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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 March 31, 2006
 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
 PAGE
 PART I  FINANCIAL INFORMATION
    
    
    4Item 1   Financial Statements
    
    
    4Consolidated Statements of Financial Condition (Unaudited) as of March 31, 2006 and
December 31, 2005
    
    
    4Consolidated Statements of Income (Unaudited)  Quarters Ended March 31, 2006 and
March 31, 2005
    
    
    5Consolidated Statements of Changes in Stockholders Equity (Unaudited)  Quarters
Ended March 31, 2006 and March 31, 2005
    
    
    6Consolidated Statements of Comprehensive Loss (Unaudited)  ̄ Quarters Ended March
31, 2006 and March 31, 2005
    
    
    7Consolidated Statements of Cash Flows (Unaudited)  Quarters Ended March 31, 2006
and March 31, 2005
    
    
    8Notes to Consolidated Financial Statements (Unaudited)
    
    
    9Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    39Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    
    75Item 4  Controls and Procedures
    
    
    75PART II  OTHER INFORMATION
    
    
    76Item 1  Legal Proceedings
    
    
    76Item 1A  Risk Factors
    
    
    76Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    77Item 3  Defaults Upon Senior Securities
    
    
    77Item 4  Submission of Matters to a Vote of Security Holders
    
    
    77Item 5  Other Information
    
    
    77Item 6  Exhibits
    
    
    77SIGNATURES
    
    
    78EX-12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESEX-12.2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHANGES AND PREFERRED STOCK 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 CFO
  2




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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;
    
    potential adverse developments from ongoing enforcement actions by bank
regulatory agencies;
    
    potential adverse developments in connection with ongoing shareholder litigation
against Doral Financial;
    
    risks and uncertainties associated with the refinancing of the Companys $625
million floating rate notes due July 2007;
    
    Doral Financials ability to derive sufficient income to realize the benefits of
its deferred tax asset;
    
    risks associated with the effects of global, national and regional economic and
political conditions, including with respect to fluctuations in interest rates;
    
    risks arising from worsening economic conditions in Puerto Rico;
    
    potential adverse developments in connection with the ongoing grand jury
investigation by the U.S. Attorneys Office for the Southern District of New York;
    
    risks associated with Doral Financials inability to prepare and timely file
financial statements;
    
    risks arising from the downgrade and potential further downgrades in the credit
ratings of Doral Financials securities;
    
    risks arising from material weaknesses in Doral Financial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.
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
(UNAUDITED)
 MARCH 31,
    
    
    DECEMBER 31,2006
    
    
    2005ASSETSCash and due from banks
    
    $
    126,452
    
    
    $
    192,141Money market investments:Money market investments with creditors right to repledge
    
    
    150,800
    
    
    
    141,391Other money market investments
    
    
    962,959
    
    
    
    1,212,970Total money market investments
    
    
    1,113,759
    
    
    
    1,354,361Pledged investment securities that can be repledged:Securities held for trading, at fair value (includes fair value of IOs of $3,550 in 2006; $11,257
in 2005)
    
    
    187,251
    
    
    
    202,759Securities available for sale, at fair value
    
    
    3,854,332
    
    
    
    4,219,153Securities held to maturity, at amortized cost (market value of $1,716,893 in 2006; $1,659,237 in
2005)
    
    
    1,814,857
    
    
    
    1,698,264Total pledged investment securities that can be repledged
    
    
    5,856,440
    
    
    
    6,120,176Other investment securities:Securities held for trading, at fair value (includes fair value of IOs of $35,152 in 2006; $62,777
in 2005)
    
    
    182,227
    
    
    
    185,917Securities available for sale, at fair value
    
    
    383,331
    
    
    
    412,420Securities held to maturity, at amortized cost (market value of $263,037 in 2006; $392,214 in 2005)
    
    
    280,124
    
    
    
    401,430Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    76,705
    
    
    
    72,205Total other investment securities
    
    
    922,387
    
    
    
    1,071,972Total investment securities
    
    
    6,778,827
    
    
    
    7,192,148Loans:Mortgage loans held for sale, at lower of cost or market, pledged with creditors right to repledge
    
    
    3,366,680
    
    
    
    3,515,156Other mortgage loans held for sale, at lower of cost or market
    
    
    2,229,975
    
    
    
    1,807,039Loans receivable, net of allowance for loan and lease losses (2006 - $39,330; 2005 - $35,044)
    
    
    3,419,944
    
    
    
    2,477,960Total loans
    
    
    9,016,599
    
    
    
    7,800,155Receivables and mortgage-servicing advances
    
    
    58,811
    
    
    
    66,909Accrued interest receivable
    
    
    82,843
    
    
    
    85,338Servicing assets, net
    
    
    150,802
    
    
    
    150,576Premises and equipment, net
    
    
    147,645
    
    
    
    150,450Real estate held for sale, net
    
    
    22,004
    
    
    
    17,662Deferred tax asset
    
    
    259,448
    
    
    
    213,217Other assets
    
    
    72,241
    
    
    
    75,792Total assets
    
    $
    17,829,431
    
    
    $
    17,298,749LIABILITIESDeposits:Non-interest-bearing deposits
    
    $
    389,513
    
    
    $
    425,788Interest-bearing deposits
    
    
    3,834,599
    
    
    
    3,811,481Securities sold under agreements to repurchase
    
    
    5,858,014
    
    
    
    6,054,598Advances from FHLB
    
    
    1,069,500
    
    
    
    969,500Loans payable
    
    
    3,428,556
    
    
    
    3,578,230Notes payable
    
    
    889,490
    
    
    
    965,621Unconditional option to buy back mortgage loans
    
    
    1,032,772
    
    
    
    74,043Accrued expenses and other liabilities
    
    
    238,057
    
    
    
    269,679Total liabilities
    
    
    16,740,501
    
    
    
    16,148,940Commitments and contingencies (Note u)STOCKHOLDERS EQUITYPreferred stock, $1 par value; 40,000,000 shares authorized; 9,015,000 shares issued and outstanding in 2006
and 2005, 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 shares issued and outstanding
    
    
    107,930
    
    
    
    107,930Additional paid-in capital
    
    
    165,684
    
    
    
    165,609Legal surplus
    
    
    23,596
    
    
    
    23,596Retained earnings
    
    
    405,019
    
    
    
    404,885Accumulated other comprehensive loss, net of income tax benefit of $6,616 in 2006 and $3,809 in 2005
    
    
    (186,549
    )
    
    
    (125,461
    )Total stockholders equity
    
    
    1,088,930
    
    
    
    1,149,809Total liabilities and stockholders equity
    
    $
    17,829,431
    
    
    $
    17,298,749
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
 QUARTER ENDEDMARCH 31,2006
    
    
    2005Interest income:Loans
    
    $
    137,872
    
    
    $
    110,733Mortgage-backed securities
    
    
    51,195
    
    
    
    52,568Interest-only strips (IOs)
    
    
    1,831
    
    
    
    3,300Investment securities
    
    
    30,101
    
    
    
    32,829Other interest-earning assets
    
    
    12,440
    
    
    
    16,099Total interest income
    
    
    233,439
    
    
    
    215,529Interest expense:Deposits
    
    
    32,708
    
    
    
    22,457Securities sold under agreements to repurchase
    
    
    62,229
    
    
    
    50,458Advances from FHLB
    
    
    10,378
    
    
    
    12,479Loans payable
    
    
    55,067
    
    
    
    42,187Notes payable
    
    
    14,441
    
    
    
    12,895Total interest expense
    
    
    174,823
    
    
    
    140,476Net interest income
    
    
    58,616
    
    
    
    75,053Provision for loan and lease losses
    
    
    5,173
    
    
    
    4,047Net interest income after provision for loan and lease losses
    
    
    53,443
    
    
    
    71,006Non-interest (loss) income:Net (loss) gain on mortgage loan sales and fees
    
    
    (14,693
    )
    
    
    7,940Net (loss) gain on securities held for trading, including gains
and losses on the fair value of IOs
    
    
    (9,947
    )
    
    
    6,636Net gain on sale of investment securities
    
    
    63
    
    
    
    4,844Servicing income, net of amortization and impairment/recovery
    
    
    5,150
    
    
    
    7,828Commissions, fees and other income
    
    
    9,734
    
    
    
    7,766Total non-interest (loss) income
    
    
    (9,693
    )
    
    
    35,014Non-interest expenses:Compensation and benefits
    
    
    19,591
    
    
    
    25,589Taxes, other than payroll and income taxes
    
    
    3,308
    
    
    
    2,352Advertising
    
    
    2,595
    
    
    
    4,342Professional services
    
    
    17,151
    
    
    
    3,973Communication and information systems
    
    
    5,227
    
    
    
    4,824Occupancy and other office expenses
    
    
    7,155
    
    
    
    7,163Depreciation and amortization
    
    
    5,703
    
    
    
    4,953Other
    
    
    5,044
    
    
    
    3,211Total non-interest expenses
    
    
    65,774
    
    
    
    56,407(Loss) Income before income taxes
    
    
    (22,024
    )
    
    
    49,613Income tax benefit (expense)
    
    
    39,117
    
    
    
    (10,384
    )Net income
    
    $
    17,093
    
    
    $
    39,229Net income attributable to common shareholders
    
    $
    8,768
    
    
    $
    30,904Net income per common share:Basic
    
    $
    0.08
    
    
    $
    0.29Diluted
    
    $
    0.08
    
    
    $
    0.28Dividends per common share
    
    $
    0.08
    
    
    $
    0.18
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(IN THOUSANDS)
(UNAUDITED)
 QUARTER ENDEDMARCH 31,2006
    
    
    2005PREFERRED STOCK
    
    $
    573,250
    
    
    $
    573,250COMMON STOCK:Balance at beginning of period
    
    
    107,930
    
    
    
    107,909Common stock issued under stock option plan
    
    
    
    
    
    
    21Balance at end of period
    
    
    107,930
    
    
    
    107,930ADDITIONAL PAID-IN CAPITAL:Balance at beginning of period
    
    
    165,609
    
    
    
    161,639Shares issued under stock option plan
    
    
    
    
    
    
    98Stock-based compensation recognized
    
    
    75
    
    
    
    2,427Balance at end of period
    
    
    165,684
    
    
    
    164,164LEGAL SURPLUS
    
    
    23,596
    
    
    
    22,716RETAINED EARNINGS:Balance at beginning of period
    
    
    404,885
    
    
    
    492,786Net income
    
    
    17,093
    
    
    
    39,229Cash dividends declared on common stock
    
    
    (8,634
    )
    
    
    (19,424
    )Cash dividends declared on preferred stock
    
    
    (8,325
    )
    
    
    (8,325
    )Balance at end of period
    
    
    405,019
    
    
    
    504,266ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX:Balance at beginning of period
    
    
    (125,461
    )
    
    
    (73,683
    )Other comprehensive loss, net of deferred tax
    
    
    (61,088
    )
    
    
    (55,076
    )Balance at end of period
    
    
    (186,549
    )
    
    
    (128,759
    )Total stockholders equity
    
    $
    1,088,930
    
    
    $
    1,243,567
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)
 QUARTER ENDEDMARCH 31,2006
    
    
    2005Net income
    
    $
    17,093
    
    
    $
    39,229Other comprehensive loss, before tax:Unrealized losses on securities arising during the period
    
    
    (63,843
    )
    
    
    (50,684
    )Amortization of unrealized loss on securities reclassified to
held to maturity
    
    
    11
    
    
    
    11Reclassification of realized gains included in net income
    
    
    (63
    )
    
    
    (4,844
    )Other comprehensive loss, before tax
    
    
    (63,895
    )
    
    
    (55,517
    )Income tax benefit related to items of other comprehensive loss
    
    
    2,807
    
    
    
    441Other comprehensive loss
    
    
    (61,088
    )
    
    
    (55,076
    )Comprehensive loss, net of tax
    
    $
    (43,995
    )
    
    $
    (15,847
    )
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 QUARTER ENDEDMARCH 31,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    17,093
    
    
    $
    39,229Adjustments to reconcile net income to net cash used in operating activities:Stock-based compensation recognized
    
    
    75
    
    
    
    2,427Depreciation and amortization
    
    
    5,703
    
    
    
    4,953Amortization and impairment of servicing assets
    
    
    4,239
    
    
    
    1,520Deferred tax (benefit) provision
    
    
    (43,404
    )
    
    
    3,079Provision for loan and lease losses
    
    
    5,173
    
    
    
    4,047Amortization of premium and accretion of discount on loans, investment securities and debt
    
    
    1,838
    
    
    
    4,735Unrealized loss on mortgage loans held for sale
    
    
    17,313
    
    
    
    Origination and purchases of mortgage loans held for sale
    
    
    (535,852
    )
    
    
    (1,593,846
    )Principal repayment and sales of mortgage loans held for sale
    
    
    262,306
    
    
    
    749,070Gain on sale of securities
    
    
    (2,954
    )
    
    
    (2,652
    )Unrealized (gain) loss on securities held for trading
    
    
    (760
    )
    
    
    396Purchases of securities held for trading
    
    
    
    
    
    
    (1,308,269
    )Principal repayment and sales of trading securities
    
    
    67,193
    
    
    
    1,176,814Amortization and net loss in the fair value of IOs
    
    
    35,332
    
    
    
    36,371Unrealized gain on derivative instruments
    
    
    (19,371
    )
    
    
    (22,711
    )Net proceeds(payments) on derivative instruments
    
    
    7,541
    
    
    
    (20,429
    )(Increase) decrease in receivables and mortgage servicing advances
    
    
    (6,519
    )
    
    
    34,754Decrease in accrued interest receivable
    
    
    2,495
    
    
    
    9,422Decrease in other assets
    
    
    16,883
    
    
    
    3,459(Decrease) increase in accrued expenses and other liabilities
    
    
    (31,622
    )
    
    
    5,777Total adjustments
    
    
    (214,391
    )
    
    
    (911,083
    )Net cash used in operating activities
    
    
    (197,298
    )
    
    
    (871,854
    )Cash flows from investing activities:Purchases of securities available for sale
    
    
    (46,023
    )
    
    
    (1,006,305
    )Principal repayment and sales of securities available for sale
    
    
    370,820
    
    
    
    757,783Purchases of securities held to maturity
    
    
    
    
    
    
    Principal repayment and maturities of securities held to maturity
    
    
    8,185
    
    
    
    106,472(Increase) decrease in FHLB stock
    
    
    (4,500
    )
    
    
    2,500Origination of loans receivable
    
    
    (339,890
    )
    
    
    (246,320
    )Principal repayment of loans receivable
    
    
    253,024
    
    
    
    192,765Purchases of servicing assets
    
    
    (216
    )
    
    
    (1,080
    )Purchases of premises and equipment
    
    
    (2,898
    )
    
    
    (5,556
    )Proceeds from sales of real estate held for sale
    
    
    5,176
    
    
    
    11,751Net cash provided by (used in) investing activities
    
    
    243,678
    
    
    
    (187,990
    )Cash flows from financing activities:Decrease in deposits
    
    
    (13,157
    )
    
    
    (108,989
    )(Decrease) increase in securities sold under agreements to repurchase
    
    
    (196,584
    )
    
    
    535,212Proceeds from advances from FHLB
    
    
    100,000
    
    
    
    50,000Repayment of advances from FHLB
    
    
    
    
    
    
    (100,000
    )Increase in loans payable:Increase in warehousing lines and other credit facilities
    
    
    
    
    
    
    205,338Proceeds from secured borrowings, pledged to creditors
    
    
    
    
    
    
    880,746Repayment of secured borrowings, pledged to creditors
    
    
    (149,674
    )
    
    
    (155,417
    )Repayment of notes payable
    
    
    (75,000
    )
    
    
    (356
    )Consent fees paid
    
    
    (1,297
    )
    
    
    Issuance of common stock, net
    
    
    
    
    
    
    119Dividends paid
    
    
    (16,959
    )
    
    
    (27,749
    )Net cash (used in) provided by financing activities
    
    
    (352,671
    )
    
    
    1,278,904Net (decrease) increase in cash and cash equivalents
    
    $
    (306,291
    )
    
    $
    219,060Cash and cash equivalents at beginning of period
    
    
    1,546,502
    
    
    
    2,535,726Cash and cash equivalents at the end of period
    
    $
    1,240,211
    
    
    $
    2,754,786Cash and cash equivalents includes:Cash and due from banks
    
    $
    126,452
    
    
    $
    76,287Money market investments
    
    
    1,113,759
    
    
    
    2,678,499$
    1,240,211
    
    
    $
    2,754,786Supplemental schedule of non-cash activities:Loan securitizations
    
    $
    67,849
    
    
    $
    208,891Loans foreclosed
    
    $
    8,251
    
    
    $
    9,275Reclassification of mortgage loans held for sale to loans receivable
    
    $
    876,240
    
    
    $
    Capitalization of servicing assets
    
    $
    4,249
    
    
    $
    6,550Capitalization of IOs from loan sales
    
    $
    
    
    
    $
    5,323Supplemental information for cash flows:Cash used to pay interest
    
    $
    179,229
    
    
    $
    140,859Cash used to pay income taxes
    
    $
    474
    
    
    $
    176
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 a.
    
