast method of amortization was based on the projected cash flows returned by the third party market valuation. A particular periodic amortization was calculated by applying to the carrying amount of the MSRs the ratio of the cash flows projected for the current period to total remaining net MSR forecasted cash flow.

Servicing and Warranty Obligations

In the ordinary course of business, Doral Financial makes certain representations and warranties to purchasers and insurers of mortgage loans at the time of the loans sales to third parties regarding the characteristics of the loans sold. To the extent the loans do not meet specified characteristics, Doral Financial may be required to repurchase the mortgage loan.

Real Estate Held for Sale

The Company acquires real estate through foreclosure proceedings. Legal fees and other direct costs incurred in a foreclosure are expensed as incurred. These properties are held for sale and are stated at the lower of cost or fair value (after deduction of estimated disposition costs). A loss is recognized for any initial write down to fair value less costs to sell. Gains and losses not previously recognized that result from disposition of real estate held for sale are recorded in non-interest expenses within the other expenses caption in the accompanying Consolidated Statements of (Loss) Income.

F-13

Assets to be Disposed of by Sale

Long-term assets to be sold by the Company are classified as available for sale if the following criterias are met: (i) management, having the authority to approve the action, commits to a plan to sell the asset; (ii) the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; (iii) an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated; (iv) the sale of the asset is probable, and transfer of the asset is probable, and transfer of the asset is expected to qualify for recognition as completed sale, within one year; (v) the asset is being actively marketed for sale at price that is reasonable in relation to its current fair value; (vi) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Assets classified as available for sale are recorded at lower-of-cost-or-market less selling costs, recording a loss and adjusting book value. In the event the asset is not sold, it shall be registered at the lower of book value prior to reclassification to available for sale adjusted for the unrecognized depreciation or the fair value of the asset.

Premises and Equipment

Premises, equipment and leasehold improvements are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided on the straight-line method over the lesser of the estimated useful lives of the assets or the terms of the leases. The lease term is defined as the contractual term plus lease renewals that are considered to be “reasonably assured.” Useful lives range from three to ten years for leasehold improvements and equipment, and thirty to forty years for retail branches and office facilities.

The Company measures impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If identified, an impairment loss is recognized through a charge to earnings based on the fair value of the property.

Rent expense under operating leases is recognized on a straight-line basis over the lease term taking into consideration contractual rent increases. The difference between rent expense and the amount actually paid during a period is charged to a “Deferred rent obligation” account, included as part of accrued expenses and other liabilities in the Consolidated Statements of Financial Condition.

Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities

The Company recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished.

In the past, the Company sold mortgage loans and mortgage-backed securities subject to recourse provisions. Pursuant to these recourse arrangements, the Company agrees to retain or share the credit risk with the purchaser of such mortgage loans for a specified period or up to a certain percentage of the total amount in loans sold. The Company estimates the fair value of the retained recourse obligation or any liability incurred at the time of sale and includes such obligation with the net proceeds from the sale, resulting in a lower gain on sale recognition. Doral recognizes the fair value of its recourse obligation by estimating the amount that the Company would be required to pay for mortgage insurance from a third party in order to be relieved of its obligation under the contracts.

In accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” a transfer of financial assets (or all or a portion of the financial asset) in which Doral surrenders control over these financial assets shall be accounted for as a sale to the extent that consideration, other than beneficial interests in the transferred assets, is received in exchange. Doral has surrendered control over transferred assets if and only if all of the following conditions are met:

a. The transferred assets have been isolated from Doral – put presumptively beyond the reach of Doral and its creditors, even in bankruptcy or other receivership.

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b.	Each transferee has the right to pledge or exchange the assets it received, and no condition both constrains the transferee from taking advantage of its rights to pledge or exchange and provided more than a trivial benefit to Doral.
c.	Doral does not maintain effective control over the transferred assets through either (1) an agreement that both entitles and obligates Doral to repurchase or redeem them before their maturity, or (2) the ability to unilaterally cause the holder to return specific assets other than through a cleanup call.

If a transfer of financial assets in exchange for cash or other consideration (other than beneficial interests in the transferred assets) does not meet the criteria for a sale as described above, Doral accounts for the transfer as a secured borrowing with pledge of collateral.

GNMA programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the Company provides servicing. At the Company’s option and without GNMA prior authorization, Doral may repurchase such delinquent loan for an amount equal to 100% of the loan’s remaining principal balance. This buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When the loans backing a GNMA security are initially securitized, the Company treats the transaction as a sale for accounting purposes because the conditional nature of the buy-back option means that the Company does not maintain effective control over the loans and the loans are derecognized from the balance sheet. When individual loans later meet GNMA’s specified delinquency criteria and are eligible for repurchase, Doral is deemed to have regained effective control over these loans and must be brought back onto the Company’s books as assets at fair value, regardless of whether the Company intends to exercise the buy-back option. An offsetting liability is also recorded as part of “Accrued Expenses and Other Liabilities.”

Securities Sold under Agreements to Repurchase

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 140. Accordingly, the amounts received under these agreements represent borrowings, and the securities underlying the agreements remain in the asset accounts. These transactions are carried at the amounts at which transactions will be settled. The counterparties to the contracts generally have the right to repledge the securities received as collateral. Those securities are presented in the Consolidated Statements of Financial Condition as part of pledged investment securities.

Insurance Agency Commissions

Commissions generated by the Company’s insurance agency operation are recorded when earned. The Company’s insurance agency earns commissions when the insurance policies are issued by unaffiliated insurance companies.

Derivatives and Interest Rate Risk Management

Doral Financial uses derivatives to manage its exposure to interest rate risk caused by changes in interest rates, to changes in fair value of assets and liabilities and to secure future cash flows. 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 accounts for its derivatives under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. This statement requires recognition of all derivatives as either assets or liabilities in the balance sheet and requires measurement of those instruments at fair value through adjustments to accumulated other comprehensive income (loss) and/or current earnings, as appropriate. On the date the Company enters into a derivative contract, it designates the derivative instrument as either a fair value hedge, cash flow hedge or as a free-standing derivative instrument. In the case of a qualifying fair value hedge, changes in the value of the derivative instruments that have been highly effective are recognized in current period earnings along with the change in value of the designated hedged item. If the hedge relationship is terminated, hedge

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accounting is discontinued and changes in the value of the derivative instrument continues to be recognized in current period earnings, the hedged item is no longer adjusted for fair value changes, and the fair value adjustment to the hedged item while it was designated as a hedge continues to be reported as part of the basis of the item and is amortized to earnings as a yield adjustment. In the case of a qualifying cash flow hedge, changes in the value of the derivative instruments that have been highly effective are recognized in other comprehensive income, until such a time as those earnings are affected by the variability of the cash flows of the underlying hedged item. If the hedge relationship is terminated, the net derivative gain or loss related to the discontinued cash flow hedge should continue to be reported in accumulated other comprehensive income (loss) and will be reclassified into earnings when the cash flows that were hedged occur, or when the forecasted transaction affects earnings or if no longer expected to occur. After a cash flow hedge is discontinued, the derivative instrument future changes in fair value are recognized in current period earnings. In either a fair value hedge or a cash flow hedge, net earnings may be impacted to the extent the changes in the value of the derivative instruments do not perfectly offset changes in the value of the hedged items. For free-standing derivative instruments, changes in fair values are reported in current period income.

Prior to entering a hedge transaction, the Company formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that are designated as fair value or cash flow hedges to specific assets and liabilities on the statement of condition or to specific forecasted transactions or firm commitments along with a formal assessment, at both inception of the hedge and on an ongoing basis, as to the effectiveness of the derivative instrument in offsetting changes in fair values or cash flows of the hedged item. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued and the adjustment to fair value of the derivative instrument is recorded in current period earnings.

Income Taxes

Doral Financial recognizes deferred tax assets and liabilities based upon the expected future tax consequences of existing temporary differences between the carrying amounts and the tax bases of assets and liabilities based on applicable tax laws. To the extent tax laws change, deferred tax assets and liabilities are adjusted, when necessary, in the period that the tax change is enacted and recognizes income tax benefits when the realization of such benefits is probable. A valuation allowance is recognized for any deferred tax asset for which, based on management’s evaluation, it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax asset will not be realized. Significant management judgment is required in determining the provision for income taxes and, in particular, any valuation allowance recorded against our deferred tax assets. The amount of the valuation allowance has been determined based on our estimates of taxable income over the periods in which the deferred tax assets will be recoverable. Our methodology for determining the realizability of deferred tax assets involves estimates of future taxable income for the Company, as well as estimated operating expenses to support that anticipated level of business and the expiration dates and amounts of net operating loss carryforwards. These estimates are projected through the life of the related deferred tax assets based on assumptions that we believe to be reasonable and consistent with current operating results. In the determination of the realizability of the deferred tax asset, the Company evaluates both positive and negative evidence regarding the ability of the Company to generate sufficient taxable income. Changes in future operating results not currently forecasted may have a significant impact on the realization of deferred tax assets.

Income tax benefit or expense includes: (a) deferred tax expense or benefit, which represents the net change in the deferred tax liability or asset during the year plus any change in the valuation allowance, if any, and (b) current tax expense. Income tax expense excludes the tax effects related to adjustments recorded to accumulated other comprehensive income.

Legal Surplus

The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of Doral Bank PR’s net income for the year be transferred to a legal surplus account until such surplus equals its paid-in capital. The surplus account is not available for payment of dividends.

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Statements of Cash Flows

Cash and cash equivalents include cash and due from banks and money market instruments, which include securities purchased under agreements to resell, time deposits and other short-term investments with maturities of three months or less when purchased.

Earnings per Share

Basic net income per share is determined by dividing net income, after deducting any dividends on preferred stock, by the weighted-average number of common shares outstanding during the period.

Diluted net income per share is computed based on the assumption that all of the shares of convertible instruments will be converted into common stock, if dilutive, and considers the dilutive effect of stock options using the Treasury stock method.

Stock Option Plan

Effective January 1, 2006, the Doral Financial adopted SFAS No. 123R “Share-Based Payment” (“SFAS 123R”), without a material effect on the Consolidated Financial Statements of the Company. Since 2003, the Company expensed the fair value of stock options granted to employees using the “modified prospective” method under SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” (“SFAS 148”). Under this method, the Company expenses the fair value of all employee stock options granted after January 1, 2003, as well as the unvested portions of previously granted options. When unvested options are forfeited, any compensation expense previously recognized on such options is reversed in the period of the forfeiture.

SFAS 123R requires the Company to estimate the pre-vesting forfeiture rate, for grants that are forfeited prior to vesting, beginning on the grant date and to true-up forfeiture estimates through the vesting date so that compensation expense is recognized only for grants that vest. When unvested grants are forfeited, any compensation expense previously recognized on the forfeited grants is reversed in the period of the forfeiture. Accordingly, periodic compensation expense includes adjustments for actual and estimated pre-vesting forfeitures and changes in the estimated pre-vesting forfeiture rate.

During 2007, in connection with the closing of the sale of common stock to Doral Holdings all stock options outstanding as of July 19, 2007 were terminated. For additional information regarding the Company’s stock options please refer to Note 27.

Comprehensive Income

Comprehensive income includes net income and other transactions, except those with stockholders, which are recorded directly in equity. In the Company’s case, in addition to net income, other comprehensive income results from the changes in the unrealized gains and losses on securities that are classified as available for sale and unrealized gains and losses classified as cash flow hedges.

Segment Information

The Company reports financial and descriptive information about its reportable segments (see Note 32). Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance.

The Company’s segment reporting is organized by legal entity and aggregated by line of business consistent with the Company’s business model. Legal entities that do not meet the threshold for separate disclosure are aggregated with other legal entities with similar lines of business. Doral’s management made this determination based on operating decisions particular to each line of business.

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Reclassifications

Certain amounts reflected in the 2005 and 2006 Consolidated Financial Statements have been reclassified to conform to the presentation for 2007. In particular for 2005 and 2006, Doral Financial has reclassified the expenses related to temporary employment agencies on the Statements of Income. Previously, the temporary employment agencies expense was included as part of professional services. This amount has been reclassified to compensation and benefit expense for 2005 and 2006.

Recent Accounting Pronouncements

Accounting for Certain Hybrid Financial Instruments. On February 16, 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140” (“SFAS 155”), which resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets” (“DIG Issue D1”). SFAS 155 amends SFAS 133 to simplify the accounting for certain derivatives embedded in other financial instruments (a hybrid financial instrument) by permitting fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise required bifurcation, provided that the entire hybrid financial instrument is accounted for on a fair value basis. SFAS 155 also establishes the requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, which replaces the interim guidance in DIG Issue D1. SFAS 155 amends SFAS 140 to allow a qualifying special-purpose entity to hold a derivative financial instrument that pertains to beneficial interests other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements for any period of the fiscal year. The adoption of the provision of SFAS 155 did not have material impact on the Company’s financial statements.

Fair Value Measurements. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements.

The definition of fair value retains the exchange price notion in earlier definitions of fair value. This Statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the principal (or most advantageous) market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. Therefore, the definition focuses on the price that would be received to sell the asset or paid to transfer the liability at the measurement date (an exit price), not the price that would be paid to acquire the asset or received to assume the liability at the measurement date (an entry price).

This Statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, this Statement establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The notion of unobservable inputs is intended to allow for situations in which there is little, if any, market activity for the asset or liability at the measurement date. In those situations, the reporting entity need not undertake all possible efforts to obtain information about market participant assumptions. However, the reporting entity must not ignore information about market participant assumptions that is reasonably available without undue cost and effort.

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This Statement expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. The disclosures focus on the inputs used to measure fair value and for recurring fair value measurements using significant unobservable inputs (within Level 3 of the fair value hierarchy), the effect of the measurements on earnings (or changes in net assets) for the period. This Statement encourages entities to combine the fair value information disclosed under this Statement with the fair value information disclosed under other accounting pronouncements, including FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” where practicable.

This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The Company is currently evaluating the effect, if any, of the adoption of this Statement on its financial statements, commencing on January 1, 2008.

Issuer’s Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument. In November 2006, the FASB ratified the consensus reached by the EITF on EITF Issue No. 06-7, “Issuer’s Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities” (“EITF 06-07”). The consensus provides that a previously bifurcated conversion option in a convertible debt instrument for which the embedded conversion option no longer meets the bifurcation criteria in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), should be reclassified (at its fair value on the date of reclassification) to stockholders’ equity. Any debt discount recognized when the conversion option was bifurcated from the convertible debt instrument should continue to be amortized. EITF 06-07 should be applied to all previously bifurcated conversion options in convertible debt instruments that no longer meet the bifurcation criteria in SFAS 133, in interim or annual periods beginning after December 15, 2006. As of December 31, 2007 the Company did not have any convertible debt instruments.

SFAS No. 159 “Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.” In February 2007, the FASB issued SFAS No. 159, which provides companies with an option to report selected financial assets and liabilities at fair value. The statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The new statement does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in FASB Statements No. 157, Fair Value Measurements, and No. 107, Disclosures about Fair Value of Financial Instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007.

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 Company will be evaluating the effect, if any, of the adoption of this recently issued accounting bulletin on its consolidated financial statements commencing on January 1, 2008.

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

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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 define 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 fist quarter of 2009. Earlier application in not permitted. The Company is currently evaluating the effect, if any, of the adoption of this Statement on its financial statements, commencing on January 1, 2009.

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

SFAS 141 (revised) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity at the acquisition date, measured at their fair values as of that date. In addition, this statement expands and improves the information reported about assets acquired and liabilities assumed arising from contingencies. Contingencies arising from a business combination should be recognized as of the acquisition date, 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 in not permitted. The effective date of this Statement is the same as that of the related SFAS Statement No. 160, Noncontrolling Interest in Consolidated Financial Statements. The Company is currently evaluating the effect, if any, of the adoption of this Statement on its financial statements, commencing on January 1, 2009.

3. Regulatory Requirements

Holding Company Requirements

Doral Financial is a bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956 (the “BHC Act”), as amended by the Gramm-Leach-Bliley Act of 1999 (the “Gramm-Leach-Bliley Act”). As a bank holding company, Doral Financial’s activities and those of its banking and non-banking subsidiaries are limited to banking activities and such other activities as the Federal Reserve has determined to be closely related to the business of banking. Under the Gramm-Leach-Bliley Act, financial holding companies can engage in a broader range of financial activities than other holding companies. Given the difficulties faced by Doral Financial following the restatement of its audited financial statements for the period between January 1, 2000 to December 31, 2004, the Company filed a notice with the Federal Reserve withdrawing its election to be treated as a financial holding company, which became effective January 8, 2008.

The withdrawal of its election to be treated as a financial holding company has not adversely affected and is not expected to adversely affect Doral Financial’s current operations, all of which are permitted to bank holding companies that have not elected to be treated as financial holding companies. Specifically, Doral Financial is

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authorized to engage in insurance agency activities in Puerto Rico pursuant to Regulation K promulgated under the BHC Act. Under the BHC Act, Doral Financial may not, directly or indirectly, acquire the ownership or control of more than 5% of any class of voting shares of a bank or another bank holding company, without the prior approval of the Federal Reserve.

Banking Charters

Doral Bank PR is a commercial bank chartered under the laws of the Commonwealth of Puerto Rico regulated by the Office of the Commissioner of Financial Institutions (the “CFI”), pursuant to the Puerto Rico Banking Act of 1933, as amended, and subject to supervision and examination by the Federal Deposit Insurance Corporation (“FDIC”). Its deposits are insured by the FDIC.

Doral Bank NY is a federally chartered savings bank regulated by the Office of Thrift Supervision (“OTS”). Its deposit accounts are also insured by the FDIC.

As of December 31, 2007, 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, the Company entered into a consent order with the Federal Reserve. Pursuant to the requirements of the existing cease and desist order, the Company submitted a capital plan to the Federal Reserve, pursuant to which it established a target minimum leverage ratio of 5.5% for Doral Financial and 6.0% for Doral Bank PR. As a result of the increase in the allowance for loan and lease losses recorded by Doral Bank PR during the fourth quarter of 2007, its leverage ratio dropped to 5.7%. 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 December 31, 2007, the Doral Financial’s banking subsidiaries were in compliance with all capital requirements.

Doral Financial’s regulatory capital ratios as of December 31, 2007 increased as a result of the issuance of common stock in connection with the recapitalization

On February 15, 2008, the Board of Directors of Doral Financial approved a capital infusion of $80.0 million to Doral Bank PR to raise its leverage ratio above 6.0%.

Regulatory Capital Requirements

The Company’s banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory actions against Doral Financial’s banking subsidiaries, as well as additional discretionary actions, by regulators that, if undertaken, could have a direct material effect on the Company. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory guidelines. The Company’s and its banking subsidiaries’ capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures, established by regulation to ensure capital adequacy, require the Company’s banking subsidiaries to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).

Under the consent order entered into with the Federal Reserve, the Company filed a capital plan with the Federal Reserve in which it agreed to maintain a leverage ratio of at least 5.5% and 6.0% for Doral Financial and Doral Bank PR, respectively.

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As of December 31, 2007, Doral Bank PR was considered “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized”, Doral Bank PR must maintain Total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table.

Doral Bank NY is subject to substantially the same regulatory capital requirements of Doral Bank PR as set forth above. As of December 31, 2007, Doral Bank NY was in compliance with the capital requirements for a “well-capitalized” institution.

As a result of the change in control described in Note 1, Doral Financial is no longer required to meet regulatory capital standards.

Doral Financial’s, Doral Bank PR’s and Doral Bank NY’s actual capital amounts and ratios are presented in the following table. Total of approximately $419.2 million (2006 — $404.4 million), $126.4 million (2006 — $25.4 million), and $2.2 million (2006 — $1.0 million) representing non-qualifying perpetual preferred stock and non-allowable assets such as deferred tax asset, goodwill and other intangible assets, were deducted from the capital of Doral Financial, Doral Bank PR and Doral Bank NY, respectively.

									To be well capitalized
					For capital adequacy				under prompt corrective
	Actual				purposes				action provisions
(Dollars in thousands)	Amount		Ratio (%)		Amount		Ratio (%)		Amount		Ratio (%)
As of December 31, 2007:
Total capital (to risk-weighted assets):
Doral Financial Consolidated	$	1,033,962		17.8	$	465,331		³8.0		N/A		N/A
Doral Bank PR	$	485,057		12.2	$	319,502		³8.0	$	399,378		³10.0
Doral Bank NY	$	13,257		13.8	$	7,696		³8.0	$	9,620		³10.0
Tier 1 capital (to risk-weighted assets):
Doral Financial Consolidated	$	960,639		16.5	$	232,666		³4.0		N/A		N/A
Doral Bank PR	$	434,357		10.9	$	159,751		³4.0	$	239,627		³6.0
Doral Bank NY	$	12,530		13.0	$	3,848		³4.0	$	5,772		³6.0
Leverage Ratio:(1)
Doral Financial Consolidated	$	960,639\		10.8	$	355,863		³4.0		N/A		N/A
Doral Bank PR	$	434,357		5.7	$	302,446		³4.0	$	378,057		³5.0
Doral Bank NY	$	12,530		10.6	$	4,727		³4.0	$	5,909		³5.0
As of December 31, 2006:
Total capital (to risk-weighted assets):
Doral Financial Consolidated	$	805,946		13.7	$	470,496		³8.0		N/A		N/A
Doral Bank PR	$	737,175		21.1	$	279,605		³8.0	$	349,507		³10.0
Doral Bank NY	$	63,272		16.3	$	31,078		³8.0	$	38,847		³10.0
Tier 1 capital (to risk-weighted assets):
Doral Financial Consolidated	$	605,971		10.3	$	235,248		³4.0		N/A		N/A
Doral Bank PR	$	692,954		19.8	$	139,803		³4.0	$	209,704		³6.0
Doral Bank NY	$	61,336		15.8	$	15,539		³4.0	$	23,308		³6.0
Leverage Ratio:(1)
Doral Financial Consolidated	$	605,971		4.5	$	533,733		³4.0		N/A		N/A
Doral Bank PR	$	692,954		6.8	$	410,010		³4.0	$	512,513		³5.0
Doral Bank NY	$	61,336		10.3	$	23,921		³4.0	$	29,901		³5.0

⁽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.

Housing and Urban Development Requirements

The Company’s mortgage operation is a US Department of Housing and Urban Development (“HUD”) approved non-supervised mortgagee and is required to maintain an excess of current assets over current liabilities and minimum net worth, as defined by the various regulatory agencies. Such equity requirement is tied to the size of the Company’s servicing portfolio and ranged up to $1.0 million. The Company is also required to maintain fidelity bonds and errors and omissions insurance coverage based on the balance of its servicing portfolio.

F-22

For the year ended December 31, 2007, Doral Mortgage did not maintain the required minimum level for adjusted net worth required by HUD. In February 2008, Doral Bank PR made a capital contribution to Doral Mortgage in order to comply with the minimum adjusted net worth required by HUD.

Registered Broker-Dealer Requirements

During 2006, the Company decided to reduce 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 of this decision, Doral Securities’ operations are currently limited to acting as a co-investment manager to a local fixed-income investment company. The Company intends to eliminate this operation during 2008 and assign its contract to Doral Bank PR.

4. Money Market Investments

At December 31, 2007 and December 31, 2006, money market investments included $199.8 million and $234.3 million, respectively, in time deposits and other short-term money market investments pledged as collateral for securities sold under agreement to repurchase, which the counterparty can repledge.

5. Securities Held for Trading

Securities held for trading consisted of:

	December 31,
(In thousands)	2007		2006
Mortgage-backed securities:
GNMA exempt	$	33,678	$	52,969
GNMA taxable		11,928		19,374
CMO certificates		16,064		24,888
FHLMC and FNMA		8,693		9,343
Variable rate interest-only strips		51,074		48,864
Fixed rate interest-only strips		854		1,062
U.S. Treasury Notes		152,695		—
Derivatives		1,476		27,282
Other		—		23
	$	276,462	$	183,805

The weighted-average yield on securities held for trading, including IOs, as of December 31, 2007 was 6.00% (2006 — 7.00%).

Set forth below is a summary of the components of net loss from securities held for trading:

	Year ended December 31,
(In thousands)	2007			2006			2005
Net realized (losses) gains on sales of securities held for trading	$	(25,935	)	$	(8,554	)	$	13,315
Gain (loss) on the IO valuation		8,554			(41,967	)		(12,523	)
Net unrealized losses on trading securities, excluding IOs		(8,557	)		(2,662	)		(4,530	)
Net realized and unrealized (losses) gains on derivative instruments		(1,787	)		15,955			332
Total	$	(27,725	)	$	(37,228	)	$	(3,406	)

F-23

6. Securities Available for Sale

The amortized cost, gross unrealized gains and losses, approximate market value, weighted-average yield and contractual maturities of securities available for sale as of December 31, 2007 and 2006, and approximate market value and weighted-average yield as of December 31, 2005, were as follows:

	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		6.90	%
FNMA
Due over ten years		260,143		4,297		558		263,882		6.06	%
CMO Certificates
Due over ten years		537,997		—		28,944		509,053		6.21	%
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 a 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 a year		6,899		11		20		6,890		3.98	%
Due from five to ten 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		5.55	%

F-24

	2006											2005
									Weighted-					Weighted-
	Amortized		Unrealized		Unrealized		Market		Average			Market		Average
(Dollars in thousands)	Cost		Gains		Losses		Value		Yield			Value		Yield
Mortgage-Backed Securities GNMA
Due over ten years	$	1,346,927	$	17	$	36,794	$	1,310,150		4.62	%	$	2,541,681		4.76	%
FHLMC and FNMA
Due over ten years		217,638		—		7,331		210,307		4.94	%		957,449		5.32	%
Debt Securities
FHLB Notes
Due over ten years		27,901		—		404		27,497		5.50	%		110,052		5.50	%
FNMA Notes
Due from one to five years		46,011		—		300		45,711		4.60	%		—		—
U.S. Treasury
Due within a year		100,032		—		376		99,656		1.97	%		—		—
Due from one to five years		—		—		—		—		—			198,727		1.58	%
Due from five to ten years		761,100		—		45,735		715,365		3.65	%		97,625		1.97	%
Due over ten years		—		—		—		—		—			726,039		3.65	%
	$	2,499,609	$	17	$	90,940	$	2,408,686		4.26	%	$	4,631,573		4.52	%

The weighted-average yield is computed based on amortized cost and, therefore, does not give effect to changes in fair value.

Proceeds from sales of securities available for sale during 2007 were approximately $2.6 billion (2006 — $1.4 billion and 2005 — $4.6 billion). For 2007, gross gains of $2.7 million (2006 — $0.7 million and 2005 — $13.4 million) were realized on those sales. For 2007, gross losses of $100.2 million (2006 — $28.4 million and 2005 — $54.2 million) were realized on those sales.

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.

During the third quarter of 2007, as a result of a reassessment, in order to reduce interest rate risk, based on existing market conditions, of the Company’s intent of holding available for sale securities until maturity or recovery of losses, the Company sold $1.9 billion in available for sale securities at a loss of $96.8 million. As part of this transaction, the related borrowings used to finance these securities were cancelled and losses of $16.4 million on economic hedging transactions and of $14.8 million on extinguishment of liabilities were recognized.

During the fourth quarter of 2007, the Company transferred its held to maturity portfolio, amounting to approximately $1.8 billion, to the available for sale portfolio and subsequently sold $437.5 million in long dated US Treasury securities for a gain. The sale was executed to reduce the Company’s interest rate risk exposure. Provide to the Company with a greater ability to manage interest rate risk was the primary factor in making the decision to transfer the securities from the held to maturity to the available for sale portfolio. Since the transfer did not qualify under the exemption provisions for the sale or transfer of held to maturity securities under SFAS 115, the reclassification decision by the Company is deemed to have “tainted” the held to maturity category and it will not be permitted to prospectively classify any investment securities scoped under SFAS 115 as held to maturity for a period of two years. The Company recognized, at the time of the transfer, $8.1 million of unrealized loss on available for sale securities in accumulated in other comprehensive loss, net of taxes. Under current conditions, based on credit characteristics of the investment portfolio, management’s assessment is that the Company has the intent and ability to retain its portfolio of investment securities until market recovery.

During 2006, the Company’s sold $1.7 billion in available for sale securities (of which $231.0 million settled during the first quarter of 2007) at a loss of $22.7 million. As part of this transaction, repurchase agreements amounting to $1.7 billion were terminated and a loss of $6.9 million was recorded as loss on sale extinguishment for the year ended December 31, 2006. Also, during 2005 the Company sold $1.2 billion in available for sale securities at a loss of $45.3 million.

F-25

7. Securities Held to Maturity

The Company transferred $1.8 billion of held to maturity investment securities to the available for sale portfolio during the fourth quarter of 2007. As a result of the transfer, there were no held to maturity securities as of December 31, 2007.

The amortized cost, gross unrealized gains and losses, approximate market value, weighted-average yield and contractual maturities of securities held to maturity as of December 31, 2006 and the amortized cost and weighted-average yield as of December 31, 2005 were as follows:

	2006											2005
									Weighted-					Weighted-
	Amortized		Unrealized		Unrealized		Market		Average			Amortized		Average
(Dollars in thousands)	Cost		Gains		Losses		Value		Yield			Cost		Yield
Mortgage-Backed Securities
GNMA
Due from one to five years	$	656	$	9	$	—	$	665		5.99	%	$	508		5.88	%
Due from five to ten years													328		6.45	%
Due over ten years		3,592		127		—		3,719		6.85	%		4,336		6.73	%
FHLMC and FNMA
Due over ten years		291,905		2,587		964		293,528		6.05	%		337,266		6.05	%
CMO Certificates
Due over ten years		8,209		—		542		7,667		5.79	%		9,817		5.78	%
Debt Securities
FHLB Notes
Due within one year		100,000		—		271		99,729		2.86	%		—		—
Due from one to five years		100,671		—		2,327		98,344		4.15	%		200,847		3.53	%
Due from five to ten years		50,000		—		625		49,375		4.13	%		50,000		4.13	%
Due over ten years		273,594		—		13,555		260,039		5.10	%		273,594		5.10	%
FHLB Zero Coupon
Due over ten years		128,602		—		5,221		123,381		6.50	%		120,543		6.50	%
FHLMC Zero Coupon
Due over ten years		269,975		—		8,831		261,144		5.85	%		254,647		5.86	%
FHLMC and FNMA Notes
Due over ten years		149,989		—		4,357		145,632		5.65	%		149,988		5.65	%
P.R. Housing Bank
Due within one year		5,000		11		—		5,011		6.00	%		5,000		6.00	%
Due over ten years		7,235		—		—		7,235		5.72	%		2,235		6.20	%
U.S. Treasury
Due from five to ten years		201,195		—		12,758		188,437		3.52	%		201,361		3.52	%
Due over ten years		472,364		1,083		36,194		437,253		4.31	%		473,904		4.33	%
Other
Due within one year		25		—		—		25		5.30	%		25		6.20	%
Due from one to five years		11,925		—		206		11,719		4.47	%		8,295		4.42	%
Due over ten years		8,000		449		—		8,449		5.61	%		7,000		5.93	%
	$	2,082,937	$	4,266	$	85,851	$	2,001,352		4.96	%	$	2,099,694		4.98	%

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.

8. Investments in an Unrealized Loss Position

The following tables show the Company’s gross unrealized losses and fair value for available for sale and held to maturity investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2007 and December 31, 2006.

F-26

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 Certificates		9		502,712		28,285		4		6,341		659		13		509,053		28,944
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

SECURITIES AVAILABLE FOR SALE

	As of December 31, 2006
	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	$	484	$	15		109	$	1,309,019	$	36,779		110	$	1,309,503	$	36,794
FNMA		—		—		—		22		210,307		7,331		22		210,307		7,331
Debt Securities
FNMA Notes		2		45,711		300		—		—		—		2		45,711		300
FHLB Notes		—		—		—		1		27,497		404		1		27,497		404
US Treasury		—		—		—		11		815,021		46,111		11		815,021		46,111
		3	$	46,195	$	315		143	$	2,361,844	$	90,625		146	$	2,408,039	$	90,940

SECURITIES HELD TO MATURITY

	As of December 31, 2006
	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
FNMA		—	$	—	$	—		2	$	40,143	$	964		2	$	40,143	$	964
CMO Certificates		1		148		1		5		7,519		541		6		7,667		542
Debt Securities
FHLB Notes		1		49,375		625		9		458,112		16,153		10		507,487		16,778
FHLB Zero Coupon		—		—		—		1		123,381		5,221		1		123,381		5,221
FHLMC Zero Coupon		—		—		—		4		261,144		8,831		4		261,144		8,831
FHLMC and FNMA Notes		1		11,858		391		4		133,774		3,966		5		145,632		4,357
US Treasury		1		214,344		20,866		7		349,195		28,086		8		563,539		48,952
Other		2		4,954		46		2		6,739		160		4		11,693		206
		6	$	280,679	$	21,929		34	$	1,380,007	$	63,922		40	$	1,660,686	$	85,851

The securities held by the Company are principally mortgage-backed securities, US Treasury and agency securities. Thus, a substantial portion of these instruments are guaranteed by mortgages, a US government-sponsored entity or the full faith and credit of the US government and, therefore, principal and interest on the securities are deemed recoverable. The Company has the ability and intent to hold the securities until maturity or until the unrealized losses are recovered. Therefore, no other-than-temporary impairment loss has been recognized.

F-27

The market value of the portfolio of non agency CMO’s that the Company purchased during the third and fourth quarters of 2007 had decreased in value by $28.3 million as of December 31, 2007. All of the bonds in this portfolio are AAA rated and in general are the super senior tranches of the corresponding deals. The market place for these types of securities has suffered from a generalized lack of liquidity as of the fourth quarter. This lack of liquidity has caused some serious dislocations in the pricing of these instruments. There have been many participants that have been forced to sell out of positions in adverse market conditions. These forced sales have had the effect of flooding the market with more bonds and therefore creating further price adjustments. The changes in prices are being caused by market dislocations associated with the lack of liquidity in the market and not by the underlying fundamentals of the bond structures. Furthermore the Company does not rely on repurchase facilities to finance the positions and therefore it has the capacity to hold the transactions until they recover their value. For this reason the Company has not deemed these securities to be impaired.

9. Loans Held for Sale

At December 31, loans held for sale consisted of the following:

(In thousands)	2007		2006
Conventional single family residential loans	$	189,995	$	1,371,088
FHA/VA loans		141,601		115,225
Mortgage loans on residential multifamily		—		5,621
Construction and commercial real estate loans		86,960		277,156
Total loans held for sale(1)	$	418,556	$	1,769,090

(1) At December 31, 2007 and 2006, the loans held for sale portfolio includes $2.0 million and $23.2 million, respectively, related to interest-only loans

During 2007, the Company performed a review of its loans held for sale portfolio. As a result of this review, the Company reassessed its plan to sell certain of its mortgage portfolio classified as held for sale and transferred a total of $1.4 billion of loans from the held for sale portfolio to its loan receivable portfolio, at lower-of-cost-or-market on an aggregated basis. No charge was recorded at the time of transfer because such loans had been marked to the lower-of-cost-or-market while classified in the held for sale portfolio.

On March 15, 2007, Doral Bank NY, Doral Financial’s wholly owned New York City-based thrift subsidiary, entered into a definitive purchase and assumption agreement with New York Commercial Bank, the commercial bank subsidiary of New York Community Bancorp, pursuant to which New York Commercial Bank agreed to acquire Doral Bank NY’s eleven existing branches in the New York City metropolitan area and certain other assets and will assume certain liabilities. Accordingly, during the first quarter of 2007, Doral Bank NY transferred some loans from the loans receivable portfolio to its loans held for sale portfolio at the lower-of-cost-or-market, and recorded a loss of $2.1 million. On July 27, 2007, the Company completed the sale of approximately $209.1 million in loans related to the sale of Doral Bank NY’s branch network and certain related assets.

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

At December 31, 2007 and 2006, the loans held for sale portfolio includes $126.0 million and $100.3 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.

As of December 31, the aggregated amortized cost and approximate fair value of loans held for sale were as follows:

F-28

			Approximate
(In thousands)	Amortized Cost		Fair Value
2007	$	418,556	$	419,865
2006	$	1,769,090	$	1,786,728

10. Loans Receivable

Loans receivable are related to the Company’s banking and construction loan operations and consisted of:

	December 31,
(In thousands)	2007			2006
Construction loans(1)	$	588,175		$	817,352
Residential mortgage loans(2)		3,340,162			1,785,454
Commercial-secured by real estate		767,441			541,891
Consumer-other:
Personal loans		44,810			37,896
Auto loans		195			426
Credit cards		19,047			20,086
Overdrawn checking account		164			324
Revolving lines of credit		26,941			28,229
Lease financing receivables		33,457			43,565
Commercial non-real estate		126,484			158,963
Loans on savings deposits		11,037			16,811
Land secured		119,232			42,769
Loans receivable, gross(3)		5,077,145			3,493,766
Less:
Discount on loans transferred(2)		(17,615	)		(22,016	)
Unearned interest and deferred loan fees, net		(8,597	)		(14,580	)
Allowance for loan and lease losses		(124,733	)		(67,233	)
		(150,945	)		(103,829	)
Loans receivable, net	$	4,926,200		$	3,389,937

(1)	Includes $422.4 million and $680.6 million of construction loans for residential housing projects as of December 31, 2007 and 2006, respectively. Also includes $165.8 million and $136.8 million of construction loans for commercial, condominiums and multifamily projects as of December 31, 2007 and 2006, respectively.
(2)	Includes $1.4 billion and $961.5 million of loans transferred during 2007 and 2006, respectively, from the loans held for sale portfolio to the loans receivable portfolio.
(3)	Includes $56.4 million and $42.6 million of interest-only loans as of December 31, 2007 and 2006, respectively.

Fixed-rate loans and adjustable-rate loans were approximately $4.2 billion and $0.9 billion at December 31, 2007, and $2.6 billion and $0.9 billion, at December 31, 2006, respectively.

The adjustable rate loans, mostly composed of construction loans for residential projects, land loans, commercial real estate, commercial non-real estate and certain consumer loans, have interest rate adjustment limitations and are generally tied to interest rate market indices (primarily Prime Rate and 3-month LIBOR). Future market factors may affect the correlation of the interest rate adjustment with the rate the Company pays on the short-term deposits that have primarily funded these loans.

As of December 31, 2007, loans held for investment amounting to $212.5 million were pledged to secure financing agreements with local financial institutions, and for which the creditor has the right to repledge this collateral.

F-29

Loans analyzed individually for impairment as of December 31, 2007 and 2006 amounted to approximately $297.6 million and $139.6 million, respectively. At December 31, 2007, an allowance of approximately $54.0 million (2006 - - $22.6 million) was allocated to certain loans analyzed individually for impairment with an aggregate principal outstanding balance of $263.2 million (2006 — $112.4 million). Average impaired loans for the years ended December 31, 2007 and 2006, were $257.5 million and $92.9 million, respectively.

As of December 31, 2007, the Company had loans receivable and loans held for sale, including impaired loans, on which the accrual of interest income had been discontinued, amounting to approximately $661.9 million (2006 — $377.4 million). For the year ended December 31, 2007 and 2006, the Company would have recognized $22.8 million and $7.2 million, respectively, in additional interest income had all delinquent loans been accounted for on an accrual basis.

11. Allowance for Loan and Lease Losses

Changes in the allowance for loan and lease losses were as follows:

	Year ended December 31,
(In thousands)	2007			2006			2005
Balance at beginning of year	$	67,233		$	35,044		$	20,881
Provision for loan and lease losses		78,214			39,829			22,369
Recoveries		802			822			647
Losses charged to the allowance		(21,516	)		(8,462	)		(8,761	)
Other		—			—			(92	)
Balance at the end of year	$	124,733		$	67,233		$	35,044

12. Servicing Activities

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 (“MSR’s”). The Company determines the fair value of its MSRs on the basis of a third party market valuation for the Company’s entire servicing portfolio (governmental, conforming and non-conforming portfolios). 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 components of net servicing income for the year ended December 31, 2007, upon the adoption of SFAS No. 156, are shown below:

	Year ended
(In thousands)	December 31, 2007
Servicing fees	$	35,378
Late charges		9,057
Prepayment penalties		635
Interest loss		(3,969	)
Other servicing fees		386
Servicing income, gross		41,487
Changes in fair value of mortgage servicing rights(1)		(20,800	)
Total net servicing income	$	20,687

(1) Change in fair value was the result of the prepayment speed and the normal run-off.

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The components of net servicing income for the years ended December 31, 2006 and 2005 (prior to the implementation of SFAS No. 156) are shown below:

	Year ended December 31,
(In thousands)	2006			2005
Servicing fees	$	36,557		$	31,330
Late charges		9,470			8,860
Prepayment penalties		1,024			2,502
Interest loss		(4,601	)		(3,551	)
Other servicing fees		251			438
Servicing income, gross		42,701			39,579
Amortization of servicing assets		(31,211	)		(26,846	)
Net (impairment) recovery of servicing assets		(4,586	)		3,982
Total net servicing income	$	6,904		$	16,715

Upon the adoption of SFAS No. 156, the Company recorded a cumulative effect adjustment to retained earnings (net of tax) as of the beginning of January 1, 2007 for the difference between the fair value and the carrying amount to bring the MSR balance at December 31, 2006 to fair value. The table below reconciles the balance of MSRs as of December 31, 2006 and January 1, 2007.

(In thousands)
Balance at December 31, 2006	$	176,367
Adjustment upon adoption of SFAS No.156		1,517
Balance at January 1, 2007	$	177,884

The changes in servicing assets for the years ended December 31, 2007, 2006 and 2005 are shown below:

	Year ended December 31,
(In thousands)	2007			2006			2005
Balance at beginning of year	$	177,884		$	156,812		$	136,024
Capitalization of servicing assets		5,305			50,028			45,433
Sales of servicing assets(1)		(9,581	)		—			—
MSRs reversal on loans purchased(2)		(2,570	)		—			—
Net servicing assets recognized as part of the restructured mortgage loan sale transactions		—			11,351			—
Rights purchased		—			209			4,421
Amortization		—			(31,211	)		(26,846	)
Application of valuation allowance to write-down permanently impaired servicing assets		—			(410	)		(2,220	)
Balance before valuation allowance at end of year		171,038			186,779			156,812
Change in fair value (2007), valuation allowance for temporary impairment (2006 and 2005)		(20,800	)		(10,412	)		(6,236	)
Balance at end of year(3)	$	150,238		$	176,367		$	150,576

(1)	Amount represents MSR sales related to $693.9 million in principal balance of mortgage loans.
(2)	MSR value related to loans purchased from a financial institution with a balance of $276.8 million as of October 31, 2007, where the Company owned the MSR.
(3)	Outstanding balance of loans serviced for third parties amounted to $10.1 billion as of December 31, 2007.

Prior to the adoption of SFAS No. 156 the Company’s MSRs, impairment charges were recognized through a valuation allowance for each individual stratum of servicing assets. The valuation allowance was adjusted to reflect the amount, if any, by which the cost basis of the servicing asset for a given stratum of loans being serviced

F-31

exceeded its fair value. Any fair value in excess of the cost basis of the servicing asset for a given stratum was not recognized. Other-than-temporary impairment, if any, was recognized as a direct write-down of the servicing assets, and the valuation allowance was created to reduce the cost basis of the servicing asset.

Changes in the impairment allowance for the years ended December 31, 2006 and 2005 were as follows:

	December 31,
(In thousands)	2006			2005
Balance at beginning of year	$	6,236		$	12,438
Temporary impairment charges		9,905			21,912
Write-down for other than temporary impairment of servicing assets		(410	)		(2,220	)
Recoveries		(5,319	)		(25,894	)
Balance at end of year	$	10,412		$	6,236

The Company’s servicing portfolio amounted to approximately $13.8 billion, $15.3 billion and $15.7 billion at December 31, 2007, 2006 and 2005, respectively, including $3.7 billion, $3.3 billion and $5.9 billion, respectively, of loans owned by the Company for which no servicing asset has been recognized.

During the fourth quarter of 2007, the Company purchased approximately $276.8 million of residential mortgage loans from a third party, but serviced by the Company. As a result of the settlement of this transaction, the Company reversed $2.6 million in MSRs associated with the purchased loans.

During the years ended December 31, 2006 and 2005, the Company purchased servicing rights of approximately $16.4 million and $229.0 million, respectively, in principal amount of mortgage loans. During 2007, the Company did not purchase servicing rights.

Under most of the servicing agreements, the Company is required to advance funds to make scheduled payments to investors, if payments due have not been received from the mortgagors. At December 31, 2007, receivables and mortgage-servicing advances included advances to investors of approximately $31.8 million (2006 — $47.9 million).

In general, Doral Financial’s servicing agreements are terminable by the investors for cause. The Company’s servicing agreements with FNMA permit FNMA to terminate the Company’s servicing rights if FNMA determines that changes in the Company’s financial condition have materially adversely affected the Company’s ability to satisfactorily service the mortgage loans. Approximately 37% of Doral Financial’s mortgage loan servicing on behalf of third parties relates to mortgage servicing for FNMA. Termination of Doral Financial’s servicing rights with respect to FNMA or other parties for which it provides servicing could have a material adverse effect on the results of operations and financial condition of Doral Financial.

13. Sales and Securitizations of Mortgage Loans

As disclosed in Note 3, 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 retained interests are subject to prepayment and interest rate risk.

