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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 June 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
    
    66-0312162(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification number)1451 F.D. Roosevelt Avenue,
    
    00920-2717San Juan, Puerto Rico
    
    (Zip Code)(Address of principal executive offices)
   
 o þ
  þ o o
 o þ




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##### 



DORAL FINANCIAL CORPORATION
INDEX PAGE
 PAGEPART I  FINANCIAL INFORMATION
    
    
    4Item 1  Financial Statements
    
    
    4Consolidated Statements of Financial Condition (Unaudited) as of June 30, 2005
and December 31, 2004
    
    
    4Consolidated Statements of Income (Unaudited)  Quarters ended June 30, 2005 and
June 30, 2004 (As Restated) and six months ended June 30, 2005 and June 30, 2004 (As
Restated)
    
    
    5Consolidated Statements of Changes in Stockholders Equity (Unaudited)  Six
months ended June 30, 2005 and June 30, 2004 (As Restated)
    
    
    6Consolidated Statements of Comprehensive Income (Unaudited)  Quarters ended
June 30, 2005 and June 30, 2004 (As Restated) and six months ended June 30, 2005 and
June 30, 2004 (As Restated)
    
    
    7Consolidated Statements of Cash Flows (Unaudited)  Six months ended June 30,
2005 and June 30, 2004 (As Restated)
    
    
    8Notes to Consolidated Financial Statements (Unaudited)
    
    
    9Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    42Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    
    79Item 4  Controls and Procedures
    
    
    80PART II  OTHER INFORMATION
    
    
    81Item 1  Legal Proceedings
    
    
    81Item 1A  Risk Factors
    
    
    81Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    81Item 3  Defaults Upon Senior Securities
    
    
    82Item 4  Submission of Matters to a Vote of Security Holders
    
    
    82Item 5  Other Information
    
    
    82Item 6  Exhibits
    
    
    82SIGNATURES
    
    
    83EX-12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESEX-12.2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDSEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF 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;
    
    risks associated with the Companys inability to prepare and timely file financial statements;
 2




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
    
    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.
   3




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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
(UNAUDITED)
 JUNE 30,
    
    
    DECEMBER 31,2005
    
    
    2004ASSETSCash and due from banks
    
    $
    110,833
    
    
    $
    64,940Money market investments:Money market investments with creditors right to repledge
    
    
    1,122,693
    
    
    
    806,849Other money market investments
    
    
    1,471,242
    
    
    
    1,663,937Total money market investments
    
    
    2,593,935
    
    
    
    2,470,786Pledged investment securities that can be repledged:Securities held for trading, at fair value (includes fair value of IOs of $12,567 in 2005; $14,673
in 2004)
    
    
    232,344
    
    
    
    283,372Securities available for sale, at fair value
    
    
    6,360,465
    
    
    
    4,224,168Securities held to maturity, at amortized cost (market value of $2,086,226 in 2005;
$2,062,312 in 2004)
    
    
    2,071,627
    
    
    
    2,100,303Total pledged investment securities that can be repledged
    
    
    8,664,436
    
    
    
    6,607,843Other investment securities:Securities held for trading, at fair value (includes fair value of IOs of $113,100
in 2005; $112,688 in 2004)
    
    
    262,695
    
    
    
    205,698Securities available for sale, at fair value
    
    
    174,562
    
    
    
    758,340Securities held to maturity, at amortized cost (market value of $112,708 in 2005; $191,381 in 2004)
    
    
    111,334
    
    
    
    201,392Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    80,870
    
    
    
    86,120Total other investment securities
    
    
    629,461
    
    
    
    1,251,550Total investment securities
    
    
    9,293,897
    
    
    
    7,859,393Loans:Mortgage loans held for sale, at lower of cost or market, pledged with creditors right to repledge
    
    
    3,830,357
    
    
    
    3,282,152Other mortgage loans held for sale, at lower of cost or market
    
    
    1,740,817
    
    
    
    1,640,355Loans receivable, net of allowance for loan and lease losses (2005 - $22,672; 2004 - $20,881)
    
    
    1,995,081
    
    
    
    1,747,699Total loans
    
    
    7,566,255
    
    
    
    6,670,206Receivables and mortgage-servicing advances
    
    
    78,136
    
    
    
    99,727Accounts receivable from investment sales
    
    
    46,301
    
    
    
    40,052Accrued interest receivable
    
    
    73,633
    
    
    
    73,547Servicing assets, net
    
    
    113,135
    
    
    
    123,586Premises and equipment, net
    
    
    151,431
    
    
    
    146,551Real estate held for sale, net
    
    
    20,586
    
    
    
    20,072Deferred tax asset
    
    
    219,381
    
    
    
    217,024Other assets
    
    
    67,717
    
    
    
    49,778Total assets
    
    $
    20,335,240
    
    
    $
    17,835,662LIABILITIESDeposits:Non-interest-bearing deposits
    
    $
    509,860
    
    
    $
    459,360Interest-bearing deposits
    
    
    3,479,015
    
    
    
    3,183,720Securities sold under agreements to repurchase
    
    
    8,000,754
    
    
    
    6,305,163Advances from FHLB
    
    
    1,244,500
    
    
    
    1,294,500Loans payable
    
    
    4,295,910
    
    
    
    3,638,507Notes payable
    
    
    1,089,102
    
    
    
    1,095,977Accounts payable from investment purchases
    
    
    161,334
    
    
    
    325,740Accrued expenses and other liabilities
    
    
    288,898
    
    
    
    248,078Total liabilities
    
    
    19,069,373
    
    
    
    16,551,045Commitments and contingencies (Note w)STOCKHOLDERS EQUITYPreferred 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
    
    
    166,591
    
    
    
    161,639Legal surplus
    
    
    22,716
    
    
    
    22,716Retained earnings
    
    
    453,726
    
    
    
    492,786Accumulated other comprehensive loss, net of income tax benefit of $2,378 in 2005 and $4,591 in 2004
    
    
    (58,346
    )
    
    
    (73,683
    )Total stockholders equity
    
    
    1,265,867
    
    
    
    1,284,617Total liabilities and stockholders equity
    
    $
    20,335,240
    
    
    $
    17,835,662
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2004
    
    
    
    
    
    
    20042005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Interest income:Loans
    
    $
    124,896
    
    
    $
    100,642
    
    
    $
    234,642
    
    
    $
    202,084Mortgage-backed securities
    
    
    60,306
    
    
    
    17,344
    
    
    
    112,874
    
    
    
    35,087Interest-only strips (IOs)
    
    
    2,541
    
    
    
    3,395
    
    
    
    5,841
    
    
    
    6,608Investment securities
    
    
    31,939
    
    
    
    45,641
    
    
    
    64,768
    
    
    
    78,750Other interest-earning assets
    
    
    17,700
    
    
    
    4,711
    
    
    
    33,799
    
    
    
    8,228Total interest income
    
    
    237,382
    
    
    
    171,733
    
    
    
    451,924
    
    
    
    330,757Interest expense:Deposits
    
    
    23,178
    
    
    
    19,499
    
    
    
    45,635
    
    
    
    38,481Securities sold under agreements to repurchase
    
    
    59,635
    
    
    
    25,412
    
    
    
    110,093
    
    
    
    48,084Advances from FHLB
    
    
    13,055
    
    
    
    12,358
    
    
    
    25,534
    
    
    
    24,144Loans payable
    
    
    52,099
    
    
    
    18,975
    
    
    
    94,286
    
    
    
    36,443Notes payable
    
    
    14,162
    
    
    
    11,603
    
    
    
    27,057
    
    
    
    23,046Total interest expense
    
    
    162,129
    
    
    
    87,847
    
    
    
    302,605
    
    
    
    170,198Net interest income
    
    
    75,253
    
    
    
    83,886
    
    
    
    149,319
    
    
    
    160,559Provision for loan and lease losses
    
    
    3,658
    
    
    
    3,481
    
    
    
    7,705
    
    
    
    5,250Net interest income after provision for loan and lease losses
    
    
    71,595
    
    
    
    80,405
    
    
    
    141,614
    
    
    
    155,309Non-interest (loss) income:Net gain on mortgage loan sales and fees
    
    
    15,387
    
    
    
    19,817
    
    
    
    23,327
    
    
    
    41,884Net loss on securities held for trading, including gains and losses on
the fair value of IOs
    
    
    (43,063
    )
    
    
    (21,484
    )
    
    
    (36,427
    )
    
    
    (49,160
    )Net gain (loss) on sale of investment securities
    
    
    4,714
    
    
    
    (17,424
    )
    
    
    9,558
    
    
    
    66Servicing (loss) income, net of amortization and impairment/recovery
    
    
    (18,682
    )
    
    
    23,390
    
    
    
    (9,867
    )
    
    
    6,811Commissions, fees and other income
    
    
    8,179
    
    
    
    7,759
    
    
    
    15,945
    
    
    
    14,927Total non-interest (loss) income
    
    
    (33,465
    )
    
    
    12,058
    
    
    
    2,536
    
    
    
    14,528Non-interest expenses:Compensation and benefits
    
    
    23,679
    
    
    
    22,588
    
    
    
    49,268
    
    
    
    42,849Taxes, other than payroll and income taxes
    
    
    2,374
    
    
    
    2,258
    
    
    
    4,726
    
    
    
    4,468Advertising
    
    
    4,586
    
    
    
    4,113
    
    
    
    8,928
    
    
    
    7,303Professional services
    
    
    11,263
    
    
    
    2,605
    
    
    
    15,236
    
    
    
    5,027Communication and information systems
    
    
    4,564
    
    
    
    3,308
    
    
    
    9,388
    
    
    
    6,588Occupancy and other office expenses
    
    
    8,182
    
    
    
    6,593
    
    
    
    15,345
    
    
    
    12,392Depreciation and amortization
    
    
    5,129
    
    
    
    4,225
    
    
    
    10,082
    
    
    
    8,237Other
    
    
    5,858
    
    
    
    6,802
    
    
    
    9,069
    
    
    
    11,794Total non-interest expenses
    
    
    65,635
    
    
    
    52,492
    
    
    
    122,042
    
    
    
    98,658(Loss) income before income taxes
    
    
    (27,505
    )
    
    
    39,971
    
    
    
    22,108
    
    
    
    71,179Income tax benefit (expense)
    
    
    4,718
    
    
    
    (10,365
    )
    
    
    (5,666
    )
    
    
    (6,620
    )Net (loss) income
    
    $
    (22,787
    )
    
    $
    29,606
    
    
    $
    16,442
    
    
    $
    64,559Net (loss) income attributable to common shareholders
    
    $
    (31,112
    )
    
    $
    21,281
    
    
    $
    (208
    )
    
    $
    47,909Net (loss) income per common share:Basic
    
    $
    (0.29
    )
    
    $
    0.20
    
    
    $
    0.00
    
    
    $
    0.44Diluted
    
    $
    (0.29
    )
    
    $
    0.19
    
    
    $
    0.00
    
    
    $
    0.43Dividends per common share
    
    $
    0.18
    
    
    $
    0.15
    
    
    $
    0.36
    
    
    $
    0.27
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(IN THOUSANDS)
(UNAUDITED)
 SIX MONTH PERIOD ENDEDJUNE 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
    
    
    
    21Stock-based compensation recognized
    
    
    4,854
    
    
    
    4,854Balance at end of period
    
    
    166,591
    
    
    
    156,777LEGAL SURPLUS
    
    
    22,716
    
    
    
    14,155RETAINED EARNINGS:Balance at beginning of period
    
    
    492,786
    
    
    
    384,596Net income
    
    
    16,442
    
    
    
    64,559Cash dividends declared on common stock
    
    
    (38,852
    )
    
    
    (29,134
    )Cash dividends declared on preferred stock
    
    
    (16,650
    )
    
    
    (16,650
    )Balance at end of period
    
    
    453,726
    
    
    
    403,371ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME, NET OF
TAX:Balance at beginning of period
    
    
    (73,683
    )
    
    
    (49,445
    )Other comprehensive (loss) income, net of deferred tax
    
    
    15,337
    
    
    
    (53,889
    )Balance at end of period
    
    
    (58,346
    )
    
    
    (103,334
    )Total stockholders equity
    
    $
    1,265,867
    
    
    $
    1,152,127
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2004
    
    
    
    
    
    
    20042005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Net (loss) income
    
    $
    (22,787
    )
    
    $
    29,606
    
    
    $
    16,442
    
    
    $
    64,559Other comprehensive income (loss), before tax:Unrealized gains (losses) on securities arising during the period
    
    
    77,770
    
    
    
    (121,549
    )
    
    
    27,086
    
    
    
    (62,353
    )Amortization of unrealized loss on securities reclassified to
held to maturity
    
    
    11
    
    
    
    3
    
    
    
    22
    
    
    
    14Reclassification of realized (gains) losses included in net income
    
    
    (4,714
    )
    
    
    17,424
    
    
    
    (9,558
    )
    
    
    (66
    )Other comprehensive income (loss), before tax
    
    
    73,067
    
    
    
    (104,122
    )
    
    
    17,550
    
    
    
    (62,405
    )Income tax (expense) benefit related to items of other comprehensive
income (loss)
    
    
    (2,654
    )
    
    
    11,099
    
    
    
    (2,213
    )
    
    
    8,516Other comprehensive income (loss)
    
    
    70,413
    
    
    
    (93,023
    )
    
    
    15,337
    
    
    
    (53,889
    )Comprehensive income (loss), net of tax
    
    $
    47,626
    
    
    $
    (63,417
    )
    
    $
    31,779
    
    
    $
    10,670
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 SIX MONTH PERIOD ENDEDJUNE 30,20042005
    
    
    (As Restated)Cash flows from operating activities:Net income
    
    $
    16,442
    
    
    $
    64,559Adjustments to reconcile net income to net cash used in operating activities:Stock-based compensation recognized
    
    
    4,854
    
    
    
    4,854Depreciation and amortization
    
    
    10,082
    
    
    
