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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 COMMISSION FILE NUMBER 0-17224
 DORAL FINANCIAL CORPORATION
  Puerto Rico
(State or other jurisdiction of
incorporation or organization)
    
    66-0312162
(I.R.S. employer
identification number)1451 F.D. Roosevelt Avenue,
San Juan, Puerto Rico
(Address of principal
executive offices)
    
    00920-2717
(Zip Code)
 
   o þ
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
  o þ




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##### 



DORAL FINANCIAL CORPORATION
INDEX PAGE
  
 PAGEPART I  FINANCIAL INFORMATION
    
    
    3Item 1 
    
    Financial Statements
    
    
    3Consolidated Statements of Financial Condition (Unaudited) as of September 30,
2005 and December 31, 2004
    
    
    3Consolidated Statements of Income (Unaudited)  Quarters ended September 30,
2005 and September 30, 2004 (As Restated) and nine months ended September 30, 2005
and September 30, 2004 (As Restated)
    
    
    5Consolidated Statements of Changes in Stockholders Equity (Unaudited)  Nine
months ended September 30, 2005 and September 30, 2004 (As Restated)
    
    
    6Consolidated Statements of Comprehensive Income (Unaudited)  Quarters ended
September 30, 2005 and September 30, 2004 (As Restated) and nine months ended
September 30, 2005 and September 30, 2004 (As Restated)
    
    
    7Consolidated Statements of Cash Flows (Unaudited)  Nine months ended September
30, 2005 and September 30, 2004 (As Restated)
    
    
    8Notes to Consolidated Financial Statements (Unaudited)
    
    
    9Item 2 
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    41Item 3 
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    77Item 4 
    
    Controls and Procedures
    
    
    78PART II  OTHER INFORMATION
    
    
    79Item 1 
    
    Legal Proceedings
    
    
    79Item 1A 
    
    Risk Factors
    
    
    79Item 2 
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    79Item 3 
    
    Defaults Upon Senior Securities
    
    
    80Item 4 
    
    Submission of Matters to a Vote of Security Holders
    
    
    80Item 5 
    
    Other Information
    
    
    80Item 6 
    
    Exhibits
    
    
    80SIGNATURES
    
    
    81EX-12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESEX-12.2 COMPUTATION OF RATIO OF EARNING TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDSEX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32.1 SECTION 906, CERTIFICATION OF THE CEOEX-32.2 SECTION 906, CERTIFICATION OF THE CFO
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EXPLANATORY NOTE
    FORWARD LOOKING STATEMENTS
   
    
    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;
    
    risks associated with the effects of global, national and regional economic and
political conditions, including with respect to fluctuations in interest rates;
    
    potential adverse developments in connection with the ongoing Securities and
Exchange Commission (SEC) investigation or the request for information from the
U.S. Attorneys Office for the Southern District of New York;
    
    potential adverse developments from ongoing enforcement actions by bank
regulatory agencies;
    
    potential adverse developments in connection with ongoing shareholder litigation
against the Company;
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
    
    risks associated with the Companys inability to prepare and timely file financial statements;
    
    potential further downgrades in the credit ratings of the Companys securities;
    
    risks arising from material weaknesses in the Companys internal control over
financial reporting; and
    
    developments from changes in the regulatory and legal environment for financial
services companies in Puerto Rico and the United States.
   2




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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 (IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
 (UNAUDITED)
 SEPTEMBER 30,
    
    
    DECEMBER 31,2005
    
    
    2004ASSETSCash and due from banks
    
    $
    81,183
    
    
    $
    64,940Money market investments:Money market investments with creditors right to repledge
    
    
    517,877
    
    
    
    806,849Other money market investments
    
    
    1,278,244
    
    
    
    1,663,937Total money market investments
    
    
    1,796,121
    
    
    
    2,470,786Pledged investment securities that can be repledged:Securities held for trading, at fair value (includes fair value of IOs of $11,562 in 2005;
$14,673 in 2004)
    
    
    202,770
    
    
    
    283,372Securities available for sale, at fair value
    
    
    5,955,047
    
    
    
    4,224,168Securities held to maturity, at amortized cost (market value of $2,010,414 in 2005;
$2,062,312 in 2004)
    
    
    2,046,572
    
    
    
    2,100,303Total pledged investment securities that can be repledged
    
    
    8,204,389
    
    
    
    6,607,843Other investment securities:Securities held for trading, at fair value (includes fair value of IOs of $76,689
in 2005; $112,688 in 2004)
    
    
    247,516
    
    
    
    205,698Securities available for sale, at fair value
    
    
    200,797
    
    
    
    758,340Securities held to maturity, at amortized cost (market value of $70,169 in 2005; $191,381 in 2004)
    
    
    70,079
    
    
    
    201,392Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    72,620
    
    
    
    86,120Total other investment securities
    
    
    591,012
    
    
    
    1,251,550Total investment securities
    
    
    8,795,401
    
    
    
    7,859,393Loans:Mortgage loans held for sale, at lower of cost or market, pledged with creditors right to repledge
    
    
    3,656,475
    
    
    
    3,282,152Other mortgage loans held for sale, at lower of cost or market
    
    
    1,643,911
    
    
    
    1,640,355Loans receivable, net of allowance for loan and lease losses (2005 - $30,858; 2004 - $20,881)
    
    
    2,198,344
    
    
    
    1,747,699Total loans
    
    
    7,498,730
    
    
    
    6,670,206Receivables and mortgage-servicing advances
    
    
    76,837
    
    
    
    99,727Accounts receivable from investment sales
    
    
    272,471
    
    
    
    40,052Accrued interest receivable
    
    
    76,981
    
    
    
    73,547Servicing assets, net
    
    
    142,905
    
    
    
    123,586Premises and equipment, net
    
    
    151,412
    
    
    
    146,551Real estate held for sale, net
    
    
    21,669
    
    
    
    20,072Deferred tax asset
    
    
    214,894
    
    
    
    217,024Other assets
    
    
    70,838
    
    
    
    49,778Total assets
    
    $
    19,199,442
    
    
    $
    17,835,662LIABILITIESDeposits:Non-interest-bearing deposits
    
    $
    467,282
    
    
    $
    459,360Interest-bearing deposits
    
    
    3,638,043
    
    
    
    3,183,720Securities sold under agreements to repurchase
    
    
    7,629,913
    
    
    
    6,305,163Advances from FHLB
    
    
    1,079,500
    
    
    
    1,294,500Loans payable
    
    
    3,762,747
    
    
    
    3,638,507Notes payable
    
    
    1,080,970
    
    
    
    1,095,977Accounts payable from investment purchases
    
    
    60,475
    
    
    
    325,740Accrued expenses and other liabilities
    
    
    275,714
    
    
    
    248,078Total liabilities
    
    
    17,994,644
    
    
    
    16,551,045Commitments and contingencies (Note w)STOCKHOLDERS EQUITY
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SEPTEMBER 30,
    
    
    DECEMBER 31,2005
    
    
    2004Preferred stock, $1 par value; 40,000,000 shares authorized; 9,015,000 shares issued and outstanding
in 2005 and 2004, at aggregate liquidation preference value:Perpetual noncumulative nonconvertible preferred stock (Series A, B and C)
    
    
    228,250
    
    
    
    228,250Perpetual cumulative convertible preferred stock
    
    
    345,000
    
    
    
    345,000Common stock, $1 par value; 500,000,000 shares authorized; 107,930,236 and 107,908,862
shares issued and outstanding in 2005 and 2004, respectively
    
    
    107,930
    
    
    
    107,909Additional paid-in capital
    
    
    169,019
    
    
    
    161,639Legal surplus
    
    
    22,716
    
    
    
    22,716Retained earnings
    
    
    466,904
    
    
    
    492,786Accumulated
other comprehensive loss, net of income tax benefit of $20,017 in 2005 and $4,591 in 2004
    
    
    (135,021
    )
    
    
    (73,683
    )Total stockholders equity
    
    
    1,204,798
    
    
    
    1,284,617Total liabilities and stockholders equity
    
    $
    19,199,442
    
    
    $
    17,835,662
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME
 (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
 (UNAUDITED)
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,2004
    
    
    
    
    
    
    20042005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Interest income:Loans
    
    $
    125,412
    
    
    $
    108,294
    
    
    $
    360,054
    
    
    $
    310,378Mortgage-backed securities
    
    
    56,741
    
    
    
    28,433
    
    
    
    169,615
    
    
    
    63,520Interest-only strips (IOs)
    
    
    2,799
    
    
    
    3,312
    
    
    
    8,640
    
    
    
    9,920Investment securities
    
    
    41,324
    
    
    
    41,824
    
    
    
    106,092
    
    
    
    120,574Other interest-earning assets
    
    
    20,847
    
    
    
    4,932
    
    
    
    54,646
    
    
    
    13,160Total interest income
    
    
    247,123
    
    
    
    186,795
    
    
    
    699,047
    
    
    
    517,552Interest expense:Deposits
    
    
    29,326
    
    
    
    20,211
    
    
    
    74,961
    
    
    
    58,692Securities sold under agreements to repurchase
    
    
    73,957
    
    
    
    31,463
    
    
    
    184,050
    
    
    
    79,547Advances from FHLB
    
    
    12,397
    
    
    
    12,611
    
    
    
    37,931
    
    
    
    36,755Loans payable
    
    
    51,051
    
    
    
    22,707
    
    
    
    145,337
    
    
    
    59,150Notes payable
    
    
    15,236
    
    
    
    10,129
    
    
    
    42,293
    
    
    
    33,175Total interest expense
    
    
    181,967
    
    
    
    97,121
    
    
    
    484,572
    
    
    
    267,319Net interest income
    
    
    65,156
    
    
    
    89,674
    
    
    
    214,475
    
    
    
    250,233Provision for loan and lease losses
    
    
    9,370
    
    
    
    5,344
    
    
    
    17,075
    
    
    
    10,594Net interest income after provision for loan and lease losses
    
    
    55,786
    
    
    
    84,330
    
    
    
    197,400
    
    
    
    239,639Non-interest income (loss):Net gain on mortgage loan sales and fees
    
    
    18,580
    
    
    
    26,806
    
    
    
    41,907
    
    
    
    68,690Net gain
(loss) on securities held for trading, including gains and
losses on the fair value of IOs
    
    
    28,094
    
    
    
    (41,026
    )
    
    
    (8,333
    )
    
    
    (90,186
    )Net (loss) gain on sale of investment securities
    
    
    (1,999
    )
    
    
    10,548
    
    
    
    7,559
    
    
    
    10,614Servicing
income (loss), net of amortization and impairment/recovery
    
    
    25,443
    
    
    
    (8,790
    )
    
    
    15,576
    
    
    
    (1,979
    )Commissions, fees and other income
    
    
    10,290
    
    
    
    9,322
    
    
    
    26,235
    
    
    
    24,249Total non-interest income (loss)
    
    
    80,408
    
    
    
    (3,140
    )
    
    
    82,944
    
    
    
    11,388Non-interest expenses:Compensation and benefits
    
    
    23,639
    
    
    
    21,751
    
    
    
    72,907
    
    
    
    64,600Taxes, other than payroll and income taxes
    
    
    2,787
    
    
    
    2,389
    
    
    
    7,513
    
    
    
    6,857Advertising
    
    
    4,044
    
    
    
    3,366
    
    
    
    12,972
    
    
    
    10,669Professional services
    
    
    17,985
    
    
    
    3,053
    
    
    
    33,221
    
    
    
    8,080Communication and information systems
    
    
    4,391
    
    
    
    3,610
    
    
    
    13,779
    
    
    
    10,198Occupancy and other office expenses
    
    
    8,320
    
    
    
    7,207
    
    
    
    23,665
    
    
    
    19,599Depreciation and amortization
    
    
    5,424
    
    
    
    4,345
    
    
    
    15,506
    
    
    
    12,582Other
    
    
    3,686
    
    
    
    8,969
    
    
    
    12,755
    
    
    
    20,763Total non-interest expenses
    
    
    70,276
    
    
    
    54,690
    
    
    
    192,318
    
    
    
    153,348Income before income taxes
    
    
    65,918
    
    
    
    26,500
    
    
    
    88,026
    
    
    
    97,679Income tax expense
    
    
    (24,989
    )
    
    
    (2,417
    )
    
    
    (30,655
    )
    
    
    (9,037
    )Net income
    
    $
    40,929
    
    
    $
    24,083
    
    
    $
    57,371
    
    
    $
    88,642Net income attributable to common shareholders
    
    $
    32,605
    
    
    $
    15,759
    
    
    $
    32,397
    
    
    $
    63,668Net income per common share:Basic
    
    $
    0.30
    
    
    $
    0.14
    
    
    $
    0.30
    
    
    $
    0.59Diluted
    
    $
    0.30
    
    
    $
    0.14
    
    
    $
    0.29
    
    
    $
    0.57Dividends per common share
    
    $
    0.18
    
    
    $
    0.15
    
    
    $
    0.54
    
    
    $
    0.42
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 (IN THOUSANDS)
 (UNAUDITED)
 NINE MONTH PERIOD ENDEDSEPTEMBER 30,20042005
    
    
    (As Restated)PREFERRED STOCK
    
    $
    573,250
    
    
    $
    573,250COMMON STOCK:Balance at beginning of period
    
    
    107,909
    
    
    
    107,904Shares issued under stock option plan
    
    
    21
    
    
    
    4Balance at end of period
    
    
    107,930
    
    
    
    107,908ADDITIONAL PAID-IN CAPITAL:Balance at beginning of period
    
    
    161,639
    
    
    
    151,902Common shares issued under stock option plan
    
    
    98
    
    
    
    28Stock-based compensation recognized
    
    
    7,282
    
    
    
    7,282Balance at end of period
    
    
    169,019
    
    
    
    159,212LEGAL SURPLUS
    
    
    22,716
    
    
    
    14,155RETAINED EARNINGS:Balance at beginning of period
    
    
    492,786
    
    
    
    384,596Net income
    
    
    57,371
    
    
    
    88,642Cash dividends declared on common stock
    
    
    (58,279
    )
    
    
    (45,321
    )Cash dividends declared on preferred stock
    
    
    (24,974
    )
    
    
    (24,974
    )Balance at end of period
    
    
    466,904
    
    
    
    402,943ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME,
NET OF TAX:Balance at beginning of period
    
    
    (73,683
    )
    
    
    (49,445
    )Other comprehensive loss, net of deferred tax
    
    
    (61,338
    )
    
    
    (15,593
    )Balance at end of period
    
    
    (135,021
    )
    
    
    (65,038
    )Total stockholders equity
    
    $
    1,204,798
    
    
    $
    1,192,430
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (IN THOUSANDS)
 (UNAUDITED)
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,2004
    
    
    
    
    
    
    20042005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Net income
    
    $
    40,929
    
    
    $
    24,083
    
    
    $
    57,371
    
    
    $
    88,642Other comprehensive (loss) income, before tax:Unrealized (losses) gains on securities arising during the period
    
    
    (96,323
    )
    
    
    57,527
    
    
    
    (69,237
    )
    
    
    (4,826
    )Amortization of unrealized loss on securities reclassified to
held to maturity
    
    
    10
    
    
    
    11
    
    
    
    32
    
    
    
    25Reclassification of realized losses (gains) included in net income
    
    
    1,999
    
    
    
    (10,548
    )
    
    
    (7,559
    )
    
    
    (10,614
    )Other comprehensive (loss) income, before tax
    
    
    (94,314
    )
    
    
    46,990
    
    
    
    (76,764
    )
    
    
    (15,415
    )Income tax benefit (expense) related to items of other comprehensive
(loss) income
    
    
    17,639
    
    
    
    (8,694
    )
    
    
    15,426
    
    
    
    (178
    )Other comprehensive (loss) income
    
    
    (76,675
    )
    
    
    38,296
    
    
    
    (61,338
    )
    
    
    (15,593
    )Comprehensive (loss) income, net of tax
    
    $
    (35,746
    )
    
    $
    62,379
    
    
    $
    (3,967
    )
    
    $
    73,049
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (UNAUDITED)
 NINE MONTH PERIOD ENDEDSEPTEMBER 30,20042005
    
    
    (As Restated)Cash flows from operating activities:Net income
    
    $
    57,371
    
    
    $
    88,642Adjustments to reconcile net income to net cash used in by operating activities:Stock-based compensation recognized
    
    
    7,282
    
    
    
    7,282Depreciation and amortization
    
    
    15,506
    
    
    
    12,582Amortization and impairment of servicing assets
    
    
    17,021
    
    
    
    32,699Deferred tax provision (benefit)
    
    
    16,607
    
    
    
    (19,106
    )Provision for loan and lease losses
    
    
    17,075
    
    
    
    10,594Amortization of premium and accretion of discount on loans, investment securities and debt
    
    
    16,311
    
    
    
    742Origination and purchases of mortgage loans held for sale
    
    
    (3,909,319
    )
    
    
    (3,465,803
    )Principal repayment and sales of mortgage loans held for sale
    
    
    2,477,706
    
    
    
    2,329,847Unrealized loss (gain) on securities held for trading
    
    
    1,690
    
    
    
    (4,167
    )Purchases of securities held for trading
    
    
    (2,159,515
    )
    
    
    (2,124,826
    )Principal repayment and sales of trading securities
    
    
    2,762,405
    
    
    
    3,053,911Amortization and gain or loss in the fair value of IOs
    
    
    50,091
    
    
    
    31,624Unrealized
(gain) loss on derivative instruments
    
    
    (54,190
    )
    
    
    13,703Decrease (increase) in derivative instruments
    
    
    20,463
    
    
    
    (3,638
    )Purchase of servicing assets
    
    
    (3,404
    )
    
    
    (3,614
    )Decrease (increase) in receivables and mortgage servicing advances
    
    
    22,890
    
    
    
    (5,003
    )(Increase) decrease in accrued interest receivable
    
    
    (3,434
    )
    
    
    1,738Increase in other assets
    
    
    (20,136
    )
    
    
    (12,323
    )Increase in accrued expenses and other liabilities
    
    
    48,189
    
    
    
    28,580Total adjustments
    
    
    (676,762
    )
    
    
    (115,178
    )Net cash used in by operating activities
    
    
    (619,391
    )
    
    
    (26,536
    )Cash flows from investing activities:Purchases of securities available for sale
    
    
    (5,595,630
    )
    
    
    (10,684,952
    )Principal repayments and sales of securities available for sale
    
    
    4,218,876
    
    
    
    8,934,439Purchases of securities held to maturity
    
    
    (100,000
    )
    
    
    (1,110,170
    )Principal repayment and maturities of securities held to maturity
    
    
    297,081
    
    
    
    269,992Decrease (increase) in FHLB stock
    
    
    13,500
    
    
    
    (4,400
    )Origination of loans receivable
    
    
    (849,297
    )
    
    
    (771,264
    )Principal repayment of loans receivable
    
    
    364,550
    
    
    
    553,139Purchases of premises and equipment
    
    
    (20,367
    )
    
    
    (22,553
    )Proceeds from sales of real estate held for sale
    
    
    34,149
    
    
    
    14,963Net cash used in investing activities
    
    
    (1,637,138
    )
    
    
    (2,820,806
    )Cash flows from financing activities:Increase in deposits
    
    
    462,245
    
    
    
    449,541Increase in securities sold under agreements to repurchase
    
    
    1,324,750
    
    
    
    2,295,608Proceeds from advances from FHLB
    
    
    50,000
    
    
    
    205,000Repayment of advances from FHLB
    
    
    (265,000
    )
    
    
    (117,000
    )Increase in loans payable:Decrease in warehousing lines and other credit facilities
    
    
    (238,924
    )
    
    
    (1,130
    )Proceeds from secured borrowings, pledged to creditors
    
    
    880,746
    
    
    
    1,060,169Repayment of secured borrowings, pledged to creditors
    
    
    (517,582
    )
    
    
    (355,633
    )Proceeds from issuance of notes payable
    
    
    
    
    
    
    739,311Repayment of notes payable
    
    
    (14,994
    )
    
    
    (205,808
    )Issuance of common stock, net
    
    
    119
    
    
    
    32Dividends paid
    
    
    (83,253
    )
    
    
    (70,295
    )Net cash provided by financing activities
    
    
    1,598,107
    
    
    
    3,999,795Net (decrease) increase in cash and cash equivalents
    
    
    (658,422
    )
    
    
    1,152,453Cash and cash equivalents at beginning of period
    
    
    2,535,726
    
    
    
    954,722Cash and cash equivalents at the end of period
    
    $
    1,877,304
    
    
    $
    2,107,175Cash and cash equivalents includes:Cash and due from banks
    
    $
    81,183
    
    
    $
    82,858Money market investments
    
    
    1,796,121
    
    
    
    2,024,317$
    1,877,304
    
    
    $
    2,107,175Supplemental schedule of non-cash activities:Loan securitizations
    
    $
    978,775
    
    
    $
    604,536Loans foreclosed
    
    $
    35,142
    
    
    $
    16,544Supplemental information for cash flows:Cash used to pay interest
    
    $
    494,157
    
    
    $
    270,714Cash used to pay income taxes
    
    $
    39,748
    
    
    $
    39,745
  8




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##### Table of Contents



DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 a.
    