Key economic assumptions used in determining the fair value at the time of sale ranged as follows:

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	Servicing Assets						Interest-Only Strips
	Minimum			Maximum			Minimum			Maximum
2007:
Constant prepayment rate:
Government –guaranteed mortgage loans		7.74	%		11.91	%		N/A			N/A
Conventional conforming mortgage loans		7.79	%		13.99	%		N/A			N/A
Conventional non-conforming mortgage loans		7.24	%		38.27	%		8.88	%		10.22	%
Residual cash flow discount rate:
Government –guaranteed mortgage loans		10.50	%		10.50	%		N/A			N/A
Conventional conforming mortgage loans		9.00	%		10.98	%		N/A			N/A
Conventional non-conforming mortgage loans		13.80	%		15.00	%		8.48	%		12.69	%
2006:
Constant prepayment rate:
Government –guaranteed mortgage loans		9.07	%		14.06	%		N/A			N/A
Conventional conforming mortgage loans		8.49	%		22.79	%		N/A			N/A
Conventional non-conforming mortgage loans		11.86	%		47.77	%		11.16	%		16.33	%
Residual cash flow discount rate:
Government –guaranteed mortgage loans		10.50	%		10.50	%		N/A			N/A
Conventional conforming mortgage loans		9.00	%		10.50	%		N/A			N/A
Conventional non-conforming mortgage loans		13.99	%		14.86	%		8.98	%		14.05	%
2005:
Constant prepayment rate:
Government –guaranteed mortgage loans		6.54	%		14.82	%		N/A			N/A
Conventional conforming mortgage loans		5.32	%		22.45	%		N/A			N/A
Conventional non-conforming mortgage loans		5.58	%		24.87	%		13.44	%		19.90	%
Residual cash flow discount rate:
Government –guaranteed mortgage loans		10.00	%		10.00	%		N/A			N/A
Conventional conforming mortgage loans		8.50	%		10.00	%		N/A			N/A
Conventional non-conforming mortgage loans		11.50	%		12.00	%		8.63	%		11.48	%

At December 31, 2007 and 2006, fair values of the Company’s retained interests were based on internal and external valuation models that incorporate market driven assumptions, adjusted by the particular characteristics of the Company’s servicing portfolio, discount rates, mortgage prepayment rates, and implied forward LIBOR rates (in the case of variable IOs). 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 December 31, 2007, were as follows:

(Dollars in thousands)	Servicing Assets			Interest-Only Strips
Carrying amount of retained interest	$	150,238		$	51,928
Weighted-average expected life (in years)		7.0			5.7
Constant prepayment rate (weighted-average annual rate)		11.50	%		9.81	%
Decrease in fair value due to 10% adverse change	$	(4,762	)	$	(1,808	)
Decrease in fair value due to 20% adverse change	$	(9,189	)	$	(3,519	)
Residual cash flow discount rate (weighted-average annual rate)		11.44	%		12.11	%
Decrease in fair value due to 10% adverse change	$	(5,889	)	$	(1,158	)
Decrease in fair value due to 20% adverse change	$	(11,349	)	$	(2,263	)

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 this table, 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 counteract the sensitivities.

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The activity of interest-only strips is shown below:

(In thousands)	2007			2006			2005
Balance at beginning of year	$	49,926		$	74,034		$	127,361
Capitalization of IOs from loan sales		—			—			10,981
Amortization		(6,552	)		(16,520	)		(51,785	)
Negative IO value eliminated as part of the mortgage loans sale transactions restructured (mortgage loans repurchased)		—			18,190			—
Negative value of IOs sold		—			16,189			—
Gain (loss) on the value of IOs		8,554			(41,967	)		(12,523	)
Balance at end of year	$	51,928		$	49,926		$	74,034

The following table presents a detail of the cash flows received on Doral Financial’s portfolio of IOs for 2007, 2006 and 2005:

	Year ended December 31,
(In thousands)	2007			2006			2005
Total cash flows received on IO portfolio	$	12,533		$	23,042		$	62,639
Amortization of IOs, as offset to cash flows		(6,552	)		(16,520	)		(51,785	)
Net cash flows recognized as interest income	$	5,981		$	6,522		$	10,854

During 2007, the Company recognized a gain of $2.2 million, on the sales and securitization of residential mortgage loans, compared to loss of $34.5 million and a gain of $52.1 million for the corresponding periods in 2006 and 2005, respectively. Total loan sales and securitizations amounted to $296.1 million, $4.2 billion (including $3.1 billion of sales relating to restructuring of prior mortgage loan transfers classified as secured borrowings as part of the restatement) and $2.7 billion (relating to restructuring of prior mortgage loan transfers classified as secured borrowings as part of the restatement) for 2007, 2006 and 2005, respectively.

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 loan after sale. The Company also securitized certain loans into FNMA and FHLMC mortgage-backed securities on a recourse basis. During 2006, the Company discontinued the practice of selling loans subject to recourse provisions, except for certain early payments defaults. As of December 31, 2007, the Company had an estimated recourse obligation of $11.8 million recognized as part of “Accrued expenses and other liabilities.”

From time to time, Doral Financial receives demands for repurchases associated with documentation issues (primarily loan file deficiencies) involving mortgage loans sold to third parties. Doral Financial works with counterparties to review the claims and to correct alleged documentation deficiencies, which relate primarily to loan file deficiencies. Doral Financial does not have a reserve on its financial statements for possible losses related to repurchase resulting from representation and warranties violations, including early default payments, because it does not expect any such losses to be significant.

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.

Pursuant to these recourse arrangements, the Company agrees to retain or share the credit risk with the purchaser of such mortgage loans for a specified period or up to a certain percentage of the total amount in loans sold. The Company estimates the fair value of the retained recourse obligation or any liability incurred at the time of sale and includes such obligation with the net proceeds from the sale, resulting in a lower gain on sale recognition. Doral Financial recognizes the fair value of its recourse obligation by estimating the amount that the Company would be required to pay for mortgage insurance from a third party in order to be relieved of its estimated recourse exposure on these loans. The Company believes that this method resulted in an adequate valuation of its recourse allowance as

F-34

of December 31, 2007. In late 2006, the Company discontinued the practice of selling loans subject to recourse provisions.

14. Premises and Equipment

Premises and equipment consisted of:

	December 31,
(In thousands)	2007			2006
Office buildings	$	61,927		$	75,388
Office furniture and equipment		75,146			76,944
Leasehold improvements		53,483			63,760
Automobiles		386			400
		190,942			216,492
Less – accumulated depreciation and amortization		(103,731	)		(96,019	)
		87,211			120,473
Land		14,797			15,483
Construction in progress		4,309			2,849
	$	106,317		$	138,805

15. Sources of Borrowings

At December 31, 2007, the scheduled aggregate annual contractual maturities (or estimates in the case of loans payable) of the Company’s borrowings were approximately as follows:

			Repurchase		Advances from		Loans		Notes
(In thousands)	Deposits		Agreements(1)		the FHLB(1)		Payable(2)		Payable		Total
2008	$	3,649,764	$	111,835	$	315,000	$	46,316	$	5,207	$	4,128,122
2009		495,592		116,693		115,000		41,808		4,843		773,936
2010		66,908		1,115,835		415,000		37,722		3,744		1,639,209
2011		35,155		—		199,000		34,020		3,396		271,571
2012		16,578		—		190,000		30,666		32,715		269,959
2013 and thereafter		4,027		100,000		—		212,169		232,553		548,749
	$	4,268,024	$	1,444,363	$	1,234,000	$	402,701	$	282,458	$	7,631,546

(1)

Includes $782.5 million of repurchase agreements with an average rate of 5.50% and $304.0 million in advances from the FHLB-NY with an average rate of 5.40%, which lenders have the right to call before their contractual maturity at various dates beginning in July, 2009.

(2)

Secured borrowings with local financial institutions, collateralized by real estate mortgages at fixed and variable interest rates tied to 3-month LIBOR. These loans are not subject to scheduled principal payments, but are payable according to the regular schedule amortization and prepayments of the underlying mortgage loans. For purposes of the table above the Company used a CPR of 6.88% to estimate the repayments.

16. Deposit Accounts

At December 31, deposits and their weighted-average interest rates are summarized as follows:

	2007				2006
(Dollars in thousands)	Amount		%		Amount		%
Certificates of deposit	$	2,998,684		4.77	$	2,947,893		4.50
Regular savings		317,436		3.15		442,796		3.62
NOW accounts		394,036		3.03		532,885		3.23
Money markets accounts		315,047		4.13		—		—
Total interest-bearing		4,025,203		4.07		3,923,574		3.90
Non interest-bearing deposits		242,821		—		327,186		—
Total deposits	$	4,268,024		4.07	$	4,250,760		3.90

F-35

At December 31, 2007 and 2006, certificates of deposit over $100,000 amounted to approximately $2.7 billion and $2.3 billion, respectively. Brokered certificates of deposit amounted to $2.5 billion and $2.0 billion at December 31, 2007 and 2006, respectively. Doral Bank PR had brokered certificates of deposit maturing as follows:

	As of
(In thousands)	December 31, 2007
2008	$	1,899,380
2009		473,676
2010		54,881
2011		27,463
2012		15,000
2013 and thereafter		3,228
	$	2,473,628

At December 31, 2007, Doral Financial’s banking subsidiaries had deposits from officers (including former officers who left during 2007), directors and principal stockholders of the Company amounting to approximately $2.6 million (2006 — $5.5 million).

The Company, as a servicer of loans, is required to maintain certain balances on behalf of the borrowers called custodial and escrow funds. At December 31, 2007, custodial and escrow funds amounted to approximately $120.0 million (2006 — $110.9 million), of which $97.4 million were deposited with Doral Bank PR (2006 — $82.1 million). The remaining escrow funds were deposited with other banks and therefore excluded from the Company’s assets and liabilities.

17. Securities Sold Under Agreements to Repurchase

The following summarizes significant data about securities sold under agreements to repurchase for the years ended December 31, 2007 and 2006.

(Dollars in thousands)	2007			2006
Carrying amount as of December 31,	$	1,444,363		$	3,899,365
Average daily aggregate balance outstanding	$	2,788,039		$	5,540,978
Maximum balance outstanding at any month-end	$	3,689,187		$	5,987,599
Weighted-average interest rate during the year		4.48	%		4.35	%
Weighted-average interest rate at year end		4.97	%		4.25	%

The Company recognized a loss of $14.8 million and $6.9 million for the year ended December 31, 2007 and 2006, respectively, in connection with an early extinguishment of certain securities sold under agreements to repurchase.

F-36

Securities sold under agreements to repurchase as of December 31, 2007, grouped by counterparty, were as follows:

			Weighted-average
(Dollars in thousands)	Repurchase		maturity
Counterparty	Liability		(in months)
Lehman Brothers, Inc.	$	504,028		30
CitiGroup Global Markets		450,000		29
Merrill Lynch, Pierce, Fenner & Smith, Inc.		294,800		36
Federal Home Loan Bank of New York		188,500		26
Others		7,035		1
Total	$	1,444,363		30

The following table presents the carrying and market values of securities available for sale and securities held to maturity pledged as collateral at December 31, shown by maturity of the repurchase agreement. The information in this table excludes repurchase agreement transactions which were collateralized with securities or other asset held for trading or which have been obtained under agreement to resell:

	2007									2006
	Carrying		Market		Repurchase		Repo			Carrying		Market		Repurchase		Repo
(Dollars in thousands)	Value		Value		Liability		Rate			Value		Value		Liability		Rate
Mortgage-Backed Securities
GNMA
Term up to 30 days	$	—	$	—	$	—		—		$	24,166	$	23,484	$	22,680		5.33	%
Term over 90 days		—		—		—		—			1,252,202		1,248,086		1,287,793		3.55	%
FNMA
Term over 90 days		173,185		175,225		172,293		4.19	%		433,269		426,760		399,163		3.80	%
CMO Certificates
Term over 90 days		212,742		202,255		188,500		5.91	%		—		—		—		—
Debt Securities
FHLB Notes
Term over 90 days		227,464		226,886		219,700		5.88	%		514,617		497,771		399,874		5.77	%
FHLB and FHLMC
Zero Coupons
Term up to 30 days		—		—		—		—			128,119		143,934		140,400		5.32	%
Term of 30 to 90 days		—		—		—		—			74,477		77,653		72,850		5.32	%
Term over 90 days		314,423		306,203		285,789		4.47	%		142,092		135,855		92,400		5.55	%
FHLMC and FNMA Notes
Term over 90 days		78,794		78,774		75,518		4.19	%		65,537		64,466		60,707		3.14	%
U.S. Treasury
Term over 90 days		108,949		104,873		94,364		5.84	%		1,336,701		1,257,332		1,129,225		4.39	%
	$	1,115,557	$	1,094,216	$	1,036,164		5.09	%	$	3,971,180	$	3,875,341	$	3,605,092		4.25	%

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18. Advances from Federal Home Loan Bank

Advances from FHLB consisted of the following:

	December 31,
(In thousands)	2007		2006
Non-callable advances with maturities ranging from March 2008 to October 2012 (2006-January 2007 to October 2011), at various fixed rates averaging 4.60% and 4.85% at December 31, 2007 and 2006, respectively	$	535,000	$	467,000
Non-callable advances due on September 14, 2007, tied to 1-month LIBOR adjustable monthly at 5.36% rate at December 31, 2006.		—		100,000
Non-callable advances with maturities ranging from October 2008 to November 2012, tied to 1-month LIBOR adjustable monthly at various variable rates averaging 5.05% rate at December 31, 2007		380,000		—
Non-callable advances due on September 2008, tied to 3-month LIBOR adjustable monthly at 4.84% rate at December 31, 2007		15,000		—
Callable advances with maturities ranging from July 2009 to March 2012, at various fixed rates averaging 5.40% and 4.58% at December 31, 2007 and 2006, respectively, callable at various dates beginning on January 2008.		304,000		467,500
	$	1,234,000	$	1,034,500

At December 31, 2007, the Company had pledged qualified collateral in the form of first mortgage notes, investments and mortgage-backed 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.

19. Loans Payable

At December 31, 2007 and 2006, loans payable consisted of financing agreements with local financial institutions secured by mortgage loans.

Outstanding loans payable consisted of the following:

	December 31,
(In thousands)	2007		2006
Secured borrowings with local financial institutions, collateralized by real estate mortgage loans at variable interest rates tied to 3-month LIBOR averaging 6.85% and 6.86% at December 31, 2007 and 2006, respectively	$	377,487	$	415,019
Secured borrowings with local financial institutions, collateralized by real estate mortgage loans at fixed interest rates averaging 7.43% and 7.77% at December 31, 2007 and 2006, respectively		25,214		29,424
	$	402,701	$	444,443

Maximum borrowings outstanding at any month end during 2007 and 2006 were $439.6 million and $3.4 billion, respectively. The approximate average daily outstanding balance of loans payable during the periods were $425.4 million and $2.0 billion, respectively. The weighted-average interest rate of such borrowings, computed on a daily basis, was 6.78% in 2007 and 5.94% in 2006.

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20. Notes Payable

Notes payable consisted of the following:

	December 31,
(In thousands)	2007		2006
$625 million floating rate senior notes tied to 3-month LIBOR at 6.20% due on July 20, 2007, paying interest quarterly (1)	$	—	$	624,814
$100 million notes, net of discount, bearing interest at 7.65%, due on March 26, 2016, paying interest monthly		98,307		98,166
$30 million notes, net of discount, bearing interest at 7.00%, due on April 26, 2012, paying interest monthly		29,634		29,564
$40 million notes, net of discount, bearing interest at 7.10%, due on April 26, 2017, paying interest monthly		39,322		39,272
$30 million notes, net of discount, bearing interest at 7.15%, due on April 26, 2022, paying interest monthly		29,423		29,401
Senior term notes at fixed rates ranging of 8.55% due on August 31, 2007, paying interest semiannually on February 28 and August 31		—		9,000
Bonds payable secured by mortgage on building at fixed rates ranging from 6.35% to 6.90%, with maturities ranging from June 2008 to December 2029 (2006 - June 2007 to December 2029), paying interest monthly		41,190		41,995
Bonds payable at 6.25%, with maturities ranging from December 2010 to December 2029, paying interest monthly		7,600		7,600
Zero coupon senior notes (effective rate of 6.50%) due on April 30, 2007		—		2,456
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		36,982		41,645
	$	282,458	$	923,913

⁽¹⁾ On July 20, 2007, the Company repaid in full its $625.0 million floating rate senior notes at their stated maturity.

21. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following:

	December 31,
(In thousands)	2007		2006
Amounts retained on mortgage loans, generally paid within 5 days	$	727	$	3,494
Accrued severance and salaries expenses		6,563		5,696
Guaranteed bonus		—		4,155
Customer mortgages and closing expenses payable		9,015		10,018
Accrued interest payable		56,836		73,779
Recourse obligation		11,755		9,522
GNMA defaulted loans – buy-back option (Note 9)		125,984		100,275
Deferred rent obligation		1,789		2,597
Provision for contingencies		—		95,000
Accrued expenses and other liabilities		113,456		95,503
	$	326,125	$	400,039

22. 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 US assets. Any such tax is creditable, with certain limitations, against Puerto Rico income taxes. Except for the operations of Doral Bank NY and Doral

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Money, substantially all of the Company’s operations are conducted through subsidiaries in Puerto Rico. Doral Bank NY and Doral Money are US corporations and are subject to US income tax on their income derived from all sources. For the years ended December 31, 2007, 2006 and 2005, the provision for income taxes for the Company’s U.S. subsidiaries amounted to approximately $94,000, $3.4 million and $2.3 million, respectively.

The maximum statutory corporate income tax rate in Puerto Rico is 39.0% for the taxable year ended December 31, 2007. In August 2005, the Government of Puerto Rico approved an increase in the maximum statutory rate from 39.0% to 41.5% to corporations and partnerships for a two-year period. The tax rate was applied retroactively effective January 1, 2005 to all of the Company’s subsidiaries doing business in Puerto Rico. The additional tax related to the income earned from January 1 to the date of enactment of the law was fully recorded in the third quarter of 2005 net of the impact in the deferred taxes. In addition, in May 2006, the Government of Puerto Rico approved an additional one year transitory tax applicable only to the banking industry that raised the maximum statutory tax rate to 43.5% for taxable years commenced during the calendar year 2006. For taxable years beginning after December 31, 2006, the maximum statutory tax rate is 39.0%.

Doral Financial enjoys income tax exemption on interest income derived from FHA and VA mortgage loan financing for the original acquisition of newly constructed housing in Puerto Rico and securities backed by such mortgage loans. Doral Financial also invests in US 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 US securities and US mortgage-backed securities, which interest income and gain on sale, if any, is exempt from Puerto Rico income taxation and excluded from federal income taxation on the basis of the portfolio interest deduction in the case of interest, and in the case of capital gains, because the gains are sourced outside the United States. During 2008, the Company will be transferring substantially all of the assets at the international banking entity to Doral Bank PR as part of the tax planning actions described below.

For the year ended December 31, 2007, Doral Financial recognized an income tax benefit of $131.9 million, compared to an income tax benefit of $48.1 million for the comparable 2006 period. The recognition of income tax benefit for the period ended December 31, 2007 is related to an increase in the deferred tax asset and the release of the valuation allowance of the deferred tax assets, which is described below.

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 $87.3 million of its deferred tax asset, related primarily related to net operating losses, will not be realized 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 year ended December 31, 2007, net operating losses of $114.0 million were created. Based on the forecasted future taxable income the Company will not be able to obtain the full benefit of these net operating losses.

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

The realization of the deferred tax asset is dependent upon the existence of, or generation of, taxable income during the remaining 12 (15 year original amortization period) year period in which the amortization deduction of the IO tax asset is available. In determining the valuation allowance recorded, the Company considered both the positive and negative evidence regarding the Company’s ability to generate sufficient taxable income to realize its deferred tax assets. Positive evidence included projected earnings attributable to the core business through the projection period, repayment of the $625.0 million in senior notes due in July of 2007, to the recapitalization which served to significantly reduce interest expense, results of the leveraging program, which includes loan growth of approximately $0.5 billion through purchases of single-family loans and the purchase of approximately $1.0 billion in securities. Further positive evidence included the ability to isolate verifiable nonrecurring charges in historical losses, the core earnings of the business absent these nonrecurring items and the flexibility to move IO tax asset amortization to profitable entities according to Doral Financial’s agreements with the Puerto Rico Treasury Department. During the fourth quarter of 2007, the Company implemented certain tax planning actions in order to generate future taxable income that contributed to the reduction in its valuation allowance. These include the transfer of substantially all of the assets from Doral International to Doral Bank PR. Negative evidence included the Company’s recorded losses for the year 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.

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In weighing the positive and negative evidence above, Doral Financial considered the more-likely-than-not criteria contemplated to 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 $480.2 million would not be realized. As a result, the Company recorded a valuation allowance. At December 31, 2007, the deferred tax asset, net of its valuation allowance of $87.3 million, amounted to approximately $392.9 million compared to $261.6 million at December 31, 2006.

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

The Company adopted FIN 48 effective January 1, 2007. As a result of the adoption, the Company recorded an adjustment to retained earnings amounting to $2.4 million. The Company classifies all interest and penalties related to tax uncertainties as income tax expense. For the period ended December 31, 2007, the Company recognized approximately $1.4 million in interest and penalties.

Unrecognized tax benefits as of December 31, 2007 amounted to $17.2 million. The amount of unrecognized tax benefits or liabilities may increase or decrease in the future for various reasons, including changes in the 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. The Company does not anticipate any significant changes to its unrecognized tax benefits within the next 12 months.

The Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to our liability for income taxes. Any such adjustment could be material to our results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of December 31, 2007, the statute of limitations for the years ended December 2003, 2004, 2005 and 2006 remained open.

Reconciliation of Effective Tax Rate

The provision for income taxes of the Company differs from amounts computed by applying the applicable Puerto Rico statutory rate to income before taxes. A reconciliation of the difference follows:

	Year Ended December 31,
(Dollars in thousands)	2007						2006						2005
(Loss) income before income taxes	$(302,762)						$(272,008)						$32,283
				% of						% of						% of
				Pre-tax						Pre-tax						Pre-tax
(Dollars in thousands)	Amount			Income			Amount			Income			Amount			Income
Tax benefit (expense) at statutory rates	$	118,077			39.0		$	112,883			41.5		$	(13,397	)		(41.5	)
Tax effect of exempt income, net of expense disallowance		2,794			0.9			5,365			2.0			6,851			21.2
Net (loss) income from the international banking entity		(27,583	)		(9.1	)		11,732			4.3			35,378			109.6
Net tax (expense) benefit from capital gain transactions		(4,408	)		(1.5	)		—			—			706			2.2
Effect of net operating losses not used		(44,452	)		(14.6	)		(29,881	)		(11.0	)		(30,420	)		(94.2	)
Net change in IOs tax differential basis		(25,300	)		(8.3	)		70,541			25.9			—			—
Deferred tax valuation allowance decrease (increase)		121,179			40.0			(125,923	)		(46.2	)		(4,440	)		(13.8	)
Non-tax deductible expenses		—			—			—			—			(12,311	)		(38.1	)
Other, net		(8,453	)		(2.8	)		3,390			1.2			(1,458	)		(4.5	)
Income tax benefit (expense)	$	131,854			43.6		$	48,107			17.7		$	(19,091	)		(59.1	)

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The components of income tax (benefit) expense for the years ended December 31 are summarized below:

(In thousands)	2007			2006			2005
Current income tax expense	$	3,936		$	3,888		$	17,720
Deferred income tax (benefit) expense		(135,790	)		(51,995	)		1,371
Total income tax (benefit) expense	$	(131,854	)	$	(48,107	)	$	19,091

At December 31, the components of the net deferred tax asset were:

(In thousands)	2007			2006
Deferred income tax asset (liability) resulting from:
Net unrealized losses on securities	$	10,970		$	2,661
Differential in tax basis of IOs sold		256,472			281,771
Net operating loss carry-forward		121,337			99,221
Capital losses carry-forward		8,570			6,872
Allowance for loan and lease losses		48,644			26,287
Provision for contingencies		—			37,050
Other reserves and allowances		34,179			16,274
		480,172			470,136
Valuation allowance		(87,312	)		(208,491	)
Net deferred tax asset	$	392,860		$	261,645

23. Related Party Transactions

At December 31, 2007, the Company had $7.4 million of loans outstanding to officers (including former officers who left during 2007), directors and 5% or more stockholders, of which $6.8 million are secured by mortgages on real estate.

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 during 2007 to this Company amounted to $1.5 million.

At December 31, 2007, the Company paid $1.9 million in professional services related to Doral Holdings.

At December 31, 2006, the Company had $5.8 million of loans outstanding to officers (including former officers who left during 2006), directors and 5% or more stockholders, of which $5.4 million are secured by mortgage on real estate. Furthermore, the Company had construction loans receivable outstanding as of December 31, 2006 to a party related to a former officer and director of $14.9 million. As of December 31, 2007, this loan was classified as impaired.

During 2006, the Company paid $1.3 million to an entity that provides property inspection services and is co-owned by the spouse of an Executive VP of the Company.

24. 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 mortgage-backed securities and loans. At December 31, 2007, commitments to extend credit amounted to approximately $210.5 million and commitments to sell mortgage-backed securities and loans amounted to approximately $221.0 million at fair value. Commitments to extend credit are agreements to lend to a customer as long as the conditions established in the contract are met. Commitments generally have fixed expiration dates or other termination clauses. Generally, the Company does not enter into interest rate lock agreements with borrowers.

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

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

Lawsuits

On June 21, 2005, a lawsuit was filed against Doral Financial and certain of its former officers and directors in the U.S. District Court for the District of Puerto Rico. Between June 29, 2005 and August 20, 2005, plaintiff filed three amended complaints. The suit as amended concerns a divorce settlement entered by a former chairman and chief executive officer of Doral Financial and also alleges, among other things, violations of federal securities laws, Racketeer Influenced and Corrupt Organizations (“RICO”) Act violations, as well as fraud and breach of contract under Puerto Rico law, some of which are stated in the alternative as derivative claims on behalf of Doral Financial. Plaintiff seeks an award of damages, costs and expenses. All defendants have moved to dismiss the complaint as amended, and such motions have not been decided. On March 6, 2008, the plaintiff and the defendents entered into a settlement agreement to dismiss the case in exchange for the defendents agreeing not to seek attorneys’ fees and costs from the plaintiff. The case was dismissed with prejudice on March 14, 2008.

In addition, on October 14, 2005, the Company and certain former officers and directors of the Company were named as defendants in an action brought by an individual plaintiff filed in the U.S. District Court for the Southern District of New York, alleging violations of federal securities laws and various Kentucky state laws based on making allegedly materially false and misleading statements concerning Doral’s financial results, allegedly failing to disclose material information concerning the valuation of the company’s IOs, and allegedly misleading the plaintiff as to the Company’s vulnerability to interest rate increases. Plaintiff seeks compensatory damages in the amount of $292,000 for losses the plaintiff allegedly incurred in connection with Doral Financial securities purchased between January 19, 2005 and March 18, 2005, as well as unspecified punitive damages, interest, costs and other expenses. On March 11, 2008, Doral and the plaintiff entered into an agreement to settle all claims in the case, and on March 13, 2008, the plaintiff filed with the court a notice of voluntary dismissal with prejudice of all claims against all defendants.

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 to submit a plan 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.

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Effective January 14, 2008 and in recognition of the corrective actions taken, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of Commissioner terminated the March 16, 2006 Cease and Desist Order (the “Former Order”) applicable to the Company’s Puerto Rico banking subsidiary, Doral Bank PR (“Doral Bank PR”). The Former Order was similar to the consent order between Doral Financial and the Federal Reserve and related to safety and soundness issues in connection with the announcement by the Company in April 2005 of the need to restate its financial statements for the period from January 1, 2000 to December 31, 2004. Under the terms of the Former Order, Doral Bank PR could not pay a dividend or extend credit to, or enter into certain asset purchase and sale transactions with Doral Financial or its subsidiaries, without the prior approval of the FDIC and the Office of the Commissioner.

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

On February 19, 2008, Doral Bank PR entered into a consent order with the FDIC relating to failure to comply with certain requirements of the Bank Secrecy Act (“BSA”). The regulatory findings that resulted in the order were based on an examination conducted for the period ended December 31, 2006, and were related to findings that had initially occurred in 2005 prior to the Company’s change in management and recapitalization. The order replaces the MOU 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.

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.

25. Retirement and Compensation Plans

The Company maintains a profit-sharing plan with a cash or deferred arrangement named the Doral Financial Corporation Retirement Savings and Incentive Plan (“the Plan”). The Plan is available to all employees of Doral Financial who have attained age 18 and complete one year of service with the Company. Participants in the Plan have the option of making pre-tax or after-tax contributions. The Company makes a matching contribution equal to $0.50 for every dollar of pre-tax contribution made by participants to the Plan with an annual compensation exceeding $30,000, up to 3% of the participant’s basic compensation, as defined. For those participants to the Plan with an annual compensation up to $30,000, the Company makes a matching contribution equal to $1.00 for every dollar of pre-tax contribution, up to 3% of the participant’s basic compensation, as defined. Company matching

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contributions are invested following the employee’s investment direction for his own money. The Company is also able to make fully discretionary profit-sharing contributions to the Plan. The Company’s expense related to its retirement plan during the years ended December 31, 2007, 2006 and 2005, amounted to approximately $336,000, $794,000, and $755,000, respectively.

The Company had unfunded deferred incentive compensation arrangements (the “Deferred Compensation”) with certain employees up to 2006. The Deferred Compensation was determined as a percentage of net income arising from the mortgage-banking activities, as defined, and was payable to participants after a five-year vesting period. The expense for the years ended December 31, 2006 and 2005 amounted to approximately $68,000 and $491,000, respectively.

The Company’s CEO’s employment agreement provided for a supplemental retirement program (SERP) whereby the Company deposited funds in an escrow account on his behalf. On August 31, 2007, the Compensation Committee of the Board of Directors authorized payment, to the CEO, of the funds in the escrow account. The Company recognized a compensation expense of $5.1 million during 2007 pursuant to this program.

As of December 31, 2007 the Company had no defined benefit or post-employment benefit plans.

26. Capital Stock and Additional Paid-In Capital

On September 29, 2003, and October 8, 2003, the Company issued 1,200,000 shares and 180,000 shares, respectively, of its 4.75% Perpetual cumulative convertible preferred stock (the “convertible preferred stock”) having a liquidation preference of $250 per share in a private offering to qualified institutional buyers pursuant to Rule 144A. The convertible preferred stock ranks on parity with the Company’s 7.00% noncumulative monthly income preferred stock, Series A (the “7% preferred stock”), 8.35% noncumulative monthly income preferred stock, Series B (the “8.35% preferred stock”) and 7.25% noncumulative monthly income preferred stock, Series C (the “7.25% preferred stock”), with respect to dividend rights and rights upon liquidation, winding up or dissolution (see description below). The net proceeds of the Company after the underwriting discounts and expenses were approximately $336.5 million. Each share of convertible preferred stock is currently convertible into 0.31428 shares of common stock, subject to adjustment under specific conditions. As of December 31, 2005, there were 1,380,000 shares issued and outstanding. During 2007, the Company paid dividends of $11.875 per share (an aggregate of $16.4 million) on the convertible preferred stock. Refer to Note 29 for additional information regarding specific conditions for the convertible preferred stock.

During the second quarter of 2002, the Company issued 4,140,000 shares of its 7.25% preferred stock at a price of $25 per share, its liquidation preference. As of December 31, 2007, there were 4,140,000 shares issued and outstanding. During 2007, the Company paid dividends of $1.8125 per share (an aggregate of $7.5 million) on the 7.25% preferred stock. The 7.25% preferred stock may be redeemed at the option of the Company beginning on May 31, 2007, at varying redemption prices starting at $25.50 per share. The net proceeds to the Company after the underwriting discounts and expenses were approximately $100 million.

On August 31, 2000, the Company issued 2,000,000 shares of its 8.35% preferred stock at a price of $25 per share, its liquidation preference. As of December 31, 2007, there were 2,000,000 shares issued and outstanding. During 2007, the Company paid dividends of $2.0875 per share (an aggregate of $4.2 million) on the 8.35% preferred stock. The 8.35% preferred stock may be redeemed at the option of the Company beginning on September 30, 2005, at varying redemption prices that start at $25.50 per share.

On February 22, 1999, the Company issued 1,495,000 shares of its 7% preferred stock at a price of $50 per share, its liquidation preference. As of December 31, 2007, there were 1,495,000 shares issued and outstanding. During 2007, the Company paid dividends of $3.50 per share (an aggregate of $5.2 million) on the 7% preferred stock. The 7% preferred stock may be redeemed at the option of the Company beginning February 28, 2004, at varying redemption prices that start at $51.00 per share.

The 7.25% preferred stock, 8.35% preferred stock and 7% preferred stock (collectively, the “nonconvertible preferred stocks”) are not convertible into shares of common stock or any other equity securities and have equal rank as to the payment of dividends and rights on liquidation. The holders of the nonconvertible preferred stocks are entitled to receive non-cumulative cash dividends on their liquidation preference when declared by the Board of Directors at the annual rate established for each series, payable monthly. The terms of the nonconvertible preferred stocks prohibit the Company from declaring or paying any dividends on the common stock (1) unless all accrued and unpaid dividends on the nonconvertible preferred stocks for the preceding 12 dividend periods have been paid and the full dividend on the nonconvertible preferred stocks for the current monthly dividend period is

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contemporaneously declared and paid or set aside for payment or (2) if the Company has defaulted in the payment of the redemption price of any shares of the nonconvertible preferred stocks called for redemption. The terms of the nonconvertible preferred stocks provide that if the Company is unable to pay in full dividends on a series of nonconvertible preferred stock, all dividends will be distributed pro rata among the outstanding series of nonconvertible preferred stock.

The ability of the Company to pay dividends in the future is limited by the consent order entered into with the Federal Reserve and by various restrictive covenants contained in the debt agreements of the Company, the earnings, cash position and capital needs of the Company, general business conditions and other factors deemed relevant by the Company’s Board of Directors.

Current regulations limit the amount in dividends that Doral Bank PR and Doral Bank NY may pay. Payment of such dividends is prohibited if, among other things, the effect of such payment would cause the capital of Doral Bank PR or Doral Bank NY to fall below the regulatory capital requirements. The Federal Reserve Board has issued a policy statement that provides that insured banks and financial holding companies should generally pay dividends only out of current operating earnings. In addition, the Company’s consent order with the Federal Reserve does not permit the Company to receive dividends from Doral Bank PR unless the payment of such dividends has been approved by the FDIC.

Dividends paid from a US subsidiary to certain qualifying Puerto Rico corporations such as the Company are generally subject to a 10% withholding tax under the provisions of the US Internal Revenue Code.

In connection with the recapitalization transaction, the Company incurred in the following transactions related to its common stock:

• On July 17, 2007, Doral Financial amended its Restated Certificate of Incorporation to decrease the par value of the Company’s common stock from $1.00 to $0.01 per share.

• On July 19, 2007, Doral Financial completed the private sale of 968,253,968 (48,412,698 on a post-reverse split basis) newly issued shares of common stock to Doral Holdings for an aggregate purchase price of $610.0 million (the “Recapitalization”).

• On August 17, 2007, Doral Financial effected a 1-for-20 reverse split of its common stock previously approved by Doral Financial’s stockholders on July 17, 2007. Upon the effectiveness of the reverse split, each 20 shares of authorized and outstanding common stock were reclassified and combined into one new share of common stock. Doral Financial’s common stock began trading on a split-adjusted basis on August 20, 2007.

Common stock issued and outstanding reconciliation for the year ended December 31, 2007:

	2007
Shares issued and outstanding as of July 16, 2007		107,948,236
New issuance of common stock		968,253,968
Total stock issued and outstanding		1,076,202,204
Effect of 1-for-20 reverse stock split		53,810,110

27. Stock Option Plans

2007 Events

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 (the “Omnibus Plan”) and the 1997 Employee Stock Option Plan (“ the Old Plan”) effective upon the issuance of the shares of the Company’s common stock to Doral Holdings. In connection with the acceleration and termination of outstanding stock options, the Company recognized as compensation expense all unvested benefits prior to the closing of the transaction as follows:

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• For the Old Plan there were 18,225 (911 on a post-reverse split basis) options outstanding, all of which were fully vested as of July 19, 2007, and therefore no additional compensation expense was recorded.

• For the Omnibus Plan, the Compensation Committee determined to cancel the outstanding options in exchange for a payment per share based on the change of control price, which at the time of the closing was determined to be $0.63 ($12.60 on a post-reverse split basis). This resulted in a settlement payment of zero dollars. As of July 19, 2007, there were 1,615,500 (80,775 on a post-reverse split basis) options outstanding under the Omnibus Plan. The unrecognized compensation expense related to the termination of the 1,615,500 (80,775 on a post-reverse split basis) options was $2,960,122.

• There were 200,000 (10,000 on a post-reverse split basis) restricted units outstanding under the Plan, which immediately vested on July 19, 2007. The unrecognized compensation expense related to the 200,000 (10,000 on a post-reverse split basis) restricted units was $865,283.

During the first quarter of 2007, the Company’s Compensation Committee awarded 125,000 (6,250 on a post-reverse split basis) stock options with a weighted average grant date fair value of $0.98 ($19.51 on a post-reverse split basis) per share. No options were awarded during the second, third or fourth quarters of 2007. As noted above, in connection with the closing of the sale of shares of common stock to Doral Holdings all stock options outstanding as of July 19, 2007 were terminated and there were no options outstanding as of December 31, 2007.

Other Stock Option Information

Effective January 1, 2006, the Company adopted SFAS No. 123R “Share-Based Payment” (“SFAS 123R”), without a material effect on the Consolidated Financial Statements of the Company, since in 2003 Doral Financial commenced expensing the fair value of stock options granted to employees using the “modified prospective” method described in SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123.” Using this method, the Company has expensed the fair value of all employee stock options and restricted stock granted after January 1, 2003, as well as the unvested portions of previously granted stock options. SFAS 123R requires the Company to estimate the pre-vesting forfeiture rate, for grants that are forfeited prior to vesting, beginning on the grant date and to true-up forfeiture estimates through the vesting date so that compensation expense is recognized only for grants that vest. When unvested grants are forfeited, any compensation expense previously recognized on the forfeited grants is reversed in the period of the forfeiture. Accordingly, periodic compensation expense will include adjustments for actual and estimated pre-vesting forfeitures and changes in the estimated pre-vesting forfeiture rate. The Company did not change its adjustment for actual and estimated pre-vesting forfeitures and changes in the estimated pre-vesting forfeiture rate.

The Omnibus Plan was in effect from April 21, 2004 and provides for equity-based compensation incentives (the “awards”) through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and dividend equivalents, as well as cash and equity-based performance awards. The Compensation Committee has full authority and absolute discretion to determine those eligible to receive awards and to establish the terms and conditions of any awards; however, the Omnibus Plan has various limits and vesting restrictions that apply to individual and aggregate awards.

Prior to the Omnibus Plan, from April 16, 1997, to April 20, 2004, the Company offered an employee stock option plan (the “Old Plan”). All options awarded under the Old Plan were issued at market value at the date of the grants, for terms of ten years and vest ratably on an annual basis over a two-year period from the grant date.

Stock-based compensation recognized for 2007, 2006 and 2005 is as follows:

(Dollars in thousands)	2007			2006			2005
Stock-based compensation recognized	$	685		$	872		$	8,118
Stock-based compensation reversed due to pre-vesting forfeitures		(25	)		(63	)		(4,246	)
Stock-based compensation recognized, net	$	660		$	809		$	3,872
Stock-based compensation recognized on termination of option plan	$	3,823		$	—		$	—
Unrecognized at December 31	$	—		$	4,373		$	221

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Changes in stock options for 2007, 2006 and 2005 are as follows:

	2007					2006					2005
				Weighted-					Weighted-					Weighted-
	Number			Average		Number			Average		Number			Average
	of			Exercise		of			Exercise		of			Exercise
	Options			Price		Options			Price		Options			Price
Beginning of year		84,753		$	129.00		115,321		$	296.80		276,377		$	321.60
Granted		6,250			19.51		81,250			120.76		5,000			255.60
Exercised		—			—		(900	)		105.56		(1,069	)		111.80
Purchased		—			—		—			—		(337	)		311.40
Post-vesting cancellations		(6,029	)		232.37		(108,318	)		302.22		(137,900	)		281.60
Pre-vesting forfeitures		(3,288	)		97.93		(2,600	)		105.20		(26,750	)		630.20
Balance prior termination (2007)/End of year (2006 and 2005)		81,686		$	114.24		84,753		$	129.00		115,321		$	296.80
Terminated		(81,686	)				—					—
Exercisable at period end		—					84,753					115,321

The fair value of the options granted in 2007 was estimated using the Binomial Tree option-pricing model with the following weighted average assumptions:

	2007			2006
Stock price at grant date and exercise price	$	19.51		$	120.76
Stock option estimated fair value	$	12.72 - $24.25		$	53.75
Expected stock option term (years)		2.44 - 7.87			5.7
Expected volatility		41.65% - 42.72	%		39.00	%
Expected dividend yield		0	%		0	%
Risk-free interest rate		4.70% - 5.02	%		4.81	%

Expected volatility is based on the historical volatility of the Company’s common stock over a ten-year period. The Company uses empirical research data to estimate options exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is based on management’s expectation that the Company will not resume dividend payments on its Common Stock for the foreseeable future.

During 2007, no options were exercised. 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.

The total intrinsic value of options exercised for the year ended December 31, 2006 was approximately $27,760. Cash proceeds from options exercised during 2006 amounted to approximately $95,000.

28. Supplemental Income Statement Information

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

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

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	Year ended December 31,
(In thousands)	2007			2006			2005
Employee costs, gross	$	127,595		$	123,561		$	134,019
Deferred costs pursuant to SFAS No. 91		(8,886	)		(27,219	)		(41,064	)
Employee cost, net	$	118,709		$	96,342		$	92,955
Other expenses, gross	$	44,184		$	32,769		$	37,215
Deferred costs pursuant to SFAS No. 91		(2,910	)		(3,756	)		(8,318	)
Other expenses, net	$	41,274		$	29,013		$	28,897

As of December 31, 2007, the Company had a net deferred origination fee on loans held for sale and loans receivable amounting to $879,000 (2006 – $5.2 million) and $10.9 million (2006 — $8.7 million), respectively.

29. Earnings per Share

The reconciliation of the numerator and denominator of the basic and diluted earnings per share, follows:

	Year ended December 31,
(Dollars in thousands, except per share data)	2007			2006			2005
Net (Loss) Income:
Net (loss) income	$	(170,908	)	$	(223,901	)	$	13,192
Convertible preferred stock dividends		(16,388	)		(16,388	)		(16,387	)
Nonconvertible preferred stock dividends		(16,911	)		(16,911	)		(16,912	)
Net (loss) income attributable to common stock	$	(204,207	)	$	(257,200	)	$	(20,107	)
Weighted-Average Shares:
Basic weighted-average number of common shares outstanding		27,415,242			5,397,057			5,396,352
Incremental shares issuable upon exercise of stock options		—			—			—
Diluted weighted-average number of common shares outstanding		27,415,242			5,397,057			5,396,352
Net Loss per Common Share:
Basic	$	(7.45	)	$	(47.66	)	$	(3.73	)
Diluted	$	(7.45	)	$	(47.66	)	$	(3.73	)

For the years ended December 31, 2007, 2006 and 2005, there were 1,380,000 shares of the Company’s 4.75% perpetual cumulative convertible preferred stock issued in the second half of 2003 that were excluded from the computation of diluted earnings per share because their effect would have been antidilutive, except for the computation of diluted earnings per share for the fourth quarter of 2004. 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.

Weighted-average shares and net loss per common share reflects the 1-for-20 reverse stock split effective August 17, 2007. On July 19, 2007, restricted stock units amounting to 10,000 shares vested.

On August 17, 2007, Doral Financial’s effected a 1-for-20 reverse split of its common stock which had been previously approved by Doral Financial’s stockholders on July 17, 2007. Upon the effectiveness of the reverse split, each 20 shares of authorized and outstanding common stock were reclassified and combined into one new share of common stock.

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30. Disclosures about Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial instruments as of December 31, 2007 and 2006, is made by the Company using available market information and appropriate valuation methods. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amounts.

	2007				2006
	Carrying		Fair		Carrying		Fair
(In thousands)	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	67,884	$	67,884	$	227,127	$	227,127
Money market investments		721,285		721,285		918,734		918,734
Securities held for trading		276,462		276,462		183,805		183,805
Securities available for sale		1,921,940		1,921,940		2,408,686		2,408,686
Securities held to maturity		—		—		2,082,937		2,001,352
Loans held for sale(1)		418,556		419,865		1,769,090		1,786,728
Loans receivable		4,926,200		4,895,297		3,389,937		3,355,735
Servicing assets		150,238		150,238		176,367		179,960
Financial liabilities:
Deposits	$	4,268,024	$	4,274,564	$	4,250,760	$	4,232,210
Securities sold under agreements to repurchase		1,444,363		1,453,972		3,899,365		3,860,723
Advances from FHLB		1,234,000		1,254,058		1,034,500		1,032,734
Loans payable		402,701		402,701		444,443		444,443
Notes payable(2)		282,458		260,578		923,913		864,394

(1)	Includes $126.0 million and $100.3 million for 2007 and 2006, respectively, related to GNMA defaulted loans for which the Company has an unconditional buy-back option.
(2)	For 2006, the difference between the carrying amount and the fair value was principally impacted by the lower market rate of its $625.0 million floating rate senior notes.

The following notes summarize the major methods and assumptions used in estimating the fair values of financial instruments:

Cash and due from banks and money market investments: valued at the carrying amounts in the Consolidated Statements of Financial Condition. The carrying amounts are reasonable estimates of fair value due to the relatively short period to maturity.

