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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 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, San Juan, Puerto Rico
    
    00920-2717(Address of principal
    
    (Zip Code)executive offices)
 
 
 þ o
  þ o o
 o þ




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DORAL FINANCIAL CORPORATION
INDEX PAGE
 PAGEPART I  FINANCIAL INFORMATIONItem 1  Financial StatementsConsolidated Statements of Financial Condition (Unaudited) as of September 30,
2006 and December 31, 2005
    
    
    4Consolidated Statements of (Loss) Income (Unaudited)  Quarters ended September
30, 2006 and September 30, 2005 and nine months ended September 30, 2006 and
September 30, 2005
    
    
    5Consolidated Statements of Changes in Stockholders Equity (Unaudited)  Nine
months ended September 30, 2006 and September 30, 2005
    
    
    6Consolidated Statements of Comprehensive Income (Loss)(Unaudited)  Quarters
ended September 30, 2006 and September 30, 2005 and nine months ended September 30,
2006 and September 30, 2005
    
    
    7Consolidated Statements of Cash Flows (Unaudited)  Nine months ended September
30, 2006 and September 30, 2005
    
    
    8Notes to Consolidated Financial Statements (Unaudited)
    
    
    9Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    45Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    85Item 4 Controls and Procedures
    
    
    85PART II  OTHER INFORMATION
    
    
    86Item 1 Legal Proceedings
    
    
    86Item 1A Risk Factors
    
    
    86Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    87Item 3 Defaults Upon Senior Securities
    
    
    87Item 4 Submission of Matters to a Vote of Security Holders
    
    
    87Item 5 Other Information
    
    
    88Item 6 Exhibits
    
    
    88SIGNATURES
    
    
    89EX-10.1 EMPLOYMENT AGREEMENT BETWEEN DORAL FINANCIAL CORPORATION AND LESBIA BLANCOEX-10.2 EMPLOYMENT AGREEMENT BETWEEN DORAL FINANCIAL CORPORATION AND CALIXTO GARCIA-VELEZEX-10.3 EMPLOYMENT AGREEMENT BETWEEN DORAL FINANCIAL CORPORATION AND MARANGAL I. DOMINGOZEX-10.4 EMPLOYMENT AGREEMENT BETWEEN DORAL FINANCIAL CORPORATION AND OLGA MAYORAL-WILSONEX-10.5 EMPLOYMENT AGREEMENT BETWEEN DORAL FINANCIAL CORPORATION AND GERARDO LEIVAEX-10.7 EMPLOYMENT AGREEMENT BETWEEN DORAL FINANCIAL CORPORATION AND ENRIQUE R. UBARRI, ESQ.EX-12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESEX-12.2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDSEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
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EXPLANATORY NOTE
  FORWARD LOOKING STATEMENTS
   
    
    risks and uncertainties associated with the Companys need for significant outside financing to meet its liquidity and capital needs, including the refinancing of the Companys $625
million floating rate notes due July 2007;
    
    potential adverse developments in connection with ongoing shareholder litigation
against Doral Financial;
    
    potential adverse developments from ongoing enforcement actions by bank
regulatory agencies;
    
    risk associated with the potential impact of fluctuating
interest rates on the Companys net interest margin resulting
from the current mismatch in its assets and liabilities;
    
    Doral Financials ability to attract new clients and retain existing clients;
    
    Doral Financials ability to retain and attract key employees;
    
    Doral Financials ability to successfully implement new business strategies;
    
    Doral Financials ability to derive sufficient income to realize the benefits of
its deferred tax asset;
    
    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)
 SEPTEMBER 30,
    
    
    DECEMBER 31,2006
    
    
    2005ASSETSCash and due from banks
    
    $
    144,955
    
    
    $
    192,141Money market investments:Money market investments with creditors right to repledge
    
    
    48,031
    
    
    
    141,391Other money market investments
    
    
    807,085
    
    
    
    1,212,970Total money market investments
    
    
    855,116
    
    
    
    1,354,361Pledged investment securities that can be repledged:Securities held for trading, at fair value (includes fair value of IOs of $3,286 in 2006; $11,257
in 2005)
    
    
    77,952
    
    
    
    202,759Securities available for sale, at fair value
    
    
    3,518,530
    
    
    
    4,219,153Securities held to maturity, at amortized cost (market value of $1,854,411 in 2006; $1,659,237 in
2005)
    