    The Consolidated Financial Statements (unaudited) include the accounts of Doral Financial
Corporation , 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 Annual Report on Form 10-K for the year ended December 31, 2005. 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, 2005, included in the Companys 2005 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.Certain amounts reflected in the 2005 unaudited interim Consolidated Financial Statements
have been reclassified or revised to conform to the presentation for 2006. In particular, for
2005, Doral Financial has revised the presentation of prepayment fee income related to its
loan portfolio on the Statement of Income. Previously, prepayment fee income from the
Companys loan portfolio was included as part of servicing income. These amounts were
reclassified as part of the filing of the Companys 2005 Annual Report on Form 10-K and are now
included in interest income. Also, for the 2005 unaudited interim Consolidated Financial
Statements, the Company has revised the classification for amounts paid in the purchase of
servicing assets and for gains and losses on sale of investment securities on the Statement
of Cash Flows. Previously, the amount paid for the purchase of servicing assets was
classified as part of operating activities and gains and losses on sale of investment
securities were included as part of investing activities. These amounts were reclassified
as part of the filing of the Companys 2005 Annual Report on Form 10-K and the amount paid
for the purchase of servicing assets is included as part of investing activities and gains
and losses on sale of investment securities are included as part of operating activities.
The changes to revise prior amounts were not material to the interim unaudited Statement of
Income or Statement of Cash Flows in any prior period.
 b.
    
    The results of operations for the quarter ended March 31, 2006 are not necessarily indicative
of the results to be expected for the full year.
 c.
    
    At March 31, 2006, escrow funds and custodial accounts included approximately $123.1 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 $57.3 million
deposited with other banks, which are excluded from the Companys assets and liabilities. The
Company had fidelity bond and errors and omissions coverage of $35.0 million and $21.0
million, respectively, as of March 31, 2006.
 9




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 d.
    
    The reconciliation of the numerator and denominator of the basic and diluted
earnings-per-share follows:
 Quarter EndedMarch 31,(Dollars in thousands, except per share amounts)
    
    2006
    
    
    2005Net Income:Net income
    
    $
    17,093
    
    
    $
    39,229Convertible preferred stock dividend
    
    
    (4,097
    )
    
    
    (4,097
    )Nonconvertible preferred stock dividend
    
    
    (4,228
    )
    
    
    (4,228
    )Net income attributable to common shareholders
    
    $
    8,768
    
    
    $
    30,904Weighted-Average Shares(1):Basic weighted-average number of common shares outstanding(2)
    
    
    107,930,236
    
    
    
    107,917,262Average potential common shares(3)
    
    
    496,013
    
    
    
    3,283,658Diluted weighted-average number of common shares outstanding
    
    
    108,426,249
    
    
    
    111,200,920Net Income per Common Share:Basic
    
    $
    0.08
    
    
    $
    0.29Diluted
    
    $
    0.08
    
    
    $
    0.28
 
 (1)
    
    For the quarters ended March 31, 2006 and 2005, 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 date 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)
    
    Excludes unvested shares of restricted stock.(3)
    
    Potential common shares consist of common stock issuable under the assumed exercise of stock
options and unvested shares of restricted stock using the treasury stock method. This method
assumes that the potential common shares are issued and the proceeds from exercise in
addition to the amount of compensation cost attributed to future services are used to
purchase common stock at the exercise date. The difference between the number of potential
shares issued and the shares purchased is added as incremental shares to the actual number of
shares outstanding to compute diluted earnings per share. Stock options and unvested
shares of restricted stock that result in lower potential shares issued than shares purchased under
the treasury stock method are not included in the computation of dilutive earnings per share
since their inclusion would have an antidilutive effect in earnings per share. For the
quarter ended March 31, 2006, there were 1,375,833 and 2,778 weighted average antidilutive
stock options and unvested restricted stock, respectively, that were excluded from the
computation of diluted earnings per common share since their inclusion would have an
antidilutive effect. For the quarter ended March 31, 2005, all stock options were treated as
outstanding for purpose of this computation as they were all dilutive. 10




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 e.
    
    Employee costs and other expenses are shown in the Consolidated Statements of Income net of
direct loan origination costs which, pursuant to Statement of Financial Accounting Standard
(SFAS) No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases (SFAS 91), are capitalized as part of
the carrying cost of mortgage loans and are offset against net gains on mortgage loan sales
and fees when the loans are sold or amortized as yield adjustment in the case of loans
receivable.Set forth below is a reconciliation of the application of SFAS 91 to employee costs and
other expenses:
 Quarter EndedMarch 31,(In thousands)
    
    2006
    
    
    2005Employee costs, gross
    
    $
    29,452
    
    
    $
    35,533Deferred costs pursuant to SFAS 91
    
    
    (9,861
    )
    
    
    (9,944
    )Employee cost, net
    
    $
    19,591
    
    
    $
    25,589Other expenses, gross
    
    $
    6,389
    
    
    $
    5,289Deferred costs pursuant to SFAS 91
    
    
    (1,345
    )
    
    
    (2,078
    )Other expenses, net
    
    $
    5,044
    
    
    $
    3,211
 As of March 31, 2006, the Company had a net deferred origination fee on mortgage loans held
for sale and loans receivable amounting to approximately $30.8 million ($30.8 million as of
December 31, 2005) and $11.3 million ($15.7 million as of December 31, 2005), respectively.f.
    
    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 following tables present net interest income,
non-interest income (loss), net income (loss) 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.
 11




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (In thousands)
 MortgageBanking andRisk
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentManagement
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations*
    
    TotalsQUARTER ENDED MARCH 31, 2006Net interest income
    
    $
    4,962
    
    
    
    52,344
    
    
    
    365
    
    
    
    
    
    
    
    945
    
    
    $
    58,616Non-interest (loss)
income
    
    $
    (11,358
    )
    
    
    740
    
    
    
    362
    
    
    
    2,707
    
    
    
    (2,144
    )
    
    $
    (9,693
    )Net (loss) income
    
    $
    (378
    )
    
    
    16,082
    
    
    
    577
    
    
    
    1,393
    
    
    
    (581
    )
    
    $
    17,093Identifiable assets
    
    $
    6,601,263
    
    
    
    11,405,998
    
    
    
    50,480
    
    
    
    17,912
    
    
    
    (246,222
    )
    
    $
    17,829,431
 QUARTER ENDED MARCH 31, 2005Net interest income
    
    $
    22,244
    
    
    
    50,314
    
    
    
    723
    
    
    
    1,230
    
    
    
    542
    
    
    $
    75,053Non-interest income
    
    $
    9,751
    
    
    
    27,298
    
    
    
    868
    
    
    
    2,742
    
    
    
    (5,645
    )
    
    $
    35,014Net (loss) income
    
    $
    (163
    )
    
    
    40,473
    
    
    
    844
    
    
    
    2,675
    
    
    
    (4,600
    )
    
    $
    39,229Identifiable assets
    
    $
    6,857,223
    
    
    
    12,255,505
    
    
    
    221,916
    
    
    
    88,919
    
    
    
    (637,250
    )
    
    $
    18,786,313
 
 *
    
    The intersegment eliminations in the above table, include servicing fees paid by the
banking subsidiaries to the parent company recognized as a reduction of net interest
income, direct intersegment loan origination costs amortized as yield adjustment or offset
against net gains on mortgage loan sales and fees (mainly related with origination costs
paid by the banking segment to the mortgage banking segment) and other income derived from
intercompany transactions, related principally to rental income paid to Doral Properties,
the Companys subsidiary that owns the corporate headquarters facilities. Assets include
internal funding and investment in subsidiaries accounted for at cost. 12




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (In thousands)
 Puerto Rico
    
    Mainland US
    
    Eliminations
    
    TotalsQUARTER ENDED MARCH 31, 2006Net interest income
    
    $
    52,741
    
    
    
    5,851
    
    
    
    24
    
    
    $
    58,616Non-interest (loss) income
    
    $
    (9,829
    )
    
    
    244
    
    
    
    (108
    )
    
    $
    (9,693
    )Net income
    
    $
    15,822
    
    
    
    1,274
    
    
    
    (3
    )
    
    $
    17,093Identifiable assets
    
    $
    17,265,146
    
    
    
    664,582
    
    
    
    (99,229
    )
    
    $
    17,830,499
 QUARTER ENDED MARCH 31, 2005Net interest income
    
    $
    71,141
    
    
    
    3,847
    
    
    
    65
    
    
    $
    75,053Non-interest income
    
    $
    34,248
    
    
    
    1,393
    
    
    
    (627
    )
    
    $
    35,014Net income
    
    $
    38,805
    
    
    
    914
    
    
    
    (490
    )
    
    $
    39,229Identifiable assets
    
    $
    18,211,101
    
    
    
    650,103
    
    
    
    (74,891
    )
    
    $
    18,786,313
  (In thousands)
 MortgageBankingand RiskManagement
    
    
    BankingQUARTER ENDEDMARCH 31, 2006Net loss on mortgage loan sales and fees
    
    $
    (1,454
    )
    
    $
    (12,705
    )Investment activities (loss) gain
    
    
    (16,488
    )
    
    
    6,464Servicing income
    
    
    6,185
    
    
    
    7Commissions, fees and other income
    
    
    399
    
    
    
    6,974Total non-interest (loss) income
    
    $
    (11,358
    )
    
    $
    740
 QUARTER ENDEDMARCH 31, 2005Net (loss) gain on mortgage loan sales and fees
    
    $
    (13,604
    )
    
    $
    19,582Investment activities gain
    
    
    8,304
    
    
    
    3,075Servicing income
    
    
    8,506
    
    
    
    4Commissions, fees and other income
    
    
    6,545
    
    
    
    4,637Total non-interest income
    
    $
    9,751
    
    
    $
    27,298
 13




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 g.
    
    The fair value of the Companys securities held for trading and
the fair value and carrying value of its securities classified
as available for sale and held to maturity are shown below by
category.
 1.
    
    The following table summarizes Doral Financials holdings of securities held
for trading as of March 31, 2006 and December 31, 2005.
 SECURITIES HELD FOR TRADING
    
    MARCH 31,
    
    
    DECEMBER 31,(In thousands)
    
    2006
    
    
    2005Mortgage-backed securities:GNMA exempt
    
    $
    218,330
    
    
    $
    206,406GNMA taxable
    
    
    35,820
    
    
    
    43,155CMO certificates
    
    
    1,871
    
    
    
    1,846FHLMC and FNMA
    
    
    21,152
    
    
    
    21,305Variable interest-only strips
    
    
    37,386
    
    
    
    72,550Fixed interest-only strips
    
    
    1,316
    
    
    
    1,484FHLB Notes
    
    
    11,062
    
    
    
    11,156Puerto Rico government and agency securities
    
    
    5,447
    
    
    
    5,510Derivatives(1)
    
    
    37,071
    
    
    
    25,241Other
    
    
    23
    
    
    
    23Total
    
    $
    369,478
    
    
    $
    388,676
 
 (1)
    
    Doral Financial uses derivatives to manage its exposure to interest
rate risk caused by changes in interest rates. Derivatives include interest
rate swaps 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 $2.5 billion as
of March 31, 2006 and $14.6 billion as of December 31, 2005. 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 March 31, 2006 and December 31, 2005.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.
 14




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES AVAILABLE FOR SALE
AS OF MARCH 31, 2006
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    2,439,482
    
    
    $
    38
    
    
    $
    73,332
    
    
    $
    2,366,188
    
    
    
    4.75
    %FHLMC and FNMADue over ten years
    
    
    946,750
    
    
    
    3
    
    
    
    31,792
    
    
    
    914,961
    
    
    
    5.32
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    111,963
    
    
    
    
    
    
    
    3,312
    
    
    
    108,651
    
    
    
    5.50
    %FNMA NOTESDue from one to five years
    
    
    46,023
    
    
    
    
    
    
    
    377
    
    
    
    45,646
    
    
    
    4.60
    %U.S. TREASURYDue within a year
    
    
    100,242
    
    
    
    
    
    
    
    2,476
    
    
    
    97,766
    
    
    
    1.97
    %Due from five to ten years
    
    
    762,187
    
    
    
    
    
    
    
    57,736
    
    
    
    704,451
    
    
    
    3.65
    %$
    4,406,647
    
    
    $
    41
    
    
    $
    169,025
    
    
    $
    4,237,663
    
    
    
    4.64
    %
 SECURITIES AVAILABLE FOR SALE
AS OF DECEMBER 31, 2005
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    2,585,231
    
    
    $
    41
    
    
    $
    43,591
    
    
    $
    2,541,681
    
    
    
    4.76
    %FHLMC and FNMADue over ten years
    
    
    975,960
    
    
    
    233
    
    
    
    18,744
    
    
    
    957,449
    
    
    
    5.32
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    111,961
    
    
    
    
    
    
    
    1,909
    
    
    
    110,052
    
    
    
    5.50
    %U.S. TREASURYDue within a year
    
    
    199,933
    
    
    
    
    
    
    
    1,206
    
    
    
    198,727
    
    
    
    1.58
    %Due from one to five years
    
    
    100,310
    
    
    
    
    
    
    
    2,685
    
    
    
    97,625
    
    
    
    1.97
    %Due from five to ten years
    
    
    762,573
    
    
    
    
    
    
    
    36,534
    
    
    
    726,039
    
    
    
    3.65
    %$
    4,735,968
    
    
    $
    274
    
    
    $
    104,669
    
    
    $
    4,631,573
    
    
    
    4.52
    %
 15




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 3.
    