Mortgage loans held for sale, securities held for trading, securities held to maturity and securities available for sale: valued at quoted market prices, if available. For securities without quoted prices, fair values represent quoted market prices for comparable instruments. In certain other cases, particularly in the case of the Company’s IOs, fair values have been estimated based on an internal valuation model which incorporates observable parameters of risk. Estimated future cash flows for variable IOs are based on the SWAP forward curve and discounted with the SWAP spot rate curve plus a spread. The spread over the discount rate is based on mortgage IO Z-spreads quoted by major financial institutions. Forecasted prepayments on the underlying mortgage portfolio are based on publicly available US mainland projected CPRs scaled by an empirically estimated factor that takes into consideration the prepayment experience of loans originated in Puerto Rico. The fair value of derivative financial instruments is estimated as the amounts that the Company would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses of open contracts. Market or dealer quotes are available for many derivatives; otherwise, pricing or valuation models are applied to current market information to estimate fair value.

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Loans receivable: valued on the basis of estimated future principal and interest cash flows, discounted at rates commensurate with the loan characteristics. The same methodology described above was used to forecast prepayments. Future cash flows for homogeneous categories of loans, such as residential mortgage loans, are estimated on a portfolio basis and discounted at current rates offered for loans with similar characteristics.

Servicing assets: values derived from an independent market valuation based on present value calculations of the expected future cash flows associated with the servicing rights. Such valuations are based on assumptions that market participants would use in estimating future servicing income and expense, such as: discount rates, prepayment speeds, estimates of servicing cost, ancillary income per loan and default rates.

Deposits: for demand deposits and deposits with no defined maturities, fair value is taken to be the amount payable on demand at the reporting date. The fair values of fixed-maturity deposits, including certificates of deposit, are estimated using rates currently offered for deposits of similar remaining maturities. The value of long-term relationships with depositors is not taken into account in estimating the fair values disclosed.

Loans payable: These loans represent secured lending arrangements with local financial institutions that are generally floating rate instruments, and therefore their fair value has been determined to be par.

Notes payable, advances from FHLB and securities sold under agreements to repurchase: valued utilizing discounted cash flow analysis over the remaining term of the obligation using market rates for similar instruments.

31. Derivatives

As of December 31, 2007, the Company had the following derivative financial instruments outstanding:

									Other
									Comprehensive
						(Loss) Gain for the			Loss for the
						year ended			year ended
(In thousands)	Notional Amount		Fair Value			December 31, 2007			December 31, 2007(1)
Cash Flow Hedges:
Interest rate swaps	$	80,000	$	(937	)	$	—		$	(572	)
Other Derivatives
Interest rate swaps		115,000		(1,951	)		(11,875	)		—
Interest rate caps		270,000		1,481			(676	)		—
Forward contracts		29,000		(6	)		8,425			—
Futures on U.S. Treasury bonds and notes		—		—			2,339			—
Total	$	494,000	$	(1,413	)	$	(1,787	)	$	(572	)

(1) Net of tax

As of December 31, 2006, the Company had the following derivative financial instruments outstanding:

						Gain (Loss) for the
	Notional					year ended
(In thousands)	Amount		Fair Value			December 31, 2006(1)
Interest rate swaps	$	1,700,000	$	22,176		$	13,429
Forward contracts		931,413		5,106			3,056
Options on Futures		—		—			(2,030	)
Other derivatives		2,500,000		(1,000	)		1,500
Total	$	5,131,413	$	26,282		$	15,955

(1) Net of tax

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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.

Doral Financial’s interest rate swaps had weighted average receive rates of 4.88% and 5.37% and weighted average pay rate of 4.51% and 4.02% at December 31, 2007 and 2006, respectively.

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

	December 31, 2007							December 31, 2006
	Notional		Fair Value					Notional		Fair Value
(In thousands)	Amount		Asset		Liability			Amount		Asset		Liability
Derivatives Designated as Cash Flow Hedges:
Hedging medium term bank notes and FHLB advances	$	80,000	$	—	$	(937	)	$	—	$	—	$	—
Derivatives Not Designated as Hedges		414,000		1,481		(1,957	)		5,131,413		27,282		(1,000	)
Total	$	494,000	$	1,481	$	(2,894	)	$	5,131,413	$	27,282	$	(1,000	)

Cash Flow Hedges

As of December 31, 2007, the Company had $80.0 million outstanding pay fixed interest rate swaps designated as cash flow hedges with maturities between September 2008 and October 2012. 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 year ended December 31, 2007, no ineffectiveness was recognized. 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, which the Company expects to reclassify approximately $0.2 million into earnings during the next twelve months.

Trading and Non-Hedging Activities

Doral Financial held $414.0 million and $5.1 billion in notional value of derivatives not designated as hedges at December 31, 2007 and 2006, respectively. At December 31, 2007, these instruments were in a net loss position with a net estimated fair value of $476,000. At December 31, 2006, these instruments were in a net gain position with a net estimated fair value of $26.3 million. Changes in the fair value of these derivatives are reflected in current period earnings.

The Company held $115.0 million and $1.7 billion in freestanding interest rate swaps agreements as of December 31, 2007 and 2006, respectively. The $1.6 billion decrease in freestanding interest rate swaps agreements between 2007 and 2006 relates to the unwinding of swaps during the third quarter of 2007 and to the maturity of some of the instruments during the course of the period.

The Company purchases interest rate caps to manage its interest rate exposure. Interest rate caps 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 December 31,

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2007, the Company had outstanding interest rate caps with a notional amount of $270.0 million. For the year ended December 31, 2007, the Company recognized a $0.7 million loss on interest rate caps transactions.

The Company entered into forward contracts to create an economic hedge on its mortgage warehouse line. As of December 31, 2007 the Company had forwards with a notional amount of $29.0 million. The Company recorded a gain of $8.4 million for the year ended December 31, 2007, related to forward contracts. At December 31, 2006, the Company held forward contracts with a notional amount of $931.4 million, and recognized a gain of $3.1 million on these derivatives during the year then ended.

During 2007, the Company entered into certain futures on US Treasury bonds and notes in order to establish an economic hedge on its portfolio of investment securities available for sale. These transactions were unwound as a result of the sale of $1.9 billion of the portfolio during the third quarter of 2007. The Company recognized a gain on these transactions of $2.3 million.

During 2006, the Company had a derivative with a notional value of $2.5 billion resulting from certain gain-sharing agreements created in connection with certain mortgage loan sales. The Company had the right to share, on a limited basis, the gains realized by the buyers of such loans within specified time periods from subsequent sales or securitizations. The Company agreed to the termination of this contract in exchange for a monetary payment of $2.5 million.

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 the 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 credit risk exposure related to derivatives contracts at December 31, 2007 and 2006 was not considered material.

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

During 2006, the Company consolidated all of its mortgage origination activities under a single Doral Mortgage brand, thus eliminating the mortgage banking operations of Sana Mortgage, Centro Hipotecario and HF Mortgage Bankers.

During 2007, in connection with the recapitalization transaction, Doral Financial transferred the Company’s mortgage origination platform and servicing portfolio, subject to certain exceptions, to Doral Bank PR. Following

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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 years ended December 31, 2007 with the new reportable segment structure as well as comparative segment information for the year ended December 31, 2007, 2006 and 2005, using the old report segment structure. In establishing the old reportable segment structure for the year ended December 31, 2007, the servicing assets and related income and expenses that were transferred during the third quarter of 2007 to Doral Bank PR have been reclassified to the mortgage banking segment including the elimination of the dividend paid by Doral Bank PR to the Company as a result of the transfer.

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, 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.

(In thousands)	2007			2006			2005
Net interest income
Reportable segments:
Mortgage banking	$	(2,408	)	$	3,516		$	82,871
Banking		153,032			192,873			191,170
Institutional securities		—			587			2,298
Insurance agency		—			—			2,001
Intersegment eliminations(1)		3,717			4,414			2,257
Consolidated net interest income	$	154,341		$	201,390		$	280,597
Non-interest (loss) income
Reportable segments:
Mortgage banking	$	39,929		$	(40,071	)	$	28,327
Banking		(103,810	)		(9,081	)		56,784
Institutional securities		664			(315	)		2,200
Insurance agency		9,545			9,135			12,153
Intersegment eliminations(1)		(21,725	)		(18,895	)		(36,916	)
Consolidated non-interest (loss) income	$	(75,397	)	$	(59,227	)	$	62,548
Net (loss) income
Reportable segments:
Mortgage banking	$	(6,970	)	$	(237,999	)	$	(62,787	)
Banking		(153,703	)		22,396			96,968
Institutional securities		416			(308	)		2,068
Insurance agency		3,213			4,152			8,393
Intersegment eliminations(1)		(13,864	)		(12,142	)		(31,450	)
Consolidated net (loss) income	$	(170,908	)	$	(223,901	)	$	13,192
Identifiable assets
Reportable segments:
Mortgage banking	$	2,130,656		$	2,356,997		$	5,914,162
Banking		7,516,059			9,817,814			11,557,952
Institutional securities		2,850			2,066			52,579
Insurance agency		21,173			23,072			15,999
Intersegment eliminations(1)		(366,360	)		(343,525	)		(241,943	)
Consolidated total identifiable assets	$	9,304,378		$	11,856,424		$	17,298,749

(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

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adjustment or offset against net gains on mortgage loan sales and fees (mainly related with origination costs paid by the banking segment to the mortgage banking segment) and other income derived from intercompany transactions, related principally to rental income paid to Doral Properties, the Company’s subsidiary that owns the corporate headquarters facilities. Assets include internal funding and investments in subsidiaries accounted for at cost.

The following table presents net interest (loss) income, non-interest income (loss), net income (loss) and identifiable assets at period end for each of the Company’s reportable segments for the year ended December 31, 2007 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 and the associated dividend payment of $155.0 million in the mortgage banking segment.

	Mortgage						Institutional		Insurance		Intersegment
	Banking			Banking			Securities		Agency		Eliminations(1)			Totals
(In thousands)	Year ended December 31, 2007
Net interest (loss) income	$	(2,408	)	$	153,032		$	—	$	—	$	3,717		$	154,341
Non-interest income (loss)	$	188,244		$	(97,124	)	$	664	$	9,545	$	(176,726	)	$	(75,397	)
Net income (loss)	$	159,469		$	(165,142	)	$	416	$	3,213	$	(168,864	)	$	(170,908	)
Identifiable assets	$	2,130,656		$	7,704,370		$	2,850	$	21,173	$	(554,671	)	$	9,304,378

(1) The intersegment eliminations in the above table include servicing fees paid by the parent company to the banking subsidiaries recognized as a reduction of net interest income, direct intersegment loan origination costs amortized as yield adjustment or offset against net gains on mortgage loan sales and fees. Also the intersegment elimination includes the dividend of $155.0 million paid by Doral Bank PR to the Company as a result of the transfer.

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

(In thousands)	2007			2006			2005
Net interest income
Reportable operations:
Puerto Rico	$	140,022		$	178,344		$	261,009
Mainland U.S		14,176			22,924			19,366
Interoperation eliminations		143			122			222
Consolidated net interest income	$	154,341		$	201,390		$	280,597
Non-interest (loss) income
Reportable operations:
Puerto Rico	$	(72,154	)	$	(60,240	)	$	62,578
Mainland U.S		(2,862	)		1,446			471
Interoperation eliminations		(381	)		(433	)		(501	)
Consolidated non-interest (loss) income	$	(75,397	)	$	(59,227	)	$	62,548
Net (loss) income
Reportable operations:
Puerto Rico	$	(170,353	)	$	(228,698	)	$	10,398
Mainland U.S.		(535	)		4,796			2,769
Interoperation eliminations		(20	)		1			25
Consolidated net (loss) income(1)	$	(170,908	)	$	(223,901	)	$	13,192
Identifiable assets
Reportable operations:
Puerto Rico	$	9,274,627		$	11,297,203		$	16,724,839
Mainland U.S.		132,265			656,646			677,647
Interoperation eliminations		(102,514	)		(97,425	)		(103,737	)
Consolidated total identifiable assets	$	9,304,378		$	11,856,424		$	17,298,749

(1) Net of income tax benefit of $131.9 million for 2007, income tax benefit of $51.5 million for 2006, income tax expense of $16.8 million for 2005 related to Puerto Rico operations. For the year ended December 31, 2007, 2006 and 2005, the provision for income taxes for the Company’s U.S. subsidiaries amounted to $94,000, $3.4 million and $2.3 million, respectively.

33. Quarterly Results of Operations (Unaudited)

Financial data showing results for each of the quarters in 2007, 2006 and 2005 are presented below. These results are unaudited. In the opinion of management all adjustments necessary (consisting only of normal recurring adjustments) for a fair statement have been included:

F-56

(In thousands, except per share data)	1st			2nd			3rd			4th
2007
Interest income	$	157,248		$	153,243		$	134,861		$	133,608
Net interest income		38,164			34,629			39,435			42,113
Provision for loan and lease losses		5,989			19,322			5,062			47,841
Non-interest income (loss)		11,628			24,897			(109,569	)		(2,353	)
Loss before income taxes		(31,415	)		(36,415	)		(148,414	)		(86,518	)
Net loss		(37,309	)		(37,478	)		(62,148	)		(33,973	)
Net loss attributable to common shareholders		(45,634	)		(45,803	)		(70,472	)		(42,298	)
Loss per common share – Basic		(8.45	)		(8.49	)		(1.59	)		(0.79	)
Loss per common share – Diluted		(8.45	)		(8.49	)		(1.59	)		(0.79	)
2006
Interest income	$	233,439		$	222,676		$	187,295		$	178,485
Net interest income		58,616			55,443			44,148			43,183
Provision for loan and lease losses		5,173			5,872			10,126			18,658
Non-interest loss		(9,693	)		(21,470	)		(1,519	)		(26,545	)
Loss before income taxes		(22,024	)		(40,720	)		(27,815	)		(181,449	)
Net income (loss)		17,093			(50,925	)		(28,654	)		(161,415	)
Net income (loss) attributable to common shareholders		8,768			(59,250	)		(36,978	)		(169,740	)
Earnings (loss) per common share – Basic		1.62			(10.98	)		(6.85	)		(31.45	)
Earnings (loss) per common share – Diluted		1.62			(10.98	)		(6.85	)		(31.45	)
2005
Interest income	$	215,529		$	238,470		$	248,520		$	245,260
Net interest income		75,053			76,341			66,553			62,650
Provision for loan and lease losses		4,047			3,658			9,370			5,294
Non-interest income (loss)		35,014			(34,553	)		79,011			(16,924	)
Income (loss) before income taxes		49,613			(27,505	)		65,918			(55,743	)
Net income (loss)		39,229			(22,787	)		40,929			(44,179	)
Net income (loss) attributable to common shareholders		30,904			(31,112	)		32,605			(52,504	)
Earnings (loss) per common share – Basic		5.73			(5.77	)		6.04			(9.73	)
Earnings (loss) per common share – Diluted		5.56			(5.77	)		5.96			(9.73	)

F-57

34. Doral Financial Corporation (Holding Company Only) Financial Information

The following condensed financial information presents the financial position of the holding company only as of December 31, 2007 and 2006, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2007.

Doral Financial Corporation
(Parent Company Only)
Statements of Financial Condition	As of December 31,
(In thousands)	2007		2006
Assets:
Cash and cash equivalents	$	250,428	$	164,781
Investment securities:
Trading securities, at fair value		122,285		118,166
Securities available for sale, at fair value		52,861		46,841
Securities held to maturity, at amortized cost		—		117,980
Total investment securities		175,146		282,987
Loans held for sale, at lower of cost or market		194,257		722,778
Loans receivable, net		594,286		254,492
Servicing assets, net		—		176,018
Premises and equipment, net		7,098		11,067
Other assets		443,748		267,493
Investments in subsidiaries, at equity		571,619		950,745
Total assets	$	2,236,582	$	2,830,361
Liabilities and Stockholders’ Equity:
Securities sold under agreements to repurchase	$	197,089	$	252,941
Loans payable		402,701		444,443
Notes payable(1)		233,668		874,318
Accounts payable and other liabilities		56,417		355,255
Stockholders’ equity		1,346,707		903,404
Total liabilities and stockholders’ equity	$	2,236,582	$	2,830,361

(1) On July 20, 2007, Doral Financial paid in full its $625.0 million floating rate senior note due on July 20, 2007.

Doral Financial Corporation
(Parent Company Only)
Statements of (Loss) Income	For the year ended December 31,
(In thousands)	2007			2006			2005
Income:
Dividends from subsidiaries	$	165,059		$	7,889		$	46,002
Interest income		83,744			190,609			366,073
Net gain (loss) on mortgage loan sales and fees		4,163			(17,031	)		(4,317	)
Net (loss) gain on securities held for trading		(11,401	)		(26,904	)		4,863
Net loss on sale of investment securities		(5,540	)		—			(40,551	)
Net gain on extinguishment		—			6,154			—
Servicing income (net of mark-to-market adjustment for 2007, and net of amortization and impairment/recovery for 2006)		19,886			11,556			19,348
Other income		120			3,356			2,045
Total income		256,031			175,629			393,463
Expenses:
Interest expense		87,394			193,121			293,478
Loan servicing, administrative and general expenses		123,457			224,523			124,428
Provision (recovery) for loan losses		9,365			1,625			(37	)
Total expenses		220,216			419,269			417,869
Gain (loss) before income taxes and equity in earnings of subsidiaries		35,815			(243,640	)		(24,406	)
Income tax (benefit) expense		(154,539	)		(93,951	)		10,541
Equity in undistributed (loss) earnings of subsidiaries		(361,262	)		(74,212	)		48,139
Net (loss) income	$	(170,908	)	$	(223,901	)	$	13,192

F-58

Doral Financial Corporation
(Parent Company Only)
Statements of Cash Flows	Year ended December 31,
(In thousands)	2007			2006			2005
Cash flows from operating activities:
Net (loss) income	$	(170,908	)	$	(223,901	)	$	13,192
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in earnings (losses) of subsidiaries		196,204			66,323			(94,141	)
Loss on sale of securities		5,631			8,435			28,049
Depreciation and amortization		1,809			3,877			2,042
Mark-to-market adjustment (2007), amortization and impairment/recovery of servicing assets (2006)		6,279			35,754			22,799
Provision (recovery) for losses on loans and real estate held for sale		9,365			1,625			(37	)
Stock-based compensation recognized		4,483			809			3,872
Deferred tax (benefit) provision		(155,545	)		(93,951	)		9,002
Originations and purchases of loans held for sale		(38,640	)		(1,153,767	)		(2,653,813	)
Principal repayments and sales of loans held for sale		106,894			4,252,438			2,274,288
Decrease in trading securities		111,272			99,613			39,350
Dividends received from subsidiaries		165,059			7,889			46,002
Decrease in prepaid expenses and other assets		206,677			13,181			40,469
(Decrease) increase in accounts payable and other liabilities		(415,138	)		59,180			120,351
Total adjustments		204,350			3,301,406			(161,767	)
Net cash provided by (used in) operating activities		33,442			3,077,505			(148,575	)
Cash flows from investing activities:
Principal repayments and maturities of securities held to maturity		1,592			1,906			11,273
Purchases of securities available for sale		—			(46,023	)		(2,132,833	)
Principal repayments and sales of securities available for sale		170,632			193			2,433,954
Net (increase) decrease of loans receivables		(3,575	)		26,487			12,057
Additions to premises and equipment		(904	)		—			(7,817	)
Disposition of premises and equipment		3,064			—			—
Proceeds from sale of servicing assets		7,000			—			—
Purchase of servicing assets		—			(209	)		(4,421	)
Return of investment		35,939			8,111			12,001
Net cash provided by (used in) investing activities		213,748			(9,535	)		324,214
Cash flows from financing activities:
Decrease in securities sold under agreements to repurchase		(55,852	)		(157,113	)		(285,824	)
(Decrease) increase in loans payable		(41,742	)		(3,092,141	)		89,779
Decrease in notes payable		(640,650	)		(82,594	)		(129,646	)
Issuance of common stock, net		610,000			95			119
Dividends paid		(33,299	)		(41,933	)		(100,213	)
Net cash used in by financing activities		(161,543	)		(3,373,686	)		(425,785	)
Net increase (decrease) in cash and cash equivalents		85,647			(305,716	)		(250,146	)
Cash and cash equivalents at beginning of year		164,781			470,497			720,643
Cash and cash equivalents at the end of year	$	250,428		$	164,781		$	470,497

During 2007, the parent company received dividends amounted to $165.1 million from Doral Bank PR and Doral Bank NY.

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, and on July 26, 2007, sold the branch network of Doral Bank NY. In connection with these transactions, Doral Bank PR obtained regulatory approval to pay a $155.0 million cash dividend to the holding company and Doral Bank NY received regulatory approval to effect a capital distribution to the holding company in the amount of $50.0 million, of which $45.0 million was paid on July 30, 2007.

During 2006, the parent company received dividends of $7.9 million from Doral Securities.

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     As a state non-member bank, Doral Bank PR’s ability to pay dividends is limited by the Puerto Rico Banking Law which requires that a reserve fund be maintained in an amount equal to at least 20% of the outstanding capital of the institution. The payment of dividends by Doral Bank PR may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels described in Note 3, above.

     Savings banks, such as Doral Bank NY, that meet all applicable capital requirements may make distributions in an amount equal to the sum of (i) the current year’s net income, and (ii) the retained net income from the preceding two years, without an application to the OTS. See Note 26, for additional information regarding restrictions to pay dividends.

35. Subsequent Events

     General

     Termination of Cease and Desist Order. Effective January 14, 2008 and in recognition of the corrective actions taken, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of Commissioner terminated the March 16, 2006 Cease and Desist Order (the “Former Order”) applicable to the Company’s Puerto Rico banking subsidiary, Doral Bank PR (“Doral Bank PR”). The Former Order was similar to the consent order between Doral Financial and the Federal Reserve and related to safety and soundness issues in connection with the announcement by the Company in April 2005 of the need to restate its financial statements for the period from January 1, 2000 to December 31, 2004. Under the terms of the Former Order, Doral Bank PR could not pay a dividend or extend credit to, or enter into certain asset purchase and sale transactions with Doral Financial or its subsidiaries, without the prior approval of the FDIC and the Office of the Commissioner.

     BSA Cease and Desist Order. On February 19, 2008 Doral entered into a consent order with the FDIC related to failure to comply with the requirements of the Bank Secrecy Act. See Note 26, for additional information.

     Insurance Portfolio acquired by Doral Insurance Agency, Inc. On February 27, 2008, Doral Insurance Agency announced the acquisition of an insurance portfolio of approximately 11,000 policies from Citiseguros P.R. Inc., a subsidiary of Citibank, N.A.-Puerto Rico, for a premium of approximately $1.5 million.

     Agreement with the PR Treasury Department. During the first quarter of 2008, the Company obtained a ruling from the PR Treasury Department. This ruling will permit the Company to transfer certain deductions to profitable entities and will thereby be able to realize certain deferred tax assets.

F-60

EX-3.1(H)

Exhibit 3.1(h)

CERTIFICATE OF AMENDMENT TO
SECOND RESTATED CERTIFICATE OF INCORPORATION OF
DORAL FINANCIAL CORPORATION
(Registration Number 29,324)

     Doral Financial Corporation (the “Corporation”), a corporation organized and existing under the laws of the Commonwealth of Puerto Rico, does hereby certify:

     FIRST: That at a meeting of the Board of Directors of the Corporation, duly held and convened on May 15, 2007, resolutions were duly adopted approving proposed amendments (the “Amendments”) to the Corporation’s Second Restated Certificate of Incorporation, as amended, and declaring said Amendments advisable to (i) increase the number of authorized shares of capital stock from 540,000,000 to 1,990,000,000 shares, (ii) increase the number of authorized shares of common stock from 500,000,000 to 1,950,000,000 shares, and (iii) decrease the par value of the common stock from $1.00 to $0.01.

     SECOND: That at a meeting of Shareholders of the Corporation held on July 17, 2007, the inspectors of election appointed for the purpose of conducting and tabulating the votes of the shareholders for and against the adoption of the Amendments, executed and delivered a certificate to the effect that more than a majority of the issued and outstanding stock of the Corporation entitled to vote on the Amendments voted in favor of the said Amendments.

     THIRD: That the Amendments have been adopted in accordance with the provisions of Article 8.02 of the Puerto Rico General Corporation Law of 1995.

     FOURTH: That the first paragraph of Article FOURTH of the Second Restated Certificate of Incorporation is hereby amended to read in its entirety as follows:

     “FOURTH: The total number of shares of all classes of stock which the Corporation is authorized to issue is 1,990,000,000 shares, consisting of 1,950,000,000 shares of Common Stock, $0.01 par value, and 40,000,000 shares of Serial Preferred Stock, $1.00 par value.”

     IN WITNESS WHEREOF, Doral Financial Corporation has caused its corporate seal to be hereunder affixed and this Certificate to be signed by Marangal I. Domingo, its Executive Vice President and Chief Financial Officer and Enrique R. Ubarri, its Executive Vice President, General Counsel and Secretary, this 14th day of March, 2008.

/s/ Marangal I. Domingo  

Marangal I. Domingo 

Executive Vice President and
Chief Financial Officer 

(Corporate Seal)

/s/ Enrique R. Ubarri  

Enrique R. Ubarri 

Executive Vice President,
General Counsel and Secretary 

2 

EX-3.1(J)

EXHIBIT 3.1(j)

COMPOSITE
CERTIFICATE OF INCORPORATION

OF

DORAL FINANCIAL CORPORATION

as in effect on March 14, 2008

     Doral Financial Corporation, a corporation organized under the laws of the Commonwealth of Puerto Rico, does hereby certify pursuant to Article 8.05 of the Puerto Rico General Corporation Law, that

     FIRST: The name under which it was originally incorporated was HF, Inc. The name was subsequently amended to First Financial Caribbean Corporation and on September 22, 1997 was amended to Doral Financial Corporation.

     SECOND: Its original Certificate of Incorporation was filed in the Office of the Secretary of State of the Commonwealth of Puerto Rico on October 23, 1972, Reg. No. 29,324. The original Certificate of Incorporation as amended to such date was restated on March 26, 1997.

     THIRD: This Second Restated Certificate of Incorporation was approved by the Board of Directors of Doral Financial Corporation at a meeting duly called and held on October 6, 1997 and does not further amend the provisions of Doral Financial Corporation=s Restated Certificate of Incorporation as heretofore amended, and there are no discrepancies between those provisions and of this Second Restated Certificate of Incorporation.

     FOURTH: The text of the Restated Certificate of Incorporation of Doral Financial Corporation, as amended, is hereby restated without further amendment or change, effective as of the date of filing of this instrument with the Secretary of State of the Commonwealth of Puerto Rico, to read as follows:

     FIRST: The name of the corporation (hereinafter called the Corporation) is DORAL FINANCIAL CORPORATION.

     SECOND: The principal office of the Corporation in the Commonwealth of Puerto Rico is located at Avenida F.D. Roosevelt 1159, Puerto Nuevo, Puerto Rico 00920, in the Municipality of San Juan. The name of the resident agent of the Corporation is David Levis, the mailing address of such resident agent is Avenida F.D. Roosevelt 1159, Puerto Nuevo, Puerto Rico 00920.

2

     THIRD: The nature of the business of the Corporation and the objects or purposes to be transacted, promoted or carried on by it are as follows:

     1. To engage in the business of mortgage banking, including but not limited to the origination, servicing and resale of first and second mortgages, both conventional and Veterans Administration guaranteed and Federal Housing Administration insured, and the issuance and brokerage of mortgage-backed certificates.

     2. To make, manufacture, produce, prepare, process, purchase or otherwise acquire, and to hold, own, use, sell, import, export, dispose of or otherwise trade or deal in and with, machines, machinery, appliances, apparatus, goods, wares, products and merchandise of every kind, nature and description; and, in general, to engage or participate in any manufacturing or other business of any kind or character whatsoever, whether or not related to, conducive to, incidental to or in any way connected with the above business.

     3. To engage in research, exploration, laboratory and development work relating to any material, substance, compound or mixture now known or which may hereafter be known, discovered or developed, and to perfect, develop, manufacture, use, apply and generally to deal in and with any such material, substance, compound or mixture.

     4. To adopt, apply for, obtain, register, purchase, lease, take licenses in respect of or otherwise acquire, and to maintain, protect, hold, use, own, exercise, develop, manufacture under, operate and introduce, and to sell and grant licenses or other rights in respect of, assign or otherwise dispose of, turn to account, or in any manner deal with and contract with reference to, any trademarks, trade names, patents, patent rights, concessions, franchises, designs, copyrights and distinctive marks and rights analogous thereto, and inventions, devices, processes, recipes, formulae and improvements and modifications thereof.

     5. To act as agent or broker for any person, firm or corporation including, but not limited to, acting as agent for any local, municipal, state or Commonwealth agency or instrumentality.

     6. To purchase, lease or otherwise acquire, to hold, own, use, develop, maintain, manage and operate, and to sell, transfer, lease, assign, convey, exchange or

3

otherwise turn to account or dispose of, and otherwise deal in and with such real property, whether located within the Commonwealth of Puerto Rico or elsewhere, as may be necessary or convenient in connection with the business of the Corporation, and personal property, tangible or intangible, without limitation; provided, however, that the Corporation shall not be authorized, as respects real property located within the Commonwealth of Puerto Rico, to conduct the business of buying and selling real estate, and shall in all other respects be subject to the provisions of Section 14 of Article VI of the Constitution of the Commonwealth of Puerto Rico.

     7. To enter into any joint ventures, agreements and any other lawful arrangements for sharing profits, union of interest, reciprocal concession or cooperation, with any corporation, association, partnership, syndicate, entity, person or governmental, municipal or public authority, domestic or foreign, in the carrying on of any business that the Corporation is authorized to carry on or any business or transaction deemed necessary, convenient or incidental to carrying out any of the purposes of the Corporation.

     8. To enter into, make, perform and carry out contracts of every kind and description, not prohibited by law, with any person, firm, association, corporation or governmental body; and to guarantee the contracts or obligations, and the payment of interest or dividends on securities of any other person, firm, association, corporation or governmental body.

     9. To lend its uninvested funds from time to time to such extent, to such persons, firms, associations, corporations or governments or subdivisions, agencies or instrumentalities thereof, and on such terms and on such security, if any, as the Board of Directors of the Corporation may determine.

     10. To acquire and undertake all or any part of the business assets and liabilities of any person, firm, association or corporation on such terms and conditions as may be agreed upon, and to pay for the same in cash, property or securities of the Corporation, or otherwise, and to conduct the whole or any part of any business thus acquired, subject only to the provisions of the laws of the Commonwealth of Puerto Rico.

     11. To merge into, merge into itself or consolidate with, and to enter into agreements and cooperative

4

relations, not in contravention of law, with any person, firm, association or corporation.

     12. To purchase, lease, construct or otherwise acquire, and to hold, own, use, maintain, manage and operate, buildings, factories, plants, laboratories, installations, equipment, machinery, pipelines, rolling stocks, and other structures, facilities and apparatus of every kind and description, used or useful in the conduct of the business of the Corporation.

     13. To purchase, lease, construct, or otherwise acquire, and to hold, own, use, maintain, manage and operate dwelling houses and other buildings at or near any place of business of the Corporation for the purpose of furnishing housing and other conveniences to employees of the Corporation, and others, and to carry on a general mercantile business at or near any such place of business for the convenience of those residing in the vicinity thereof, and others.

     14. To purchase or otherwise acquire, and to hold, pledge, sell, exchange, or otherwise dispose of securities (which term, for the purpose of this Article THIRD, shall include any shares of stock, bonds, debentures, notes, mortgages or other obligations and any certificates, receipts or other instruments representing rights to receive, purchase or subscribe for the same, or representing any other rights or interests therein or in any property or assets) created or issued by any person, firm, association, corporation or governmental body, and while the holder thereof to exercise all the rights, powers and privileges in respect thereof, including the right to vote, to the same extent as a natural person might or could do.

     15. To borrow money for any of the purposes of the Corporation, from time to time, and without limit as to amount; from time to time to issue and sell its own securities in such amounts, on such terms and conditions, for such purposes and for such consideration, as may now be or hereafter shall be permitted by the laws of the Commonwealth of Puerto Rico; and to secure the same by mortgage upon, or the pledge of, or the conveyance or assignment in trust of, the whole or any part of the properties, assets, business and goodwill of the Corporation, then owned or thereafter acquired.

     16. To purchase, or otherwise acquire and to hold, cancel, reissue, sell, exchange, transfer or otherwise

5

deal in its own securities from time to time to such extent and upon such terms as shall be permitted by the laws of the Commonwealth of Puerto Rico; provided, however, that shares of its own capital stock so purchased or held shall not be directly or indirectly voted, nor shall they be entitled to dividends during such period or periods as they shall be held by the Corporation.

     17. To such extent as a corporation organized under the laws of the Commonwealth of Puerto Rico may now or hereafter lawfully do, to do, either as principal or agent and either alone or through subsidiaries or in connection with other persons, firms, associations or corporations, all and everything necessary, suitable, convenient or proper for, or in connection with, or incident to, the accomplishment of any of the purposes or the attainment of any one or more of the objects herein enumerated, or designed directly or indirectly to promote the interests of the Corporation or to enhance the value of its properties; and in general to do any and all things and exercise any and all powers, rights, and privileges which a corporation may now or hereafter be organized to do or to exercise under the laws of the Commonwealth of Puerto Rico.

     The foregoing provisions of this Article THIRD shall be construed both as purposes and powers and each as an independent purpose and power. The foregoing enumeration of specific purposes and powers shall not be held to limit or restrict in any manner the purposes and powers of the Corporation, and the purposes and powers herein specified shall, except when otherwise provided in this Article THIRD, be in no wise limited or restricted by reference to, or inference from, the terms of any provisions of this or any other Article of this Certificate of Incorporation.

     The Corporation is to be carried on for pecuniary profit.

     FOURTH: The total number of shares of all classes of stock which the Corporation is authorized to issue is 137,500,000 shares, consisting of 97,500,000 shares of Common Stock, $0.01 par value and 40,000,000 shares of Serial Preferred Stock, $1.00 par value.

     The minimum amount of capital with which the Corporation will commence business is $10,000.00.

     The Board of Directors is authorized at any time, and from time to time, to provide for the issuance of

6

shares of Serial Preferred Stock in one or more series, and to determine the designations, preferences, limitations and relative or other rights of the Serial Preferred Stock or any series thereof. For each series, the Board of Directors shall determine, by resolution or resolutions adopted prior to the issuance of any shares thereof, the designations, preferences, limitations and relative or other rights thereof, including but not limited to the following relative rights and preferences, as to which there may be variations among different series:

     (a) The rates or rates (which may be floating, variable or adjustable), or the method of determining such rate or rates and the times and manner of payment of dividends, if any (and whether such payment should be in cash or securities);

     (b) Whether shares may be redeemed or purchased, in whole or in part, at the option of the holder or the Corporation and, if so, the price or prices and the terms and conditions of such redemption or purchase;

     (c) The amount payable upon shares in the event of voluntary or involuntary liquidation, dissolution or other winding up of the Corporation;

     (d) Sinking fund provisions, if any, for the redemption or purchase of shares;

     (e) The terms and conditions, if any, on which shares may be converted or exchanged into shares of Common Stock or other capital stock or securities of the Corporation;

     (f) Voting rights, if any; and

     (g) Any other rights and preferences of such shares, to the full extent now or hereafter permitted by the laws of the Commonwealth of Puerto Rico.

     All shares of Serial Preferred Stock (i) shall rank senior to the Common Stock in respect of the right to receive dividends and the right to receive payments out of the assets of the Corporation upon voluntary or involuntary liquidation, dissolution or winding up of the Corporation, (ii) shall be of equal rank, regardless of series, and (iii) shall be identical in all respects except as provided in (a) through (g) above. The shares

7

of any series of the Serial Preferred Stock shall be identical with each other in all respects except as to the dates from and after which dividends thereof shall be cumulative. In case the stated dividends or the amounts payable on liquidation are not paid in full, the shares of all series of the Serial Preferred Stock shall share ratably in the payment of dividends, including accumulations, if any, in accordance with the sums which would be payable on said shares if all dividends were declared and paid in full, and in any distribution of assets other than by way of dividends in accordance with the sums which would be payable on such distribution if all sums payable were discharged in full.

     The Board of Directors shall have the authority to determine the number of shares that will comprise each series. Unless otherwise provided in the resolution establishing such series, all shares of Serial Preferred Stock redeemed, retired by sinking fund payment, repurchased by the Corporation or converted into Common Stock shall have the status of authorized but unissued shares of Serial Preferred Stock undesignated as to series.

     Prior to the issuance of any shares of a series, but after adoption by the Board of Directors of the resolution establishing such series, the appropriate officers of the Corporation shall file such documents with the Commonwealth of Puerto Rico as may be required by law.

     No holder of shares of Common Stock or Serial Preferred Stock shall be entitled as a matter right to subscribe for or purchase, or have any preemptive right with respect to, any part of any new or additional issue of stock of any class whatsoever, or of securities convertible into any stock of any class whatsoever, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend.

     Upon the filing and effectiveness (the “Effective Time”) of this amendment to the Corporation’s Certificate of Incorporation pursuant to the Puerto Rico General Corporations Law of 1995, each 20 shares of the Common Stock (the “Old Common Stock”) issued and outstanding immediately prior to the Effective Time shall be reclassified and combined into one validly issued, fully paid and non-assessable share of the Corporation’s Common Stock, $0.01 par value per share (the “New Common Stock”), without any action by the holder thereof. The Corporation shall not issue fractions of shares of New Common stock in connection with such reclassification and combination. Any shareholder who, immediately prior to the Effective Time, owns a number of shares of Old Common

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Stock which is not evenly divisible by 20 shall, with respect to such fractional interest, be entitled to receive cash in lieu of any fractional share of New Common Stock in an amount equal to the net cash proceeds attributable to the sale of such fractional share following the aggregation and sale by the Corporation’s transfer agent of all fractional shares of New Common Stock otherwise issuable. Each certificate that theretofore represented shares of Old Common Stock shall thereafter represent that number of shares of New Common Stock into which shares of Old Common stock represented by such certificate shall have been reclassified and combined; provided, that each person holding of record a stock certificate or certificates that represented shares of Old Common Stock shall receive, upon surrender of such certificate or certificates, a new certificate or certificates evidencing and representing the number of shares of New Common Stock to which such person is entitled under the foregoing reclassification and combination.

     FIFTH: The Corporation is to have perpetual existence.

     SIXTH: For the management of the business and for the conduct of the affairs of the Corporation, and in further creation, definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders, it is further provided:

     1. The number of directors of the Corporation shall be fixed by, or in the manner provided in, the By-laws, but in no case shall the number be less than three. The directors need not be stockholders. Election of directors need not be by ballot unless the By-laws so require. Meetings of the Board of Directors may be held at such place or places within or without the Commonwealth of Puerto Rico as shall be specified in the respective notices thereof or in the respective waivers of notice thereof signed by all the directors of the Corporation at the time in office

     2. In furtherance and not in limitation of the powers conferred by the laws of the Commonwealth of Puerto Rico, and subject at all times to the provisions thereof, the Board of Directors is expressly authorized and empowered:

     (a) To make, alter and repeal the By-laws of the Corporation, subject to the power of the stockholders to alter or repeal the By-laws made by the Board of Directors.

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     (b) To determine, from time to time, whether and to what extent and at what times and places and under what conditions and regulations the accounts and books and documents of the Corporation (other than the stock ledger), or any of them, shall be open to inspection by the stockholders; and no stockholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by the laws of the Commonwealth of Puerto Rico, unless and until duly authorized to do so by resolution of the Board of Directors.

     (c) To authorize and issue obligations of the Corporation, secured or unsecured, to include therein such provisions as to redeemability, convertibility or otherwise, as the Board of Directors in its sole discretion may determine, and to authorize the mortgaging or pledging of, and to authorize and cause to be executed mortgages and liens upon, any property of the Corporation, real or personal, including after-acquired property.

     (d) To determine whether any, and, if any, what part, of the net profits of the Corporation or of its net assets in excess of its capital shall be declared in dividends and paid to the stockholders, and to direct and determine the use and disposition thereof.

     (e) To set apart a reserve or reserves, and to abolish any such reserve or reserves, or to make such other provisions, if any, as the Board of Directors may deem necessary or advisable for working capital, for additions, improvements and betterments to plant and equipment, for expansion of the business of the Corporation (including the acquisition of real and personal property for that purpose) and for any other purpose of the Corporation.

     (f) To establish bonus, profit-sharing, pension, thrift, and other types of incentive, compensation or retirement plans for the officers and employees (including officers and employees who are also directors) of the Corporation and to fix the amounts of profits to be distributed or shared or contributed and the amounts of the Corporation’s funds otherwise to be devoted thereto and to determine the persons to participate in any such

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plans and the amounts of their respective participations.

     (g) To issue, or grant options for the purchase of, shares of stock of the Corporation to officers and employees (including officers and employees who are also directors) of the Corporation and its subsidiaries for such consideration and on such terms and conditions as the Board of Directors may from time to time determine.

     (h) To enter into contracts for the management of the business of the Corporation for terms not exceeding three years.

     (i) By resolution or resolutions passed by a majority of the whole Board, to designate one or more committees, each committee to consist of two or more of the directors of the Corporation, which to the extent provided in such resolution or resolutions or in the Bylaws, shall have and may exercise the powers of the Board of Directors (other than to remove or elect officers) in the management of the business and affairs of the Corporation and may have power to authorize the seal of the Corporation to be affixed to all papers which may require it, such committee or committees to have such name or names as may be stated in the By-laws or as may be determined from time to time by resolution adopted by the Board of Directors.

     (j) To exercise all the powers of the Corporation, except such as are conferred by law, or by this Certificate of Incorporation or by the By-laws of the Corporation, upon the stockholders.

     3. Any one or all of the directors may be removed, with or without cause, at any time, by either (a) the vote of the holders of a majority of the stock of the Corporation issued and outstanding and entitled to vote and present in person or by proxy at any meeting of the stockholders called for the purpose, or (b) an instrument or instruments in writing addressed to the Board of Directors directing such removal and signed by the holders of a majority of the stock of the Corporation issued and outstanding and entitled to vote; and thereupon the term of each such director who shall be so removed shall terminate.

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     4. No contract or other transaction between the Corporation and any other corporation, whether or not such other corporation is related to the Corporation through the direct or indirect ownership by such other corporation of a majority of the shares of the capital stock of the Corporation or by the Corporation of a majority of the shares of the capital stock of such other corporation, and no other act of the Corporation shall, in the absence of fraud, in any way be affected or invalidated by the fact that any of the directors of the Corporation are pecuniarily or otherwise interested in, or are directors or officers of, such other corporation or by the fact that such other corporation is so related to the Corporation. Any director of the Corporation individually, or any firm or association of which any director may be a member, may be a party to, or may be pecuniarily or otherwise interested in, any contract or transaction of the Corporation, provided that the fact that he individually or such firm or association is so interested shall be disclosed or shall have been known to the Board of Directors or a majority of such members thereof as shall be present at any meeting of the Board of Directors at which action upon any such contract or transaction shall be taken. Any director of the Corporation who is also a director or officer of such other corporation or who is so interested may be counted in determining the existence of a quorum at any meeting of the Board of Directors which shall authorize any such contract or transaction, with like force and effect as if he were not such director or officer of such other corporation or not so interested.

     5. Any person made or threatened to be made a party to any action or proceeding, whether civil or criminal, by reason of the fact that he, his testator or intestate is or was a Director, officer or employee of the Corporation or serve or served any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprises in any capacity at the request of the Corporation shall be indemnified by the Corporation, and the Corporation may advance his related expenses, to the fullest extent permitted by law. The Corporation may purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such.

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     SEVENTH: A director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the Puerto Rico General Corporation Law of 1995 as the same exists or may hereafter be amended. Any repeal or modification of the foregoing provisions of this Article SEVENTH shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to or at the time of such repeal or modification.

     EIGHTH: The Corporation reserves the right to amend, alter or repeal any of the provisions of this Certificate of Incorporation and to add other provisions authorized by the laws of the Commonwealth of Puerto Rico at the time in force in the manner and at the time prescribed by said laws, and all rights, powers and privileges at any time conferred upon the Board of Directors and the stockholders are granted subject to the provisions of this Article.@

     RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation in accordance with the provisions of its Restated Certificate of Incorporation, a series of Serial Preferred Stock of the Corporation be and it hereby is created.

     FURTHER RESOLVED, that the directors have determined that the preferences and relative, participating, optional or other special rights of the shares of such series of Preferred Stock, and the qualifications, limitations or restrictions thereof, as stated and expressed herein, are under the circumstances prevailing on the date hereof fair and equitable to all the existing shareholders of the Corporation.

     FURTHER RESOLVED, that the designation and amount of such series and the voting powers, preferences and relative, participating, optional or other special rights of the shares of such series of Preferred Stock, and the qualifications, limitations or restrictions thereof are as follows:

     a. Designation and Amount

          The shares of such series of Preferred Stock shall be designated as the “8% Convertible Cumulative Preferred Stock (Liquidation Preference $1,000 per share)” (hereinafter called the “8% Preferred Stock”),

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and the number of authorized shares constituting such series shall be 20,000.

     b. Dividends

     (i) Holders of record of the 8% Preferred Stock (“Holders”) will be entitled to receive, when, as and if declared by the Board of Directors of the Corporation, out of funds of the Corporation legally available therefor, cumulative cash dividends at the annual rate per share of 8% of their liquidation preferences, or $6.66b per share per month.