    The Consolidated Financial Statements (unaudited) include the accounts of Doral Financial
Corporation (Doral Financial or the Company), Doral Mortgage Corporation (Doral
Mortgage), SANA Mortgage Corporation (SANA), Centro Hipotecario de Puerto Rico, Inc., Doral
Securities, Inc. (Doral Securities), Doral Bank (Doral Bank PR), Doral Bank, FSB (Doral
Bank NY), Doral Money, Inc. (Doral Money), Doral International, Inc. (Doral
International), Doral Properties, Inc. (Doral Properties), Doral Insurance Agency, Inc.
(Doral Agency) and CB, LLC. References herein to Doral Financial or the Company shall
be deemed to refer to the Company and its consolidated subsidiaries, unless otherwise
provided. All significant intercompany accounts and transactions have been eliminated in
consolidation. The Consolidated Financial Statements (unaudited) have been prepared in
conformity with the accounting policies stated in the Companys Annual Audited Financial
Statements included in the Companys amended Annual Report on Form 10-K for the year ended
December 31, 2004. Certain information and note disclosure normally included in the financial
statements prepared in accordance with generally accepted accounting principles in the United
States of America (GAAP) have been condensed or omitted from these statements pursuant to
the rules and regulations of the SEC and, accordingly, these financial statements should be
read in conjunction with the audited Consolidated Financial Statements of the Company for the
year ended December 31, 2004, included in the Companys amended 2004 Annual Report on Form
10-K. All adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the statement of financial position, results of
operations and cash flows for the interim periods have been reflected.b.
    
    The results of operations for the quarter and nine month period ended September 30, 2005 are
not necessarily indicative of the results to be expected for the full year.c.
    
    As previously reported in the Companys amended Form 10-K for the year ended December 31,
2004 filed with the SEC on February 27, 2006, the Company restated its audited financial
statements for the years ended December 31, 2004, 2003 and 2002 and unaudited selected
quarterly financial data for each of the four quarters of 2004, 2003 and 2002 to correct
accounting errors and departures from GAAP. The following provides a brief description of the
principal accounting adjustments included in the restatement of the Companys consolidated
financial statements and the effect of the adjustments on the Companys Consolidated
Statements of Financial Condition as of September 30, 2004, its Consolidated Statements of
Income for the quarter and nine-month period ended September 30, 2004 and its Consolidated
Statements of Cash Flows for the nine-month period ended September 30, 2004. All financial
information for the quarter and nine-month period ended September 30, 2004 included in any
subsequent notes is presented on a restated basis. A more detailed description of the
accounting adjustments made in connection with the restatement, as well as a background
discussion of the restatement, is included in Note 1 Restatement of Previously Issued
Financial Statements  Summary of Accounting Adjustments by Category to Doral Financial
audited Consolidated Financial Statements, included in the Companys amended 2004 Annual
Report on Form 10-K.As part of the restatement process, the Companys management identified a number of material
weaknesses in the Companys internal control over financial reporting as of December 31,
2004, including a material weakness in the Companys control environment. These material
weaknesses resulted in the restatement of the Companys consolidated financial statements
for the years ended December 31, 2004, 2003 and 2002 and for each of the quarters of 2004
and 2003.The Company classified the accounting practices and related adjustments that were affected
by the restatement into six categories, as set forth below. The classification involves
subjective judgments by management, and particular accounting errors may fall within more
than one category.Recharacterization of mortgage loan sale transactions as secured borrowings.In prior
periods, the Company had inaccurately recorded as sales certain transfers of mortgage loans
to certain local financial
 9




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Valuation of IOs.
 
    
    Use of implied forward LIBOR rates;
    
    Market-based prepayment and discount rate determination methodology; and
    
    Separate valuation of elements of the IO, including variable or fixed
spread, as well as caps and floors.
  Accounting for servicing assets
 Accounting for derivative instruments and investment securities
 Provision for loan and lease losses.
 10




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Other accounting adjustments.
 Miscellaneous adjustments.
  Quarter Ended
    
    
    Nine Month PeriodSeptember 30,
    
    
    Ended September 30,2004
    
    
    2004Net income, as previously reported
    
    $
    120,628
    
    
    $
    339,111Pre-tax restatement adjustments:Recharacterization of mortgage loan sale transactions as
secured borrowings
    
    
    (50,706
    )
    
    
    (187,534
    )Valuation of IOs
    
    
    (38,603
    )
    
    
    (74,261
    )Accounting for servicing assets
    
    
    (21,243
    )
    
    
    (21,586
    )Accounting for derivative instruments and investment securities
    
    
    (6,082
    )
    
    
    (16,812
    )Provision for loan and lease losses
    
    
    (5,058
    )
    
    
    (7,310
    )Other accounting adjustments
    
    
    1,977
    
    
    
    (7,419
    )Total pre-tax restatement adjustments
    
    
    (119,715
    )
    
    
    (314,922
    )Income tax impact of restatement adjustments
    
    
    23,170
    
    
    
    64,453Total net restatement adjustments
    
    $
    (96,545
    )
    
    $
    (250,469
    )Net income, as restated
    
    $
    24,083
    
    
    $
    88,642Basic earnings per common share, as previously reported
    
    $
    1.04
    
    
    $
    2.91Effect of adjustments
    
    
    (0.90
    )
    
    
    (2.34
    )Basic earnings per common share, as restated
    
    $
    0.14
    
    
    $
    0.57Diluted earnings per common share, as previously reported
    
    $
    1.01
    
    
    $
    2.83Effect of adjustments
    
    
    (0.87
    )
    
    
    (2.26
    )Diluted earnings per common share, as restated
    
    $
    0.14
    
    
    $
    0.57
  11




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 RECONCILIATION OF PREVIOUSLY REPORTED TO RESTATED FIGURES  CONSOLIDATED STATEMENT OF INCOME
 Quarter Ended September 30, 2004Previously
    
    
    
    
    
    
    As(Dollars in Thousands, except per share information)
    
    Reported
    
    
    Adjustments
    
    
    RestatedInterest income:Loans
    
    $
    58,270
    
    
    $
    50,024
    
    
    $
    108,294Mortgage-backed securities
    
    
    27,667
    
    
    
    766
    
    
    
    28,433Interest-only strips (IOs)
    
    
    14,107
    
    
    
    (10,795
    )
    
    
    3,312Investment securities
    
    
    41,423
    
    
    
    401
    
    
    
    41,824Other interest-earning assets
    
    
    4,932
    
    
    
    
    
    
    
    4,932Total interest income
    
    
    146,399
    
    
    
    40,396
    
    
    
    186,795Interest Expense:Deposits
    
    
    20,211
    
    
    
    
    
    
    
    20,211Securities sold under agreements to repurchase
    
    
    31,463
    
    
    
    
    
    
    
    31,463Advances from FHLB
    
    
    12,611
    
    
    
    
    
    
    
    12,611Loans payable
    
    
    1,500
    
    
    
    21,207
    
    
    
    22,707Notes payable
    
    
    10,760
    
    
    
    (631
    )
    
    
    10,129Total interest expenses
    
    
    76,545
    
    
    
    20,576
    
    
    
    97,121Net interest income
    
    
    69,854
    
    
    
    19,820
    
    
    
    89,674Provision for loan and lease losses
    
    
    325
    
    
    
    5,019
    
    
    
    5,344Net interest income after provision for loan and lease losses
    
    
    69,529
    
    
    
    14,801
    
    
    
    84,330Non-interest income:Net gain on mortgage loan sales and fees
    
    
    165,480
    
    
    
    (138,674
    )
    
    
    26,806Net loss on securities held for trading
    
    
    (61,290
    )
    
    
    20,264
    
    
    
    (41,026
    )Net gain on sale of investment securities
    
    
    10,548
    
    
    
    
    
    
    
    10,548Servicing income (loss), net of amortization and impairment
    
    
    5,928
    
    
    
    (14,718
    )
    
    
    (8,790
    )Commissions, fees and other income
    
    
    10,241
    
    
    
    (919
    )
    
    
    9,322Total non-interest income
    
    
    130,907
    
    
    
    (134,047
    )
    
    
    (3,140
    )Non-interest expenses:Compensation and benefits
    
    
    23,630
    
    
    
    (1,879
    )
    
    
    21,751Taxes, other than payroll and income taxes
    
    
    2,389
    
    
    
    
    
    
    
    2,389Advertising
    
    
    3,366
    
    
    
    
    
    
    
    3,366Professional services
    
    
    3,053
    
    
    
    
    
    
    
    3,053Communication and information systems
    
    
    3,610
    
    
    
    
    
    
    
    3,610Occupancy and other office expenses
    
    
    7,105
    
    
    
    102
    
    
    
    7,207Depreciation and amortization
    
    
    4,345
    
    
    
    
    
    
    
    4,345Other
    
    
    6,723
    
    
    
    2,246
    
    
    
    8,969Total non-interest expenses
    
    
    54,221
    
    
    
    469
    
    
    
    54,690Income before income taxes
    
    
    146,215
    
    
    
    (119,715
    )
    
    
    26,500Income tax expense
    
    
    (25,587
    )
    
    
    23,170
    
    
    
    (2,417
    )Net Income
    
    $
    120,628
    
    
    $
    (96,545
    )
    
    $
    24,083Net income per common share:Basic
    
    $
    1.04
    
    
    $
    (0.90
    )
    
    $
    0.14Diluted
    
    $
    1.01
    
    
    $
    (0.87
    )
    
    $
    0.14
 12




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 RECONCILIATION OF PREVIOUSLY REPORTED TO RESTATED FIGURES
CONSOLIDATED STATEMENT OF INCOME
 Nine Month Period EndedSeptember 30, 2004Previously
    
    
    
    
    
    
    As(Dollars in Thousands, except per share information)
    
    Reported
    
    
    Adjustments
    
    
    RestatedInterest income:Loans
    
    $
    175,149
    
    
    $
    135,229
    
    
    $
    310,378Mortgage-backed securities
    
    
    61,989
    
    
    
    1,531
    
    
    
    63,520Interest-only strips (IOs)
    
    
    40,897
    
    
    
    (30,977
    )
    
    
    9,920Investment securities
    
    
    119,240
    
    
    
    1,334
    
    
    
    120,574Other interest-earning assets
    
    
    13,160
    
    
    
    
    
    
    
    13,160Total interest income
    
    
    410,435
    
    
    
    107,117
    
    
    
    517,552Interest Expense:Deposits
    
    
    58,692
    
    
    
    
    
    
    
    58,692Securities sold under agreements to repurchase
    
    
    79,547
    
    
    
    
    
    
    
    79,547Advances from FHLB
    
    
    36,755
    
    
    
    
    
    
    
    36,755Loans payable
    
    
    4,628
    
    
    
    54,522
    
    
    
    59,150Notes payable
    
    
    35,260
    
    
    
    (2,085
    )
    
    
    33,175Total interest expenses
    
    
    214,882
    
    
    
    52,437
    
    
    
    267,319Net interest income
    
    
    195,553
    
    
    
    54,680
    
    
    
    250,233Provision for loan and lease losses
    
    
    4,498
    
    
    
    6,096
    
    
    
    10,594Net interest income after provision for loan and lease losses
    
    
    191,055
    
    
    
    48,584
    
    
    
    239,639Non-interest income:Net gain on mortgage loan sales and fees
    
    
    432,922
    
    
    
    (364,232
    )
    
    
    68,690Net loss on securities held for trading
    
    
    (103,856
    )
    
    
    13,670
    
    
    
    (90,186
    )Net gain on sale of investment securities
    
    
    9,209
    
    
    
    1,405
    
    
    
    10,614Servicing income (loss), net of amortization and impairment
    
    
    5,272
    
    
    
    (7,251
    )
    
    
    (1,979
    )Commissions, fees and other income
    
    
    28,702
    
    
    
    (4,453
    )
    
    
    24,249Total non-interest income
    
    
    372,249
    
    
    
    (360,861
    )
    
    
    11,388Non-interest expenses:Compensation and benefits
    
    
    65,663
    
    
    
    (1,063
    )
    
    
    64,600Taxes, other than payroll and income taxes
    
    
    6,857
    
    
    
    
    
    
    
    6,857Advertising
    
    
    10,669
    
    
    
    
    
    
    
    10,669Professional services
    
    
    8,080
    
    
    
    
    
    
    
    8,080Communication and information systems
    
    
    10,198
    
    
    
    
    
    
    
    10,198Occupancy and other office expenses
    
    
    19,283
    
    
    
    316
    
    
    
    19,599Depreciation and amortization
    
    
    12,928
    
    
    
    (346
    )
    
    
    12,582Other
    
    
    17,025
    
    
    
    3,738
    
    
    
    20,763Total non-interest expenses
    
    
    150,703
    
    
    
    2,645
    
    
    
    153,348Income before income taxes
    
    
    412,601
    
    
    
    (314,922
    )
    
    
    97,679Income tax expense
    
    
    (73,490
    )
    
    
    64,453
    
    
    
    (9,037
    )Net Income
    
    $
    339,111
    
    
    $
    (250,469
    )
    
    $
    88,642Net income per common share:Basic
    
    $
    2.91
    
    
    $
    (2.32
    )
    
    $
    0.59Diluted
    
    $
    2.83
    
    
    $
    (2.26
    )
    
    $
    0.57
 13




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  RECONCILIATION OF PREVIOUSLY REPORTED TO RESTATED FIGURES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
 September 30, 2004Previously
    
    
    
    
    
    
    As(Dollars in Thousands, except share information)
    
    Reported
    
    
    Adjustments
    
    
    RestatedAssetsCash and due from banks
    
    $
    82,858
    
    
    $
    
    
    
    $
    82,858Money market investments
    
    
    2,024,317
    
    
    
    
    
    
    
    2,024,317Investment securities:Securities held for trading, at fair value
    
    
    1,220,437
    
    
    
    (723,410
    )
    
    
    497,027Securities available for sale, at fair value
    
    
    4,445,982
    
    
    
    
    
    
    
    4,445,982Securities held to maturity, at amortized cost
    
    
    2,492,435
    
    
    
    (16,144
    )
    
    
    2,476,291Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    86,120
    
    
    
    
    
    
    
    86,120Total investment securities
    
    
    8,244,974
    
    
    
    (739,554
    )
    
    
    7,505,420Loans:Mortgage loans held for sale, at lower of cost or market
    
    
    1,638,683
    
    
    
    2,563,053
    
    
    
    4,201,736Loans receivable, net of allowance for loan and lease losses
    
    
    1,626,249
    
    
    
    (6,193
    )
    
    
    1,620,056Total loans
    
    
    3,264,932
    
    
    
    2,556,860
    
    
    
    5,821,792Receivables and mortgage-servicing advances
    
    
    99,668
    
    
    
    (9,230
    )
    
    
    90,438Accounts receivable from investment sales
    
    
    726,094
    
    
    
    
    
    
    
    726,094Accrued interest receivable
    
    
    60,772
    
    
    
    3,729
    
    
    
    64,501Servicing assets, net
    
    
    191,713
    
    
    
    (73,175
    )
    
    
    118,538Premises and equipment, net
    
    
    145,661
    
    
    
    
    
    
    
    145,661Real estate held for sale, net
    
    
    20,287
    
    
    
    (537
    )
    
    
    19,750Deferred tax asset
    
    
    
    
    
    
    96,969
    
    
    
    96,969Other assets
    
    
    40,091
    
    
    
    
    
    
    
    40,091Total assets
    
    $
    14,901,367
    
    
    $
    1,835,062
    
    
    $
    16,736,429LiabilitiesDeposits
    
    
    3,420,813
    
    
    $
    
    
    
    $
    3,420,813Securities sold under agreements to repurchase
    
    
    5,898,550
    
    
    
    
    
    
    
    5,898,550Advances from FHLB
    
    
    1,294,500
    
    
    
    
    
    
    
    1,294,500Loans payable
    
    
    177,204
    
    
    
    2,540,385
    
    
    
    2,717,589Notes payable
    
    
    1,106,367
    
    
    
    (10,123
    )
    
    
    1,096,244Accounts payable from investment purchases
    
    
    879,895
    
    
    
    
    
    
    
    879,895Accrued expenses and other liabilities
    
    
    268,371
    
    
    
    (31,963
    )
    
    
    236,408Total liabilities
    
    
    13,045,700
    
    
    
    2,498,299
    
    
    
    15,543,999Stockholders EquityPreferred stock, $1 par value; 40,000,000 shares authorized;
9,015,000 shares issued and outstanding at aggregate liquidation
preference value:Perpetual noncumulative nonconvertible preferred stock (Series
A,B and C)
    
    
    228,250
    
    
    
    
    
    
    
    228,250Perpetual cumulative convertible preferred stock
    
    
    345,000
    
    
    
    
    
    
    
    345,000Common stock, $1 par value; 500,000,000 shares authorized;
107,908,412 shares issued and outstanding
    
    
    107,908
    
    
    
    
    
    
    
    107,908Additional paid-in capital
    
    
    159,212
    
    
    
    
    
    
    
    159,212Legal surplus
    
    
    13,806
    
    
    
    349
    
    
    
    14,155Retained earnings
    
    
    1,073,334
    
    
    
    (670,391
    )
    
    
    402,943Accumulated other comprehensive loss, net of income tax
    
    
    (71,843
    )
    
    
    6,805
    
    
    
    (65,038
    )Total stockholders equity
    
    
    1,855,667
    
    
    
    (663,237
    )
    
    
    1,192,430Total liabilities and stockholders equity
    
    $
    14,901,367
    
    
    $
    1,835,062
    
    
    $
    16,736,429
 14




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  RECONCILIATION OF PREVIOUSLY REPORTED TO RESTATED FIGURES
SUMMARY OF CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Month PeriodEnded September 30, 2004Previously
    
    
    
    
    
    As(Dollars in thousands)
    
    Reported
    
    Adjustments
    
    RestatedNet cash used in operating activities
    
    $
    (914,151
    )
    
    $
    887,615
    
    
    $
    (26,536
    )Net cash used in investing activities
    
    
    (1,198,631
    )
    
    
    (1,622,175
    )
    
    
    (2,820,806
    )Net cash provided by financing activities
    
    
    3,265,235
    
    
    
    734,560
    
    
    
    3,999,795
 d.
    