    8,237Amortization and impairment of servicing assets
    
    
    30,514
    
    
    
    13,527Deferred tax provision (benefit)
    
    
    (4,635
    )
    
    
    (11,525
    )Provision for loan and lease losses
    
    
    7,705
    
    
    
    5,250Amortization of premium and accretion of discount on loans, investment securities and debt
    
    
    9,972
    
    
    
    454Origination and purchases of mortgage loans held for sale
    
    
    (2,825,804
    )
    
    
    (2,368,499
    )Principal repayment and sales of mortgage loans held for sale
    
    
    1,413,980
    
    
    
    1,410,494Unrealized loss on securities held for trading
    
    
    1,573
    
    
    
    78Purchases of securities held for trading
    
    
    (2,005,052
    )
    
    
    (1,867,378
    )Principal repayment and sales of trading securities
    
    
    2,396,126
    
    
    
    2,593,921Unrealized loss on derivative instruments
    
    
    22,870
    
    
    
    13,946Decrease
(increase) in derivative instruments
    
    
    7,424
    
    
    
    (3,933
    )Amortization and gain or loss in the fair value of IOs
    
    
    12,675
    
    
    
    32,909Purchases of servicing assets
    
    
    (2,220
    )
    
    
    (2,729
    )Decrease (increase) in receivables and mortgage servicing advances
    
    
    21,591
    
    
    
    (21,362
    )Increase in accrued interest receivable
    
    
    (86
    )
    
    
    (2,973
    )Increase in other assets
    
    
    (17,856
    )
    
    
    (13,155
    )Increase in accrued expenses and other liabilities
    
    
    166,373
    
    
    
    37,840Total adjustments
    
    
    (749,914
    )
    
    
    (170,044
    )Net cash used in operating activities
    
    
    (733,472
    )
    
    
    (105,485
    )Cash flows from investing activities:Purchases of securities available for sale
    
    
    (4,663,474
    )
    
    
    (5,806,958
    )Principal repayment and sales of securities available for sale
    
    
    3,109,422
    
    
    
    5,133,908Purchases of securities held to maturity
    
    
    (100,000
    )
    
    
    (1,110,170
    )Principal repayment and maturities of securities held to maturity
    
    
    227,472
    
    
    
    147,656Decrease (increase) in FHLB stock
    
    
    5,250
    
    
    
    (1,900
    )Origination of loans receivable
    
    
    (580,646
    )
    
    
    (517,222
    )Principal repayment of loans receivable
    
    
    309,438
    
    
    
    328,330Purchases of premises and equipment
    
    
    (14,962
    )
    
    
    (16,488
    )Proceeds from sales of real estate held for sale
    
    
    23,413
    
    
    
    10,495Net cash used in investing activities
    
    
    (1,684,087
    )
    
    
    (1,832,349
    )Cash flows from financing activities:Increase in deposits
    
    
    345,795
    
    
    
    268,124Increase in securities sold under agreements to repurchase
    
    
    1,695,591
    
    
    
    1,782,292Proceeds from advances from FHLB
    
    
    50,000
    
    
    
    100,000Repayment of advances from FHLB
    
    
    (100,000
    )
    
    
    (112,000
    )Increase in loans payable:Increase in warehousing lines and other credit facilities
    
    
    111,815
    
    
    
    120,538Proceeds from secured borrowings, pledged to creditors
    
    
    880,746
    
    
    
    685,081Repayment of secured borrowings, pledged to creditors
    
    
    (335,158
    )
    
    
    (227,385
    )Proceeds from issuance of notes payable
    
    
    
    
    
    
    114,885Repayment of notes payable
    
    
    (6,805
    )
    
    
    (708
    )Issuance of common stock, net
    
    
    119
    
    
    
    25Dividends paid
    
    
    (55,502
    )
    
    
    (45,784
    )Net cash provided by financing activities
    
    
    2,586,601
    
    
    
    2,685,068Net increase in cash and cash equivalents
    
    
    169,042
    
    
    
    747,234Cash and cash equivalents at beginning of period
    
    
    2,535,726
    
    
    
    954,722Cash and cash equivalents at the end of period
    
    $
    2,704,768
    
    
    $
    1,701,956Cash and cash equivalents includes:Cash and due from banks
    
    $
    110,833
    
    
    $
    86,953Money market investments
    
    
    2,593,935
    
    
    
    1,615,003$
    2,704,768
    
    
    $
    1,701,956Supplemental schedule of non-cash activities:Loan securitizations
    
    $
    702,298
    
    
    $
    452,292Loans foreclosed
    
    $
    23,134
    
    
    $
    8,339Supplemental information for cash flows:Cash used to pay interest
    
    $
    280,389
    
    
    $
    168,787Cash used to pay income taxes
    
    $
    32,003
    
    
    $
    31,076
  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 six month period ended June 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 June 30, 2004, its Consolidated Statements of Income
for the quarter and six-month period ended June 30, 2004 and its Consolidated Statements of
Cash Flows for the six-month period ended June 30, 2004. All financial information for the
quarter and six-month period ended June 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
    
    
    Six Month PeriodJune 30,
    
    
    Ended June 30,2004
    
    
    2004Net income, as previously reported
    
    $
    114,906
    
    
    $
    218,483Pre-tax restatement adjustments:Recharacterization of mortgage loan sale transactions as
secured borrowings
    
    
    (62,448
    )
    
    
    (136,828
    )Valuation of IOs
    
    
    (40,018
    )
    
    
    (35,658
    )Accounting for servicing assets
    
    
    22,858
    
    
    
    (343
    )Accounting for derivative instruments and investment securities
    
    
    (10,334
    )
    
    
    (10,730
    )Provision for loan and lease losses
    
    
    (979
    )
    
    
    (2,252
    )Other accounting adjustments
    
    
    (9,180
    )
    
    
    (9,396
    )Total pre-tax restatement adjustments
    
    
    (100,101
    )
    
    
    (195,207
    )Income tax impact of restatement adjustments
    
    
    14,801
    
    
    
    41,283Total net restatement adjustments
    
    
    (85,300
    )
    
    
    (153,924
    )Net income, as restated
    
    $
    29,606
    
    
    $
    64,559Basic earnings per common share, as previously reported
    
    $
    0.99
    
    
    $
    1.87Effect of adjustments
    
    
    (0.79
    )
    
    
    (1.43
    )Basic earnings per common share, as restated
    
    
    0.20
    
    
    
    0.44Diluted earnings per common share, as previously reported
    
    $
    0.96
    
    
    $
    1.82Effect of adjustments
    
    
    (0.77
    )
    
    
    (1.39
    )Diluted earnings per common share, as restated
    
    $
    0.19
    
    
    $
    0.43
  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 June 30, 2004Previously
    
    
    
    
    
    
    As(Dollars in Thousands, except per share information)
    
    Reported
    
    
    Adjustments
    
    
    RestatedInterest income:Loans
    
    $
    56,743
    
    
    $
    43,899
    
    
    $
    100,642Mortgage-backed securities
    
    
    16,852
    
    
    
    492
    
    
    
    17,344Interest-only strips (IOs)
    
    
    14,406
    
    
    
    (11,011
    )
    
    
    3,395Investment securities
    
    
    45,225
    
    
    
    416
    
    
    
    45,641Other interest-earning assets
    
    
    4,711
    
    
    
    
    
    
    
    4,711Total interest income
    
    
    137,937
    
    
    
    33,796
    
    
    
    171,733Interest Expense:Deposits
    
    
    19,499
    
    
    
    
    
    
    
    19,499Securities sold under agreements to repurchase
    
    
    25,412
    
    
    
    
    
    
    
    25,412Advances from FHLB
    
    
    12,358
    
    
    
    
    
    
    
    12,358Loans payable
    
    
    1,723
    
    
    
    17,252
    
    
    
    18,975Notes payable
    
    
    12,299
    
    
    
    (696
    )
    
    
    11,603Total interest expenses
    
    
    71,291
    
    
    
    16,556
    
    
    
    87,847Net interest income
    
    
    66,646
    
    
    
    17,240
    
    
    
    83,886Provision for loan and lease losses
    
    
    2,612
    
    
    
    869
    
    
    
    3,481Net interest income after provision for loan
and lease losses
    
    
    64,034
    
    
    
    16,371
    
    
    
    80,405Non-interest income:Net gain on mortgage loan sales and fees
    
    
    130,586
    
    
    
    (110,769
    )
    
    
    19,817Net loss on securities held for trading
    
    
    6,048
    
    
    
    (27,532
    )
    
    
    (21,484
    )Net gain on sale of investment securities
    
    
    (17,489
    )
    
    
    65
    
    
    
    (17,424
    )Servicing income (loss), net of amortization and
impairment
    
    
    (2,345
    )
    
    
    25,735
    
    
    
    23,390Commissions, fees and other income
    
    
    9,780
    
    
    
    (2,021
    )
    
    
    7,759Total non-interest income
    
    
    126,580
    
    
    
    (114,522
    )
    
    
    12,058Non-interest expenses:Compensation and benefits
    
    
    22,276
    
    
    
    312
    
    
    
    22,588Taxes, other than payroll and income taxes
    
    
    2,258
    
    
    
    
    
    
    
    2,258Advertising
    
    
    4,113
    
    
    
    
    
    
    
    4,113Professional services
    
    
    2,605
    
    
    
    
    
    
    
    2,605Communication and information systems
    
    
    3,308
    
    
    
    
    
    
    
    3,308Occupancy and other office expenses
    
    
    6,489
    
    
    
    104
    
    
    
    6,593Depreciation and amortization
    
    
    4,311
    
    
    
    (86
    )
    
    
    4,225Other
    
    
    5,182
    
    
    
    1,620
    
    
    
    6,802Total non-interest expenses
    
    
    50,542
    
    
    
    1,950
    
    
    
    52,492Income before income taxes
    
    
    140,072
    
    
    
    (100,101
    )
    
    
    39,971Income tax (expense) benefit
    
    
    (25,166
    )
    
    
    14,801
    
    
    
    (10,365
    )Net Income
    
    $
    114,906
    
    
    $
    (85,300
    )
    
    $
    29,606Net income per common share:Basic
    
    $
    0.99
    
    
    $
    (0.79
    )
    
    $
    0.20Diluted
    
    $
    0.96
    
    
    $
    (0.77
    )
    
    $
    0.19
 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
 Six Month PeriodEnded June 30, 2004Previously(Dollars in Thousands, except per share information)
    
    Reported
    
    
    Adjustments
    
    
    As RestatedInterest income:Loans
    
    $
    116,879
    
    
    $
    85,205
    
    
    $
    202,084Mortgage-backed securities
    
    
    34,322
    
    
    
    765
    
    
    
    35,087Interest-only strips (IOs)
    
    
    26,790
    
    
    
    (20,182
    )
    
    
    6,608Investment securities
    
    
    77,817
    
    
    
    933
    
    
    
    78,750Other interest-earning assets
    
    
    8,228
    
    
    
    
    
    
    
    8,228Total interest income
    
    
    264,036
    
    
    
    66,721
    
    
    
    330,757Interest expense:Deposits
    
    
    38,481
    
    
    
    
    
    
    
    38,481Securities sold under agreements to repurchase
    
    
    48,084
    
    
    
    
    
    
    
    48,084Advances from FHLB
    
    
    24,144
    
    
    
    
    
    
    
    24,144Loans payable
    
    
    3,128
    
    
    
    33,315
    
    
    
    36,443Notes payable
    
    
    24,500
    
    
    
    (1,454
    )
    
    
    23,046Total interest expenses
    
    
    138,337
    
    
    
    31,861
    
    
    
    170,198Net interest income
    
    
    125,699
    
    
    
    34,860
    
    
    
    160,559Provision for loan and lease losses
    
    
    4,173
    
    
    
    1,077
    
    
    
    5,250Net interest income after provision for
loan and lease losses
    
    
    121,526
    
    
    
    33,783
    
    
    
    155,309Non-interest income:Net gain on mortgage loan sales and fees
    
    
    267,442
    
    
    
    (225,558
    )
    
    
    41,884Net loss on securities held for trading
    
    
    (42,566
    )
    
    
    (6,594
    )
    
    
    (49,160
    )Net (loss) gain on sale of investment securities
    
    
    (1,339
    )
    
    
    1,405
    
    
    
    66Servicing (loss) income, net of amortization and
impairment
    
    
    (656
    )
    
    
    7,467
    
    
    
    6,811Commissions, fees and other income
    
    
    18,461
    
    
    
    (3,534
    )
    
    
    14,927Total non-interest income
    
    
    241,342
    
    
    
    (226,814
    )
    
    
    14,528Non-interest expenses:Compensation and benefits
    
    
    42,033
    
    
    
    816
    
    
    
    42,849Taxes, other than payroll and income taxes
    
    
    4,468
    
    
    
    
    
    
    
    4,468Advertising
    
    
    7,303
    
    
    
    
    
    
    
    7,303Professional services
    
    
    5,027
    
    
    
    
    
    
    
    5,027Communication and information systems
    
    
    6,588
    
    
    
    
    
    
    
    6,588Occupancy and other office expenses
    
    
    12,178
    
    
    
    214
    
    
    
    12,392Depreciation and amortization
    
    
    8,583
    
    
    
    (346
    )
    
    
    8,237Other
    
    
    10,302
    
    
    
    1,492
    
    
    
    11,794Total non-interest expenses
    
    
    96,482
    
    
    
    2,176
    
    
    
    98,658Income before income taxes
    
    
    266,386
    
    
    
    (195,207
    )
    
    
    71,179Income tax expense
    
    
    (47,903
    )
    
    
    41,283
    
    
    
    (6,620
    )Net Income
    
    $
    218,483
    
    
    $
    (153,924
    )
    
    $
    64,559Net income per common share:Basic
    
    $
    1.87
    
    
    $
    (1.43
    )
    