     (ii) Dividends on the 8% Preferred Stock will accrue from their date of original issuance and will be payable (when, as and if declared by the Board of Directors of the Corporation out of funds of the Corporation legally available therefor) monthly in arrears in United States dollars commencing on the last day of the month in which the 8% Preferred Stock is issued, and on the last day of each calendar month of each year thereafter to the holders of record of the 8% Preferred Stock as they appear on the books of the Corporation on the Business Day (as defined below) immediately preceding the relevant date of payment. In the case of the dividend payable in the month in which the 8% Preferred Stock is issued, such dividend shall cover the period from the date of issuance of the 8% Preferred Stock to the end of such month. In the event that any date on which dividends are payable is not a Business Day, then payment of the dividend payable on such date will be made on the next succeeding Business Day without any interest or other payment in respect of any such delay, except that, if such Business Day is in the next succeeding calendar year, such payment will be made on the Business Day immediately preceding the relevant date of payment, in each case with the same force and effect as if made on such date. A “Business Day” is a day other than a Saturday, Sunday or bank holiday in San Juan, Puerto Rico.

     (iii) Dividends on the 8% Preferred Stock will be cumulative from their date of issuance, and will accrue, to the extent not paid, on the last day of each month.

     (iv) The amount of dividends payable for any monthly dividend period will be computed on the basis of twelve 30-day months and a 360-day year. The amount of dividends payable for any period

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shorter than a full monthly dividend period will be computed on the basis of the actual number of days elapsed in such period.

     (v) Subject to any applicable fiscal or other laws and regulations, each dividend payment will be made by dollar check drawn on a bank in New York, New York or San Juan, Puerto Rico and mailed to the record holder thereof at such holder’s address as it appears on the register for such 8% Preferred Stock or, in the case of holders of $1,000,000 or more in aggregate liquidation preference of the 8% Preferred Stock, by wire transfer of immediately available funds to the account of such holders as notified by such holders to the Corporation.

     (vi) So long as any shares of the 8% Preferred Stock remain outstanding, the Corporation shall not declare, set apart or pay any dividend or make any other distribution of assets (other than dividends paid or other distributions made in stock of the Corporation ranking junior to the 8% Preferred Stock as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up of the Corporation) on, or redeem, purchase, set apart or otherwise acquire (except upon conversion or exchange for stock of the Corporation ranking junior to the 8% Preferred Stock as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up of the Corporation), shares of common stock or of any other class of stock of the Corporation ranking junior to the 8% Preferred Stock as to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up of the Corporation, unless all accrued and unpaid dividends on the 8% Preferred Stock shall have been paid or are paid contemporaneously and the full monthly dividend on the 8% Preferred Stock for the then current month has been or is contemporaneously declared and paid or declared and set apart for payment and unless the Corporation has not defaulted in the payment of the redemption price of any shares of 8% Preferred Stock called for redemption.

     (vii) When dividends are not paid in full on the 8% Preferred Stock and any other shares of stock of the Corporation ranking on a parity as to the payment of dividends with the 8% Preferred Stock, all dividends declared upon the 8% Preferred Stock and any such other shares of stock of the Corporation will be declared pro rata so that the

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amount of dividends declared per share on the 8% Preferred Stock and any such other shares of stock will in all cases bear to each other the same ratio that the liquidation preference per share of the 8% Preferred Stock and any such other shares of stock bear to each other.

     (viii) Holders of record of the 8% Preferred Stock will not be entitled to any dividend, whether payable in cash, property or stock, in excess of the dividends provided for herein on the shares of 8% Preferred Stock. The Corporation may, however, at its discretion, declare a special dividend in an amount sufficient to allow the Corporation to pay dividends on any stock of the Corporation ranking junior to the 8% Preferred Stock in compliance with the provisions of Section B.6 above.

c. Conversion

     (i) A holder of a share of 8% Preferred Stock may convert it into common stock of the Corporation at any time before the close of business on December 1, 2005 (the “Expiration Date”). If a share of 8% Preferred Stock is called for redemption, the holder may convert it at any time before the close of business on the day preceding the redemption date. The initial conversion price is $8.75 per share of common stock of the Corporation, subject to adjustment in certain events as provided in subsection 4 below (as so adjusted from time to time, the “Conversion Price”). To determine the number of shares of common stock of the Corporation issuable upon conversion of a share of 8% Preferred Stock, divide (a) the aggregate liquidation preference of the shares of 8% Preferred Stock to be converted by (b) the Conversion Price in effect on the conversion date. The Corporation will deliver a check for an amount equal to the value of any fractional share plus the total amount of accrued but unpaid dividends on such shares to the date of conversion.

     (ii) To convert a share of 8% Preferred Stock a Holder must (1) complete and sign the conversion election on the back of the certificate, (2) surrender the certificate to the Corporation, (3) furnish appropriate endorsements and transfer documents if required by the Corporation, and (4) pay any transfer or similar tax if required.

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     (iii) Reservation, Listing and Issuance of Shares. The Corporation will at all times have authorized, and reserve and keep available, free from preemptive rights, for the purpose of enabling it to satisfy any obligation to issue shares of common stock of the Corporation upon the conversion of shares of 8% Preferred Stock, the number of shares of common stock of the Corporation deliverable upon conversion of the outstanding shares of 8% Preferred Stock. The Corporation will, at its expense, cause the shares of common stock of the Corporation deliverable upon conversion of the 8% Preferred Stock to be listed (subject to issuance or notice of issuance of such shares) on all stock exchanges on which the common stock is listed not later than the date such common stock is so listed. The Corporation agrees to list such shares (subject to issuance or notice of issuance) on NASDAQ-NMS, to the extent not already listed, promptly after the date of this Certificate of Designation.

     Before taking any action which could cause an adjustment pursuant to subsection 4 below reducing the Conversion Price below the then par value (if any) of the shares of common stock of the Corporation, the Corporation will take any corporate action which may be necessary in order that the Corporation may validly and legally issue at the Conversion Price as so adjusted shares of common stock of the Corporation that are fully paid and non-assessable.

     The Corporation covenants that all shares of common stock of the Corporation deliverable upon conversion of the 8% Preferred Stock will, upon issuance in accordance with the terms hereof, be (i) duly authorized, fully paid and non-assessable, and (ii) free from all taxes with respect to the issuance thereof and from all liens, charges and security interests created by the Corporation.

     (iv) Adjustments of Conversion Price and Number of Shares of Common Stock Issuable upon Conversion of the 8% Preferred Stock. Adjustment of Conversion Price upon Issuance of Common Stock. If and whenever, after September 25, 1995, the Corporation shall issue or sell any shares of common stock (except upon conversion of one or more of the 8.25% convertible subordinated debentures due January 1, 2006 or of one or more shares of the 8% Preferred Stock or upon exercise by Popular, Inc. of certain rights to purchase shares of common stock of the Corporation set forth in Article 5 of

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the Exchange Agreement dated July 9, 1997, between the Corporation and Popular, Inc.) for a consideration per share less than the Market Price (as hereinafter defined) at the time of such issue or sale, then, forthwith upon such issue or sale, the Conversion Price shall be reduced to the price (calculated to the nearest cent) determined by multiplying the Conversion Price in effect immediately prior to the time of such issue or sale by a fraction, the numerator of which shall be the sum of (a) the number of shares of common stock of the Corporation outstanding immediately prior to such issue or sale multiplied by the Market Price immediately prior to such issue or sale plus (b) the consideration received by the Corporation upon such issue or sale, and the denominator of which shall be the product of (c) the total number of shares of common stock outstanding immediately after such issue or sale, multiplied by (d) the Market Price immediately prior to such issue or sale. No adjustment of any Conversion Price, however, shall be made in an amount less than $0.01 per share, but any such lesser adjustment shall be carried forward and shall be made at the time of, and together with, the next subsequent adjustment which together with any adjustments so carried forward shall amount to $0.01 per share or more.

     (i) For the purposes of this subsection 4, the following provisions shall also be applicable:

               1) Issuance of Rights or Options. In case at any time the Corporation shall grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, common stock or any stock or securities convertible into or exchangeable for common stock (such convertible or exchangeable stock or securities being herein called “Convertible Securities”) whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which common stock is issuable upon the conversion of such rights or options or upon conversion or exchange of such Convertible Securities (determined as provided below) shall be less than the Market Price determined as of the date of granting such rights or options, then the total maximum number of shares of common stock issuable upon the conversion of such rights or options or

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upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the conversion of such rights or options shall (as of the date of granting of such rights or options) be deemed to be outstanding and to have been issued for such price per share. Except as provided in clause (iii) of this subsection, no further adjustments of any Conversion Price shall be made upon the actual issue of such common stock or of such Convertible Securities upon conversion of such rights or options or upon the actual issue of such common stock upon conversion or exchange of such Convertible Securities. For the purposes of this clause (i), the price per share for which common stock is issuable upon the conversion of any such rights or options or upon conversion or exchange of any such Convertible Securities shall be determined by dividing (A) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon the conversion of all such rights or options, plus, in the case of such rights or options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (B) the total maximum number of shares of common stock issuable upon the conversion of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the conversion of such rights or options.

               2) Issuance of Convertible Securities. In case the Corporation shall issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which common stock is issuable upon conversion or exchange of such Convertible Securities (determined as provided below) shall be less than the Market Price, determined as of the date of such issue or sale of such Convertible Securities, then the total maximum number of shares of common stock issuable upon conversion or exchange of all such Convertible

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Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, provided that (1) except as provided in clause (iii) of this subsection, no further adjustments of any Conversion Price shall be made upon the actual issue of such common stock upon conversion or exchange of such Convertible Securities, and (2) if any such issue or sale of such Convertible Securities is made upon conversion of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of any Conversion Price have been or are to be made pursuant to other provisions of this subsection (b), no further adjustment of any Conversion Price shall be made by reason of such issue or sale. For the purposes of this clause (ii), the price per share for which common stock is issuable upon conversion or exchange of Convertible Securities shall be determined by dividing (A) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (B) the total maximum number of shares of common stock issuable upon the conversion or exchange of all such Convertible Securities.

               3) Change in Option Price or Conversion Rate. If the purchase price provided for in any rights or options referred to in clause (i) above, or the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in clause (i) or (ii) above, or the rate at which any Convertible Securities referred to in clause (i) or (ii) above are convertible into or exchangeable for common stock, shall change (other than under or by reason of provisions designed to protect against dilution), then the Conversion Price in effect at the time of such event shall forthwith be readjusted to the Conversion Price which would have been in effect at such time had such rights, options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case

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may be, at the time initially granted, issued or sold.

               4) Expiration of Options, Rights and Other Similar Conversion Privileges. On the expiration of any such option or right or the termination of any such right to convert or exchange such Convertible Securities, the Conversion Price then in effect hereunder shall forthwith be increased to the Conversion Price which would have been in effect at the time of such expiration or termination had such right, option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued, and the common stock issuable thereunder shall no longer be deemed to be outstanding. If the purchase price provided for in any such right or option referred to in clause (i) above or the rate at which any Convertible Securities referred to in clause (i) or (ii) above are convertible into or exchangeable for common stock, shall decrease at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of common stock upon the conversion of any such right or option or upon conversion or exchange of any such Convertible Security, the Conversion Price then in effect hereunder shall forthwith be adjusted to such respective amount as would have obtained had such right, option or Convertible Security never been issued as to such common stock and had adjustments been made upon the issuance of the shares of common stock delivered as aforesaid, but only if as a result of such adjustment the Conversion Price then in effect hereunder is thereby decreased.

               5) Stock Dividends. In case the Corporation shall declare a dividend or make any other distribution upon any stock of the Corporation payable in common stock or Convertible Securities, any common stock or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration.

               6) Consideration for Stock. In case any shares of common stock or Convertible Securities or any rights or options to purchase any such common stock or Convertible

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Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Corporation therefor, without deduction therefrom of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Corporation in connection therewith. In case any shares of common stock or Convertible Securities or any rights or options to purchase any such common stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be deemed to be the fair value of such consideration as determined, in good faith and in the exercise of reasonable business judgment, by the board of directors of the Corporation, without deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Corporation in connection therewith. In case any shares of common stock or Convertible Securities or any rights or options to purchase such shares of common stock or Convertible Securities shall be issued in connection with any merger or consolidation in which the Corporation is the surviving corporation (other than any consolidation or merger in which the previously outstanding shares of common stock of the Corporation shall be changed into or exchanged for the stock or other securities of another corporation), the amount of consideration therefor shall be deemed to be the fair value as determined reasonably and in good faith by the board of directors of the Corporation of such portion of the assets and business of the non-surviving corporation as such board may determine to be attributable to such shares of common stock, Convertible Securities, rights or options, as the case may be. In the event of any consolidation or merger of the Corporation in which the Corporation is not the surviving corporation or in which the previously outstanding shares of common stock of the Corporation shall be changed into or exchanged for the stock or other securities of another corporation or in the event of any sale of all or substantially all of the assets of the Corporation for stock or other securities of any corporation, the Corporation shall be deemed to have issued a number of shares of its common stock for stock or securities or other property of the other

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corporation computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of all such stock or securities or other property of the other corporation, and if any such calculation results in adjustment of the Conversion Price, the determination of the number of shares of common stock issuable upon conversion of the Securities immediately prior to such merger, consolidation or sale, for purposes of subsection (e) below, shall be made after giving effect to such adjustment of the Conversion Price.

               7) Record Date. In case the Corporation shall take a record of the holders of its common stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in common stock or in Convertible Securities, or (B) to subscribe for or purchase common stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of common stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.

               8) Treasury Shares. The number of shares of common stock outstanding at any given time shall not include shares owned or held by or for the account of the Corporation, and the disposition of any such shares shall be considered an issue or sale of common stock for the purposes of this subsection (b).

               9) Definition of Market Price. “Market Price” shall mean the average of the daily closing prices per share of the common stock for the ten consecutive trading days immediately preceding the day as of which “Market Price” is being determined, except that, in the case of an underwritten bona fide public offering, “Market Price” shall mean the initial public offering price. The closing price for each day shall be the last sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case on the New York Stock Exchange, or, if shares of the common stock are not

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listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange (including for this purpose the NASDAQ-NMS) on which the shares are listed or admitted to trading, or if the shares are not so listed or admitted to trading, the average of the highest reported bid and lowest reported asked prices as furnished by the National Association of Securities Dealers, Inc. through NASDAQ or through a similar organization if NASDAQ is no longer reporting such information. If shares of the common stock are not listed or admitted to trading on any exchange or quoted through NASDAQ or any similar organization, the “Market Price” shall be deemed to be the higher of (A) the book value of a share of the common stock as determined by any firm of independent public accountants of recognized standing, selected by the board of directors of the Corporation, as at the last day of any month ending within sixty days preceding the date as of which the determination is to be made or (B) the fair value thereof determined in good faith by an independent brokerage firm or Standard & Poor’s Corporation as of a date which is within fifteen days of the date as of which the determination is to be made (the fees and expenses of any such independent public accountants, independent brokerage firm or other firm engaged pursuant to subclauses (A) and (B) of this clause (ix) to be paid by the Corporation).

               10) Determination of Market Price under Certain Circumstances. Anything herein to the contrary notwithstanding, in case the Corporation shall issue any shares of common stock or Convertible Securities in connection with the acquisition by the Corporation of the stock or assets of any other corporation or the merger of any other corporation into the Corporation, the Market Price shall be determined as of the date the number of shares of common stock or Convertible Securities (or in the case of Convertible Securities other than stock, the aggregate principal amount of Convertible Securities) was determined (as set forth in a written agreement between the Corporation and the other party to the transaction) rather than on the date of issuance of such shares of common stock or Convertible Securities.

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               11) Certain Issues Excepted. Anything herein to the contrary notwithstanding, the Corporation shall not be required to make any adjustment of any Conversion Price in case of the issuance of shares of common stock (1) upon the conversion of options or rights relating to up to 500,000 shares (subject to adjustment for stock splits, stock combinations, stock dividends and similar events) of the Corporation’s common stock granted or provided or to be granted or provided under the Corporation’s stock option plan, as in effect on July 9, 1997, or (2) under the Corporation’s restricted stock plan, as in effect on July 9, 1997, up to a maximum of 250,000 shares (subject to adjustment for stock splits, stock combinations, stock dividends and similar events), and shall not be required to make any such adjustment upon the granting of any options or rights referred to above if and to the extent that issuance of the shares covered thereby is excepted by this clause.

     (ii) Adjustment for Certain Special Dividends. In case the Corporation shall declare a dividend upon the common stock payable otherwise than out of earnings or earned surplus, determined in accordance with Generally Accepted Accounting Principles, and otherwise than in common stock or Convertible Securities, the Conversion Price in effect immediately prior to the declaration of such dividend shall be reduced by an amount equal, in the case of a dividend in cash, to the amount per share of the common stock so declared as payable otherwise than out of earnings or earned surplus or, in the case of any other dividend, to the fair value per share of the common stock of the property so declared as payable otherwise than out of earnings or earned surplus, as determined, reasonably and in good faith, by the board of directors of the Corporation. For the purposes of the foregoing a dividend other than in cash shall be considered payable out of earnings or earned surplus (other than revaluation or paid-in-surplus) only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend, as determined, reasonably and in good faith, by the board of directors of the Corporation. Such reductions shall take effect as of the date on which a record

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is taken for the purpose of such dividend, or, if a record is not taken, the date as of which the holders of common stock of record entitled to such dividend are determined.

     (iii) Subdivision or Combination of Stock. In case the Corporation shall at any time subdivide the outstanding shares of common stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of common stock shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased.

     (iv) Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, etc. In case the Corporation (a) consolidates with or merges into any other corporation and is not the continuing or surviving corporation of such consolidation or merger, or (b) permits any other corporation to consolidate with or merge into the Corporation and the Corporation is the continuing or surviving corporation but, in connection with such consolidation or merger, the common stock is changed into or exchanged for stock or other securities of any other corporation or cash or any other assets, or (c) transfers all or substantially all of its properties and assets to any other corporation, or (d) effects a capital reorganization or reclassification of the capital stock of the Corporation in such a way that holders of common stock shall be entitled to receive stock, securities, cash or assets with respect to or in exchange for common stock, then, and in each such case, proper provision shall be made so that, upon the basis and upon the terms and in the manner provided in this subsection (e), the Holders, upon the conversion of each Security at any time after the consummation of such consolidation, merger, transfer, reorganization or reclassification, shall be entitled to receive (at the aggregate Conversion Price in effect for all shares of common stock issuable upon such conversion immediately prior to such consummation as adjusted to the time of such transaction), in lieu of shares of common stock issuable upon such conversion prior to

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such consummation, the stock and other securities, cash and assets to which such Holder would have been entitled upon such consummation if such Holder had so converted such Security immediately prior thereto (subject to adjustments subsequent to such corporate action as nearly equivalent as possible to the adjustments provided for in this subsection 4).

     (v) Notice of Adjustment. Upon any adjustment of the Conversion Price, then and in each such case the Corporation shall promptly deliver a notice to the registered holder of the Securities, which notice shall state the Conversion Price resulting from such adjustment, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based.

     (vi) Other Notices. In case at any time:

               (1) the Corporation shall declare or pay any dividend on or make any distribution with respect to its common stock, other than quarterly cash dividends consistent with past practice;

               (2) the Corporation shall offer for subscription pro rata to the holders of its common stock any additional shares of stock of any class or other rights;

               (3) there shall be any capital reorganization, or reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with another corporation (other than a Subsidiary of the Corporation in which the Corporation is the surviving or continuing corporation and no change occurs in the Corporation’s common stock), or sale of all or substantially all of its assets to, another corporation;

               (4) there shall be a voluntary or involuntary dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, or winding up of the Corporation; or

               (5) the Corporation proposes to take any other action or an event occurs which

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would require an adjustment of the Conversion Price pursuant to subsection (h) below;

then, in any one or more of said cases, the Corporation shall give written notice, addressed to each Holder at the address of such Holder as shown on the books of the Corporation, of (1) the date on which the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights, or (2) the date (or, if not then known, a reasonable approximation thereof by the Corporation) on which such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, winding up or other action, as the case may be, shall take place. Such notice shall also specify (or, if not then known, reasonably approximate) the date as of which the holders of common stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their common stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, winding up, or other action, as the case may be. Such written notice shall be given at least twenty days prior to the action in question and not less than twenty days prior to the record date or the date on which the Corporation’s transfer books are closed in respect thereto.

     (vii) Certain Events. If any event occurs as to which in the reasonable opinion of the Corporation, in good faith, the other provisions of this subsection 4 are not strictly applicable but the lack of any adjustment would not in the opinion of the Corporation fairly protect the conversion rights of the Holders in accordance with the basic intent and principles hereof, or if strictly applicable would not fairly protect the conversion rights of the Holders in accordance with the basic intent and principles hereof, then the Corporation shall appoint a firm of independent certified public accountants (which may be the regular auditors of the Corporation) of recognized national standing, which shall give their opinion upon

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the adjustment, if any, on a basis consistent with the basic intent and principles established in the other provisions of this subsection 4, necessary to preserve, without dilution, the conversion rights of the Holders. Upon receipt of such opinion, the Corporation shall forthwith make the adjustments described therein.

     (vii) All calculations under this subsection 4 shall be made to the nearest cent or to the nearest one hundredth (1/100) of a share, as the case may be.

     (viii) In any case in which the provisions hereof require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event (i) issuing to the Holder of any Security converted after such record date and before the occurrence of such event the additional shares of common stock issuable upon such conversion by reason of the adjustments required by such event over and above the shares of common stock issuable upon such conversion before giving effect to such adjustment and (ii) paying to such Holder any amount in cash in lieu of a fractional share of common stock; provided, however, that the Corporation shall deliver to such Holder a due bill or other appropriate instrument evidencing such Holder’s right to receive such additional shares and such cash upon the occurrence of the event requiring such adjustment.

d. Redemption at the Option of the Corporation

     (i) The shares of the 8% Preferred Stock are not redeemable prior to January 1, 2001. On and after that date, the shares of the 8% Preferred Stock will be redeemable in whole or in part from time to time at the option of the Corporation, with the consent of the Board of Governors of the Federal Reserve System, upon not less than thirty nor more than sixty days’ notice by mail, at the redemption prices set forth below, during the twelve-month periods beginning on January 1 of the years set forth below, plus accrued and unpaid dividends to the date fixed for redemption.

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Year	Redemption Price
2001	$	1,020.00
2002	$	1,015.00
2003	$	1,010.00
2004	$	1,005.00
2005 and thereafter	$	1,000.00

     (ii) In the event that less than all of the outstanding shares of the 8% Preferred Stock are to be redeemed in any redemption at the option of the Corporation, the total number of shares to be redeemed in such redemption shall be determined by the Board of Directors and the shares to be redeemed shall be allocated pro rata or by lot as may be determined by the Board of Directors or by such other method as the Board of Directors may approve and deem equitable, including any method to conform to any rule or regulation of any national or regional stock exchange or automated quotation system upon which the shares of the 8% Preferred Stock may at the time be listed or eligible for quotation.

     (iii) Notice of any proposed redemption shall be given by the Corporation by mailing a copy of such notice to the holders of record of the shares of 8% Preferred Stock to be redeemed, at their address of record, not more than sixty nor less than thirty days prior to the redemption date. The notice of redemption to each holder of shares of 8% Preferred Stock shall specify the number of shares of 8% Preferred Stock to be redeemed, the redemption date and the redemption price payable to such holder upon redemption, and shall state that from and after said date dividends thereon will cease to accrue. If less than all the shares owned by a holder are then to be redeemed at the option of the Corporation, the notice shall also specify the number of shares of 8% Preferred Stock which are to be redeemed and the numbers of the certificates representing such shares. Any notice which is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not the stockholder receives such notice; and failure duly to give such notice by mail, or any defect in such notice, to the holders of any stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of 8% Preferred Stock.

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     (iv) Notice having been mailed as aforesaid, from and after the redemption date (unless default be made in the payment of the redemption price for any shares to be redeemed), all dividends on the shares of 8% Preferred Stock called for redemption shall cease to accrue and all rights of the holders of such shares as stockholders of the Corporation by reason of the ownership of such shares (except the right to receive the redemption price, on presentation and surrender of the respective certificates representing the redeemed shares), shall cease on the redemption date, and such shares shall not after the redemption date be deemed to be outstanding. In case less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued without cost to the holder thereof representing the unredeemed shares.

     (v) At its option, the Corporation may, on or prior to the redemption date, irrevocably deposit the aggregate amount payable upon redemption of the shares of the 8% Preferred Stock to be redeemed with a bank or trust company designated by the Board of Directors having its principal office in New York, New York, San Juan, Puerto Rico, or any other city in which the Corporation shall at that time maintain a transfer agency with respect to its capital stock, and having a combined capital and surplus (as shown by its latest published statement) of at least $50,000,000 (hereinafter referred to as the “Depositary”), to be held in trust by the Depositary for payment to the holders of the shares of the 8% Preferred Stock then to be redeemed. If such deposit is made and the funds so deposited are made immediately available to the holders of the shares of the 8% Preferred Stock to be redeemed, the Corporation shall thereupon be released and discharged (subject to the provisions of Section D.6) from any obligation to make payment of the amount payable upon redemption of the shares of the 8% Preferred Stock to be redeemed, and the holders of such shares shall look only to the Depositary for such payment.

     (vi) Any funds remaining unclaimed at the end of two years from and after the redemption date in respect of which such funds were deposited shall be returned to the Corporation forthwith and thereafter the holders of shares of the 8% Preferred Stock called for redemption with respect to which such funds were deposited shall look only to the Corporation for the payment of the redemption price thereof. Any interest accrued on any funds deposited with the Depositary shall belong to

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the Corporation and shall be paid to it from time to time on demand.

     (vii) Any shares of the 8% Preferred Stock which shall at any time have been redeemed shall, after such redemption, have the status of authorized but unissued shares of Preferred Stock, without designation as to series, until such shares are once more designated as part of a particular series by the Board of Directors.

e. Liquidation Preference

     (i) Upon any voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, the then record holders of shares of 8% Preferred Stock will be entitled to receive out of the assets of the Corporation available for distribution to shareholders, before any distribution is made to holders of common stock or any other equity securities of the Corporation ranking junior upon liquidation to the 8% Preferred Stock, distributions upon liquidation in the amount of $1,000 per share plus an amount equal to any accrued and unpaid dividends to the date of payment. Such amount shall be paid to the holders of the 8% Preferred Stock prior to any payment or distribution to the holders of the common stock of the Corporation or of any other class of stock or series thereof of the Corporation ranking junior to the 8% Preferred Stock in respect of dividends or as to the distribution of assets upon liquidation.

     (ii) If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the amounts payable with respect to the 8% Preferred Stock and any other shares of stock of the Corporation ranking as to any such distribution on a parity with the 8% Preferred Stock are not paid in full, the holders of the 8% Preferred Stock and of such other shares will share ratably in any such distribution of assets of the Corporation in proportion to the full liquidation preferences to which each is entitled. After payment of the full amount of the liquidation preference to which they are entitled, the holders of shares of 8% Preferred Stock will not be entitled to any further participation in any distribution of assets of the Corporation.

     (iii) Neither the consolidation or merger of the Corporation with any other corporation, nor any sale, lease or conveyance of all or any part of the

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property or business of the Corporation, shall be deemed to be a liquidation, dissolution, or winding up of the Corporation.

     (iv) If the assets distributable upon any dissolution, liquidation, or winding up of the Corporation shall be insufficient to permit the payment to the holders of the 8% Preferred Stock of the full preferential amounts aforesaid, then such assets or the proceeds thereof shall be distributed among the holders of the 8% Preferred Stock ratably in proportion to the respective amounts the holders of such shares of stock would be entitled to receive if they were paid the full preferential amounts aforesaid.

f. Voting Rights

     (i) Except as described in this Section F, or except as required by applicable law, holders of the 8% Preferred Stock will not be entitled to receive notice of or attend or vote at any meeting of stockholders of the Corporation.

     (ii) Any variation or abrogation of the rights, preferences and privileges of the 8% Preferred Stock by way of amendment of the Corporation’s Restated Certificate of Incorporation or otherwise (including, without limitation, the authorization or issuance of any shares of the Corporation ranking, as to dividend rights or rights on liquidation, winding up and dissolution, senior to the 8% Preferred Stock) shall not be effective (unless otherwise required by applicable law) except with the consent in writing of the holders of at least a majority of the outstanding shares of the 8% Preferred Stock or with the sanction of a special resolution passed at a separate general meeting by the holders of at least a majority of the outstanding shares of the 8% Preferred Stock. Notwithstanding the foregoing, the Corporation may, without the consent or sanction of the holders of the 8% Preferred Stock, authorize and issue shares of the Corporation ranking, as to dividend rights and rights on liquidation, winding up and dissolution, on a parity with or junior to the 8% Preferred Stock.

     (iii) No vote of the holders of the 8% Preferred Stock will be required for the Corporation to redeem or purchase and cancel the 8% Preferred Stock in accordance with the Restated Certificate of Incorporation of the Corporation.

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     (iv) The Corporation will cause a notice of any meeting at which holders of any series of Preferred Stock are entitled to vote to be mailed to each record holder of such series of Preferred Stock. Each such notice will include a statement setting forth (i) the date of such meeting, (ii) a description of any resolution to be proposed for adoption at such meeting on which such holders are entitled to vote and (iii) instructions for deliveries of proxies.

     (v) Except as set forth in this Section F, holders of 8% Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote as set forth herein) for taking any corporate action.

g. Rank

     The 8% Preferred Stock will, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank (i) senior to all classes of common stock of the Corporation and to all other equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank junior to the 8% Preferred Stock (or to a number of series of Preferred Stock which includes the 8% Preferred Stock); (ii) on a parity with all equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank on a parity with the 8% Preferred Stock (or with a number of series of Preferred Stock which includes the 8% Preferred Stock); and (iii) junior to all equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank senior to the 8% Preferred Stock (or to a number of series of Preferred Stock which includes the 8% Preferred Stock). For this purpose, the term “equity securities” does not include debt securities convertible into or exchangeable for equity securities.

h. Form of Certificate for 8% Preferred Stock; Transfer and Registration

     (i) The 8% Preferred Stock shall be issued in registered form only. The Corporation may treat the record holder of a share of 8% Preferred Stock, including the Depository Trust Company and its

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nominee and any other holder that holds such share on behalf of any other person, as such record holder appears on the books of the registrar for the 8% Preferred Stock, as the sole owner of such share for all purposes.

     (ii) The transfer of a share of 8% Preferred Stock may be registered upon the surrender of the certificate evidencing the share of 8% Preferred Stock to be transferred, together with the form of transfer endorsed on it duly completed and executed, at the office of the transfer agent and registrar.

     (iii) Registration of transfers of shares of 8% Preferred Stock will be effected without charge by or on behalf of the Corporation, but upon payment (or the giving of such indemnity as the transfer agent and registrar may require) in respect of any tax or other governmental charges which may be imposed in relation to it.

     (iv) The Corporation will not be required to register the transfer of a share of 8% Preferred Stock after such share has been called for redemption.

i. Replacement of Lost Certificates

     If any certificate for a share of 8% Preferred Stock is mutilated or alleged to have been lost, stolen or destroyed, a new certificate representing the same share shall be issued to the holder upon request subject to delivery of the old certificate or, if alleged to have been lost, stolen or destroyed, compliance with such conditions as to evidence, indemnity and the payment of out-of-pocket expenses of the Corporation in connection with the request as the Board of Directors of the Corporation may determine.

j. No Preemptive Rights

     Holders of the 8% Preferred Stock will have no preemptive rights to purchase any securities of the Corporation.

     RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation and delegated to the Preferred Stock Pricing Committee in accordance with the provisions of its Restated Certificate of Incorporation, a series of Serial

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Preferred Stock of the Corporation be and it hereby is created.

     FURTHER RESOLVED, that the Preferred Stock Pricing Committee designated by the Board of Directors has determined that the preferences and relative, participating, optional or other special rights of the shares of such series of Preferred Stock, and the qualifications, limitations or restrictions thereof, as stated and expressed herein, are under the circumstances prevailing on the date hereof fair and equitable to all the existing shareholders of the Corporation.

     FURTHER RESOLVED, that the designation and amount of such series and the voting powers, preferences and relative, participating, optional or other special rights of the shares of such series of Preferred Stock, and the qualifications, limitations or restrictions thereof are as follows:

A. Designation and Amount

     The shares of such series of Preferred Stock shall be designated as the “7% Noncumulative Monthly Income Preferred Stock, Series A” (hereinafter called the “Series A Preferred Stock”), and the number of authorized shares constituting such series shall be 1,495,000.

B. Dividends

     1. Holders of record of the Series A Preferred Stock (“Holders”) will be entitled to receive, when, as and if declared by the Board of Directors of the Corporation, out of funds of the Corporation legally available therefor, noncumulative cash dividends at the annual rate per share of 7% of their liquidation preferences, or $0.2917 per share per month, with each aggregate payment made to each record holder of the Series A Preferred Stock being rounded to the next lowest cent.

     2. Dividends on the Series A Preferred Stock will accrue from their date of original issuance and will be payable (when, as and if declared by the Board of Directors of the Corporation out of funds of the Corporation legally available therefor) monthly in arrears in United States dollars commencing on March 31, 1999, and on the last day of each calendar month of each year thereafter to the holders of record of the Series A Preferred Stock as they appear on the books of the Corporation on the second Business Day (as defined below) immediately preceding the relevant date of payment. In the case of the dividend payable on March 31, 1999, such

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dividend shall cover the period from the date of issuance of the Series A Preferred Stock to March 31, 1999. In the event that any date on which dividends are payable is not a Business Day, then payment of the dividend payable on such date will be made on the next succeeding Business Day without any interest or other payment in respect of any such delay, except that, if such Business Day is in the next succeeding calendar year, such payment will be made on the Business Day immediately preceding the relevant date of payment, in each case with the same force and effect as if made on such date. A “Business Day” is a day other than a Saturday, Sunday or a general bank holiday in San Juan, Puerto Rico or New York, New York.

     3. Dividends on the Series A Preferred Stock will be noncumulative. The Corporation is not obligated or required to declare or pay dividends on the Series A Preferred Stock, even if it has funds available for the payment of such dividends. If the Board of Directors of the Corporation or an authorized committee thereof does not declare a dividend payable on a dividend payment date in respect of the Series A Preferred Stock, then the holders of such Series A Preferred Stock shall have no right to receive a dividend in respect of the monthly dividend period ending on such dividend payment date and the Company will have no obligation to pay the dividend accrued for such monthly dividend period or to pay any interest thereon, whether or not dividends on such Series A Preferred Sock are declared for any future monthly dividend period.

     4. The amount of dividends payable for any monthly dividend period will be computed on the basis of twelve 30-day months and a 360-day year. The amount of dividends payable for any period shorter than a full monthly dividend period will be computed on the basis of the actual number of days elapsed in such period.

     5. Subject to any applicable fiscal or other laws and regulations, each dividend payment will be made by dollar check drawn on a bank in New York, New York or San Juan, Puerto Rico and mailed to the record holder thereof at such holder’s address as it appears on the register for such Series A Preferred Stock.

     6. So long as any shares of the Series A Preferred Stock remain outstanding, the Corporation shall not declare, set apart or pay any dividend or make any other distribution of assets (other than dividends paid or other distributions made in stock of the Corporation ranking junior to the Series A Preferred Stock as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up of the Corpora-

37

tion) on, or redeem, purchase, set apart or otherwise acquire (except upon conversion or exchange for stock of the Corporation ranking junior to the Series A Preferred Stock as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up of the Corporation), shares of common stock or of any other class of stock of the Corporation ranking junior to the Series A Preferred Stock as to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up of the Corporation, unless (i) all accrued and unpaid dividends on the Series A Preferred Stock for the twelve monthly dividend periods ending on the immediately preceding dividend payment date shall have been paid or are paid contemporaneously and the full monthly dividend on the Series A Preferred Stock for the then current month has been or is contemporaneously declared and paid or declared and set apart for payment, and (ii) the Corporation has not defaulted in the payment of the redemption price of any shares of Series A Preferred Stock called for redemption.

     7. When dividends are not paid in full on the Series A Preferred Stock and any other shares of stock of the Corporation ranking on a parity as to the payment of dividends with the Series A Preferred Stock, all dividends declared upon the Series A Preferred Stock and any such other shares of stock of the Corporation will be declared pro rata so that the amount of dividends declared per share on the Series A Preferred Stock and any such other shares of stock will in all cases bear to each other the same ratio that the liquidation preference per share of the Series A Preferred Stock and any such other shares of stock bear to each other.

     8. Holders of record of the Series A Preferred Stock will not be entitled to any dividend, whether payable in cash, property or stock, in excess of the dividends provided for herein on the shares of Series A Preferred Stock.

C. Conversion

     1. The Series A Preferred Stock will not be convertible into or exchangeable for any other securities of the Corporation.

D. Redemption at the Option of the Corporation

     1. The shares of the Series A Preferred Stock are not redeemable prior to February 28, 2004. On and after that date, the shares of the Series A Preferred Stock will be redeemable in whole or in part from time to time at the option of the Corporation, with the consent of the

38

Board of Governors of the Federal Reserve System (the AFederal Reserve Board@) to the extent required by D. 8 below, upon not less than thirty nor more than sixty days’ notice by mail, at the redemption prices set forth below, during the twelve-month periods beginning on February 28, 2004 of the years set forth below, plus accrued and unpaid dividends to the date fixed for redemption.

Year	Redemption Price
2004	$	51.00
2005	$	50.50
2006 and thereafter	$	50.00

     2. In the event that less than all of the outstanding shares of the Series A Preferred Stock are to be redeemed in any redemption at the option of the Corporation, the total number of shares to be redeemed in such redemption shall be determined by the Board of Directors and the shares to be redeemed shall be allocated pro rata or by lot as may be determined by the Board of Directors or by such other method as the Board of Directors may approve and deem equitable, including any method to conform to any rule or regulation of any national or regional stock exchange or automated quotation system upon which the shares of the Series A Preferred Stock may at the time be listed or eligible for quotation.

     3. Notice of any proposed redemption shall be given by the Corporation by mailing a copy of such notice to the holders of record of the shares of Series A Preferred Stock to be redeemed, at their address of record, not more than sixty nor less than thirty days prior to the redemption date. The notice of redemption to each holder of shares of Series A Preferred Stock shall specify the number of shares of Series A Preferred Stock to be redeemed, the redemption date and the redemption price payable to such holder upon redemption, and shall state that from and after said date dividends thereon will cease to accrue. If less than all the shares owned by a holder are then to be redeemed at the option of the Corporation, the notice shall also specify the number of shares of Series A Preferred Stock which are to be redeemed and the numbers of the certificates representing such shares. Any notice which is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not the stockholder receives such notice; and failure duly to give such notice by mail, or any defect in such notice, to the holders of any stock designated for redemption shall not affect the

39

validity of the proceedings for the redemption of any other shares of Series A Preferred Stock.

     4. Notice having been mailed as aforesaid, from and after the redemption date (unless default be made in the payment of the redemption price for any shares to be redeemed), all dividends on the shares of Series A Preferred Stock called for redemption shall cease to accrue and all rights of the holders of such shares as stockholders of the Corporation by reason of the ownership of such shares (except the right to receive the redemption price, on presentation and surrender of the respective certificates representing the redeemed shares), shall cease on the redemption date, and such shares shall not after the redemption date be deemed to be outstanding. In case less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued without cost to the holder thereof representing the unredeemed shares.

     5. At its option, the Corporation may, on or prior to the redemption date, irrevocably deposit the aggregate amount payable upon redemption of the shares of the Series A Preferred Stock to be redeemed with a bank or trust company designated by the Board of Directors having its principal office in New York, New York, San Juan, Puerto Rico, or any other city in which the Corporation shall at that time maintain a transfer agency with respect to its capital stock, and having a combined capital and surplus (as shown by its latest published statement) of at least $50,000,000 (hereinafter referred to as the “Depositary”), to be held in trust by the Depositary for payment to the holders of the shares of the Series A Preferred Stock then to be redeemed. If such deposit is made and the funds so deposited are made immediately available to the holders of the shares of the Series A Preferred Stock to be redeemed, the Corporation shall thereupon be released and discharged (subject to the provisions of Section D.6) from any obligation to make payment of the amount payable upon redemption of the shares of the Series A Preferred Stock to be redeemed, and the holders of such shares shall look only to the Depositary for such payment.

     6. Any funds remaining unclaimed at the end of two years from and after the redemption date in respect of which such funds were deposited shall be returned to the Corporation forthwith and thereafter the holders of shares of the Series A Preferred Stock called for redemption with respect to which such funds were deposited shall look only to the Corporation for the payment of the redemption price thereof. Any interest accrued on any funds deposited with the Depositary shall

40

belong to the Corporation and shall be paid to it from time to time on demand.

     7. Any shares of the Series A Preferred Stock which shall at any time have been redeemed shall, after such redemption, have the status of authorized but unissued shares of Preferred Stock, without designation as to series, until such shares are once more designated as part of a particular series by the Board of Directors.

     8. To the extent required to have the Series A Preferred Stock treated as Tier 1 capital for bank regulatory purposes or otherwise required by applicable regulations of the Federal Reserve Board, the shares of Series A Preferred Stock may not be redeemed by the Corporation without the prior consent of the Federal Reserve Board.

E. Liquidation Preference

     1. Upon any voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, the then record holders of shares of Series A Preferred Stock will be entitled to receive out of the assets of the Corporation available for distribution to shareholders, before any distribution is made to holders of common stock or any other equity securities of the Corporation ranking junior upon liquidation to the Series A Preferred Stock, distributions upon liquidation in the amount of $50 per share plus an amount equal to any accrued and unpaid dividends for the current monthly dividend period to the date of payment. Such amount shall be paid to the holders of the Series A Preferred Stock prior to any payment or distribution to the holders of the common stock of the Corporation or of any other class of stock or series thereof of the Corporation ranking junior to the Series A Preferred Stock in respect of dividends or as to the distribution of assets upon liquidation.

     2. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the amounts payable with respect to the Series A Preferred Stock and any other shares of stock of the Corporation ranking as to any such distribution on a parity with the Series A Preferred Stock are not paid in full, the holders of the Series A Preferred Stock and of such other shares will share ratably in any such distribution of assets of the Corporation in proportion to the full liquidation preferences to which each is entitled. After payment of the full amount of the liquidation preference to which they would otherwise be entitled, the holders of shares of Series A Preferred Stock will not be entitled

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to any further participation in any distribution of assets of the Corporation.

     3. Neither the consolidation or merger of the Corporation with any other corporation, nor any sale, lease or conveyance of all or any part of the property or business of the Corporation, shall be deemed to be a liquidation, dissolution, or winding up of the Corporation.

F. Voting Rights

     1. Except as described in this Section F, or except as required by applicable law, holders of the Series A Preferred Stock will not be entitled to receive notice of or attend or vote at any meeting of stockholders of the Corporation.

     2. If the Corporation does not pay dividends in full on the Series A Preferred Stock for eighteen consecutive monthly dividend periods, the holders of outstanding shares of the Series A Preferred Stock, together with the holders of any other shares of stock of the Corporation having the right to vote for the election of directors solely in the event of any failure to pay dividends, acting as a single class without regard to series, will be entitled, by written notice to the Corporation given by the holders of a majority in liquidation preference of such shares or by ordinary resolution passed by the holders of a majority in liquidation preference of such shares present in person or by proxy at a separate general meeting of such holders convened for the purpose, to appoint two additional members of the Board of Directors of the Corporation, to remove any such member from office and to appoint another person in place of such member. Not later than 30 days after such entitlement arises, if written notice by a majority of the holders of such shares has not been given as provided for in the preceding sentence, the Board of Directors or an authorized committee thereof will convene a separate general meeting for the above purpose. If the Board of Directors or such authorized committee fails to convene such meeting within such 30-day period, the holders of 10% of the outstanding shares of the Series A Preferred Stock and any such other stock will be entitled to convene such meeting. The provisions of the Certificate of Incorporation and By-laws of the Corporation relating to the convening and conduct of general meetings of stockholders will apply with respect to any such separate general meeting. Any member of the Board of Directors so appointed shall vacate office if, following the event which gave rise to such appointment, the Corporation shall have resumed the payment of

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dividends in full on the Series A Preferred Stock and each such other series of stock for twelve consecutive monthly dividend periods.

     3. Any variation or abrogation of the rights, preferences and privileges of the Series A Preferred Stock by way of amendment of the Corporation’s Restated Certificate of Incorporation or otherwise (including, without limitation, the authorization or issuance of any shares of the Corporation ranking, as to dividend rights or rights on liquidation, winding up and dissolution, senior to the Series A Preferred Stock) shall not be effective (unless otherwise required by applicable law) except with the consent in writing of the holders of at least two thirds of the outstanding aggregate liquidation preference of the outstanding shares of the Series A Preferred Stock or with the sanction of a special resolution passed at a separate general meeting by the holders of at least two thirds of the aggregate liquidation preference of the outstanding shares of the Series A Preferred Stock. Notwithstanding the foregoing, the Corporation may, without the consent or sanction of the holders of the Series A Preferred Stock, authorize and issue shares of the Corporation ranking, as to dividend rights and rights on liquidation, winding up and dissolution, on a parity with or junior to the Series A Preferred Stock.

     4. No vote of the holders of the Series A Preferred Stock will be required for the Corporation to redeem or purchase and cancel the Series A Preferred Stock in accordance with the Restated Certificate of Incorporation of the Corporation.

     5. The Corporation will cause a notice of any meeting at which holders of any series of Preferred Stock are entitled to vote to be mailed to each record holder of such series of Preferred Stock. Each such notice will include a statement setting forth (i) the date of such meeting, (ii) a description of any resolution to be proposed for adoption at such meeting on which such holders are entitled to vote and (iii) instructions for deliveries of proxies.