    The following tables summarize the amortized cost, gross unrealized gains and
losses, approximate market value, weighted-average yield and contractual maturities of
securities held to maturity as of March 31, 2006 and December 31, 2005.The weighted average yield is computed based on amortized cost and, therefore, does
not give effect to changes in fair value. Expected maturities of mortgage-backed
securities and certain debt securities might differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
 SECURITIES HELD TO MATURITY
AS OF MARCH 31, 2006
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue from one to five years
    
    $
    434
    
    
    $
    6
    
    
    $
    
    
    
    $
    440
    
    
    
    5.79
    %Due from five to ten years
    
    
    316
    
    
    
    5
    
    
    
    
    
    
    
    321
    
    
    
    6.44
    %Due over ten years
    
    
    4,097
    
    
    
    190
    
    
    
    
    
    
    
    4,287
    
    
    
    6.69
    %FHLMC and FNMADue over ten years
    
    
    328,119
    
    
    
    322
    
    
    
    2,313
    
    
    
    326,128
    
    
    
    6.05
    %CMO CERTIFICATESDue over ten years
    
    
    9,375
    
    
    
    
    
    
    
    600
    
    
    
    8,775
    
    
    
    5.80
    %DEBT SECURITIESFHLB NOTESDue within a year
    
    
    100,000
    
    
    
    
    
    
    
    1,860
    
    
    
    98,140
    
    
    
    2.89
    %Due from one to five years
    
    
    100,804
    
    
    
    
    
    
    
    3,475
    
    
    
    97,329
    
    
    
    4.16
    %Due from five to ten years
    
    
    50,000
    
    
    
    125
    
    
    
    
    
    
    
    50,125
    
    
    
    4.13
    %Due over ten years
    
    
    273,594
    
    
    
    
    
    
    
    18,676
    
    
    
    254,918
    
    
    
    5.10
    %FHLB ZERO COUPONDue over ten years
    
    
    122,486
    
    
    
    
    
    
    
    9,351
    
    
    
    113,135
    
    
    
    6.50
    %FHLMC ZERO COUPONDue over ten years
    
    
    258,349
    
    
    
    
    
    
    
    14,331
    
    
    
    244,018
    
    
    
    5.86
    %FHLMC and FNMA NOTESDue over ten years
    
    
    149,989
    
    
    
    
    
    
    
    5,224
    
    
    
    144,765
    
    
    
    5.65
    %P.R. HOUSING BANKDue from one to five years
    
    
    5,000
    
    
    
    32
    
    
    
    
    
    
    
    5,032
    
    
    
    6.00
    %Due over ten years
    
    
    2,235
    
    
    
    
    
    
    
    
    
    
    
    2,235
    
    
    
    6.20
    %U.S. TREASURYDue from five to ten years
    
    
    201,320
    
    
    
    
    
    
    
    15,977
    
    
    
    185,343
    
    
    
    3.52
    %Due over ten years
    
    
    473,481
    
    
    
    192
    
    
    
    44,319
    
    
    
    429,354
    
    
    
    4.33
    %OTHERDue within a year
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    6.20
    %Due from one to five years
    
    
    8,318
    
    
    
    34
    
    
    
    230
    
    
    
    8,122
    
    
    
    4.43
    %Due over ten years
    
    
    7,039
    
    
    
    399
    
    
    
    
    
    
    
    7,438
    
    
    
    5.93
    %$
    2,094,981
    
    
    $
    1,305
    
    
    $
    116,356
    
    
    $
    1,979,930
    
    
    
    4.98
    %
 16




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES HELD TO MATURITY
AS OF DECEMBER 31, 2005
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue from one to five years
    
    $
    508
    
    
    $
    10
    
    
    $
    
    
    
    $
    518
    
    
    
    5.88
    %Due from five to ten years
    
    
    328
    
    
    
    7
    
    
    
    
    
    
    
    335
    
    
    
    6.45
    %Due over ten years
    
    
    4,336
    
    
    
    209
    
    
    
    
    
    
    
    4,545
    
    
    
    6.73
    %FHLMC and FNMADue over ten years
    
    
    337,266
    
    
    
    4,312
    
    
    
    928
    
    
    
    340,650
    
    
    
    6.05
    %CMO CERTIFICATESDue over ten years
    
    
    9,817
    
    
    
    
    
    
    
    581
    
    
    
    9,236
    
    
    
    5.78
    %DEBT SECURITIESFHLB NOTESDue from one to five years
    
    
    200,847
    
    
    
    
    
    
    
    4,145
    
    
    
    196,702
    
    
    
    3.53
    %Due from five to ten years
    
    
    50,000
    
    
    
    125
    
    
    
    
    
    
    
    50,125
    
    
    
    4.13
    %Due over ten years
    
    
    273,594
    
    
    
    
    
    
    
    15,100
    
    
    
    258,494
    
    
    
    5.10
    %FHLB ZERO COUPONDue over ten years
    
    
    120,543
    
    
    
    
    
    
    
    563
    
    
    
    119,980
    
    
    
    6.50
    %FHLMC ZERO COUPONDue over ten years
    
    
    254,647
    
    
    
    7
    
    
    
    1,568
    
    
    
    253,086
    
    
    
    5.86
    %FHLMC and FNMA NOTESDue over ten years
    
    
    149,988
    
    
    
    
    
    
    
    3,813
    
    
    
    146,175
    
    
    
    5.65
    %P.R. HOUSING BANKDue from one to five years
    
    
    5,000
    
    
    
    77
    
    
    
    
    
    
    
    5,077
    
    
    
    6.00
    %Due over ten years
    
    
    2,235
    
    
    
    
    
    
    
    
    
    
    
    2,235
    
    
    
    6.20
    %U.S. TREASURYDue from five to ten years
    
    
    201,361
    
    
    
    
    
    
    
    10,642
    
    
    
    190,719
    
    
    
    3.52
    %Due over ten years
    
    
    473,904
    
    
    
    3,629
    
    
    
    19,057
    
    
    
    458,476
    
    
    
    4.33
    %OTHERDue within a year
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    6.20
    %Due from one to five years
    
    
    8,295
    
    
    
    4
    
    
    
    176
    
    
    
    8,123
    
    
    
    4.42
    %Due over ten years
    
    
    7,000
    
    
    
    
    
    
    
    50
    
    
    
    6,950
    
    
    
    5.93
    %$
    2,099,694
    
    
    $
    8,380
    
    
    $
    56,623
    
    
    $
    2,051,451
    
    
    
    4.98
    %
 h.
    
    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 March 31, 2006 and December 31, 2005.
 17




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES
AVAILABLE FOR SALE
(As of March 31, 2006)
 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
    
    $
    269,711
    
    
    $
    8,887
    
    
    $
    2,094,846
    
    
    $
    64,445
    
    
    $
    2,364,557
    
    
    $
    73,332FHLMC and FNMA
    
    
    618,830
    
    
    
    16,577
    
    
    
    296,029
    
    
    
    15,215
    
    
    
    914,859
    
    
    
    31,792Debt SecuritiesFHLB Notes
    
    
    108,651
    
    
    
    3,312
    
    
    
    
    
    
    
    
    
    
    
    108,651
    
    
    
    3,312FNMA Notes
    
    
    45,646
    
    
    
    377
    
    
    
    
    
    
    
    
    
    
    
    45,646
    
    
    
    377U.S. Treasury
    
    
    94,258
    
    
    
    4,746
    
    
    
    707,959
    
    
    
    55,466
    
    
    
    802,217
    
    
    
    60,212$
    1,137,096
    
    
    $
    33,899
    
    
    $
    3,098,834
    
    
    $
    135,126
    
    
    $
    4,235,930
    
    
    $
    169,025
 SECURITIES
AVAILABLE FOR SALE
(As of December 31, 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
    
    $
    927,922
    
    
    $
    14,658
    
    
    $
    1,612,002
    
    
    $
    28,933
    
    
    $
    2,539,924
    
    
    $
    43,591FHLMC and FNMA
    
    
    775,897
    
    
    
    12,326
    
    
    
    141,915
    
    
    
    6,418
    
    
    
    917,812
    
    
    
    18,744Debt SecuritiesFHLB Notes
    
    
    110,052
    
    
    
    1,909
    
    
    
    
    
    
    
    
    
    
    
    110,052
    
    
    
    1,909U.S. Treasury
    
    
    97,266
    
    
    
    1,736
    
    
    
    925,125
    
    
    
    38,689
    
    
    
    1,022,391
    
    
    
    40,425$
    1,911,137
    
    
    $
    30,629
    
    
    $
    2,679,042
    
    
    $
    74,040
    
    
    $
    4,590,179
    
    
    $
    104,669
 At March 31, 2006, securities available for sale included a net unrealized loss of
$168.9 million, which represented the difference between fair value and amortized
cost. The comparable amount at December 31, 2005 was a net unrealized loss of $104.4
million. The adverse impact on bond prices of increases in interest rates during
the first quarter of 2006 resulted in an increase in the net adverse unrealized loss
position as of March 31, 2006.The securities held by the Company are principally mortgage-backed securities, U.S.
Treasury and agency securities. Thus, payment on a substantial portion of these instruments is
guaranteed or secured by mortgages, a U.S. government-sponsored entity or the full faith and
credit of the U.S. government and, therefore, principal and interest on the
securities are deemed recoverable. As of March 31, 2006, the Company had the
ability and intent to hold the securities until maturity or until the unrealized
losses are recovered. Therefore, no other-than-temporary impairment loss was
recognized.The Company evaluates its portfolio of securities available for sale in light of
changing market conditions and other factors and, where appropriate, takes steps
intended to improve the overall risk exposure and portfolio objectives.
 18




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES
HELD TO MATURITY
(As of March 31, 2006)
 LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(Dollars in thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed SecuritiesFHLMC and FNMA
    
    $
    168,883
    
    
    $
    2,313
    
    
    $
    
    
    
    $
    
    
    
    $
    168,883
    
    
    $
    2,313CMO Certificates
    
    
    2,093
    
    
    
    87
    
    
    
    6,682
    
    
    
    513
    
    
    
    8,775
    
    
    
    600Debt SecuritiesFHLB Notes
    
    
    97,328
    
    
    
    3,475
    
    
    
    353,059
    
    
    
    20,536
    
    
    
    450,387
    
    
    
    24,011FHLB Zero Coupon
    
    
    113,135
    
    
    
    9,351
    
    
    
    
    
    
    
    
    
    
    
    113,135
    
    
    
    9,351FHLMC Zero Coupon
    
    
    73,063
    
    
    
    2,524
    
    
    
    170,955
    
    
    
    11,807
    
    
    
    244,018
    
    
    
    14,331FHLMC and FNMA Notes
    
    
    96,140
    
    
    
    3,849
    
    
    
    48,625
    
    
    
    1,375
    
    
    
    144,765
    
    
    
    5,224U.S. Treasury
    
    
    365,252
    
    
    
    36,938
    
    
    
    244,310
    
    
    
    23,358
    
    
    
    609,562
    
    
    
    60,296Other
    
    
    2,965
    
    
    
    35
    
    
    
    3,705
    
    
    
    195
    
    
    
    6,670
    
    
    
    230$
    918,859
    
    
    $
    58,572
    
    
    $
    827,336
    
    
    $
    57,784
    
    
    $
    1,746,195
    
    
    $
    116,356
 SECURITIES
HELD TO MATURITY
(As of December 31, 2005)
 LESS THAN 12 MONTHS
    
    
    12 MONTHS OR MORE
    
    
    TOTALFAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED
    
    
    FAIR
    
    
    UNREALIZED(Dollars in thousands)
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSES
    
    
    VALUE
    
    
    LOSSESMortgage-Backed SecuritiesFHLMC and FNMA
    
    $
    46,361
    
    
    $
    928
    
    
    $
    
    
    
    $
    
    
    
    $
    46,361
    
    
    $
    928CMO Certificates
    
    
    2,280
    
    
    
    55
    
    
    
    6,724
    
    
    
    526
    
    
    
    9,004
    
    
    
    581Debt SecuritiesFHLB Notes
    
    
    98,703
    
    
    
    2,144
    
    
    
    356,493
    
    
    
    17,101
    
    
    
    455,196
    
    
    
    19,245FHLB Zero Coupon
    
    
    119,980
    
    
    
    563
    
    
    
    
    
    
    
    
    
    
    
    119,980
    
    
    
    563FHLMC Zero Coupon
    
    
    
    
    
    
    
    
    
    
    178,602
    
    
    
    1,568
    
    
    
    178,602
    
    
    
    1,568FHLMC and FNMA Notes
    
    
    97,550
    
    
    
    2,438
    
    
    
    48,625
    
    
    
    1,375
    
    
    
    146,175
    
    
    
    3,813U.S. Treasury
    
    
    330,704
    
    
    
    15,636
    
    
    
    253,710
    
    
    
    14,063
    
    
    
    584,414
    
    
    
    29,699Other
    
    
    11,674
    
    
    
    226
    
    
    
    
    
    
    
    
    
    
    
    11,674
    
    
    
    226$
    707,252
    
    
    $
    21,990
    
    
    $
    844,154
    
    
    $
    34,633
    
    
    $
    1,551,406
    
    
    $
    56,623
 At March 31, 2006, securities held to maturity included a net unrealized loss of
$115.1 million, which represented the difference between fair value and amortized cost.
The comparable amount at December 31, 2005 was a net unrealized loss of $48.2 million. The
adverse impact on bond prices of increases in interest rates during the first quarter of
2006 resulted in an increase in the net adverse unrealized loss position as of March 31,
2006.The securities held by the Company are principally mortgage-backed securities, U.S. Treasury
and agency securities. Thus, payment on a substantial portion of these instruments is
guaranteed or secured by mortgages, a U.S. government-sponsored entity or the full faith and
credit of the U.S. government and, therefore, principal and interest on the securities are
deemed recoverable. As of March 31, 2006, the Company had the ability and intent to hold
the securities until maturity or until the unrealized losses are recovered. Therefore, no
other-than-temporary impairment loss was recognized.
 19




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 i.
    
    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)
    
    MARCH 31, 2006
    
    
    DECEMBER 31, 2005Conventional single family residential loans
    
    $
    4,829,544
    
    
    $
    4,555,932FHA/VA loans
    
    
    137,193
    
    
    
    162,338Construction and commercial real estate loans
    
    
    629,918
    
    
    
    603,925$
    5,596,655
    
    
    $
    5,322,195
 At March 31, 2006 and December 31, 2005, loans held for sale for which the creditor has the
right to repledge the collateral amounted to $3.4 billion and $3.5 billion, respectively.
Such loans were pledged to secure financing agreements with local financial institutions.During the first quarter of 2006, the Company performed a review of its mortgage loans held for
sale portfolio in light of the more stringent requirements of the U.S. secondary mortgage market,
which has now become its principal outlet for non-conforming loans as a result of the reduced
demand for this product from Puerto Rico financial institutions. As a result of this review, management
reassessed its plan to sell certain of its mortgage portfolio classified as held for sale,
specifically loans with a low FICO or with documentation and compliance issues, and
transferred $876.2 million from the mortgage loan held for sale portfolio to its loan
receivable portfolio. The transfer of mortgage loans included a
market value adjustment of $12.3 million that was taken as a
charge against earnings for the first quarter of 2006.Under certain mortgage loan sale agreements with local financial institutions, Doral
Financial was required to pay to the counterparties a floating pass-through rate tied to the
London Interbank Offered Rate (LIBOR), while the underlying mortgages generate interest at
a fixed rate. The Company also retained a call option which granted it a right to
repurchase the mortgage loans at par if the floating pass-through rate reached a
pre-determined rate, usually below the weighted-average coupon of the underlying mortgage
loans. Under the terms of the agreement, if the floating pass-through rate reached the
pre-determined rate, the loans became eligible for repurchase and Doral Financial would be
deemed to have regained control over the loans. At such time, the loans must be brought
back on the Companys balance sheet, as assets, according to the provisions of SFAS 140
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, regardless of whether the Company intends to exercise the call option. During
the first quarter of 2006, as a result of the continued rise in short-term interest rates
the floating pass-through rate reached the pre-determined rate, causing the Companys call
rights to become exercisable. As a result, approximately $963.2 million of mortgage loans
were brought back on the Companys balance sheet as mortgage loans held for sale during the
first quarter of 2006.Also, at March 31, 2006 and December 31, 2005, the mortgage loans held for sale portfolio
includes $69.6 million and $74.0 million, respectively, related to defaulted loans backing
GNMA securities for which the Company has an unconditional buy-back option.
 20




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 j.
    