    $
    0.44Diluted
    
    $
    1.82
    
    
    $
    (1.39
    )
    
    $
    0.43
 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
 June 30, 2004Previously
    
    
    
    
    
    
    As(Dollars in Thousands, except share information)
    
    Reported
    
    
    Adjustments
    
    
    RestatedAssetsCash and due from banks
    
    $
    86,953
    
    
    $
    
    
    
    $
    86,953Money market investments
    
    
    1,615,003
    
    
    
    
    
    
    
    1,615,003Investment securities:Securities held for trading, at fair value
    
    
    1,103,724
    
    
    
    (633,853
    )
    
    
    469,871Securities available for sale, at fair value
    
    
    3,184,142
    
    
    
    
    
    
    
    3,184,142Securities held to maturity, at amortized cost
    
    
    2,625,086
    
    
    
    (16,741
    )
    
    
    2,608,345Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    83,620
    
    
    
    
    
    
    
    83,620Total investment securities
    
    
    6,996,572
    
    
    
    (650,594
    )
    
    
    6,345,978Loans:Mortgage loans held for sale, at lower of cost or market
    
    
    1,937,387
    
    
    
    2,280,233
    
    
    
    4,217,620Loans receivable, net of allowance for loan and lease losses
    
    
    1,602,619
    
    
    
    (6,430
    )
    
    
    1,596,189Total loans
    
    
    3,540,006
    
    
    
    2,273,803
    
    
    
    5,813,809Receivables and mortgage-servicing advances
    
    
    113,584
    
    
    
    (6,787
    )
    
    
    106,797Accounts receivable from investment sales
    
    
    541,944
    
    
    
    
    
    
    
    541,944Accrued interest receivable
    
    
    66,220
    
    
    
    2,992
    
    
    
    69,212Servicing assets, net
    
    
    178,645
    
    
    
    (47,008
    )
    
    
    131,637Premises and equipment, net
    
    
    143,941
    
    
    
    
    
    
    
    143,941Real estate held for sale, net
    
    
    17,099
    
    
    
    
    
    
    
    17,099Deferred tax asset
    
    
    
    
    
    
    97,618
    
    
    
    97,618Other assets
    
    
    40,452
    
    
    
    
    
    
    
    40,452Total assets
    
    $
    13,340,419
    
    
    $
    1,670,024
    
    
    $
    15,010,443LiabilitiesDeposits
    
    
    3,239,396
    
    
    
    
    
    
    
    3,239,396Securities sold under agreements to repurchase
    
    
    5,385,234
    
    
    
    
    
    
    
    5,385,234Advances from FHLB
    
    
    1,194,500
    
    
    
    
    
    
    
    1,194,500Loans payable
    
    
    298,872
    
    
    
    2,293,545
    
    
    
    2,592,417Notes payable
    
    
    710,246
    
    
    
    (34,370
    )
    
    
    675,876Accounts payable from investment purchases
    
    
    511,378
    
    
    
    
    
    
    
    511,378Accrued expenses and other liabilities
    
    
    282,523
    
    
    
    (23,008
    )
    
    
    259,515Total liabilities
    
    
    11,622,149
    
    
    
    2,236,167
    
    
    
    13,858,316Stockholders 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;
107,907,512 shares issued and outstanding
    
    
    107,908
    
    
    
    
    
    
    
    107,908Additional paid-in capital
    
    
    156,777
    
    
    
    
    
    
    
    156,777Legal surplus
    
    
    13,806
    
    
    
    349
    
    
    
    14,155Retained earnings
    
    
    977,217
    
    
    
    (573,846
    )
    
    
    403,371Accumulated other comprehensive loss, net of income tax
    
    
    (110,688
    )
    
    
    7,354
    
    
    
    (103,334
    )Total stockholders equity
    
    
    1,718,270
    
    
    
    (566,143
    )
    
    
    1,152,127Total liabilities and stockholders equity
    
    $
    13,340,419
    
    
    $
    1,670,024
    
    
    $
    15,010,443
 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
 Six Month PeriodEnded June 30, 2004Previously
    
    
    
    
    
    As(Dollars in thousands)
    
    Reported
    
    Adjustments
    
    RestatedNet cash used in operating activities
    
    $
    (643,391
    )
    
    $
    537,906
    
    
    $
    (105,485
    )Net cash used in investing activities
    
    $
    (830,235
    )
    
    $
    (1,002,114
    )
    
    $
    (1,832,349
    )Net cash provided by financing activities
    
    $
    2,220,860
    
    
    $
    464,208
    
    
    $
    2,685,068
 d.
    
    At June 30, 2005, escrow funds and custodial accounts included approximately $139.4 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 $60.9 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 $30.0 million and $16.0
million, respectively, as of June 30, 2005.
 15




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 e.
    
    The reconciliation of the numerator and denominator of the basic and diluted
earnings-per-share follows:
 Quarter Ended
    
    
    Six Month Period EndedJune 30,
    
    
    June 30,2004
    
    
    
    
    
    
    2004(Dollars in thousands, except per share amounts)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Net (Loss) Income:Net (loss) income
    
    $
    (22,787
    )
    
    $
    29,606
    
    
    $
    16,442
    
    
    $
    64,559Convertible preferred stock dividend
    
    
    (4,097
    )
    
    
    (4,097
    )
    
    
    (8,194
    )
    
    
    (8,194
    )Nonconvertible preferred stock dividend
    
    
    (4,228
    )
    
    
    (4,228
    )
    
    
    (8,456
    )
    
    
    (8,456
    )Net (loss) income attributable to common shareholders
    
    $
    (31,112
    )
    
    $
    21,281
    
    
    $
    (208
    )
    
    $
    47,909Weighted-Average Shares(1):Basic weighted-average number of common shares outstanding
    
    
    107,930,236
    
    
    
    107,907,512
    
    
    
    107,923,785
    
    
    
    107,906,894Incremental shares issuable upon exercise of stock options(2)
    
    
    
    
    
    
    2,844,247
    
    
    
    
    
    
    
    2,848,300Diluted weighted-average number of common shares outstanding
    
    
    107,930,236
    
    
    
    110,751,759
    
    
    
    107,923,785
    
    
    
    110,755,194Net (Loss) Income per Common Share:Basic
    
    $
    (0.29
    )
    
    $
    0.20
    
    
    $
    0.00
    
    
    $
    0.44Diluted
    
    $
    (0.29
    )
    
    $
    0.19
    
    
    $
    0.00
    
    
    $
    0.43
 
 (1)
    
    For the quarter and six month period ended June 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 ended and six month period ended June 30, 2005, options to purchase 3,333,000
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
six month period ended June 30, 2004, options to purchase 15,000 shares of common stock were
outstanding, but not included in the computation of diluted earnings per share because they
were antidilutive. 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.
 16




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Quarter Ended
    
    
    Six Month Period EndedJune 30,
    
    
    June 30,2004
    
    
    
    
    
    
    2004(In thousands)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Employee costs, gross
    
    $
    34,335
    
    
    $
    32,376
    
    
    $
    69,868
    
    
    $
    62,426Deferred costs pursuant to SFAS 91
    
    
    (10,656
    )
    
    
    (9,788
    )
    
    
    (20,600
    )
    
    
    (19,577
    )Employee cost, net
    
    $
    23,679
    
    
    $
    22,588
    
    
    $
    49,268
    
    
    $
    42,849Other expenses, gross
    
    $
    8,037
    
    
    $
    8,239
    
    
    $
    13,326
    
    
    $
    14,816Deferred costs pursuant to SFAS 91
    
    
    (2,179
    )
    
    
    (1,437
    )
    
    
    (4,257
    )
    
    
    (3,022
    )Other expenses, net
    
    $
    5,858
    
    
    $
    6,802
    
    
    $
    9,069
    
    
    $
    11,794
  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 six month period
ended June 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 six month period ended June 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)
 (In thousands)MortgageBanking and Risk
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentManagement
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations*
    
    TotalsQUARTER ENDED JUNE 30, 2005Net interest income
    
    $
    24,809
    
    
    
    48,514
    
    
    
    675
    
    
    
    771
    
    
    
    484
    
    
    $
    75,253Non-interest (loss)
income
    
    $
    (21,643
    )
    
    
    11,998
    
    
    
    1,211
    
    
    
    2,869
    
    
    
    (27,900
    )
    
    $
    (33,465
    )Net (loss) income
    
    $
    (26,984
    )
    
    
    26,793
    
    
    
    1,000
    
    
    
    2,251
    
    
    
    (25,847
    )
    
    $
    (22,787
    )Identifiable assets
    
    $
    7,985,064
    
    
    
    12,701,985
    
    
    
    155,801
    
    
    
    11,836
    
    
    
    (519,446
    )
    
    $
    20,335,240QUARTER ENDED JUNE 30, 2004(As Restated)Net interest income
    
    $
    33,572
    
    
    
    45,051
    
    
    
    888
    
    
    
    1,553
    
    
    
    2,822
    
    
    $
    83,886Non-interest
(loss) income
    
    $
    (823
    )
    
    
    13,920
    
    
    
    854
    
    
    
    2,466
    
    
    
    (4,359
    )
    
    $
    12,058Net income
    
    $
    4,241
    
    
    
    22,120
    
    
    
    1,061
    
    
    
    2,780
    
    
    
    (596
    )
    
    $
    29,606Identifiable assets
    
    $
    5,917,856
    
    
    
    9,109,238
    
    
    
    330,055
    
    
    
    107,964
    
    
    
    (454,670
    )
    
    $
    15,010,443
 (In thousands)MortgageBanking and Risk
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentManagement
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations*
    
    TotalsSIX MONTH PERIOD ENDED JUNE 30, 2005Net interest income
    
    $
    46,066
    
    
    
    98,828
    
    
    
    1,398
    
    
    
    2,001
    
    
    
    1,026
    
    
    $
    149,319Non-interest
(loss) income
    
    $
    (10,905
    )
    
    
    39,296
    
    
    
    2,079
    
    
    
    5,611
    
    
    
    (33,545
    )
    
    $
    2,536Net (loss) income
    
    $
    (27,147
    )
    
    
    67,266
    
    
    
    1,844
    
    
    
    4,926
    
    
    
    (30,447
    )
    
    $
    16,442Identifiable assets
    
    $
    7,985,064
    
    
    
    12,701,985
    
    
    
    155,801
    
    
    
    11,836
    
    
    
    (519,446
    )
    
    $
    20,335,240SIX MONTH PERIOD ENDED JUNE 30, 2004(As Restated)Net interest income
    
    $
    69,036
    
    
    
    79,423
    
    
    
    1,838
    
    
    
    2,534
    
    
    
    7,728
    
    
    $
    160,559Non-interest
(loss) income
    
    $
    (56,285
    )
    
    
    69,351
    
    
    
    2,326
    
    
    
    5,343
    
    
    
    (6,207
    )
    
    $
    14,528Net (loss) income
    
    $
    (26,411
    )
    
    
    81,141
    
    
    
    2,437
    
    
    
    5,404
    
    
    
    1,988
    
    
    $
    64,559Identifiable assets
    
    $
    5,917,856
    
    
    
    9,109,238
    
    
    
    330,055
    
    
    
    107,964
    
    
    
    (454,670
    )
    
    $
    15,010,443
 
 *
    
    The intersegment eliminations in the above table, include direct intersegment loan
origination costs amortized as yield adjustment (mainly related with origination costs paid
by the banking segment to the mortgage banking segment) and other income derived from
intercompany transactions, related principally to fees and commissions paid to the
Companys institutional securities subsidiary and rental income paid to Doral Properties,
the Companys subsidiary that owns the corporate headquarters facilities. During the six
month period ended June 30, 2005, the intersegment elimination for non-interest income also
includes dividends paid by Doral Securities and Doral Agency to the parent company. During
the six month period ended June 30, 2004, the intersegment eliminations for net income also
include realized losses recognized by the mortgage banking segment on sale of investment
securities to the banking segment. Assets include internal funding and investment in
subsidiaries accounted for at cost. 18




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (In thousands)Puerto Rico
    
    Mainland US
    
    Eliminations
    
    TotalsQUARTER ENDED JUNE 30, 2005Net interest income
    
    $
    70,262
    
    
    
    4,967
    
    
    
    24
    
    
    $
    75,253Non-interest (loss) income
    
    $
    (33,927
    )
    
    
    794
    
    
    
    (332
    )
    
    $
    (33,465
    )Net (loss) income
    
    $
    (23,658
    )
    
    
    1,105
    
    
    
    (234
    )
    
    $
    (22,787
    )Identifiable assets
    
    $
    19,721,628
    
    
    
    690,812
    
    
    
    (77,200
    )
    
    $
    20,335,240QUARTER ENDED JUNE 30, 2004(As Restated)Net interest income
    
    $
    80,628
    
    
    
    3,203
    
    
    
    55
    
    
    $
    83,886Non-interest income
    
    $
    11,462
    
    
    
    521
    
    
    
    75
    
    
    $
    12,058Net income
    
    $
    29,091
    
    
    
    480
    
    
    
    35
    
    
    $
    29,606Identifiable assets
    
    $
    14,571,213
    
    
    
    554,986
    
    
    
    (115,756
    )
    
    $
    15,010,443
 (In thousands)Puerto Rico
    
    Mainland US
    
    Eliminations
    
    TotalsSIX MONTH PERIOD ENDED JUNE 30, 2005Net interest income
    
    $
    140,416
    
    
    
    8,814
    
    
    
    89
    
    
    $
    149,319Non-interest income
    
    $
    1,308
    
    
    
    2,187
    
    
    
    (959
    )
    
    $
    2,536Net income
    
    $
    15,147
    
    
    
    2,019
    
    
    
    (724
    )
    
    $
    16,442Identifiable assets
    
    $
    19,721,628
    
    
    
    690,812
    
    
    
    (77,200
    )
    
    $
    20,335,240SIX MONTH PERIOD ENDED JUNE 30, 2004(As Restated)Net interest income
    