     6. Except as set forth in this Section F, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote as set forth herein) for taking any corporate action.

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G. Rank

     The Series A Preferred Stock will, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank (i) senior to all classes of common stock of the Corporation and to all other equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank junior to the Series A Preferred Stock (or to a number of series of Preferred Stock which includes the Series A Preferred Stock); (ii) on a parity with the Corporation’s outstanding 8% Convertible Cumulative Preferred Stock (Liquidation Preference $1,000 per share) and with all other equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank on a parity with the Series A Preferred Stock (or with a number of series of Preferred Stock which includes the Series A Preferred Stock); and (iii) junior to all equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank senior to the Series A Preferred Stock (or to a number of series of Preferred Stock which includes the Series A Preferred Stock). For this purpose, the term “equity securities” does not include debt securities convertible into or exchangeable for equity securities.

H. Form of Certificate for Series A Preferred Stock; Transfer and Registration

     1. The Series A Preferred Stock shall be issued in registered form only. The Corporation may treat the record holder of a share of Series A Preferred Stock, including the Depository Trust Company and its nominee and any other holder that holds such share on behalf of any other person, as such record holder appears on the books of the registrar for the Series A Preferred Stock, as the sole owner of such share for all purposes.

     2. The transfer of a share of Series A Preferred Stock may be registered upon the surrender of the certificate evidencing the share of Series A Preferred Stock to be transferred, together with the form of transfer endorsed on it duly completed and executed, at the office of the transfer agent and registrar.

     3. Registration of transfers of shares of Series A Preferred Stock will be effected without charge by or on behalf of the Corporation, but upon payment (or the giving of such indemnity as the transfer agent and registrar may require) in respect of any tax or other governmental charges which may be imposed in relation to it.

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     4. The Corporation will not be required to register the transfer of a share of Series A Preferred Stock after such share has been called for redemption.

I. Replacement of Lost Certificates

     If any certificate for a share of Series A Preferred Stock is mutilated or alleged to have been lost, stolen or destroyed, a new certificate representing the same share shall be issued to the holder upon request subject to delivery of the old certificate or, if alleged to have been lost, stolen or destroyed, compliance with such conditions as to evidence, indemnity and the payment of out-of-pocket expenses of the Corporation in connection with the request as the Board of Directors of the Corporation may determine.

J. No Preemptive Rights

     Holders of the Series A Preferred Stock will have no preemptive or preferential rights to purchase any securities of the Corporation.

K. No Repurchase at the Option of Holders; Miscellaneous

     Holders of Series A Preferred Stock will have no right to require the Corporation to redeem or repurchase any shares of Series A Preferred Stock, and the shares of Series A Preferred Stock are not subject to any sinking fund or similar obligation. The Corporation may, at its option, purchase shares of the Series A Preferred Stock from holders thereof from time to time, by tender, in privately negotiated transactions or otherwise.

     RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation and delegated to the Preferred Stock Pricing Committee in accordance with the provisions of its Restated Certificate of Incorporation, a series of Serial Preferred Stock of the Corporation be and it hereby is created.

     FURTHER RESOLVED, that the Preferred Stock Pricing Committee designated by the Board of Directors has determined that the preferences and relative, participating, optional or other special rights of the shares of such series of Preferred Stock, and the qualifications, limitations or restrictions thereof, as stated and expressed herein, are under the circumstances prevailing on the date hereof fair and equitable to all the existing shareholders of the Corporation.

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     FURTHER RESOLVED, that the designation and amount of such series and the voting powers, preferences and relative, participating, optional or other special rights of the shares of such series of Preferred Stock, and the qualifications, limitations or restrictions thereof are as follows:

A. Designation and Amount

     The shares of such series of Preferred Stock shall be designated as the A8.35% Noncumulative Monthly Income Preferred Stock, Series B@ (hereinafter called the ASeries B Preferred Stock@), and the number of authorized shares constituting such series shall be 2,000,000.

B. Dividends

     1. Holders of record of the Series B Preferred Stock (AHolders@) will be entitled to receive, when, as and if declared by the Board of Directors of the Corporation or an authorized committee thereof (the ABoard of Directors@), out of funds of the Corporation legally available therefor, noncumulative cash dividends at the annual rate per share of 8.35% of their liquidation preferences, or $0.173958 per share per month, with each aggregate payment made to each record holder of the Series B Preferred Stock being rounded to the next lowest cent.

     2. Dividends on the Series B Preferred Stock will accrue from their date of original issuance and will be payable (when, as and if declared by the Board of Directors of the Corporation out of funds of the Corporation legally available therefor) monthly in arrears in United States dollars commencing on September 30, 2000, and on the last day of each calendar month of each year thereafter to the holders of record of the Series B Preferred Stock as they appear on the books of the Corporation on the fifteenth day of the month for which the dividends are payable. In the case of the dividend payable on September 30, 2000, such dividend shall cover the period from the date of issuance of the Series B Preferred Stock to September 30, 2000. In the event that any date on which dividends are payable is not a Business Day (as defined below), then payment of the dividend payable on such date will be made on the next succeeding Business Day without any interest or other payment in respect of any such delay, except that, if such Business Day is in the next succeeding calendar year, such payment will be made on the Business Day immediately preceding the relevant date of payment, in each case with the same force and effect as if made on

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such date. A ABusiness Day@ is a day other than a Saturday, Sunday or a general bank holiday in San Juan, Puerto Rico or New York, New York.

     3. Dividends on the Series B Preferred Stock will be noncumulative. The Corporation is not obligated or required to declare or pay dividends on the Series B Preferred Stock, even if it has funds available for the payment of such dividends. If the Board of Directors of the Corporation does not declare a dividend payable on a dividend payment date in respect of the Series B Preferred Stock, then the holders of such Series B Preferred Stock shall have no right to receive a dividend in respect of the monthly dividend period ending on such dividend payment date and the Company will have no obligation to pay the dividend accrued for such monthly dividend period or to pay any interest thereon, whether or not dividends on such Series B Preferred Sock are declared for any future monthly dividend period.

     4. The amount of dividends payable for any monthly dividend period will be computed on the basis of twelve 30-day months and a 360-day year. The amount of dividends payable for any period shorter than a full monthly dividend period will be computed on the basis of the actual number of days elapsed in such period.

     5. Subject to any applicable fiscal or other laws and regulations, each dividend payment will be made by dollar check drawn on a bank in New York, New York or San Juan, Puerto Rico and mailed to the record holder thereof at such holder=s address as it appears on the register for such Series B Preferred Stock.

     6. So long as any shares of the Series B Preferred Stock remain outstanding, the Corporation shall not declare, set apart or pay any dividend or make any other distribution of assets (other than dividends paid or other distributions made in stock of the Corporation ranking junior to the Series B Preferred Stock as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up of the Corporation) on, or redeem, purchase, set apart or otherwise acquire (except upon conversion or exchange for stock of the Corporation ranking junior to the Series B Preferred Stock as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up of the Corporation), shares of common stock or of any other class of stock of the Corporation ranking junior to the Series B Preferred Stock as to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up of the Corporation, unless (i) all accrued and unpaid dividends on the Series B Preferred Stock for the twelve monthly dividend periods ending on

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the immediately preceding dividend payment date shall have been paid or are paid contemporaneously and the full monthly dividend on the Series B Preferred Stock for the then current month has been or is contemporaneously declared and paid or declared and set apart for payment, and (ii) the Corporation has not defaulted in the payment of the redemption price of any shares of Series B Preferred Stock called for redemption.

     7. When dividends are not paid in full on the Series B Preferred Stock and any other shares of stock of the Corporation ranking on a parity as to the payment of dividends with the Series B Preferred Stock, all dividends declared upon the Series B Preferred Stock and any such other shares of stock of the Corporation will be declared pro rata so that the amount of dividends declared per share on the Series B Preferred Stock and any such other shares of stock will in all cases bear to each other the same ratio that the accrued dividends per share on the Series B Preferred Stock for the then current dividend period bears to the accrued dividends per share on such other shares of stock (which shall not include any accrual in respect of unpaid dividends for prior dividend periods if such preferred stock does not have a cumulative dividend).

     8. Holders of record of the Series B Preferred Stock will not be entitled to any dividend, whether payable in cash, property or stock, in excess of the dividends provided for herein on the shares of Series B Preferred Stock.

C. Conversion

     1. The Series B Preferred Stock will not be convertible into or exchangeable for any other securities of the Corporation.

D. Redemption at the Option of the Corporation

     1. The shares of the Series B Preferred Stock are not redeemable prior to September 30, 2005. On and after that date, the shares of the Series B Preferred Stock will be redeemable in whole or in part from time to time at the option of the Corporation, with the consent of the Board of Governors of the Federal Reserve System (the AFederal Reserve Board@) to the extent required by D. 8 below, upon not less than thirty nor more than sixty days= notice by mail, at the redemption prices set forth below, during the twelve-month periods beginning on September 30, 2005 of the years set forth below, plus accrued and unpaid dividends from the dividend payment date immediately preceding the redemption date (without

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any cumulation for unpaid dividends for prior dividend periods on the Series B Preferred Stock) to the date fixed for redemption.

	Redemption
Year	Price
2005	$	25.50
2006	$	25.25
2007 and thereafter	$	25.00

     2. In the event that less than all of the outstanding shares of the Series B Preferred Stock are to be redeemed in any redemption at the option of the Corporation, the total number of shares to be redeemed in such redemption shall be determined by the Board of Directors and the shares to be redeemed shall be allocated pro rata or by lot as may be determined by the Board of Directors or by such other method as the Board of Directors may approve and deem equitable, including any method to conform to any rule or regulation of any national or regional stock exchange or automated quotation system upon which the shares of the Series B Preferred Stock may at the time be listed or eligible for quotation.

     3. Notice of any proposed redemption shall be given by the Corporation by mailing a copy of such notice to the holders of record of the shares of Series B Preferred Stock to be redeemed, at their address of record, not more than sixty nor less than thirty days prior to the redemption date. The notice of redemption to each holder of shares of Series B Preferred Stock shall specify the number of shares of Series B Preferred Stock to be redeemed, the redemption date and the redemption price payable to such holder upon redemption, and shall state that from and after said date dividends thereon will cease to accrue. If less than all the shares owned by a holder are then to be redeemed at the option of the Corporation, the notice shall also specify the number of shares of Series B Preferred Stock which are to be redeemed and the numbers of the certificates representing such shares. Any notice which is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not the stockholder receives such notice; and failure duly to give such notice by mail, or any defect in such notice, to the holders of any stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series B Preferred Stock.

     4. Notice having been mailed as aforesaid, from and after the redemption date (unless default be made in the

49

payment of the redemption price for any shares to be redeemed), all dividends on the shares of Series B Preferred Stock called for redemption shall cease to accrue and all rights of the holders of such shares as stockholders of the Corporation by reason of the ownership of such shares (except the right to receive the redemption price, on presentation and surrender of the respective certificates representing the redeemed shares), shall cease on the redemption date, and such shares shall not after the redemption date be deemed to be outstanding. In case less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued without cost to the holder thereof representing the unredeemed shares.

     5. At its option, the Corporation may, on or prior to the redemption date, irrevocably deposit the aggregate amount payable upon redemption of the shares of the Series B Preferred Stock to be redeemed with a bank or trust company designated by the Board of Directors having its principal office in New York, New York, San Juan, Puerto Rico, or any other city in which the Corporation shall at that time maintain a transfer agency with respect to its capital stock, and having a combined capital and surplus (as shown by its latest published statement) of at least $50,000,000 (hereinafter referred to as the ADepositary@), to be held in trust by the Depositary for payment to the holders of the shares of the Series B Preferred Stock then to be redeemed. If such deposit is made and the funds so deposited are made immediately available to the holders of the shares of the Series B Preferred Stock to be redeemed, the Corporation shall thereupon be released and discharged (subject to the provisions of Section D.6) from any obligation to make payment of the amount payable upon redemption of the shares of the Series B Preferred Stock to be redeemed, and the holders of such shares shall look only to the Depositary for such payment.

     6. Any funds remaining unclaimed at the end of two years from and after the redemption date in respect of which such funds were deposited shall be returned to the Corporation forthwith and thereafter the holders of shares of the Series B Preferred Stock called for redemption with respect to which such funds were deposited shall look only to the Corporation for the payment of the redemption price thereof. Any interest accrued on any funds deposited with the Depositary shall belong to the Corporation and shall be paid to it from time to time on demand.

     7. Any shares of the Series B Preferred Stock which shall at any time have been redeemed shall, after such redemption, have the status of authorized but unissued

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shares of Preferred Stock, without designation as to series, until such shares are once more designated as part of a particular series by the Board of Directors.

     8. To the extent required to have the Series B Preferred Stock treated as Tier 1 capital for bank regulatory purposes or otherwise required by applicable regulations of the Federal Reserve Board, the shares of Series B Preferred Stock may not be redeemed by the Corporation without the prior consent of the Federal Reserve Board.

E. Liquidation Preference

     1. Upon any voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, the then record holders of shares of Series B Preferred Stock will be entitled to receive out of the assets of the Corporation available for distribution to shareholders, before any distribution is made to holders of common stock or any other equity securities of the Corporation ranking junior upon liquidation to the Series B Preferred Stock, distributions upon liquidation in the amount of $25 per share plus an amount equal to any accrued and unpaid dividends (without any cumulation for unpaid dividends for prior dividend periods on the Series B Preferred Stock) for the current monthly dividend period to the date of payment. Such amount shall be paid to the holders of the Series B Preferred Stock prior to any payment or distribution to the holders of the common stock of the Corporation or of any other class of stock or series thereof of the Corporation ranking junior to the Series B Preferred Stock in respect of dividends or as to the distribution of assets upon liquidation.

     2. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the amounts payable with respect to the Series B Preferred Stock and any other shares of stock of the Corporation ranking as to any such distribution on a parity with the Series B Preferred Stock are not paid in full, the holders of the Series B Preferred Stock and of such other shares will share ratably in any such distribution of assets of the Corporation in proportion to the full liquidation preferences to which each is entitled. After payment of the full amount of the liquidation preference to which they would otherwise be entitled, the holders of shares of Series B Preferred Stock will not be entitled to any further participation in any distribution of assets of the Corporation.

     3. Neither the consolidation or merger of the Corporation with any other corporation, nor any sale,

51

lease or conveyance of all or any part of the property or business of the Corporation, shall be deemed to be a liquidation, dissolution, or winding up of the Corporation.

F. Voting Rights

     1. Except as described in this Section F, or except as required by applicable law, holders of the Series B Preferred Stock will not be entitled to receive notice of or attend or vote at any meeting of stockholders of the Corporation.

     2. If the Corporation does not pay dividends in full on the Series B Preferred Stock for eighteen consecutive monthly dividend periods, the holders of outstanding shares of the Series B Preferred Stock, together with the holders of any other shares of stock of the Corporation having the right to vote for the election of directors solely in the event of any failure to pay dividends, acting as a single class without regard to series, will be entitled, by written notice to the Corporation given by the holders of a majority in liquidation preference of such shares or by ordinary resolution passed by the holders of a majority in liquidation preference of such shares present in person or by proxy at a separate general meeting of such holders convened for the purpose, to appoint two additional members of the Board of Directors of the Corporation, to remove any such member from office and to appoint another person in place of such member. Not later than 30 days after such entitlement arises, if written notice by a majority of the holders of such shares has not been given as provided for in the preceding sentence, the Board of Directors or an authorized committee thereof will convene a separate general meeting for the above purpose. If the Board of Directors or such authorized committee fails to convene such meeting within such 30-day period, the holders of 10% of the outstanding shares of the Series B Preferred Stock and any such other stock will be entitled to convene such meeting. The provisions of the Certificate of Incorporation and By-laws of the Corporation relating to the convening and conduct of general meetings of stockholders will apply with respect to any such separate general meeting. Any member of the Board of Directors so appointed shall vacate office if, following the event which gave rise to such appointment, the Corporation shall have resumed the payment of dividends in full on the Series B Preferred Stock and each such other series of stock for twelve consecutive monthly dividend periods.

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     3. Any amendment, alteration or repeal of the rights, preferences and privileges of the Series B Preferred Stock by way of amendment of the Corporation=s Restated Certificate of Incorporation whether by merger or otherwise (including, without limitation, the authorization or issuance of any shares of the Corporation ranking, as to dividend rights or rights on liquidation, winding up and dissolution, senior to the Series B Preferred Stock) which would materially and adversely affect the powers, preferences or special rights of the Series B Preferred Stock shall not be effective (unless otherwise required by applicable law) except with the consent in writing of the holders of at least two thirds of the outstanding aggregate liquidation preference of the outstanding shares of the Series B Preferred Stock or with the sanction of a special resolution passed at a separate general meeting by the holders of at least two thirds of the aggregate liquidation preference of the outstanding shares of the Series B Preferred Stock. Notwithstanding the foregoing, the Corporation may, without the consent or sanction of the holders of the Series B Preferred Stock, authorize and issue shares of the Corporation ranking, as to dividend rights and rights on liquidation, winding up and dissolution, on a parity with or junior to the Series B Preferred Stock.

     The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of the Series B Preferred Stock shall have been redeemed or called for redemption upon proper notice and sufficient funds shall have been deposited in trust to effect such redemption.

     4. No vote of the holders of the Series B Preferred Stock will be required for the Corporation to redeem or purchase and cancel the Series B Preferred Stock in accordance with the Restated Certificate of Incorporation of the Corporation.

     5. The Corporation will cause a notice of any meeting at which holders of any series of Preferred Stock are entitled to vote to be mailed to each record holder of such series of Preferred Stock. Each such notice will include a statement setting forth (i) the date of such meeting, (ii) a description of any resolution to be proposed for adoption at such meeting on which such holders are entitled to vote and (iii) instructions for deliveries of proxies.

     6. Except as set forth in this Section F, holders of Series B Preferred Stock shall have no special voting rights and their consent shall not be required (except to

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the extent they are entitled to vote as set forth herein) for taking any corporate action.

G. Rank

     The Series B Preferred Stock will, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank (i) senior to all classes of common stock of the Corporation and to all other equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank junior to the Series B Preferred Stock (or to a number of series of Preferred Stock which includes the Series B Preferred Stock); (ii) on a parity with the Corporation=s outstanding 7% Noncumulative Monthly Income Preferred Stock, Series A and with all other equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank on a parity with the Series B Preferred Stock (or with a number of series of Preferred Stock which includes the Series B Preferred Stock); and (iii) subject to the provisions of F.3 hereof, junior to all equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank senior to the Series B Preferred Stock (or to a number of series of Preferred Stock which includes the Series B Preferred Stock). For this purpose, the term Aequity securities@ does not include debt securities convertible into or exchangeable for equity securities.

H. Form of Certificate for Series B Preferred Stock; Transfer and Registration

     1. The Series B Preferred Stock shall be issued in registered form only. The Corporation may treat the record holder of a share of Series B Preferred Stock, including the Depository Trust Company and its nominee and any other holder that holds such share on behalf of any other person, as such record holder appears on the books of the registrar for the Series B Preferred Stock, as the sole owner of such share for all purposes.

     2. The transfer of a share of Series B Preferred Stock may be registered upon the surrender of the certificate evidencing the share of Series B Preferred Stock to be transferred, together with the form of transfer endorsed on it duly completed and executed, at the office of the transfer agent and registrar.

     3. Registration of transfers of shares of Series B Preferred Stock will be effected without charge by or on behalf of the Corporation, but upon payment (or the giving of such indemnity as the transfer agent and regis-

54

trar may require) in respect of any tax or other governmental charges which may be imposed in relation to it.

     4. The Corporation will not be required to register the transfer of a share of Series B Preferred Stock after such share has been called for redemption.

I. Replacement of Lost Certificates

     If any certificate for a share of Series B Preferred Stock is mutilated or alleged to have been lost, stolen or destroyed, a new certificate representing the same share shall be issued to the holder upon request subject to delivery of the old certificate or, if alleged to have been lost, stolen or destroyed, compliance with such conditions as to evidence, indemnity and the payment of out-of-pocket expenses of the Corporation in connection with the request as the Board of Directors of the Corporation may determine.

J. No Preemptive Rights

     Holders of the Series B Preferred Stock will have no preemptive or preferential rights to purchase any securities of the Corporation.

K. No Repurchase at the Option of Holders; Miscellaneous

     Holders of Series B Preferred Stock will have no right to require the Corporation to redeem or repurchase any shares of Series B Preferred Stock, and the shares of Series B Preferred Stock are not subject to any sinking fund or similar obligation. The Corporation may, at its option, purchase shares of the Series B Preferred Stock from holders thereof from time to time, by tender, in privately negotiated transactions or otherwise.

     RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation and delegated to the Pricing Committee in accordance with the provisions of its Restated Certificate of Incorporation, a series of Serial Preferred Stock of the Corporation be and it hereby is created.

     FURTHER RESOLVED, that the Pricing Committee designated by the Board of Directors has determined that the preferences and relative, participating, optional or other special rights of the shares of such series of Preferred Stock, and the qualifications, limitations or restrictions thereof, as stated and expressed herein, are

55

under the circumstances prevailing on the date hereof fair and equitable to all the existing shareholders of the Corporation.

     FURTHER RESOLVED, that the designation and amount of such series and the voting powers, preferences and relative, participating, optional or other special rights of the shares of such series of Preferred Stock, and the qualifications, limitations or restrictions thereof are as follows:

A. DESIGNATION AND AMOUNT

     The shares of such series of Preferred Stock shall be designated as the “7.25% Noncumulative Monthly Income Preferred Stock, Series C” (hereinafter called the “Series C Preferred Stock”), and the number of authorized shares constituting such series shall be 4,140,000.

B. DIVIDENDS

     1. Holders of record of the Series C Preferred Stock (“Holders”) will be entitled to receive, when, as and if declared by the Board of Directors of the Corporation or an authorized committee thereof (the “Board of Directors”), out of funds of the Corporation legally available therefor, noncumulative cash dividends at the annual rate per share of 7.25% of their liquidation preferences, or $0.151042 per share per month, with each aggregate payment made to each record holder of the Series C Preferred Stock being rounded to the next lowest cent.

     2. Dividends on the Series C Preferred Stock will accrue from their date of original issuance and will be payable (when, as and if declared by the Board of Directors of the Corporation <PAGE> 53 out of funds of the Corporation legally available therefor) monthly in arrears in United States dollars commencing on June 30, 2002, and on the last day of each calendar month of each year thereafter to the holders of record of the Series C Preferred Stock as they appear on the books of the Corporation on the fifteenth day of the month for which the dividends are payable. In the case of the dividend payable on June 30, 2002, such dividend shall cover the period from the date of issuance of the Series C Preferred Stock to June 30, 2002. In the event that any date on which dividends are payable is not a Business Day (as defined below), then payment of the dividend payable on such date will be made on the next succeeding Business Day without any interest or other payment in respect of any such delay, except that, if such Business Day is in the next succeeding calendar year, such payment will be

56

made on the Business Day immediately preceding the relevant date of payment, in each case with the same force and effect as if made on such date. A “Business Day” is a day other than a Saturday, Sunday or a general bank holiday in San Juan, Puerto Rico or New York, New York.

     3. Dividends on the Series C Preferred Stock will be noncumulative. The Corporation is not obligated or required to declare or pay dividends on the Series C Preferred Stock, even if it has funds available for the payment of such dividends. If the Board of Directors of the Corporation does not declare a dividend payable on a dividend payment date in respect of the Series C Preferred Stock, then the holders of such Series C Preferred Stock shall have no right to receive a dividend in respect of the monthly dividend period ending on such dividend payment date and the Company will have no obligation to pay the dividend accrued for such monthly dividend period or to pay any interest thereon, whether or not dividends on such Series C Preferred Sock are declared for any future monthly dividend period.

     4. The amount of dividends payable for any monthly dividend period will be computed on the basis of twelve 30-day months and a 360-day year. The amount of dividends payable for any period shorter than a full monthly dividend period will be computed on the basis of the actual number of days elapsed in such period.

     5. Subject to any applicable fiscal or other laws and regulations, each dividend payment will be made by dollar check drawn on a bank in New York, New York or San Juan, Puerto Rico and mailed to the record holder thereof at such holder’s address as it appears on the register for such Series C Preferred Stock.

     6. So long as any shares of the Series C Preferred Stock remain outstanding, the Corporation shall not declare, set apart or pay any dividend or make any other distribution of assets (other than dividends paid or other distributions made in stock of the Corporation ranking junior to the Series C Preferred Stock as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up of the Corporation) on, or redeem, purchase, set apart or otherwise acquire (except upon conversion or exchange for stock of the Corporation ranking junior to the Series C Preferred Stock as to the payment of dividends and the distribution of assets upon

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liquidation, dissolution or winding up of the Corporation), shares of common stock or of any other class of stock of the Corporation ranking junior to the Series C Preferred Stock as to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up of the Corporation, unless (i) all accrued and unpaid dividends on the Series C Preferred Stock for the twelve monthly dividend periods ending on the immediately preceding dividend payment date shall have been paid or are paid contemporaneously and the full monthly dividend on the Series C Preferred Stock for the then current month has been or is contemporaneously declared and paid or declared and set apart for payment, and (ii) the Corporation has not defaulted in the payment of the redemption price of any shares of Series C Preferred Stock called for redemption.

     7. When dividends are not paid in full on the Series C Preferred Stock and any other shares of stock of the Corporation ranking on a parity as to the payment of dividends with the Series C Preferred Stock, all dividends declared upon the Series C Preferred Stock and any such other shares of stock of the Corporation will be declared pro rata so that the amount of dividends declared per share on the Series C Preferred Stock and any such other shares of stock will in all cases bear to each other the same ratio that the accrued dividends per share on the Series C Preferred Stock for the then current dividend period bears to the accrued dividends per share on such other shares of stock (which shall not include any accrual in respect of unpaid dividends for prior dividend periods if such preferred stock does not have a cumulative dividend).

     8. Holders of record of the Series C Preferred Stock will not be entitled to any dividend, whether payable in cash, property or stock, in excess of the dividends provided for herein on the shares of Series C Preferred Stock.

C. CONVERSION

     1. The Series C Preferred Stock will not be convertible into or exchangeable for any other securities of the Corporation.

D. REDEMPTION AT THE OPTION OF THE CORPORATION

     1. The shares of the Series C Preferred Stock are not redeemable prior to May 31, 2007. On and after that date, the shares of the Series C Preferred Stock will be redeemable in whole or in part from time to time at the option of the Corporation, with the consent of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) to the extent required by D. 8 below, upon not less than thirty nor more than sixty days’ notice by mail, at the redemption prices set forth below,

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during the twelve-month periods beginning on May 31, 2007 of the years set forth below, plus accrued and unpaid dividends from the dividend payment date immediately preceding the redemption date (without any cumulation for unpaid dividends for prior dividend periods on the Series C Preferred Stock) to the date fixed for redemption.

	Redemption
Year	Price
2007	$	25.50
2008	$	25.25
2009 and thereafter	$	25.00

     2. In the event that less than all of the outstanding shares of the Series C Preferred Stock are to be redeemed in any redemption at the option of the Corporation, the total number of shares to be redeemed in such redemption shall be determined by the Board of Directors and the shares to be redeemed shall be allocated pro rata or by lot as may be determined by the Board of Directors or by such other method as the Board of Directors may approve and deem equitable, including any method to conform to any rule or regulation of any national or regional stock exchange or automated quotation system upon which the shares of the Series C Preferred Stock may at the time be listed or eligible for quotation.

     3. Notice of any proposed redemption shall be given by the Corporation by mailing a copy of such notice to the holders of record of the shares of Series C Preferred Stock to be redeemed, at their address of record, not more than sixty nor less than thirty days prior to the redemption date. The notice of redemption to each holder of shares of Series C Preferred Stock shall specify the number of shares of Series C Preferred Stock to be redeemed, the redemption date and the redemption price payable to such holder upon redemption, and shall state that from and after said date dividends thereon will cease to accrue. If less than all the shares owned by a holder are then to be redeemed at the option of the Corporation, the notice shall also specify the number of shares of Series C Preferred Stock which are to be redeemed and the numbers of the certificates representing such shares. Any notice which is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not the stockholder receives such notice; and failure duly to give such notice by mail, or any defect in such notice, to the holders of any stock designated for redemption shall not affect the validity

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of the proceedings for the redemption of any other shares of Series C Preferred Stock.

     4. Notice having been mailed as aforesaid, from and after the redemption date (unless default be made in the payment of the redemption price for any shares to be redeemed), all dividends on the shares of Series C Preferred Stock called for redemption shall cease to accrue and all rights of the holders of such shares as stockholders of the Corporation by reason of the ownership of such shares (except the right to receive the redemption price, on presentation and surrender of the respective certificates representing the redeemed shares), shall cease on the redemption date, and such shares shall not after the redemption date be deemed to be outstanding. In case less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued without cost to the holder thereof representing the unredeemed shares.

     5. At its option, the Corporation may, on or prior to the redemption date, irrevocably deposit the aggregate amount payable upon redemption of the shares of the Series C Preferred Stock to be redeemed with a bank or trust company designated by the Board of Directors having its principal office in New York, New York, San Juan, Puerto Rico, or any other city in which the Corporation shall at that time maintain a transfer agency with respect to its capital stock, and having a combined capital and surplus (as shown by its latest published statement) of at least $50,000,000 (hereinafter referred to as the “Depositary”), to be held in trust by the Depositary for payment to the holders of the shares of the Series C Preferred Stock then to be redeemed. If such deposit is made and the funds so deposited are made immediately available to the holders of the shares of the Series C Preferred Stock to be redeemed, the Corporation shall thereupon be released and discharged (subject to the provisions of Section D.6) from any obligation to make payment of the amount payable upon redemption of the shares of the Series C Preferred Stock to be redeemed, and the holders of such shares shall look only to the Depositary for such payment.

     6. Any funds remaining unclaimed at the end of two years from and after the redemption date in respect of which such funds were deposited shall be returned to the Corporation forthwith and thereafter the holders of shares of the Series C Preferred Stock called for redemption with respect to which such funds were deposited shall look only to the Corporation for the payment of the redemption price thereof. Any interest accrued on any funds deposited with the Depositary shall

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belong to the Corporation and shall be paid to it from time to time on demand.

     7. Any shares of the Series C Preferred Stock which shall at any time have been redeemed shall, after such redemption, have the status of authorized but unissued shares of Preferred Stock, without designation as to series, until such shares are once more designated as part of a particular series by the Board of Directors. 8. To the extent required to have the Series C Preferred Stock treated as Tier 1 capital for bank regulatory purposes or otherwise required by applicable regulations of the Federal Reserve Board, the shares of Series C Preferred Stock may not be redeemed by the Corporation without the prior consent of the Federal Reserve Board.

E. LIQUIDATION PREFERENCE

     1. Upon any voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, the then record holders of shares of Series C Preferred Stock will be entitled to receive out of the assets of the Corporation available for distribution to shareholders, before any distribution is made to holders of common stock or any other equity securities of the Corporation ranking junior upon liquidation to the Series C Preferred Stock, distributions upon liquidation in the amount of $25 per share plus an amount equal to any accrued and unpaid dividends (without any cumulation for unpaid dividends for prior dividend periods on the Series C Preferred Stock) for the current monthly dividend period to the date of payment. Such amount shall be paid to the holders of the Series C Preferred Stock prior to any payment or distribution to the holders of the common stock of the Corporation or of any other class of stock or series thereof of the Corporation ranking junior to the Series C Preferred Stock in respect of dividends or as to the distribution of assets upon liquidation.

     2. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the amounts payable with respect to the Series C Preferred Stock and any other shares of stock of the Corporation ranking as to any such distribution on a parity with the Series C Preferred Stock are not paid in full, the holders of the Series C Preferred Stock and of such other shares will share ratably in any such distribution of assets of the Corporation in proportion to the full liquidation preferences to which each is entitled. After payment of the full amount of the liquidation preference to which they would otherwise be entitled, the holders of shares of Series C Preferred Stock will not be entitled to any

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further participation in any distribution of assets of the Corporation.

     3. Neither the consolidation or merger of the Corporation with any other corporation, nor any sale, lease or conveyance of all or any part of the property or business of the Corporation, shall be deemed to be a liquidation, dissolution, or winding up of the Corporation.

F. VOTING RIGHTS

     1. Except as described in this Section F, or except as required by applicable law, holders of the Series C Preferred Stock will not be entitled to receive notice of or attend or vote at any meeting of stockholders of the Corporation.

     2. If the Corporation does not pay dividends in full on the Series C Preferred Stock for eighteen consecutive monthly dividend periods, the holders of outstanding shares of the Series C Preferred Stock, together with the holders of any other shares of stock of the Corporation having the right to vote for the election of directors solely in the event of any failure to pay dividends, acting as a single class without regard to series, will be entitled, by written notice to the Corporation given by the holders of a majority in liquidation preference of such shares or by ordinary resolution passed by the holders of a majority in liquidation preference of such shares present in person or by proxy at a separate general meeting of such holders convened for the purpose, to appoint two additional members of the Board of Directors of the Corporation, to remove any such member from office and to appoint another person in place of such member. Not later than 30 days after such entitlement arises, if written notice by a majority of the holders of such shares has not been given as provided for in the preceding sentence, the Board of Directors or an authorized committee thereof will convene a separate general meeting for the above purpose. If the Board of Directors or such authorized committee fails to convene such meeting within such 30- day period, the holders of 10% of the outstanding shares of the Series C Preferred Stock and any such other stock will be entitled to convene such meeting. The provisions of the Certificate of Incorporation and By-laws of the Corporation relating to the convening and conduct of general meetings of stockholders will apply with respect to any such separate general meeting. Any member of the Board of Directors so appointed shall vacate office if, following the event which gave rise to such appointment, the Corporation shall have resumed the payment of dividends in full on

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the Series C Preferred Stock and each such other series of stock for twelve consecutive monthly dividend periods.

     3. Any amendment, alteration or repeal of the rights, preferences and privileges of the Series C Preferred Stock by way of amendment of the Corporation’s Restated Certificate of Incorporation whether by merger or otherwise (including, without limitation, the authorization or issuance of any shares of the Corporation ranking, as to dividend rights or rights on liquidation, winding up and dissolution, senior to the Series C Preferred Stock) which would materially and adversely affect the powers, preferences or special rights of the Series C Preferred Stock shall not be effective (unless otherwise required by applicable law) except with the consent in writing of the holders of at least two thirds of the outstanding aggregate liquidation preference of the outstanding shares of the Series C Preferred Stock or with the sanction of a special resolution passed at a separate general meeting by the holders of at least two thirds of the aggregate liquidation preference of the outstanding shares of the Series C Preferred Stock. Notwithstanding the foregoing, the Corporation may, without the consent or sanction of the holders of the Series C Preferred Stock, authorize and issue shares of the Corporation ranking, as to dividend rights and rights on liquidation, winding up and dissolution, on a parity with or junior to the Series C Preferred Stock.

     The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of the Series C Preferred Stock shall have been redeemed or called for redemption upon proper notice and sufficient funds shall have been deposited in trust to effect such redemption.

     4. No vote of the holders of the Series C Preferred Stock will be required for the Corporation to redeem or purchase and cancel the Series C Preferred Stock in accordance with the Restated Certificate of Incorporation of the Corporation.

     5. The Corporation will cause a notice of any meeting at which holders of any series of Preferred Stock are entitled to vote to be mailed to each record holder of such series of Preferred Stock. Each such notice will include a statement setting forth (i) the date of such meeting, (ii) a description of any resolution to be proposed for adoption at such meeting on which such holders are entitled to vote and (iii) instructions for deliveries of proxies.

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     6. Except as set forth in this Section F, holders of Series C Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote as set forth herein) for taking any corporate action.

G. RANK

     The Series C Preferred Stock will, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank (i) senior to all classes of common stock of the Corporation and to all other equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank junior to the Series C Preferred Stock (or to a number of series of Preferred Stock which includes the Series C Preferred Stock); (ii) on a parity with the Corporation’s outstanding 7% Noncumulative Monthly Income Preferred Stock, Series A, and 8.35% Noncumulative Monthly Income Preferred Stock, Series B, and with all other equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank on a parity with the Series C Preferred Stock (or with a number of series of Preferred Stock which includes the Series C Preferred Stock); and (iii) subject to the provisions of F.3 hereof, junior to all equity securities issued by the Corporation the terms of which specifically provide that such equity securities will rank senior to the Series C Preferred Stock (or to a number of series of Preferred Stock which includes the Series C Preferred Stock). For this purpose, the term “equity securities” does not include debt securities convertible into or exchangeable for equity securities.

H. FORM OF CERTIFICATE FOR SERIES C PREFERRED STOCK; TRANSFER AND REGISTRATION

     1. The Series C Preferred Stock shall be issued in registered form only. The Corporation may treat the record holder of a share of Series C Preferred Stock, including the Depository Trust Company and its nominee and any other holder that holds such share on behalf of any other person, as such record holder appears on the books of the registrar for the Series C Preferred Stock, as the sole owner of such share for all purposes.

     2. The transfer of a share of Series C Preferred Stock may be registered upon the surrender of the certificate evidencing the share of Series C Preferred Stock to be transferred, together with the form of transfer endorsed on it duly completed and executed, at the office of the transfer agent and registrar.

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     3. Registration of transfers of shares of Series C Preferred Stock will be effected without charge by or on behalf of the Corporation, but upon payment (or the giving of such indemnity as the transfer agent and registrar may require) in respect of any tax or other governmental charges which may be imposed in relation to it.

     4. The Corporation will not be required to register the transfer of a share of Series C Preferred Stock after such share has been called for redemption.

I. REPLACEMENT OF LOST CERTIFICATES

     If any certificate for a share of Series C Preferred Stock is mutilated or alleged to have been lost, stolen or destroyed, a new certificate representing the same share shall be issued to the holder upon request subject to delivery of the old certificate or, if alleged to have been lost, stolen or destroyed, compliance with such conditions as to evidence, indemnity and the payment of out-of-pocket expenses of the Corporation in connection with the request as the Board of Directors of the Corporation may determine.

J. NO PREEMPTIVE RIGHTS

     Holders of the Series C Preferred Stock will have no preemptive or preferential rights to purchase any securities of the Corporation.

K. NO REPURCHASE AT THE OPTION OF HOLDERS; MISCELLANEOUS

     Holders of Series C Preferred Stock will have no right to require the Corporation to redeem or repurchase any shares of Series C Preferred Stock, and the shares of Series C Preferred Stock are not subject to any sinking fund or similar obligation. The Corporation may, at its option, purchase shares of the Series C Preferred Stock from holders thereof from time to time, by tender, in privately negotiated transactions or otherwise.

     RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation and delegated to the Preferred Stock Pricing Committee in accordance with the provisions of its Restated Certificate of Incorporation, a series of Serial Preferred Stock of the Corporation be and hereby is created.

     FURTHER RESOLVED, that the Preferred Stock Pricing Committee designated by the Board of Directors has

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determined that the preferences and relative, participating, optional or other special rights of the shares of such series of Preferred Stock, and the qualifications, limitations or restrictions thereof, as stated and expressed herein, are under the circumstances prevailing on the date hereof fair and equitable to all the existing shareholders of the Corporation.

     FURTHER RESOLVED, that the designation and amount of such series and the voting powers, references and relative, participating, optional or other special rights of the shares of such series of Preferred Stock, and the qualifications, limitations or restrictions thereof are as follows:

     1. Designation and Amount. The shares of such series of Preferred Stock shall be designated as the “4.75% Perpetual Cumulative Convertible Preferred Stock” (hereinafter called the “Preferred Stock”), and the number of authorized shares constituting such series shall be 1,380,000.

     2. Certain Definitions. As used in this Certificate, the following terms shall have the following meanings, unless the context otherwise requires:

          “Affiliate” of any Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person. For the purposes of this definition, “control” when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

          “Agent Members” shall have the meaning assigned to it in Section 14(a) hereof.

          “Board of Directors” means either the board of directors of the Corporation or any duly authorized committee of such board.

          “Business Day” means any day other than a Saturday, Sunday or a day on which state or U.S. federally chartered banking institutions in San Juan, Puerto Rico or New York, New York are not required to be open.

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          “Capital Stock” of any Person means any and all shares, interests, participations or other equivalents however designated of corporate stock or other equity participations, including partnership interests, whether general or limited, of such Person and any rights (other than debt securities convertible or exchangeable into an equity interest), warrants or options to acquire an equity interest in such Person.

          “Certificate” means this Certificate of Designation.

          “Clearing Agency” shall have the meaning assigned to it in Section 14(a) hereof.

          “Closing Sale Price” with respect to shares of Common Stock or other capital stock or similar equity interests on any Trading Day means the closing sale price per share (or, if no closing sale price is reported, the average of the closing bid and ask prices or, if more than one in either case, the average of the average closing bid and the average closing ask prices) on such date as reported on the principal United States securities exchange on which shares of Common Stock or such other capital stock or similar equity interests are traded or, if the shares of Common Stock or such other capital stock or similar equity interests are not listed on a United States national or regional securities exchange, as reported by NASDAQ or by the National Quotation Bureau Incorporated. In the absence of such quotations, the Corporation shall be entitled to determine the Closing Sale Price on the basis it considers appropriate. The Closing Sale Price shall be determined without reference to extended or after hours trading.

          “Common Share Legend” shall have the meaning assigned to it in Section 15(f).

          “Common Stock” means any stock of any class of the Corporation that has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation and that is not subject to redemption by the Corporation. Subject to the provisions of Section 10, however, shares issuable on conversion of the Preferred Stock shall include only shares of the class designated as common stock of the Corporation at the date of this Certificate (namely, the Common Stock, par value $1.00 per share) or shares of any class or classes resulting from any reclassification or

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reclassifications thereof and that have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation and which are not subject to redemption by the Corporation; provided that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable on conversion shall be substantially in the proportion that the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications.

          “Conversion Agent” shall have the meaning assigned to it in Section 16(a) hereof.

          “Conversion Price” per share of Preferred Stock means, on any date, the Liquidation Preference divided by the Conversion Rate in effect on such date.

          “Conversion Rate” per share of Preferred Stock means 4.1904 shares of Common Stock, subject to adjustment pursuant to Section 9 hereof.

          “Corporation” shall have the meaning assigned to it in the preamble to this Certificate, and shall include any successor to such Corporation.

          “Current Market Price” shall mean, as of any date of determination, the average of the daily Closing Sale Prices per share of Common Stock for the ten consecutive Trading Days selected by the Corporation commencing no more than 30 Trading Days before and ending not later than the earlier of such date of determination and the day before the “ex” date with respect to the issuance, distribution, subdivision or combination requiring such computation. For purpose of this paragraph, the term “ex” date, (1) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades, regular way, on the relevant exchange or in the relevant market from which the Closing Sale Price was obtained without the right to receive such issuance or distribution, and (2) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades, regular way, on such exchange or in such market after the time at which such subdivision or combination becomes effective. If another issuance, distribution, subdivision or combination to which Section 9(d) applies occurs during the period of ten consecutive trading days

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referred to above applicable for calculating “Current Market Price” pursuant to this definition, the “Current Market Price” shall be calculated for such period in a manner determined by the Board of Directors to reflect the impact of such issuance, distribution, subdivision or combination on the Closing Sale Price of the Common Stock during such period

          “Depositary” means DTC or its successor depositary.

          “Dividend Payment Date” means March 15, June 15, September 15 and December 15 each year, or if any such date is not a Business Day, the next succeeding Business Day.

          “Dividend Period” shall mean the period beginning on, and including, a Dividend Payment Date and ending on, and excluding, the immediately succeeding Dividend Payment Date.

          “DTC” shall mean The Depository Trust Corporation, New York, New York.

          “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

          “Fair Market Value” shall mean the amount which a willing buyer would pay a willing seller in an arm’s-length transaction.

          “Global Preferred Shares” shall have the meaning assigned to it in Section 14(a) hereof.

          “Global Shares Legend” shall have the meaning assigned to it in Section 14(a) hereof.

          “Initial Purchasers” shall have the meaning assigned to it in the Purchase Agreement.

          “Junior Stock” shall have the meaning assigned to it in Section 3(d) hereof.

          “Liquidation Damages Payment” shall have the meaning assigned to it in the Registration Rights Agreement.

          “Liquidation Preference” shall have the meaning assigned to it in Section 5(a) hereof.

          “NASDAQ” means the National Association of Securities Dealers Automated Quotation System.

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          “Officer” means the Chairman of the Board, the President, any Vice President, the Treasurer, any Assistant Treasurer, the Controller, any Assistant Controller, the Secretary, any Assistant Treasurer or any Assistant Secretary of the Corporation.

          “Outstanding” means, when used with respect to Preferred Stock, as of any date of determination, all shares of Preferred Stock outstanding as of such date; provided, however, that, in determining whether the holders of Preferred Stock have given any request, demand, authorization, direction, notice, consent or waiver or taken any other action hereunder, Preferred Stock owned by the Corporation shall be deemed not to be Outstanding, except that, in determining whether the Registrar shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, waiver or other action, only Preferred Stock which the Registrar has actual knowledge of being so owned shall be deemed not to be Outstanding.

          “Parity Stock” shall have the meaning assigned to it in Section 3(c) hereof.

          “Paying Agent” shall have the meaning assigned to it in Section 16(a) hereof.

          “Person” means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

          “Preferred Stock” shall have the meaning assigned to it in Section 1 hereof.

          “Preferred Stock Director” shall have the meaning assigned to it in Section 6(b) hereof.

          “Purchase Agreement” means the Purchase Agreement dated as of September 23, 2003 between the Corporation and Wachovia Capital Markets, LLC, on behalf of itself and as representative of the other Initial Purchasers named therein, relating to the Preferred Stock.