    The following table sets forth certain information regarding Doral Financials loans
receivable as of the dates indicated:
 LOANS RECEIVABLE, NET
(Dollars in thousands)
    
    MARCH 31, 2006
    
    
    DECEMBER 31, 2005AMOUNT
    
    
    PERCENT
    
    
    AMOUNT
    
    
    PERCENTConstruction loans(1)
    
    $
    817,859
    
    
    
    23
    %
    
    $
    795,848
    
    
    
    31
    %Residential mortgage loans(2)
    
    
    1,437,802
    
    
    
    41
    %
    
    
    514,164
    
    
    
    20
    %Commercial  secured by real estate(3)
    
    
    892,253
    
    
    
    26
    %
    
    
    891,795
    
    
    
    35
    %Consumer  other:Personal loans
    
    
    28,489
    
    
    
    1
    %
    
    
    30,453
    
    
    
    1
    %Auto loans
    
    
    652
    
    
    
    0
    %
    
    
    760
    
    
    
    0
    %Credit cards
    
    
    19,382
    
    
    
    1
    %
    
    
    19,278
    
    
    
    1
    %Overdrawn checking accounts
    
    
    422
    
    
    
    0
    %
    
    
    448
    
    
    
    0
    %Revolving lines of credit
    
    
    28,718
    
    
    
    1
    %
    
    
    30,525
    
    
    
    1
    %Lease financing receivables
    
    
    46,876
    
    
    
    1
    %
    
    
    44,636
    
    
    
    2
    %Commercial non-real estate
    
    
    155,051
    
    
    
    5
    %
    
    
    142,909
    
    
    
    6
    %Loans on savings deposits
    
    
    13,513
    
    
    
    0
    %
    
    
    15,082
    
    
    
    1
    %Land secured
    
    
    48,706
    
    
    
    1
    %
    
    
    50,358
    
    
    
    2
    %Loans receivable, gross
    
    
    3,489,723
    
    
    
    100
    %
    
    
    2,536,256
    
    
    
    100
    %Less:Discount on
loans transferred(2)
    
    
    (12,095
    )
    
    
    
    
    
    
    Unearned interest and deferred
loan fees, net
    
    
    (18,354
    )
    
    
    
    
    
    
    (23,252
    )Allowance for loan and lease losses
    
    
    (39,330
    )
    
    
    
    
    
    
    (35,044
    )(69,779
    )
    
    
    
    
    
    
    (58,296
    )Loans receivable, net
    
    $
    3,419,944
    
    
    
    
    
    
    $
    2,477,960
 
 (1)
    
    Includes $682.1 million and $670.3 million of construction loans for residential housing projects as of March 31,
2006 and December 31, 2005, respectively. Also includes $135.8 million and $125.5 million of construction loans for commercial,
condominiums and multifamily projects as of March 31, 2006 and December 31, 2005, respectively.(2)
    
    During the first quarter of 2006, the Company reclassified $876.2
million from its mortgage loans held for sale portfolio to its loans receivable portfolio, as a result of a review of its mortgage
loans held for sale portfolio.(3)
    
    Includes $426.6 million and $448.0 million of commercial loans collateralized with 1-to-4 residential mortgage loans, as
of March 31, 2006 and December 31, 2005, respectively.  ALLOWANCE FOR LOAN AND LEASE LOSSES
 QUARTER ENDEDMARCH 31,(DOLLARS IN THOUSANDS)
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    35,044
    
    
    $
    20,881Provision for loan and lease losses
    
    
    5,173
    
    
    
    4,047Charge-offs
    
    
    (1,005
    )
    
    
    (735
    )Recoveries
    
    
    105
    
    
    
    62Other
    
    
    13
    
    
    
    Balance at end of period
    
    $
    39,330
    
    
    $
    24,255
  21




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 k.
    
    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
March 31, 2006, the outstanding principal balance of the bonds
was $50.4 million with fixed interest rates, ranging from 6.25%
to 6.90%, and maturities ranging from June 2006 to December
2029. Certain series of the bonds are secured by a mortgage on
the building and underlying real property.l.
    
    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 ENDEDMARCH 31,(In thousands)
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    156,812
    
    
    $
    136,024Capitalization of servicing assets
    
    
    4,249
    
    
    
    6,550Rights purchased
    
    
    216
    
    
    
    1,080Amortization
    
    
    (6,418
    )
    
    
    (5,738
    )Balance before valuation allowance at end of period
    
    
    154,859
    
    
    
    137,916Valuation allowance for temporary impairment
    
    
    (4,057
    )
    
    
    (8,220
    )Balance at end of period
    
    $
    150,802
    
    
    $
    129,696
 Impairment charges are recognized through a valuation allowance for each individual stratum
of servicing assets. The valuation allowance is adjusted to reflect the amount, if any, by
which the cost basis of the servicing asset for a given stratum of loans being serviced
exceeds its fair value. Any fair value in excess of the cost basis of the servicing asset
for a given stratum is not recognized. Other-than-temporary impairment, if any, is
recognized as a direct write-down of the servicing asset, and the valuation allowance is
applied to reduce the cost basis of the servicing asset. The Companys policy is to test
for permanent impairment at least annually.Changes in the impairment allowance for servicing assets were as follows:
 QUARTER ENDEDMARCH 31,(In thousands)
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    6,236
    
    
    $
    12,438Temporary impairment charges
    
    
    
    
    
    
    273Recoveries
    
    
    (2,179
    )
    
    
    (4,491
    )Balance at end of period
    
    $
    4,057
    
    
    $
    8,220
 At March 31, 2006, and based on recent prepayment experience, the expected weighted-average
remaining life of the Companys servicing assets was 5.5 years. Any projection of the
expected weighted-average remaining life of servicing assets is limited by conditions that
existed at the time the calculations were performed, and may not be indicative of actual
amortization expense that will be recorded in future periods.
 22




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 INTEREST-ONLY STRIPS ACTIVITY
(In thousands)
 QUARTER ENDEDMARCH 31,2006
    
    
    2005Balance at beginning of period
    
    $
    74,034
    
    
    $
    127,361Capitalization of IOs from loan sales
    
    
    
    
    
    
    5,323Amortization
    
    
    (8,729
    )
    
    
    (13,425
    )Losses on the IO value
    
    
    (26,603
    )
    
    
    (22,946
    )Balance at end of period
    
    $
    38,702
    
    
    $
    96,313
 At March 31, 2006, fair values of the Companys retained interests were based on external
and internal valuation models that incorporate market driven assumptions, adjusted by the
particular characteristics of the Companys servicing portfolio, regarding discount rates,
mortgage prepayment rates, and implied forward LIBOR rates (in the case of variable IOs).
These models resulted in constant prepayment rates of 12.27% and 12.46% for the Companys
servicing assets and 12.25% and 15.72% for the Companys IOs, for the first quarters of 2006
and 2005, respectively, and in discount rates of 9.87% and 9.99% for the Companys servicing
assets and 12.99% and 11.80% for the Companys IOs, for the first quarters of 2006 and 2005,
respectively. During the first quarter of 2006, the Company performed
a review of the assumptions used to estimate the discount rate used
to value its portfolio of IOs.
The IO internal valuation model utilizes a Z-spread approach to calculate discount rates.
The Z-spread is the market recognized spread over the swap curve that takes into
consideration additional yield requirements based on the risk characteristics of a
particular instrument. The Z-spread incorporates a premium for prepayment optionality and
liquidity risk over the period-end swap curve. As a result of the review, management reassessed the liquidity premium incorporated in the model in
light of the more stringent requirements of the U.S. secondary mortgage market, which has now
become its principal outlet for non-conforming loans as a result of the reduced demand for this
product from Puerto Rico financial institutions, and incorporated an additional 300 basis points of
liquidity premium to the discount calculation.
The weighted-averages of the key economic assumptions used by the
Company in its external and internal valuation models and the sensitivity of the current
fair value of residual cash flows to immediate 10 percent and 20 percent adverse changes in
those assumptions for mortgage loans at March 31, 2006, were as follows:
 Servicing
    
    Interest-only(Dollars in thousands)
    
    Assets
    
    stripsCarrying amount of retained interest
    
    $
    150,802
    
    
    $
    38,702Weighted-average expected life (in years)
    
    
    5.5
    
    
    
    5.9Constant prepayment rate (weighted-average annual rate)
    
    
    12.27
    %
    
    
    12.25
    %Decrease in fair value due to 10% adverse change
    
    $
    (4,958
    )
    
    $
    (1,596
    )Decrease in fair value due to 20% adverse change
    
    $
    (9,472
    )
    
    $
    (3,094
    )Residual cash flow discount rate (weighted-average
annual rate)
    
    
    9.87
    %
    
    
    12.99
    %Decrease in fair value due to 10% adverse change
    
    $
    (5,972
    )
    
    $
    (850
    )Decrease in fair value due to 20% adverse change
    
    $
    (11,555
    )
    
    $
    (1,665
    )
 These sensitivities are hypothetical and should be used with caution. As the figures
indicate, changes in fair value based on a 10 percent variation in assumptions generally
cannot be extrapolated because the relationship of the change in assumption to the change in
fair value may not be linear. Also, in the table above, the effect of a variation in a
particular assumption on the fair value of the retained interest is calculated without
changing any other assumption. In reality, changes in one factor may results in changes in
another (for example, increases in market interest rates may result in lower prepayments),
which may magnify or counteract the sensitivities.
 23




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 The following table summarizes the estimated change in the fair value of the Companys IOs,
the constant prepayment rate and the weighted-average expected life under the Companys
valuation model, given several hypothetical (instantaneous and parallel) increases or
decreases in the yield curve. For mortgage loan sales contracts that are not subject to
interest rate caps, to the extent that the interest rate payable to investors on the
mortgage loans underlying the floating rate IOs exceeds the weighted-average coupon on such
mortgage loans, the change in the fair value of the Companys floating rate IOs may exceed
the carrying value of the IOs, creating a liability instead of an asset.
 (Dollars in thousands)Weighted-average
    
    Change in FairChange in yield curve (basis points)
    
    Constant prepayment rate
    
    expected life (Years)
    
    Value of IOs
    
    % Change+200
    
    
    10.37
    %
    
    
    6.5
    
    
    $
    (108,036
    )
    
    
    (279
    )%+100
    
    
    10.94
    %
    
    
    6.4
    
    
    
    (55,390
    )
    
    
    (143
    )%+50
    
    
    11.39
    %
    
    
    6.2
    
    
    
    (27,900
    )
    
    
    (72
    )%Base
    
    
    12.25
    %
    
    
    5.9
    
    
    
    
    
    
    
    0
    %-50
    
    
    13.88
    %
    
    
    5.4
    
    
    
    26,539
    
    
    
    69
    %-100
    
    
    16.98
    %
    
    
    4.6
    
    
    
    48,288
    
    
    
    125
    %-200
    
    
    25.54
    %
    
    
    3.2
    
    
    
    77,728
    
    
    
    201
    %
 m.
    
    Stock Option and Other Incentive Plans.From April 16, 1997, to April 20, 2004, the
Company offered an employee stock option plan (the Old Plan). This plan, as amended in 2001,
allowed for the granting of up to 6,750,000 purchase options on shares of the Companys common
stock to employees, including officers and directors who are also employees of the Company.
The Compensation Committee of the Board of Directors (the Compensation Committee) had the
authority and absolute discretion to determine the number of stock options to be granted,
their vesting rights, and the option exercise price. The vesting rights, however, could not
exceed ten years, and the exercise price may not be lower than the market value at the date of
the grant.The Old Plan also permitted the Compensation Committee to grant rights to optionees (stock
appreciation rights) under which an optionee may surrender any exercisable stock option in
return for cash equal to the excess of the fair value of the common stock to which the
option is related at the time of exercise over the option price of the common stock at grant
date. The Old Plan provided for a proportional adjustment in the exercise price and the
number of shares that can be purchased in the event of a stock split, reclassifications of
stock and a merger or reorganization.Effective April 21, 2004, the Company adopted the Doral Financial Corporation Omnibus
Incentive Plan (the Omnibus Plan). The Omnibus Plan provides for equity-based compensation
incentives (the awards) through the grant of stock options, stock appreciation rights,
restricted stock, restricted stock units and dividend equivalents, as well as cash and
equity-based performance awards. This plan allows the issuance of up to 4,000,000 shares of
common stock subject to adjustments for stock splits, reorganization and other similar
events (as described below), to any employee, including officers and directors who are also
employees of the Company. The Compensation Committee has full authority and absolute
discretion to determine those eligible to receive awards and to establish the terms and
conditions of any awards; however, the Omnibus Plan has various limits and vesting
restrictions that apply to individual and aggregate awards. In case of a stock split,
reorganization, merger or other similar event affecting the common stock, the Compensation
Committee, in its discretion, shall adjust appropriately (a) the aggregate number of shares
of common stock available for awards, (b) the aggregate limitations on the number of shares
that may be awarded as a particular type of award or that may be awarded to any particular
participant in any particular period, and (c) the aggregate number of shares subject to
outstanding awards and the respective exercise prices or base prices applicable to
outstanding awards. During the first quarter of 2006, the Company granted 50,000 shares of
restricted stock with a fair value of $10.79 under the Omnibus Plan to the Companys Chief
Financial Officer. The restrictions on such restricted stock award lapse ratably on an
annual basis over a five-year period commencing on March 27, 2007. During the quarter ended
March 31, 2006, the Company recognized $899 of stock-based compensation expense related to
the aforementioned stock award. The total unrecognized compensation cost related to
these nonvested shares of restricted stock was $538,601 and is expected to be recognized over a period of
5 years.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
   For the quarter endedMarch 31, 2006Weighted-AverageRemaining
    
    
    AggregateNumber of
    
    
    Weighted-Average
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Exercise Price
    
    
    Term (Years)
    
    
    ValueBeginning of period
    
    
    2,306,414
    
    
    $
    14.84Options granted
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    Options purchased
    
    
    
    
    
    
    Options expired and unexercised
    
    
    (97,500
    )
    
    
    26.81Unvested options
forfeited
    
    
    
    
    
    
    End of period
    
    
    2,208,914
    
    
    $
    14.31
    
    
    
    5.51
    
    
    $
    Exercisable at period end
    
    
    2,108,914
    
    
    $
    14.39
    
    
    
    5.32
    
    
    $
    
   Weighted-AverageNonvested Shares
    
    Number of Options
    
    
    Grant Date Fair ValueNonvested at beginning of period
    
    
    107,500
    
    
    $
    3.59Vested
    
    
    (7,500
    )
    
    
    12.07Nonvested at period end
    
    
    100,000
    
    
    $
    2.95
  25




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 2005Stock price at grant date and exercise price
    
    $
    12.76Stock option estimated fair value
    
    $
    2.95Expected stock option term (years)
    
    
    4.8Expected volatility
    
    
    38
    %Expected dividend yield
    
    
    5.76
    %Risk-free interest rate
    
    
    4.28
    %
   n.
    