    $
    154,599
    
    
    
    5,891
    
    
    
    69
    
    
    $
    160,559Non-interest income
    
    $
    13,218
    
    
    
    1,397
    
    
    
    (87
    )
    
    $
    14,528Net income
    
    $
    63,678
    
    
    
    767
    
    
    
    114
    
    
    $
    64,559Identifiable assets
    
    $
    14,571,213
    
    
    
    554,986
    
    
    
    (115,756
    )
    
    $
    15,010,443
 19




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  (In thousands)MortgageBankingand RiskManagement
    
    
    BankingQUARTER ENDEDJUNE 30, 2005Net gain on mortgage loan sales and fees
    
    $
    5,708
    
    
    $
    10,349Investment activities
    
    
    (35,802
    )
    
    
    (3,354
    )Servicing (loss) income
    
    
    (18,097
    )
    
    
    Commissions, fees and other income
    
    
    26,548
    
    
    
    5,003Total non-interest (loss) income
    
    $
    (21,643
    )
    
    $
    11,998QUARTER ENDEDJUNE 30, 2004(As Restated)Net (loss) gain on mortgage loan sales and fees
    
    $
    (13,412
    )
    
    $
    35,639Investment activities
    
    
    (10,903
    )
    
    
    (26,010
    )Servicing income (loss)
    
    
    22,744
    
    
    
    (12
    )Commissions, fees and other income
    
    
    748
    
    
    
    4,303Total non-interest (loss) income
    
    $
    (823
    )
    
    $
    13,920
 (In thousands)MortgageBankingand RiskManagement
    
    
    BankingSIX MONTH PERIODENDED JUNE 30, 2005Net (loss) gain on mortgage loan sales and fees
    
    $
    (7,896
    )
    
    $
    29,931Investment activities
    
    
    (27,498
    )
    
    
    (279
    )Servicing (loss) income
    
    
    (8,604
    )
    
    
    4Commissions, fees and other income
    
    
    33,093
    
    
    
    9,640Total non-interest (loss) income
    
    $
    (10,905
    )
    
    $
    39,296SIX MONTH PERIODENDED JUNE 30, 2004(As Restated)Net (loss) gain on mortgage loan sales and fees
    
    $
    (20,451
    )
    
    $
    66,926Investment activities
    
    
    (42,810
    )
    
    
    (5,411
    )Servicing income (loss)
    
    
    5,566
    
    
    
    (11
    )Commissions, fees and other income
    
    
    1,410
    
    
    
    7,847Total non-interest (loss) income
    
    $
    (56,285
    )
    
    $
    69,351
 20




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 h.
    
    The fair value of the Companys securities held for trading and the fair value and carrying
value of its securities classified as available for sale and held to maturity are shown below
by category.
 1.
    
    The following table summarizes Doral Financials holdings of securities held
for trading as of June 30, 2005 and December 31, 2004.
 SECURITIES HELD FOR TRADING
    
    JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2005
    
    
    2004Mortgage-backed securities:GNMA exempt
    
    $
    243,338
    
    
    $
    266,380GNMA taxable
    
    
    57,190
    
    
    
    50,974CMO certificates
    
    
    1,705
    
    
    
    2,513FHLMC and FNMA
    
    
    32,745
    
    
    
    17,720Variable interest-only strips
    
    
    123,832
    
    
    
    125,216Fixed interest-only strips
    
    
    1,835
    
    
    
    2,145FHLB Notes
    
    
    11,401
    
    
    
    5,025Puerto Rico government and agency securities
    
    
    5,529
    
    
    
    5,444Derivatives(1)
    
    
    17,441
    
    
    
    13,630Other
    
    
    23
    
    
    
    23Total
    
    $
    495,039
    
    
    $
    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 $16.9 billion as of
June 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 June 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 ($24.9 million as of June 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 JUNE 30, 2005
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    3,333,369
    
    
    $
    189
    
    
    $
    19,569
    
    
    $
    3,313,989
    
    
    
    5.34
    %FHLMC and FNMADue over ten years
    
    
    844,310
    
    
    
    5,848
    
    
    
    4,948
    
    
    
    845,210
    
    
    
    5.07
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    111,956
    
    
    
    2,317
    
    
    
    
    
    
    
    114,273
    
    
    
    5.51
    %US TREASURYDue within a year
    
    
    399,667
    
    
    
    
    
    
    
    5,550
    
    
    
    394,117
    
    
    
    1.59
    %Due from one to five years
    
    
    100,447
    
    
    
    
    
    
    
    2,588
    
    
    
    97,859
    
    
    
    1.97
    %Due from five to ten years
    
    
    1,779,727
    
    
    
    2,772
    
    
    
    12,920
    
    
    
    1,769,579
    
    
    
    3.81
    %$
    6,569,476
    
    
    $
    11,126
    
    
    $
    45,575
    
    
    $
    6,535,027
    
    
    
    4.62
    %
 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
    %
 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 June 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
 22




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 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 JUNE 30, 2005
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue from one to five years
    
    $
    582
    
    
    $
    20
    
    
    $
    
    
    
    $
    602
    
    
    
    5.80
    %Due from five to ten years
    
    
    396
    
    
    
    16
    
    
    
    
    
    
    
    412
    
    
    
    6.39
    %Due over ten years
    
    
    4,668
    
    
    
    262
    
    
    
    
    
    
    
    4,930
    
    
    
    6.85
    %FHLMC and FNMADue over ten years
    
    
    384,398
    
    
    
    14,891
    
    
    
    
    
    
    
    399,289
    
    
    
    5.18
    %CMO CERTIFICATESDue over ten years
    
    
    11,748
    
    
    
    6
    
    
    
    209
    
    
    
    11,545
    
    
    
    5.79
    %DEBT SECURITIESFHLB NOTESDue from one to five years
    
    
    200,932
    
    
    
    1,719
    
    
    
    1,450
    
    
    
    201,201
    
    
    
    3.53
    %Due from five to ten years
    
    
    50,000
    
    
    
    125
    
    
    
    
    
    
    
    50,125
    
    
    
    4.13
    %Due over ten years
    
    
    273,594
    
    
    
    
    
    
    
    2,902
    
    
    
    270,692
    
    
    
    5.10
    %FHLB ZERO COUPONDue over ten years
    
    
    116,669
    
    
    
    
    
    
    
    477
    
    
    
    116,192
    
    
    
    6.51
    %FHLMC ZERO COUPONDue over ten years
    
    
    291,324
    
    
    
    322
    
    
    
    1,396
    
    
    
    290,250
    
    
    
    5.89
    %FHLMC and FNMA NOTESDue over ten years
    
    
    149,988
    
    
    
    47
    
    
    
    469
    
    
    
    149,566
    
    
    
    5.63
    %P.R. HOUSING AUTHORITYDue from one to five years
    
    
    5,000
    
    
    
    167
    
    
    
    
    
    
    
    5,167
    
    
    
    6.00
    %Due over ten years
    
    
    2,235
    
    
    
    16
    
    
    
    
    
    
    
    2,251
    
    
    
    6.20
    %U.S. TREASURYDue from five to ten years
    
    
    201,442
    
    
    
    
    
    
    
    3,567
    
    
    
    197,875
    
    
    
    3.52
    %Due over ten years
    
    
    474,665
    
    
    
    8,491
    
    
    
    257
    
    
    
    482,899
    
    
    
    4.35
    %OTHERDue within a year
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    6.20
    %Due from one to five years
    
    
    8,105
    
    
    
    88
    
    
    
    140
    
    
    
    8,053
    
    
    
    4.37
    %Due from five to ten years
    
    
    190
    
    
    
    6
    
    
    
    
    
    
    
    196
    
    
    
    6.75
    %Due over ten years
    
    
    7,000
    
    
    
    664
    
    
    
    
    
    
    
    7,664
    
    
    
    5.93
    %$
    2,182,961
    
    
    $
    26,840
    
    
    $
    10,867
    
    
    $
    2,198,934
    
    
    
    4.87
    %
 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 June 30, 2005 and December 31, 2004.
 SECURITIES
 AVAILABLE FOR SALE
 (As of June 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
    
    $
    3,029,652
    
    
    $
    16,372
    
    
    $
    242,949
    
    
    $
    3,197
    
    
    $
    3,272,601
    
    
    $
    19,569FHLMC and FNMA
    
    
    200,816
    
    
    
    1,561
    
    
    
    210,706
    
    
    
    3,387
    
    
    
    411,522
    
    
    
    4,948Debt SecuritiesU.S. Treasury
    
    
    507,532
    
    
    
    1,538
    
    
    
    993,617
    
    
    
    19,520
    
    
    
    1,501,149
    
    
    
    21,058$
    3,738,000
    
    
    $
    19,471
    
    
    $
    1,447,272
    
    
    $
    26,104
    
    
    $
    5,185,272
    
    
    $
    45,575
 SECURITIES
 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 June 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 SecuritiesCMO Certificates
    
    $
    
    
    
    $
    
    
    
    $
    7,749
    
    
    $
    209
    
    
    $
    7,749
    
    
    $
    209Debt SecuritiesFHLB Notes
    
    
    369,241
    
    
    
    4,352
    
    
    
    
    
    
    
    
    
    
    
    369,241
    
    
    
    4,352FHLB Zero Coupon
    
    
    116,192
    
    
    
    477
    
    
    
    
    
    
    
    
    
    
    
    116,192
    
    
    
    477FHLMC Zero Coupon
    
    
    
    
    
    
    
    
    
    
    173,589
    
    
    
    1,396
    
    
    
    173,589
    
    
    
    1,396FHLMC and FNMA Notes
    
    
    99,351
    
    
    
    469
    
    
    
    
    
    
    
    
    
    
    
    99,351
    
    
    
    469U.S. Treasury
    
    
    52,140
    
    
    
    90
    
    
    
    264,235
    
    
    
    3,734
    
    
    
    316,375
    
    
    
    3,824Other
    
    
    3,760
    
    
    
    140
    
    
    
    
    
    
    
    
    
    
    
    3,760
    
    
    
    140$
    640,684
    
    
    $
    5,528
    
    
    $
    445,573
    
    
    $
    5,339
    
    
    $
    1,086,257
    
    
    $
    10,867
 SECURITIES
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
 The Companys investment securities consist primarily of mortgage-backed securities,
U.S. Treasury and agency securities. Given the high credit quality of these instruments,
the principal of and interest on the securities are deemed recoverable. The Company has the
ability and intent to hold the securities until maturity or until the unrealized losses are
recovered. Therefore, no other-than-temporary impairment loss has been recognized.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)
    
    JUNE 30, 2005
    
    
    DECEMBER 31, 2004Conventional single family residential loans
    
    $
    4,834,315
    
    
    $
    4,226,712FHA/VA loans
    
    
    161,186
    
    
    
    171,882Mortgage loans on residential multifamily
    
    
    29,362
    
    
    
    42,824Construction and commercial real estate loans
    
    
    546,311
    
    
    
    481,089$
    5,571,174
    
    
    $
    4,922,507
 26




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
    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
    
    JUNE 30, 2005
    
    
    DECEMBER 31, 2004(Dollars in thousands)
    
    AMOUNT
    
    
    PERCENT
    
    
    AMOUNT
    
    
    PERCENTConstruction loans(1)
    
    $
    712,363
    
    
    
    35
    %
    
    $
    629,913
    
    
    
    35
    %Residential mortgage loans(2)
    
    
    142,309
    
    
    
    7
    %
    
    
    409,005
    
    
    
    23
    %Commercial  secured by real estate
    
    
    893,984
    
    
    
    44
    %
    
    
    568,842
    
    
    
    32
    %Consumer  secured by real estate
    
    
    
    
    
    
    0
    %
    
    
    320
    
    
    
    0
    %Consumer  other:Personal loans
    
    
    30,544
    
    
    
    1
    %
    
    
    28,865
    
    
    
    2
    %Auto loans
    
    
    935
    
    
    
    0
    %
    
    
    1,175
    
    
    
    0
    %Credit cards
    
    
    17,078
    
    
    
    1
    %
    
    
    13,401
    
    
    
    1
    %Overdrawn checking accounts
    
    
    371
    
    
    
    0
    %
    
    
    524
    
    
    
    0
    %Revolving lines of credit
    
    
    30,847
    
    
    
    1
    %
    
    
    26,614
    
    
    
    1
    %Lease financing receivables
    
    
    31,242
    
    
    
    2
    %
    
    
    7,488
    
    
    
    0
    %Commercial non-real estate
    
    
    115,655
    
    
    
    6
    %
    
    
    36,848
    
    
    
    2
    %Loans on savings deposits
    
    
    12,627
    
    
    
    1
    %
    
    
    9,354
    
    
    
    1
    %Land secured
    
    
    49,726
    
    
    
    2
    %
    
    
    51,853
    
    
    
    3
    %Loans receivable, gross
    
    
    2,037,681
    
    
    
    100
    %
    
    
    1,784,202
    
    
    
    100
    %Less:Unearned interest and deferred
loan fees, net
    
    
    (19,928
    )
    
    
    
    
    
    
    (15,622
    )Allowance for loan and lease losses
    
    
    (22,672
    )
    
    
    
    
    
    
    (20,881
    )(42,600
    )
    
    
    
    
    
    
    (36,503
    )Loans receivable, net
    
    $
    1,995,081
    
    
    
    
    
    
    $
    1,747,699
 
 (1)
    
    Includes $550.5 million and $556.0 million of construction loans for residential housing projects
as of June 30, 2005 and December 31, 2004, respectively. Also includes $161.9 million and $73.9 million
of construction loans for commercial, condominiums and multifamily projects as of June 30, 2005 and
December 31, 2004, respectively.(2)
    
    The reduction in residential mortgage loans from December 31, 2004 to June 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 are 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
    
    
    SIX MONTH PERIOD ENDEDALLOWANCE FOR LOAN AND LEASE
    
    JUNE 30,
    
    
    JUNE 30,LOSSES
    
    
    
    
    
    2004
    
    
    
    
    
    
    2004(DOLLARS IN THOUSANDS)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Balance at beginning of period
    
    $
    24,255
    
    
    $
    16,057
    
    
    $
    20,881
    
    
    $
    14,919Provision for loan and lease losses
    
    
    3,658
    
    
    
    3,481
    
    
    
    7,705
    
    
    
    5,250Charge-offs
    
    
    (5,409
    )
    
    
    (1,265
    )
    
    
    (6,144
    )
    
    
    (1,931
    )Recoveries
    
    
    220
    
    
    
    42
    
    
    
    282
    
    
    
    150Other
    
    
    (52
    )
    
    
    4
    
    
    
    (52
    )
    
    
    (69
    )Balance at end of period
    
    $
    22,672
    
    
    $
    18,319
    
    
    $
    22,672
    
    
    $
    18,319
 28




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 l.
    