    At September 30, 2005, escrow funds and custodial accounts included approximately $134.8
million deposited with Doral Bank PR. These funds are included in the Companys consolidated
financial statements. Escrow funds and custodial accounts also included approximately $60.0
million deposited with other banks, which are excluded from the Companys assets and
liabilities. The Company had fidelity bond and errors and omissions coverage of $35.0 million
and $16.0 million, respectively, as of September 30, 2005.e.
    
    The reconciliation of the numerator and denominator of the basic and diluted
earnings-per-share follows:
 15




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Quarter Ended
    
    
    Nine Month Period EndedSeptember 30,
    
    
    September 30,2004
    
    
    
    
    
    
    2004(Dollars in thousands, except per share amounts)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Net Income:Net income
    
    $
    40,929
    
    
    $
    24,083
    
    
    $
    57,371
    
    
    $
    88,642Convertible preferred stock dividend
    
    
    (4,096
    )
    
    
    (4,096
    )
    
    
    (12,290
    )
    
    
    (12,290
    )Nonconvertible preferred stock dividend
    
    
    (4,228
    )
    
    
    (4,228
    )
    
    
    (12,684
    )
    
    
    (12,684
    )Net income attributable to common shareholders
    
    $
    32,605
    
    
    $
    15,759
    
    
    $
    32,397
    
    
    $
    63,668Weighted-Average Shares(1) (2):Basic weighted-average number of common shares outstanding
    
    
    107,930,236
    
    
    
    107,908,216
    
    
    
    107,925,959
    
    
    
    107,907,339Incremental shares issuable upon exercise of stock options
    
    
    1,435,617
    
    
    
    3,261,632
    
    
    
    2,224,044
    
    
    
    3,000,574Diluted weighted-average number of common shares outstanding
    
    
    109,365,853
    
    
    
    111,169,848
    
    
    
    110,150,003
    
    
    
    110,907,913Net Income per Common Share:Basic
    
    $
    0.30
    
    
    $
    0.14
    
    
    $
    0.30
    
    
    $
    0.59Diluted
    
    $
    0.30
    
    
    $
    0.14
    
    
    $
    0.29
    
    
    $
    0.57
 
 (1)
    
    For the quarter and nine month period ended September 30, 2005 and 2004, there were 1,380,000 shares of the Companys 4.75% Perpetual
cumulative convertible preferred stock that were excluded from the computation of diluted earnings per share because their effect would have been
antidilutive. Each share of convertible preferred stock is currently convertible into 6.2856 shares of common stock, subject to adjustment under
specific conditions. The option of the purchasers to convert the convertible preferred stock into shares of the Companys common stock is
exercisable only (a) if during any fiscal quarter after September 30, 2003, the closing sale price of the Companys common stock for at least 20
trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter exceeds 120% of the conversion
price of the convertible preferred stock (currently 120% of $39.77, or $47.72); (b) upon the occurrence of certain corporate transactions; or (c)
upon the delisting of the Companys common stock. On or after September 30, 2008, the Company may, at its option, cause the convertible preferred
stock to be converted into the number of shares of common stock that are issuable at the conversion price. The Company may only exercise its
conversion right if the closing sale price of the Companys common stock exceeds 130% of the conversion price of the convertible preferred stock in
effect for 20 trading days within any period of 30 consecutive trading days ending on a trading day not more than two trading days prior to the date
the Company gives notice of conversion.(2)
    
    For the quarter and nine month period ended September 30, 2005, options to purchase 3,326,250 and 1,560,000 shares of common tock, respectively,
were outstanding but not included in the computation of diluted earnings per share because they were antidilutive. For the quarter and nine month
period ended September 30, 2004, all options to purchase shares of common stock outstanding, were included in the computation of diluted earnings per
share. 16




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 f.
    
    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 Originating 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:
 Quarter Ended
    
    
    Nine Month Period EndedSeptember 30,
    
    
    September 30,2004
    
    
    
    
    
    
    2004(In thousands)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Employee costs, gross
    
    $
    34,544
    
    
    $
    31,539
    
    
    $
    104,412
    
    
    $
    93,965Deferred costs pursuant to SFAS 91
    
    
    (10,905
    )
    
    
    (9,788
    )
    
    
    (31,505
    )
    
    
    (29,365
    )Employee cost, net
    
    $
    23,639
    
    
    $
    21,751
    
    
    $
    72,907
    
    
    $
    64,600Other expenses, gross
    
    $
    5,845
    
    
    $
    10,828
    
    
    $
    19,171
    
    
    $
    25,644Deferred costs pursuant to SFAS 91
    
    
    (2,159
    )
    
    
    (1,859
    )
    
    
    (6,416
    )
    
    
    (4,881
    )Other expenses, net
    
    $
    3,686
    
    
    $
    8,969
    
    
    $
    12,755
    
    
    $
    20,763
 As of September 30, 2005, the Company had a net deferred origination fee on mortgage loans
held for sale and loans receivable amounting to approximately $29.8 million ($27.0 million
as of December 31, 2004) and $15.7 million ($14.3 million as of December 31, 2004),
respectively.g.
    
    Segment informationThe Company operates in four reportable segments identified by line of business: mortgage
banking and risk management activities, banking (including thrift operations), institutional
securities operations and insurance agency activities. Management made this determination
based on operating decisions particular to each business line and because each one targets
different customers and requires different strategies. The majority of the Companys
operations are conducted in Puerto Rico. The Company also operates in the mainland United
States, principally in the New York City metropolitan area.The results of the mortgage banking and risk management segment for the nine month period
ended September 30, 2004 include the results of Doral Overseas, an international banking
entity organized as a division at the parent company level. In connection with local
legislation passed on January 8, 2004, designed to encourage international banking entities
to operate as separate legal entities rather than operating divisions, effective March 31,
2004, Doral Financial phased out the operations of Doral Overseas. Concurrently, the
Company increased the investment activities of Doral International, another international
banking entity and a wholly-owned subsidiary of Doral Bank PR. The operations of Doral
International are included within the banking segment.For the nine month period ended September 30, 2004, the operations of Doral Overseas
contributed approximately $755,000 of the total net interest income, $804,000 of total
non-interest income and $1.2 million of total net income of the mortgage banking and risk
management segment.The following tables present net interest income, non-interest income, net income and
identifiable assets for each of the Companys reportable
segments for the periods presented,
as well as for the Companys Puerto Rico and mainland U.S. operations for the periods
presented.
 17




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 MortgageBanking andRisk
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentManagement
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations*
    
    Totals(In thousands)
    
    QUARTER ENDED SEPTEMBER 30, 2005Net interest income
    
    $
    20,077
    
    
    
    44,001
    
    
    
    488
    
    
    
    
    
    
    
    590
    
    
    $
    65,156Non-interest income
    
    $
    70,560
    
    
    
    7,752
    
    
    
    379
    
    
    
    3,294
    
    
    
    (1,577
    )
    
    $
    80,408Net income
    
    $
    28,681
    
    
    
    9,720
    
    
    
    369
    
    
    
    1,750
    
    
    
    409
    
    
    $
    40,929Identifiable assets
    
$
    7,572,254
    
    
$
    11,768,867
    
    
    $
    132,725
    
    
    
    13,796
    
    
    
    (288,200
    )
    
    $
    19,199,442QUARTER ENDED SEPTEMBER 30, 2004(As Restated)Net interest income
    
    $
    34,122
    
    
    
    52,398
    
    
    
    821
    
    
    
    1,432
    
    
    
    901
    
    
    $
    89,674Non-interest
(loss) income
    
    $
    (36,372
    )
    
    
    29,843
    
    
    
    1,039
    
    
    
    2,654
    
    
    
    (304
    )
    
    $
    (3,140
    )Net (loss) income
    
    $
    (28,764
    )
    
    
    46,555
    
    
    
    1,006
    
    
    
    2,867
    
    
    
    2,419
    
    
    $
    24,083Identifiable assets
    
    $
    5,444,363
    
    
    
    11,656,390
    
    
    
    118,449
    
    
    
    99,799
    
    
    
    (582,572
    )
    
    $
    16,736,429MortgageBanking andRisk
    
    
    
    
    
    
    Institutional
    
    
    Insurance
    
    
    IntersegmentManagement
    
    
    Banking
    
    
    Securities
    
    
    Agency
    
    
    Eliminations*
    
    
    Totals(In thousands)
    
    NINE MONTH PERIOD ENDED SEPTEMBER 30, 2005Net interest income
    
    $
    66,143
    
    
    
    142,829
    
    
    
    1,886
    
    
    
    2,001
    
    
    
    1,616
    
    
    $
    214,475Non-interest income
    
    $
    59,655
    
    
    
    47,048
    
    
    
    2,458
    
    
    
    8,905
    
    
    
    (35,122
    )
    
    $
    82,944Net income
    
    $
    1,534
    
    
    
    76,986
    
    
    
    2,213
    
    
    
    6,676
    
    
    
    (30,038
    )
    
    $
    57,371Identifiable assets
    
    $
    7,572,254
    
    
    
    11,768,867
    
    
    
    132,725
    
    
    
    13,796
    
    
    
    (288,200
    )
    
    $
    19,199,442NINE MONTH PERIOD ENDED SEPTEMBER 30, 2004(As Restated)Net interest income
    
    $
    103,158
    
    
    
    131,821
    
    
    
    2,659
    
    
    
    3,966
    
    
    
    8,629
    
    
    $
    250,233Non-interest
(loss) income
    
    $
    (92,657
    )
    
    
    99,194
    
    
    
    3,365
    
    
    
    7,997
    
    
    
    (6,511
    )
    
    $
    11,388Net (loss) income
    
    $
    (55,175
    )
    
    
    127,696
    
    
    
    3,443
    
    
    
    8,271
    
    
    
    4,407
    
    
    $
    88,642Identifiable assets
    
    $
    5,444,363
    
    
    
    11,656,390
    
    
    
    118,449
    
    
    
    99,799
    
    
    
    (582,572
    )
    
    $
    16,736,429
   18




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Puerto Rico
    
    
    Mainland US
    
    
    Eliminations
    
    
    Totals(In thousands)
    
    QUARTER ENDED SEPTEMBER 30, 2005Net interest income
    
    $
    60,003
    
    
    
    5,116
    
    
    
    37
    
    
    $
    65,156Non-interest income
    
    $
    80,038
    
    
    
    713
    
    
    
    (343
    )
    
    $
    80,408Net income
    
    $
    40,110
    
    
    
    1,043
    
    
    
    (224
    )
    
    $
    40,929Identifiable assets
    
    $
    18,588,066
    
    
    
    696,417
    
    
    
    (85,041
    )
    
    $
    19,199,442QUARTER ENDED SEPTEMBER 30, 2004(As Restated)Net interest income
    
    $
    85,650
    
    
    
    3,982
    
    
    
    42
    
    
    $
    89,674Non-interest
(loss) income
    
    $
    (3,399
    )
    
    
    326
    
    
    
    (67
    )
    
    $
    (3,140
    )Net income
    
    $
    23,476
    
    
    
    572
    
    
    
    35
    
    
    $
    24,083Identifiable assets
    
    $
    16,277,055
    
    
    
    556,316
    
    
    
    (96,942
    )
    
    $
    16,736,429
 Puerto Rico
    
    
    Mainland US
    
    
    Eliminations
    
    
    Totals(In thousands)
    
    NINE MONTH PERIOD ENDED SEPTEMBER 30, 2005Net interest income
    
    $
    200,419
    
    
    
    13,930
    
    
    
    126
    
    
    $
    214,745Non-interest income
    
    $
    81,346
    
    
    
    2,900
    
    
    
    (1,302
    )
    
    $
    82,944Net income
    
    $
    55,257
    
    
    
    3,062
    
    
    
    (948
    )
    
    $
    57,371Identifiable assets
    
    $
    18,588,066
    
    
    
    696,417
    
    
    
    (85,041
    )
    
    $
    19,199,442NINE MONTH PERIOD ENDED SEPTEMBER 30, 2004(As Restated)Net interest income
    
    $
    240,249
    
    
    
    9,873
    
    
    
    111
    
    
    $
    250,233Non-interest income
    
    $
    9,819
    
    
    
    1,723
    
    
    
    (154
    )
    
    $
    11,388Net income
    
    $
    87,154
    
    
    
    1,339
    
    
    
    149
    
    
    $
    88,642Identifiable assets
    
    $
    16,277,055
    
    
    
    556,316
    
    
    
    (96,942
    )
    
    $
    16,736,429
 19




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
   MortgageBankingand Risk Management
    
    
    BankingQUARTER ENDED(In thousands)
    
    SEPTEMBER 30, 2005Net gain on mortgage loan sales and fees
    
    $
    14,296
    
    
    $
    4,547Investment activities
    
    
    29,681
    
    
    
    (3,612
    )Servicing income
    
    
    26,065
    
    
    
    2Commissions, fees and other income
    
    
    518
    
    
    
    6,815Total non-interest income
    
    $
    70,560
    
    
    $
    7,752QUARTER ENDEDSEPTEMBER 30, 2004(As Restated)Net (loss) gain on mortgage loan sales and fees
    
    $
    (16,803
    )
    
    $
    42,869Investment activities
    
    
    (11,496
    )
    
    
    (18,369
    )Servicing (loss) income
    
    
    (9,577
    )
    
    
    229Commissions, fees and other income
    
    
    1,504
    
    
    
    5,114Total non-interest (loss) income
    
    $
    (36,372
    )
    
    $
    29,843MortgageBankingand Risk Management
    
    
    BankingNINE MONTH PERIOD(In thousands)
    
    ENDED SEPTEMBER 30, 2005Net gain on mortgage loan sales and fees
    
    $
    6,400
    
    
    $
    34,478Investment activities
    
    
    2,183
    
    
    
    (3,891
    )Servicing income
    
    
    17,461
    
    
    
    6Commissions, fees and other income
    
    
    33,611
    
    
    
    16,455Total non-interest income
    
    $
    59,655
    
    
    $
    47,048NINE MONTH PERIODENDED SEPTEMBER 30, 2004(As Restated)Net (loss) gain on mortgage loan sales and fees
    
    $
    (37,254
    )
    
    $
    109,795Investment activities
    
    
    (54,306
    )
    
    
    (23,780
    )Servicing (loss) income
    
    
    (4,011
    )
    
    
    218Commissions, fees and other income
    
    
    2,914
    
    
    
    12,961Total non-interest (loss) income
    
    $
    (92,657
    )
    
    $
    99,194
 20




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##### Table of Contents





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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


1.
    
    The following table summarizes Doral Financials holdings of securities held
for trading as of September 30, 2005 and December 31, 2004.


SECURITIES HELD FOR TRADING


SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2005
    
    
    2004Mortgage-backed securities:GNMA exempt
    
    $
    224,881
    
    
    $
    266,380GNMA taxable
    
    
    37,751
    
    
    
    50,974CMO certificates
    
    
    1,701
    
    
    
    2,513FHLMC and FNMA
    
    
    41,447
    
    
    
    17,720Variable interest-only strips
    
    
    86,576
    
    
    
    125,216Fixed interest-only strips
    
    
    1,675
    
    
    
    2,145FHLB Notes
    
    
    11,251
    
    
    
    5,025Puerto Rico government and agency securities
    
    
    5,582
    
    
    
    5,444Derivatives(1)
    
    
    39,399
    
    
    
    13,630Other
    
    
    23
    
    
    
    23Total
    
    $
    450,286
    
    
    $
    489,070





|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Doral Financial uses derivatives to manage its exposure to interest rate
risk caused by changes in interest rates. Derivatives include interest rate swaps,
interest rate caps and collars, futures, forwards and options. Doral Financials
general policy is to account for derivatives on a marked-to market basis with gains
or losses charged to operations as they occur. The fair value of derivatives is
generally reported net by counterparty, provided that a legally enforceable master
netting agreement exists. Derivatives in a net asset position are recorded as
securities held for trading and derivatives in a net liability position as
liabilities. The gross notional amount of derivatives totaled $16.1 billion as of
September 30, 2005 and $72.3 billion as of December 31, 2004. Notional amounts
indicate the volume of derivatives activity, but do not represent Doral Financials
exposure to market or credit risk.

2.
    
    The following tables summarize the amortized cost, gross unrealized gains and
losses, approximate market value, weighted-average yield and contractual maturities of
securities available for sale as of September 30, 2005 and December 31, 2004.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.Under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, the Company may designate a derivative as a hedge of the fair value of a
recognized fixed rate asset or liability (fair value hedge). Some hedging
activities related to certain available for sale securities were accounted for as a
fair value hedge, beginning on the second quarter of 2004. In a qualifying fair
value hedge, both the changes in fair value of the hedged item (in this case
available-for-sale securities) and changes in fair value of the derivative are
included in net gain (loss) on securities held for trading in the Consolidated
Statements of Income. As a result, any ineffectiveness of the derivative in hedging
the fair value of the hedged item is reflected immediately in earnings. Derivatives
hedging the fair value of certain available-for-sale securities expired during the
third quarter of 2004 and the Company decided to discontinue the fair value hedge
for such securities. As a result of this decision, the favorable cumulative
mark-to-market valuation from the inception date of the fair value hedge to its
discontinuation date of approximately $27.2 million ($24.3 million as of September
30, 2005) is being amortized as a yield adjustment over the remaining term of the
securities. 21




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES AVAILABLE FOR SALE
AS OF SEPTEMBER 30, 2005
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    3,028,650
    
    
    $
    80
    
    
    $
    44,636
    
    
    $
    2,984,094
    
    
    
    5.13
    %FHLMC and FNMADue over ten years
    
    
    1,064,455
    
    
    
    943
    
    
    
    12,615
    
    
    
    1,052,783
    
    
    
    5.08
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    111,958
    
    
    
    
    
    
    
    329
    
    
    
    111,629
    
    
    
    5.50
    %US TREASURYDue within a year
    
    
    199,893
    
    
    
    
    
    
    
    2,294
    
    
    
    197,599
    
    
    
    1.58
    %Due from one to five years
    
    
    100,379
    
    
    
    
    
    
    
    2,926
    
    
    
    97,453
    
    
    
    1.97
    %Due from five to ten years
    
    
    1,779,352
    
    
    
    
    
    
    
    67,066
    
    
    
    1,712,286
    
    
    
    3.81
    %$
    6,284,687
    
    
    $
    1,023
    
    
    $
    129,866
    
    
    $
    6,155,844
    
    
    
    4.60
    %
 SECURITIES AVAILABLE FOR SALE
AS OF DECEMBER 31, 2004
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    2,946,222
    
    
    $
    985
    
    
    $
    11,297
    
    
    $
    2,935,910
    
    
    
    5.62
    %FHLMC and FNMADue over ten years
    
    
    398,662
    
    
    
    98
    
    
    
    9,403
    
    
    
    389,357
    
    
    
    5.18
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    111,951
    
    
    
    2,255
    
    
    
    
    
    
    
    114,206
    
    
    
    5.51
    %US TREASURYDue from one to five years
    
    
    500,147
    
    
    
    
    
    
    
    8,561
    
    
    
    491,586
    
    
    
    1.66
    %Due from five to ten years
    
    
    863,239
    
    
    
    
    
    
    
    27,946
    
    
    
    835,293
    
    
    
    3.71
    %Due over ten years
    
    
    219,863
    
    
    
    
    
    
    
    3,707
    
    
    
    216,156
    
    
    
    4.71
    %$
    5,040,084
    
    
    $
    3,338
    
    
    $
    60,914
    
    
    $
    4,982,508
    
    
    
    4.83
    %
 22




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 3.
    