          “Purchase Price” means an amount equal to 100% of the Liquidation Preference per share of Preferred Stock being purchased, plus an amount equal to any accumulated and unpaid dividends, (whether or not earned or declared).

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          “Record Date” means (i) with respect to the dividends payable on March 15, June 15, September 15 and December 15 of each year, March 1, June 1, September 1 and December 1 of each year, respectively, or such other record date, not more than 60 days and not less than 10 days preceding the applicable Dividend Payment Date, as shall be fixed by the Board of Directors and (ii) solely for the purpose of adjustments to the Conversion Rate pursuant to Section 9, with respect to any dividend, distribution or other transaction or event in which the holders of Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of stockholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise).

          “Registrar” shall have the meaning assigned to it in Section 12 hereof.

          “Registration Default” shall have the meaning assigned to it in the Registration Rights Agreement.

          “Registration Rights Agreement” means the Registration Rights Agreement dated as of September 29, 2003, between the Corporation, and Wachovia Capital Markets, LLC, on behalf of itself and as representative of the other Initial Purchasers named therein, relating to the Preferred Stock.

          “Restricted Shares Legend” shall have the meaning assigned to it in Section 14(a).

          “Securities Act” means the Securities Act of 1933, as amended.

          “Senior Stock” shall have the meaning assigned to it in Section 3(b) hereof.

          “Shelf Registration Statement” shall have the meaning assigned to it in the Registration Rights Agreement.

          “Subsidiary” means, with respect to any Person, (a) any corporation, association or other business entity of which more than 50% of the total voting power of shares of capital stock entitled (without regard to the occurrence of any contingency) to vote in the election of

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directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (b) any partnership (i) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (ii) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof).

          “Trading Day” means a day during which trading in securities generally occurs on the New York Stock Exchange or, if the Common Stock is not listed on the New York Stock Exchange, on the principal other national or regional securities exchange on which the Common Stock is then listed or, if the Common Stock is not listed on a national or regional securities exchange, on NASDAQ or, if the Common Stock is not quoted on NASDAQ, on the principal other market on which the Common Stock is then traded.

          “Transfer Agent” shall have the meaning assigned to it in Section 12 hereof.

     3. Ranking. The Preferred Stock shall, with respect to dividend rights and rights upon liquidation, winding up or dissolution, rank:

          (a) junior to all existing and future debt obligations of the Corporation (collectively, the “Senior Debt”);

          (b) junior to each class or series of Capital Stock of the Corporation, the terms of which expressly provide that such class or series ranks senior to the Preferred Stock as to dividend rights and rights on liquidation, winding up and dissolution of the Corporation (collectively, together with any warrants, rights, calls or options exercisable for or convertible into such Capital Stock, the “Senior Stock”);

          (c) on a parity with the Corporation’s outstanding 7.00% Noncumulative Monthly Income Preferred Stock, Series A, 8.35% Noncumulative Monthly Income Preferred Stock, Series B and 7.25% Noncumulative Monthly Income Preferred Stock, Series C and with any other class or series of Capital Stock of the Corporation, the terms of which expressly provide that such class or series ranks on a parity with the Preferred Stock as to dividend rights and rights on liquidation, winding up and

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dissolution of the Corporation (collectively, the “Parity Stock”); and

          (d) senior to the Common Stock and any other class or series of Capital Stock of the Corporation, the terms of which expressly provide that such class or series ranks junior to the Preferred Stock as to dividend rights and rights on liquidation, winding up and dissolution of the Corporation (collectively, the “Junior Stock”).

     4. Dividends. (a) Holders of the Preferred Stock shall be entitled to receive, when, as and if, declared by the Board of Directors, out of funds of the Corporation legally available for the payment of dividends, cumulative cash dividends at the annual rate of 4.75% of the Liquidation Preference per share, or $2.96875 per share per quarter, with each aggregate payment made to each record holder of the Preferred Stock being rounded to the next lowest cent. Such dividends shall be payable in arrears in equal amounts quarterly on each Dividend Payment Date, beginning December 15, 2003, in preference to and in priority over dividends on any Junior Stock but subject to the rights of any holders of Senior Stock or Parity Stock.

          (b) Dividends shall be cumulative from the initial date of issuance or the last Dividend Payment Date for which accumulated dividends were paid, whichever is later, whether or not funds of the Corporation are legally available for the payment of such dividends. Each such dividend shall be payable to the holders of record of shares of the Preferred Stock, as they appear on the Corporation’s stock register at the close of business on a Record Date. Accumulated and unpaid dividends for any past Dividend Periods may be declared and paid at any time, without reference to any Dividend Payment Date, to holders of record on such date, not more than 45 days preceding the payment date thereof, as may be fixed by the Board of Directors.

          (c) The amount of dividends payable for each full Dividend Period for the Preferred Stock shall be computed by dividing the annual dividend rate by four. The amount of dividends payable for the initial Dividend Period, or any other period shorter or longer than a full Dividend Period, on the Preferred Stock shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Holders of Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or

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stock, in excess of cumulative dividends, as herein provided, on the Preferred Stock.

          (d) No dividend shall be declared or paid or set apart for payment or other distribution declared or made, whether in cash, obligations or shares of Capital Stock of the Corporation (other than Junior Stock) or other property, directly or indirectly, upon any shares of Junior Stock or Parity Stock, nor shall any shares of Junior Stock or Parity Stock be redeemed, repurchased or otherwise acquired for consideration by the Corporation through a sinking fund or otherwise, unless all accumulated and unpaid dividends through the most recent Dividend Payment Date (whether or not there are funds of the Corporation legally available for the payment of dividends) on the shares of Preferred Stock and any Parity Stock have been or contemporaneously are declared and paid in full or set apart for payment; provided, however, that, notwithstanding any provisions of this Section 4(d) to the contrary, the Corporation may redeem, repurchase or otherwise acquire for consideration Preferred Stock and Parity Stock pursuant to a purchase or exchange offer made on the same terms to all holders of such Preferred Stock and Parity Stock.

          (e) When dividends are not paid in full, as aforesaid, upon the shares of Preferred Stock, all dividends declared on the Preferred Stock and any other Parity Stock shall be declared and paid pro rata so that the amount of dividends so declared on the shares of Preferred Stock and each such other class or series of Parity Stock shall in all cases bear to each other the same ratio as accumulated dividends on the shares of Preferred Stock and such class or series of Parity Stock bear to each other which shall not include any accrual in respect to unpaid dividends for prior dividend periods in the case of Capital Stock that does not have a cumulative dividend.

          (f) Upon a Registration Default, a Liquidated Damages Payment shall accumulate and be payable to the holders of the Preferred Stock or holders of the Common Stock issuable upon conversion of the Preferred Stock in accordance with the Registration Rights Agreement.

     5. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, before any payment or distribution of the Corporation’s assets (whether capital or surplus) shall be made to or set apart for the holders

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of Junior Stock, holders of Preferred Stock shall be entitled to receive $250.00 per share of Preferred Stock (the “Liquidation Preference”) plus an amount equal to all dividends, (whether or not earned or declared) accumulated and unpaid thereon to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding up of the Corporation, the Corporation’s assets, or proceeds thereof, distributable among the holders of Preferred Stock are insufficient to pay in full the preferential amount aforesaid and liquidating payments on any Parity Stock, then such assets, or the proceeds thereof, shall be distributed among the holders of the Preferred Stock and any other Parity Stock ratably in accordance with the respective amounts that would be payable on such shares of Preferred Stock and any such other Parity Stock if all amounts payable thereon were paid in full.

          (b) Neither the consolidation or merger of the Corporation with any other corporation, nor any sale, lease or conveyance of all or any part of the property or business of the Corporation, shall be deemed to be a liquidation, dissolution, or winding up of the Corporation.

          (c) Subject to the rights of the holders of any Parity Stock, after payment has been made in full to the holders of the Preferred Stock, as provided in this Section 5, holders of Junior Stock shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of Preferred Stock shall not be entitled to share therein.

     6. Voting Rights.

          (a) The holders of record of shares of the Preferred Stock shall not be entitled to any voting rights except as hereinafter provided in this Section 6, as otherwise provided in the Corporation’s Restated Certificate of Incorporation, or as otherwise provided by law.

          (b) If at any time (1) dividends on any shares of Preferred Stock or any other class or series of Parity Stock having like voting rights shall be in arrears for consecutive dividend periods, containing in the aggregate a number of days equivalent to six fiscal quarters, the holders of shares of Preferred Stock (voting separately

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as a class with all other series of preferred stock ranking on parity with the Preferred Stock upon which like voting rights have been conferred and are exercisable) will be entitled, by written notice to the Corporation given by the holders of a majority in liquidation preference of such shares or by ordinary resolution passed by the holders of a majority in liquidation preference of such shares present in person or by proxy at a separate general meeting of such holders convened for this purpose, to appoint at the next annual meeting of the stockholders of the Corporation or at a special meeting called for such purpose, whichever is earlier, two of the authorized number of the Corporation’s directors (each, a “Preferred Stock Director”) at the next annual meeting of stockholders and each subsequent meeting until all dividends accumulated on the Preferred Stock have been fully paid or set aside for payment, to remove any such member from office and to appoint another person in place of such Preferred Stock Director. The term of office of such Preferred Stock Directors will terminate immediately upon the termination of the right of the holders of Preferred Stock to vote for directors. Not later than 30 days after such entitlement arises, if written notice by a majority of the holders of such shares has not been given as provided for in the preceding sentence, the Board of Directors will convene a separate general meeting for the above purpose. If the Board of Directors or such authorized committee fails to convene such meeting within such 30-day period, the holders of 10% of the outstanding shares of the Preferred Stock and any such other stock, considered as a single class, will be entitled to convene such meeting. The provisions of the Restated Certificate of Incorporation and By-laws of the Corporation relating to the convening and conduct of general meetings of stockholders will apply with respect to any such separate general meeting. Any member of the Board of Directors so appointed shall vacate office if, following the event which gave rise to such appointment, the Corporation shall have resumed the payment of accumulated dividends in full on the Preferred Stock and each such other series of stock having similar voting rights.

          (c) The affirmative vote of holders of at least two-thirds of the outstanding shares of the Preferred Stock voting as a separate class, in person or by proxy, at a special meeting called for the purpose, or by written consent in lieu of meeting, shall be required to amend, alter or repeal, whether by merger, consolidation, combination, reclassification or otherwise, any

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provisions of the Restated Certificate of Incorporation if the amendment would amend, alter or affect the powers, preferences or rights of the Preferred Stock, so as to materially and adversely affect the holders thereof; provided however, that any increase in the amount of the authorized common stock or authorized preferred stock or the creation and issuance of other series of common stock or preferred stock ranking on a parity with or junior to the preferred stock as to dividends and upon liquidation will not be deemed to materially and adversely affect such powers, preference or special rights.

     7. Conversion. (a) Right to Convert. Each share of Preferred Stock shall be convertible in accordance with, and subject to, this Section 7 into a number of fully paid and non-assessable shares of Common Stock (as such shares shall then be constituted) equal to the Conversion Rate in effect on the date notice of conversion is given. The Preferred Stock shall be convertible only upon any of the events, and for the period, specified in the following clauses (i) through (iv) below. Upon the determination that holders of the Preferred Stock are or will be entitled to convert shares of Preferred Stock in accordance with any of the following provisions, the Corporation shall issue a press release and publish such information on its website.

               (i) Conversion Rights Based on Common Stock Price. At any time after September 30, 2003, the Preferred Stock may be surrendered for conversion into shares of Common Stock in any fiscal quarter of the Corporation (and only during such fiscal quarter), if, as of the last day of the preceding fiscal quarter of the Corporation, the Closing Sale Price of the Common Stock for at least 20 Trading Days in a period of 30 consecutive Trading Days ending on the last Trading Day of such fiscal quarter is more than 120% of the Conversion Price as of each such Trading Day. A holder’s right to convert pursuant to this Section 7(a)(i) is subject to the Corporation’s right to require conversion pursuant to Section 8.

               (ii) Conversion Rights Upon Occurrence of Certain Corporate Transactions. If the Corporation is a party to a consolidation, merger or binding share exchange pursuant to which shares of Common Stock would be converted into cash, securities or other property as set forth in Section 10, each share of Preferred Stock may be surrendered for conversion at any time from and after the date that is 15 days prior to the anticipated

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effective date of the transaction until 15 days after the actual date of such transaction and, at the effective time of the transaction, the right to convert Preferred Stock into shares of Common Stock shall be changed into a right to convert such Preferred Stock into the kind and amount of cash, securities or other property of the Corporation or another Person that the holder would have received if the holder had converted such Preferred Stock immediately prior to the transaction.

               (iii) Conversion Rights Upon Certain Distributions. If the Corporation elects to:

                    (1) distribute to all holders of any class of Common Stock

                    (A) rights or warrants entitling them to purchase, for a period expiring within 45 days of the record date for such distribution, Common Stock at less than the average Closing Sale Price for the 10 Trading Days preceding the declaration date for such distribution, or

                    (B) cash, assets, debt securities or rights to purchase the Corporation’s securities, which distribution has a per share value exceeding 1.5% of the Closing Sale Price of the Common Stock on the Trading Day immediately preceding the declaration date for such distribution, the Preferred Stock may be surrendered for conversion on the date that the Corporation gives notice to the holders of such right, which shall not be less than 20 days prior to the time (“Ex-Dividend Time”) immediately prior to the commencement of “ex-dividend” trading for such distribution on the New York Stock Exchange or such other principal national or regional exchange or market on which the Common Stock is then listed or quoted for such dividend or distribution, and at any time thereafter until the earlier of close of business on the Business Day immediately preceding the Ex-Dividend Time and the date the Corporation announces that such dividend or distribution will not take place. Notwithstanding the foregoing, holders shall not have the right to surrender shares of Preferred Stock for conversion pursuant to this Section 7(a)(iii) if they will otherwise participate in the distribution described above without first converting Preferred Stock into Common Stock.

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               (iv) Conversion Upon Delisting of the Common Stock. The Preferred Stock may be surrendered for conversion into shares of Common Stock if at any time the Common Stock (or other common stock into which the Preferred Stock is then convertible) is neither listed for trading on the New York Stock Exchange or another U.S. national securities exchange nor approved for trading on the NASDAQ or any similar United States system of automated dissemination of quotations of securities prices.

          (b) Conversion Procedures. (i) Conversion of shares of the Preferred Stock may be effected by any holder thereof upon the surrender to the Corporation, at the principal office of the Corporation or at the office of the Conversion Agent as may be designated by the Board of Directors, of the certificate or certificates for such shares of the Preferred Stock to be converted accompanied by a complete and manually signed Notice of Conversion (as set forth in the form of Preferred Stock certificate attached hereto) along with (A) appropriate endorsements and transfer documents as required by the Registrar or Conversion Agent and (B) if required pursuant to Section 7(c) funds equal to the dividend payable on the next Dividend Payment Date. In case such Notice of Conversion shall specify a name or names other than that of such holder, such notice shall be accompanied by payment of all transfer taxes payable upon the issuance of shares of Common Stock in such name or names. Other than such taxes, the Corporation shall pay any documentary, stamp or similar issue or transfer taxes that may be payable in respect of any issuance or delivery of shares of Common Stock upon conversion of shares of the Preferred Stock pursuant hereto. The conversion of the Preferred Stock will be deemed to have been made on the date (the “Conversion Date") such certificate or certificates have been surrendered and the receipt of such notice of conversion and payment of all required transfer taxes, if any (or the demonstration to the satisfaction of the Corporation that such taxes have been paid). As promptly as practicable following the Conversion Date, the Corporation shall deliver or cause to be delivered (i) certificates representing the number of validly issued, fully paid and nonassessable full shares of Common Stock to which the holder of shares of the Preferred Stock being converted (or such holder’s transferee) shall be entitled, and (ii) if less than the full number of shares of the Preferred Stock evidenced by the surrendered certificate or certificates is being converted, a new certificate or certificates, of like tenor, for the

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number of shares evidenced by such surrendered certificate or certificates less the number of shares being converted. On the Conversion Date, the rights of the holder of the Preferred Stock as to the shares being converted shall cease except for the right to receive shares of Common Stock and the Person entitled to receive the shares of Common Stock shall be treated for all purposes as having become the record holder of such shares of Common Stock at such time.

               (ii) Anything herein to the contrary notwithstanding, in the case of Global Preferred Shares, notices of conversion may be delivered and shares of the Preferred Stock representing beneficial interests in respect of such Global Preferred Shares may be surrendered for conversion in accordance with the applicable procedures of the Depositary as in effect from time to time.

          (c) Dividend and Other Payments Upon Conversion. If a holder of shares of Preferred Stock exercises its conversion rights, such shares will cease to accumulate dividends as of the end of the day immediately preceding the Conversion Date. On conversion of the Preferred Stock, except for conversion during the period from the close of business on any Record Date corresponding to a Dividend Payment Date to the close of business on the Business Day immediately preceding such Dividend Payment Date, in which case the holder on such Dividend Record Date shall receive the dividends payable on such Dividend Payment Date, accumulated and unpaid dividends on the converted shares of Preferred Stock shall not be cancelled, extinguished or forfeited, but rather shall be deemed to be paid in full to the holder thereof through delivery of the Common Stock (together with the cash payment, if any, in lieu of fractional shares) in exchange for the Preferred Stock being converted pursuant to the provisions hereof. Shares of the Preferred Stock surrendered for conversion after the close of business on any Record Date for the payment of dividends declared and before the opening of business on the Dividend Payment Date corresponding to that Record Date must be accompanied by a payment to the Corporation in cash of an amount equal to the dividend payable in respect of those shares on such Dividend Payment Date; provided that a holder of shares of the Preferred Stock on a Record Date who converts such shares into shares of Common Stock on the corresponding Dividend Payment Date shall be entitled to receive the dividend payable on such shares of the Preferred Stock on such Dividend Payment Date, and such

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holder need not include payment to the Corporation of the amount of such dividend upon surrender of shares of the Preferred Stock for conversion.

          (d) Fractional Shares. In connection with the conversion of any shares of the Preferred Stock, no fractions of shares of Common Stock shall be issued, but the Corporation shall pay a cash adjustment in respect of any fractional interest in an amount equal to the fractional interest multiplied by the Closing Sale Price of the Common Stock on the Conversion Date, rounded to the nearest whole cent.

          (e) Total Shares. If more than one share of the Preferred Stock shall be surrendered for conversion by the same holder at the same time, the number of full shares of Common Stock issuable on conversion of those shares shall be computed on the basis of the total number of shares of the Preferred Stock so surrendered.

          (f) Reservation of Shares; Shares to be Fully Paid; Compliance with Governmental Requirement. The Corporation shall:

               (i) at all times reserve and keep available, free from preemptive rights, for issuance upon the conversion of shares of the Preferred Stock such number of its authorized but unissued shares of Common Stock as shall from time to time be sufficient to permit the conversion of all outstanding shares of the Preferred Stock;

               (ii) prior to the delivery of any securities that the Corporation shall be obligated to deliver upon conversion of the Preferred Stock, comply with all applicable federal and state laws and regulations that require action to be taken by the Corporation (including, without limitation, the registration or approval, if required, of any shares of Common Stock to be provided for the purpose of conversion of the Preferred Stock hereunder); and

               (iii) ensure that all shares of Common Stock delivered upon conversion of the Preferred Stock, upon delivery, be duly and validly issued and fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights.

     8. Conversion at the Option of the Corporation. Shares of Preferred Stock shall be convertible at the

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option of the Corporation in accordance with this Section 8.

          (a) The Corporation may not require conversion of any shares of Preferred Stock before September 30, 2008. On or after September 30, 2008, the Corporation shall have the option to cause the Preferred Stock to be converted into that number of shares of Common Stock that are issuable at the Conversion Price in effect on the day notice of conversion is given pursuant to clause (b)(i) below, but only if the Closing Sale Price of the Common Stock for 20 Trading Days within a period of 30 consecutive Trading Days ending on a Trading Day that is not more than two Trading Days prior to the date the Corporation gives notice of its intention to convert pursuant to clause (b)(i) below exceeds 130% of the Conversion Price in effect on each such Trading Day.

          (b) In the event the Corporation elects to require conversion of the shares of Preferred Stock, the Corporation shall:

               (i) issue a press release for Publication on the Dow Jones News Service (or similar news service if the Dow Jones News Service is no longer in existence) prior to the opening of business no later than the second Trading Day after the conditions described in Section 8(a) are met (and only while such conditions are met), announcing the Corporation’s intention to require conversion.

               (ii) send written notice by mail or publication (with subsequent prompt notice by mail) to each holder of record of the Preferred Stock, announcing the Corporation’s intention to require conversion, not later than four Business Days after the date of the press release, stating:

                    (A) the conversion date, which will be a date selected by the Corporation and will be no more than five Business Days after the date the Corporation issues the press release pursuant to clause (b)(i) above;

                    (B) the number of shares of Common Stock to be issued upon conversion of each share of Preferred Stock; and

                    (C) that dividends on the Preferred Stock to be converted will cease to accrue on the conversion date;

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          (c) Any notice which is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not the stockholder receives such notice; and failure duly to give such notice by mail, or any defect in such notice, to any holder of Preferred Stock shall not affect the validity of the proceedings for the conversion of the shares Preferred Stock of any other holder.

          (d) Notice having been mailed as aforesaid, from and after the conversion date, all dividends on the shares of Preferred Stock called for conversion shall cease to accrue and all rights of the holders of such shares by reason of the ownership of such shares (except the right to receive the shares of Common Stock issuable upon conversion thereof), shall cease on the conversion date, and such shares shall not after the conversion date be deemed to be outstanding.

          (e) The dividend payment with respect to the shares of Preferred Stock called for conversion on a date during the period between the close of business on any Record Date for the payment of dividends to the close of business on the corresponding dividend payment date will be payable on such dividend payment date to the record holder of such share on such Record Date if such share has been converted after such Record Date and prior to such Dividend Payment Date. Except as provided in the immediately preceding sentence no payment or adjustment will be made upon conversion of Preferred Stock for accumulated and unpaid dividends or for dividends with respect to the Common Stock issued upon such conversion.

          (f) The Corporation may not authorize, issue a press release or give notice of any conversion unless, prior to giving the conversion notice, all accumulated and unpaid dividends on the Preferred Stock for dividend periods ended prior to the date of such conversion notice shall have been paid in cash.

          (g) At its option, the Corporation may, with the prior approval of the Board of Governors of the Federal Reserve System, if there are less than 120,000 shares of Preferred Stock outstanding, at any time on or after September 30, 2008, cause the Preferred Stock to be automatically converted into that number of shares of Common Stock equal to $250.00 (the liquidation preference per share of Preferred Stock) divided by the lesser of the Conversion Price in effect on the date notice of conversion is given and the average Closing Sale Price of

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the Common Stock for the five Trading Day period ending on the second Trading Day immediately prior to the Conversion Date.

     9. Conversion Rate Adjustments. The Conversion Rate shall be adjusted from time to time by the Corporation in accordance with the provisions of this Section 9.

          (a) If the Corporation shall hereafter pay a dividend or make a distribution to all holders of the outstanding Common Stock in shares of Common Stock, the Conversion Rate shall be increased so that the same shall equal the rate determined by multiplying the Conversion Rate in effect at the opening of business on the date following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution by a fraction,

               (i) the numerator of which shall be the sum of the number of shares of Common Stock outstanding at the close of business on the date fixed for the determination of stockholders entitled to receive such dividend or other distribution plus the total number of shares of Common Stock constituting such dividend or other distribution; and

               (ii) the denominator of which shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination,

such increase to become effective immediately after the opening of business on the day following the date fixed for such determination. If any dividend or distribution of the type described in this Section 9(a) is declared but not so paid or made, the Conversion Rate shall again be adjusted to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

          (b) If the Corporation shall issue rights or warrants to all holders of any class of Common Stock entitling them (for a period expiring within forty-five (45) days after the date fixed for determination of stockholders entitled to receive such rights or warrants) to subscribe for or purchase shares of Common Stock at a price per share less than the average of the Closing Sale Prices of the Common Stock for the 10 Trading Days preceding the declaration date for such distribution, the Conversion Rate shall be increased so that the same shall equal the rate determined by multiplying the Conversion

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Rate in effect immediately prior to the date fixed for determination of stockholders entitled to receive such rights or warrants by a fraction,

               (i) the numerator of which shall be the number of shares of Common Stock outstanding on the date fixed for the determination of stockholders entitled to receive such rights or warrants plus the total number of additional shares of Common Stock offered for subscription or purchase; and

               (ii) the denominator of which shall be the sum of the number of shares of Common Stock outstanding at the close of business on the date fixed for the determination of stockholders entitled to receive such rights or warrants plus the number of shares that the aggregate offering price of the total number of shares so offered would purchase at a price equal to the average of the Closing Sale Prices of the Common Stock for the 10 Trading Days preceding the declaration date for such distribution.

Such adjustment shall be successively made whenever any such rights or warrants are issued, and shall become effective immediately after the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered after the expiration of such rights or warrants, the Conversion Rate shall be readjusted to the Conversion Rate that would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. If such rights or warrants are not so issued, the Conversion Rate shall again be adjusted to be the Conversion Rate that would then be in effect if such date fixed for the determination of stockholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at a price less than the average of the Closing Sale Prices of the Common Stock for the 10 Trading Days preceding the declaration date for such distribution, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received by the Corporation for such rights or warrants and any amount payable on exercise or conversion thereof, the value of such consideration, if

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other than cash, to be determined by the Board of Directors.

          (c) If the outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and conversely, in case outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately reduced, such increase or reduction, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective.

          (d) If the Corporation shall, by dividend or otherwise, distribute to all holders of its Common Stock shares of any class of Capital Stock of the Corporation or evidences of its indebtedness or other assets (including securities, but excluding (x) any rights or warrants referred to in 9(b) and (y) any dividend or distribution (I) paid exclusively in cash or (II) referred to in Section 9(a)) (any of the foregoing hereinafter in this Certificate called the “Distributed Property”), then, in each such case, the Conversion Rate shall be increased so that the same shall be equal to the rate determined by multiplying the Conversion Rate in effect on the Record Date with respect to such distribution by a fraction,

               (i) the numerator of which shall be the Current Market Price on such Record Date; and

               (ii) the denominator of which shall be the Current Market Price on such Record Date less the Fair Market Value (as determined by the Board of Directors, whose determination shall be conclusive, and described in a resolution of the Board of Directors) on the Record Date of the portion of the Distributed Property so distributed applicable to one share of Common Stock,

such adjustment to become effective immediately prior to the opening of business on the day following such Record Date; provided that if the then Fair Market Value (as so determined) of the portion of the Distributed Property so distributed applicable to one share of Common Stock is

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equal to or greater than the Current Market Price on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of Preferred Stock shall have the right to receive upon conversion the amount of Distributed Property such holder would have received had such holder converted each share Preferred Stock on the Record Date. If such dividend or distribution is not so paid or made, the Conversion Rate shall again be adjusted to be the Conversion Rate that would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the Fair Market Value of any distribution for purposes of this Section 9(d) by reference to the actual or when issued trading market for any securities, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price on the applicable Record Date.

     For purposes of this Section 9(d), Section 9(a) and Section 9(b), any dividend or distribution to which this Section 9(d) is applicable that also includes shares of Common Stock, or rights or warrants to subscribe for or purchase shares of Common Stock (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, assets or shares of capital stock other than such shares of Common Stock or rights or warrants (and any Conversion Rate adjustment required by this Section 9(d) with respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend or distribution of such shares of Common Stock or such rights or warrants (and any further Conversion Rate adjustment required by Sections 9(a) and 9(b) with respect to such dividend or distribution shall then be made), except (A) the Record Date of such dividend or distribution shall be substituted as “the date fixed for the determination of stockholders entitled to receive such dividend or other distribution”, “the date fixed for the determination of stockholders entitled to receive such rights or warrants” and “the date fixed for such determination” within the meaning of Sections 9(a) and 9(b) and (B) any shares of Common Stock included in such dividend or distribution shall not be deemed “outstanding at the close of business on the date fixed for such determination” within the meaning of Section 9(a).

          (e) If the Corporation shall, by dividend or otherwise, distribute to all holders of its Common Stock cash (excluding any dividend or distribution in connection with the liquidation, dissolution or winding

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up of the Corporation, whether voluntary or involuntary), then if the sum of the amount of such cash distributions per share of Common Stock plus the aggregate amount of cash distributions per share of Common Stock in the immediately preceding twelve month period exceeds the greater of:

               (i) the annualized amount per share of Common Stock of the next preceding quarterly cash dividend on the Common Stock to the extent that such preceding quarterly dividend did not require any adjustment to the Conversion Rate pursuant to this Section 9(e) (as adjusted to reflect subdivisions, or combinations of the Common Stock); and

               (ii) 1.5% of the average of the Closing Sale Price during the ten Trading Days immediately prior to the date of declaration of such dividend,

the Conversion Rate shall be increased so that the same shall equal the rate determined by multiplying the Conversion Rate in effect immediately prior to the close of business on such record date by a fraction,

               (i) the numerator of which shall be the Current Market Price on such record date; and

               (ii) the denominator of which shall be the Current Market Price on such record date less (x) in the case of a quarterly cash dividend, the amount of cash distributed in excess of the threshold set forth above) applicable to one share of Common Stock or (y) in the case of a cash distribution that is not a quarterly dividend, the amount of such distribution applicable to one share of Common Stock.

such adjustment to be effective immediately prior to the opening of business on the day following the Record Date; provided that if the portion of the cash so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price on the record date, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of Preferred Stock shall have the right to receive upon conversion the amount of cash such holder would have received had such holder converted each share of Preferred Stock on the Record Date. If such dividend or distribution is not so paid or made, the Conversion Rate shall again be adjusted to be the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

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          (f) If a tender or exchange offer made by the Corporation or any Subsidiary for all or any portion of the Common Stock shall expire and such tender or exchange offer (as amended upon the expiration thereof) shall require the payment to stockholders of consideration per share of Common Stock having a Fair Market Value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) that as of the last time (the “Expiration Time”) tenders or exchanges may be made pursuant to such tender or exchange offer (as it may be amended) exceeds the Closing Sale Price of a share of Common Stock on the Trading Day next succeeding the Expiration Time, the Conversion Rate shall be increased so that the same shall equal the rate determined by multiplying the Conversion Rate in effect immediately prior to the Expiration Time by a fraction,

               (i) the numerator of which shall be the sum of (x) the Fair Market Value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted up to any such maximum, being referred to as the “Purchased Shares”) and (y) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) at the Expiration Time and the Closing Sale Price of a share of Common Stock on the Trading Day next succeeding the Expiration Time, and

               (ii) the denominator of which shall be the number of shares of Common Stock outstanding (including any tendered or exchanged shares) at the Expiration Time multiplied by the Closing Sale Price of a share of Common Stock on the Trading Day next succeeding the Expiration Time,

such adjustment to become effective immediately prior to the opening of business on the day following the Expiration Time. If the Corporation is obligated to purchase shares pursuant to any such tender or exchange offer, but the Corporation is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Rate shall again be adjusted to be the Conversion Rate that would then be in effect if such tender or exchange offer had not been made.

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          (g) If the Corporation pays a dividend or makes a distribution to all holders of its Common Stock consisting of capital stock of any class or series, or similar equity interests, of or relating to a Subsidiary or other business unit of the Corporation, the Conversion Rate shall be increased so that the same shall be equal to the rate determined by multiplying the Conversion Rate in effect on the Record Date with respect to such distribution by a fraction,

               (i) the numerator of which shall be the sum of (A) the average of the Closing Sale Prices of the Common Stock for the ten (10) Trading Days commencing on and including the fifth Trading Day after the date on which “ex-dividend trading” commences for such dividend or distribution on The New York Stock Exchange or such other national or regional exchange or market which such securities are then listed or quoted (the “Ex-Dividend Date”) plus (B) the Fair Market Value of the securities distributed in respect of each share of Common Stock for which this Section 9(g) applies, which shall equal the number of securities distributed in respect of each share of Common Stock multiplied by the average of the Closing Sale Prices of those distributed securities for the ten (10) Trading Days commencing on and including the fifth Trading Day after the Ex-Dividend Date; and

               (ii) the denominator of which shall be the average of the Closing Sale Prices of the Common Stock for the ten (10) Trading Days commencing on and including the fifth Trading Day after the Ex-Dividend Date,

such adjustment to become effective immediately prior to the opening of business on the day following the fifteenth Trading Day after the Ex-Dividend Date; provided that if (x) the average of the Closing Sale Prices of the Common Stock for the ten (10) Trading Days commencing on and including the fifth Trading Day after the Ex-Dividend Date minus (y) the Fair Market Value of the securities distributed in respect of each share of Common Stock for which this Section 9(g) applies (as calculated in Section 9(g)(i) above) is less than $1.00, then the adjustment provided by for by this Section 9(g) shall not be made and in lieu thereof the provisions of Section 10 shall apply to such distribution.

          (h) The Corporation may make such increases in the Conversion Rate in addition to those required by Sections 9(a), (b), (c), (d), (e), (f) and (g) as the Board of Directors considers to be advisable to avoid or

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diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. To the extent permitted by applicable law, the Corporation from time to time may increase the Conversion Rate by any amount for any period of time if the Board of Directors shall have made a determination that such increase would be in the best interests of the Corporation, which determination shall be conclusive. Whenever the Conversion Rate is increased pursuant to the preceding sentence, the Corporation shall mail to holders of the Preferred Stock a notice of the increase prior to the date the increased Conversion Rate takes effect, and such notice shall state the increased Conversion Rate and the period during which it will be in effect.

          (i) No adjustment in the Conversion Rate shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in such rate; provided that any adjustments that by reason of this Section 9(i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 9 shall be made by the Corporation and shall be made to the nearest cent or to the nearest one-ten thousandth (1/10,000) of a share, as the case may be. No adjustment need be made for rights to purchase Common Stock pursuant to a Corporation plan for reinvestment of dividends or interest or, except as set forth in this Section 9, for any issuance of Common Stock or convertible or exchangeable securities or rights to purchase Common Stock or convertible or exchangeable securities. To the extent the securities become convertible into cash, assets, property or securities (other than Capital Stock of the Corporation), subject to Section 10, no adjustment need be made thereafter as to the cash, assets, property or such securities. Dividends will not accrue on any cash into which the Preferred Stock is convertible.

          (j) Whenever the Conversion Rate is adjusted as herein provided, the Corporation shall promptly file with the Conversion Agent an Officer’s certificate setting forth the Conversion Rate after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Unless and until a responsible officer of the Conversion Agent shall have received such Officer’s certificate, the Conversion Agent shall not be deemed to have knowledge of any adjustment of the Conversion Rate and may assume that the last Conversion

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Rate of which it has knowledge is still in effect. Promptly after delivery of such certificate, the Corporation shall prepare a notice of such adjustment of the Conversion Rate setting forth the adjusted Conversion Rate and the date on which each adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Rate to the each holder of Preferred Stock at his last address appearing on the register within twenty (20) days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of any such adjustment.

          (k) For purposes of this Section 9, the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Corporation, unless such treasury shares participate in any distribution or dividend that requires an adjustment pursuant to this Section 9, but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock.

     10. Effect of Reclassification, Consolidation, Merger or Sale on Conversion Privilege. (a) If any of the following events occur, namely (i) any reclassification or change of the outstanding shares of Common Stock (other than a subdivision or combination to which Section 9(c) applies), (ii) any consolidation, merger or combination of the Corporation with another Person as a result of which holders of Common Stock shall be entitled to receive stock, other securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, or (iii) any sale or conveyance of all or substantially all of the properties and assets of the Corporation to any other Person as a result of which holders of Common Stock shall be entitled to receive stock, other securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, then each share of Preferred Stock shall be convertible, on and after the effective date of such reclassification, change, consolidation, merger, combination, sale or conveyance, into the kind and amount of shares of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance by a holder of the number of shares of Common Stock issuable upon conversion of such Preferred Stock (assuming, for such purposes, a sufficient number of authorized shares of Common Stock are available to convert all such Preferred Stock) immediately prior to such reclassification, change, consolidation, merger,

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combination, sale or conveyance assuming such holder of Common Stock did not exercise his rights of election, if any, as to the kind or amount of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance (provided that, if the kind or amount of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised (“non-electing share”), then for the purposes of this Section 10 the kind and amount of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares).

          (b) The Corporation shall cause notice of the application of this Section 10 within twenty (20) days after the occurrence of the events specified in Section 10(a) and shall issue a press release containing such information and publish such information on its website. Failure to deliver such notice shall not affect the legality or validity of the modification to the conversion rights of the Preferred Stock effected by this Section 10.

          (c) The above provisions of this Section shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances, and the provisions of Section 9 shall apply to any shares of Capital Stock received by the holders of Common Stock in any such reclassification, change, consolidation, merger, combination, sale or conveyance.

          (d) If this Section 10 applies to any event or occurrence, Section 9 shall not apply.

     11. Consolidation, Merger and Sale of Assets. The Corporation, without the consent of the holders of any of the outstanding Preferred Stock may, consolidate with or merge into any other Person or convey, transfer or lease all or substantially all of its assets to any Person or may permit any Person to consolidate with or merge into, or transfer or lease all or substantially all its properties to the Corporation; provided, however that (a)

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the successor, transferee or lessee is organized under the laws of the United States, any political subdivision thereof or Puerto Rico and (b) the shares of Preferred Stock will become shares of such successor, transferee or lessee, having in respect of such successor, transferee or lessee the same powers, preferences and relative participating, optional or other special rights and the qualification, limitations or restrictions thereon, that the Preferred Stock had immediately prior to such transaction.

     Under any consolidation by the Corporation with, or merger by it into, any other Person or any conveyance, transfer or lease of all or substantially all its assets as described in the preceding paragraph, the successor resulting from such consolidation or into which the Corporation is merged or the transferee or lessee to which such conveyance, transfer or lease is made, will succeed to, and be substituted for, and may exercise every right and power of, the Corporation under the shares of Preferred Stock, and thereafter, except in the case of a lease, the predecessor (if still in existence) will be released from its obligations and covenants with respect to the preferred stock.

     12. Transfer Agent and Registrar. The duly appointed Transfer Agent and Registrar for the Preferred Stock shall be Mellon Investor Services LLC. The Corporation may, in its sole discretion, remove the Transfer Agent and Registrar in accordance with the agreement between the Corporation and the Transfer Agent and Registrar; provided that the Corporation shall appoint a successor transfer agent who shall accept such appointment prior to the effectiveness of such removal.

     13. Currency. All shares of Preferred Stock shall be denominated in U.S. currency, and all payments and distributions thereon or with respect thereto shall be made in U.S. currency. All references herein to “$”or “dollars” refer to U.S. currency.

     14. Form. (a) Preferred Stock shall initially be issued in the form of one or more permanent global shares of Preferred Stock in definitive, fully registered form with the global legend (the “Global Shares Legend”) and, until such time as otherwise determined by the Corporation and the Transfer Agent, the restricted shares legend (the “Restricted Shares Legend”), each substantially as set forth on the form of Preferred Stock certificate attached

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hereto as Exhibit A (each, a “Global Preferred Share”), which is hereby incorporated in and expressly made a part of this Certificate. The Global Preferred Share may have notations, legends or endorsements required by law, stock exchange rules, agreements to which the Corporation is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Corporation). The Global Preferred Share shall be deposited on behalf of the holders of the Preferred Stock represented thereby with the Registrar, at its New York office, as custodian for DTC or a Depositary, and registered in the name of the Depositary or a nominee of the Depositary, duly executed by the Corporation and countersigned and registered by the Registrar as hereinafter provided. The aggregate number of shares represented by each Global Preferred Share may from time to time be increased or decreased by adjustments made on the records of the Registrar and the Depositary or its nominee as hereinafter provided. This Section 14(a) shall apply only to a Global Preferred Share deposited with or on behalf of the Depositary. The Corporation shall execute and the Registrar shall, in accordance with this Section 14, countersign and deliver initially one or more Global Preferred Shares that (i) shall be registered in the name of Cede & Co. or other nominee of the Depositary and (ii) shall be delivered by the Registrar to Cede & Co. or pursuant to instructions received from Cede & Co. or held by the Registrar as custodian for the Depositary pursuant to an agreement between the Depositary and the Registrar. Members of, or participants in, the Depositary (“Agent Members”) shall have no rights under this Certificate with respect to any Global Preferred Share held on their behalf by the Depositary or by the Registrar as the custodian of the Depositary or under such Global Preferred Share, and the Depositary may be treated by the Corporation, the Registrar and any agent of the Corporation or the Registrar as the absolute owner of such Global Preferred Share for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Corporation, the Registrar or any agent of the Corporation or the Registrar from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices of the Depositary governing the exercise of the rights of a holder of a beneficial interest in any Global Preferred Share. Unless otherwise required by applicable law, owners of beneficial interests in Global Preferred Shares shall not be entitled to receive physical delivery of certificated shares of

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Preferred Stock, unless (x) DTC is unwilling or unable to continue as Depositary for the Global Preferred Shares and the Corporation does not appoint a qualified replacement for DTC within 90 days, (y) DTC ceases to be a “clearing agency” registered under the Exchange Act or (z) the Corporation decides to discontinue the use of book-entry transfer through DTC (or any successor Depositary). In either such case, the Global Preferred Shares shall be exchanged in whole for definitive shares of Preferred Stock in registered form, with the same terms and of an equal aggregate Liquidation Preference, and bearing a Restricted Shares Legend (unless the Corporation determines otherwise in accordance with applicable law). Definitive shares of Preferred Stock shall be registered in the name or names of the Person or Person specified by DTC in a written instrument to the Registrar. To the extent required by law, the Corporation will issue Preferred Stock in certificate form to beneficial owners upon their written request. Such certificates shall be substantially in the form of Exhibit A except for references to the Depositary and its nominee, will bear the Restricted Shares Legend and may have such other modifications as deemed necessary or advisable by the Corporation.

          (b) (i) An Officer shall sign the Global Preferred Shares for the Corporation, in accordance with the Corporation’s bylaws and applicable law, by manual or facsimile signature.

               (ii) If an Officer whose signature is on a Global Preferred Share no longer holds that office at the time the Transfer Agent authenticates the Global Preferred Share, the Global Preferred Share shall be valid nevertheless.

               (iii) A Global Preferred Share shall not be valid until an authorized signatory of the Transfer Agent manually countersigns the Global Preferred Share. The signature shall be conclusive evidence that the Global Preferred Share has been authenticated under this Certificate. Each Global Preferred Share shall be dated the date of its authentication.

     15. Registration; Transfer. (a) The Preferred Stock and the Common Stock issuable upon conversion of the shares of Preferred Stock have not been registered under the Securities Act and may not be resold, pledged or otherwise transferred prior to the date when they no

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longer constitute “restricted securities” for purposes of Rule 144(k) under the Securities Act other than (i) to the Corporation, (ii) to “qualified institutional buyers” pursuant to and in compliance with Rule 144A under the Securities Act (“Rule 144A”), (iii) pursuant to an exemption from the registration requirements of the Securities Act provided by Rule 144 under the Securities Act or (iv) pursuant to an effective registration statement under the Securities Act, in each case, in accordance with any applicable securities laws of any state of the United States.

          (b) Notwithstanding any provision to the contrary herein, so long as a Global Preferred Share remains outstanding and is held by or on behalf of the Depositary, transfers of a Global Preferred Share, in whole or in part, or of any beneficial interest therein, shall only be made in accordance with this Section 15; provided, however, that a beneficial interest in a Global Preferred Share bearing the Restricted Shares Legend may be transferred to a Person who takes delivery thereof in the form of a beneficial interest in a different Global Preferred Share not bearing the Restricted Shares Legend in accordance with the transfer restrictions set forth in the Restricted Shares Legend and the provisions set forth in Section 15(c)(ii).

          (c) (i) Except for transfers or exchanges made in accordance with Section 15(c)(ii), transfers of a Global Preferred Share shall be limited to transfers of such Global Preferred Share in whole, but not in part, to nominees of the Depositary or to a successor of the Depositary or such successor’s nominee.

               (ii) If an owner of a beneficial interest in a Global Preferred Share deposited with the Depositary, or with the Registrar as custodian for the Depositary, wishes at any time to transfer its interest in such Global Preferred Share bearing the Restricted Shares Legend to a Person who is eligible to take delivery thereof in the form of a beneficial interest in a Global Preferred Share not bearing the Restricted Shares Legend, such owner may, subject to the rules and procedures of the Depositary, cause the exchange of such interest for a new beneficial interest in the applicable Global Preferred Share. Upon receipt by the Transfer Agent at its office in The City of New York of (A) instructions from the holder directing the Transfer Agent to transfer its interest in the applicable Global Preferred Share, such instructions to contain the name of the transferee

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and appropriate account information, (B) a certificate in the form of the Certificate of Transfer on the reverse side of the form of Preferred Stock certificate attached hereto as Exhibit B, given by the transferor, to the effect set forth therein, and (C) such other certifications, legal opinions and other information as the Corporation or the Registrar may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, then the Registrar shall instruct the Depositary to reduce or cause to be reduced such Global Preferred Share bearing the Restricted Shares Legend (in the form attached as Schedule A) by the number of shares to be exchanged and to debit or cause to be debited from the account of the Person making such transfer the beneficial interest in the Global Preferred Share that is being transferred, and concurrently with such reduction and debit, the Registrar will instruct the Depositary to increase or cause to be increased the applicable Global Preferred Share not bearing the Restricted Shares Legend by the aggregate number of shares being exchanged and to credit or cause to be credited to the account of the transferee the beneficial interest in the Global Preferred Share that is being transferred. Similar procedures will be followed by the Corporation or its Transfer Agent for any Preferred Stock issued in certificated form.