    Doral Financial is the guarantor of various unregistered serial and term bonds issued by
Doral Properties, a wholly-owned subsidiary, through the Puerto Rico Industrial, Tourist,
Educational, Medical and Environmental Control Facilities Financing Authority (AFICA). The
bonds were issued to finance the construction and development of the Doral Financial Plaza
building, the headquarters facility of Doral Financial. As of June 30, 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
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2004
    
    
    
    
    
    
    2004(In thousands)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Balance at beginning of period
    
    $
    137,916
    
    
    $
    132,088
    
    
    $
    136,024
    
    
    $
    133,237Capitalization of servicing assets
    
    
    11,293
    
    
    
    7,377
    
    
    
    17,843
    
    
    
    13,515Rights purchased
    
    
    1,140
    
    
    
    1,310
    
    
    
    2,220
    
    
    
    2,729Amortization
    
    
    (7,394
    )
    
    
    (5,638
    )
    
    
    (13,132
    )
    
    
    (14,344
    )Balance before valuation
allowance at end of period
    
    
    142,955
    
    
    
    135,137
    
    
    
    142,955
    
    
    
    135,137Valuation allowance for temporary
impairment
    
    
    (29,820
    )
    
    
    (3,500
    )
    
    
    (29,820
    )
    
    
    (3,500
    )Balance at end of period
    
    $
    113,135
    
    
    $
    131,637
    
    
    $
    113,135
    
    
    $
    131,637
  29




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  QUARTER ENDED
    
    
    SIX MONTH PERIOD ENDEDJUNE 30,
    
    
    JUNE 30,2004
    
    
    
    
    
    
    2004(In thousands)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Balance at beginning of period
    
    $
    8,220
    
    
    $
    22,206
    
    
    $
    12,438
    
    
    $
    4,317Temporary impairment charges
    
    
    21,621
    
    
    
    
    
    
    
    21,894
    
    
    
    17,936Recoveries
    
    
    (21
    )
    
    
    (18,706
    )
    
    
    (4,512
    )
    
    
    (18,753
    )Balance at end of period
    
    $
    29,820
    
    
    $
    3,500
    
    
    $
    29,820
    
    
    $
    3,500
  INTEREST-ONLY STRIPS ACTIVITY
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2004
    
    
    
    
    
    
    2004(In thousands)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Balance at beginning of period
    
    $
    96,313
    
    
    $
    140,529
    
    
    $
    127,361
    
    
    $
    128,566Capitalization of IOs from loan sales
    
    
    5,658
    
    
    
    10,114
    
    
    
    10,981
    
    
    
    24,073Amortization
    
    
    (14,827
    )
    
    
    (12,947
    )
    
    
    (28,252
    )
    
    
    (24,048
    )Gains (losses) on the IO value
    
    
    38,523
    
    
    
    (17,966
    )
    
    
    15,577
    
    
    
    (8,861
    )Balance at end of period
    
    $
    125,667
    
    
    $
    119,730
    
    
    $
    125,667
    
    
    $
    119,730
  30




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Servicing
    
    Interest-only(Dollars in thousands)
    
    Assets
    
    stripsCarrying amount of retained interest
    
    $
    113,135
    
    
    $
    125,667Weighted-average expected life (in years)
    
    
    4.9
    
    
    
    4.6Constant prepayment rate
(weighted-average annual rate)
    
    
    17.88
    %
    
    
    17.64
    %Decrease in fair value due to 10%
adverse change
    
    $
    (4,483
    )
    
    $
    (6,123
    )Decrease in fair value due to 20%
adverse change
    
    $
    (8,486
    )
    
    $
    (11,760
    )Residual cash flow discount rate
(weighted-average annual rate)
    
    
    9.94
    %
    
    
    9.16
    %Decrease in fair value due to 10%
adverse change
    
    $
    (3,404
    )
    
    $
    (2,688
    )Decrease in fair value due to 20%
adverse change
    
    $
    (6,610
    )
    
    $
    (5,250
    )
   (Dollars in thousands)
    
    Constant
    
    Weighted-average
    
    Change in FairChange in yield curve (basis points)
    
    prepayment rate
    
    expected life
    
    Value of IOs
    
    % Change+200
    
    
    
    12.36
    %
    
    
    6.1
    
    
    $
    (128,892
    )
    
    
    (102.6
    )%+100
    
    
    
    13.56
    %
    
    
    5.7
    
    
    
    (61,981
    )
    
    
    (49.3
    )%+50
    
    
    
    14.88
    %
    
    
    5.3
    
    
    
    (28,972
    )
    
    
    (23.1
    )%Base
    
    
    17.64
    %
    
    
    4.6
    
    
    
    0
    
    
    
    0.0
    %-50
    
    
    
    21.54
    %
    
    
    3.9
    
    
    
    22,051
    
    
    
    17.5
    %-100
    
    
    
    25.08
    %
    
    
    3.4
    
    
    
    40,363
    
    
    
    32.1
    %-200
    
    
    
    28.38
    %
    
    
    3.1
    
    
    
    84,746
    
    
    
    67.4
    %
 n.
    
    At June 30, 2005 and December 31, 2004, money market investments included $1.1 billion and
$806.8 million, respectively, of pledged money market investments. Such money market
investments secured short-term borrowings generally due within 90 days. At June 30, 2005 and
December 31, 2004, the carrying value of securities purchased under resell agreements included
in money market investments was
 31




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 $49.2 million for both periods. 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 second
quarter and first half of 2005 and 2004 was $2.4 million and $4.9 million for each of the
periods, respectively.p.
    
    The following table summarizes deposit balances:
 (In thousands)
    
    JUNE 30, 2005
    
    
    DECEMBER 31, 2004Certificates of deposit
    
    $
    2,297,685
    
    
    $
    1,983,271Regular savings
    
    
    477,276
    
    
    
    474,271NOW accounts
    
    
    704,054
    
    
    
    726,178Non interest-bearing deposits
    
    
    509,860
    
    
    
    459,360$
    3,988,875
    
    
    $
    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 $8.0
billion and $6.3 billion as of June 30, 2005 and December 31, 2004, respectively.
 32




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 r.
    
    Advances from the FHLB consisted of the following:
 JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2005
    
    
    2004Non-callable advances with
maturities ranging from July 2005 to
March 2010 (from July 2005 to March
2008, at December 31, 2004), at
various fixed rates averaging 3.46%
and 3.12% at June 30, 2005 and
December 31, 2004, respectively
    
    $
    272,000
    
    
    $
    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 (3.10% and
2.41% at June 30, 2005 and December
31, 2004, respectively)
    
    
    100,000
    
    
    
    100,000Callable advances with maturities
ranging from August 2005 to November
2012, at various fixed rates
averaging 4.50%, callable at various
dates beginning on July 2, 2005
    
    
    872,500
    
    
    
    872,500$
    1,244,500
    
    
    $
    1,294,500
 At June 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 $1.4
billion to secure the above advances from the FHLB. According to contractual agreements,
such investments can be repledged by the counterparty.s.
    
    At June 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:
 JUNE 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 4.67% and
3.60% at June 30, 2005 and December
31, 2004, respectively
    
    $
    3,817,536
    
    
    $
    3,258,459Secured borrowings with local
financial institutions, collateralized
by real estate mortgage loans at fixed
interest rates averaging 6.44% and
7.41% at June 30, 2005 and December
31, 2004, respectively
    
    
    44,611
    
    
    
    57,566Secured borrowings with a local
financial institution, collateralized
by IOs at a fixed interest rate of
7.75%
    
    
    42,388
    
    
    
    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 4.27% and 3.17% at June 30,
2005 and December 31, 2004,
respectively, and other financing
arrangements
    
    
    391,375
    
    
    
    279,560$
    4,295,910
    
    
    $
    3,638,507
  33




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 t.
    
    Notes payable consisted of the following:
 (In thousands)
    

JUNE
30,
 2005
    
    

DECEMBER
31,
 2004$625 million floating rate senior notes tied to 3-month LIBOR (3.97%
and 2.91% at June 30, 2005 and December 31, 2004, respectively), due on
July 20, 2007, paying interest quarterly
    
    $
    625,443
    
    
    $
    625,330$115 million floating rate senior notes tied to 3-month LIBOR (3.99%
and 3.07% at June 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
    
    
    98,212
    
    
    
    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
    
    
    29,543
    
    
    
    29,560$40 million notes, net of discount, bearing interest at 7.10%, due on
April 26, 2017, paying interest monthly
    
    
    39,301
    
    
    
    39,339$30 million notes, net of discount, bearing interest at 7.15%, due on
April 26, 2022, paying interest monthly
    
    
    29,441
    
    
    
    29,476Senior term notes at fixed rates ranging from 8.45% to 8.55% with
maturities ranging from August 2005 to August 2007, paying interest
semiannually on February 28 and August 31
    
    
    24,000
    
    
    
    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
    
    
    2,257
    
    
    
    2,191Notes payable at fixed rates, 6.00% at June 30, 2005 (7.00% at December
31, 2004), due on February 2005 (at various maturities ranging from
February to March 2005 at December 31, 2004), paying interest monthly
    
    
    190
    
    
    
    555$
    1,089,102
    
    
    $
    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 States
 34




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
        35




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 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 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 June 30, 2005, the
deferred tax asset, net of its valuation allowance of $56.2 million, amounted to
approximately $134.1 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 June 30, 2005, the Company had outstanding $3.8 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 June 30, 2005, the outstanding principal balance of loans sold
subject to full or partial recourse was $2.1 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 $1.4 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 $16.9 million,
as of June 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
June 30, 2005, commitments to extend credit amounted to approximately $563.7 million and
commitments to sell mortgage-backed securities and loans amounted to approximately $2.0
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 $2.0 billion in commitments to sell
mortgage-backed securities existing as of June 30, 2005, $1.6 billion relate to commitments
to sell mortgage loans that would give rise to IOs, which were terminated after June 30,
2005.As of June 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.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.
 36




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Class Action Lawsuits.
 Shareholder Derivative Lawsuits.
 Other Lawsuits.
   37




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 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 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
 38




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Share-Based Payments
 Exchanges of Nonmonetary Assets.
 39




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Accounting Changes and Error Corrections.
 Accounting for Conditional Asset Retirement Obligations.
 Accounting for Certain Hybrid Financial Instruments
 Terms
of Loan Products that may Give Rise to a Concentration of Credit Risk
 Accounting for Servicing of Financial Assets.
 40




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  41




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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
   42




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SUBSEQUENT EVENTS
         43




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OVERVIEW OF RESULTS OF OPERATIONS
  
    
    The effects 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 for financial reporting purposes.
    
    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 continuous flattening of the yield curve experienced since the third
quarter of 2004 substantially impacted the Companys net
interest margin and the value of
its trading and hedging instruments.
  
    
    Net income decreased from $29.6 million for the quarter ended June 30, 2004
to a loss of $22.8 million for the second quarter of 2005 and decreased on a diluted
earnings per share basis from $0.19 to a loss per share of $0.29.
    
    Results for the second quarter of 2005 were principally impacted by a
decrease in non-interest income driven by lower trading profits and servicing income,
and higher non-interest expenses.
    
    Net interest income for the quarter ended June 30, 2005 was $75.3 million
compared to $83.9 million for the same period in 2004. The decrease in net interest
income resulted from a significant decrease in interest rate margin, which was
partially offset 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, resulting in a lower
interest rate margin.
    
    The provision for loan and lease losses increased slightly for the second
quarter from $3.5 million in 2004 to $3.7 million in 2005. During the second quarter
of 2005, Doral Financial foreclosed and disposed of a construction development project
that the Company had partially reserved in 2003. The disposition resulted in an
improvement in non-performing loans outstanding and an improvement in the ratio of
allowance for loan and lease losses as a percentage of loan receivable outstanding.
    
    Non-interest loss for the quarter ended June 30, 2005
was $33.5 million,
compared to a non-interest income of $12.1 million for the same period in 2004. The
decrease in non-interest income was driven by losses on securities held for trading and
lower servicing income, which were partially offset by higher fees from banking and
insurance agency activities and higher gains on sale of investment securities. Losses
on trading activities for the second quarter of 2005 were principally due to realized
and unrealized losses with respect to derivative instruments undertaken for risk
management purposes, which were in turn were mainly attributable to a decrease in
long-term interest and swap rates.
    