    The following tables summarize the amortized cost, gross unrealized gains and
losses, approximate market value, weighted-average yield and contractual maturities of
securities held to maturity as of September 30, 2005 and December 31, 2004.The weighted average yield is computed based on amortized cost and, therefore, does
not give effect to changes in fair value. Expected maturities of mortgage-backed
securities and certain debt securities might differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
 SECURITIES HELD TO MATURITY
AS OF SEPTEMBER 30, 2005
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue from one to five years
    
    $
    550
    
    
    $
    17
    
    
    $
    
    
    
    $
    567
    
    
    
    5.82
    %Due from five to ten years
    
    
    380
    
    
    
    14
    
    
    
    
    
    
    
    394
    
    
    
    6.59
    %Due over ten years
    
    
    4,410
    
    
    
    239
    
    
    
    
    
    
    
    4,649
    
    
    
    6.74
    %FHLMC and FNMADue over ten years
    
    
    358,389
    
    
    
    7,625
    
    
    
    533
    
    
    
    365,481
    
    
    
    5.18
    %CMO CERTIFICATESDue over ten years
    
    
    10,629
    
    
    
    122
    
    
    
    242
    
    
    
    10,509
    
    
    
    5.79
    %DEBT SECURITIESFHLB NOTESDue from one to five years
    
    
    200,890
    
    
    
    
    
    
    
    2,369
    
    
    
    198,521
    
    
    
    3.53
    %Due from five to ten years
    
    
    50,000
    
    
    
    125
    
    
    
    
    
    
    
    50,125
    
    
    
    4.13
    %Due over ten years
    
    
    273,594
    
    
    
    
    
    
    
    10,806
    
    
    
    262,788
    
    
    
    5.10
    %FHLB ZERO COUPONDue over ten years
    
    
    118,590
    
    
    
    
    
    
    
    108
    
    
    
    118,482
    
    
    
    6.50
    %FHLMC ZERO COUPONDue over ten years
    
    
    250,918
    
    
    
    297
    
    
    
    2,205
    
    
    
    249,010
    
    
    
    5.86
    %FHLMC and FNMA NOTESDue over ten years
    
    
    149,988
    
    
    
    
    
    
    
    1,630
    
    
    
    148,358
    
    
    
    5.63
    %P.R. HOUSING AUTHORITYDue from one to five years
    
    
    5,000
    
    
    
    112
    
    
    
    
    
    
    
    5,112
    
    
    
    6.00
    %Due over ten years
    
    
    2,235
    
    
    
    17
    
    
    
    
    
    
    
    2,252
    
    
    
    6.20
    %U.S. TREASURYDue from five to ten years
    
    
    201,402
    
    
    
    
    
    
    
    9,621
    
    
    
    191,781
    
    
    
    3.52
    %Due over ten years
    
    
    474,356
    
    
    
    3,474
    
    
    
    21,001
    
    
    
    456,829
    
    
    
    4.35
    %OTHERDue within a year
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    6.20
    %Due from one to five years
    
    
    8,105
    
    
    
    43
    
    
    
    169
    
    
    
    7,979
    
    
    
    4.37
    %Due from five to ten years
    
    
    190
    
    
    
    5
    
    
    
    
    
    
    
    195
    
    
    
    6.75
    %Due over ten years
    
    
    7,000
    
    
    
    526
    
    
    
    
    
    
    
    7,526
    
    
    
    5.93
    %$
    2,116,651
    
    
    $
    12,616
    
    
    $
    48,684
    
    
    $
    2,080,583
    
    
    
    4.84
    %
 23




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES HELD TO MATURITY
AS OF DECEMBER 31, 2004
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue from one to five years
    
    $
    493
    
    
    $
    25
    
    
    $
    
    
    
    $
    518
    
    
    
    6.50
    %Due from five to ten years
    
    
    618
    
    
    
    33
    
    
    
    
    
    
    
    651
    
    
    
    7.00
    %Due over ten years
    
    
    5,754
    
    
    
    336
    
    
    
    
    
    
    
    6,090
    
    
    
    7.00
    %FHLMC and FNMADue over ten years
    
    
    420,670
    
    
    
    14,339
    
    
    
    
    
    
    
    435,009
    
    
    
    5.22
    %CMO CERTIFICATESDue from one to five years
    
    
    614
    
    
    
    
    
    
    
    3
    
    
    
    611
    
    
    
    6.10
    %Due over ten years
    
    
    25,264
    
    
    
    11
    
    
    
    440
    
    
    
    24,835
    
    
    
    6.58
    %DEBT SECURITIESFHLB NOTESDue from one to five years
    
    
    100,000
    
    
    
    
    
    
    
    941
    
    
    
    99,059
    
    
    
    2.89
    %Due from five to ten years
    
    
    50,000
    
    
    
    250
    
    
    
    
    
    
    
    50,250
    
    
    
    4.13
    %Due over ten years
    
    
    398,587
    
    
    
    1,102
    
    
    
    5,040
    
    
    
    394,649
    
    
    
    5.38
    %FHLB ZERO COUPONDue over ten years
    
    
    167,361
    
    
    
    
    
    
    
    5,942
    
    
    
    161,419
    
    
    
    6.51
    %FHLMC ZERO COUPONDue over ten years
    
    
    282,947
    
    
    
    
    
    
    
    7,971
    
    
    
    274,976
    
    
    
    5.90
    %FHLMC and FNMA NOTESDue over ten years
    
    
    149,988
    
    
    
    46
    
    
    
    1,285
    
    
    
    148,749
    
    
    
    5.63
    %P.R. HOUSING AUTHORITYDue from one to five years
    
    
    5,000
    
    
    
    50
    
    
    
    
    
    
    
    5,050
    
    
    
    6.00
    %Due over ten years
    
    
    2,235
    
    
    
    28
    
    
    
    
    
    
    
    2,263
    
    
    
    6.20
    %U.S. TREASURYDue from five to ten years
    
    
    201,521
    
    
    
    
    
    
    
    7,802
    
    
    
    193,719
    
    
    
    3.52
    %Due over ten years
    
    
    475,323
    
    
    
    1,008
    
    
    
    35,871
    
    
    
    440,460
    
    
    
    4.33
    %OTHERDue from one to five years
    
    
    7,950
    
    
    
    17
    
    
    
    
    
    
    
    7,967
    
    
    
    4.32
    %Due from five to ten years
    
    
    370
    
    
    
    8
    
    
    
    
    
    
    
    378
    
    
    
    6.75
    %Due over ten years
    
    
    7,000
    
    
    
    40
    
    
    
    
    
    
    
    7,040
    
    
    
    5.93
    %$
    2,301,695
    
    
    $
    17,293
    
    
    $
    65,295
    
    
    $
    2,253,693
    
    
    
    5.02
    %
 24




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 i.
    
    The following tables show Doral Financials gross unrealized losses and fair value
for available-for-sale and held-to-maturity investments, aggregated by investment category
and length of time that individual securities have been in a continuous unrealized loss
position, at September 30, 2005 and December 31, 2004.
 SECURITIES
AVAILABLE FOR SALE
(As of September 30, 2005)
 LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(Dollars in thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed SecuritiesGNMA
    
    $
    2,610,201
    
    
    $
    36,999
    
    
    $
    371,530
    
    
    $
    7,637
    
    
    $
    2,981,731
    
    
    $
    44,636FHLMC and FNMA
    
    
    577,487
    
    
    
    5,769
    
    
    
    194,371
    
    
    
    6,846
    
    
    
    771,858
    
    
    
    12,615Debt SecuritiesFHLB Notes
    
    
    111,629
    
    
    
    329
    
    
    
    
    
    
    
    
    
    
    
    111,629
    
    
    
    329U.S. Treasury
    
    
    1,130,489
    
    
    
    36,254
    
    
    
    876,849
    
    
    
    36,032
    
    
    
    2,007,338
    
    
    
    72,286$
    4,429,806
    
    
    $
    79,351
    
    
    $
    1,442,750
    
    
    $
    50,515
    
    
    $
    5,872,556
    
    
    $
    129,866SECURITIES
AVAILABLE FOR SALE
(As of December 31, 2004)LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(Dollars in thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed SecuritiesGNMA
    
    $
    2,262,950
    
    
    $
    8,869
    
    
    $
    158,223
    
    
    $
    2,428
    
    
    $
    2,421,173
    
    
    $
    11,297FHLMC and FNMA
    
    
    35,340
    
    
    
    201
    
    
    
    345,679
    
    
    
    9,202
    
    
    
    381,019
    
    
    
    9,403Debt SecuritiesU.S. Treasury
    
    
    1,300,887
    
    
    
    24,419
    
    
    
    242,148
    
    
    
    15,795
    
    
    
    1,543,035
    
    
    
    40,214$
    3,599,177
    
    
    $
    33,489
    
    
    $
    746,050
    
    
    $
    27,425
    
    
    $
    4,345,227
    
    
    $
    60,914
 25




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES
HELD TO MATURITY
(As of September 30, 2005)
 LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(Dollars in thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed SecuritiesFHLMC and FNMA
    
    $
    42,817
    
    
    $
    533
    
    
    $
    
    
    
    $
    
    
    
    $
    42,817
    
    
    $
    533CMO Certificates
    
    
    534
    
    
    
    46
    
    
    
    7,463
    
    
    
    196
    
    
    
    7,997
    
    
    
    242Debt SecuritiesFHLB Notes
    
    
    149,295
    
    
    
    1,594
    
    
    
    312,014
    
    
    
    11,581
    
    
    
    461,309
    
    
    
    13,175FHLB Zero Coupon
    
    
    118,482
    
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    118,482
    
    
    
    108FHLMC Zero Coupon
    
    
    
    
    
    
    
    
    
    
    175,353
    
    
    
    2,205
    
    
    
    175,353
    
    
    
    2,205FHLMC and FNMA Notes
    
    
    98,733
    
    
    
    1,255
    
    
    
    49,625
    
    
    
    375
    
    
    
    148,358
    
    
    
    1,630U.S. Treasury
    
    
    329,372
    
    
    
    17,268
    
    
    
    254,519
    
    
    
    13,354
    
    
    
    583,891
    
    
    
    30,622Other
    
    
    3,731
    
    
    
    169
    
    
    
    
    
    
    
    
    
    
    
    3,731
    
    
    
    169$
    742,964
    
    
    $
    20,973
    
    
    $
    798,974
    
    
    $
    27,711
    
    
    $
    1,541,938
    
    
    $
    48,684SECURITIES
HELD TO MATURITY
(As of December 31, 2004)LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(Dollars in thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed SecuritiesCMO Certificates
    
    $
    7,069
    
    
    $
    167
    
    
    $
    9,161
    
    
    $
    276
    
    
    $
    16,230
    
    
    $
    443Debt SecuritiesFHLB Notes
    
    
    367,606
    
    
    
    5,981
    
    
    
    
    
    
    
    
    
    
    
    367,606
    
    
    
    5,981FHLB Zero Coupon
    
    
    53,725
    
    
    
    658
    
    
    
    107,694
    
    
    
    5,284
    
    
    
    161,419
    
    
    
    5,942FHLMC Zero Coupon
    
    
    242,758
    
    
    
    3,779
    
    
    
    32,218
    
    
    
    4,192
    
    
    
    274,976
    
    
    
    7,971FHLMC and FNMA Notes
    
    
    98,715
    
    
    
    1,285
    
    
    
    
    
    
    
    
    
    
    
    98,715
    
    
    
    1,285U.S. Treasury
    
    
    
    
    
    
    
    
    
    
    571,992
    
    
    
    43,673
    
    
    
    571,992
    
    
    
    43,673$
    769,873
    
    
    $
    11,870
    
    
    $
    721,065
    
    
    $
    53,425
    
    
    $
    1,490,938
    
    
    $
    65,295
  26




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 j.
    
    The following table sets forth certain information regarding Doral Financials mortgage loans
held for sale as of the dates indicated:
 MORTGAGE LOANS HELD FOR SALE(In thousands)
    
    SEPTEMBER 30, 2005
    
    
    DECEMBER 31, 2004Conventional single family residential loans
    
    $
    4,541,723
    
    
    $
    4,226,712FHA/VA loans
    
    
    169,901
    
    
    
    171,882Mortgage loans on residential multifamily
    
    
    28,148
    
    
    
    42,824Construction and commercial real estate loans
    
    
    560,614
    
    
    
    481,089$
    5,300,386
    
    
    $
    4,922,507
 At September 30, 2005 and December 31, 2004, loans held for sale for which the creditor has
the right to repledge the collateral amounted to $3.7 billion and $3.3 billion,
respectively. Such loans were pledged to secure financing agreements with local financial
institutions.Also, at September 30, 2005 and December 31, 2004, the mortgage loans held for sale
portfolio includes $59.0 million and $71.2 million, respectively, related to GNMA
defaulted loans for which the Company has an unconditional buy-back option.The Company recognizes interest income on its loan portfolios on an accrual basis, except
when management believes the collection of principal and interest is doubtful. 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
raised concerns as to ultimate collectibility of the loan. The effect of the change was a
decrease in interest income on loans of approximately $7.0 million.
 27




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 k.
    
    The following table sets forth certain information regarding Doral Financials loans
receivable as of the dates indicated:
 LOANS RECEIVABLE, NET(Dollars in thousands)
    
    SEPTEMBER 30, 2005
    
    
    DECEMBER 31, 2004AMOUNT
    
    
    PERCENT
    
    
    AMOUNT
    
    
    PERCENTConstruction loans(1)
    
    $
    754,949
    
    
    
    34
    %
    
    $
    629,913
    
    
    
    35
    %Residential mortgage loans(2)
    
    
    281,306
    
    
    
    12
    %
    
    
    409,005
    
    
    
    23
    %Commercial  secured by real estate
    
    
    895,554
    
    
    
    40
    %
    
    
    568,842
    
    
    
    32
    %Consumer  secured by real estate
    
    
    
    
    
    
    0
    %
    
    
    320
    
    
    
    0
    %Consumer  other:Personal loans
    
    
    33,208
    
    
    
    1
    %
    
    
    28,865
    
    
    
    2
    %Auto loans
    
    
    922
    
    
    
    0
    %
    
    
    1,175
    
    
    
    0
    %Credit cards
    
    
    18,434
    
    
    
    1
    %
    
    
    13,401
    
    
    
    1
    %Overdrawn checking accounts
    
    
    428
    
    
    
    0
    %
    
    
    524
    
    
    
    0
    %Revolving lines of credit
    
    
    30,458
    
    
    
    1
    %
    
    
    26,614
    
    
    
    1
    %Lease financing receivables
    
    
    40,126
    
    
    
    2
    %
    
    
    7,488
    
    
    
    0
    %Commercial non-real estate
    
    
    132,240
    
    
    
    6
    %
    
    
    36,848
    
    
    
    2
    %Loans on savings deposits
    
    
    14,152
    
    
    
    1
    %
    
    
    9,354
    
    
    
    1
    %Land secured
    
    
    49,623
    
    
    
    2
    %
    
    
    51,853
    
    
    
    3
    %Loans receivable, gross
    
    
    2,251,400
    
    
    
    100
    %
    
    
    1,784,202
    
    
    
    100
    %Less:Unearned interest and deferred
loan fees, net
    
    
    (22,198
    )
    
    
    
    
    
    
    (15,622
    )Allowance for loan and lease losses
    
    
    (30,858
    )
    
    
    
    
    
    
    (20,881
    )(53,056
    )
    
    
    
    
    
    
    (36,503
    )Loans receivable, net
    
    $
    2,198,344
    
    
    
    
    
    
    $
    1,747,699
 
 (1)
    
    Includes $584.2 million and $556.0 million of construction loans for residential housing projects as
of September 30, 2005 and December 31, 2004, respectively. Also includes $170.7 million and $73.9 million of
construction loans for commercial, condominiums and multifamily projects as of September 30, 2005 and
December 31, 2004, respectively.(2)
    
    The reduction in residential mortgage loans from
December 31, 2004 to September 30, 2005, reflects the impact
of the intercompany sale during the first quarter of 2005 of
approximately $330.0 million in mortgage loans previously classified
as loans receivable by Doral Bank PR to the holding company. These
loans are now classified as held for sale and as pledged to a local
financial institution to secure a borrowing. A significant portion of the loans pledged were originated by Doral Bank PR and
previously classified as loans receivable.  QUARTER ENDED
    
    
    NINE MONTH PERIOD ENDEDSEPTEMBER 30,
    
    
    SEPTEMBER 30,ALLOWANCE FOR LOAN AND LEASE LOSSES
    
    
    
    
    
    2004
    
    
    
    
    
    
    2004(DOLLARS IN THOUSANDS)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Balance at beginning of period
    
    $
    22,672
    
    
    $
    18,319
    
    
    $
    20,881
    
    
    $
    14,919Provision for loan and lease losses
    
    
    9,370
    
    
    
    5,344
    
    
    
    17,075
    
    
    
    10,594Charge-offs
    
    
    (1,293
    )
    
    
    (1,207
    )
    
    
    (7,437
    )
    
    
    (3,138
    )Recoveries
    
    
    133
    
    
    
    108
    
    
    
    415
    
    
    
    258Other
    
    
    (24
    )
    
    
    (300
    )
    
    
    (76
    )
    
    
    (369
    )Balance at end of period
    
    $
    30,858
    
    
    $
    22,264
    
    
    $
    30,858
    
    
    $
    22,264
 l.
    
    Doral Financial is the guarantor of various unregistered serial and term bonds issued by
Doral Properties, a wholly-owned subsidiary, through the Puerto Rico Industrial, Tourist,
Educational, Medical and
 28




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Environmental
Control Facilities Financing Authority (AFICA). The bonds were issued to finance the
construction and development of the Doral Financial Plaza building, the headquarters
facility of Doral Financial. As of September 30, 2005, the outstanding principal balance of
the bonds was $50.7 million with fixed interest rates, ranging from 6.20% to 6.90%, and
maturities ranging from December 2005 to December 2029. Certain series of the bonds are
secured by a mortgage on the building and underlying real property.m.
    