    
    1,929,251
    
    
    
    1,698,264Total pledged investment securities that can be repledged
    
    
    5,525,733
    
    
    
    6,120,176Other investment securities:Securities held for trading, at fair value (includes fair value of IOs of $49,249 in 2006; $62,777
in 2005)
    
    
    106,756
    
    
    
    185,917Securities available for sale, at fair value
    
    
    431,107
    
    
    
    412,420Securities held to maturity, at amortized cost (market value of $153,714 in 2006; $392,214 in 2005)
    
    
    159,829
    
    
    
    401,430Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    72,783
    
    
    
    72,205Total other investment securities
    
    
    770,475
    
    
    
    1,071,972Total investment securities
    
    
    6,296,208
    
    
    
    7,192,148Loans:Mortgage loans held for sale, at lower of cost or market, pledged with creditors right to repledge
    
    
    864,498
    
    
    
    3,515,156Other mortgage loans held for sale, at lower of cost or market
    
    
    1,353,995
    
    
    
    1,807,039Loans receivable, net of allowance for loan and lease losses (2006 - $52,918; 2005 - $35,044)
    
    
    3,437,708
    
    
    
    2,477,960Total loans
    
    
    5,656,201
    
    
    
    7,800,155Receivables and mortgage-servicing advances
    
    
    68,317
    
    
    
    66,909Accounts receivable from investment sales
    
    
    2,436
    
    
    
    Accrued interest receivable
    
    
    66,886
    
    
    
    85,338Servicing assets, net
    
    
    178,010
    
    
    
    150,576Premises and equipment, net
    
    
    141,660
    
    
    
    150,450Real estate held for sale, net
    
    
    29,830
    
    
    
    17,662Deferred tax
asset, net
    
    
    242,889
    
    
    
    213,217Other assets
    
    
    87,365
    
    
    
    75,792Total assets
    
    $
    13,769,873
    
    
    $
    17,298,749LIABILITIESDeposits:Non-interest-bearing deposits
    
    $
    338,773
    
    
    $
    425,788Interest-bearing deposits
    
    
    4,038,493
    
    
    
    3,811,481Securities sold under agreements to repurchase
    
    
    5,251,099
    
    
    
    6,054,598Advances from FHLB
    
    
    1,034,500
    
    
    
    969,500Loans payable
    
    
    913,000
    
    
    
    3,578,230Notes payable
    
    
    882,472
    
    
    
    965,621Accrued expenses and other liabilities
    
    
    283,104
    
    
    
    343,722Total liabilities
    
    
    12,741,441
    
    
    
    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; 107,948,236 and 107,930,236 shares issued
and outstanding in 2006 and 2005, respectively
    
    
    107,948
    
    
    
    107,930Additional paid-in capital
    
    
    166,242
    
    
    
    165,609Legal surplus
    
    
    23,596
    
    
    
    23,596Retained earnings
    
    
    308,791
    
    
    
    404,885Accumulated
other comprehensive loss, net of income tax benefit of $2,565 in 2006 and $3,809 in 2005
    
    
    (151,395
    )
    
    
    (125,461
    )Total stockholders equity
    
    
    1,028,432
    
    
    
    1,149,809Total liabilities and stockholders equity
    
    $
    13,769,873
    
    
    $
    17,298,749
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest income:Loans
    
    $
    97,821
    
    
    $
    126,809
    
    
    $
    364,388
    
    
    $
    363,526Mortgage-backed securities
    
    
    45,617
    
    
    
    56,741
    
    
    
    145,613
    
    
    
    169,615Interest-only strips (IOs)
    
    
    1,631
    
    
    
    2,799
    
    
    
    4,956
    
    
    
    8,640Investment securities
    
    
    29,969
    
    
    
    41,324
    
    
    
    89,837
    
    
    
    106,092Other interest-earning assets
    
    
    12,257
    
    
    
    20,847
    
    
    
    38,616
    
    
    
    54,646Total interest income
    
    
    187,295
    
    
    
    248,520
    
    
    
    643,410
    
    
    
    702,519Interest expense:Deposits
    
    
    41,125
    
    
    
    29,326
    
    
    
    111,340
    
    
    
    74,961Securities sold under agreements to repurchase
    
    
    60,375
    
    
    
    73,957
    
    
    
    185,587
    
    
    
    184,050Advances from FHLB
    
    
    11,394
    
    
    