    Non-interest expenses for the second quarter of 2005 were
$65.6 million
compared to $52.5 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
principally to expenses associated with the Companys restatement. Refer to the
Non-Interest
 44




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Expense section of the
Managements Discussion and Analysis of Financial Condition and Results of Operations
for further explanations.
 CRITICAL ACCOUNTING POLICIES
   RESULTS OF OPERATIONS FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (As Restated)
   NET INCOME
   45




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NET INTEREST INCOME
     46




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TABLE A
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
 QUARTER ENDED JUNE 30,20042005
    
    
    (As Restated)AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEBALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    7,271,065
    
    
    $
    124,896
    
    
    
    6.89
    %
    
    $
    5,501,626
    
    
    $
    100,642
    
    
    
    7.34
    %Mortgage-backed securities
    
    
    4,873,325
    
    
    
    60,306
    
    
    
    4.96
    %
    
    
    1,429,426
    
    
    
    17,344
    
    
    
    4.87
    %Interest-only strips
    
    
    111,266
    
    
    
    2,541
    
    
    
    9.16
    %
    
    
    130,935
    
    
    
    3,395
    
    
    
    10.40
    %Investment securities
    
    
    3,269,654
    
    
    
    31,939
    
    
    
    3.92
    %
    
    
    4,474,582
    
    
    
    45,641
    
    
    
    4.09
    %Other interest-earning assets
    
    
    2,516,832
    
    
    
    17,700
    
    
    
    2.82
    %
    
    
    1,717,583
    
    
    
    4,711
    
    
    
    1.10
    %Total interest-earning assets/interest income
    
    
    18,042,142
    
    
    $
    237,382
    
    
    
    5.28
    %
    
    
    13,254,152
    
    
    $
    171,733
    
    
    
    5.20
    %Total non-interest-earning assets
    
    
    838,655
    
    
    
    
    
    
    
    
    
    
    
    572,923Total assets
    
    $
    18,880,797
    
    
    
    
    
    
    
    
    
    
    $
    13,827,075LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    3,601,919
    
    
    $
    23,178
    
    
    
    2.58
    %
    
    $
    3,193,809
    
    
    $
    19,499
    
    
    
    2.45
    %Repurchase agreements
    
    
    6,918,520
    
    
    
    59,635
    
    
    
    3.46
    %
    
    
    4,906,775
    
    
    
    25,412
    
    
    
    2.08
    %Advances from the FHLB
    
    
    1,244,566
    
    
    
    13,055
    
    
    
    4.21
    %
    
    
    1,277,467
    
    
    
    12,358
    
    
    
    3.88
    %Loans payable
    
    
    4,508,201
    
    
    
    52,099
    
    
    
    4.64
    %
    
    
    2,378,546
    
    
    
    18,975
    
    
    
    3.20
    %Notes payable
    
    
    1,089,151
    
    
    
    14,162
    
    
    
    5.22
    %
    
    
    590,008
    
    
    
    11,603
    
    
    
    7.89
    %Total interest-bearing liabilities/interest expense
    
    
    17,362,357
    
    
    $
    162,129
    
    
    
    3.75
    %
    
    
    12,346,605
    
    
    $
    87,847
    
    
    
    2.85
    %Total non-interest-bearing liabilities
    
    
    278,457
    
    
    
    
    
    
    
    
    
    
    
    284,693Total liabilities
    
    
    17,640,814
    
    
    
    
    
    
    
    
    
    
    
    12,631,298Stockholders equity
    
    
    1,239,983
    
    
    
    
    
    
    
    
    
    
    
    1,195,777Total liabilities and stockholders equity
    
    $
    18,880,797
    
    
    
    
    
    
    
    
    
    
    $
    13,827,075Net interest-earning assets
    
    $
    679,785
    
    
    
    
    
    
    
    
    
    
    $
    907,547Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    75,253
    
    
    
    
    
    
    
    
    
    
    $
    83,886Interest
rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.53
    %
    
    
    
    
    
    
    
    
    
    
    2.35
    %Interest
rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.67
    %
    
    
    
    
    
    
    
    
    
    
    2.54
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    103.92
    %
    
    
    
    
    
    
    
    
    
    
    107.35
    %
 
 (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 second quarter of 2004 interest income on loans includes a yield adjustment of $3.1 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 B
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
 SIX MONTH PERIOD ENDED JUNE 30,20042005
    
    (As Restated)AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEBALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    6,907,742
    
    
    $
    234,642
    
    
    
    6.85
    %
    
    $
    5,323,906
    
    
    $
    202,084
    
    
    
    7.63
    %Mortgage-backed securities
    
    
    4,650,120
    
    
    
    112,874
    
    
    
    4.89
    %
    
    
    1,402,398
    
    
    
    35,087
    
    
    
    5.03
    %Interest-only strips
    
    
    114,246
    
    
    
    5,841
    
    
    
    10.31
    %
    
    
    133,554
    
    
    
    6,608
    
    
    
    9.95
    %Investment securities
    
    
    3,271,269
    
    
    
    64,768
    
    
    
    3.99
    %
    
    
    3,708,007
    
    
    
    78,750
    
    
    
    4.27
    %Other interest-earning assets
    
    
    2,591,403
    
    
    
    33,799
    
    
    
    2.63
    %
    
    
    1,600,725
    
    
    
    8,228
    
    
    
    1.03
    %Total interest-earning assets/interest income
    
    
    17,534,780
    
    
    $
    451,924
    
    
    
    5.20
    %
    
    
    12,168,590
    
    
    $
    330,757
    
    
    
    5.47
    %Total non-interest-earning assets
    
    
    841,004
    
    
    
    
    
    
    
    
    
    
    
    593,633Total assets
    
    $
    18,375,784
    
    
    
    
    
    
    
    
    
    
    $
    12,762,223LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    3,584,596
    
    
    $
    45,635
    
    
    
    2.57
    %
    
    $
    3,148,900
    
    
    $
    38,481
    
    
    
    2.46
    %Repurchase agreements
    
    
    6,829,562
    
    
    
    110,093
    
    
    
    3.25
    %
    
    
    4,106,041
    
    
    
    48,084
    
    
    
    2.35
    %Advances from the FHLB
    
    
    1,238,732
    
    
    
    25,534
    
    
    
    4.16
    %
    
    
    1,239,808
    
    
    
    24,144
    
    
    
    3.92
    %Loans payable
    
    
    4,062,513
    
    
    
    94,286
    
    
    
    4.68
    %
    
    
    2,223,987
    
    
    
    36,443
    
    
    
    3.30
    %Notes payable
    
    
    1,092,737
    
    
    
    27,057
    
    
    
    4.99
    %
    
    
    575,207
    
    
    
    23,046
    
    
    
    8.06
    %Total interest-bearing liabilities/interest expense
    
    
    16,808,140
    
    
    $
    302,605
    
    
    
    3.63
    %
    
    
    11,293,943
    
    
    $
    170,198
    
    
    
    3.03
    %Total non-interest-bearing liabilities
    
    
    305,593
    
    
    
    
    
    
    
    
    
    
    
    266,813Total liabilities
    
    
    17,113,733
    
    
    
    
    
    
    
    
    
    
    
    11,560,756Stockholders equity
    
    
    1,262,051
    
    
    
    
    
    
    
    
    
    
    
    1,201,467Total liabilities and stockholders equity
    
    $
    18,375,784
    
    
    
    
    
    
    
    
    
    
    $
    12,762,223Net interest-earning assets
    
    $
    726,640
    
    
    
    
    
    
    
    
    
    
    $
    874,647Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    149,319
    
    
    
    
    
    
    
    
    
    
    $
    160,559Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.57
    %
    
    
    
    
    
    
    
    
    
    
    2.44
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.72
    %
    
    
    
    
    
    
    
    
    
    
    2.65
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    104.32
    %
    
    
    
    
    
    
    
    
    
    
    107.74
    %
 
 (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 six 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. 49




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TABLE C
NET INTEREST INCOME VARIANCE ANALYSIS
(IN THOUSANDS)
 QUARTER ENDEDJUNE 30,2005 COMPARED TO 2004 (As Restated)INCREASE (DECREASE) DUE TO:VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    32,469
    
    
    $
    (8,215
    )
    
    $
    24,254Mortgage-backed securities
    
    
    41,929
    
    
    
    1,033
    
    
    
    42,962Interest-only strips
    
    
    (511
    )
    
    
    (343
    )
    
    
    (854
    )Investment securities
    
    
    (12,320
    )
    
    
    (1,382
    )
    
    
    (13,702
    )Other interest-earning assets
    
    
    2,198
    
    
    
    10,791
    
    
    
    12,989TOTAL INTEREST INCOME VARIANCE
    
    
    63,765
    
    
    
    1,884
    
    
    
    65,649INTEREST EXPENSE VARIANCEDeposits
    
    
    2,500
    
    
    
    1,179
    
    
    
    3,679Repurchase agreements
    
    
    10,461
    
    
    
    23,762
    
    
    
    34,223Advances from the FHLB
    
    
    (319
    )
    
    
    1,016
    
    
    
    697Loans payable
    
    
    17,037
    
    
    
    16,087
    
    
    
    33,124Notes payable
    
    
    9,846
    
    
    
    (7,287
    )
    
    
    2,559TOTAL INTEREST EXPENSE VARIANCE
    
    
    39,525
    
    
    
    34,757
    
    
    
    74,282NET INTEREST INCOME VARIANCE
    
    $
    24,240
    
    
    $
    (32,873
    )
    
    $
    (8,633
    )
 50




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TABLE
D
NET INTEREST INCOME VARIANCE ANALYSIS

(IN THOUSANDS)
 SIX MONTH PERIODENDED
JUNE 30,2005 COMPARED TO 2004 (As Restated)INCREASE (DECREASE) DUE TO:VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    60,423
    
    
    $
    (27,865
    )
    
    $
    32,558Mortgage-backed securities
    
    
    81,680
    
    
    
    (3,893
    )
    
    
    77,787Interest-only strips
    
    
    (961
    )
    
    
    194
    
    
    
    (767
    )Investment securities
    
    
    (9,324
    )
    
    
    (4,658
    )
    
    
    (13,982
    )Other interest-earning assets
    
    
    5,102
    
    
    
    20,469
    
    
    
    25,571TOTAL INTEREST INCOME VARIANCE
    
    
    136,920
    
    
    
    (15,753
    )
    
    
    121,167INTEREST EXPENSE VARIANCEDeposits
    
    
    5,359
    
    
    
    1,795
    
    
    
    7,154Repurchase agreements
    
    
    32,001
    
    
    
    30,008
    
    
    
    62,009Advances from the FHLB
    
    
    (21
    )
    
    
    1,411
    
    
    
    1,390Loans payable
    
    
    30,335
    
    
    
    27,508
    
    
    
    57,843Notes payable
    
    
    20,856
    
    
    
    (16,845
    )
    
    
    4,011TOTAL INTEREST EXPENSE VARIANCE
    
    
    88,530
    
    
    
    43,877
    
    
    
    132,407NET INTEREST INCOME VARIANCE
    
    $
    48,390
    
    
    $
    (59,630
    )
    
    $
    (11,240
    )
 INTEREST INCOME
    51




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Quarter Ended
    
    Six Month PeriodJune 31,
    
    Ended June 30,2004
    
    
    
    
    
    2004(In thousands)
    
    2005
    
    (As Restated)
    
    2005
    
    (As Restated)Total cash flows received on IO portfolio
    
    $
    17,368
    
    
    $
    16,342
    
    
    $
    34,093
    
    
    $
    30,656Amortization of IOs, as offset to cash flows
    
    
    (14,827
    )
    
    
    (12,947
    )
    
    
    (28,252
    )
    
    
    (24,048
    )Net cash flows recognized as interest income
    
    $
    2,541
    
    
    $
    3,395
    
    
    $
    5,841
    
    
    $
    6,608
   INTEREST EXPENSE
  52




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53




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PROVISION FOR LOAN AND LEASE LOSSES
    NON-INTEREST INCOME
  Net Gain on Mortgage Loan Sales and Fees.
 54




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FOR THE
    
    
    
    
    
    FOR THEFOR THE
    
    QUARTER
    
    FOR THE
    
    SIX MONTHQUARTER
    
    ENDED
    
    SIX MONTH
    
    PERIOD ENDEDENDED
    
    JUNE 30,
    
    PERIOD ENDED
    
    JUNE 30,JUNE 30,
    
    2004
    
    JUNE 30,
    
    2004(In thousands)
    
    2005
    
    (As Restated)
    
    2005
    
    (As Restated)Total loan sales and securitizations
    
    $
    749,438
    
    
    $
    582,994
    
    
    $
    1,571,303
    
    
    $
    1,165,564Total loans sales resulting in the
recording of IOs
    
    $
    192,938
    
    
    $
    270,808
    
    
    $
    732,650
    
    
    $
    443,756IOs capitalized
    
    $
    5,658
    
    
    $
    10,114
    
    
    $
    10,981
    
    
    $
    24,073MSRs capitalized
    
    $
    11,293
    
    
    $
    7,377
    
    
    $
    17,843
    
    
    $
    13,515
 Net Servicing Income.
   55




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TABLE E  NET SERVICING (LOSS) INCOME
 QUARTER ENDED
    
    
    SIX MONTH PERIOD ENDEDJUNE 30,
    
    
    JUNE 30,2004
    
    
    
    
    
    
    2004(In thousands)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Servicing fees (net of guarantee fees)
    
    $
    7,786
    
    
    $
    7,305
    
    
    $
    15,364
    
    
    $
    14,574Late charges
    
    
    2,048
    
    
    
    1,762
    
    
    
    4,305
    
    
    
    3,594Prepayment penalties
    
    
    1,751
    
    
    
    1,675
    
    
    
    3,110
    
    
    
    3,020Interest loss
    
    
    (1,373
    )
    
    
    (658
    )
    
    
    (2,331
    )
    
    
    (1,260
    )Other servicing fees
    
    
    100
    
    
    
    238
    
    
    
    199
    
    
    
    410Servicing income, gross
    
    
    10,312
    
    
    
    10,322
    
    
    
    20,647
    
    
    
    20,338(Amortization and impairment) recovery
of servicing assets
    
    
    (28,994
    )
    
    
    13,068
    
    
    
    (30,514
    )
    
    
    (13,527
    )Total net servicing (loss) income
    
    $
    (18,682
    )
    
    $
    23,390
    
    
    $
    (9,867
    )
    
    $
    6,811
 Trading Activities.
 TABLE F  COMPONENTS OF TRADING ACTIVITIES
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2004
    
    
    