    The following table summarizes deposit balances:
 (In thousands)
    
    MARCH 31, 2006
    
    
    DECEMBER 31, 2005Certificates of deposit
    
    $
    2,808,692
    
    
    $
    2,749,643Regular savings
    
    
    450,409
    
    
    
    449,449NOW accounts
    
    
    575,498
    
    
    
    612,389Non interest-bearing deposits
    
    
    389,513
    
    
    
    425,788$
    4,224,112
    
    
    $
    4,237,269
 o
    
    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 No. 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 consisted of the
following:
 26




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 March 31,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005Non-callable repurchase
agreements with maturities less
than or equal to 90 days, at
various fixed rates averaging
4.69% and 4.10% at March 31,
2006 and December 31, 2005,
respectively.
    
    $
    1,006,336
    
    
    $
    1,039,345Non-callable repurchase
agreements with maturities
ranging from June 2007 to June
2010, at various fixed rates
averaging 4.09% at March 31,
2006 and December 31, 2005.
    
    
    1,100,000
    
    
    
    1,100,000Non-callable repurchase
agreements with maturities
ranging from March 2007 to
January 2008 (2005 - January
2006 to January 2008), tied to
3-month LIBOR adjustable
quarterly, averaging 5.11% and
4.39% at March 31, 2006 and
December 31, 2005,
respectively.
    
    
    364,800
    
    
    
    528,375Callable repurchase
agreements with maturities
ranging from March 2008 to
February 2014 (2005 - September
2008 to February 2014), at
various fixed rates averaging,
5.21% at March 31, 2006 and
December 31, 2005, callable at
various dates beginning on April
1, 2006.
    
    
    1,086,878
    
    
    
    1,086,878Callable repurchase
agreements due on March 22,
2015, at various fixed rates
during non-callable period
averaging 3.22% at March 31,
2006 and December 31, 2005,
callable beginning on March 22,
2008. Beginning on March 22,
2008, the interest converts to
an inverse floater (fixed rate
minus 3-month LIBOR, subject to
a cap).
    
    
    1,500,000
    
    
    
    1,500,000Callable repurchase
agreements with maturities
ranging from February to March
2008, variable annually at
different pre-determined fixed
rates, averaging 5.21% and
5.11% at March 31, 2006 and
December 31, 2005,
respectively, callable at
various dates beginning on May
1, 2006.
    
    
    200,000
    
    
    
    200,000Callable repurchase
agreements with maturities
ranging from October to
November 2014, tied to 3-month
LIBOR adjustable quarterly,
averaging 3.97% and 3.56% at
March 31, 2006 and December 31,
2005, respectively, callable at
various dates beginning on
October 23, 2006.(1)
    
    
    600,000
    
    
    
    600,000$
    5,858,014
    
    
    $
    6,054,598
 
 (1)
    
    Beginning on the call date of each individual repurchase
agreement the Company will pay interest at various fixed rates averaging 3.85%. 27




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 p.
    
    Advances from the FHLB consisted of the following:
 MARCH 31,
    
    
    DECEMBER 31,(In thousands)
    
    2006
    
    
    2005Non-callable advances with maturities
ranging from October 2007 to March 2010,
at various fixed rates averaging 4.37% and
3.84%, at March 31, 2006 and December 31,
2005, respectively.
    
    $
    267,000
    
    
    $
    167,000Non-callable advances due on September 14,
2007, tied to 1-month LIBOR adjustable
monthly (4.75% and 4.38% at March 31, 2006
and December 31, 2005, respectively).
    
    
    100,000
    
    
    
    100,000Callable advances with maturities ranging
from July 2009 to November 2012, at
various fixed rates averaging 4.09%, at
March 31 2006 and December 31, 2005,
callable at various dates beginning on
April 2, 2006.
    
    
    702,500
    
    
    
    702,500$
    1,069,500
    
    
    $
    969,500
  q.
    
    At March 31, 2006 and December 31, 2005, loans payable principally consisted of financing
agreements with local financial institutions secured by mortgage loans.Outstanding loans payable consisted of the following:
 MARCH 31,
    
    
    DECEMBER 31,(In thousands)
    
    2006
    
    
    2005Secured borrowings with local financial
institutions, collateralized by real estate
mortgage loans, at variable interest rates
tied to 3-month LIBOR averaging 6.13% and
5.71%, at March 31, 2006 and December 31,
2005, respectively.
    
    $
    3,350,884
    
    
    $
    3,498,638Secured borrowings with local financial
institutions, collateralized by real estate
mortgage loans, at fixed interest rates
averaging 7.65% and 7.70%, at March 31, 2006
and December 31, 2005, respectively.
    
    
    35,810
    
    
    
    37,585Secured borrowings with a local financial
institution, collateralized by IOs, at a
fixed interest rate of 7.75%.
    
    
    41,862
    
    
    
    42,007$
    3,428,556
    
    
    $
    3,578,230
  28




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 r.
    
    Notes payable consisted of the following:
 MARCH 31,
    
    
    DECEMBER 31,(In thousands)
    
    2006
    
    
    2005$625 million floating rate senior notes tied to 3-month LIBOR (5.43%
and 5.00% at March 31, 2006 and December 31, 2005, respectively), due
on July 20, 2007, paying interest quarterly
    
    $
    624,575
    
    
    $
    625,337$100 million notes, net of discount, bearing interest at 7.65%, due on
March 26, 2016, paying interest monthly
    
    
    98,067
    
    
    
    98,2667.84% senior notes due on October 10, 2006, paying interest
semiannually on April 10 and October 10
    
    
    
    
    
    
    75,000$30 million notes, net of discount, bearing interest at 7.00%, due on
April 26, 2012, paying interest monthly
    
    
    29,515
    
    
    
    29,570$40 million notes, net of discount, bearing interest at 7.10%, due on
April 26, 2017, paying interest monthly
    
    
    39,237
    
    
    
    39,320$30 million notes, net of discount, bearing interest at 7.15%, due on
April 26, 2022, paying interest monthly
    
    
    29,385
    
    
    
    29,450Senior term notes at fixed rates ranging from 8.50% to 8.55% with
maturities ranging from August 2006 to August 2007, paying interest
semiannually on February 28 and August 31
    
    
    16,000
    
    
    
    16,000Bonds payable secured by mortgage on building at fixed rates ranging
from 6.25% to 6.90%, with maturities ranging from June 2006 to December
2029, paying interest monthly
    
    
    42,755
    
    
    
    42,755Bonds payable at 6.25%, with maturities ranging from December 2010 to
December 2029, paying interest monthly
    
    
    7,600
    
    
    
    7,600Zero coupon senior notes (effective rate of 6.50%) due on April 30, 2007
    
    
    2,356
    
    
    
    2,323$
    889,490
    
    
    $
    965,621
  s.
    
    Income TaxesExcept for the operations of Doral Bank NY and Doral Money, substantially all of the
Companys operations are conducted through subsidiaries in Puerto Rico. Doral Bank NY and
Doral Money are U.S. corporations and are subject to U.S. income-tax on their income derived
from all sources.Income taxes include Puerto Rico income taxes as well as applicable federal and state taxes.
As Puerto Rico corporations, Doral Financial and all of its Puerto Rico subsidiaries are
generally required to pay federal income taxes only with respect to their income derived
from the active conduct of a trade or business in the United States (excluding Puerto Rico)
and certain investment income derived from U.S. assets. Any such tax is creditable, with
certain limitations, against Puerto Rico income taxes. The maximum statutory corporate
income tax rate in Puerto Rico is 41.5% for the taxable year ended December 31, 2006. In
August 2005, the Government of Puerto Rico approved an increase in the maximum statutory tax
rate from 39.0% to 41.5% to corporations and partnerships for a two-year period. The tax
rate was applied
retroactively effective January 1, 2005 to all of the Companys subsidiaries doing business in Puerto Rico.
 29




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
         30




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 t.
    
    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 March 31, 2006, the Company had outstanding $8.0 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 transfers subject to recourse
arrangements that generally require Doral Financial to repurchase or substitute the loans if
the loans are 90 days or more past due or otherwise in default. 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 March 31, 2006, the outstanding principal balance of loans sold
subject to full or partial recourse was $2.3 billion. As of such date, the maximum
contractual exposure in principal amount of loans that Doral Financial would have been
required to repurchase if all loans subject to recourse defaulted was $1.7 billion. Doral
Financials contingent obligation with respect to such recourse provision is not reflected
on the Companys Consolidated Financial Statements, except for a liability of $17.1 million,
as of March 31, 2006, for estimated losses from such recourse agreements, which is included
in Accrued expenses and other liabilities.u.
    
    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
March 31, 2006, commitments to extend credit amounted to approximately $534.3 million and
commitments to sell mortgage-backed securities and loans amounted to approximately $468.1
million. Commitments to extend credit are agreements to lend to a customer as long as the
conditions established in the contract are met. Commitments generally have fixed expiration
dates or other termination clauses. Generally, the Company does not enter into interest
rate lock agreements with borrowers.As of March 31, 2006, 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 of its financial statements.LawsuitsClass Action Lawsuits.Following the announcement of the restatement, Doral Financial and
certain of its officers and directors and former officers and directors, were named as
defendants in eighteen purported class action lawsuits filed between April 20, 2005 and June
14, 2005, alleging violations of federal securities laws. Sixteen of these actions were
filed in the U.S. District Court for the Southern District of New York and two were filed in
the U.S. District Court for the District of Puerto Rico. These lawsuits, brought on behalf
of shareholders who purchased Doral Financial securities as early as May 15, 2000 and as
late as May 26, 2005, allege primarily that the defendants engaged in securities fraud by
disseminating materially false and misleading statements during the class period, failing to
disclose material information concerning the valuation of the Companys IOs, and misleading
investors as to the Companys vulnerability to interest rate increases. The two actions not
initially filed in the U.S. District Court for the Southern District of New York have been
transferred there by the Judicial Panel on Multi-District Litigation for coordinated or
consolidated pretrial proceedings with the actions previously filed there before Judge
Richard Owen.
 31




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
   Shareholder Derivative Lawsuits .
 Other Lawsuits.
   32




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Other Legal Matters
         33




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
       34




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 v.
    
    Recent Accounting PronouncementsShare-Based Payments. In December 2004, the FASB issued SFAS 123R. This statement is a
revision of SFAS No. 123, Accounting for Stock-Based Compensation and it also supersedes
APB No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance. This statement focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. SFAS 123R requires companies
to (1) use fair value to measure stock-based compensation awards and (2) cease using the
intrinsic value method of accounting, which APB 25 allowed and resulted in no expense for
many awards of stock options for which the exercise price of the option did not exceed the
price of the underlying stock at the grant date. In addition, SFAS 123R retains the modified
grant date model from SFAS No. 123. Under that model, compensation cost is measured at the
grant date fair value of the award and is adjusted to reflect anticipated forfeitures and
the expected outcome of certain conditions. The fair value of an award is not remeasured
after its initial estimation on the grant date, except in the case of a liability award or
if the award is modified, based on specific criteria included in SFAS 123R. Also, SFAS 123R
clarifies the financial impact of vesting and/or acceleration clauses due at retirement.
Under the revised SFAS, the expense should be fully accrued for any employee that is
eligible to retire regardless of the actual retirement experience of the employer. The
adoption of this statement on January 1, 2006 did not have a material effect on the
Consolidated Financial Statements of the Company since in 2003, Doral Financial started to
expense the fair value of stock options granted to employees using the modified
prospective method under SFAS 148. Under this method, the Company expenses the fair value
of all employee stock options granted after January 1, 2003, as well as the unvested
portions of previously granted options.Exchanges of Nonmonetary Assets.In December 2004, the FASB issued SFAS No. 153, Exchanges
of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions. This statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The entitys future cash flows are
expected to significantly change if either of the following criteria is met: a) The
configuration (risk, timing, and amount) of the future cash flows of the asset(s) received
differs significantly from the configuration of the future cash flows of the asset(s)
transferred; b) The entity-specific value of the asset(s) received differs from the
entity-specific value of the asset(s) transferred, and the difference is significant in
relation to the fair values of the assets exchanged. A qualitative assessment will, in some
cases, be conclusive in determining that the estimated cash flows of the entity are expected
to significantly change as a result of the exchange. This statement is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. This
statement did not have a material impact on the Companys Consolidated Financial Statements
upon adoption in 2006.Accounting Changes and Error Corrections.In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Errors Corrections. This Statement replaces APB Opinion No. 20,
Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of a change
in accounting principle. This statement requires retrospective application to prior periods
financial statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the change. This
statement also requires that a change in depreciation, amortization, or depletion method for
long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected
by a change in accounting principle. Opinion 20 previously required that such changes in
accounting principle be reported as a change in accounting principle by including in net
income of the period of the change the cumulative effect of changing to the new accounting
principle. This statement does not change the transition provisions of any existing
accounting pronouncements, including those that are in a transition phase as of the
effective date of this Statement. SFAS No. 154 did not have a significant impact on the
Companys Consolidated Financial Statements upon adoption in 2006.
 35




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Accounting for Certain Hybrid Financial Instruments.
 Accounting for Servicing of Financial Assets.
 Accounting for Uncertainty in Income Taxes
 
    
    Recognition: A tax benefit from an uncertain position may be recognized only
if it is more likely than not that the position is sustainable, based on its
technical merits.
    
    Measurement: The tax benefit of a qualifying position is the largest amount
of tax benefit that is greater than 50 percent likely of being realized upon
ultimate settlement with a taxing authority having full knowledge of all
relevant information.
 36




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
    
    Change in judgment: The assessment of the recognition threshold and the
measurement of the associated tax benefit might change as new information
becomes available. Unrecognized tax benefits should be recognized in the period
that the position reaches the recognition threshold, which might occur prior to
absolute finality of the matter. Similarly, recognized tax benefits should be
derecognized in the period in which the position falls below the threshold.
    
    Interest/Penalties: A taxpayer is required to accrue interest and penalties
that, under relevant tax law, the taxpayer would be regarded as having
incurred. Accordingly, under FIN 48, interest would start to accrue in the
period that it would begin accruing under the relevant tax law, and penalties
should be accrued in the first period for which a position is taken (or is
expected to be taken) on a tax return that would give rise to the penalty. How
a company classifies interest and penalties in the income statement is an
accounting policy decision. The company should disclose that policy and the
amounts recognized.
    
    Disclosures: FIN 48 requires qualitative and quantitative disclosures,
including discussion of reasonably possible changes that might occur in the
recognized tax benefits over the next 12 months; a description of open tax
years by major jurisdictions; and a roll-forward of all unrecognized tax
benefits, presented as a reconciliation of the beginning and ending balances of
the unrecognized tax benefits on a worldwide aggregated basis.
   Fair Value Measurements
   37




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
    38




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##### Table of Contents



ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 INTERNAL CONTROL OVER FINANCIAL REPORTING
   SUBSEQUENT EVENTS
 Business
  Changes in Senior Management.
 