    12,397
    
    
    
    33,181
    
    
    
    37,931Loans payable
    
    
    14,948
    
    
    
    51,051
    
    
    
    110,637
    
    
    
    145,337Notes payable
    
    
    15,305
    
    
    
    15,236
    
    
    
    44,458
    
    
    
    42,293Total interest expense
    
    
    143,147
    
    
    
    181,967
    
    
    
    485,203
    
    
    
    484,572Net interest income
    
    
    44,148
    
    
    
    66,553
    
    
    
    158,207
    
    
    
    217,947Provision for loan and lease losses
    
    
    10,126
    
    
    
    9,370
    
    
    
    21,171
    
    
    
    17,075Net interest income after provision for loan and lease losses
    
    
    34,022
    
    
    
    57,183
    
    
    
    137,036
    
    
    
    200,872Non-interest (loss) income:Net gain (loss) on mortgage loan sales and fees
    
    
    15,597
    
    
    
    18,580
    
    
    
    (25,937
    )
    
    
    41,907Net (loss) gain on securities held for trading, including gains and
losses on the fair value of IOs
    
    
    (21,545
    )
    
    
    28,094
    
    
    
    (39,046
    )
    
    
    (8,333
    )Net (loss) gain on sale of investment securities
    
    
    
    
    
    
    (1,999
    )
    
    
    63
    
    
    
    7,559Servicing (loss) income, net of amortization and impairment/recovery
    
    
    (2,963
    )
    
    
    24,046
    
    
    
    3,600
    
    
    
    12,104Commissions, fees and other income
    
    
    7,392
    
    
    
    10,290
    
    
    
    28,638
    
    
    
    26,235Total non-interest (loss) income
    
    
    (1,519
    )
    
    
    79,011
    
    
    
    (32,682
    )
    
    
    79,472Non-interest expenses:Compensation and benefits
    
    
    21,741
    
    
    
    23,639
    
    
    
    64,366
    
    
    
    72,907Taxes, other than payroll and income taxes
    
    
    2,807
    
    
    
    2,787
    
    
    
    9,379
    
    
    
    7,513Advertising
    
    
    2,593
    
    
    
    4,044
    
    
    
    8,414
    
    
    
    12,972Professional services
    
    
    10,537
    
    
    
    17,985
    
    
    
    43,915
    
    
    
    33,221Communication and information systems
    
    
    4,430
    
    
    
    4,391
    
    
    
    13,985
    
    
    
    13,779Occupancy and other office expenses
    
    
    6,747
    
    
    
    8,320
    
    
    
    20,691
    
    
    
    23,665Depreciation and amortization
    
    
    5,392
    
    
    
    5,424
    
    
    
    17,020
    
    
    
    15,506Other
    
    
    6,071
    
    
    
    3,686
    
    
    
    17,143
    
    
    
    12,755Total non-interest expenses
    
    
    60,318
    
    
    
    70,276
    
    
    
    194,913
    
    
    
    192,318(Loss) Income before income taxes
    
    
    (27,815
    )
    
    
    65,918
    
    
    
    (90,559
    )
    
    
    88,026Income tax (expense) benefit
    
    
    (839
    )
    
    
    (24,989
    )
    
    
    28,073
    
    
    
    (30,655
    )Net (loss) income
    
    $
    (28,654
    )
    
    $
    40,929
    
    
    $
    (62,486
    )
    
    $
    57,371Net (loss) income attributable to common shareholders
    
    $
    (36,978
    )
    
    $
    32,605
    
    
    $
    (87,460
    )
    
    $
    32,397Net (loss) income per common share:Basic
    
    $
    (0.34
    )
    
    $
    0.30
    
    
    $
    (0.81
    )
    
    $
    0.30Diluted
    
    $
    (0.34
    )
    
    $
    0.30
    
    
    $
    (0.81
    )
    
    $
    0.29Dividends per common share
    
    $
    0.00
    
    
    $
    0.18
    
    
    $
    0.08
    
    
    $
    0.54
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(IN THOUSANDS)
(UNAUDITED)
 NINE MONTH PERIOD ENDEDSEPTEMBER 30,2006
    
    
    2005PREFERRED STOCK
    
    $
    573,250
    
    
    $
    573,250COMMON STOCK:Balance at beginning of period
    
    
    107,930
    
    
    
    107,909Shares issued under stock option plan
    
    
    18
    
    
    