    The Company routinely originates, securitizes and sells mortgage loans into the secondary
market. As a result of this process, the Company typically retains the servicing rights and
may retain interest-only strips. The Companys retained interests are subject to prepayment
and interest rate risks. The following tables show the changes in the Companys mortgage
servicing assets and interest-only strips for each of the periods shown:
 MORTGAGE SERVICING ASSETS ACTIVITY
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,2004
    
    
    
    
    
    
    2004(In thousands)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Balance at beginning of period
    
    $
    142,955
    
    
    $
    135,137
    
    
    $
    136,024
    
    
    $
    133,237Capitalization of servicing assets
    
    
    15,093
    
    
    
    5,188
    
    
    
    32,936
    
    
    
    18,703Rights purchased
    
    
    1,184
    
    
    
    885
    
    
    
    3,404
    
    
    
    3,614Amortization
    
    
    (6,865
    )
    
    
    (7,651
    )
    
    
    (19,997
    )
    
    
    (21,995
    )Balance before valuation
allowance at end of period
    
    
    152,367
    
    
    
    133,559
    
    
    
    152,367
    
    
    
    133,559Valuation allowance for temporary
impairment
    
    
    (9,462
    )
    
    
    (15,021
    )
    
    
    (9,462
    )
    
    
    (15,021
    )Balance at end of period
    
    $
    142,905
    
    
    $
    118,538
    
    
    $
    142,905
    
    
    $
    118,538
 Impairment charges are recognized through a valuation allowance for each individual stratum
of servicing assets. The valuation allowance is adjusted to reflect the amount, if any, by
which the cost basis of the servicing asset for a given stratum of loans being serviced
exceeds its fair value. Any fair value in excess of the cost basis of the servicing asset
for a given stratum is not recognized. Other-than-temporary impairment, if any, is
recognized as a direct write-down of the servicing asset, and the valuation allowance is
applied to reduce the cost basis of the servicing asset. The Companys policy is to test
for permanent impairment at least annually.Changes in the impairment allowance for servicing assets were as follows:
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    

ENDED SEPTEMBER 30,2004
    
    
    
    
    
    
    2004(In thousands)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Balance at beginning of period
    
    $
    29,820
    
    
    $
    3,500
    
    
    $
    12,438
    
    
    $
    4,317Temporary impairment charges
    
    
    
    
    
    
    11,550
    
    
    
    21,894
    
    
    
    29,486Recoveries
    
    
    (20,358
    )
    
    
    (29
    )
    
    
    (24,870
    )
    
    
    (18,782
    )Balance at end of period
    
    $
    9,462
    
    
    $
    15,021
    
    
    $
    9,462
    
    
    $
    15,021
 At September 30, 2005, and based on recent prepayment experience, the expected weighted
average remaining life of the Companys servicing assets was 5.4 years. Any projection of
the expected weighted
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 average remaining life of servicing assets is limited by conditions that existed at the time the
calculations were performed, and may not be indicative of actual amortization expense that
will be recorded in future periods.
 INTEREST-ONLY STRIPS ACTIVITY
(In thousands)
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,2004
    
    
    
    
    
    
    2004(In thousands)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Balance at beginning of period
    
    $
    125,667
    
    
    $
    119,730
    
    
    $
    127,361
    
    
    $
    128,566Capitalization of IOs from loan sales
    
    
    
    
    
    
    20,919
    
    
    
    10,981
    
    
    
    44,992Amortization
    
    
    (12,153
    )
    
    
    (13,038
    )
    
    
    (40,405
    )
    
    
    (37,086
    )(Losses) gains on the IO value
    
    
    (25,263
    )
    
    
    14,323
    
    
    
    (9,686
    )
    
    
    5,462Balance at end of period
    
    $
    88,251
    
    
    $
    141,934
    
    
    $
    88,251
    
    
    $
    141,934
 At September 30, 2005, fair values of the Companys retained interests were based on
external and internal valuation models that incorporate market driven assumptions, adjusted
by the particular characteristics of the Companys servicing portfolio, regarding discount
rates, mortgage prepayment rates, and implied forward LIBOR rates. The weighted-averages of
the key economic assumptions used in the 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 September 30, 2005, were
as follows:
 Servicing
    
    Interest-only(Dollars in thousands)
    
    Assets
    
    stripsCarrying amount of retained interest
    
    $
    142,905
    
    
    $
    88,251Weighted-average expected life (in years)
    
    
    5.4
    
    
    
    5.1Constant prepayment rate
(weighted-average annual rate)
    
    
    14.57
    %
    
    
    15.18
    %Decrease in fair value due to 10%
adverse change
    
    $
    (5,444
    )
    
    $
    (4,194
    )Decrease in fair value due to 20%
adverse change
    
    $
    (10,388
    )
    
    $
    (8,000
    )Residual cash flow discount rate
(weighted-average annual rate)
    
    
    9.90
    %
    
    
    10.47
    %Decrease in fair value due to 10%
adverse change
    
    $
    (5,059
    )
    
    $
    (2,314
    )Decrease in fair value due to 20%
adverse change
    
    $
    (9,802
    )
    
    $
    (4,424
    )
 These sensitivities are hypothetical and should be used with caution. This information is
furnished to provide the reader with a basis for assessing the sensitivity of the values
presented to changes in key assumptions. As the figures indicate, changes in fair value
based on a 10 percent variation in assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not be linear.
Also, in the table above, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other assumption. In
reality, changes in
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 one factor may results in changes in another (for example, increases in market interest rates may result in lower
prepayments), which may magnify or counteract the sensitivities.The following table summarizes the estimated change in the fair value of the Companys IOs
and the constant prepayment rate under the Companys internal valuation model, given several
hypothetical (instantaneous and parallel) increases or decreases in the yield curve. For
mortgage loan sales contracts that are not subject to interest rate caps, to the extent that
the interest rate payable to investors on the mortgage loans underlying the floating rate
IOs exceeds the weighted-average coupon on such mortgage loans, the change in the fair value
of the Companys floating rate IOs may exceed the carrying value of the IOs.
 (Dollars in thousands)
    
    Constant
    
    Weighted-average
    
    Change in FairChange in yield curve (basis points)
    
    prepayment rate
    
    expected life
    
    Value of IOs
    
    % Change+200
    
    
    
    11.70
    %
    
    
    6.2
    
    
    $
    (119,465
    )
    
    
    (135.4
    )%+100
    
    
    
    12.54
    %
    
    
    5.9
    
    
    
    (59,419
    )
    
    
    (67.3
    )%+50
    
    
    
    13.44
    %
    
    
    5.6
    
    
    
    (29,063
    )
    
    
    (32.9
    )%Base
    
    
    15.18
    %
    
    
    5.1
    
    
    
    0
    
    
    
    0.0
    %-50
    
    
    
    17.94
    %
    
    
    4.5
    
    
    
    25,476
    
    
    
    28.9
    %-100
    
    
    
    22.08
    %
    
    
    3.7
    
    
    
    43,885
    
    
    
    49.7
    %-200
    
    
    
    25.86
    %
    
    
    3.3
    
    
    
    83,550
    
    
    
    94.7
    %
 n.
    
    At September 30, 2005 and December 31, 2004, money market investments included $517.9
million and $806.8 million, respectively, of pledged money market investments. Such money
market investments secured short-term borrowings generally due within 90 days. At December 31,
2004, the carrying value of securities purchased under resell agreements included in money
market investments was $49.2 million. The underlying securities were held on behalf of the
Company by the dealers that arranged the transactions.o.
    
    The Company expenses the fair value of stock options granted to employees using the modified
prospective method. 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. The before-tax expense associated with expensing
stock options for the third
quarter and first nine months of 2005 and 2004 was $2.4 million and $7.3 million,
respectively, for both years.p.
    
    The following table summarizes deposit balances:
 (In thousands)
    
    SEPTEMBER 30, 2005
    
    
    DECEMBER 31, 2004Certificates of deposit
    
    $
    2,514,350
    
    
    $
    1,983,271Regular savings
    
    
    473,037
    
    
    
    474,271NOW accounts
    
    
    650,656
    
    
    
    726,178Non interest-bearing deposits
    
    
    467,282
    
    
    
    459,360$
    4,105,325
    
    
    $
    3,643,080
 q.
    
    The Company routinely enters into financing agreements to sell securities under agreements to
repurchase. 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. Securities sold under agreements to repurchase amounted to $7.6
billion and $6.3 billion as of September 30, 2005 and December 31, 2004, respectively.
 31




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 r.
    
    Advances from the FHLB consisted of the following:
 SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2005
    
    
    2004Non-callable advances with maturities
ranging from December 2005 to March
2010 (from July 2005 to March 2008, at
December 31, 2004), at various fixed
rates averaging 3.45% and 3.12% at
September 30, 2005 and December 31,
2004, respectively
    
    $
    267,000
    
    
    $
    222,000Non-callable advances due on January
29, 2005, tied to 3-month LIBOR
adjustable quarterly, 2.83% at
December 31, 2004
    
    
    
    
    
    
    100,000Non-callable advances due on September
14, 2007, tied to 1-month LIBOR
adjustable monthly (3.76% and 2.41% at
September 30, 2005 and December 31,
2004,
respectively)
    
    
    100,000
    
    
    
    100,000Callable advances with maturities
ranging from November 2005 to November
2012 (2004  August 2005 to November
2012), at various fixed rates averaging
4.12% and 4.50% at September 30, 2005
and December 31, 2005, respectively,
callable at various dates beginning on
October 2, 2005
    
    
    712,500
    
    
    
    872,500$
    1,079,500
    
    
    $
    1,294,500
 At September 30, 2005, the Company had pledged qualified collateral in the form of
first mortgage notes, investments and mortgage-backed securities with a market value of $1.1
billion to secure the above advances from the FHLB. According to contractual agreements,
such investments can be repledged by the counterparty.s.
    
    At September 30, 2005 and December 31, 2004, loans payable consisted of financing agreements
with local financial institutions secured by mortgage loans and also include warehousing lines
of credit and gestation or presale facilities. Advances under these facilities are also
secured by mortgage loans.Outstanding loans payable consisted of the following:
 SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2005
    
    
    2004Secured borrowings with local financial
institutions, collateralized by real
estate mortgage loans at variable
interest rates tied to 3-month LIBOR
averaging 5.15% and 3.60% at September
30, 2005 and December 31, 2004,
respectively
    
    $
    3,638,806
    
    
    $
    3,258,459Secured borrowings with local financial
institutions, collateralized by real
estate mortgage loans at fixed interest
rates averaging 7.68% and 7.41% at
September 30, 2005 and December 31,
2004, respectively
    
    
    41,129
    
    
    
    57,566Secured borrowings with a local
financial institution, collateralized by
IOs at a fixed interest rate of 7.75%
    
    
    42,176
    
    
    
    42,922Loans payable resulting from the use of
warehousing lines of credit and
gestation or presale facilities due in
2005, at various variable rates
averaging 3.00% and 3.17% at September
30, 2005 and December 31, 2004,
respectively, and other financing
arrangements
    
    
    40,636
    
    
    
    279,560$
    3,762,747
    
    
    $
    3,638,507
 At September 30, 2005 and December 31, 2004, loans held for sale amounting to $3.7 billion
and $3.3 billion, respectively, were pledged to secured financing agreements with local
financial institutions, such loans can be repledged by the counterparty.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 t.
    
    Notes payable consisted of the following:
 SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2005
    
    
    2004$625 million floating rate senior notes tied to 3-month LIBOR (4.45%
and 2.91% at September 30, 2005 and December 31, 2004, respectively),
due on July 20, 2007, paying interest quarterly
    
    $
    625,390
    
    
    $
    625,330$115 million floating rate senior notes tied to 3-month LIBOR (4.40%
and 3.07% at September 30, 2005 and December 31, 2004, respectively),
due on December 7, 2005, paying interest quarterly
    
    
    115,000
    
    
    
    115,000$100 million notes, net of discount, bearing interest at 7.65%, due on
March 26, 2016, paying interest monthly
    
    
    98,256
    
    
    
    98,3727.84% senior notes due on October 10, 2006, paying interest
semiannually on April 10 and October 10
    
    
    75,000
    
    
    
    75,000$30 million notes, net of discount, bearing interest at 7.00%, due on
April 26, 2012, paying interest monthly
    
    
    29,558
    
    
    
    29,560$40 million notes, net of discount, bearing interest at 7.10%, due on
April 26, 2017, paying interest monthly
    
    
    39,313
    
    
    
    39,339$30 million notes, net of discount, bearing interest at 7.15%, due on
April 26, 2022, paying interest monthly
    
    
    29,448
    
    
    
    29,476Senior term notes at fixed rates ranging from 8.50% to 8.55% (2004 
8.45% to 8.55%) with maturities ranging from August 2006 to August 2007
(2004  August 2005 to August 2007), paying interest semiannually on
February 28 and August 31
    
    
    16,000
    
    
    
    24,000Bonds payable secured by mortgage on building at fixed rates ranging
from 6.20% to 6.90%, with maturities ranging from December 2005 to
December 2029, paying interest monthly
    
    
    50,715
    
    
    
    51,065Notes payable to bank, collateralized by CMO certificates at variable
interest rates tied to 1-month LIBOR (3.96% at December 31, 2004), due
on June 30, 2005, paying interest monthly
    
    
    
    
    
    
    6,089Zero coupon senior notes (effective rate of 6.50%) due on April 30, 2007
    
    
    2,290
    
    
    
    2,191Notes payable at fixed rates, 7.00% at December 31, 2004, with
maturities ranging from February to March 2005, paying interest monthly
    
    
    
    
    
    
    555$
    1,080,970
    
    
    $
    1,095,977
 u.
    
    Income TaxesIncome taxes include Puerto Rico income taxes as well as applicable federal and state taxes.
As Puerto Rico corporations, Doral Financial and all of its Puerto Rico subsidiaries are
generally required to pay federal income taxes only with respect to their income derived
from the active conduct of a trade or business in the United
 33




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 States (excluding Puerto Rico) and certain investment income derived from U.S. assets. Any
such tax is creditable, with certain limitations, against Puerto Rico income taxes. The
maximum statutory corporate income tax rate in Puerto Rico is 41.5%
for the taxable years ended December 31, 2005 and 2006, and 39% for
subsequent taxable years.For the third quarter and first nine months of 2005, Doral Financial recognized a tax
expense of $25.0 million and $30.7 million, respectively, compared to a tax expense of $2.4
million and $9.0 million for the corresponding periods in 2004. The increase in the tax
provision for 2005 reflected increased pre-tax income from Doral Financials non-tax exempt
activities, including gain on hedging activities and income from insurance agency activities
coupled with a change in the statutory income tax rate under the Puerto Rico Internal
Revenue Code of 1994, as amended (PR Code) from 39% to 41.5%, adjusted retroactively to
January 1, 2005. The change in the PR Code resulted in an increase of $2.0 million during
the quarter.The
increase in income tax provision for the third quarter and first nine
months of 2005 was primarily due to higher pre-tax income from Doral
Financials non-tax exempt activities, including gain (loss) on
hedging activities, coupled with net operating losses in certain
subsidiaries that under the PR Code could not be used to offset gains
in other subsidiaries, offset in part by higher income from Doral
Financials international banking entity subsidiary.For
the third quarter and first nine months of 2005, net gain (loss) from
trading activities amounted to an income of $28.1 million and a loss
of $8.3 million, respectively, compared to a loss of $41.0 million and $90.2
million for the corresponding periods in 2004. During the first nine
months of 2005, pre-tax income from Doral Financials international
banking entity subsidiary amounted to $69.9 million or 79% of total
consolidated pre-tax income, compared to $53.4 million or 55% for the
same period in 2004.Except for the operations of Doral Bank NY and Doral Money, substantially all of the
Companys operations are conducted through subsidiaries in Puerto Rico. Doral Bank NY and
Doral Money are U.S. corporations and are subject to U.S. income-tax on their income derived
from all sources.Doral Financial enjoys tax-exemption on interest income derived from certain FHA and VA
mortgage loans secured by properties located in Puerto Rico and on GNMA securities backed by
such mortgage loans. Doral Financial also invests in U.S. Treasury and agency securities
that are exempt from Puerto Rico taxation and are not subject to federal income taxation
because of the portfolio interest deduction to which Doral Financial is entitled as a
foreign corporation. In addition, Doral Financial uses its international banking entity
subsidiary to invest in various U.S. securities and U.S. mortgage-backed securities, which
interest income and gain on sale, if any, is exempt from Puerto Rico income taxation and
excluded from federal income taxation on the basis of the portfolio interest deduction in
the case of interest, and in the case of capital gains, because the gains are sourced
outside the United States.On August 22, 2004, legislation was enacted in Puerto Rico to provide a temporary reduction
in long-term capital gain tax rates. The law amended the PR Code to reduce the
long-term capital gains tax rates by fifty percent for transactions occurring from July 1,
2004 through June 30, 2005. The maximum long-term capital gains tax rate applicable to
gains on sale of property located in Puerto Rico (as defined in the PR Code) during this
period was reduced to 6.25% from 12.5% for corporations and partnerships. To take advantage
of this reduction, during the fourth quarter of 2004 and second quarter of 2005, the Company
completed two separate agreements with the local taxing authorities to accelerate the
recognition for tax purposes of long-term capital gains of $536.6 million and $39.9 million,
respectively, related to IOs created in previous transactions. The value of
the IOs at the time of the agreement, after making all relevant
adjustments pursuant to the
restatement, approximates $49.1 and $15.6 million, respectively. Refer to Note 1
Restatement of Previously Issued Financial Statements to the Consolidated Financial
Statements accompanying the Companys amended 2004 Annual Report on Form 10-K for additional
information. The transaction executed during the second quarter of 2005 resulted in the
recognition of an income tax benefit of approximately $2.6 million, representing the
difference between the deferred tax liability originally accrued on the IOs at the higher
rate and the reduced long-term capital gain rate of 6.25%.As a result of the correction in the methodology used to determine the fair value of its
portfolio of IOs and the recharacterization of certain mortgage loan transfers as secured
borrowings, the Company recognized a deferred tax asset and deferred benefit of $199.6
million (before any valuation allowance). This benefit is attributable to
 34




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 the tax effect of the difference between the tax basis of the
IOs ($536.6 million) and their restated book
value ($49.1 million). The basis differential arises from the fact that Doral Financial paid taxes on the
book value of the IOs prior to the restatement, as opposed to the restated value, which
would have resulted in a significantly lower tax obligation. The company accounted for this
tax benefit pursuant to the guidance in EITF 98-11, Accounting for Acquired Temporary
Differences in Certain Purchase Transactions That Are Not Accounted for as Business
Combinations.As a result of the increase in deferred tax assets attributable to the restatement, the
Company has evaluated its ability to realize the deferred tax asset and concluded,
based on the evidence available, that it is more likely than not that
some of the deferred tax asset will not
be realized and as a result, established a valuation allowance. At September 30, 2005, the
deferred tax asset, net of its valuation allowance of $56.2 million, amounted to
approximately $131.0 million.v.
    
    GuaranteesIn November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation
No. 45, (FIN 45) Guarantors Accounting and Disclosure Requirements for Guarantees.
This interpretation requires a guarantor of certain types of guarantees to recognize, at the
inception of the guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. As of September 30, 2005, the Company had outstanding $7.2 million
in commercial and financial standby letters of credit. The fair value on these commitments
is not significant.Certain of the Companys loan sale activities involve mortgage loans subject to recourse
arrangements that generally obligate Doral Financial to repurchase or substitute the loans
if the loans are 90 days or more past due or otherwise in default. Recourse is generally
limited to a period of time (from four to seven years) or to a percentage of the loans sold
(from 10% to 15%). As of September 30, 2005, the outstanding principal balance of loans
sold subject to full or partial recourse was $2.4 billion. As of such date, the maximum
contractual exposure in principal amount of loans that Doral Financial would have been
required to repurchase if all loans subject to recourse defaulted was $1.7 billion. Doral
Financials contingent obligation with respect to such recourse provision is not reflected
on the Companys Consolidated Financial Statements, except for a liability of $17.5 million,
as of September 30, 2005, for estimated losses from such recourse agreements, which is
included in Accrued expenses and other liabilities.w.
    