          (d) Except in connection with a Shelf Registration Statement contemplated by and in accordance with the terms of the Registration Rights Agreement relating to the Preferred Stock and shares of Common Stock issuable on conversion of the Preferred Stock (collectively, the “Registrable Securities”), if shares of Preferred Stock are issued upon the transfer, exchange or replacement of Preferred Stock bearing the Restricted Shares Legend, or if a request is made to remove such Restricted Shares Legend on Preferred Stock, the Preferred Stock so issued shall bear the Restricted Shares Legend and the Restricted Shares Legend shall not be removed unless there is delivered to the Corporation and the Registrar such satisfactory evidence, which may include an opinion of counsel, as may be reasonably required by the Corporation or the Registrar, that neither the legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of Rule 144A or Rule 144 under the Securities Act or that such shares of Preferred Stock are not “restricted securities” within the meaning of Rule 144 under the Securities Act. Upon

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provision of such satisfactory evidence, the Registrar, at the direction of the Corporation, shall countersign and deliver shares of Preferred Stock that do not bear the Restricted Shares Legend.

          (e) The Corporation will refuse to register any transfer of Preferred Stock or any Common Stock issuable upon conversion of the shares of Preferred Stock that is not made in accordance with the provisions of the Restricted Shares Legend and the provisions of Rule 144A or pursuant to a registration statement that has been declared effective under the Securities Act or pursuant to an available exemption from the registration requirements of the Securities Act; provided that the provisions of this paragraph (e) shall not be applicable to any Preferred Stock that does not bear any Restricted Shares Legend or to any Common Stock that does not bear the Common Share Legend.

          (f) Common Stock issued upon a conversion of the Preferred Stock prior to the effectiveness of a Shelf Registration Statement shall be delivered in certificated form and shall bear the common share legend (the “Common Share Legend”) set forth in Exhibit C hereto and include on its reverse side the Form of Certificate of Transfer for Common Stock set out in Exhibit D. If (i) shares of Common Stock issued prior to the effectiveness of a Shelf Registration Statement are to be registered in a name other than that of the holder of Preferred Stock or (ii) shares of Common Stock represented by a certificate bearing the Common Share Legend are transferred subsequently by such holder, then the holder must deliver to the Registrar a certificate in substantially the form of Exhibit D as to compliance with the restrictions on transfer applicable to such Common Stock and the Transfer Agent shall not be required to register any transfer of such Common Stock not so accompanied by a properly completed certificate. Such Common Share Legend may be removed, and new certificates representing the Common Stock may be issued, upon the presentation of satisfactory evidence that such Common Share Legend is no longer required as described above in paragraph (c) of this Section 15 with respect to the Preferred Stock.

     16. Paying Agent and Conversion Agent.

          (a) The Corporation shall maintain in the Borough of Manhattan, City of New York, State of New York (i) an office or agency for the payment of dividends on the Preferred Stock (the “Paying Agent”) and (ii) an office

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or agency where Preferred Stock may be presented for conversion (the “Conversion Agent”). The Transfer Agent shall act as Paying Agent and Conversion Agent, unless another Paying Agent or Conversion Agent is appointed by the Corporation. The Corporation may appoint the Transfer Agent, the Paying Agent and the Conversion Agent and may appoint one or more additional paying agents and one or more additional conversion agents in such other locations as it shall determine. The term “Paying Agent” includes any additional paying agent and the term “Conversion Agent” includes any additional conversion agent. The Corporation may change any Paying Agent or Conversion Agent without prior notice to any holder. The Corporation shall notify the Registrar of the name and address of any Paying Agent or Conversion Agent appointed by the Corporation. If the Corporation fails to appoint or maintain another entity as Paying Agent or Conversion Agent, the Registrar shall act as such. The Corporation or any of its Affiliates may act as Paying Agent, Transfer Agent, co-registrar or Conversion Agent.

          (b) Payments due on the Preferred Stock shall be payable by United States dollar check drawn on, or wire transfer (provided that appropriate wire instructions have been received by the Registrar at least 15 days prior to the applicable date of payment) to a U.S. dollar account maintained by the holder with, a bank located in New York City; provided that at the option of the Corporation, payment of dividends may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Preferred Stock register. Notwithstanding the foregoing, payments due in respect of beneficial interests in the Global Preferred Share shall be payable by wire transfer of immediately available funds in accordance with the procedures of the Depositary.

     17. Headings. The headings of the Sections of this Certificate are for convenience of reference only and shall not define, limit or affect any of the provisions hereof.

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EXHIBIT A

FORM OF 4.75% PERPETUAL CUMULATIVE CONVERTIBLE
PREFERRED STOCK

          Number: ___

____________ Shares

CUSIP NO.:

4.75% Perpetual Cumulative Convertible Preferred Stock
(par value $1.00 per share)
(liquidation preference $250.00 per share)
OF
DORAL FINANCIAL CORPORATION

FACE OF SECURITY

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL IN ASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO. HAS AN INTEREST HEREIN.

TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR’S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE CERTIFICATE OF DESIGNATION REFERRED TO BELOW.

IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS THE TRANSFER AGENT MAY REASONABLY REQUIRE

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TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.

THIS SECURITY AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SECURITY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY, THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.

THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF DORAL FINANCIAL CORPORATION THAT (a) THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED OTHER THAN (1) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (2) IN A TRANSACTION ENTITLED TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (3) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT (“RULE 144A”), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE l44A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), (4) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, SUBJECT, IN THE CASE OF CLAUSES (2) OR (4), TO THE RECEIPT BY DORAL FINANCIAL CORPORATION OF AN OPINION OF COUNSEL OR SUCH OTHER EVIDENCE ACCEPTABLE TO DORAL FINANCIAL CORPORATION THAT SUCH RESALE, PLEDGE OR TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR (5) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND THAT (b) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS NOTE OF THE RESALE RESTRICTIONS REFERRED TO HEREIN AND DELIVER TO THE TRANSFEREE (OTHER THAN A QUALIFIED INSTITUTIONAL BUYER) PRIOR TO THE SALE A COPY OF THE TRANSFER RESTRICTIONS APPLICABLE HERETO (COPIES OF WHICH MAY BE OBTAINED FROM US).

THE HOLDER OF THIS SECURITY IS ENTITLED TO THE BENEFITS OF A REGISTRATION RIGHTS AGREEMENT (AS SUCH TERM IS DEFINED IN THE CERTIFICATE OF DESIGNATION REFERRED TO ON

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THE REVERSE HEREOF) AND, BY ITS ACCEPTANCE HEREOF, AGREES TO BE BOUND BY AND TO COMPLY WITH THE PROVISIONS OF SUCH REGISTRATION RIGHTS AGREEMENT.

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DORAL FINANCIAL CORPORATION, a Puerto Rico corporation (the “Corporation”), hereby certifies that Cede & Co. or registered assigns (the “Holder”) is the registered owner of ___ fully paid and non-assessable shares of preferred stock of the Corporation designated the 4.75% Perpetual Cumulative Convertible Preferred Stock, par value $1.00 per share and liquidation preference $250.00 per share (the “Preferred Stock”). The shares of Preferred Stock are transferable on the books and records of the Registrar, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Stock represented hereby are issued and shall in all respects be subject to the provisions of the Certificate of Designation of the Corporation dated September 29, 2003, as the same may be amended from time to time in accordance with its terms (the “Certificate of Designation”). Capitalized terms used but not defined herein shall have the respective meanings given to them in the Certificate of Designation. The Corporation will provide a copy of the Certificate of Designation to a Holder without charge upon written request to the Corporation at its principal place of business.

Reference is hereby made to select provisions of the Preferred Stock set forth on the reverse hereof, and to the Certificate of Designation, which select provisions and the Certificate of Designation shall for all purposes have the same effect as if set forth at this place.

Upon receipt of this certificate, the Holder is bound by the Certificate of Designation and is entitled to the benefits thereunder.

Unless the Transfer Agent’s Certificate of Authentication hereon has been properly executed, the shares of Preferred Stock evidenced hereby shall not be entitled to any benefit under the Certificate of Designation or be valid or obligatory for any purpose.

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IN WITNESS WHEREOF, Doral Financial Corporation has executed this certificate as of the date set forth below.

DORAL FINANCIAL CORPORATION
By:
	Name:
	Title:
	Dated:

TRANSFER AGENT’S CERTIFICATE OF AUTHENTICATION

This is one of the certificates representing shares of Preferred Stock referred to in the within mentioned Certificate of Designation.

Dated: 

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REVERSE OF SECURITY

DORAL FINANANCIAL CORPORATION

4.75% Perpetual Cumulative Convertible Preferred Stock

Dividends on each share of Preferred Stock shall be payable in cash at a rate per annum set forth on the face hereof or as provided in the Certificate of Designation.

The shares of Preferred Stock shall be convertible into the Corporation’s Common Stock in the manner and according to the terms set forth in the Certificate of Designation.

As required under Puerto Rico law, the Corporation shall furnish to any Holder, upon request and without charge, a full summary statement of the designations, voting rights, preferences, limitations and special rights of the shares of each class or series authorized to be issued by the Corporation so far as they have been fixed and determined.

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ASSIGNMENT

          FOR VALUE RECEIVED, the undersigned assigns and transfers the shares of Preferred Stock evidenced hereby to:

(Insert assignee’s social security or tax identification number)

(Insert address and zip code of assignee)

and irrevocably appoints:

agent to transfer the shares of Preferred Stock evidenced hereby on the books of the Transfer Agent and Registrar. The agent may substitute another to act for him or her.

Date: ____________

Signature: ____________

(Sign exactly as your name appears on the other side of this Preferred Stock Certificate)

Signature Guarantee: ____________1

1  Signature must be guaranteed by an “eligible guarantor institution” (i.e., a bank, stockbroker, savings and loan association or credit union) meeting the requirements of the Registrar, which requirements include

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NOTICE OF CONVERSION

(To be Executed by the Registered Holder
in order to Convert the Preferred Stock)

The undersigned hereby irrevocably elects to convert (the “Conversion”) ___ shares of 4.75% Perpetual Cumulative Convertible Preferred Stock (the “Preferred Stock”), represented by stock certificate No(s). ___ (the “Preferred Stock Certificates”) into shares of common stock, par value $1.00 per share (“Common Stock”), of Doral Financial Corporation (the “Corporation”) according to the conditions of the Certificate of Designation establishing the terms of the Preferred Stock (the “Certificate of Designation”), as of the date written below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates. No fee will be charged to the holder for any conversion, except for transfer taxes, if any. A copy of each Preferred Stock Certificate is attached hereto (or evidence of loss, theft or destruction thereof).

The undersigned represents and warrants that all offers and sales by the undersigned of the shares of Common Stock issuable to the undersigned upon conversion of the Preferred Stock shall be made pursuant to registration of the Common Stock under the Securities Act of 1933 (the “Act”) or pursuant to an exemption from registration under the Act.

Any holder, upon the exercise of its conversion rights in accordance with the terms of the Certificate of Designation and the Preferred Stock, agrees to be bound by the terms of the Registration Rights Agreement.

The Corporation is not required to issue shares of Common Stock until the original Preferred Stock Certificate(s) (or evidence of loss, theft or destruction thereof) to be converted are received by the Corporation or its Transfer Agent. The Corporation shall issue and deliver shares of Common Stock to an overnight courier not later than two

membership or participation in the Securities Transfer Agents Medallion Program (“STAMP”) or such other “signature guarantee program” as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.

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business days following receipt of the original Preferred Stock Certificate(s) to be converted.

Capitalized terms used but not defined herein shall have the meanings ascribed thereto in or pursuant to the Certificate of Designation.

Date of Conversion:

Number of shares of Convertible

Preferred Stock to be Converted:

Signature:

Name:

Address: 2

Fax No.:

2  Address where shares of Common Stock and any other payments or certificates shall be sent by the Corporation.

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SCHEDULE A

SCHEDULE OF EXCHANGES FOR GLOBAL SECURITY

     The initial number of shares of Preferred Stock represented by this Global Preferred Share shall be ____________. The following exchanges of a part of this Global Preferred Share have been made:

	Amount of	Amount of	Number of shares
	decrease in	increase in	represented by this
	number of shares	number of shares	Global Preferred
	represented by this	represented by this	Share following	Signature of
	Global Preferred	Global Preferred	such decrease or	authorized officer
Date of Exchange	Share	Share	increase	of Registrar

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EXHIBIT B

FORM OF CERTIFICATE OF TRANSFER
(Transfers pursuant to 15(c)(ii) and 15(e)
of the Certificate of Designation)

[                    ] as Transfer Agent
[ADDRESS]
[ATTN]

Re:	Doral Financial Corporation
	4.75% Perpetual Cumulative Convertible Preferred Stock (the “Preferred Stock”)

Reference is hereby made to the Certificate of Designation relating to the Preferred Stock dated September 25, 2003, as such may be amended from time to time (the “Certificate of Designation”). Capitalized terms used but not defined herein shall have the respective meanings given to them in the Certificate of Designation.

This Certificate relates to ___ shares of the Preferred Stock (the “Securities”) which are held in the form of a Global Preferred Share bearing the Restricted Shares Legend (CUSIP NO.) with the Depository in the name of [name of transferor] (the “Transferor”) to effect the transfer of the Securities.

In connection with such request, and in respect of the Preferred Stock, the Transferor does hereby certify that shares of the Preferred Stock are being transferred (i) in accordance with the applicable securities laws of the relevant state or jurisdiction of the United States or other jurisdiction and (ii) in accordance with their terms:

CHECK ONE BOX BELOW, AS APPLICABLE:

(1) o to a transferee that the Transferor reasonably believes is a qualified institutional buyer, within the meaning of Rule 144A under the Securities Act, purchasing for its own account or for the account of a qualified institutional buyer in a transaction meeting the requirements of Rule 144A;

(2) o pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available);

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(3) o in accordance with another exemption from the registration requirements of the Securities Act;

(4) o to the Corporation or a subsidiary thereof; or

(5) o pursuant to a registration statement that has been declared effective under the Securities Act.

Unless one of the boxes is checked, the Transfer Agent will refuse to register any of the Securities evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (2) or (3) is checked, the Transfer Agent and the Corporation shall be entitled to require, prior to registering any such transfer of the Securities, such legal opinions, certifications and other information as the Corporation has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act.

[Name of Transferor]
By:
	Name:
	Title:

Dated:

cc:	Doral Financial Corporation
	Corporate Secretary
	1451 F.D. Roosevelt Avenue
	San Juan, Puerto Rico 00920-2717

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EXHIBIT C

Form of Common Share Legend

     THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”). THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF DORAL FINANCIAL CORPORATION THAT (a) THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED OTHER THAN (1) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (2) IN A TRANSACTION ENTITLED TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (3) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT (“RULE 144A”), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE l44A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), (4) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, SUBJECT, IN THE CASE OF CLAUSES (2) OR (4), TO THE RECEIPT BY DORAL FINANCIAL CORPORATION OF AN OPINION OF COUNSEL OR SUCH OTHER EVIDENCE ACCEPTABLE TO DORAL FINANCIAL CORPORATION THAT SUCH RESALE, PLEDGE OR TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR (5) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND THAT (b) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS NOTE OF THE RESALE RESTRICTIONS REFERRED TO HEREIN AND DELIVER TO THE TRANSFEREE (OTHER THAN A QUALIFIED INSTITUTIONAL BUYER) PRIOR TO THE SALE A COPY OF THE TRANSFER RESTRICTIONS APPLICABLE HERETO (COPIES OF WHICH MAY BE OBTAINED FROM US).

THE HOLDER OF THIS SECURITY IS ENTITLED TO THE BENEFITS OF A REGISTRATION RIGHTS AGREEMENT (AS SUCH TERM IS DEFINED IN THE CERTIFICATE OF DESIGNATION REFERRED TO ON THE REVERSE HEREOF) AND, BY ITS ACCEPTANCE HEREOF, AGREES TO BE BOUND BY AND TO COMPLY WITH THE PROVISIONS OF SUCH REGISTRATION RIGHTS AGREEMENT.

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EXHIBIT D

FORM OF CERTIFICATE OF TRANSFER
FOR COMMON STOCK

(Transfers pursuant to Section 15(f) of the Certificate of Designation)

[Transfer Agent]

Attn:

Re:  Doral Financial Corporation
4.75% Perpetual Cumulative Convertible Preferred Stock (the “Preferred Stock”)

Reference is hereby made to the Certificate of Designation relating to the Preferred Stock dated September 25, 2003, as such may be amended from time to time (the “Certificate of Designation”). Capitalized terms used but not defined herein shall have the respective meanings given them in the Certificate of Designation.

This letter relates to ___ shares of Common Stock represented by the accompanying certificate(s) that were issued upon conversion of the Preferred Stock and which are held in the name of [name of transferor] (the “Transferor”) to effect the transfer of such Common Stock.

In connection with such request and in respect of the shares of Common Stock, the Transferor does hereby certify that the shares of Common Stock are being transferred (i) in accordance with applicable securities laws of any state of the United States or any other jurisdiction and (ii) in accordance with their terms:

CHECK ONE BOX BELOW

(1) o to a transferee that the Transferor reasonably believes is a qualified institutional buyer, within the meaning of Rule 144A under the Securities Act, purchasing for its own account or for the account of a qualified institutional buyer in a transaction meeting the requirements of Rule 144A;

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(2) o pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available);

(3) o in accordance with another exemption from the registration requirements of the Securities Act (based upon an opinion of counsel if the Corporation so requests);

(4) o to the Corporation or a subsidiary thereof; or

(5) o pursuant to a registration statement that has been declared effective under the Securities Act.

Unless one of the boxes is checked, the Transfer Agent will refuse to register any of the Securities evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (2) or (3) is checked, the Transfer Agent shall be entitled to require, prior to registering any such transfer of the Securities, such legal opinions, certifications and other information as the Corporation has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act.

[Name of Transferor]
By:
	Name:
	Title:

Dated:

cc:	Doral Financial Corporation
	Corporate Secretary
	1451 F.D. Roosevelt Avenue
	San Juan, Puerto Rico 00920-2717

     The undersigned hereby certify that the capital of the Corporation will not be reduced under or by reason of the adoption of the above resolutions providing for the creation of the above described Preferred Stock.

EX-4.1

Exhibit 4.1

CUSIP 25811P 88 6

EX-10.10

Exhibit 10.10

EMPLOYMENT AGREEMENT

          AGREEMENT between DORAL FINANCIAL CORPORATION, a corporation organized under the laws of the Commonwealth of Puerto Rico (together with its successors and assigns, the “Company”), and CHRISTOPHER POULTON (the “Executive”), dated as of June 1, 2007.

           WHEREAS, the Board of Directors of the Company (the “Board”) has determined that it is in the best interests of the Company to employ the Executive on the terms set forth herein;

          WHEREAS, the Executive has agreed to be employed by the Company on the terms set forth herein;

          WHEREAS, the Executive and the Company wish to set forth the terms and conditions of the Executive’s employment in this Agreement;

          NOW THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived from this Agreement, the parties hereto agree as follows:

     1. Employment Period. Subject to the terms of this Agreement, the Company hereby agrees to employ the Executive, and the Executive hereby agrees to serve the Company and its subsidiaries, for the period commencing on the Commencement Date (as defined herein) and ending on the second anniversary of the Commencement Date; provided that the Executive’s employment by the Company will automatically be extended by twelve (12) additional months on the second anniversary of the Commencement Date and each annual anniversary thereafter unless either party provides written notice to the other party no less than one hundred and eighty (180) days prior to the date of any such scheduled extension of its or his intention not to extend the term of the Executive’s employment (the original employment term plus any extension thereof being referred to herein as the “Employment Period”). For purposes hereof, the Commencement Date means the date the Executive commences employment with the Company which in all events shall be no later than June 4, 2007. Notwithstanding the foregoing, the Employment Period shall end on the date on which the Executive’s employment is terminated by either party in accordance with the provisions of this Agreement.

     2. Position and Duties.

          (a) During the Employment Period, the Executive shall serve as Executive Vice President - Chief Business Develoment Strategy Officer, and shall have such duties and responsibilities as are commensurate with such positions. During the Employment Period, the Executive shall report directly to the Chief Executive Officer of the Company or the Board. During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote his full business attention and time to the business and affairs of the Company, and to use his best efforts to perform faithfully and

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efficiently such responsibilities. During the Employment Period, the Executive shall be entitled to engage in charitable and educational activities and to manage his personal and family investments, to the extent such activities are not competitive with the business of the Company or its subsidiaries and do not interfere in any way, in the reasonable judgment of the Board (or a committee thereof), with the performance of his duties for the Company and are otherwise consistent with the Company’s governance policies.

     3. Compensation.

          (a) Annual Base Salary. During the Employment Period, the Executive shall receive an annual base salary (“Annual Base Salary”) at a rate of $400,000.00, payable in accordance with the Company’s normal payroll policies. The Executive’s Annual Base Salary shall be prorated for 2007 and for any other partial year of employment during the Employment Period based upon the portion of the year that the Executive is employed by the Company. The Executive’s Annual Base Salary shall be subject to review for increase in the sole discretion of the Board (or a committee thereof). Annual Base Salary, however, shall not be subject to reduction without the Executive’s prior written consent.

          (b) Annual Bonus. With respect to each fiscal year completed during the Employment Period, the Executive shall have a target annual bonus opportunity including for 2007 equal to 60% of his Annual Base Salary (“Target Bonus”); provided that the maximum bonus payable for any fiscal year shall not exceed 200% of Target Bonus. The Board shall establish, in its sole discretion, the performance and payment conditions applicable to such annual bonuses. Notwithstanding the foregoing, the Executive shall receive a bonus in respect of 2007 of at least $240,000 guaranteed.

          (c) Additional Compensation. The Executive will receive a one time signing bonus of $250,000.00 in a lump sum payment upon his hiring date.

          (d) Long-Term Incentive Plans. During the Employment Period, the Executive shall be eligible to participate in the ongoing equity and other long-term awards and programs of the Company as determined in the sole discretion of the Board or a committee thereof.

          (e) Other Benefits and Perquisites. During the Employment Period, the Executive shall be entitled to participate in the Company’s employee benefit plans, programs and arrangements (including, without limitation, life, medical and dental insurance, 401(k), and disability insurance, vacation and sick leave programs) and perquisite programs and arrangements, if any, in each case, on the same basis as generally provided to other similarly-situated executives of the Company. In all events, during the Employment Period, the Executive shall be entitled to four (4) weeks of paid vacation per calendar year (pro-rated for any partial year of employment).

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          (f) Certain Expenses. The Company shall reimburse the Executive for all appropriate business expenses in accordance with the terms of the Company’s policies and procedures In effect from time to time.

     4. Termination of Employment.

          (a) Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. In the event of the Executive’s Disability (as defined in Exhibit A attached hereto), the Company may provide the Executive with written notice in accordance with Section 12(c) of this Agreement of its intention to terminate the Executive’s employment due to Disability. In such event, the Executive’s employment with the Company shall terminate effective on the date the Company sends such notice is given to the Executive (the “Disability Commencement Date”); provided that the Executive’s employment hereunder shall immediately terminate on the first date the Executive incurs a Disability as defined in clause (i) of the definition of Disability set forth on Exhibit A.

          (b) With or Without Cause. The Executive is an employee at will and the Company may terminate the Executive’s employment either with or without Cause (as defined in Exhibit A attached hereto). For purposes of this Agreement, a termination “without Cause” shall mean a termination by the Company of the Executive’s employment other than due to Cause, death or Disability.

          (c) With or Without Good Reason. The Executive’s employment may be terminated by the Executive voluntarily with or without Good Reason (as defined in Exhibit A attached hereto).

          (d) Notice of Termination. Any termination of the Executive’s employment by the Company or the Executive (other than death) shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(c) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) if necessary, specifies the Date of Termination consistent with this Agreement (which date shall be not more than thirty (30) days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.

          (e) Date of Termination. “Date of Termination” means (i) if the Executive’s employment is terminated by the Company for Cause, the date of receipt of the Notice of Termination or any later date specified therein within thirty (30) days of such notice, as the case

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may be; provided that if the event giving rise to a termination for Cause is pursuant to clauses (i), (iv), (v) or (vi) of the definition of Cause, the date on which there is delivered to the Executive written notice of the requisite Board vote as set forth in the definition of “Cause” in Exhibit A, (ii) if the Executive’s employment is terminated by the Company without Cause, the date of receipt of the Notice of Termination or any later date specified therein within thirty (30) days of such notice, as the case may be, (iii) if the Executive’s employment is terminated by the Executive for Good Reason, thirty (30) days after the Company receives the Notice of Termination unless the Company has cured the alleged grounds for such termination within 30 days after such receipt or if the Executive’s employment is terminated by the Executive without Good Reason, thirty (30) days after the Company receives the Notice of Termination, provided however, in either case the Company may accelerate the Date of Termination to an earlier date by providing the Executive notice of such action, and (iv) if the Executive’s employment is terminated by reason of death or Disability, the date of the Executive’s death or the Disability Commencement Date, as the case may be.

          (f) Resignation. Upon termination of the Executive’s employment for any reason, the Executive agrees to resign, effective as of the Date of Termination, from any positions that the Executive holds with the Company and its subsidiaries, the Board (and any committees thereof) and the board of directors (and any committees thereof) of any of the Company’s subsidiaries The Executive hereby agrees to execute any and all documentation of such resignations upon request by the Company, but he shall be treated for all purposes as having so resigned upon termination of his employment, regardless of when or whether he executes any such documentation, or Executive is terminated due to his death or Disability.

     5. Obligations of the Company upon Termination of Employment.

          (a) Good Reason; Without Cause. If, during the Employment Period, the Company terminates the Executive’s employment without Cause, or the Executive terminates his employment for Good Reason, or if the Company fails to renew or extend this Agreement upon expiration of the Employment Period, the Company shall have no further obligations to the Executive under this Agreement or otherwise other than to pay or provide to the Executive the following amounts and benefits (provided the Executive has executed, delivered to the Company and not revoked a general release of claims against the Company in a form satisfactory to the Company (the “Release”) and subject to Section 8(h) hereof):

          (i) An amount equal to Executive’s unpaid Annual Base Salary for services through the Date of Termination;

          (ii) an amount equal to two (2) times his compensation (salary and bonus) during the preceding year (the “Severance Payment”), and if such termination occurs in the first year of employment, the Severance Payment shall be $1,280,000.00 dollars;

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          (iii) continued participation until the second anniversary of the Date of Termination in all Company medical and dental plans in which the Executive and his eligible dependents were participating immediately prior to the Date of Termination (subject to offset as set forth in Section 8 hereof);

          (iv) as long as the Executive uses such services prior to the first anniversary of the Date of Termination, up to $25,000 in outplacement services; and

          (v) payment of other amounts, entitlements or benefits, if any, in accordance with applicable plans, programs, arrangements or other agreements of the Company.

          (b) Death or Disability. If the Executive’s employment is terminated by reason of the Executive’s death or Disability during the Employment Period, the Company shall have no further obligations to the Executive or his legal representatives, as applicable, under this Agreement or otherwise other than for the payment of the amounts and provision of the benefits set forth below:

          (i) payment of Annual Base Salary through the end of the month in which the Executive’s Date of Termination occurs;

          (ii) payment of the Severance Payment provided in subsection (a)(ii) above;

          (iii) except in the case of Executive’s death, continued participation until the second anniversary of the Date of Termination in all Company medical and dental plans in which the Executive and his eligible dependents were participating immediately prior to the Date of Termination (subject to offset as set forth in Section 8 hereof); and

          (iv) payment of other amounts, entitlements or benefits, if any, in accordance with applicable plans, programs, arrangements or other agreements of the Company.

          (c) Cause or Voluntary Resignation Without Good Reason. If the Executive’s employment shall be terminated by the Company for Cause or by the Executive for any reason other than Good Reason at any time during the Employment Period, the Company shall have no further obligations to the Executive under this Agreement or otherwise other than for the payment of the amounts and provision of the benefits set forth below:

          (i) an amount equal to the Executive’s unpaid Annual Base Salary for services through the Date of Termination;

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          (ii) for a voluntary resignation (without Good Reason), continued exercisability for 90 days following the Date of Termination for the portion of the Stock Option Award or any other equity awards, if any, that was vested and outstanding as of the Date of Termination (but in no event beyond the expiration of the original term of the award);

          (iii) for a termination for Cause, forfeiture and cancellation of all stock option and any other equity awards (whether vested or unvested) as of the Date of Termination;

          (iv) forfeiture and cancellation of the unvested portion of all stock option and any other equity awards as of the Date of Termination; and

          (v) payment of other amounts, entitlements or benefits, if any, in accordance with applicable plans, programs, arrangements or other agreements of the Company.

          6. Change in Control Protections.

          (a) Upon the occurrence of a Change in Control (as defined in Exhibit A attached hereto) and all other equity awards then held by the Executive shall immediately vest and become exercisable.

          (b) In the event, during the Employment Period, the Company terminates the Executive’s employment without Cause or the Executive terminates his employment for Good Reason, in both cases upon or within two (2) years immediately following a Change in Control, the Company shall have no futher obligations to the Executive under the terms of this Agreement or otherwise other than to pay or provide to the Executive the following amounts and benefits (provided the Executive has executed, delivered to the Company and not revoked a general release of claims against the Company in a form satisfactory to the Company (the “Release) and subject to Section 8(h) hereof):

          (i) payment of Annual Base Salary through the end of the month in which the Executive’s Date of Termination occurs;

          (ii) payment of the Severance Payment provided in Section (5)(a)(ii) above;

          (iii) full vesting as of the Date of Termination of the Stock Option Award (as defined in Section 3(c) hereof), and any other equity awards granted to Executive, with continued exercisability of the outstanding options for twelve (12) months following the Date of Termination (but in no event beyond the end of the original term of the options);

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          (iv) continued participation until the second anniversary of the Date of Termination in all Company medical and dental plans in which the Executive and his eligible dependents were participating immediately prior to the Date of Termination (subject to offset as set forth in Section 7 hereof); and

          (v) as long as the Executive uses such services prior to the first anniversary of the Date of Termination, up to $25,000 in outplacement services; and

          (vi) payments of other amounts, entitlements or benefits, if any, in accordance with applicable plans, programs, arrangements or other agreements of the Company.

     7. No Duplication; No Mitigation. In no event shall the Executive be entitled to duplicate payments or benefits under different provisions of this Agreement or pursuant to the terms of any other plan, program or arrangement of the Company or its subsidiaries. In the event of any termination of the Executive’s employment, the Executive shall be under no obligation to seek other employment, and there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment except with respect to the continuation of benefits under Section 5(a)(iii) and Section 6(b)(iv), which shall terminate immediately upon obtaining comparable coverage from another employer.

     8. Restrictive Covenants.

          (a) Confidentiality. During the Employment Period and thereafter, other than in the ordinary course of performing his duties for the Company, the Executive agrees that he shall not disclose to anyone or make use of any trade secret or proprietary or confidential information of the Company or any affiliate of the Company, including such trade secret or proprietary or confidential information of any customer or other entity to which the Company owes an obligation not to disclose such information, which he acquires during the course of his employment, including, but not limited to, records kept in the ordinary course of business, except when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent or actual jurisdiction to order him to divulge, disclose or make accessible such information. In the event the Executive is requested to disclose information as contemplated in the preceding sentence, the Executive agrees, unless otherwise prohibited by law, to use his best efforts to give the Company’s General Counsel prompt written notice of any request for disclosure in advance of the Executive making such disclosure in order to permit the Company a reasonable opportunity to challenge such disclosure. The foregoing shall not apply to information that (i) was known to the public prior to its disclosure by the Executive, or (ii) becomes known to the public through no wrongful disclosure by or act of the Executive or any representative of the Executive.

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     (b) Property Rights. Whether during the Employment Period or thereafter, the Executive agrees to hereby sell, assign and transfer to the Company all of his right, title and interest in and to all inventions, discoveries, improvements and copyrightable subject matter (the “Rights”) which during the period of his employment are made or conceived by him, alone or with others, and which are within or arise out of any general field of the Company’s business or arise out of any work he performs, or information he receives regarding the business of the Company, while employed by the Company. The Executive shall fully disclose to the Company as promptly as available all information known or possessed by him concerning any Rights, and upon request by the Company and without any further remuneration in any form to him by the Company, but at the expense of the Company, execute all applications for patents and for copyright registration, assignments thereof and other instruments and do all things which the Company may deem necessary to vest and maintain in it the entire right, title and interest in and to all such Rights. The Executive agrees that at the time of the termination of employment, whether at the instance of the Executive or the Company, and regardless of the reasons therefor, he will promptly deliver to the Company’s General Counsel, and not keep or deliver to anyone else, any and all of the following which is in his possession or control: (i) Company property (including, without limitation, credit cards, computers, communication devices, home office equipment and other Company tangible property) and (ii) notes, files, memoranda, papers and, in general, any and all physical matter and computer files containing confidential or proprietary information of the Company or any of its subsidiaries, including any and all documents relating to the conduct of the business of the Company or any of its subsidiaries and any and all documents containing confidential or proprietary information of the customers of the Company or any of its subsidiaries, except for (x) any documents for which the Company’s General Counsel has given written consent to removal at the time of termination of the Executive’s employment and (y) any information necessary for the Executive to retain for his tax purposes.

     (c) Non-Competition. The Executive acknowledges that in his capacity in management the Executive has had or will have a great deal of exposure and access of the Company’s trade secrets and confidential and proprietary information. Therefore, during the Executive’s employment and for twelve (12) months following termination of such employment (whether during the Employment Period or thereafter) (the “Restricted Period”) (i) the Executive shall protect the Company’s trade secrets and other confidential and proprietary information, and (ii) the Executive agrees that he shall not, other than in the ordinary course of performing his duties hereunder or as agreed by the Company in writing, engage in a “Competitive Business,” directly or indirectly, as an individual, partner, shareholder, director, officer, principal, agent, employee, trustee, consultant, or in any relationship or capacity. The Executive shall not be deemed to be in violation of this Section 9(c) by reason of the fact that he owns or acquires, solely as an investment, two percent (2%) or less of the outstanding equity securities (measured by value) of any publicly traded company. “Competitive Business” shall mean (x) the Executive’s participation in any unsolicited offer to purchase the stock or assets of the Company or its subsidiaries or (y) any financial institution with a substantial presence in the mortgage origination business in Puerto Rico. Notwithstanding the foregoing, if the Company provides the Executive with notice that it is not renewing the Employment Period in accordance with Section

8

1 hereof, the provisions of this Section 9(c) shall no longer be effective upon the expiration of the Employment Period.

          (d) Non-Interference. The Executive acknowledges that information regarding the Company’s business and financial relations with its vendors and customers is Confidential Information and proprietary to the Company and that any interference with such relations based directly or indirectly on the use of such information would cause irreparable damage to the Company. The Executive acknowledges that by virtue of his employment with the Company, he has gained or may gain knowledge of such information concerning the Company’s vendors and customers (respectively “Vendor Information” or “Customer Information”), and that he would inevitably have to draw on this Vendor Information and Customer Information and on other Confidential Information if he were to solicit or service the Company’s vendors or customers on behalf of a competing business enterprise. Accordingly, and subject to the immediately following sentence, the Executive agrees that, other than in the ordinary course of performing his duties for the Company, during the Restricted Period, the Executive will not, on behalf of himself or any other person or entity, directly or indirectly seek to encourage or induce any vendor or customer of the Company to cease doing business with, or lessen its business with, the Company, or otherwise interfere with or damage (or attempt to interfere with or damage) any of the Company’s relationships with its vendors and customers. No action by another person or entity shall be deemed to be a breach of this provision unless the Executive directly or indirectly assisted, encouraged or otherwise counseled such person or entity to engage in such activity.

          (e) No Hire; Non-Solicitation. The Executive agrees that, during the Restricted Period (other than in the ordinary course of performing his duties for the Company), he will not, without the prior written consent of the Company, directly or indirectly, (i) hire any employee of the Company or any of its subsidiaries who is then an employee of the Company or such affiliate or was an employee during the prior six (6) month period, or (ii) solicit or encourage any such employee to leave the employ of the Company or such affiliate, as the case may be. No action by another person or entity shall be deemed to be a breach of this provision unless the Executive directly or indirectly assisted, encouraged or otherwise counseled such person or entity to engage in such activity.

          (f) Public Comment. Following the Employment Period, the Executive shall notat any time (i) make any public derogatory comment concerning the Company or its subsidiaries or anyone whom the Executive knows to be a current or former director, officer, stockholder or employee of the Company or (ii) without the prior written consent of the Company, which consent shall not be unreasonably withheld, publish or produce any information or write any book, article, screenplay, teleplay or similar type of publication relating to the Company or its subsidiaries or anyone whom the Executive knows to be a current or former director, officer, stockholder or employee; provided that no such consent shall be necessary for an academic work relating to Executive’s employment with the Company. Following the Employment Period, the Company shall not at any time make any public derogatory comment concerning the Executive. Notwithstanding the foregoing, nothing in this Section 8(f) shall prohibit any person from (x) responding publicly to incorrect, disparaging or derogatory public statements about the Company

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or the Executive relating to his employment with the Company, (y) providing truthful testimony in any judicial or administrative matter, or (z) making truthful statements required by law, by any regulatory authority or organization, or in connection with any public filing required by the Securities and Exchange Commission or any other regulatory authority.

          (g) Blue Penciling. If any restrictions on competitive or other activities contained in this Section 8 shall for any reason be held by a court of competent jurisdiction to be excessively broad as to duration, geographical scope, activity or subject, such restrictions shall be construed so as thereafter to be limited or reduced to be enforceable to the extent compatible with the applicable law; it being understood that by the execution of this Agreement, (i) the parties hereto regard such restrictions as reasonable and compatible with their respective rights and (ii) the Executive acknowledges and agrees that the restrictions will not prevent him from obtaining gainful employment subsequent to the termination of his employment.

          (h) Remedies; Injunctive Relief.

          (i) The Executive acknowledges and agrees that the covenants and obligations of the Executive set forth in this Section 8 relate to special, unique and extraordinary services rendered by the Executive to the Company and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, the Executive agrees that the Company shall be entitled to seek an injunction, restraining order or other temporary or permanent equitable relief (without the requirement to post bond) restraining the Executive from committing any violation of the covenants and obligations contained herein. These injunctive remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. The existence of any claim or cause of action by the Executive against the Company shall not constitute a defense to the enforcement by the Company of the foregoing restrictive covenants, but such claim or cause of action shall be determined separately.

          (ii) If at any time the Executive materially breaches any of the covenants in Section 8, and fails to cure such breach within ten (10) days after receipt of written notice from the Company, then (x) the Company shall have the right to cease to pay or provide to the Executive any payment, benefit or entitlement due (or accrued) under this Agreement and (y) the Executive shall be required to repay to the Company the net after-tax amount (such after-tax amount to be determined after taking into account tax deductions, tax credits, and the like attributable to the repayment) of any severance paid to the Executive under this Agreement. Such repayment to be made within 15 days after written notice from the Company to the Executive requesting such repayment.

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          (iii) If at any time following the Restricted Period but prior to the second anniversary of the termination of the Executive’s . employment, the Executive takes any action or engages in any conduct that would have constituted a material breach of Section 8(d) or 8(e) if it had occurred during the Restricted Period, then clauses (x) and (y) of Section 8(h)(ii) — as limited by Section 8(h)(ii) — shall apply as if such material breach had occurred during the Restricted Period.

          (i) Survival. The provisions of this Section 8 shall remain in full force and effect until the expiration of the periods specified herein notwithstanding the earlier termination of the Executive’s employment hereunder or the expiration of the Employment Period. For purposes of this Section 8, “Company” shall mean the Company and any affiliate of the Company or any successor thereto.

     9. Mandatory Arbitration. Except to the extent necessary to enforce the provisions of Section 8 hereof in accordance with Section 8(g) or 8(h), the Executive (on behalf of himself and his beneficiaries) and the Company agree that any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, or the Executive’s employment with the Company or any affiliate, or any termination of such employment, shall be settled by confidential arbitration in Puerto Rico in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Any award entered shall be final, binding and nonreviewable except on such limited grounds for review of arbitration awards as may be permitted by applicable law. Judgment upon the award rendered by the arbitrator(s) may be entered into any court having jurisdiction thereof.

     10. Successors.

          (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives, heirs or legatees.

          (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company without the Executive’s prior written consent except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or a sale, liquidation or other disposition of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and assumes the liabilities, obligations and duties of the Company under this Agreement, either contractually or as a matter of law.

     11. Miscellaneous.

          (a) The Executive represents and warrants that he has the free and unfettered right to enter into this Agreement and to perform his obligations under it and that he knows of no agreement between him and any other person, firm or organization, or any law or regulation, that

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would be violated by the performance of his obligations under this Agreement. The Executive agrees that he will not use or disclose any confidential or proprietary information of any prior employer in the course of performing his duties for the Company or any of its subsidiaries.

          (b) This Agreement shall be governed by and construed in accordance with its express terms, and otherwise in accordance with the laws of the Commonwealth of Puerto Rico, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. In the event of any conflict or inconsistency between the provisions of this Agreement and any other Company plan, program, policy or agreement, the provisions of this Agreement shall control.

          (c) All notices and other communications hereunder shall be in writing and shall be given (i) when delivered personally (provided that a written acknowledgement of receipt is obtained), (ii) three (3) days after being sent by certified or registered mail, postage prepaid, return receipt requested or (iii) two (2) days after being sent by overnight courier (provided that a written acknowledgement of receipt is obtained by the overnight courier), with any such notice duly addressed to the party concerned at the address indicated below:

If to the Executive:	At the most recent address on file at the Company
If to the Company:	At the address of its principal executive offices
	Attention: General Counsel

or to such other address as either party shall have furnished to the other in writing in accordance herewith.

          (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

          (e) The Company may withhold from any amounts payable under this Agreement such federal, Puerto Rico, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. In addition, this Agreement is intended to comply with the requirements of Section 409A of the Code and the regulations promulgated thereunder (“Section 409A”) so as not to subject the Executive to the payment of interest or any additional tax under Section 409A. In furtherance thereof, if payment or provision of any amount or benefit hereunder at the time specified in this Agreement would subject such amount or benefit to any additional tax under Section 409A, the payment or provision of such amount or benefit shall be postponed to the earliest commencement date on which the payment or the provision of such amount or benefit could be made without incurring such additional tax (including paying any

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severance that is delayed in a lump sum upon the earliest possible payment date which is consistent with Section 409A).

          (f) Following the Executive’s termination of employment for any reason (whether during or after the expiration of the Employment Period), upon reasonable request of the Company, the Executive shall cooperate with the Company or any of its subsidiaries with respect to any legal or investigatory proceeding, including any government or regulatory investigation, or any litigation or other dispute relating to matters in which he was involved or had knowledge (or reasonably should have had knowledge) during his employment with the Company, subject to his reasonable personal and business schedules. The Company shall reimburse the Executive for all reasonable out-of-pocket travel and meal expenses associated with any cooperation provided hereunder.

          (g) No waiver shall be valid unless in writing signed by the party against whom the waiver is being enforced (that is, by the Executive or an authorized officer of the Company, as the case may be).

          (h) This Agreement contains the entire agreement between the parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the parties with respect thereto (including, without limitation, the term sheet previously negotiated by the parties). In the event of any inconsistency between the provisions of this Agreement and the provisions of any other agreement or plan relating to the Stock Option Award or any other equity award granted to Executive, the provisions of this Agreement shall control. Any provision of this Agreement, to the extent necessary to carry out the intent of such provision, shall survive after the expiration of the Employment Period.

          (i) The Executive shall be entitled to indemnification in connection with any litigation or proceeding arising out of the Executive’s acting as Executive Vice President — Chief Business Develoment Strategy Officer or as an employee, officer or director of the Company, to the fullest extent permitted under the Company’s charter and by-laws and by applicable law. In addition, the Executive shall, during the Employment Period and for ten (10) years thereafter, be entitled to liability insurance coverage pursuant to a Company-purchased directors’ and officers’ liability insurance policy on the same basis as other directors and officers of the Company to whom such coverage (if any) is then provided.

          (j) Notwithstanding any other provision of this Agreement or otherwise, the Company will make no payment pursuant to this Agreement or otherwise which would be prohibited by 12 USC Section 1828(k) or any implementing regulations thereunder.

          (k) This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. Signatures delivered by facsimile shall be effective for all purposes.

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          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.

DORAL FINANCIAL CORPORATION
By:		/s/ Lesbia Blanco
Name: Lesbia Blanco
Title: Executive Vice President Chief Talent & Administration Officer
/s/ Christopher Poulton
	Christopher Poulton

EXHIBIT A

          For all purposes of this Agreement, the following terms shall have the meanings set forth below:

          “affiliate” of a person or other entity shall mean a person or other entity controlled by, controlling or under common control with the person or other entity specified.

          “Disability” shall mean (i) the Executive becomes eligible for full benefits under a long-term disability policy provided by the Company or (ii) the Executive has been unable, due to physical or mental illness or incapacity, to substantially perform the essential duties of his employment with reasonable accommodation for a continuous period of ninety (90) days or an aggregate of one-hundred eighty (180) days during any consecutive twelve (12)-month period.