    
    On August 22, 2006, the Company announced the appointment of Calixto García-Vélez as
Chairman and Chief Executive Officer of Doral Bank PR. Mr. García-Vélez joined the
Company from Citigroup, where he previously served as President of Citibank West, FSB.
Prior to serving as President of Citibank West, Mr. García-Vélez was president of
Citibank Florida and business manager of Citibank North Americas South division, which
included Florida, the Mid-Atlantic region, Puerto Rico and Texas. Mr. García-Vélez
succeeded Antonio Faría, former Chief Executive Officer of Doral Bank PR, who resigned
from his position effective October 15, 2006.
    
    On September 8, 2006, the Company announced the appointment of Marangal I. Domingo
as Executive Vice President  Chief Investment Officer and Treasurer. Prior to
joining the Company, Mr. Domingo served as Executive Vice President, Finance & Strategy
at Countrywide Bank, N.A., a member of the Countrywide Financial Corporation family of
companies. Prior to Countrywide, he served as President and Chief Executive Officer of
Downey Financial Corporation, where he was responsible for setting the banks strategic
direction and managing day-to-day operations. Before Downey Savings, Mr. Domingo was
with Washington Mutual as Executive Vice President of Capital Markets and was
responsible for all of its mortgage capital markets businesses. He also served as
Treasurer for Washington Mutual. Mr. Domingo succeeded Julio Micheo, the former
Executive Vice President and Treasurer of the Company, who resigned from his position
effective August 23, 2006.
    
    On September 13, 2006, the Company announced the appointment of Enrique R. Ubarri as
Executive Vice President and General Counsel, Lesbia Blanco-Diaz as Executive Vice
President and Corporate Human Resources Director, and Olga Mayoral-Wilson as Executive
Vice President and Corporate Communications Director.
 39




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##### Table of Contents



Regulatory Matters.
    Restructuring of Certain Prior Mortgage Loan Transfers.
 40




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##### Table of Contents



OVERVIEW OF RESULTS OF OPERATIONS
   
    
    Net income for the first quarter of 2006 decreased by 56% when compared to
the same period in 2005, from $39.2 million to
$17.1 million, and decreased on a diluted
earnings per share basis from $0.28 to $0.08. After the
payment of preferred stock dividends, there was a net income attributable to common
stockholders of $8.8 million for the first quarter of 2006, compared to net income
attributable to common stockholders of $30.9 million for the first quarter of 2005.
    
    Net interest income for the first quarter of 2006 was $58.6 million,
compared to $75.1 million for the same period in 2005. The decrease in net interest
income resulted from a decrease in net interest margin from 1.79% in the
first quarter of 2005 to 1.46% in
the first quarter of 2006, coupled with a decrease in average
interest-earning assets from $17.0 billion for the first quarter
of 2005 to $16.2 billion for the comparable period of 2006 (see Tables A and B below for information regarding the
Companys net interest income). The reduction in net interest
margin resulted principally from the
flattening of the yield curve, as on average, the Companys interest bearing
liabilities, principally wholesale funding and loans payable, re-priced at higher
frequency and rates than the Companys interest-earning assets. The decrease in the
Companys interest margin has been particularly significant with respect to its
portfolio of investment securities. Assuming a funding cost equal to the
weighted-average cost of the Companys repurchase agreements, the interest rate spread
on the Companys portfolio of investment securities was approximately 0.45% as of March
31, 2006, compared to 1.41% for the Companys interest-earning assets taken as a whole.
 41




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##### Table of Contents




    
    The provision for loan and lease losses for the first quarter of 2006 was
$5.2 million, compared to $4.0 million for the comparable 2005 period. The increase in
the provision for loan and lease losses reflects principally an increase in the
allowance for the Companys construction loan portfolio, as well as an increase in the
delinquency trends of the overall loans portfolio. During 2006, a number of key
economic indicators suggest that the Puerto Rico economy is suffering a slowdown, as a
result of, among other things, high levels of oil prices, the upward trend in
short-term interest rates and the flattening of the yield curve, the depreciation of
the dollar and the deceleration of public investment due to the Commonwealths current
fiscal situation. In particular, the increase in short-term rates and the reduction in
public investment have had an adverse effect in construction activity, which has been a
key contributor to economic growth in recent years. These factors contributed to
increases in delinquency rates and the loan loss provision.
    
    Non-interest income for the first quarter of 2006 was a loss
of $9.7 million, compared to a gain of $35.0 million for the same
period in 2005. The decrease
in non-interest income was principally driven by losses on securities held for trading,
by downward adjustments to the value of its mortgage loan portfolio and by
lower gains on sales of mortgage loans. These factors
were partially offset by higher fees and commissions. The decline in results on
trading activities for the first quarter of 2006 was principally due to lower realized
and unrealized gains with respect to derivative instruments undertaken for risk
management purposes. This decline was attributable to a lower volume of derivative
instruments held by the Company during the first quarter of 2006 as compared to the
same period in 2005, as well as to a smaller increase in long-term interest and swap
rates. During the second half of 2005, the Company reduced the volume of
floating-to-fixed interest rate swaps as it took steps to simplify
and transform its
business model and placed more emphasis on internal balance sheet management to manage
interest rate risk. The loss on securities held for trading includes
a $26.6 million loss on the IO valuation.
  
    
    Non-interest expenses for the first quarter of 2006 were $65.8 million
compared to $56.4 million for the same period in 2005. Non-interest expenses for 2006 continue to reflect significant expenses for professional services associated
with the restatement of the Companys prior period financial statements and related
legal and accounting matters.
 42




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##### Table of Contents




    
    For the first quarter of 2006, Doral Financial recognized an income tax
benefit of $39.1 million, compared to an income tax expense of $10.4 million for the
same period in 2005. The decrease in the tax provision for 2006 was principally due to
an increase in the net
deferred tax asset, combined with a decrease in pre-tax income.
These factors were offset in part by higher net operating losses in certain
subsidiaries that under the PR Code could not be used to offset gains in other
subsidiaries.
    
    During the first quarter of 2006, the Company had other comprehensive loss
of approximately $61.1 million related principally to the adverse impact of the
increase in interest rates on the value of the Companys portfolio of available for
sale securities. As of March 31, 2006, the Companys accumulated other comprehensive
loss (net of income tax benefit) reached $186.5 million.
    
    Doral Financials loan production for the first quarter of 2006 was $875.7
million, compared to $1.3 billion for the comparable period in 2005, a decrease of
approximately 33%. The decrease in Doral Financials loan production is due to a
number of factors including changes in the underwriting processes, economic conditions
in Puerto Rico, and competition from other financial institutions. Doral Financial has
decided to implement uniform, automated and rules-based underwriting procedures. The
implementation of these procedures has caused disruption in the Companys
loan originations. The Company believes that these underwriting standards will
allow it to more efficiently underwrite assets with better credit quality and risk
price its loan products in the future.
    
    During the first quarter of 2006, Doral Financial redeemed $75 million in
senior notes. The Companys greatest liquidity challenge is the
refinancing of its $625 million floating rate senior notes that mature in July 2007.
Doral Financial will require outside financing or other sources of capital to repay
this indebtedness at maturity. Accordingly, it is in the process of selecting an
advisor to assist the Company in reviewing a number of possible alternatives to
refinance this indebtedness and in examining alternatives to restructure its balance
sheet in order to enhance future earnings. See Liquidity and Capital Resources.
    
    Under the direction of the Companys new management team, the Company has
begun the process of transforming the business and operational strategies of the
Company. The goal is to develop more stable and transparent streams of earnings. To
achieve this goal the Company intends to place greater emphasis on lending activities
and less emphasis on trading and investment activities. The Company also intends to
reduce non-interest expenses through more efficient administrative and product delivery
systems. The Company is in the process of developing and implementing new and better
underwriting and processing procedures. These procedures are designed to produce
higher quality and more marketable assets. The development and implementation of these
procedures has caused disruption in the Companys loan originations. The
Company anticipates that, for the foreseeable future, loan production volume will
continue to be below historical levels as these new underwriting procedures are
implemented and new product offerings are developed.
 CRITICAL ACCOUNTING POLICIES
  43




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RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 2006 AND 2005
   NET INTEREST INCOME
   
    
    The continued pressure on the Companys net interest margin caused by the
compressed margin from the Companys large portfolio of investment securities.
Assuming a funding cost equal to the weighted-average cost of the Companys
repurchase agreements, the average interest rate spread on the Companys investment
securities during the first quarter of 2006 was 0.45%, compared to 1.46% for the
first quarter of 2005.
    
    The decrease in interest income on IOs attributable to lower average volume due
to increases in short-term interest rates and the flattening of the yield curve.
The following table presents a detail of the cash flows received on Doral
Financials portfolio of IOs for the first quarter of 2006 and 2005:
 44




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##### Table of Contents



Quarter Ended March 31,(In thousands)
    
    2006
    
    
    2005Total cash flows received on IO portfolio
    
    $
    10,560
    
    
    $
    16,725Amortization of IOs, as offset to cash flows
    
    
    (8,729
    )
    
    
    (13,425
    )Net cash flows recognized as interest income
    
    $
    1,831
    
    
    $
    3,300
 
    
    Increased deposits at Doral Financials banking subsidiaries, including brokered
deposits, and increased costs of its repurchase agreements, loans and notes
payable. The Companys loans payable consisted principally of borrowings with
local financial institutions tied to short-term interest rates and secured by
mortgage loans. The increase in cost on notes payable reflects the re-pricing
nature of most of the Companys notes payable; which are floating rate notes
indexed to 3-month LIBOR.
   45




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TABLE A
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
 QUARTER ENDED MARCH 31,2006
    
    
    2005AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEBALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1) (2)
    
    $
    7,987,748
    
    
    $
    137,872
    
    
    
    7.00
    %
    
    $
    6,540,381
    
    
    $
    110,733
    
    
    
    6.87
    %Mortgage-backed securities
    
    
    4,079,571
    
    
    
    51,195
    
    
    
    5.09
    %
    
    
    4,424,304
    
    
    
    52,568
    
    
    
    4.82
    %Interest-only strips
    
    
    57,165
    
    
    
    1,831
    
    
    
    12.99
    %
    
    
    113,418
    
    
    
    3,300
    
    
    
    11.80
    %Investment securities
    
    
    2,973,732
    
    
    
    30,101
    
    
    
    4.11
    %
    
    
    3,273,313
    
    
    
    32,829
    
    
    
    4.07
    %Other interest-earning assets
    
    
    1,149,713
    
    
    
    12,440
    
    
    
    4.39
    %
    
    
    2,666,837
    
    
    
    16,099
    
    
    
    2.45
    %Total interest-earning assets/interest income
    
    
    16,247,929
    
    
    $
    233,439
    
    
    
    5.83
    %
    
    
    17,018,253
    
    
    $
    215,529
    
    
    
    5.14
    %Total non-interest-earning assets
    
    
    1,807,353
    
    
    
    
    
    
    
    
    
    
    
    843,152Total assets
    
    $
    18,055,282
    
    
    
    
    
    
    
    
    
    
    $
    17,861,405LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    4,156,798
    
    
    $
    32,708
    
    
    
    3.19
    %
    
    $
    3,567,126
    
    
    $
    22,457
    
    
    
    2.55
    %Repurchase agreements
    
    
    5,979,612
    
    
    
    62,229
    
    
    
    4.22
    %
    
    
    6,739,615
    
    
    
    50,458
    
    
    
    3.04
    %Advances from the FHLB
    
    
    1,001,722
    
    
    
    10,378
    
    
    
    4.20
    %
    
    
    1,232,833
    
    
    
    12,479
    
    
    
    4.11
    %Loans payable
    
    
    3,972,827
    
    
    
    55,067
    
    
    
    5.62
    %
    
    
    3,611,872
    
    
    
    42,187
    
    
    
    4.74
    %Notes payable
    
    
    916,399
    
    
    
    14,441
    
    
    
    6.39
    %
    
    
    1,095,743
    
    
    
    12,895
    
    
    
    4.77
    %Total interest-bearing liabilities/interest expense
    
    
    16,027,358
    
    
    $
    174,823
    
    
    
    4.42
    %
    
    
    16,247,189
    
    
    $
    140,476
    
    
    
    3.51
    %Total non-interest-bearing liabilities
    
    
    423,777
    
    
    
    
    
    
    
    
    
    
    
    333,654Total liabilities
    
    
    16,451,135
    
    
    
    
    
    
    
    
    
    
    
    16,580,843Stockholders equity
    
    
    1,604,147
    
    
    
    
    
    
    
    
    
    
    
    1,280,562Total liabilities and stockholders equity
    
    $
    18,055,282
    
    
    
    
    
    
    
    
    
    
    $
    17,861,405Net interest-earning assets
    
    $
    220,571
    
    
    
    
    
    
    
    
    
    
    $
    771,064Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    58,616
    
    
    
    
    
    
    
    
    
    
    $
    75,053Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.41
    %
    
    
    
    
    
    
    
    
    
    
    1.63
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.46
    %
    
    
    
    
    
    
    
    
    
    
    1.79
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    101.38
    %
    
    
    
    
    
    
    
    
    
    
    104.75
    %
 
 (1)
    
    Average loan balances include the average balance of non-accruing loans, on which interest income is recognized when collected. Also includes the average balance of GNMA defaulted loans for
which the Company has an unconditional buy-back option.(2)
    
    Interest income on loans includes $1.1 million and $1.0 million for the first quarter of 2006 and 2005, respectively, of income from prepayment penalties related to the Companys loan portfolio.(3)
    
    Interest rate spread represents the difference between Doral Financials weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities.(4)
    
    Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets. 46




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TABLE B
NET INTEREST INCOME VARIANCE ANALYSIS
(IN THOUSANDS)
 QUARTER ENDEDMARCH 31,2006 COMPARED TO 2005INCREASE (DECREASE) DUE TO:VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    24,573
    
    
    $
    2,566
    
    
    $
    27,139Mortgage-backed securities
    
    
    (4,137
    )
    
    
    2,764
    
    
    
    (1,373
    )Interest-only strips
    
    
    (1,640
    )
    
    
    171
    
    
    
    (1,469
    )Investment securities
    
    
    (3,027
    )
    
    
    299
    
    
    
    (2,728
    )Other interest-earning assets
    
    
    (9,256
    )
    
    
    5,597
    
    
    
    (3,659
    )TOTAL INTEREST INCOME VARIANCE
    
    
    6,513
    
    
    
    11,397
    
    
    
    17,910INTEREST EXPENSE VARIANCEDeposits
    
    
    3,702
    
    
    
    6,549
    
    
    $
    10,251Repurchase agreements
    
    
    (5,799
    )
    
    
    17,570
    
    
    
    11,771Advances from the FHLB
    
    
    (2,330
    )
    
    
    229
    
    
    
    (2,101
    )Loans payable
    
    
    4,232
    
    
    
    8,648
    
    
    
    12,880Notes payable
    
    
    (2,149
    )
    
    
    3,695
    
    
    
    1,546TOTAL INTEREST EXPENSE VARIANCE
    
    
    (2,344
    )
    
    
    36,691
    
    
    
    34,347NET INTEREST INCOME VARIANCE
    
    $
    8,857
    
    
    $
    (25,294
    )
    
    $
    (16,437
    )
 PROVISION FOR LOAN AND LEASE LOSSES
   47




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NON-INTEREST INCOME
  Net (Loss) Gain on Mortgage Loan Sales and Fees.
  FOR THE QUARTER
    
    
    FOR THE QUARTERENDED MARCH 31,
    
    
    ENDED MARCH 31,(In thousands)
    