    Commitments and ContingenciesThe Company enters into financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
may include commitments to extend credit and sell mortgage-backed securities and loans. At
September 30, 2005, commitments to extend credit amounted to
approximately $574.1 million and
commitments to sell mortgage-backed securities and loans amounted to approximately $1.9
billion. 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. Out of the $1.9 billion existing as of September 30,
2005, $1.6 billion relate to commitments to sell mortgage loans that would give
rise to IOs, which were terminated during the fourth quarter of 2005.As of September 30, 2005, Doral Financial and its subsidiaries were 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 and
results of operations of Doral Financial.
 35




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 During 2005, Doral Financial became subject to various legal proceedings, including
regulatory and judicial investigations and civil litigation, arising as a result of the
restatement.Class Action Lawsuits.Following the announcement of the restatement, Doral Financial and
certain of its officers and directors and former officers and directors, were named as
defendants in eighteen purported class action lawsuits filed between April 20, 2005 and June
14, 2005, alleging violations of federal securities laws. Sixteen of these actions were
filed in the U.S. District Court for the Southern District of New York and two were filed in
the U.S. District Court for the District of Puerto Rico. These lawsuits, brought on behalf
of shareholders who purchased Doral Financial securities as early as May 15, 2000 and as
late as May 26, 2005, allege primarily that the defendants engaged in securities fraud by
disseminating materially false and misleading statements during the class period, failing to
disclose material information concerning the valuation of the Companys IOs, and misleading
investors as to Dorals vulnerability to interest rate increases. The two actions not
initially filed in the U.S. District Court for the Southern District of New York have been
transferred there by the Judicial Panel on Multi-District Litigation for coordinated or
consolidated pretrial proceedings with the actions previously filed there before Judge
Richard Owen. On February 8, 2006, Judge Owen entered an order appointing the West Virginia
Investment Management Board as lead plaintiff and approving the selection of Lerach Coughlin
Stoia Geller Rudman & Robbins LLP as lead plaintiffs counsel. These lawsuits are in very
early stages and seek unspecified compensatory damages, costs and expenses.Shareholder Derivative Lawsuits.Certain officers and directors and former officers and
directors of the Company were also named as defendants in four shareholder derivative
actions filed in the U.S. District Court for the Southern District of New York between June
2, 2005 and June 13, 2005. These derivative actions purport to bring claims on behalf of the
Company based principally on allegations that Doral Financials officers and directors
allowed Doral Financial to use inadequate procedures and financial controls in connection
with the Companys financial statements and made misstatements to the public concerning the
Companys financial controls and financial performance. These four derivative actions, which
are in very early stages, are pending before Judge Owen and have been consolidated with the
class actions during pretrial proceedings. The relief sought in these derivative actions
includes contribution in respect of the securities actions, unspecified compensatory damages
on behalf of Doral Financial, disgorgement of defendants profits and compensation,
equitable and/or injunctive relief, costs and other expenses.Other Lawsuits.On June 21, 2005, a lawsuit was filed against Doral Financial and certain of
its officers and directors and former officers and directors in the U.S. District Court for
the District of Puerto Rico. The suit as amended concerns a divorce settlement entered by the
former Chairman and chief executive officer of Doral Financial and also alleges, among other
things, violations of federal securities laws, Racketeer Influenced 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.In addition, on October 14, 2005, the Company, a director 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 similar to those
alleged in the class action lawsuits. 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. This action is at a very early stage,
is pending before Judge Owen and has been consolidated with the class and derivative actions
for pretrial proceedings.Doral Financial cannot predict the outcome of the matters described above and is unable to
ascertain the ultimate aggregate amount of monetary liability or financial impact to Doral
Financial of these matters. Accordingly, no reserve is being established in Doral
Financials financial statements at this time. Doral Financial cannot determine whether
these actions, suits, claims and proceedings will, individually or
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 collectively, have a material adverse effect on the business, results of operations,
financial condition and liquidity of Doral Financial.Other Legal Matters.On April 19, 2005, the SEC informed Doral Financial that it is
conducting an inquiry into Doral Financials accounting and disclosure practices related to
the April 19, 2005 announcement that it would restate its financial results, and the
underlying issues related to the restatement. Subsequently, the SEC issued a formal order of
investigation in connection with the previously announced informal inquiry into the
Companys restatement of its consolidated financial statements. The Company is cooperating
with the SEC in connection with this investigation.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 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.On March 17, 2006, subsequent the filing of Doral Financials amended 2004 Annual Report on
Form 10-K, the Company and its principal Puerto Rico banking  subsidiary, Doral Bank PR,
entered into consent orders with the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation (FDIC) and the Commissioner of Financial
Institutions of Puerto Rico. 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. No fines or monetary penalties were
assessed against Doral Financial or Doral Bank under the orders.Under the terms of the consent order with the FDIC and the Commissioner, Doral Bank PR may
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 consent of the FDIC
and the Commissioner.The consent order with the Federal Reserve contains similar restrictions on Doral Financial
from obtaining extensions of credit from, or entering into certain asset purchase and sale
transactions with, Doral Bank PR, without the prior approval of the Federal Reserve. The
consent order also restricts Doral Financial 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 not
less than 30 days (five days in the case of the first request following the effective date
of the order) prior to a proposed dividend declaration date.x.
    
    Recent Accounting PronouncementsAccounting for Certain Loans or Debt Securities Acquired in a Transfer.In November 2003,
the Accounting Standards Executive Committee issued the Statement of Position (SOP) No.
03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. This
statement addresses accounting for differences between contractual cash flows and cash flows
expected to be collected from an investor s initial investment in loans or debt securities
(loans) acquired in a transfer if those differences are attributable, at least in part, to
credit quality. This SOP does not apply to loans originated by the entity. This SOP
prohibits carrying over or creation of valuation allowances in the initial accounting of
all loans acquired in a transfer that are within the scope of this SOP. The prohibition of
the valuation allowance carryover applies to the purchase of an individual loan, a pool of
loans, a group of loans, and loans acquired in a purchase business combination. This SOP is
effective for loans acquired in fiscal years beginning after December 15, 2004. The
adoption of this statement did not have a material effect on Doral Financials Consolidated
Financial Statements.The Meaning of Other Than Temporary Impairment and Its Application to Certain Investments.
In March 2004, the Emerging Issue Task Force (EITF) reached a consensus on Issue 03-1,
Meaning of Other Than Temporary Impairment and Its Application to Certain Investments
(Issue 03-1). Issue 03-1 provides recognition and measurement guidance regarding when
impairments of equity and debt securities are
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 considered other-than-temporary requiring a charge to earnings, and also requires additional
annual disclosures for investments in unrealized loss positions. The additional annual
disclosure requirements were implemented by the Company during the year ended December 31,
2003. In September 2004, the FASB issued FASB Staff Position (FSP) EITF Issue 03-1-a, to
address the application of Issue 03-1 to debt securities that are impaired solely because of
interest rates and/or sector spread increases and that are analyzed for impairment under
paragraph 16 of Issue 03-1. EITF Issue 03-1-1 expanded the scope of the deferral to include
all securities covered by Issue 03-1. Both delayed the recognition and measurement
provisions of Issue 03-1 pending the issuance of further implementation guidance. In June
2005, the FASB decided to not provide additional guidance on the meaning of
other-than-temporary impairment, but directed the staff to issue proposed FSP EITF 031-a,
Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, as
final. The final FSP supersede EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments and EITF Topic No. D-44, Recognition
of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds
Fair Value. The final FSP (retitled FSP FAS 115-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments) replace the guidance set forth in
paragraphs 10-18 of Issue 03-1 with references to existing other than temporary impairment
guidance, such as SFAS 115, Accounting for Certain Investments in Debt and Equity
Securities, SEC Staff Accounting Bulletin 59, Accounting for Noncurrent Marketable Equity
Securities, and Accounting Principles Board (APB) Opinion No. 18, The Equity Method of
Accounting for Investments in Common Stock. FSP FAS 115-1 codify the guidance set forth in
EITF Topic D-44 and clarify that an investor should recognize an impairment loss no later
than when the impairment is deemed other-than-temporary, even if a decision to sell has not
been made, and is effective for other-than-temporary impairment analyses conducted in
periods beginning after September 15, 2005. The Company believes that the adoption of this
statement will not have a material effect on Doral Financials Consolidated Financial
Statements.Share-Based Payments. In December 2004, the FASB issued SFAS 123R, Share-Based Payments.
This statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation and
it also supersedes APB No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. This statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions. SFAS 123R
eliminates the alternative to use APB 25s intrinsic value method of accounting that was
provided in SFAS 123, as originally issued. This statement is effective for fiscal years
that begin after June 15, 2005. Management does not expect that the adoption of this
statement will have a material effect on the Consolidated Financial Statements of the
Company since in 2003, Doral Financial started to expense the fair value of stock options
granted to employees using the modified prospective method under SFAS 148, Accounting for
Stock-Based Compensation  Transition and Disclosure an amendment of FASB Statement No.
123. 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.Exchanges of Nonmonetary Assets.In December 2004, the FASB issued SFAS No. 153, Exchanges
of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions. This statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The entitys future cash flows are
expected to significantly change if either of the following criteria is met: a) The
configuration (risk, timing, and amount) of the future cash flows of the asset(s) received
differs significantly from the configuration of the future cash flows of the asset(s)
transferred; b) The entity-specific value of the asset(s) received differs from the
entity-specific value of the asset(s) transferred, and the difference is significant in
relation to the fair values of the assets exchanged. A qualitative assessment will, in some
cases, be conclusive in determining that the estimated cash flows of the entity are expected
to significantly change as a result of the exchange. This statement is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Management believes that the adoption of this statement will not have a material effect on
Doral Financials Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Accounting Changes and Error Corrections.In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Errors Corrections. This Statement replaces APB Opinion No. 20,
Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of a change
in accounting principle. This statement requires retrospective application to prior periods
financial statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the change. This
statement also requires that a change in depreciation, amortization, or depletion method for
long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected
by a change in accounting principle. Opinion 20 previously required that such changes in
accounting principle be reported as a change in accounting principle by including in net
income of the period of the change the cumulative effect of changing to the new accounting
principle. SFAS No. 154 is effective for accounting changes and corrections made in fiscal
years beginning after December 15, 2005. Early adoption is permitted for accounting changes
and corrections of errors made in fiscal years beginning after June 1, 2005. This statement
does not change the transition provisions of any existing accounting pronouncements,
including those that are in a transition phase as of the effective date of this Statement.Accounting for Conditional Asset Retirement Obligations.In March 2005, the FASB issued
financial interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement
Obligations  an interpretation of FASB Statement No. 143, Accounting for Asset Retirement
Obligation. This Interpretation clarifies the term conditional asset retirement obligation
as used in FASB No. 143 and requires a liability to be recorded if the fair value of the
obligation can be reasonably estimated. The types of asset retirement obligations that are
covered by this Interpretation are those for which an entity has a legal obligation to
perform an asset retirement activity, however the timing and (or) method of settling the
obligation are conditional on a future event that may or may not be within the control of
the entity. FIN No. 47 also clarifies when an entity would have sufficient information to
reasonably estimate the fair value of an asset retirement obligation. This Interpretation is
effective no later than December 31, 2005. The adoption of this statement is not expected to
have a material impact on the Corporations financial condition, results of operations, or
cash flows.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, with earlier adoption
allowed. The Company is currently evaluating the effect, if any, that the adoption of SFAS
155 will have on its financial statements.Terms of Loan Products that may Give Rise to a Concentration of Credit Risk. In December
2005, the FASB issued FASB Staff Position No. SOP 94-6-1, Terms of Loan Products That May
Give Rise to a Concentration of Credit Risk (FSP SOP 94-6-1). FSP SOP 94-6-1 addresses
disclosure requirements for entities that originate, hold, guarantee, service, or invest in
loan products whose terms may give rise to a concentration of credit risk. The effective
date of FSP SOP 94-6-1 is for interim and annual periods ending after December 19, 2005.
The Company is currently evaluating the effect, if any, that the adoption of FSP SOP 94-6-1
will have on its 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 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 and 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, (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
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, including interim financial
statements, for any period of that fiscal year. The Company is currently evaluating the
possible impact of the adoption of SFAS 156 on its financial statements.
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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
  
    
    Recharacterization of mortgage loan sale transactions as secured borrowings;
    
    Valuation of IOs;
    
    Accounting for servicing assets;
    
    Accounting for derivative instruments and investment securities;
    
    Provision for loan and lease losses; and
    
    Other accounting adjustments, including with respect to the lower of cost
or market valuation allowance, obligations for loans sold with recourse, the accounting
for certain defaulted loans, the accounting for the deferral and recognition of loan
origination fees and costs and the accounting for rent expense under operating leases.
  INTERNAL CONTROL OVER FINANCIAL REPORTING
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SUBSEQUENT EVENTS
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OVERVIEW OF RESULTS OF OPERATIONS
  
    
    The effect on the Company's business of the need to restate
its financial statements in order to correct
the methodology used to calculate the fair value of Doral Financials portfolio of
floating rate IOs.
    
    Reduced volume of mortgage loan sales, as a result of the Companys
inability to use its traditional sales channels in Puerto Rico for non-conforming loans
because of the uncertainty of the accounting treatment for sale transactions
surrounding the restatement.
    
    The impact of a flattening of the yield curve on the Companys net interest
margin and the value of its trading and hedging instruments.
  
    
    Net income for the third quarter of 2005 increased by 70% when compared to
the same period in 2004, from $24.1 million to $40.9 million, and increased by 114% on
a diluted earnings per share basis from $0.14 to $0.30.
    
    Results for the third quarter of 2005 were primarily affected by an
increase in non-interest income driven by higher trading profits and servicing income,
which was partially offset by higher non-interest expenses.
    
    Net interest income for the quarter ended September 30, 2005 was $65.2
million, compared to $89.7 million for the same period in 2004. The decrease in net
interest income reflects a significant decrease in interest rate margin offset in part
by a significant growth in average interest-earning assets, principally loans and
mortgage-backed securities (see Tables A, B, C and D below for information regarding
the Companys net interest income). The reduction in net interest margin resulted from
the flattening of the yield curve; on average, the Companys liabilities, principally
wholesale funding and loans payable, re-priced at higher rates while the Companys
assets re-priced at lower rates.
    
    The provision for loan and lease losses increased significantly for the
third quarter of 2005 to $9.4 million, from $5.3 million in the same period in 2004.
The increase in the provision reflects an increase in non-performing loans and growth
in the non-residential portfolio.
    
    Non-interest income for the third quarter of 2005 was $80.4 million,
compared to a loss of $3.1 million for the same period in 2004. The increase in
non-interest income was primarily driven by higher gains on securities held for trading
and higher servicing income offset in part by lower gain on sales of mortgage loans and
investment securities. Gains on trading activities for the third quarter of 2005 were
principally due to realized and unrealized gains with respect to derivative instruments
undertaken for risk management purposes, which were in turn mainly attributable to an
increase in long-term interest and swap rates during the third quarter of 2005.
    
    Non-interest expenses for the third quarter of 2005 were $70.3 million
compared to $54.7 million for the same period in 2004. The increase in non-interest
expenses was driven by increases in compensation, professional fees, depreciation and
amortization, occupancy and other expenses resulting from the expansion of Doral
Financials mortgage banking and banking operations and expenses related to increased
lending activities and servicing. The increase in professional services is related
primarily to expenses associated with the restatement of the Companys prior period
financial statements.
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##### Table of Contents




    
    In August 2005, the Government of Puerto Rico approved a temporary,
two-year additional tax of 2.5% for corporations, which increased the marginal tax rate
from 39% to 41.5%. The third quarter of 2005 includes the cumulative effect of the
change in marginal tax rate for the first three quarters of 2005.
 CRITICAL ACCOUNTING POLICIES
   RESULTS OF OPERATIONS FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (As
Restated)
   NET INCOME
  44




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NET INTEREST INCOME
    45




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46




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TABLE A
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
 QUARTER ENDED SEPTEMBER 30,20042005
    
    
    (As Restated)AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEBALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)
    
    $
    7,394,426
    
    
    $
    125,412
    
    
    
    6.73
    %
    
    $
    5,661,651
    
    
    $
    108,294
    
    
    
    7.59
    %Mortgage-backed securities
    
    
    4,846,714
    
    
    
    56,741
    
    
    
    4.64
    %
    
    
    2,334,382
    
    
    
    28,433
    
    
    
    4.83
    %Interest-only strips
    
    
    106,062
    
    
    
    2,799
    
    
    
    10.47
    %
    
    
    129,714
    
    
    
    3,312
    
    
    
    10.13
    %Investment securities
    
    
    4,183,459
    
    
    
    41,324
    
    
    
    3.92
    %
    
    
    4,012,448
    
    
    
    41,824
    
    
    
    4.14
    %Other interest-earning assets
    
    
    2,479,859
    
    
    
    20,847
    
    
    
    3.34
    %
    
    
    1,412,446
    
    
    
    4,932
    
    
    
    1.39
    %Total interest-earning assets/interest income
    
    
    19,010,520
    
    
    $
    247,123
    
    
    
    5.16
    %
    
    
    13,550,641
    
    
    $
    186,795
    
    
    
    5.47
    %Total non-interest-earning assets
    
    
    851,012
    
    
    
    
    
    
    
    
    
    
    
    691,978Total assets
    
    $
    19,861,532
    
    
    
    
    
    
    
    
    
    
    $
    14,242,619LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    4,066,558
    
    
    $
    29,326
    
    
    
    2.86
    %
    
    $
    3,235,541
    
    
    $
    20,211
    
    
    
    2.48
    %Repurchase agreements
    
    
    7,905,510
    
    
    
    73,957
    
    
    
    3.71
    %
    
    
    4,997,754
    
    
    
    31,463
    
    
    
    2.50
    %Advances from the FHLB
    
    
    1,185,152
    
    
    
    12,397
    
    
    
    4.15
    %
    
    
    1,242,380
    
    
    
    12,611
    
    
    
    4.03
    %Loans payable
    
    
    4,071,922
    
    
    
    51,051
    
    
    
    4.97
    %
    
    
    2,507,231
    
    
    
    22,707
    
    
    
    3.59
    %Notes payable
    
    
    1,086,094
    
    
    
    15,236
    
    
    
    5.57
    %
    
    
    823,610
    
    
    
    10,129
    
    
    
    4.88
    %Total interest-bearing liabilities/interest expense
    
    
    18,315,236
    
    
    $
    181,967
    
    
    
    3.94
    %
    
    
    12,806,516
    
    
    $
    97,121
    
    
    
    3.01
    %Total non-interest-bearing liabilities
    
    
    282,459
    
    
    
    
    
    
    
    
    
    
    
    282,484Total liabilities
    
    
    18,597,695
    
    
    
    
    
    
    
    
    
    
    
    13,089,000Stockholders equity
    
    
    1,263,837
    
    
    
    
    
    
    
    
    
    
    
    1,153,619Total liabilities and stockholders equity
    
    $
    19,861,532
    
    
    
    
    
    
    
    
    
    
    $
    14,242,619Net interest-earning assets
    
    $
    695,284
    
    
    
    
    
    
    
    
    
    
    $
    744,125Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    65,156
    
    
    
    
    
    
    
    
    
    
    $
    89,674Interest rate spread(2)
    
    
    
    
    
    
    
    
    
    
    1.22
    %
    
    
    
    
    
    
    
    
    
    
    2.46
    %Interest rate margin(3)
    
    
    
    
    
    
    
    
    
    
    1.36
    %
    
    
    
    
    
    
    
    
    
    
    2.63
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    103.80
    %
    
    
    
    
    
    
    
    
    
    
    105.81
    %
 
 (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 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.(3)
    
    Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets. 47




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TABLE B
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
 NINE MONTH PERIOD ENDED SEPTEMBER 30,20042005
    
    
    (As Restated)AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEBALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    7,071,753
    
    
    $
    360,054
    
    
    
    6.81
    %
    
    $
    5,437,288
    
    
    $
    310,378
    
    
    
    7.62
    %Mortgage-backed securities
    
    
    4,716,362
    
    
    
    169,615
    
    
    
    4.81
    %
    
    
    1,715,326
    
    
    
    63,520
    
    
    
    4.95
    %Interest-only strips
    
    
    111,610
    
    
    
    8,640
    
    
    
    10.35
    %
    
    
    132,508
    
    
    
    9,920
    
    
    
    10.00
    %Investment securities
    
    
    3,578,767
    
    
    
    106,092
    
    
    
    3.96
    %
    
    
    3,810,229
    
    
    
    120,574
    
    
    
    4.23
    %Other interest-earning assets
    
    
    2,553,803
    
    
    
    54,646
    
    
    
    2.86
    %
    
    
    1,531,814
    
    
    
    13,160
    
    
    
    1.15
    %Total interest-earning assets/interest income
    
    
    18,032,295
    
    
    $
    699,047
    
    
    
    5.18
    %
    
    
    12,627,165
    
    
    $
    517,552
    
    
    
    5.47
    %Total non-interest-earning assets
    
    
    851,399
    
    
    
    
    
    
    
    
    
    
    
    621,394Total assets
    
    $
    18,883,694
    
    
    
    
    
    
    
    
    
    
    $
    13,248,559LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    3,746,995
    
    
    $
    74,961
    
    
    
    2.67
    %
    
    $
    3,172,292
    
    
    $
    58,692
    
    
    
    2.47
    %Repurchase agreements
    
    
    7,192,152
    
    
    
    184,050
    
    
    
    3.42
    %
    
    
    4,405,448
    
    
    
    79,547
    
    
    