    
    
    
    2004(In thousands)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Net realized gains on sales of trading securities
    
    $
    9,300
    
    
    $
    210
    
    
    $
    7,108
    
    
    $
    22,988Gains (losses) on the IO valuation
    
    
    38,523
    
    
    
    (17,966
    )
    
    
    15,577
    
    
    
    (8,861
    )Net unrealized losses on trading securities, excluding IOs
    
    
    (1,177
    )
    
    
    (985
    )
    
    
    (1,573
    )
    
    
    (78
    )Net realized and unrealized losses on derivative instruments
    
    
    (89,709
    )
    
    
    (2,743
    )
    
    
    (57,539
    )
    
    
    (63,209
    )Total
    
    $
    (43,063
    )
    
    $
    (21,484
    )
    
    $
    (36,427
    )
    
    $
    (49,160
    )
 Net Gain on Sale of Investment Securities.
 56




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##### Table of Contents



Commissions,
Fees and Other Income.
 TABLE G  COMMISSIONS, FEES AND OTHER INCOME
 QUARTER
    
    
    SIX MONTH PERIODENDED JUNE 30,
    
    
    ENDED JUNE 30,2004
    
    
    
    
    
    
    2004(In Thousands)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Retail banking fees
    
    $
    4,357
    
    
    $
    3,287
    
    
    $
    8,335
    
    
    $
    6,394Securities brokerage and asset
management fees and
commissions
    
    
    340
    
    
    
    382
    
    
    
    673
    
    
    
    1,116Insurance agency commissions
    
    
    3,029
    
    
    
    3,032
    
    
    
    5,976
    
    
    
    5,931Other income
    
    
    453
    
    
    
    1,058
    
    
    
    961
    
    
    
    1,486Total
    
    $
    8,179
    
    
    $
    7,759
    
    
    $
    15,945
    
    
    $
    14,927
  57




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NON-INTEREST EXPENSE S
 TABLE H
 QUARTER
    
    
    SIX MONTH PERIODENDED JUNE 30,
    
    
    ENDED JUNE 30,NON INTEREST EXPENSES
    
    
    
    
    
    2004
    
    
    
    
    
    
    2004(In Thousands)
    
    2005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Compensation and benefits
    
    $
    23,679
    
    
    $
    22,588
    
    
    $
    49,268
    
    
    $
    42,849Taxes, other than payroll and income taxes
    
    
    2,374
    
    
    
    2,258
    
    
    
    4,726
    
    
    
    4,468Advertising
    
    
    4,586
    
    
    
    4,113
    
    
    
    8,928
    
    
    
    7,303Professional services  excluding restatement
expenses
    
    
    3,857
    
    
    
    2,605
    
    
    
    7,830
    
    
    
    5,027Professional services  restatement expenses only
    
    
    7,406
    
    
    
    
    
    
    
    7,406
    
    
    
    Communication and information systems
    
    
    4,564
    
    
    
    3,308
    
    
    
    9,388
    
    
    
    6,588Occupancy and other office expenses
    
    
    8,182
    
    
    
    6,593
    
    
    
    15,345
    
    
    
    12,392Depreciation and amortization
    
    
    5,129
    
    
    
    4,225
    
    
    
    10,082
    
    
    
    8,237Other
    
    
    5,858
    
    
    
    6,802
    
    
    
    9,069
    
    
    
    11,794Total non-interest expenses
    
    $
    65,635
    
    
    $
    52,492
    
    
    $
    122,042
    
    
    $
    98,658
  INCOME TAXES
   58




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59




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BALANCE SHEET AND OPERATING DATA ANALYSIS
 LOAN PRODUCTION
  TABLE I
 LOAN PRODUCTION
 QUARTER ENDED
    
    SIX MONTH PERIODJUNE 30,
    
    ENDED JUNE 30,(Dollars in Thousands, Except for Average Initial
    
    
    
    
    
    2004
    
    
    
    
    
    2004Loan Balance)
    
    2005
    
    (As Restated)
    
    2005
    
    (As Restated)FHA/VA mortgage loansNumber of loans
    
    
    1,029
    
    
    
    1,208
    
    
    
    2,362
    
    
    
    2,392Volume of loans
    
    $
    86,732
    
    
    $
    109,988
    
    
    $
    196,924
    
    
    $
    215,592Percent of total volume
    
    
    6
    %
    
    
    8
    %
    
    
    7
    %
    
    
    8
    %Average initial loan balance
    
    $
    84,288
    
    
    $
    91,050
    
    
    $
    83,372
    
    
    $
    90,130Conventional conforming mortgage loansNumber of loans
    
    
    3,864
    
    
    
    1,225
    
    
    
    5,422
    
    
    
    4,095Volume of loans
    
    $
    463,310
    
    
    $
    142,971
    
    
    $
    647,171
    
    
    $
    484,146Percent of total volume
    
    
    30
    %
    
    
    11
    %
    
    
    23
    %
    
    
    18
    %Average initial loan balance
    
    $
    119,904
    
    
    $
    116,711
    
    
    $
    119,360
    
    
    $
    118,229Conventional non  conforming mortgage loans(1)Number of loans
    
    
    4,935
    
    
    
    6,969
    
    
    
    11,331
    
    
    
    12,364Volume of loans
    
    $
    556,843
    
    
    $
    740,968
    
    
    $
    1,262,977
    
    
    $
    1,338,450Percent of total volume
    
    
    36
    %
    
    
    56
    %
    
    
    44
    %
    
    
    50
    %Average initial loan balance
    
    $
    112,835
    
    
    $
    106,323
    
    
    $
    111,462
    
    
    $
    108,254Other(2)Number of loans
    
    
    4,360
    
    
    
    3,020
    
    
    
    8,421
    
    
    
    5,419Volume of loans
    
    $
    438,550
    
    
    $
    320,792
    
    
    $
    740,046
    
    
    $
    634,423Percent of total volume
    
    
    28
    %
    
    
    25
    %
    
    
    26
    %
    
    
    24
    %Total loansNumber of loans
    
    
    14,188
    
    
    
    12,422
    
    
    
    27,536
    
    
    
    24,270Volume of loans
    
    $
    1,545,435
    
    
    $
    1,314,719
    
    
    $
    2,847,118
    
    
    $
    2,672,611
 
 (1)
    
    Includes $59.3 million and $41.7 million in second mortgages for the quarters ended June 30, 2005 and 2004, respectively, and $103.7
million and $81.0 million in second mortgages for the six month periods ended June 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.  60




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TABLE J
LOAN ORIGINATION SOURCES
 SIX MONTH PERIOD ENDED JUNE 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
  61




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TABLE K
MORTGAGE LOAN SERVICING
(Dollars in Thousands, Except for Average Size of Loans)
 AS OF JUNE 30,20042005
    
    
    (As Restated)COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END:GNMA
    
    $
    2,283,219
    
    
    $
    2,589,042FHLMC/FNMA
    
    
    3,900,242
    
    
    
    3,589,209Doral Financial grantor trusts
    
    
    
    
    
    
    31,037Other conventional mortgage loans(1)(2)
    
    
    8,802,444
    
    
    
    7,320,022Total servicing portfolio
    
    $
    14,985,905
    
    
    $
    13,529,310SELECTED DATA REGARDING MORTGAGE LOANS SERVICED:Number of loans
    
    
    168,556
    
    
    
    156,727Weighted- average interest rate
    
    
    6.67
    %
    
    
    6.88
    %Weighted- average remaining maturity (months)
    
    
    256
    
    
    
    258Weighted- average gross servicing fee rate
    
    
    0.3941
    %
    
    
    0.3847
    %Average servicing portfolio
    
    $
    14,600,323
    
    
    $
    13,187,217Principal prepayments
    
    $
    1,166,390
    
    
    $
    1,154,914Constant prepayment rate
    
    
    14
    %
    
    
    15
    %Average size of loans
    
    $
    88,908
    
    
    $
    86,324Servicing assets, net
    
    $
    113,135
    
    
    $
    131,637DELINQUENT MORTGAGE LOANS AND PENDING
FORECLOSURES AT PERIOD END:60-89 days past due
    
    
    1.19
    %
    
    
    1.11
    %90 days or more past due
    
    
    1.62
    %
    
    
    1.70
    %Total delinquencies excluding foreclosures
    
    
    2.81
    %
    
    
    2.81
    %Foreclosures pending
    
    
    1.59
    %
    
    
    1.71
    %SERVICING PORTFOLIO ACTIVITY:Beginning servicing portfolio
    
    $
    14,264,367
    
    
    $
    12,690,244Add:Loans funded and purchased(3)
    
    
    2,104,577
    
    
    
    2,044,751Bulk servicing acquired
    
    
    99,775
    
    
    
    156,110Less:Servicing sales
    
    
    2,537
    
    
    
    2,652Run-off(4)
    
    
    1,480,277
    
    
    
    1,359,143Ending servicing portfolio
    
    $
    14,985,905
    
    
    $
    13,529,310
 
 (1)
    
    Includes $5.5 billion and $4.7 billion of loans owned by Doral Financial at June 30, 2005 and 2004, respectively, which represented
37%and 35% of the total servicing portfolio as of such dates for which no servicing rights has been recognized.(2)
    
    Includes portfolios of $300.3 million and $270.4 million at June 30, 2005 and 2004, respectively, of delinquent FHA/VA and conventional
mortgage loans sold to third parties.(3)
    
    Excludes approximately $742.5 million and $627.9 million of commercial, consumer, construction and other non-mortgage loans originated
by Doral Financial but not part of the mortgage servicing-portfolio as of June 30, 2005 and 2004, respectively.(4)
    
    Run-off refers to regular amortization of loans, prepayments and foreclosures. 62




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LIQUIDITY AND CAPITAL RESOURCES
      63




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TABLE L
SOURCES OF BORROWINGS
(DOLLARS IN THOUSANDS)
 AS OF JUNE 30, 2005
    
    AS OF DECEMBER 31, 2004AMOUNT
    
    AVERAGE
    
    AMOUNT
    
    AVERAGEOUTSTANDING
    
    RATE
    
    OUTSTANDING
    
    RATEDeposits
    
    $
    3,988,875
    
    
    
    2.69
    %
    
    $
    3,643,080
    
    
    
    2.47
    %Repurchase Agreements
    
    
    8,000,754
    
    
    
    3.47
    %
    
    
    6,305,163
    
    
    
    2.73
    %Advances from FHLB
    
    
    1,244,500
    
    
    
    4.16
    %
    
    
    1,294,500
    
    
    
    3.98
    %Loans Payable
    
    
    4,295,910
    
    
    
    4.70
    %
    
    
    3,638,507
    
    
    
    3.68
    %Notes Payable
    
    
    1,089,102
    
    
    
    5.09
    %
    
    
    1,095,977
    
    
    
    4.38
    %
   64




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TABLE M
AVERAGE DEPOSIT BALANCE
(DOLLARS IN THOUSANDS)
 SIX MONTH PERIODENDED
    
    
    YEAR ENDEDJUNE 30, 2005
    
    
    DECEMBER 31, 2004AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    AVERAGEBALANCE
    
    
    RATE
    
    
    BALANCE
    
    
    RATECertificates of deposit
    
    $
    1,945,859
    
    
    
    3.36
    %
    
    $
    1,829,370
    
    
    
    3.15
    %Regular passbook savings
    
    
    486,017
    
    
    
    2.29
    %
    
    
    416,928
    
    
    
    2.27
    %NOW accounts
    
    
    706,395
    
    
    
    2.20
    %
    
    
    634,486
    
    
    
    2.15
    %Non-interest bearing
    
    
    446,325
    
    
    
    
    
    
    
    359,212
    
    
    
    Total deposits
    
    $
    3,584,596
    
    
    
    2.57
    %
    
    $
    3,239,996
    
    
    
    2.49
    %
  TABLE N
CERTIFICATES OF DEPOSIT MATURITIES
(IN THOUSANDS)
 AMOUNTCertificates of deposit maturing:Three months or less
    
    $
    111,637Over three through six months
    
    
    149,683Over six through twelve months
    
    
    506,507Over twelve months
    
    
    1,191,909Total
    
    $
    1,959,736
  65




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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)
    
    
    12.4
    %
    
    
    19.4
    %
    
    
    18.6
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    11.9
    %
    
    
    18.9
    %
    
    
    18.2
    %Leverage Ratio(1)
    
    
    5.7
    %
    
    
    5.7
    %
    
    
    9.0
    %
 
 (1)
    
    Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR and
Tier 1 capital to adjusted total assets in the case of Doral Bank NY.      66




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ASSETS AND LIABILITIES
  OFF-BALANCE SHEET ACTIVITIES
   TABLE
P

LOANS SUBJECT TO RECOURSE BY LOAN TYPE
 Loans Past Due -Outstanding
    
    
    Weighted-average
    
    
    Over 90 Days without
Insurance,(In thousands)
    
    Balance
    
    
    Loan to Value
    
    
    and Loan-To-Value Over 80%Loan Type:FHA/VA loan
    
    $
    20,611
    
    
    
    91.0
    %
    
    $
    Conventional loans
    
    
    2,015,947
    
    
    
    75.0
    %
    
    
    5,974Commercial
    
    
    98,283
    
    
    
    78.4
    %
    
    
    Total
    
    $
    2,134,841
    
    
    
    75.1
    %
    
    $
    5,974
 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
    
    $
    3,988,875
    
    
    $
    2,675,944
    
    
    $
    1,004,983
    
    
    $
    293,203
    
    
    $
    14,745Repurchase agreements(2)
    
    
    8,000,754
    
    
    
    4,035,954
    
    
    
    3,164,800
    
    
    
    800,000
    
    
    
    Advances from the FHLB(2)
    
    
    1,244,500
    
    
    
    547,500
    
    
    
    647,000
    
    
    
    50,000
    
    
    
    Loans payable(3)
    
    
    4,295,910
    
    
    
    391,375
    
    
    