    2006
    
    
    2005Total loan sales and securitizations
    
    $
    231,571
    
    
    $
    821,865Total loans sales resulting in the recording of IOs
    
    $
    
    
    
    $
    539,712IOs capitalized
    
    $
    
    
    
    $
    5,323MSRs capitalized
    
    $
    4,249
    
    
    $
    6,550
 Net Servicing Income.
 48




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TABLE C
NET SERVICING INCOME
 QUARTER ENDEDMARCH 31,(In thousands)
    
    2006
    
    
    2005Servicing fees (net of guarantee fees)
    
    $
    7,752
    
    
    $
    7,578Late charges
    
    
    2,443
    
    
    
    2,257Prepayment penalties
    
    
    519
    
    
    
    372Interest loss
    
    
    (1,387
    )
    
    
    (958
    )Other servicing fees
    
    
    62
    
    
    
    99Servicing income, gross
    
    
    9,389
    
    
    
    9,348Amortization of servicing assets
    
    
    (6,418
    )
    
    
    (5,738
    )Net recovery of servicing assets
    
    
    2,179
    
    
    
    4,218Total net servicing income
    
    $
    5,150
    
    
    $
    7,828
  Trading Activities.
  TABLE D
 QUARTER ENDEDCOMPONENTS OF TRADING ACTIVITIES
    
    MARCH 31,(In thousands)
    
    2006
    
    
    2005Net realized gains (losses) on sales of securities held for trading
    
    $
    2,891
    
    
    $
    (2,192
    )Losses on the IO valuation
    
    
    (26,603
    )
    
    
    (22,946
    )Net unrealized gains (losses) on trading securities, excluding IOs
    
    
    760
    
    
    
    (396
    )Net realized and unrealized gains on derivative instruments
    
    
    13,005
    
    
    
    32,170Total
    
    $
    (9,947
    )
    
    $
    6,636
  49




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Net Gain on Sale of Investment Securities.
 50




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Commissions, Fees and Other Income.
 TABLE E
 QUARTERCOMMISSIONS, FEES AND OTHER INCOME
    
    ENDED MARCH 31,(In Thousands)
    
    2006
    
    
    2005Retail banking fees
    
    $
    4,812
    
    
    $
    3,978Securities brokerage and asset management fees and commissions
    
    
    271
    
    
    
    333Insurance agency commissions
    
    
    2,702
    
    
    
    2,947Other income
    
    
    1,949
    
    
    
    508Total
    
    $
    9,734
    
    
    $
    7,766
    NON-INTEREST EXPENSE S
  TABLE F
 QUARTERNON INTEREST EXPENSES
    
    ENDED MARCH 31,(In Thousands)
    
    2006
    
    
    2005Compensation and employee benefits
    
    $
    19,591
    
    
    $
    25,589Taxes, other than payroll and income taxes
    
    
    3,308
    
    
    
    2,352Advertising
    
    
    2,595
    
    
    
    4,342Professional services  excluding restatement expenses
    
    
    6,074
    
    
    
    3,973Professional services  restatement expenses
    
    
    11,077
    
    
    
    Communication and information systems
    
    
    5,227
    
    
    
    4,824Occupancy and other office expenses
    
    
    7,155
    
    
    
    7,163Depreciation and amortization
    
    
    5,703
    
    
    
    4,953Other
    
    
    5,044
    
    
    
    3,211Total non-interest expenses
    
    $
    65,774
    
    
    $
    56,407
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INCOME TAXES
       52




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53




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BALANCE SHEET AND OPERATING DATA ANALYSIS
 LOAN PRODUCTION
  TABLE G
 LOAN PRODUCTION
    
    QUARTER ENDED MARCH 31,(Dollars in Thousands, Except for Average Initial Loan Balance)
    
    2006
    
    
    2005FHA/VA mortgage loansNumber of loans
    
    
    483
    
    
    
    1,333Volume of loans
    
    $
    46,369
    
    
    $
    110,192Percent of total volume
    
    
    5
    %
    
    
    9
    %Average initial loan balance
    
    $
    96,002
    
    
    $
    82,665Conventional conforming mortgage loansNumber of loans
    
    
    510
    
    
    
    1,558Volume of loans
    
    $
    58,861
    
    
    $
    183,861Percent of total volume
    
    
    7
    %
    
    
    14
    %Average initial loan balance
    
    $
    115,414
    
    
    $
    118,011Conventional non  conforming mortgage loans(1)Number of loans
    
    
    5,497
    
    
    
    6,396Volume of loans
    
    $
    591,385
    
    
    $
    706,134Percent of total volume
    
    
    68
    %
    
    
    54
    %Average initial loan balance
    
    $
    107,583
    
    
    $
    110,402Other(2)Number of loans
    
    
    1,014
    
    
    
    4,061Volume of loans
    
    $
    179,127
    
    
    $
    301,496Percent of total volume
    
    
    20
    %
    
    
    23
    %Total loansNumber of loans
    
    
    7,504
    
    
    
    13,348Volume of loans
    
    $
    875,742
    
    
    $
    1,301,683
 
 (1)
    
    Includes $42.2 million and $44.4 million in second mortgages for the quarters ended March 31, 2006 and 2005, 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.   54




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TABLE H
LOAN ORIGINATION SOURCES
 THREE MONTH PERIOD ENDED MARCH 31,2006
    
    2005Puerto Rico
    
    US
    
    Total
    
    Puerto Rico
    
    US
    
    TotalRetail
    
    
    72
    %
    
    
    
    
    
    
    72
    %
    
    
    72
    %
    
    
    1
    %
    
    
    73
    %Wholesale(1).
    
    
    8
    %
    
    
    
    
    
    
    8
    %
    
    
    8
    %
    
    
    
    
    
    
    8
    %New Housing Developments
    
    
    11
    %
    
    
    2
    %
    
    
    13
    %
    
    
    9
    %
    
    
    2
    %
    
    
    11
    %Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other(2)
    
    
    6
    %
    
    
    1
    %
    
    
    7
    %
    
    
    6
    %
    
    
    2
    %
    
    
    8
    %
 
 (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
  55




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TABLE I
MORTGAGE LOAN SERVICING
(Dollars in Thousands, Except for Average Size of Loans)
 AS OF MARCH 31,2006
    
    
    2005COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END:GNMA
    
    $
    2,175,165
    
    
    $
    2,360,720FHLMC/FNMA
    
    
    4,174,044
    
    
    
    3,639,212Other conventional mortgage loans(1)(2)
    
    
    9,535,232
    
    
    
    8,550,765Total servicing portfolio
    
    $
    15,884,441
    
    
    $
    14,550,697SELECTED DATA REGARDING MORTGAGE LOANS SERVICED:Number of loans
    
    
    174,924
    
    
    
    165,336Weighted- average interest rate
    
    
    6.60
    %
    
    
    6.72
    %Weighted- average remaining maturity (months)
    
    
    257
    
    
    
    255Weighted- average gross servicing fee rate  loans serviced to others
    
    
    0.3974
    %
    
    
    0.3963
    %Average servicing portfolio(3)
    
    $
    15,806,023
    
    
    $
    14,407,532Principal prepayments
    
    $
    437,880
    
    
    $
    549,301Constant prepayment rate
    
    
    10
    %
    
    
    13
    %Average size of loans
    
    $
    90,808
    
    
    $
    88,007Servicing assets, net
    
    $
    150,802
    
    
    $
    129,696DELINQUENT MORTGAGE LOANS AND PENDING
FORECLOSURES AT PERIOD END:60-89 days past due
    
    
    1.29
    %
    
    
    1.32
    %90 days or more past due
    
    
    1.51
    %
    
    
    1.71
    %Total delinquencies excluding foreclosures
    
    
    2.80
    %
    
    
    3.03
    %Foreclosures pending
    
    
    1.96
    %
    
    
    1.54
    %SERVICING PORTFOLIO ACTIVITY:Beginning servicing portfolio
    
    $
    15,727,604
    
    
    $
    14,264,367Add:Loans funded and purchased(4)
    
    
    689,956
    
    
    
    955,281Bulk servicing acquired
    
    
    16,376
    
    
    
    55,619Less:Servicing sales
    
    
    12,885
    
    
    
    2,537Run-off(5)
    
    
    536,610
    
    
    
    722,033Ending servicing portfolio
    
    $
    15,884,441
    
    
    $
    14,550,697
 
 (1)
    
    Includes $6.2 billion and $5.4 billion of loans owned by Doral Financial at March 31, 2006 and 2005, respectively, which represented 39% and 37% of the total servicing portfolio as
of such dates.(2)
    
    Includes portfolios of $270.3 million and $303.5 million at March 31, 2006 and 2005, respectively, of delinquent FHA/VA and conventional mortgage loans sold to third parties.(3)
    
    Includes the average balance of loans owned by Doral Financial of $6.0 billion and $4.4 billion at March 31, 2006 and 2005, respectively.(4)
    
    Excludes approximately $185.8 million and $346.4 million of commercial, consumer, construction and other non-mortgage loans originated by Doral Financial but not part of the mortgage
servicing-portfolio as of March 31, 2006 and 2005, respectively.(5)
    
    Run-off refers to regular amortization of loans, prepayments and foreclosures.  56




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LIQUIDITY AND CAPITAL RESOURCES
         57




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58




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TABLE J
SOURCES OF BORROWINGS
(DOLLARS IN THOUSANDS)
 AS OF MARCH 31, 2006
    
    AS OF DECEMBER 31, 2005AMOUNT
    
    AVERAGE
    
    AMOUNT
    
    AVERAGEOUTSTANDING
    
    RATE
    
    OUTSTANDING
    
    RATEDeposits
    
    $
    4,224,112
    
    
    
    3.27
    %
    
    $
    4,237,269
    
    
    
    2.98
    %Repurchase Agreements
    
    
    5,858,014
    
    
    
    4.27
    %
    
    
    6,054,598
    
    
    
    4.08
    %Advances from FHLB
    
    
    1,069,500
    
    
    
    4.22
    %
    
    
    969,500
    
    
    
    4.08
    %Loans Payable
    
    
    3,428,556
    
    
    
    6.17
    %
    
    
    3,578,230
    
    
    
    5.75
    %Notes Payable
    
    
    889,490
    
    
    
    5.99
    %
    
    
    965,621
    
    
    
    5.86
    %
       59




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TABLE K
AVERAGE DEPOSIT BALANCE
(DOLLARS IN THOUSANDS)
 QUARTER ENDED
    
    
    YEAR ENDEDMARCH 31, 2006
    
    
    DECEMBER 31, 2005AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    AVERAGEBALANCE
    
    
    RATE
    
    
    BALANCE
    
    
    RATECertificates of deposit
    
    $
    2,763,217
    
    
    
    3.92
    %
    
    $
    2,248,530
    
    
    
    3.56
    %Regular passbook savings
    
    
    444,722
    
    
    
    2.52
    %
    
    
    476,600
    
    
    
    2.34
    %NOW accounts
    
    
    578,685
    
    
    
    2.28
    %
    
    
    673,755
    
    
    
    2.22
    %Non-interest bearing
    
    
    370,174
    
    
    
    
    
    
    
    442,940
    
    
    
    Total deposits
    
    $
    4,156,798
    
    
    
    3.19
    %
    
    $
    3,841,825
    
    
    
    2.76
    %
  TABLE L
CERTIFICATES OF DEPOSIT MATURITIES
(IN THOUSANDS)
 AMOUNTCertificates of deposit maturing:Three months or less
    
    $
    373,272Over three through six months
    
    
    258,396Over six through twelve months
    
    
    637,672Over twelve months
    
    
    1,082,995Total
    
    $
    2,352,335
  REGULATORY CAPITAL RATIOS
  60




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TABLE M
REGULATORY CAPITAL RATIOS
 DORAL
    
    DORAL
    
    DORALFINANCIAL
    
    BANK PR
    
    BANK NYTotal Capital (Total capital to risk-weighted assets)
    
    
    11.9
    %
    
    
    19.5
    %
    
    
    16.9
    %Tier 1 Capital Ratio (Tier 1 capital to risk-weighted assets)
    
    
    10.9
    %
    
    
    18.5
    %
    
    
    16.4
    %Leverage Ratio(1)
    
    
    5.5
    %
    
    
    6.6
    %
    
    
    9.8
    %
 
 (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.     ASSETS AND LIABILITIES
  61




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OFF-BALANCE SHEET ACTIVITIES
   TABLE N
LOANS SUBJECT TO RECOURSE BY LOAN TYPE
 Loans Past Due - Over 90Outstanding
    
    
    Weighted-average
    
    
    Days Without Insurance, and(In thousands)
    
    Balance
    
    
    Loan to Value
    
    
    Loan-To-Value Over 80%Loan Type:FHA/VA loans
    
    $
    17,508
    
    
    
    89.3
    %
    
    $
    Conventional loans
    
    
    2,142,985
    
    
    
    75.8
    %
    
    
    10,863Commercial loans
    
    
    94,231
    
    
    
    78.3
    %
    
    
    Total
    
    $
    2,254,724
    
    
    
    76.0
    %
    
    $
    10,863
   62




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CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
  TABLE O
CONTRACTUAL OBLIGATIONS
(IN THOUSANDS)
 PAYMENT DUE BY PERIODLESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTERCONTRACTUAL OBLIGATIONS(1)
    
    TOTAL
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSDeposits
    
    $
    4,224,112
    
    
    $
    3,058,472
    
    
    $
    1,026,717
    
    
    $
    124,623
    
    
    $
    14,300Repurchase agreements(2)
    
    
    5,858,014
    
    
    
    2,313,214
    
    
    
    2,744,800
    
    
    
    800,000
    
    
    
    Advances from the FHLB(2)
    
    
    1,069,500
    
    
    
    702,500
    
    
    
    317,000
    
    
    
    50,000
    
    
    
    Loans payable(3)
    
    
    3,428,556
    
    
    
    468,027
    
    
    
    768,006
    
    
    
    586,674
    
    
    
    1,605,849Notes payable
    
    
    889,490
    
    
    
    7,760
    
    
    
    637,592
    
    
    
    1,115
    
    
    
    243,023Other liabilities
    
    
    242,440
    
    
    
    239,440
    
    
    
    2,000
    
    
    
    1,000
    
    
    
    Non-cancelable operating leases
    
    
    67,653
    
    
    
    7,545
    
    
    
    13,554
    
    
    
    11,482
    
    
    
    35,072Total Contractual Cash Obligations
    
    $
    15,779,765
    
    
    $
    6,796,958
    
    
    $
    5,509,669
    
    
    $
    1,574,894
    
    
    $
    1,898,244
 
 (1)
    
    Amounts included in the table above do not include interest.(2)
    
    Includes $3.4 billion of repurchase agreements with an average
rate of 4.11% and $702.5 million in advances from the FHLB-NY with an average
rate of 4.09%,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 February
2008 to March, 2015.They are included on the first call date basis because
increases in interest rates over the average rate of the Companys callable
borrowings may induce the lenders to exercise their call right.(3)
    
    Includes $3.4 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. For purpose of the table
above, the Company used a CPR of 12.3% to estimate the repayments. 63




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TABLE P
OTHER COMMERCIAL COMMITMENTS(1)
(IN THOUSANDS)
 AMOUNT OF COMMITMENT EXPIRATION PER PERIODTOTALOTHER COMMERCIAL
    
    AMOUNT
    
    
    LESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTERCOMMITMENTS
    
    COMMITTED
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSCommitments to extend credit
    