    2.41
    %Advances from the FHLB
    
    
    1,220,676
    
    
    
    37,931
    
    
    
    4.15
    %
    
    
    1,240,672
    
    
    
    36,755
    
    
    
    3.96
    %Loans payable
    
    
    4,055,800
    
    
    
    145,337
    
    
    
    4.79
    %
    
    
    2,319,091
    
    
    
    59,150
    
    
    
    3.41
    %Notes payable
    
    
    1,090,295
    
    
    
    42,293
    
    
    
    5.19
    %
    
    
    658,611
    
    
    
    33,175
    
    
    
    6.73
    %Total interest-bearing liabilities/interest expense
    
    
    17,305,918
    
    
    $
    484,572
    
    
    
    3.74
    %
    
    
    11,796,114
    
    
    $
    267,319
    
    
    
    3.03
    %Total non-interest-bearing liabilities
    
    
    315,383
    
    
    
    
    
    
    
    
    
    
    
    266,820Total liabilities
    
    
    17,621,301
    
    
    
    
    
    
    
    
    
    
    
    12,062,934Stockholders equity
    
    
    1,262,393
    
    
    
    
    
    
    
    
    
    
    
    1,185,625Total liabilities and stockholders equity
    
    $
    18,883,694
    
    
    
    
    
    
    
    
    
    
    $
    13,248,559Net interest-earning assets
    
    $
    726,377
    
    
    
    
    
    
    
    
    
    
    $
    831,051Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    214,475
    
    
    
    
    
    
    
    
    
    
    $
    250,233Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.44
    %
    
    
    
    
    
    
    
    
    
    
    2.44
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.59
    %
    
    
    
    
    
    
    
    
    
    
    2.65
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    104.20
    %
    
    
    
    
    
    
    
    
    
    
    107.05
    %
 
 (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)
    
    For the first nine months of 2004 interest income on loans includes a yield adjustment of $11.3 million related to deferred fees on construction loans repaid prior to maturity.(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. 48




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TABLE C
NET INTEREST INCOME VARIANCE ANALYSIS
(IN THOUSANDS)
 QUARTER ENDEDSEPTEMBER 30,2005 COMPARED TO 2004 (As Restated)INCREASE (DECREASE) DUE TO:VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    32,879
    
    
    $
    (15,761
    )
    
    $
    17,118Mortgage-backed securities
    
    
    30,336
    
    
    
    (2,028
    )
    
    
    28,308Interest-only strips
    
    
    (599
    )
    
    
    86
    
    
    
    (513
    )Investment securities
    
    
    1,770
    
    
    
    (2,270
    )
    
    
    (500
    )Other interest-earning assets
    
    
    3,709
    
    
    
    12,206
    
    
    
    15,915TOTAL INTEREST INCOME VARIANCE
    
    
    68,095
    
    
    
    (7,767
    )
    
    
    60,328INTEREST EXPENSE VARIANCEDeposits
    
    
    5,152
    
    
    
    3,963
    
    
    
    9,115Repurchase agreements
    
    
    18,173
    
    
    
    24,321
    
    
    
    42,494Advances from the FHLB
    
    
    (577
    )
    
    
    363
    
    
    
    (214
    )Loans payable
    
    
    14,043
    
    
    
    14,301
    
    
    
    28,344Notes payable
    
    
    3,202
    
    
    
    1,905
    
    
    
    5,107TOTAL INTEREST EXPENSE VARIANCE
    
    
    39,993
    
    
    
    44,853
    
    
    
    84,846NET INTEREST INCOME VARIANCE
    
    $
    28,102
    
    
    $
    (52,620
    )
    
    $
    (24,518
    )
 49




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TABLE D
NET INTEREST INCOME VARIANCE ANALYSIS
(IN THOUSANDS)
 NINE MONTH PERIODENDED SEPTEMBER 30,2005 COMPARED TO 2004 (As Restated)INCREASE (DECREASE) DUE TO:VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    93,410
    
    
    $
    (43,734
    )
    
    $
    49,676Mortgage-backed securities
    
    
    111,413
    
    
    
    (5,318
    )
    
    
    106,095Interest-only strips
    
    
    (1,567
    )
    
    
    287
    
    
    
    (1,280
    )Investment securities
    
    
    (7,343
    )
    
    
    (7,139
    )
    
    
    (14,482
    )Other interest-earning assets
    
    
    8,815
    
    
    
    32,671
    
    
    
    41,486TOTAL INTEREST INCOME VARIANCE
    
    
    204,728
    
    
    
    (23,233
    )
    
    
    181,495INTEREST EXPENSE VARIANCEDeposits
    
    
    10,646
    
    
    
    5,623
    
    
    
    16,269Repurchase agreements
    
    
    50,370
    
    
    
    54,133
    
    
    
    104,503Advances from the FHLB
    
    
    (594
    )
    
    
    1,770
    
    
    
    1,176Loans payable
    
    
    44,416
    
    
    
    41,771
    
    
    
    86,187Notes payable
    
    
    21,789
    
    
    
    (12,671
    )
    
    
    9,118TOTAL INTEREST EXPENSE VARIANCE
    
    
    126,627
    
    
    
    90,626
    
    
    
    217,253NET INTEREST INCOME VARIANCE
    
    $
    78,101
    
    
    $
    (113,859
    )
    
    $
    (35,758
    )
 INTEREST INCOME
   50




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Quarter Ended
    
    
    Nine Month PeriodSeptember 30,
    
    
    Ended September 30,(In thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Total cash flows received on IO portfolio
    
    $
    14,952
    
    
    $
    16,350
    
    
    $
    49,045
    
    
    $
    47,006Amortization of IOs, as offset to cash flows
    
    
    (12,153
    )
    
    
    (13,038
    )
    
    
    (40,405
    )
    
    
    (37,086
    )Net cash flows recognized as interest income
    
    $
    2,799
    
    
    $
    3,312
    
    
    $
    8,640
    
    
    $
    9,920
   51




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INTEREST EXPENSE
       52




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PROVISION FOR LOAN AND LEASE LOSSES
    NON-INTEREST INCOME
  Net Gain on Mortgage Loan Sales and Fees.
 53




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FOR THE
    
    
    
    
    
    FOR THEFOR THE
    
    QUARTER
    
    FOR THE
    
    NINE MONTHQUARTER
    
    ENDED
    
    NINE MONTH
    
    PERIOD ENDEDENDED
    
    SEPTEMBER 30,
    
    PERIOD ENDED
    
    SEPTEMBER 30,SEPTEMBER 30,
    
    2004
    
    SEPTEMBER 30,
    
    2004(In thousands)
    
    2005
    
    (As Restated)
    
    2005
    
    (As Restated)Total loan sales and securitizations
    
    $
    541,953
    
    
    $
    750,342
    
    
    $
    2,113,256
    
    
    $
    1,915,906Total loans sales resulting in the
recording of IOs
    
    $
    
    
    
    $
    446,342
    
    
    $
    732,650
    
    
    $
    890,098IOs capitalized
    
    $
    
    
    
    $
    20,919
    
    
    $
    10,981
    
    
    $
    44,992MSRs capitalized
    
    $
    15,093
    
    
    $
    5,188
    
    
    $
    32,936
    
    
    $
    18,703
 Net Servicing Income.
   54




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TABLE E
NET SERVICING INCOME (LOSS)
 NINE MONTH PERIODQUARTER ENDED
    
    
    ENDEDSEPTEMBER 30,
    
    
    SEPTEMBER 30,2004
    
    
    
    
    
    
    2004(In thousands)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Servicing fees (net of guarantee fees).
    
    $
    7,950
    
    
    $
    7,236
    
    
    $
    23,314
    
    
    $
    21,810Late charges
    
    
    2,176
    
    
    
    1,889
    
    
    
    6,481
    
    
    
    5,483Prepayment penalties
    
    
    2,122
    
    
    
    1,651
    
    
    
    5,232
    
    
    
    4,671Interest loss
    
    
    (418
    )
    
    
    (621
    )
    
    
    (2,749
    )
    
    
    (1,881
    )Other servicing fees
    
    
    120
    
    
    
    227
    
    
    
    319
    
    
    
    637Servicing income, gross
    
    
    11,950
    
    
    
    10,382
    
    
    
    32,597
    
    
    
    30,720Recovery (Amortization and impairment)
of servicing assets
    
    
    13,493
    
    
    
    (19,172
    )
    
    
    (17,021
    )
    
    
    (32,699
    )Total net servicing income (loss)
    
    $
    25,443
    
    
    $
    (8,790
    )
    
    $
    15,576
    
    
    $
    (1,979
    )
 Trading Activities.
 TABLE F
COMPONENTS OF TRADING ACTIVITIES
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,2004
    
    
    
    
    
    
    2004(In thousands)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Net realized gains (losses) on sales of trading securities
    
    $
    3,178
    
    
    $
    (3,544
    )
    
    $
    10,286
    
    
    $
    19,444(Losses) gains on the IO valuation
    
    
    (25,263
    )
    
    
    14,323
    
    
    
    (9,686
    )
    
    
    5,462Net unrealized (losses) gains on trading securities, excluding IOs
    
    
    (117
    )
    
    
    4,245
    
    
    
    (1,690
    )
    
    
    4,167Net realized and unrealized gains and (losses) on derivative
instruments
    
    
    50,296
    
    
    
    (56,050
    )
    
    
    (7,243
    )
    
    
    (119,259
    )Total
    
    $
    28,094
    
    
    $
    (41,026
    )
    
    $
    (8,333
    )
    
    $
    (90,186
    )
 Net Gain on Sale of Investment Securities.
 55




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Commissions, Fees and Other Income.
 TABLE G
COMMISSIONS, FEES AND OTHER INCOME
 QUARTER
    
    
    NINE MONTH PERIODENDED SEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,2004
    
    
    
    
    
    
    2004(In Thousands)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Retail banking fees
    
    $
    4,618
    
    
    $
    3,570
    
    
    $
    12,953
    
    
    $
    9,964Securities brokerage and asset
management fees and
commissions
    
    
    330
    
    
    
    389
    
    
    
    1,003
    
    
    
    1,505Insurance agency commissions
    
    
    3,244
    
    
    
    2,972
    
    
    
    9,220
    
    
    
    8,903Other income
    
    
    2,098
    
    
    
    2,391
    
    
    
    3,059
    
    
    
    3,877Total
    
    $
    10,290
    
    
    $
    9,322
    
    
    $
    26,235
    
    
    $
    24,249
  56




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NON-INTEREST EXPENSE S
 TABLE H
NON INTEREST EXPENSES
 QUARTER
    
    
    NINE MONTH PERIODENDED SEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,2004
    
    
    
    
    
    
    2004(In Thousands)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Compensation and benefits
    
    $
    23,639
    
    
    $
    21,751
    
    
    $
    72,907
    
    
    $
    64,600Taxes, other than payroll and income taxes
    
    
    2,787
    
    
    
    2,389
    
    
    
    7,513
    
    
    
    6,857Advertising
    
    
    4,044
    
    
    
    3,366
    
    
    
    12,972
    
    
    
    10,669Professional services  excluding restatement
expenses
    
    
    4,366
    
    
    
    3,053
    
    
    
    12,196
    
    
    
    8,080Professional services  restatement expenses only
    
    
    13,619
    
    
    
    
    
    
    
    21,025
    
    
    
    Communication and information systems
    
    
    4,391
    
    
    
    3,610
    
    
    
    13,779
    
    
    
    10,198Occupancy and other office expenses
    
    
    8,320
    
    
    
    7,207
    
    
    
    23,665
    
    
    
    19,599Depreciation and amortization
    
    
    5,424
    
    
    
    4,345
    
    
    
    15,506
    
    
    
    12,582Other
    
    
    3,686
    
    
    
    8,969
    
    
    
    12,755
    
    
    
    20,763Total non-interest expenses
    
    $
    70,276
    
    
    $
    54,690
    
    
    $
    192,318
    
    
    $
    153,348
  INCOME TAXES
   57




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58




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BALANCE SHEET AND OPERATING DATA ANALYSIS
 LOAN PRODUCTION
  TABLE I
LOAN PRODUCTION
 (Dollars
in Thousands, Except for Average Initial Loan Balance)
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,2004
    
    
    
    
    
    
    20042005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)FHA/VA mortgage loansNumber of loans
    
    
    876
    
    
    
    1,280
    
    
    
    3,238
    
    
    
    3,672Volume of loans
    
    $
    76,924
    
    
    $
    110,564
    
    
    $
    273,848
    
    
    $
    326,156Percent of total volume
    
    
    6
    %
    
    
    8
    %
    
    
    6
    %
    
    
    8
    %Average initial loan balance
    
    $
    87,813
    
    
    $
    86,378
    
    
    $
    84,573
    
    
    $
    88,822Conventional conforming mortgage loansNumber of loans
    
    
    2,162
    
    
    
    928
    
    
    
    7,584
    
    
    
    5,023Volume of loans
    
    $
    272,352
    
    
    $
    109,900
    
    
    $
    919,523
    
    
    $
    594,046Percent of total volume
    
    
    19
    %
    
    
    8
    %
    
    
    22
    %
    
    
    15
    %Average initial loan balance
    
    $
    125,972
    
    
    $
    118,427
    
    
    $
    121,245
    
    
    $
    118,265Conventional non  conforming mortgage loans(1)Number of loans
    
    
    6,714
    
    
    
    6,603
    
    
    
    18,045
    
    
    
    18,967Volume of loans
    
    $
    719,828
    
    
    $
    773,132
    
    
    $
    1,982,805
    
    
    $
    2,111,582Percent of total volume
    
    
    52
    %
    
    
    57
    %
    
    
    47
    %
    
    
    52
    %Average initial loan balance
    
    $
    107,213
    
    
    $
    117,088
    
    
    $
    109,881
    
    
    $
    111,329Other(2)Number of loans
    
    
    3,540
    
    
    
    3,155
    
    
    
    11,961
    
    
    
    8,574Volume of loans
    
    $
    328,292
    
    
    $
    359,792
    
    
    $
    1,068,338
    
    
    $
    994,215Percent of total volume
    
    
    23
    %
    
    
    27
    %
    
    
    25
    %
    
    
    25
    %Total loansNumber of loans
    
    
    13,292
    
    
    
    11,966
    
    
    
    40,828
    
    
    
    36,236Volume of loans
    
    $
    1,397,396
    
    
    $
    1,353,388
    
    
    $
    4,244,514
    
    
    $
    4,025,999
 
 (1)
    
    Includes $60.5 million and $37.4 million in second mortgages for the quarters ended September 30, 2005 and 2004,
respectively, and $164.2 million and $118.4 million in second mortgages for the nine month period ended September 30, 2005 and
2004, respectively.(2)
    
    Consists of construction loans on residential projects, mortgage loans secured by multi-family and commercial
properties as well as other commercial, land and consumer loans. 59




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TABLE J
LOAN ORIGINATION SOURCES
 NINE MONTH PERIOD ENDED SEPTEMBER 30,20042005
    
    
    (As Restated)Puerto Rico
    
    
    US
    
    
    Total
    
    
    Puerto Rico
    
    
    US
    
    
    TotalRetail
    
    
    69
    %
    
    
    1
    %
    
    
    70
    %
    
    
    69
    %
    
    
    
    
    
    
    69
    %Wholesale(1)
    
    
    8
    %
    
    
    
    
    
    
    8
    %
    
    
    10
    %
    
    
    
    
    
    
    10
    %New Housing Developments
    
    
    10
    %
    
    
    2
    %
    
    
    12
    %
    
    
    13
    %
    
    
    1
    %
    
    
    14
    %Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other(2)
    
    
    7
    %
    
    
    3
    %
    
    
    10
    %
    
    
    6
    %
    
    
    1
    %
    
    
    7
    %
 
 (1)
    
    Refers to purchases of mortgage loans from other financial institutions and mortgage lenders.(2)
    
    Refers to commercial, consumer and land loans originated through the banking subsidiaries and other specialized units. MORTGAGE LOAN SERVICING
  60




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TABLE K
MORTGAGE LOAN SERVICING
 (Dollars
in Thousands, Except for Average Size of Loans)
 AS OF SEPTEMBER 30,20042005
    
    
    (As Restated)COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END:GNMA
    
    $
    2,240,558
    
    
    $
    2,543,442FHLMC/FNMA
    
    
    3,979,137
    
    
    
    3,528,447Doral Financial grantor trusts
    
    
    
    
    
    
    28,856Other conventional mortgage loans(1)(2)
    
    
    9,189,884
    
    
    
    7,773,044Total servicing portfolio
    
    $
    15,409,579
    
    
    $
    13,873,789SELECTED DATA REGARDING MORTGAGE LOANS SERVICED:Number of loans
    
    
    171,770
    
    
    
    159,521Weighted- average interest rate
    
    
    6.64
    %
    
    
    6.83
    %Weighted- average remaining maturity (months)
    
    
    257
    
    
    
    259Weighted- average gross servicing fee rate
    
    
    0.3903
    %
    
    
    0.3808
    %Average servicing portfolio
    
    $
    14,802,637
    
    
    $
    13,371,538Principal prepayments
    
    $
    1,769,424
    
    
    $
    1,730,260Constant prepayment rate
    
    
    14
    %
    
    
    15
    %Average size of loans
    
    $
    89,711
    
    
    $
    86,972Servicing assets, net
    
    $
    142,905
    
    
    $
    118,538DELINQUENT MORTGAGE LOANS AND PENDING
FORECLOSURES AT PERIOD END:60-89 days past due
    
    
    1.27
    %
    
    
    1.27
    %90 days or more past due
    
    
    1.66
    %
    
    
    1.73
    %Total delinquencies excluding foreclosures
    
    
    2.93
    %
    
    
    3.00
    %Foreclosures pending
    
    
    1.62
    %
    
    
    1.70
    %SERVICING PORTFOLIO ACTIVITY:Beginning servicing portfolio
    
    $
    14,264,367
    
    
    $
    12,690,244Add:Loans funded and purchased(3)
    
    
    3,231,905
    
    
    
    2,997,856Bulk servicing acquired
    
    
    181,712
    
    
    
    212,719Less:Servicing sales
    
    
    7,583
    
    
    
    2,652Run-off(4)
    
    
    2,260,822
    
    
    
    2,024,378Ending servicing portfolio
    
    $
    15,409,579
    
    
    $
    13,873,789
 
 (1)
    
    Includes $5.7 billion and $5.0 billion of loans owned by Doral Financial at September 30, 2005 and 2004, respectively,
which represented 37% and 36% of the total servicing portfolio as of such dates for which no servicing rights has been recognized.(2)
    
    Includes portfolios of $287.7 million and $330.0 million at September 30, 2005 and 2004, respectively, of delinquent
FHA/VA and conventional mortgage loans sold to third parties.(3)
    
    Excludes approximately $1.0 billion of commercial, consumer, construction and other non-mortgage loans originated by Doral
Financial but not part of the mortgage servicing-portfolio as of September 30, 2005 and 2004.(4)
    
    Run-off refers to regular amortization of loans, prepayments and foreclosures. 61




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LIQUIDITY AND CAPITAL RESOURCES
      62




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TABLE L
SOURCES OF BORROWINGS
(DOLLARS IN THOUSANDS)
 AS OF SEPTEMBER 30, 2005
    
    
    AS OF DECEMBER 31, 2004AMOUNT
    
    
    AVERAGE
    
    
    AMOUNT
    
    
    AVERAGEOUTSTANDING
    
    
    RATE
    
    
    OUTSTANDING
    
    
    RATEDeposits
    
    $
    4,105,325
    
    
    
    2.80
    %
    
    $
    3,643,080
    
    
    
    2.47
    %Repurchase Agreements
    
    
    7,629,913
    
    
    
    3.85
    %
    
    
    6,305,163
    
    
    
    2.73
    %Advances from FHLB
    
    
    1,079,500
    
    
    