    
    
    
    
    
    
    
    
    3,904,535Notes payable
    
    
    1,089,102
    
    
    
    123,924
    
    
    
    720,310
    
    
    
    1,350
    
    
    
    243,518Other liabilities
    
    
    456,370
    
    
    
    451,747
    
    
    
    2,203
    
    
    
    2,420
    
    
    
    Non-cancelable operating leases
    
    
    64,143
    
    
    
    7,255
    
    
    
    13,503
    
    
    
    11,937
    
    
    
    31,448Total Contractual Cash Obligations
    
    $
    19,139,654
    
    
    $
    8,233,699
    
    
    $
    5,552,799
    
    
    $
    1,158,910
    
    
    $
    4,194,246
 
 (1)
    
    Amounts included in the table above do not include interest.(2)
    
    Includes $4.4 billion of repurchase agreements with an average rate of 3.48% and $872.5 million in advances from the
FHLB-NY with an average rate of 4.50%, which the lenders have the right to call before their contractual maturities. The majority of
such repurchase agreements and advances from the FHLB-NY are included in the less than one year category in the above table but have
actual contractual maturities ranging from July 2005 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 $3.9 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. 68




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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
    
    $
    563,742
    
    
    $
    287,993
    
    
    $
    274,131
    
    
    $
    1,537
    
    
    $
    81Commitments to sell mortgage-backed
securities and loans
    
    
    1,994,592
    
    
    
    794,592
    
    
    
    1,200,000
    
    
    
    
    
    
    
    Commercial and financial standby letters of credit
    
    
    3,809
    
    
    
    3,809
    
    
    
    
    
    
    
    
    
    
    
    Standby repurchase (recourse) obligations
    
    
    1,392,523
    
    
    
    75,567
    
    
    
    403,470
    
    
    
    476,082
    
    
    
    437,404Total
    
    $
    3,954,666
    
    
    $
    1,161,961
    
    
    $
    1,877,601
    
    
    $
    477,619
    
    
    $
    437,485
 
 (1)
    
    Refer to Off-Balance Sheet Activities for additional information regarding other commercial commitments of the Company. RISK MANAGEMENT
  Interest Rate and Market Risk Management
  Doral Financials Risk Profile
  Market Value
    
    Net InterestAs of June 30, 2005
    
    of Equity Risk
    
    Income Risk+ 100 BPS
    
    (8.8%)
    
    (11.7)%)- 100 BPS
    
    1.2%
    
    7.5%
 69




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Market Value of
    
    Net InterestAs of December 31, 2004
    
    Equity Risk
    
    Income Risk+ 100 BPS
    
    (22.3)%
    
    (13.0)%- 100 BPS
    
    7.1%
    
    10.5%
 Derivatives.
 70




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TABLE S
INTEREST RATE SWAPS
(DOLLARS IN THOUSANDS)
 NOTIONAL
    
    MATURITY
    
    
    
    INTEREST RATE
    
    INTEREST RATE
    
    FAIRAMOUNT
    
    DATE
    
    PURPOSE
    
    RECEIVED
    
    PAID
    
    VALUE$100,000
    
    September, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    3.390
    %
    
    
    3.688
    %
    
    $
    679$100,000
    
    September, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    3.390
    %
    
    
    3.655
    %
    
    $
    748$1,000,000
    
    March, 2008
    
    To protect the
spread of the
variable IOs
    
    
    3.470
    %
    
    
    4.325
    %
    
    $
    (7,263
    )$1,000,000
    
    March, 2008
    
    To protect the
spread of the
variable IOs
    
    
    3.490
    %
    
    
    4.474
    %
    
    $
    (11,095
    )$200,000
    
    November, 2009
    
    To protect the
spread of the
variable IOs
    
    
    3.229
    %
    
    
    3.773
    %
    
    $
    2,773$300,000
    
    November, 2009
    
    To protect the
spread of the
variable IOs
    
    
    3.270
    %
    
    
    3.975
    %
    
    $
    1,752$100,000
    
    February, 2010
    
    To protect the
spread of the
variable IOs
    
    
    3.294
    %
    
    
    4.221
    %
    
    $
    (360
    )$100,000
    
    March, 2010
    
    To fix the cost of
short-term funding
sources in a rising
rate environment
    
    
    3.390
    %
    
    
    4.510
    %
    
    $
    (1,593
    )$800,000
    
    March, 2010
    
    To protect the
spread of the
variable IOs
    
    
    3.490
    %
    
    
    4.712
    %
    
    $
    (19,924
    )$100,000
    
    February, 2015
    
    To protect the
spread of the
variable IOs
    
    
    3.294
    %
    
    
    4.618
    %
    
    $
    (2,138
    )$100,000
    
    March, 2015
    
    To fix the cost of
short-term funding
sources in a rising
rate environment
    
    
    3.390
    %
    
    
    4.880
    %
    
    $
    (4,216
    )
 71




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TABLE T
FAIR VALUE RECONCILIATION
 Six Month Period ended(In thousands)
    
    June 30, 2005Fair value of contracts outstanding at the beginning of the period
    
    $
    5,672Contracts realized or otherwise settled during the period
    
    
    10,746Fair value of new contracts entered into during the period
    
    
    (18,170
    )Changes in fair values during the period
    
    
    (22,870
    )Fair value of contracts outstanding at the end of the period
    
    $
    (24,622
    )
 TABLE U
SOURCE OF FAIR VALUE
 (In thousands)
    
    Payment Due by PeriodMaturity
    
    
    
    
    
    
    
    
    
    
    Maturityless than
    
    
    Maturity
    
    
    Maturity
    
    
    in excess
    
    
    Total FairAs of June 30, 2005
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    of 5 Years
    
    
    ValueSource of
Fair ValuePrices actively quoted
    
    $
    10,447
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    10,447Prices provided by
other external
sources
    
    
    5,568
    
    
    
    (16,931
    )
    
    
    (17,352
    )
    
    
    (6,354
    )
    
    
    (35,069
    )$
    16,015
    
    
    $
    (16,931
    )
    
    $
    (17,352
    )
    
    $
    (6,354
    )
    
    $
    (24,622
    )
  72




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TABLE V
DERIVATIVE COUNTERPARTY CREDIT EXPOSURE
 (Dollars in thousands)
 June 30, 2005Weighted AverageNumber of
    
    
    
    
    
    
    Total Exposure
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    At Fair Value(3)
    
    
    Values
    
    
    Total Fair Value(4)
    
    
    (in years)AA-
    
    
    2
    
    
    $
    2,900,000
    
    
    $
    4,005
    
    
    $
    (54,621
    )
    
    $
    (50,616
    )
    
    
    3.64A+
    
    
    2
    
    
    
    1,110,678
    
    
    
    303
    
    
    
    (480
    )
    
    
    (177
    )
    
    
    0.55A
    
    
    1
    
    
    
    800,000
    
    
    
    
    
    
    
    (29,464
    )
    
    
    (29,464
    )
    
    
    4.75Subtotal
    
    
    5
    
    
    
    4,810,678
    
    
    $
    4,308
    
    
    $
    (84,565
    )
    
    $
    (80,257
    )
    
    
    3.11Other derivatives(5):Treasury futures
    
    
    
    
    
    
    400,000Treasury future options
    
    
    
    
    
    
    7,050,000Eurodollar future options
    
    
    
    
    
    
    4,600,000Total Derivatives
    
    
    
    
    
    $
    16,860,678
 
 (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, 2004Weighted AverageNumber of
    
    
    
    
    
    
    Total Exposure
    
    
    Negative Fair
    
    
    Total Fair
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    At Fair 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. 73




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Credit Risk
       Non-performing assets and allowance for loan and lease losses
  74




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75




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TABLE W
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
 AS OF
    
    
    AS OFJUNE 30, 2005
    
    
    DECEMBER 31, 2004Mortgage banking business:Non-accrual loans:Construction loans
    
    $
    1,549
    
    
    $
    1,865Residential mortgage loans(1)
    
    
    137,641
    
    
    
    10,076Construction loans past due 90 days and still accruing
    
    
    298
    
    
    
    128Loans held-for-sale past due 90 days and still accruing(1)(2)
    
    
    
    
    
    
    85,075OREO
    
    
    18,991
    
    
    
    18,028Total NPAs of mortgage banking business
    
    
    158,479
    
    
    
    115,172Other lending activities through banking subsidiaries:Non-accrual loans:Construction loans
    
    
    4,563
    
    
    
    14,774Residential mortgage loans
    
    
    8,677
    
    
    
    8,105Commercial real estate loans
    
    
    13,465
    
    
    
    8,535Consumer loans
    
    
    1,674
    
    
    
    1,457Commercial non-real estate loans
    
    
    1,125
    
    
    
    512Total non-accrual loans
    
    
    29,504
    
    
    
    33,383Residential mortgage loans past due 90 days and still accruing
    
    
    863
    
    
    
    OREO
    
    
    1,595
    
    
    
    2,044Total NPAs of banking subsidiaries
    
    
    31,962
    
    
    
    35,427Total NPAs of Doral Financial (consolidated)
    
    $
    190,441
    
    
    $
    150,599Total NPAs of banking subsidiaries as a percentage
of their loans portfolio, net, and OREO
    
    
    0.96
    %
    
    
    1.23
    %Total NPAs of Doral Financial as a percentage of
consolidated total assets
    
    
    0.94
    %
    
    
    0.84
    %Total non-performing loans to total loans
    
    
    2.24
    %
    
    
    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
    
    
    70.38
    %
    
    
    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 raised concerns
as to ultimate collectibility of the loan.(2)
    
    Does not include approximately $47.0 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 June 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 were not considered
non-performing assets by Doral Financial as of such date 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.  76




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TABLE X
ALLOWANCE FOR LOAN AND LEASE LOSSES
(DOLLARS IN THOUSANDS)
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2004
    
    
    
    
    
    
    20042005
    
    
    (As Restated)
    
    
    2005
    
    
    (As Restated)Allowance for Loan and Lease Losses:Balance at beginning of period
    
    $
    24,255
    
    
    $
    16,057
    
    
    $
    20,881
    
    
    $
    14,919Provision for loan and lease losses
    
    
    3,658
    
    
    
    3,481
    
    
    
    7,705
    
    
    
    5,250Charge - offs:Construction loans
    
    
    (4,717
    )
    
    
    (282
    )
    
    
    (4,717
    )
    
    
    (282
    )Residential mortgage loans
    
    
    (79
    )
    
    
    
    
    
    
    (79
    )
    
    
    (20
    )Commercial real estate loans
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    Consumer loans
    
    
    (560
    )
    
    
    (692
    )
    
    
    (1,089
    )
    
    
    (1,311
    )Commercial non-real estate loans
    
    
    (53
    )
    
    
    (291
    )
    
    
    (230
    )
    
    
    (318
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    (5,409
    )
    
    
    (1,265
    )
    
    
    (6,144
    )
    
    
    (1,931
    )Recoveries:Construction loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential mortgage loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate loans
    
    
    153
    
    
    
    
    
    
    
    153
    
    
    
    Consumer loans
    
    
    43
    
    
    
    40
    
    
    
    99
    
    
    
    109Commercial non-real estate loans
    
    
    24
    
    
    
    2
    
    
    
    30
    
    
    
    41Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    220
    
    
    
    42
    
    
    
    282
    
    
    
    150Net charge-offs
    
    
    (5,189
    )
    
    
    (1,223
    )
    
    
    (5,862
    )
    
    
    (1,781
    )Other
    
    
    (52
    )
    
    
    4
    
    
    
    (52
    )
    
    
    (69
    )Balance at end of period
    
    $
    22,672
    
    
    $
    18,319
    
    
    $
    22,672
    
    
    $
    18,319Allowance for loan losses as a percentage of
loans receivable outstanding at the end of period
    
    
    1.12
    %
    
    
    1.13
    %
    
    
    1.12
    %
    
    
    1.13
    %Net
charge-offs to average loans receivable outstanding on an annualized
basis
    
    
    1.09
    %
    
    
    0.31
    %
    
    
    0.64
    %
    
    
    0.23
    %
 77




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##### Table of Contents



Operational Risk
  Overview of Operational Risk Management
  Liquidity Risk
  General Business, Economic and Political Conditions
    78




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##### Table of Contents



FUTURE OPERATIONS
     
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  79




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Control and Procedures
     Changes in Internal Control Over Financial Reporting
  80




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
      
 ITEM 1A. RISK FACTORS
   
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  81




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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Election of Directors
 VOTESNOMINEES FOR ONE-YEAR TERM
    
    VOTES FOR
    
    WITHHELDSalomón Levis
    
    
    97,178,008
    
    
    
    2,968,999Zoila Levis
    
    
    97,097,485
    
    
    
    3,049,522Richard F. Bonini
    
    
    97,128,034
    
    
    
    3,018,973Edgar M. Cullman, Jr.
    
    
    94,415,174
    
    
    
    5,731,833John L. Ernst
    
    
    95,938,465
    
    
    
    4,208,538Peter A. Hoffman
    
    
    99,164,809
    
    
    
    982,198John B. Hughes
    
    
    99,120,750
    
    
    
    1,026,257Efraim Kier
    
    
    97,656,735
    
    
    
    2,490,269Harold D. Vicente
    
    
    99,168,097
    
    
    
    978,910
 Ratification of the Appointment of PricewaterhouseCoopers LLP as the Companys Independent
Accountants for 2005
 For:
    
    
    97,646,179Against:
    
    
    2,115,533Abstain:
    
    
    507,295Broker Non-Votes:
    
    
    0
 
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
    82




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SIGNATURES
  DORAL FINANCIAL CORPORATION(Registrant)Date: May 2, 2006
    
    /s/ John A. WardJohn A. WardChairman of the Boardand Chief Executive OfficerDate: May 2, 2006
    
    /s/ Lidio SorianoLidio SorianoExecutive Vice President andChief Financial Officer
 83




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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.
 84