Doral Financial Corporation Files Its Form 10-Q Report for the Second Quarter of 2007

Doral Financial Corporation (NYSE: DRL), a diversified financial services company, today filed its Form 10-Q report for the second quarter ended June 30, 2007. For the second quarter and first six months of 2007, Doral Financial had a net loss of $37.5 million and $74.8 million, respectively, and a consolidated loss per diluted common share of $0.42 and $0.85. For the second quarter and first six months of 2006, Doral Financial had a net loss of $50.9 million and $33.8 million and consolidated loss per diluted common share of $0.55 and $0.47. "The second quarter results continue to reflect the impact of substantial expenses incurred in resolving ongoing legacy issues, transforming our business operations and recapitalizing our Company. They also reflect the deterioration in delinquency trends and the weakened Puerto Rico economy,” said Glen R. Wakeman, CEO and President of Doral Financial. "We are confident that now, having resolved our liquidity issues and realigned our business structure through the transfer of our mortgage origination and servicing platform to Doral Bank, we have taken important steps towards transforming Doral into an efficient, profitable and well-managed community bank. With a recapitalized Company, our management team is enthusiastic about having the opportunity to devote our time and energy to continue to implement our business plan and look for opportunities to provide better services and products to our customers, therefore, increasing shareholder value.” Overview of Results of Operations Doral Financial’s financial performance for the second quarter of 2007, compared to the second quarter of 2006, was principally impacted by (1) increased non-interest income related principally to a gain on mortgage loans sales and fees and to gains on securities held for trading, particularly on the value of IOs; and, (2) a decrease in income tax expense principally related to the company’s deferred tax assets. These were partially offset by increases in compensation and professional services expenses. The highlights of the Company’s financial results for the quarter ended June 30, 2007 included the following: Net loss attributable to common shareholders for the second quarter of 2007 amounted to $45.8 million, or a diluted loss per share of $0.42, compared to net loss of $59.3 million, or a diluted loss per share of $0.55, for the second quarter of 2006. Net interest income for the second quarter of 2007 was $34.6 million, compared to $55.4 million for the same period in 2006. The decrease in net interest income for 2007, compared to 2006, was related to a decrease in the Company’s net interest margin, coupled with a decrease in the average balance of interest earning assets. Net interest margin decreased from 1.47% in the second quarter of 2006 to 1.30% in the second quarter of 2007. Average interest-earning assets decreased from $15.2 billion during the second quarter of 2006 to $10.7 billion for the second quarter of 2007. For the second quarter of 2007, the provision for loan and lease losses was $19.3 million, compared to $5.9 million for the same period in 2006. The increase in the provision for loan losses is principally related to an increase of $8.8 million in the provision of the residential mortgage loan portfolio related to the transfer of $1.3 billion of loans from the mortgage loans held for sale portfolio to the loans receivable portfolio. Also, the provision for loan losses reflects an increase in the commercial non-real estate as a result of deterioration in delinquency trends and deteriorating economic conditions. Non-interest income for the second quarter of 2007 $24.9 million, compared to a non-interest loss of $21.5 million for the same period in 2006. The increase in non-interest income during the second quarter of 2007 compared to the same period in 2006 was primarily driven by a gain on mortgage loan sales and fees, which amounted to approximately $1.5 million during the second quarter of 2007, compared to losses of approximately $26.8 million for the second quarter of 2006. The loss during the second quarter of 2006 was principally attributable to the restructuring of previously reversed loan transfers. Total loan sales and securitizations for the second quarter of 2007 amounted to $75.7 million, compared to $3.4 billion for the second quarter of 2006. Non-interest income for the second quarter of 2007 reflected losses on IO valuation of $788,000, compared to loses of $16.3 million for the second quarter of 2006. Non-interest expense for the second quarter of 2007 was $76.6, compared to $68.8 million for the same period in 2006. The increase in non-interest expense for the quarter was driven by a $6.5 million increase in compensation and benefits, related to payments and associated benefit costs related to the implementation of the Company’s new key employee incentive plan and reduced deferred employee costs pursuant SFAS 91 as a result of the reduced volume of mortgage loan originations. Non-interest expense for the second quarter of 2007 also includes approximately $11.6 million in professional services principally associated with the Company’s business transformation and recapitalization efforts, as well as continued expenses related to the resolution of ongoing legacy issues. For the second quarter of 2007, Doral Financial recognized an income tax expense of $1.1 million, compared to $10.2 million for the corresponding period in 2006. The income tax expense