    3.92
    %
    
    
    1,294,500
    
    
    
    3.98
    %Loans Payable
    
    
    3,762,747
    
    
    
    5.19
    %
    
    
    3,638,507
    
    
    
    3.68
    %Notes Payable
    
    
    1,080,970
    
    
    
    5.38
    %
    
    
    1,095,977
    
    
    
    4.38
    %
   63




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TABLE M
AVERAGE DEPOSIT BALANCE
(DOLLARS IN THOUSANDS)
 NINE MONTH PERIODENDED
    
    
    YEAR ENDEDSEPTEMBER 30, 2005
    
    
    DECEMBER 31, 2004AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    AVERAGEBALANCE
    
    
    RATE
    
    
    BALANCE
    
    
    RATECertificates of deposit
    
    $
    2,122,428
    
    
    
    3.47
    %
    
    $
    1,829,370
    
    
    
    3.15
    %Regular passbook savings
    
    
    482,326
    
    
    
    2.32
    %
    
    
    416,928
    
    
    
    2.27
    %NOW accounts
    
    
    691,258
    
    
    
    2.23
    %
    
    
    634,486
    
    
    
    2.15
    %Non-interest bearing
    
    
    450,983
    
    
    
    
    
    
    
    359,212
    
    
    
    Total deposits
    
    $
    3,746,995
    
    
    
    2.67
    %
    
    $
    3,239,996
    
    
    
    2.49
    %
  TABLE N
CERTIFICATES OF DEPOSIT MATURITIES
(IN THOUSANDS)
 AMOUNTCertificates of deposit maturing:Three months or less
    
    $
    196,570Over three through six months
    
    
    224,584Over six through twelve months
    
    
    522,689Over twelve months
    
    
    1,177,949Total
    
    $
    2,121,792
  64




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REGULATORY CAPITAL RATIOS
  TABLE O
REGULATORY CAPITAL RATIOS
 DORAL
    
    
    DORAL
    
    
    DORALFINANCIAL
    
    
    BANK PR
    
    
    BANK NYTotal Capital (Total capital to risk- weighted assets)
    
    
    12.8
    %
    
    
    20.7
    %
    
    
    18.0
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    11.8
    %
    
    
    19.9
    %
    
    
    17.1
    %Leverage Ratio(1)
    
    
    5.4
    %
    
    
    5.9
    %
    
    
    9.1
    %
 
 (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.       65




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ASSETS AND LIABILITIES
  OFF-BALANCE SHEET ACTIVITIES
   TABLE P
LOANS SUBJECT TO RECOURSE BY LOAN TYPE
 Loans Past Due Over 90 Days(In thousands)
    

OutstandingBalance
    
    

Weighted-averageLoan to Value
    
    
    without
Insurance,and Loan-To-ValueOver 80%Loan Type:FHA/VA loan
    
    $
    20,015
    
    
    
    90.9%
    
    
    $
    Conventional loans
    
    
    2,300,304
    
    
    
    76.1%
    
    
    
    5,796Commercial
    
    
    109,066
    
    
    
    78.1%
    
    
    
    Total
    
    $
    2,429,385
    
    
    
    76.3%
    
    
    $
    5,796
  66




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67




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CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
  TABLE Q
CONTRACTUAL OBLIGATIONS(IN THOUSANDS)
 PAYMENT DUE BY PERIODLESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTERCONTRACTUAL OBLIGATIONS(1)
    
    TOTAL
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSDeposits
    
    $
    4,105,325
    
    
    $
    2,832,867
    
    
    $
    1,054,072
    
    
    $
    203,990
    
    
    $
    14,396Repurchase agreements(2)
    
    
    7,629,913
    
    
    
    3,665,113
    
    
    
    3,164,800
    
    
    
    800,000
    
    
    
    Advances from the FHLB(2)
    
    
    1,079,500
    
    
    
    482,500
    
    
    
    547,000
    
    
    
    50,000
    
    
    
    Loans payable(3)
    
    
    3,762,747
    
    
    
    40,636
    
    
    
    
    
    
    
    
    
    
    
    3,722,111Notes payable
    
    
    1,080,970
    
    
    
    122,735
    
    
    
    713,290
    
    
    
    1,350
    
    
    
    243,595Other liabilities
    
    
    342,378
    
    
    
    337,755
    
    
    
    2,203
    
    
    
    2,420
    
    
    
    Non-cancelable operating leases
    
    
    73,714
    
    
    
    8,221
    
    
    
    14,888
    
    
    
    13,138
    
    
    
    37,467Total Contractual Cash Obligations
    
    $
    18,074,547
    
    
    $
    7,489,827
    
    
    $
    5,496,253
    
    
    $
    1,070,898
    
    
    $
    4,017,569
 
 (1)
    
    Amounts included in the table above do not include interest.(2)
    
    Includes $3.4 billion of repurchase agreements with an average rate of 3.93% and $712.5 million in advances from the
FHLB-NY with an average rate of 4.12%,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 under the less-than-one-year category in the table above but have
actual contractual maturities ranging from February 2008 to March 2015.They are included on the first call date basis because
increases in interest rates over the average rate of the Companys callable borrowings may induce the lenders to exercise their call
right.(3)
    
    Includes $3.7 billion of secured borrowings with local financial institutions, collateralized by real estate mortgage
loans at variable interest rates tied to 3-month LIBOR. These loans are not subject to scheduled payments, but are expected to be
repaid according to the regular amortization and prepayments of the underlying mortgage loans, generally estimated to range between 10%
and 20% on an annual basis. TABLE R
OTHER COMMERCIAL COMMITMENTS(1)(IN THOUSANDS)
 AMOUNT OF COMMITMENT EXPIRATION PER PERIODTOTALAMOUNT
    
    
    LESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTEROTHER COMMERCIAL COMMITMENTS
    
    COMMITTED
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSCommitments to extend credit
    
    $
    574,137
    
    
    $
    320,643
    
    
    $
    251,821
    
    
    $
    1,544
    
    
    $
    129Commitments to sell mortgage-backed
securities and loans
    
    
    1,900,243
    
    
    
    700,243
    
    
    
    1,200,000
    
    
    
    
    
    
    
    Commercial and financial standby letters of credit
    
    
    7,204
    
    
    
    7,204
    
    
    
    
    
    
    
    
    
    
    
    Standby repurchase (recourse) obligations
    
    
    1,740,967
    
    
    
    86,643
    
    
    
    691,009
    
    
    
    561,135
    
    
    
    402,180Total
    
    $
    4,222,551
    
    
    $
    1,114,733
    
    
    $
    2,142,830
    
    
    $
    562,679
    
    
    $
    402,309
 
 (1)
    
    Refer to Off-Balance Sheet Activities for additional information regarding other commercial commitments of the Company. 68




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RISK MANAGEMENT
  Interest Rate and Market Risk Management
  Doral Financials Risk Profile
  Market Value
    
    Net InterestAs of September 30, 2005
    
    of Equity Risk
    
    Income Risk+ 100 BPS
    
    (17.3)%
    
    (12.8)%- 100 BPS
    
    11.4%
    
    10.4%
 Market Value
    
    Net InterestAs of December 31, 2004
    
    of Equity Risk
    
    Income Risk+ 100 BPS
    
    (22.3)%
    
    (13.0)%- 100 BPS
    
    7.1%
    
    10.5%
 Derivatives.
 69




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TABLE S
INTEREST RATE SWAPS
(DOLLARS IN THOUSANDS)
 INTEREST
    
    
    INTERESTNOTIONAL
    
    
    MATURITY
    
    
    
    RATE
    
    
    RATE
    
    
    FAIRAMOUNT
    
    
    DATE
    
    PURPOSE
    
    RECEIVED
    
    
    PAID
    
    
    VALUE$
    550,000
    
    
    August, 2007
    
    To fix the cost of short-term funding sources in a rising rate environment
    
    
    3.790
    %
    
    
    4.430
    %
    
    $
    1,327$
    550,000
    
    
    August, 2007
    
    To fix the cost of short-term funding sources in a rising rate environment
    
    
    3.797
    %
    
    
    4.443
    %
    
    $
    1,199$
    100,000
    
    
    September, 2007
    
    To fix the cost of short-term funding sources in a rising interest rate environment
    
    
    3.834
    %
    
    
    3.688
    %
    
    $
    1,612$
    100,000
    
    
    September, 2007
    
    To fix the cost of short-term funding sources in a rising interest rate environment
    
    
    3.834
    %
    
    
    3.655
    %
    
    $
    1,675$
    1,000,000
    
    
    March, 2008
    
    To protect the spread of the variable IOs
    
    
    3.470
    %
    
    
    4.325
    %
    
    $
    6,002$
    1,000,000
    
    
    March, 2008
    
    To protect the spread of the variable IOs
    
    
    3.490
    %
    
    
    4.474
    %
    
    $
    2,687$
    200,000
    
    
    November, 2009
    
    To protect the spread of the variable IOs
    
    
    3.229
    %
    
    
    3.773
    %
    
    $
    6,377$
    300,000
    
    
    November, 2009
    
    To protect the spread of the variable IOs
    
    
    3.270
    %
    
    
    3.975
    %
    
    $
    7,342$
    100,000
    
    
    February, 2010
    
    To protect the spread of the variable IOs
    
    
    3.294
    %
    
    
    4.221
    %
    
    $
    1,649
  70




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TABLE T
FAIR VALUE RECONCILIATION
 Nine Month Period ended(In thousands)
    
    September 30, 2005Fair value of contracts outstanding at the beginning of the period
    
    $
    5,672Contracts realized or otherwise settled during the period
    
    
    16,870Fair value of new contracts entered into during the period
    
    
    (37,333
    )Changes in fair values during the period
    
    
    54,190Fair value of contracts outstanding at the end of the period
    
    $
    39,399
 TABLE U
SOURCE OF FAIR VALUE
 (In thousands)
    
    Payment Due by PeriodMaturity
    
    
    
    
    
    
    
    
    
    
    Maturityless than
    
    
    Maturity
    
    
    Maturity
    
    
    in excess
    
    
    Total FairAs of September 30, 2005
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    of 5 Years
    
    
    ValueSource of Fair ValuePrices actively quoted
    
    $
    9,529
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    9,529Prices provided by
other external
sources
    
    
    
    
    
    
    14,502
    
    
    
    15,368
    
    
    
    
    
    
    
    29,870$
    9,529
    
    
    $
    14,502
    
    
    $
    15,368
    
    
    $
    
    
    
    $
    39,399
   71




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TABLE V
DERIVATIVE COUNTERPARTY CREDIT EXPOSURE  (Dollars in thousands)
 September 30, 2005Total Exposure
    
    
    
    
    
    
    
    
    
    
    Weighted AverageNumber of
    
    
    
    
    
    
    At Fair
    
    
    Negative Fair
    
    
    Total Fair
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    Value(3)
    
    
    Values
    
    
    Value(4)
    
    
    (in years)AA-
    
    
    2
    
    
    $
    2,600,000
    
    
    $
    18,843
    
    
    $
    
    
    
    $
    18,843
    
    
    
    2.88A+
    
    
    1
    
    
    
    750,000
    
    
    
    4,011
    
    
    
    
    
    
    
    4,011
    
    
    
    1.90A
    
    
    1
    
    
    
    550,000
    
    
    
    645
    
    
    
    
    
    
    
    645
    
    
    
    1.88Subtotal
    
    
    4
    
    
    
    3,900,000
    
    
    $
    23,499
    
    
    $
    
    
    
    $
    23,499
    
    
    
    2.55Other derivatives(5):Treasury future options
    
    
    
    
    
    
    7,600,000Eurodollar future options
    
    
    
    
    
    
    4,600,000Total Derivatives
    
    
    
    
    
    $
    16,100,000
 
 (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)
    
    These values are based on an internal risk model used to measure the sensitivity of the Companys Market Value of Equity to changes in interest rates, and not on the fair values recorded in the
Companys books for the related instruments.(5)
    
    Consists of exchange-traded contracts. Exchange trade derivatives do not measurably increase our exposure to counterparty credit risk because changes in value of open exchange-traded contracts are
settled daily through a financial clearinghouse established by each exchange. (Dollars in thousands)
 December 31, 2004Total Exposure
    
    
    
    
    
    
    
    
    
    
    Weighted AverageNumber of
    
    
    
    
    
    
    At Fair
    
    
    Negative Fair
    
    
    Total Fair
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    Value(3)
    
    
    Values
    
    
    Value(4)
    
    
    (in years)AA-
    
    
    1
    
    
    $
    414,234
    
    
    $
    1,998
    
    
    $
    
    
    
    $
    1,988
    
    
    
    4.70A+
    
    
    2
    
    
    
    1,500,000
    
    
    
    3,038
    
    
    
    (2,881
    )
    
    
    157
    
    
    
    2.17A
    
    
    4
    
    
    
    3,344,873
    
    
    
    11,702
    
    
    
    (1,441
    )
    
    
    10,261
    
    
    
    1.30Subtotal
    
    
    7
    
    
    
    5,259,107
    
    
    $
    16,738
    
    
    $
    (4,322
    )
    
    $
    12,406
    
    
    
    1.82Other derivatives(5):Treasury futures
    
    
    
    
    
    
    320,000Treasury future options
    
    
    
    
    
    
    4,340,000Eurodollar futures
    
    
    
    
    
    
    7,120,000Eurodollar future options
    
    
    
    
    
    
    55,300,000Total Derivatives
    
    
    
    
    
    $
    72,339,107
 
 (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)
    
    These values are based on an internal risk model used to measure the sensitivity of the Companys Market Value of Equity to changes in interest rates, and not on the fair values recorded in the
Companys books for the related instruments.(5)
    
    Consists of exchange-traded contracts. Exchange trade derivatives do not measurably increase our exposure to counterparty credit risk because changes in value of open exchange-traded contracts
are settled daily through a financial clearinghouse established by each exchange. Credit Risk
   72




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Non-performing assets and allowance for loan and lease losses
   73




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TABLE W
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
 AS OF
    
    
    AS OFSEPTEMBER 30, 2005
    
    
    DECEMBER 31, 2004Mortgage banking business:Non-accrual loans:Construction loans
    
    $
    1,558
    
    
    $
    1,865Residential mortgage loans(1)
    
    
    154,121
    
    
    
    10,076Construction loans past due 90 days and still accruing
    
    
    170
    
    
    
    128Loans held-for-sale past due 90 days and still accruing(1)(2)
    
    
    
    
    
    
    85,075OREO
    
    
    20,627
    
    
    
    18,028Total NPAs of mortgage banking business
    
    
    176,476
    
    
    
    115,172Other lending activities through banking subsidiaries:Non-accrual loans:Construction loans
    
    
    12,455
    
    
    
    14,774Residential mortgage loans
    
    
    11,870
    
    
    
    8,105Commercial real estate loans
    
    
    12,075
    
    
    
    8,535Consumer loans
    
    
    1,828
    
    
    
    1,457Commercial non-real estate loans
    
    
    679
    
    
    
    512Lease financing receivable
    
    
    82
    
    
    
    Total non-accrual loans
    
    
    38,989
    
    
    
    33,383OREO
    
    
    1,042
    
    
    
    2,044Total NPAs of banking subsidiaries
    
    
    40,031
    
    
    
    35,427Total NPAs of Doral Financial (consolidated)
    
    $
    216,507
    
    
    $
    150,599Total NPAs of banking subsidiaries as a percentage
of their loans portfolio, net, and OREO
    
    
    1.22
    %
    
    
    1.23
    %Total NPAs of Doral Financial as a percentage of
consolidated total assets
    
    
    1.13
    %
    
    
    0.84
    %Total non-performing loans to total loans
    
    
    2.59
    %
    
    
    1.95
    %Ratio of allowance for loan and lease losses to total
non-performing loans (excluding non-performing loans held for
sale) at end of period
    
    
    75.79
    %
    
    
    59.03
    %
 
 (1)
    
    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 ultimate
collectibility of the loan.(2)
    
    Does not include approximately $59.0 million and $71.2 million of GNMA defaulted loans (for which the
Company has the option but not the obligation to buy-back from the pools serviced), included as part of the mortgage loans held for sale
portfolio as of September 30, 2005 and December 31, 2004, respectively. Also excludes $10.2 million of 90 days past due
FHA/VA loans as of December 31, 2004, which are 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. 74




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TABLE XALLOWANCE FOR LOAN AND LEASE LOSSES
 (DOLLARS IN THOUSANDS)
 QUARTER ENDED
    
    
    NINE MONTH PERIOD ENDEDSEPTEMBER 30,
    
    
    SEPTEMBER 30,2004
    
    
    
    
    
    
    20042005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Allowance for loan and lease losses:Balance at beginning of period
    
    $
    22,672
    
    
    $
    18,319
    
    
    $
    20,881
    
    
    $
    14,919Provision for loan and lease losses
    
    
    9,370
    
    
    
    5,344
    
    
    
    17,075
    
    
    
    10,594Charge-offs:Construction loans
    
    
    
    
    
    
    (549
    )
    
    
    (4,717
    )
    
    
    (831
    )Residential mortgage loans
    
    
    
    
    
    
    
    
    
    
    (79
    )
    
    
    (20
    )Commercial real estate loans
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    Consumer loans
    
    
    (789
    )
    
    
    (536
    )
    
    
    (1,878
    )
    
    
    (1,847
    )Commercial non-real estate loans
    
    
    (504
    )
    
    
    (122
    )
    
    
    (734
    )
    
    
    (440
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    (1,293
    )
    
    
    (1,207
    )
    
    
    (7,437
    )
    
    
    (3,138
    )Recoveries:Construction loans
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    50Residential mortgage loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate loans
    
    
    20
    
    
    
    
    
    
    
    173
    
    
    
    Consumer loans
    
    
    80
    
    
    
    56
    
    
    
    179
    
    
    
    165Commercial non-real estate loans
    
    
    33
    
    
    
    2
    
    
    
    63
    
    
    
    43Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    133
    
    
    
    108
    
    
    
    415
    
    
    
    258Net charge-offs
    
    
    (1,160
    )
    
    
    (1,099
    )
    
    
    (7,022
    )
    
    
    (2,880
    )Other
    
    
    (24
    )
    
    
    (300
    )
    
    
    (76
    )
    
    
    (369
    )Balance at end of period
    
    $
    30,858
    
    
    $
    22,264
    
    
    $
    30,858
    
    
    $
    22,264Allowance for loan losses as a percentage of
loans receivable outstanding at the end of
period
    
    
    1.38
    %
    
    
    1.36
    %
    
    
    1.38
    %
    
    
    1.36
    %Net charge-offs to average loans receivable
outstanding on an annualized basis
    
    
    0.22
    %
    
    
    0.27
    %
    
    
    0.49
    %
    
    
    0.24
    %
 75




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##### Table of Contents



Operational Risk
  Overview of Operational Risk Management
  Liquidity Risk
  General Business, Economic and Political Conditions
    76




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##### Table of Contents



FUTURE OPERATIONS
     
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  77




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Control and Procedures
     Changes in Internal Control Over Financial Reporting
   78




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 10-K.
     
 ITEM 1A. RISK FACTORS
   
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  79




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##### Table of Contents



ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
    80




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##### Table of Contents



SIGNATURES
  DORAL FINANCIAL CORPORATION
(Registrant)Date: May 2, 2006
    
    /s/ John A. WardJohn A. Ward
Chairman of the Board
and Chief Executive OfficerDate: May 2, 2006
    
    /s/ Lidio SorianoLidio Soriano
Executive Vice President and
Chief Financial Officer
 81




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    
    
    Description12.1
    
    -
    
    Computation of Ratio of Earnings to Fixed Charges.12.2
    
    -
    
    Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.31.1
    
    -
    
    CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    -
    
    CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    -
    
    CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.32.2
    
    -
    
    CFO Certification pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 82