          “Cause” shall mean:

          (i) the Executive’s act of fraud, misappropriation, or embezzlement with respect to the Company or any material affiliate;

          (ii) the Executive’s indictment for, conviction of, or plea of guilty or no contest to any felony (other than a minor traffic violation);

          (iii) the Executive’s admission of liability of, or a finding by a court or the applicable regulatory agency or body of liability for, the violation of any “Securities Laws” (but excluding any technical violations of any Securities Laws which are not criminal in nature) or the violation of any “Banking Laws” (but excluding any technical violations of any Banking Laws which are not criminal in nature); as used herein, the term “Securities Laws” means any federal or state law, rule or regulation governing the issuance or exchange of securities, including without limitation the Securities Act of 1933, the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder and “Banking Laws” means any federal or state banking law, rule or regulation governing the Company or its subsidiaries;

          (iv) the Executive engages in conduct that constitutes willful gross neglect or willful misconduct, in either case, resulting in significant harm to the Company’s or its subsidiaries’ business or reputation;

          (v) the Executive’s intentional failure after reasonable prior written notice from the Company to comply with any valid and legal directive of the Board; or

          (vi) the Executive’s material breach of any covenant set forth in Section 8 of this Agreement.

          For purposes of this definition of “Cause,” an action or failure to act by the Executive shall not be considered “willful” if the Executive believed in good faith that his action or failure to act was in, or not opposed to, the best interests of the Company and its subsidiaries.

          Anything notwithstanding to the contrary, the Executive’s employment shall not be terminated for “Cause” within the meaning of clauses (i), (iv), (v) or (vi) above, unless the Executive has been given written notice by the Board stating the basis for such termination and he is given fifteen (15) days to cure the neglect or conduct that is the basis of any such claim and, if he fails to cure such conduct, or such conduct cannot be cured, the Executive has an opportunity to be heard before the full Board and after such hearing, the Board gives the Executive written notice confirming that in the judgment of a majority of the members of the Board (other than the Executive, if applicable) “Cause” for terminating the Executive’s employment exists.

          “Good Reason” shall mean the occurrence of any of the following without the Executive’s written consent:

(i) a reduction in the Executive’s then current Annual Base Salary or target bonus opportunity;

(ii) a material diminution in the Executive’s positions, duties or authorities as Executive Vice President — Chief Business Develoment Strategy Officer, including, without limitation, removing him from such positions; provided, that Good Reason shall also exist if at any time following a Change in Control involving an entity of smaller or similar size to the Company (measured on the basis of assets), Executive does not hold the positions set forth above at the ultimate parent entity resulting from such Change in Control; provided, further, the consummation of the transactions contemplated by the Stock Purchase Agreement, by and between the Company and Doral Holdings Delaware, LLC (the “Transactions”) and the fact that (a) Doral Holdings Delaware, LLC (“LLC”) will, following consummation of the Transactions, own a majority interest in the Company will not, in and of itself, constitute, and (b) the Executive does not hold at the LLC or its parent, Doral Holdings L.P. the title or position that is identified in this Agreement (or that the Executive now holds at the Company, if different), also will not constitute, a material diminution in the Executive’s positions, duties or authorities for purposes of this clause (ii); and, provided, further, that the Company and the

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Executive agree that nothing in the immediately preceding proviso is intended to interfere with the Executive’s right to terminate his employment for “Good Reason” for any other reason following the consummation of the Transactions, including the occurrence of a material diminution in his positions, duties or authorities following consummation of the Transactions based on events other than those described in such proviso;

(iii) Executive’s principal work location is moved more than twenty-five (25) miles from New York City, NY;

(iv) a change in reporting structure so that the Executive reports to someone other than the Chief Executive Officer of the Company or the Board; or

(v) the failure of any successor to all or substantially all of the Company’s assets to assume this Agreement, whether in writing or by operation of law.

          Anything notwithstanding to the contrary, the Executive may only terminate his employment for “Good Reason” upon thirty (30) days’ written notice to the Company (provided the Company does not cure the event or events giving rise to Good Reason prior to the expiration of such thirty (30)-day notice period).

          “Change in Control” will be deemed to have taken place if:

(i) any “person” (as such term is used in Sections 3(a)(9) and Section 13(d) of the Securities Exchange Act of 1934) other than the Company or any employee benefit plan of the Company or any of its subsidiaries, (x) becomes the “beneficial owner” (as such term is used in Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of Company securities having more than 50% of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors of the Company (other than as a result of the issuance of securities initiated by the Company in the ordinary course of business) (“Voting Securities”) or (y) becomes the “beneficial owner” of Company of 25% or more of the Voting Securities of the Company and such person has the power to appoint or elect a majority of the members of the Board; or

(ii) persons who, as of the effective date of this Agreement constitute the Board (the “Incumbent Directors”) cease for any reason, including without limitation, as a result of a tender offer,

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proxy contest, merger or similar transaction, to constitute at least a majority thereof, provided that any person becoming a director of the Company subsequent to the effective date of this Agreement shall be considered an Incumbent Director if such person’s election or nomination for election was approved by a vote of at least 50% of the Incumbent Directors; but provided further, that any such person whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of members of the Board or other actual or threatened solicitation of proxies or consents by or on behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange Act) other than the Board, including by reason of agreement intended to avoid or settle any such actual or threatened contest or solicitation, shall not be considered an Incumbent Director; or

(iii) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, or any combination of the foregoing transactions, the holders of all the Company’s securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction constitute, following such transaction, less than a majority of the combined voting power of the then-outstanding securities of the surviving entity (or in the event each entity survives, the ultimate parent entity resulting from such transaction) (the “Surviving Entity”) entitled to vote generally in the election to elect directors of the Surviving Entity after such transaction.

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EX-10.11

Exhibit 10.11

EMPLOYMENT AGREEMENT

          AGREEMENT between DORAL FINANCIAL CORPORATION, a corporation organized under the laws of the Commonwealth of Puerto Rico (together with its successors and assigns, the “Company”), and PAUL MAKOWSKI (the “Executive”), dated as of June 25, 2007.

          WHEREAS, the Board of Directors of the Company (the “Board”) has determined that it is in the best interests of the Company to employ the Executive on the terms set forth herein;

          WHEREAS, the Executive has agreed to be employed by the Company on the terms set forth herein;

          WHEREAS, the Executive and the Company wish to set forth the terms and conditions of the Executive’s employment in this Agreement;

          NOW THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived from this Agreement, the parties hereto agree as follows:

     1. Employment Period. Subject to the terms of this Agreement, the Company hereby agrees to employ the Executive, and the Executive hereby agrees to serve the Company and its subsidiaries, for the period commencing on the Commencement Date (as defined herein) and ending on the second anniversary of the Commencement Date; provided that the Executive’s employment by the Company will automatically be extended by twelve (12) additional months on the second anniversary of the Commencement Date and each annual anniversary thereafter unless either party provides written notice to the other party no less than one hundred and eighty (180) days prior to the date of any such scheduled extension of its or his intention not to extend the term of the Executive’s employment (the original employment term plus any extension thereof being referred to herein as the “Employment Period”). For purposes hereof, the Commencement Date means the date the Executive commences employment with the Company which in all events shall be no later than June 25, 2007. Notwithstanding the foregoing, the Employment Period shall end on the date on which the Executive’s employment is terminated by either party in accordance with the provisions of this Agreement.

     2. Position and Duties.

          (a) During the Employment Period, the Executive shall serve as Executive Vice President - Chief Enterprise Risk Officer, and shall have such duties and responsibilities as are commensurate with such positions. During the Employment Period, the Executive shall report directly to the Chief Executive Officer of the Company or the Board. During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote his full business attention and time to the business and affairs of the Company, and to use his best efforts to perform faithfully and efficiently such

1

responsibilities. During the Employment Period, the Executive shall be entitled to engage in charitable and educational activities and to manage his personal and family investments, to the extent such activities are not competitive with the business of the Company or its subsidiaries and do not interfere in any way, in the reasonable judgment of the Board (or a committee thereof), with the performance of his duties for the Company and are otherwise consistent with the Company’s governance policies.

          (b) The Executive’s principal work location, subject to travel on Company business, shall be the Company’s headquarters in Puerto Rico. Beginning no later than June 25, 2007, and at all times thereafter during the Employment Period, the primary place of residence of the Executive shall be Puerto Rico. The Executive’s family will relocate to Puerto Rico by June, 2008.

     3. Compensation.

          (a) Annual Base Salary. During the Employment Period, the Executive shall receive an annual base salary (“Annual Base Salary”) at a rate of $400,000.00, payable in accordance with the Company’s normal payroll policies. The Executive’s Annual Base Salary shall be prorated for 2007 and for any other partial year of employment during the Employment Period based upon the portion of the year that the Executive is employed by the Company. The Executive’s Annual Base Salary shall be subject to review for increase in the sole discretion of the Board (or a committee thereof). Annual Base Salary, however, shall not be subject to reduction without the Executive’s prior written consent.

          (b) Annual Bonus. With respect to each fiscal year completed during the Employment Period, the Executive shall have a target annual bonus opportunity including for 2007 equal to 60% of his Annual Base Salary (“Target Bonus”); provided that the maximum bonus payable for any fiscal year shall not exceed 200% of Target Bonus with a $240,000.00 guaranteed. The Board shall establish, in its sole discretion, the performance and payment conditions applicable to such annual bonuses and (i) for the year 2007 the annual bonus should be pro-rated by months of employment.

          (c) Additional Compensation: The Executive will receive a one time signing bonus of $150,000.00 in a lump sum payment upon his hiring date.

          (d) Long-Term Incentive Plans. During the Employment Period, the Executive shall be eligible to participate in the ongoing equity and other long-term awards and programs of the Company for employees at the executive’s level as determined in the sole discretion of the Board or a committee thereof.

          (e) Other Benefits and Perquisites. During the Employment Period, the Executive shall be entitled to participate in the Company’s employee benefit plans, programs and arrangements (including, without limitation, life, medical and dental insurance, 401(k), and disability insurance, vacation and sick leave programs) and perquisite programs and arrangements, if any, in each case, on the same basis as generally provided to other similarly-

2

situated executives of the Company. In all events, during the Employment Period, the Executive shall be entitled to four (4) weeks of paid vacation per calendar year (pro-rated for any partial year of employment).

          (f) Certain Expenses. The Company shall reimburse the Executive for all appropriate business expenses in accordance with the terms of the Company’s policies and procedures in effect from time to time.

          (g) Car Allowance: After the relocation benefit, the Company will provide the Executive with a monthly car allowance under the Company’s policy of $630.00 per month to be used to lease or purchase an automobile for use in the affairs and business of the Company and to cover related gasoline and insurance expenses related to the use of such automobile.

          (h) The Company shall reimburse the Executive for cost of housing in the amount of $3,000.00 per month, from commencement date but in no event longer than twelve (12) months.

     4. Termination of Employment.

          (a) Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. In the event of the Executive’s Disability (as defined in Exhibit A attached hereto), the Company may provide the Executive with written notice in accordance with Section 12(c) of this Agreement of its intention to terminate the Executive’s employment due to Disability. In such event, the Executive’s employment with the Company shall terminate effective on the date the Company sends such notice is given to the Executive (the “Disability Commencement Date”); provided that the Executive’s employment hereunder shall immediately terminate on the first date the Executive incurs a Disability as defined in clause (i) of the definition of Disability set forth on Exhibit A.

          (b) With or Without Cause. The Executive is an employee at will and the Company may terminate the Executive’s employment either with or without Cause (as defined in Exhibit A attached hereto). For purposes of this Agreement, a termination “without Cause” shall mean a termination by the Company of the Executive’s employment other than due to Cause, death or Disability.

          (c) With or Without Good Reason. The Executive’s employment may be terminated by. the Executive voluntarily with or without Good Reason (as defined in Exhibit A attached hereto).

          (d) Notice of Termination. Any termination of the Executive’s employment by the Company or the Executive (other than death) shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(c) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis

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for termination of the Executive’s employment under the provision so indicated and (iii) if necessary, specifies the Date of Termination consistent with this Agreement (which date shall be not more than thirty (30) days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.

          (e) Date of Termination. “Date of Termination” means (i) if the Executive’s employment is terminated by the Company for Cause, the date of receipt of the Notice of Termination or any later date specified therein within thirty (30) days of such notice, as the case may be; provided that if the event giving rise to a termination for Cause is pursuant to clauses (i), (iv), (v) or (vi) of the definition of Cause, the date on which there is delivered to the Executive written notice of the requisite Board vote as set forth in the definition of “Cause” in Exhibit A, (ii) if the Executive’s employment is terminated by the Company without Cause, the date of receipt of the Notice of Termination or any later date specified therein within thirty (30) days of such notice, as the case may be, (iii) if the Executive’s employment is terminated by the Executive for Good Reason, thirty (30) days after the Company receives the Notice of Termination unless the Company has cured the alleged grounds for such termination within 30 days after such receipt or if the Executive’s employment is terminated by the Executive without Good Reason, thirty (30) days after the Company receives the Notice of Termination, provided however, in either case the Company may accelerate the Date of Termination to an earlier date by providing the Executive notice of such action, and (iv) if the Executive’s employment is terminated by reason of death or Disability, the date of the Executive’s death or the Disability Commencement Date, as the case may be.

          (f) Resignation. Upon termination of the Executive’s employment for any reason, the Executive agrees to resign, effective as of the Date of Termination, from any positions that the Executive holds with the Company and its subsidiaries, the Board (and any committees thereof) and the board of directors (and any committees thereof) of any of the Company’s subsidiaries. The Executive hereby agrees to execute any and all documentation of such resignations upon request by the Company, but he shall be treated for all purposes as having so resigned upon termination of his employment, regardless of when or whether he executes any such documentation, or Executive is terminated due to his death or Disability.

     5. Obligations of the Company upon Termination of Employment.

          (a) Good Reason; Without Cause. If, during the Employment Period, the Company terminates the Executive’s employment without Cause, or the Executive terminates his employment for Good Reason, or if the Company fails to renew or extend this Agreement upon expiration of the Employment Period, the Company shall have no further obligations to the Executive under this Agreement or otherwise other than to pay or provide to the Executive the following amounts and benefits (provided the Executive has executed, delivered to the Company

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and not revoked a general release of claims against the Company in a form satisfactory to the Company (the “Release”) and subject to Section 8(h) hereof):

          (i) An amount equal to Executive’s unpaid Annual Base Salary for services through the Date of Termination;

          (ii) an amount equal to two (2) times his compensation (salary and bonus) during the preceding year (the “Severance Payment”), and if such termination occurs in the first year of employment, the Severance Payment shall be $1,280,000.00 dollars;

          (iii) continued participation until the second anniversary of the Date of Termination in all Company medical and dental plans in which the Executive and his eligible dependents were participating immediately prior to the Date of Termination (subject to offset as set forth in Section 8 hereof);

          (iv) as long as the Executive uses such services prior to the first anniversary of the Date of Termination, up to $25,000 in outplacement services; and

          (v) payment of other amounts, entitlements or benefits, if any, in accordance with applicable plans, programs, arrangements or other agreements of the Company.

          (b) Death or Disability. If the Executive’s employment is terminated by reason of the Executive’s death or Disability during the Employment Period, the Company shall have no further obligations to the Executive or his legal representatives, as applicable, under this Agreement or otherwise other than for the payment of the amounts and provision of the benefits set forth below:

          (i) payment of Annual Base Salary through the end of the month in which the Executive’s Date of Termination occurs;

          (ii) payment of the Severance Payment provided in subsection (a)(ii) above;

          (iii) except in the case of Executive’s death, continued participation until the second anniversary of the Date of Termination in all Company medical and dental plans in which the Executive and his eligible dependents were participating immediately prior to the Date of Termination (subject to offset as set forth in Section 8 hereof); and

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          (iv) payment of other amounts, entitlements or benefits, if any, in accordance with applicable plans, programs, arrangements or other agreements of the Company.

          (c) Cause or Voluntary Resignation Without Good Reason. If the Executive’s employment shall be terminated by the Company for Cause or by the Executive for any reason other than Good Reason at any time during the Employment Period, the Company shall have no further obligations to the Executive under this Agreement or otherwise other than for the payment of the amounts and provision of the benefits set forth below:

          (i) an amount equal to the Executive’s unpaid Annual Base Salary for services through the Date of Termination;

          (ii) for a voluntary resignation (without Good Reason), continued exercisability for 90 days following the Date of Termination for the portion of the Stock Option Award or any other equity awards, if any, that was vested and outstanding as of the Date of Termination (but in no event beyond the expiration of the original term of the award);

          (iii) for a termination for Cause, forfeiture and cancellation of all stock option and any other equity awards (whether vested or unvested) as of the Date of Termination;

          (iv) forfeiture and cancellation of the unvested portion of all stock option and any other equity awards as of the Date of Termination; and

          (v) payment of other amounts, entitlements or benefits, if any, in accordance with applicable plans, programs, arrangements or other agreements of the Company.

          6. Change in Control Protections.

          (a) Upon the occurrence of a Change in Control (as defined in Exhibit A attached hereto) and all other equity awards then held by the Executive shall immediately vest and become exercisable.

          (b) In the event, during the Employment Period, the Company terminates the Executive’s employment without Cause or the Executive terminates his employment for Good Reason, in both cases upon or within two (2) years immediately following a Change in Control, the Company shall have no futher obligations to the Executive under the terms of this Agreement or otherwise other than to pay or provide to the Executive the following amounts and benefits (provided the Executive has executed, delivered to the Company and not revoked a general release of claims against the Company in a form satisfactory to the Company (the “Release) and subject to Section 8(h) hereof):

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          (i) payment of Annual Base Salary through the end of the month in which the Executive’s Date of Termination occurs;

          (ii) payment of the Severance Payment provided in Section (5)(a)(ii) above;

          (iii) full vesting as of the Date of Termination of the Stock Option Award (as defined in Section 3(c) hereof), and any other equity awards granted to Executive, with continued exercisability of the outstanding options for twelve (12) months following the Date of Termination (but in no event beyond the end of the original term of the options);

          (iv) continued participation until the second anniversary of the Date of Termination in all Company medical and dental plans in which the Executive and his eligible dependents were participating immediately prior to the Date of Termination (subject to offset as set forth in Section 7 hereof); and

          (v) as long as the Executive uses such services prior to the first anniversary of the Date of Termination, up to $25,000 in outplacement services; and

          (vi) payments of other amounts, entitlements or benefits, if any, in accordance with applicable plans, programs, arrangements or other agreements of the Company.

     7. No Duplication; No Mitigation. In no event shall the Executive be entitled to
duplicate payments or benefits under different provisions of this Agreement or pursuant to the terms of any other plan, program or arrangement of the Company or its subsidiaries. In the event of any termination of the Executive’s employment, the Executive shall be under no obligation to seek other employment, and there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment except with respect to the continuation of benefits under Section 5(a)(iii) and Section 6(b)(iv), which shall terminate immediately upon obtaining comparable coverage from another employer.

     8. Restrictive Covenants.

          (a) Confidentiality. During the Employment Period and thereafter, other than in the ordinary course of performing his duties for the Company, the Executive agrees that he shall not disclose to anyone or make use of any trade secret or proprietary or confidential information of the Company or any affiliate of the Company, including such trade secret or proprietary or confidential information of any customer or other entity to which the Company owes an obligation not to disclose such information, which he acquires during the course of his employment, including, but not limited to, records kept in the ordinary course of business, except

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when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body {including a committee thereof) with apparent or actual jurisdiction to order him to divulge, disclose or make accessible such information. In the event the Executive is requested to disclose information as contemplated in the preceding sentence, the Executive agrees, unless otherwise prohibited by law, to use his best efforts to give the Company’s General Counsel prompt written notice of any request for disclosure in advance of the Executive making such disclosure in order to permit the Company a reasonable opportunity to challenge such disclosure. The foregoing shall not apply to information that (i) was known to the public prior to its disclosure by the Executive, or (ii) becomes known to the public through no wrongful disclosure by or act of the Executive or any representative of the Executive.

          (b) Property Rights. Whether during the Employment Period or thereafter, the Executive agrees to hereby sell, assign and transfer to the Company all of his right, title and interest in and to all inventions, discoveries, improvements and copyrightable subject matter (the “Rights”) which during the period of his employment are made or conceived by him, alone or with others, and which are within or arise out of any general field of the Company’s business or arise out of any work he performs, or information he receives regarding the business of the Company, while employed by the Company. The Executive shall fully disclose to the Company as promptly as available all information known or possessed by him concerning any Rights, and upon request by the Company and without any further remuneration in any form to him by the Company, but at the expense of the Company, execute all applications for patents and for copyright registration, assignments thereof and other instruments and do all things which the Company may deem necessary to vest and maintain in it the entire right, title and interest in and to all such Rights. The Executive agrees that at the time of the termination of employment, whether at the instance of the Executive or the Company, and regardless of the reasons therefor, he will promptly deliver to the Company’s General Counsel, and not keep or deliver to anyone else, any and all of the following which is in his possession or control: (i) Company property (including, without limitation, credit cards, computers, communication devices, home office equipment and other Company tangible property) and (ii) notes, files, memoranda, papers and, in general, any and all physical matter and computer files containing confidential or proprietary information of the Company or any of its subsidiaries, including any and all documents relating to the conduct of the business of the Company or any of its subsidiaries and any and all documents containing confidential or proprietary information of the customers of the Company or any of its subsidiaries, except for (x) any documents for which the Company’s General Counsel has given written consent to removal at the time of termination of the Executive’s employment and (y) any information necessary for the Executive to retain for his tax purposes.

          (c) Non-Competition. The Executive acknowledges that in his capacity in management the Executive has had or will have a great deal of exposure and access of the Company’s trade secrets and confidential and proprietary information. Therefore, during the Executive’s employment and for twelve (12) months following termination of such employment (whether during the Employment Period or thereafter) (the “Restricted Period”) (i) the Executive shall protect the Company’s trade secrets and other confidential and proprietary information, and

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(ii) the Executive agrees that he shall not, other than in the ordinary course of performing his duties hereunder or as agreed by the Company in writing, engage in a “Competitive Business,” directly or indirectly, as an individual, partner, shareholder, director, officer, principal, agent, employee, trustee, consultant, or in any relationship or capacity. The Executive shall not be deemed to be in violation of this Section 9(c) by reason of the fact that he owns or acquires, solely as an investment, two percent (2%) or less of the outstanding equity securities (measured by value) of any publicly traded company. “Competitive Business” shall mean (x) the Executive’s participation in any unsolicited offer to purchase the stock or assets of the Company or its subsidiaries or (y) any financial institution with a substantial presence in the mortgage origination business in Puerto Rico. Notwithstanding the foregoing, if the Company provides the Executive with notice that it is not renewing the Employment Period in accordance with Section 1 hereof, the provisions of this Section 9(c) shall no longer be effective upon the expiration of the Employment Period.

          (d) Non-interference. The Executive acknowledges that information regarding the Company’s business and financial relations with its vendors and customers is Confidential Information and proprietary to the Company and that any interference with such relations based directly or indirectly on the use of such information would cause irreparable damage to the Company. The Executive acknowledges that by virtue of his employment with the Company, he has gained or may gain knowledge of such information concerning the Company’s vendors and customers (respectively “Vendor Information” or “Customer Information”), and that he would inevitably have to draw on this Vendor Information and Customer Information and on other Confidential Information if he were to solicit or service the Company’s vendors or customers on behalf of a competing business enterprise. Accordingly, and subject to the immediately following sentence, the Executive agrees that, other than in the ordinary course of performing his duties for the Company, during the Restricted Period, the Executive will not, on behalf of himself or any other person or entity, directly or indirectly seek to encourage or induce any vendor or customer of the Company to cease doing business with, or lessen its business with, the Company, or otherwise interfere with or damage (or attempt to interfere with or damage) any of the Company’s relationships with its vendors and customers. No action by another person or entity shall be deemed to be a breach of this provision unless the Executive directly or indirectly assisted, encouraged or otherwise counseled such person or entity to engage in such activity.

          (e) No Hire; Non-Solicitation. The Executive agrees that, during the Restricted Period (other than in the ordinary course of performing his duties for the Company), he will not, without the prior written consent of the Company, directly or indirectly, (i) hire any employee of the Company or any of its subsidiaries who is then an employee of the Company or such affiliate or was an employee during the prior six (6) month period, or (ii) solicit or encourage any such employee to leave the employ of the Company or such affiliate, as the case may be. No action by another person or entity shall be deemed to be a breach of this provision unless the Executive directly or indirectly assisted, encouraged or otherwise counseled such person or entity to engage in such activity.

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          (f) Public Comment. Following the Employment Period, the Executive shall not at any time (i) make any public derogatory comment concerning the Company or its subsidiaries or anyone whom the Executive knows to be a current or former director, officer, stockholder or employee of the Company or (ii) without the prior written consent of the Company, which consent shall not be unreasonably withheld, publish or produce any information or write any book, article, screenplay, teleplay or similar type of publication relating to the Company or its subsidiaries or anyone whom the Executive knows to be a current or former director, officer, stockholder or employee; provided that no such consent shall be necessary for an academic work relating to Executive’s employment with the Company. Following the Employment Period, the Company shall not at any time make any public derogatory comment concerning the Executive. Notwithstanding the foregoing, nothing in this Section 8(f) shall prohibit any person from (x) responding publicly to incorrect, disparaging or derogatory public statements about the Company or the Executive relating to his employment with the Company, (y) providing truthful testimony in any judicial or administrative matter, or (z) making truthful statements required by law, by any regulatory authority or organization, or in connection with any public filing required by the Securities and Exchange Commission or any other regulatory authority.

          (g) Blue Penciling. If any restrictions on competitive or other activities contained in this Section 8 shall for any reason be held by a court of competent jurisdiction to be excessively broad as to duration, geographical scope, activity or subject, such restrictions shall be construed so as thereafter to be limited or reduced to be enforceable to the extent compatible with the applicable law; it being understood that by the execution of this Agreement, (i) the parties hereto regard such restrictions as reasonable and compatible with their respective rights and (ii) the Executive acknowledges and agrees that the restrictions will not prevent him from obtaining gainful employment subsequent to the termination of his employment.

          (h) Remedies; Injunctive Relief.

          (i) The Executive acknowledges and agrees that the covenants and obligations of the Executive set forth in this Section 8 relate to special, unique and extraordinary services rendered by the Executive to the Company and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, the Executive agrees that the Company shall be entitled to seek an injunction, restraining order or other temporary or permanent equitable relief (without the requirement to post bond) restraining the Executive from committing any violation of the covenants and obligations contained herein. These injunctive remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. The existence of any claim or cause of action by the Executive against the Company shall not constitute a defense to the enforcement by the Company of the foregoing restrictive covenants, but such claim or cause of action shall be determined separately.

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          (ii) If at any time the Executive materially breaches any of the covenants in Section 8, and fails to cure such breach within ten (10) days after receipt of written notice from the Company, then (x) the Company shall have the right to cease to pay or provide to the Executive any payment, benefit or entitlement due (or accrued) under this Agreement and (y) the Executive shall be required to repay to the Company the net after-tax amount (such after-tax amount to be determined after taking into account tax deductions, tax credits, and the like attributable to the repayment) of any severance paid to the Executive under this Agreement. Such repayment to be made within 15 days after written notice from the Company to the Executive requesting such repayment.

          (iii) If at any time following the Restricted Period but prior to the second anniversary of the termination of the Executive’s employment, the Executive takes any action or engages in any conduct that would have constituted a material breach of Section 8(d) or 8(e) if it had occurred during the Restricted Period, then clauses (x) and (y) of Section 8(h)(ii) — as limited by Section 8(h)(ii) — shall apply as if such material breach had occurred during the Restricted Period.

          (i) Survival. The provisions of this Section 8 shall remain in full force and effect until the expiration of the periods specified herein notwithstanding the earlier termination of the Executive’s employment hereunder or the expiration of the Employment Period. For purposes of this Section 8, “Company” shall mean the Company and any affiliate of the Company or any successor thereto.

     9. Mandatory Arbitration. Except to the extent necessary to enforce the provisions of Section 8 hereof in accordance with Section 8(g) or 8(h), the Executive (on behalf of himself and his beneficiaries) and the Company agree that any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, or the Executive’s employment with the Company or any affiliate, or any termination of such employment, shall be settled by confidential arbitration in Puerto Rico in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Any award entered shall be final, binding and nonreviewable except on such limited grounds for review of arbitration awards as may be permitted by applicable law. Judgment upon the award rendered by the arbitrator(s) may be entered into any court having jurisdiction thereof.

     10. Successors.

          (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives, heirs or legatees.

          (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. No rights or obligations of the Company under this

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Agreement may be assigned or transferred by the Company without the Executive’s prior written consent except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or a sale, liquidation or other disposition of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and assumes the liabilities, obligations and duties of the Company under this Agreement, either contractually or as a matter of law.

     11. Miscellaneous.

          (a) The Executive represents and warrants that he has the free and unfettered right to enter into this Agreement and to perform his obligations under it and that he knows of no agreement between him and any other person, firm or organization, or any law or regulation, that would be violated by the performance of his obligations under this Agreement. The Executive agrees that he will not use or disclose any confidential or proprietary information of any prior employer in the course of performing his duties for the Company or any of its subsidiaries.

          (b) This Agreement shall be governed by and construed in accordance with its express terms, and otherwise in accordance with the laws of the Commonwealth of Puerto Rico, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. In the event of any conflict or inconsistency between the provisions of this Agreement and any other Company plan, program, policy or agreement, the provisions of this Agreement shall control.

          (c) All notices and other communications hereunder shall be in writing and shall be given (i) when delivered personally (provided that a written acknowledgement of receipt is obtained), (ii) three (3) days after being sent by certified or registered mail, postage prepaid, return receipt requested or (iii) two (2) days after being sent by overnight courier (provided that a written acknowledgement of receipt is obtained by the overnight courier), with any such notice duly addressed to the party concerned at the address indicated below:

If to the Executive:	At the most recent address
	on file at the Company
If to the Company:	At the address of its principal
	executive offices
	Attention: General Counsel

or to such other address as either party shall have furnished to the other in writing in accordance herewith.

          (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

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          (e) The Company may withhold from any amounts payable under this Agreement such federal, Puerto Rico, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. In addition, this Agreement is intended to comply with the requirements of Section 409A of the Code and the regulations promulgated thereunder (“Section 409A”) so as not to subject the Executive to the payment of interest or any additional tax under Section 409A. In furtherance thereof, if payment or provision of any amount or benefit hereunder at the time specified in this Agreement would subject such amount or benefit to any additional tax under Section 409A, the payment or provision of such amount or benefit shall be postponed to the earliest commencement date on which the payment or the provision of such amount or benefit could be made without incurring such additional tax (including paying any severance that is delayed in a lump sum upon the earliest possible payment date which is consistent with Section 409A).

          (f) Following the Executive’s termination of employment for any reason (whether during or after the expiration of the Employment Period), upon reasonable request of the Company, the Executive shall cooperate with the Company or any of its subsidiaries with respect to any legal or investigatory proceeding, including any government or regulatory investigation, or any litigation or other dispute relating to matters in which he was involved or had knowledge (or reasonably should have had knowledge) during his employment with the Company, subject to his reasonable personal and business schedules. The Company shall reimburse the Executive for all reasonable out-of-pocket travel and meal expenses associated with any cooperation provided hereunder.

          (g) No waiver shall be valid unless in writing signed by the party against whom the waiver is being enforced (that is, by the Executive or an authorized officer of the Company, as the case may be).

          (h) This Agreement contains the entire agreement between the parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the parties with respect thereto (including, without limitation, the term sheet previously negotiated by the parties). In the event of any inconsistency between the provisions of this Agreement and the provisions of any other agreement or plan relating to the Stock Option Award or any other equity award granted to Executive, the provisions of this Agreement shall control. Any provision of this Agreement, to the extent necessary to carry out the intent of such provision, shall survive after the expiration of the Employment Period.

          (i) The Executive shall be entitled to indemnification in connection with any litigation or proceeding arising out of the Executive’s acting as Executive Vice President — Chief Enterprise Risk Officer or as an employee, officer or director of the Company, to the fullest extent permitted under the Company’s charter and by-laws and by applicable law. In addition, the Executive shall, during the Employment Period and for ten (10) years thereafter, be entitled to liability insurance coverage pursuant to a Company-purchased directors’ and officers’ liability

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insurance policy on the same basis as other directors and officers of the Company to whom such coverage (if any) is then provided.

          (j) Notwithstanding any other provision of this Agreement or otherwise, the Company will make no payment pursuant to this Agreement or otherwise which would be prohibited by 12 USC Section 1828(k) or any implementing regulations thereunder.

          (k) This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. Signatures delivered by facsimile shall be effective for all purposes.

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          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.

DORAL FINANCIAL CORPORATION
By:	/s/ Lesbia Blanco
Name: Lesbia Blanco
Title: Executive Vice President Chief Talent &
Administration Officer
/s/ Paul Makowski
Paul Makowski

EXHIBIT A

          For all purposes of this Agreement, the following terms shall have the meanings set forth below:

          “affiliate” of a person or other entity shall mean a person or other entity controlled by, controlling or under common control with the person or other entity specified.

          “Disability” shall mean (i) the Executive becomes eligible for full benefits under a long-term disability policy provided by the Company or (ii) the Executive has been unable, due to physical or mental illness or incapacity, to substantially perform the essential duties of his employment with reasonable accommodation for a continuous period of ninety (90) days or an aggregate of one-hundred eighty (180) days during any consecutive twelve (12)-month period.

          “Cause” shall mean:

          (i) the Executive’s act of fraud, misappropriation, or embezzlement with respect to the Company or any material affiliate;

          (ii) the Executive’s indictment for, conviction of, or plea of guilty or no contest to any felony (other than a minor traffic violation);

          (iii) the Executive’s admission of liability of, or a finding by a court or the applicable regulatory agency or body of liability for, the violation of any “Securities Laws” (but excluding any technical violations of any Securities Laws which are not criminal in nature) or the violation of any “Banking Laws” (but excluding any technical violations of any Banking Laws which are not criminal in nature); as used herein, the term “Securities Laws” means any federal or state law, rule or regulation governing the issuance or exchange of securities, including without limitation the Securities Act of 1933, the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder and “Banking Laws” means any federal or state banking law, rule or regulation governing the Company or its subsidiaries;

          (iv) the Executive engages in conduct that constitutes willful gross neglect or willful misconduct, in either case, resulting in significant harm to the Company’s or its subsidiaries’ business or reputation;

          (v) the Executive’s intentional failure after reasonable prior written notice from the Company to comply with any valid and legal directive of the Board; or

          (vi) the Executive’s material breach of any covenant set forth in Section 8 of this Agreement.

          For purposes of this definition of “Cause,” an action or failure to act by the Executive shall not be considered “willful” if the Executive believed in good faith that his action or failure to act was in, or not opposed to, the best interests of the Company and its subsidiaries.

          Anything notwithstanding to the contrary, the Executive’s employment shall not be terminated for “Cause” within the meaning of clauses (i), (iv), (v) or (vi) above, unless the Executive has been given written notice by the Board stating the basis for such termination and he is given fifteen (15) days to cure the neglect or conduct that is the basis of any such claim and, if he fails to cure such conduct, or such conduct cannot be cured, the Executive has an opportunity to be heard before the full Board and after such hearing, the Board gives the Executive written notice confirming that in the judgment of a majority of the members of the Board (other than the Executive, if applicable) “Cause” for terminating the Executive’s employment exists.

          “Good Reason” shall mean the occurrence of any of the following without the Executive’s written consent:

(i) a reduction in the Executive’s then current Annual Base Salary or target bonus opportunity;

(ii) a material diminution in the Executive’s positions, duties or authorities as Executive Vice President — Chief Enterprise Risk Officer, including, without limitation, removing him from such positions; provided, that Good Reason shall also exist if at any time following a Change in Control involving an entity of smaller or similar size to the Company (measured on the basis of assets), Executive does not hold the positions set forth above at the ultimate parent entity resulting from such Change in Control; provided, further, the consummation of the transactions contemplated by the Stock Purchase Agreement, by and between the Company and Doral Holdings Delaware, LLC (the “Transactions”) and the fact that (a) Doral Holdings Delaware, LLC (“LLC”) will, following consummation of the Transactions, own a majority interest in the Company will not, in and of itself, constitute, and (b) the Executive does not hold at the LLC or its parent, Doral Holdings L.P. the title or position that is identified in this Agreement (or that the Executive now holds at the Company, if different), also will not constitute, a material diminution in the Executive’s positions, duties or authorities for purposes of this clause (ii); and, provided, further, that the Company and the

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Executive agree that nothing in the immediately preceding proviso is intended to interfere with the Executive’s right to terminate his employment for “Good Reason” for any other reason following the consummation of the Transactions, including the occurrence of a material diminution in his positions, duties or authorities following consummation of the Transactions based on events other than those described in such proviso;

(iii) Executive’s principal work location is moved more than twenty-five (25) miles from San Juan, Puerto Rico;

(iv) a change in reporting structure so that the Executive reports to someone other than the Chief Executive Officer of the Company or the Board; or

(v) the failure of any successor to all or substantially all of the Company’s assets to assume this Agreement, whether in writing or by operation of law.

          Anything notwithstanding to the contrary, the Executive may only terminate his employment for “Good Reason” upon thirty (30) days’ written notice to the Company (provided the Company does not cure the event or events giving rise to Good Reason prior to the expiration of such thirty (30)-day notice period).

          “Change in Control” will be deemed to have taken place if:

(i) any “person” (as such term is used in Sections 3(a)(9) and Section 13(d) of the Securities Exchange Act of 1934) other than the Company or any employee benefit plan of the Company or any of its subsidiaries, (x) becomes the “beneficial owner” (as such term is used in Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of Company securities having more than 50% of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors of the Company (other than as a result of the issuance of securities initiated by the Company in the ordinary course of business) (“Voting Securities”) or (y) becomes the “beneficial owner” of Company of 25% or more of the Voting Securities of the Company and such person has the power to appoint or elect a majority of the members of the Board; or

(ii) persons who, as of the effective date of this Agreement constitute the Board (the “Incumbent Directors”) cease for any reason, including without limitation, as a result of a tender offer,

18

proxy contest, merger or similar transaction, to constitute at least a majority thereof, provided that any person becoming a director of the Company subsequent to the effective date of this Agreement shall be considered an Incumbent Director if such person’s election or nomination for election was approved by a vote of at least 50% of the Incumbent Directors; but provided further, that any such person whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of members of the Board or other actual or threatened solicitation of proxies or consents by or on behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange Act) other than the Board, including by reason of agreement intended to avoid or settle any such actual or threatened contest or solicitation, shall not be considered an Incumbent Director; or

(iii) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, or any combination of the foregoing transactions, the holders of all the Company’s securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction constitute, following such transaction, less than a majority of the combined voting power of the then-outstanding securities of the surviving entity (or in the event each entity survives, the ultimate parent entity resulting from such transaction) (the “Surviving Entity”) entitled to vote generally in the election to elect directors of the Surviving Entity after such transaction.

19

EX-12.1

Exhibit 12.1

Doral Financial Corporation
Computation of Ratio of Earnings to Fixed Charges

	For the year ended December 31,
	2007			2006			2005		2004		2003
Including Interest on Deposits
Earnings:
Pre-tax (loss) income from continuing operations	$	(302,762	)	$	(272,008	)	$	32,283	$	129,303	$	166,054
Plus:
Fixed Charges (excluding capitalized interest)		427,141			623,668			670,137		387,675		322,657
Total Earnings	$	124,379		$	351,660		$	702,420	$	516,978	$	488,711
Fixed Charges:
Interest expensed and capitalized	$	423,986		$	619,094		$	665,313	$	383,613	$	318,715
Amortized premiums, discounts, and capitalized expenses related to indebtedness		633			1,411			1,869		1,473		1,531
An estimate of the interest component within rental expense		2,522			3,163			2,955		2,589		2,411
Total Fixed Charges	$	427,141		$	623,668		$	670,137	$	387,675	$	322,657
Ratio of Earnings to Fixed Charges		(A	)		(A	)		1.05		1.33		1.51
Excluding Interest on Deposits
(Loss) earnings:
Pre-tax (loss) income from continuing operations	$	(302,762	)	$	(272,008	)	$	32,283	$	129,303	$	166,054
Plus:
Fixed Charges (excluding capitalized interest)		255,909			468,250			563,973		306,992		251,248
Total (Loss) Earnings	$	(46,853	)	$	196,242		$	596,256	$	436,295	$	417,302
Fixed Charges:
Interest expensed and capitalized	$	252,754		$	463,676		$	559,149	$	302,930	$	247,306
Amortized premiums, discounts, and capitalized expenses related to indebtedness		633			1,411			1,869		1,473		1,531
An estimate of the interest component within rental expense		2,522			3,163			2,955		2,589		2,411
Total Fixed Charges	$	255,909		$	468,250		$	563,973	$	306,992	$	251,248
Ratio of Earnings to Fixed Charges		(A	)		(A	)		1.06		1.42		1.66

(A) Due to the Company’s pre-tax losses for the years ended December 31, 2007 and 2006 the ratio coverage was less than 1:1. The Company would have to generate additional earnings of $243.8 million and $312.5 million to achieve a ratio of 1:1 in 2007 and 2006, respectively.

EX-12.2

Exhibit 12.2

Doral Financial Corporation
Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends

	For the year ended December 31,
	2007			2006			2005			2004		2003
Including Interest on Deposits
Earnings:
Pre-tax (loss) income from continuing operations	$	(302,762	)	$	(272,008	)	$	32,283		$	129,303	$	166,054
Plus:
Fixed Charges (excluding capitalized interest)		427,141			623,668			670,137			387,675		322,657
Total Earnings	$	124,379		$	351,660		$	702,420		$	516,978	$	488,711
Fixed Charges:
Interest expensed and capitalized	$	423,986		$	619,094		$	665,313		$	383,613	$	318,715
Amortized premiums, discounts, and capitalized expenses related to indebtedness		633			1,411			1,869			1,473		1,531
An estimate of the interest component within rental expense		2,522			3,163			2,955			2,589		2,411
Total Fixed Charges before preferred dividends		427,141			623,668			670,137			387,675		322,657
Preferred dividends		33,299			33,299			33,299			33,299		21,088
Ratio of pre tax income to net income		1.771			1.215			2.447			0.602		1.168
Preferred dividend factor		58,973			40,458			81,483			20,046		24,631
Total fixed charges and preferred stock dividends	$	486,114		$	664,126		$	751,620		$	407,721	$	347,288
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends		(A	)		(A	)		(A	)		1.27		1.41
Excluding Interest on Deposits
(Loss) earnings:
Pre-tax (loss) income from continuing operations	$	(302,762	)	$	(272,008	)	$	32,283		$	129,303	$	166,054
Plus:
Fixed Charges (excluding capitalized interest)		255,909			468,250			563,973			306,992		251,248
Total (Loss) Earnings	$	(46,853	)	$	196,242		$	596,256		$	436,295	$	417,302
Fixed Charges:
Interest expensed and capitalized	$	252,754		$	463,676		$	559,149		$	302,930	$	247,306
Amortized premiums, discounts, and capitalized expenses related to indebtedness		633			1,411			1,869			1,473		1,531
An estimate of the interest component within rental expense		2,522			3,163			2,955			2,589		2,411
Total Fixed Charges before preferred dividends		255,909			468,250			563,973			306,992		251,248
Preferred dividends		33,299			33,299			33,299			33,299		21,088
Ratio of pre tax income to net income		1.771			1.215			2.447			0.602		1.168
Preferred dividend factor		58,973			40,458			81,483			20,046		24,631
Total fixed charges and preferred stock dividends	$	314,882		$	508,708		$	645,456		$	327,038	$	275,879
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends		(A	)		(A	)		(A	)		1.33		1.51

(A) For the years ended December 31, 2007, 2006 and 2005 earnings were not sufficient to cover preferred dividends and the ratios were less than 1:1. The Company would have had to generate additional earnings of $243.8 million, $312.5 million, and $21.8 million to achieve a ratio of 1:1 in 2007, 2006 and 2005, respectively.

EX-21

Exhibit 21

List of Doral Financial Corporation
Subsidiaries

Name of Subsidiary	Jurisdiction of Incorporation
Doral Mortgage, LLC	Puerto Rico
Doral Securities, Inc.	Puerto Rico
Doral Bank	Puerto Rico
Doral Money, Inc.	Delaware
Doral Bank, FSB	USA
Doral International, Inc.	Puerto Rico
Doral Insurance Agency, Inc.	Puerto Rico
Doral Properties, Inc.	Puerto Rico
CB, LLC	Puerto Rico

EX-31.1

Exhibit 31.1

I, Glen R. Wakeman, Chief Executive Officer of Doral Financial Corporation, certify that:

1.	I have reviewed this Form 10-K 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 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 officers 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 fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses 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.

Date: March 17, 2008

/s/ Glen R. Wakeman  

Glen R. Wakeman 

Chief Executive Officer 

EX-31.2

Exhibit 31.2

I, Marangal I. Domingo, Chief Financial Officer of Doral Financial Corporation, certify that:

1.	I have reviewed this Form 10-K 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 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 officers 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 fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses 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.

Date: March 17, 2008

/s/ Marangal I. Domingo  

Marangal I. Domingo 

Executive Vice President and
Chief Financial Officer 

EX-32.1

EXHIBIT 32.1

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 Title 18,
United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of Doral Financial Corporation, a Puerto Rico corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:

The Annual Report on Form 10-K for the year ended December 31, 2007 (the “Form 10-K”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated : March 17, 2008

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

A signed original of this written statement required by Section 906 has been provided to, and will be retained by, the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 Title 18,
United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of Doral Financial Corporation, a Puerto Rico corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:

The Annual Report on Form 10-K for the year ended December 31, 2007 (the “Form 10-K”) of the Company fully complies with the requirements of section l3(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated : March 17, 2008

By:	/s/ Marangal I. Domingo
Name:		Marangal I. Domingo
Title:		Executive Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to, and will be retained by, the Company and furnished to the Securities and Exchange Commission or its staff upon request.