    $
    534,310
    
    
    $
    342,939
    
    
    $
    176,705
    
    
    $
    14,586
    
    
    $
    80Commitments to sell mortgage-backed
securities and loans
    
    
    468,062
    
    
    
    468,062
    
    
    
    
    
    
    
    
    
    
    
    Commercial and financial standby letters of credit
    
    
    8,006
    
    
    
    8,006
    
    
    
    
    
    
    
    
    
    
    
    Maximum contractual recourse exposure
    
    
    1,709,395
    
    
    
    85,896
    
    
    
    737,121
    
    
    
    528,068
    
    
    
    358,310Total
    
    $
    2,719,773
    
    
    $
    904,903
    
    
    $
    913,826
    
    
    $
    542,654
    
    
    $
    358,390
 
 (1)
    
    Refer to Off-Balance Sheet Activities above for additional information regarding other commercial commitments of the Company. RISK MANAGEMENT
  Interest Rate and Market Risk Management
  Doral Financials Risk Profile
    64




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Market Value
    
    Net InterestAs of March 31, 2006
    
    of Equity Risk
    
    Income Risk1+ 100 BPS
    
    
    (41.7
    )%
    
    
    (3.8
    )%- 100 BPS
    
    
    25.6
    %
    
    
    7.2
    %
 Market Value
    
    Net InterestAs of December 31, 2005
    
    of Equity Risk
    
    Income Risk1+ 100 BPS
    
    
    (24.7
    )%
    
    
    (3.7
    )%- 100 BPS
    
    
    12.8
    %
    
    
    6.8
    %
 
 (1)
    
    Based on 12-month forward change in net interest income   (In thousands)
 March 31, 2006
    
    December 31, 2005Change in FairValue of
    
    Change in Fair
    
    Change in Fair ValueAvailable for Sale
    
    Value of Held to
    
    of Available for Sale
    
    Change in Fair ValueChange in yield
    
    Securities and
    
    Maturity
    
    Securities and
    
    of Held to Maturitycurve (basis points)
    
    FHLB Stock
    
    Securities
    
    FHLB Stock
    
    Securities+200
    
    $
    (424,261
    )
    
    $
    (307,917
    )
    
    $
    (425,632
    )
    
    $
    (290,743
    )+100
    
    
    (205,575
    )
    
    
    (149,043
    )
    
    
    (200,611
    )
    
    
    (140,570
    )+50
    
    
    (99,421
    )
    
    
    (73,145
    )
    
    
    (94,944
    )
    
    
    (68,916
    )Base
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -50
    
    
    88,568
    
    
    
    68,094
    
    
    
    79,585
    
    
    
    62,654-100
    
    
    157,726
    
    
    
    132,593
    
    
    
    137,066
    
    
    
    121,809-200
    
    
    234,615
    
    
    
    245,384
    
    
    
    212,629
    
    
    
    232,626
   65




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Derivatives.
  66




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TABLE Q
INTEREST RATE SWAPS
(DOLLARS IN THOUSANDS)
 NOTIONAL
    
    MATURITY
    
    
    
    INTEREST RATE
    
    INTEREST RATE
    
    FAIRAMOUNT
    
    DATE
    
    PURPOSE
    
    RECEIVED
    
    PAID
    
    VALUE$550,000
    
    August, 2007
    
    To fix the cost of
short-term
funding sources in a rising
interest rate environment
    
    
    4.750
    %
    
    
    4.430
    %
    
    $
    6,186$550,000
    
    August, 2007
    
    To fix the cost of
short-term
funding sources in a rising
interest rate environment
    
    
    4.750
    %
    
    
    4.443
    %
    
    $
    6,077$100,000
    
    September, 2007
    
    To fix the cost of
short-term
funding sources in a rising
interest rate environment
    
    
    4.890
    %
    
    
    3.688
    %
    
    $
    2,208$100,000
    
    September, 2007
    
    To fix the cost of
short-term
funding sources in a rising
interest rate environment
    
    
    4.890
    %
    
    
    3.655
    %
    
    $
    2,256$200,000
    
    November, 2009
    
    To protect the spread of the
variable IOs
    
    
    4.715
    %
    
    
    3.773
    %
    
    $
    9,808$200,000
    
    November, 2009
    
    To protect the spread of the
variable IOs
    
    
    4.770
    %
    
    
    3.975
    %
    
    $
    8,544
   67




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TABLE R
FAIR VALUE RECONCILIATION
 Quarter ended(In thousands)
    
    March 31, 2006Fair value of contracts outstanding at the beginning of the period
    
    $
    25,241Contracts realized or otherwise settled during the period
    
    
    (7,541
    )Fair value of new contracts entered into during the period
    
    
    Changes in fair values during the period
    
    
    19,371Fair value of contracts outstanding at the end of the period
    
    $
    37,071
 TABLE S  SOURCE OF FAIR VALUE
 (In thousands)
 Payment Due by PeriodMaturity
    
    
    
    
    
    
    
    
    
    
    Maturityless than
    
    
    Maturity
    
    
    Maturity
    
    
    in excess
    
    
    Total FairAs of March 31, 2006
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    of 5 Years
    
    
    ValueSource of Fair ValuePrices actively quoted
    
    $
    1,992
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,992Prices provided by
other external
sources
    
    
    
    
    
    
    16,727
    
    
    
    18,352
    
    
    
    
    
    
    
    35,079$
    1,992
    
    
    $
    16,727
    
    
    $
    18,352
    
    
    $
    
    
    
    $
    37,071
   68




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TABLE T  DERIVATIVE COUNTERPARTY CREDIT EXPOSURE   (Dollars in thousands)
 March 31, 2006Total Exposure
    
    
    
    
    
    
    
    
    
    
    Weighted AverageNumber of
    
    
    
    
    
    
    At Fair
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA-
    
    
    1
    
    
    $
    400,000
    
    
    $
    14,760
    
    
    $
    
    
    
    $
    14,760
    
    
    
    3.62A+
    
    
    2
    
    
    
    1,250,000
    
    
    
    11,625
    
    
    
    
    
    
    
    11,625
    
    
    
    0.85A
    
    
    1
    
    
    
    800,000
    
    
    
    6,819
    
    
    
    
    
    
    
    6,819
    
    
    
    0.96Total Derivatives
    
    
    4
    
    
    $
    2,450,000
    
    
    $
    33,204
    
    
    $
    
    
    
    $
    33,204
    
    
    
    1.34
 
 (1)
    
    Based on the S&P Long Term Issuer Credit Ratings.(2)
    
    Based on legal entities. Affiliated legal entities are reported separately.(3)
    
    For each counterparty, this amount includes derivatives with a positive fair value including the related accrued interest receivable/payable (net). (Dollars in thousands)
 December 31, 2005Total Exposure
    
    
    
    
    
    
    
    
    
    
    Weighted AverageNumber of
    
    
    
    
    
    
    At Fair
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA-
    
    
    1
    
    
    $
    400,000
    
    
    $
    13,939
    
    
    $
    
    
    
    $
    13,939
    
    
    
    3.87A+
    
    
    2
    
    
    
    1,000,000
    
    
    
    1,958
    
    
    
    (3,909
    )
    
    
    (1,951
    )
    
    
    1.24A
    
    
    1
    
    
    
    550,000
    
    
    
    
    
    
    
    (2,864
    )
    
    
    (2,864
    )
    
    
    1.63Subtotal
    
    
    4
    
    
    
    1,950,000
    
    
    $
    15,897
    
    
    $
    (6,773
    )
    
    $
    9,124
    
    
    
    1.89Other derivatives(4):Treasury future options
    
    
    
    
    
    
    12,600,000Total Derivatives
    
    
    
    
    
    $
    14,550,000
 
 (1)
    
    Based on the S&P Long Term Issuer Credit Ratings.(2)
    
    Based on legal entities. Affiliated legal entities are reported separately.(3)
    
    For each counterparty, this amount includes derivatives with a positive fair value including the related accrued interest receivable/payable
(net).(4)
    
    Consists of exchange-traded contracts. Exchange trade derivatives do not measurably increase our exposure to counterparty credit risk because
changes in value of open exchange-traded contracts are settled daily through a financial clearinghouse established by each exchange. Credit Risk
    69




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As of
    
    
    As ofMarch 31,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005Construction loans(1)
    
    $
    817,859
    
    
    $
    795,848Total undisbursed funds under existing commitments
    
    $
    446,316
    
    
    $
    375,694Non-performing construction loans
    
    $
    11,322
    
    
    $
    9,212Net charge offs  Construction loans
    
    $
    
    
    
    $
    4,938Allowance for loan losses  Construction loans
    
    $
    24,547
    
    
    $
    20,748Non-performing construction loans to total construction loans
    
    
    1.38
    %
    
    
    1.16
    %Allowance for loan losses  construction loans to total
construction loans
    
    
    3.00
    %
    
    
    2.61
    %Net charge-offs to total construction loans
    
    
    0.00
    %
    
    
    0.62
    %
 
 (1)
    
    Includes $682.1 million and $670.3 million of construction loans for residential
housing projects as of March 31, 2006 and December 31, 2005, respectively. Also includes $135.8
million and $125.5 million of construction loans for commercial, condominiums and multi-family projects
as of March 31, 2006 and December 31, 2005, respectively. Non-performing assets and allowance for loan and lease losses
    71




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TABLE U
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
 AS OF
    
    
    AS OFMARCH 31, 2006
    
    
    DECEMBER 31, 2005Mortgage banking business:Non-accrual loans:Construction loans
    
    $
    2,498
    
    
    $
    1,557Residential mortgage loans(1)
    
    
    196,585
    
    
    
    162,902Construction loans past due 90 days and still accruing
    
    
    
    
    
    
    170OREO
    
    
    20,532
    
    
    
    16,351Total NPAs of mortgage banking business
    
    
    219,615
    
    
    
    180,980Other lending activities through banking subsidiaries:Non-accrual loans:Construction loans
    
    
    8,824
    
    
    
    7,485Residential mortgage loans
    
    
    20,684
    
    
    
    12,300Commercial real estate loans
    
    
    15,849
    
    
    
    11,517Consumer loans
    
    
    2,140
    
    
    
    1,932Commercial non-real estate loans
    
    
    866
    
    
    
    1,056Lease financing receivable
    
    
    180
    
    
    
    158Total non-accrual loans
    
    
    48,543
    
    
    
    34,448OREO
    
    
    1,472
    
    
    
    1,311Total NPAs of banking subsidiaries
    
    
    50,015
    
    
    
    35,759Total NPAs of Doral Financial (consolidated)
    
    $
    269,630
    
    
    $
    216,739Total NPAs of banking subsidiaries as a percentage
of their loans portfolio, net, and OREO
    
    
    1.24
    %
    
    
    0.97
    %Total NPAs of Doral Financial as a percentage of
consolidated total assets
    
    
    1.51
    %
    
    
    1.25
    %Total non-performing loans to total loans (excluding
GNMA defaulted loans and any delinquent mortgage loan
in which the Company is deemed to have regain control
base on a call option tied to pre-determined interest
rate levels, according to SFAS 140 control provisions)
    
    
    3.09
    %
    
    
    2.57
    %Ratio of allowance for loan and lease losses to total
non-performing loans (excluding non-performing
loans held for sale) at end of period(2)
    
    
    55.39
    %
    
    
    96.87
    %
 
 (1)
    
    Does not include approximately $69.6 million and $74.0
million of GNMA defaulted loans (for which the Company has the option to
buy-back from the pools serviced), included as part of the mortgage loans held
for sale portfolio as of March 31, 2006 and December 31, 2005, respectively.
Also excludes any delinquent mortgage loan in which the Company is deemed to
have regained control based on a call option, exercisable at the option of the
Company, tied to pre-determined interest rate levels. During the first quarter
of 2006, the continued rise in short-term interest rates caused the Companys
call right to become exercisable and $963.2 million of mortgage loans had to
be brought back on the Companys balance sheet as an asset, regardless of
whether the Company intends to exercise the call option.(2)
    
    During the first quarter of 2006, the Company reclassified $876.2 million from its
mortgage loans held for sale portfolio to its loans receivable portfolio, as a result of a review
of its mortgage loans held for sale portfolio. As of March 31, 2006,
there was a $12.1 million discount related with the loans transferred.   72




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TABLE
V
 QUARTER ENDEDALLOWANCE FOR LOAN AND LEASE LOSSES
    
 MARCH 31,(DOLLARS IN THOUSANDS)
    
    2006
    
    
    2005Allowance for Loan and Lease Losses:Balance at beginning of period
    
    $
    35,044
    
    
    $
    20,881Provision (recovery) for loan and lease losses:Construction loans
    
    
    3,799
    
    
    
    486Residential mortgage loans
    
    
    583
    
    
    
    (209
    )Commercial real estate loans
    
    
    (494
    )
    
    
    913Consumer loans
    
    
    980
    
    
    
    2,162Lease financing
    
    
    208
    
    
    
    233Commercial non-real estate loans
    
    
    53
    
    
    
    343Land secured loans
    
    
    44
    
    
    
    119Total provision for loan and lease losses
    
    
    5,173
    
    
    
    4,047Charge  offs:Construction loans
    
    
    
    
    
    
    Residential mortgage loans
    
    
    
    
    
    
    Commercial real estate loans
    
    
    (43
    )
    
    
    (29
    )Consumer loans
    
    
    (772
    )
    
    
    (529
    )Lease financing
    
    
    
    
    
    
    Commercial non-real estate loans
    
    
    (190
    )
    
    
    (177
    )Land secured loans
    
    
    
    
    
    
    Total charge-offs
    
    
    (1,005
    )
    
    
    (735
    )Recoveries:Construction loans
    
    
    
    
    
    
    Residential mortgage loans
    
    
    
    
    
    
    Commercial real estate loans
    
    
    
    
    
    
    Consumer loans
    
    
    54
    
    
    
    56Lease financing
    
    
    
    
    
    
    Commercial non-real estate loans
    
    
    51
    
    
    
    6Land secured loans
    
    
    
    
    
    
    Total recoveries
    
    
    105
    
    
    
    62Net charge-offs
    
    
    (900
    )
    
    
    (673
    )Other
    
    
    13
    
    
    
    Balance at end of period
    
    $
    39,330
    
    
    $
    24,255Allowance for loan and lease losses as a percentage of loans
receivable outstanding at the end of period(1)
    
    
    1.30
    %
    
    
    1.83
    %Net charge-offs to average loans receivable outstanding on an
annualized basis
    
    
    0.12
    %
    
    
    0.15
    %
 
 (1)
    
    Does not include loans secured by real estate of $426.6
million and $490.0 million as of March 31, 2006 and 2005, respectively,
resulting from mortgage transfers from local financial institutions that were
recharacterized as commercial loans for accounting and financial reporting
purposes and for which no allowance for loan losses was provided.  73




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##### Table of Contents



Operational Risk
  Overview of Operational Risk Management
   Internal Control Over Financial Reporting
  Liquidity Risk
   General Business, Economic and Political Conditions
   74




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Control and Procedures
  75




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##### Table of Contents



Changes in Internal Control Over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  76




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
    77




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SIGNATURES
  DORAL FINANCIAL CORPORATION(Registrant)Date:
October 23, 2006
    
    /s/ Glen Wakeman

Glen WakemanChief Executive Officer and PresidentDate:
October 23, 2006
    
    /s/ Lidio Soriano

Lidio SorianoExecutive Vice President andChief Financial Officer
 78




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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.
 79