for 2006 is principally related to the changes in the Company’s valuation allowance for its deferred tax assets resulting from changes in projections used to evaluate the realization of the tax assets. During the second quarter of 2007, the Company had other comprehensive loss of approximately $34.7 million related principally to the negative impact of the increase in long-term interest rates on the value of the Company’s portfolio of available for sale securities. As of June 30, 2007, the Company’s accumulated other comprehensive loss (net of income tax benefit) reached $131.8 million, compared to $106.9 million as of December 31, 2006. Doral Financial’s loan production for the second quarter of 2007 was $308.1 million, compared to $487.0 million for the comparable period in 2006, a decrease of approximately 37%. The decrease in Doral Financial’s loan production is due to a number of factors, including changes in the underwriting standards, economic conditions in Puerto Rico, and competition from other financial institutions. The Company anticipates that, for the foreseeable future, loan production will continue below historical levels as these new underwriting standards are implemented and new product offerings are developed. Total assets as of June 30, 2007 were $10.7 billion, a decrease of 9% compared to $11.9 billion as of December 31, 2006. The decrease in total assets during the first half of 2007 was due primarily to a decrease in the Company’s securities portfolio of $684.0 million, which resulted principally from the settlement of the sale of $231 million in available-for-sale securities during the first quarter of 2007. This transaction was part of the Company’s efforts to reduce the high level of interest rate risk and volatility inherent in its balance sheet. A reduction in loan balances of $105.1 million due primarily to principal repayments during the first half of 2007, also contributed to the decline in total assets as well as the decline of money markets and short term investments. Recapitalization of the Holding Company and Restructuring of Mortgage Operations As previously announced, on July 19, 2007, Doral Financial completed the private sale of 968,253,968 newly issued shares of common stock to Doral Holdings Delaware, LLC for an aggregate purchase price of $610 million. In connection with the recapitalization transaction, 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. The transfer of the mortgage operation to Doral Bank PR will result in a more traditional and effective operating structure in which most of the Company’s operational liquidity needs will be at the subsidiary level. In connection with these transactions, Doral Bank PR obtained regulatory approval to pay a $155 million cash dividend to the holding company and Doral Bank NY received regulatory approval to pay a $50 million cash dividend to the holding company, of which $45 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 million floating rate senior notes that matured on July 20, 2007, to settle its pending restatement-related litigation and to pay related transaction expenses. Following the completion of the recapitalization, on August 2, 2007, Doral Financial's newly constituted Board of Directors analyzed the Company's intent of holding available-for-sale securities until maturity or recovery of losses and based on then current market conditions approved the sale of approximately $1.9 billion in available-for-sale investment securities. The sale and the cancellation of related borrowings used to finance these securities were completed on August 8, 2007, at a pre-tax loss of approximately $130 million. FORWARD-LOOKING STATEMENTS This press release 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: potential adverse developments from ongoing enforcement actions by bank regulatory agencies; risks associated with the Company’s contingent obligations regarding recourse arrangements and representations and warranties in connection with its loan sales; risks associated with the potential impact of fluctuating interest rates on Doral Financial’s net interest margin resulting from the current mismatch in its assets and liabilities; Doral Financial’s ability to attract new clients and retain existing clients; Doral Financial’s ability to retain and attract key employees; Doral Financial’s ability to successfully implement new business strategies; Doral Financial’s ability to derive sufficient income to realize the benefits of its deferred tax asset; potential further deterioration in the credit quality of Doral Financial’s loan portfolio; risks associated with the effects of global, national and regional economic and political conditions, including with respect to fluctuations in interest rates; risks arising from worsening economic conditions in Puerto Rico; potential adverse developments in connection with the ongoing grand jury investigation by the U.S. Attorney’s Office for the Southern District of New York; risks associated with Doral Financial’s inability to prepare and timely file financial statements; risks arising from material weaknesses in Doral Financial’s internal control over financial reporting; and developments in the regulatory and legal environment for financial services companies in Puerto Rico and the United States. Doral Financial does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of those statements. Investors should carefully consider these factors and the risk factors outlined under Item 1A, Risk Factors, in Doral Financial’s 2006 Annual Report on Form 10-K.