    21Balance at end of period
    
    
    107,948
    
    
    
    107,930ADDITIONAL PAID-IN CAPITAL:Balance at beginning of period
    
    
    165,609
    
    
    
    161,639Common shares issued under stock option plan
    
    
    77
    
    
    
    98Stock-based compensation recognized
    
    
    556
    
    
    
    7,282Balance at end of period
    
    
    166,242
    
    
    
    169,019LEGAL SURPLUS
    
    
    23,596
    
    
    
    22,716RETAINED EARNINGS:Balance at beginning of period
    
    
    404,885
    
    
    
    492,786Net (loss) income
    
    
    (62,486
    )
    
    
    57,371Cash dividends declared on common stock
    
    
    (8,634
    )
    
    
    (58,279
    )Cash dividends declared on preferred stock
    
    
    (24,974
    )
    
    
    (24,974
    )Balance at end of period
    
    
    308,791
    
    
    
    466,904ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF
TAX:Balance at beginning of period
    
    
    (125,461
    )
    
    
    (73,683
    )Other comprehensive loss, net of deferred tax
    
    
    (25,934
    )
    
    
    (61,338
    )Balance at end of period
    
    
    (151,395
    )
    
    
    (135,021
    )Total stockholders equity
    
    $
    1,028,432
    
    
    $
    1,204,798
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net (loss) income
    
    $
    (28,654
    )
    
    $
    40,929
    
    
    $
    (62,486
    )
    
    $
    57,371Other comprehensive income (loss), before tax:Unrealized gains (losses) on securities arising during the period
    
    
    106,185
    
    
    
    (96,323
    )
    
    
    (24,660
    )
    
    
    (69,237
    )Amortization of unrealized loss on securities reclassified to
held to maturity
    
    
    11
    
    
    
    10
    
    
    
    33
    
    
    
    32Reclassification of realized losses (gains) included in net income
    
    
    
    
    
    
    1,999
    
    
    
    (63
    )
    
    
    (7,559
    )Other comprehensive income (loss), before tax
    
    
    106,196
    
    
    
    (94,314
    )
    
    
    (24,690
    )
    
    
    (76,764
    )Income tax (expense) benefit related to items of other comprehensive
income (loss)
    
    
    (6,961
    )
    
    
    17,639
    
    
    
    (1,244
    )
    
    
    15,426Other comprehensive income (loss)
    
    
    99,235
    
    
    
    (76,675
    )
    
    
    (25,934
    )
    
    
    (61,338
    )Comprehensive income (loss), net of tax
    
    $
    70,581
    
    
    $
    (35,746
    )
    
    $
    (88,420
    )
    
    $
    (3,967
    )
  7




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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 NINE MONTH PERIOD ENDEDSEPTEMBER 30,2006
    
    
    2005Cash flows from operating activities:Net (loss) income
    
    $
    (62,486
    )
    
    $
    57,371Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:Stock-based compensation recognized
    
    
    556
    
    
    
    7,282Depreciation and amortization
    
    
    17,020
    
    
    
    15,506Amortization and impairment of servicing assets
    
    
    27,481
    
    
    
    17,021Deferred tax (benefit) provision
    
    
    (30,921
    )
    
    
    16,607Provision for loan and lease losses
    
    
    21,171
    
    
    
    17,075Amortization of premium and accretion of discount on loans, investment securities and debt
    
    
    3,457
    
    
    
    16,311Net unrealized loss on mortgage loans held for sale transferred to loans receivable
    
    
    17,300
    
    
    
    Origination and purchases of mortgage loans held for sale
    
    
    (1,592,665
    )
    
    
    (3,909,319
    )Principal repayment and sales of mortgage loans held for sale
    
    
    3,679,523
    
    
    
    2,477,706Loss (gain) on sale of securities
    
    
    5,416
    
    
    
    (17,845
    )Unrealized loss on securities held for trading
    
    
    2,706
    
    
    
    1,690Purchases of securities held for trading
    
    
    
    
    
    
    (2,159,515
    )Principal repayment and sales of trading securities
    
    
    332,022
    
    
    
    2,772,691Amortization and net loss in the fair value of IOs
    
    
    55,878
    
    
    
    50,091Unrealized gain on derivative instruments
    
    
    (6,776
    )
    
    
    (54,190
    )Net proceeds on derivative instruments
    
    
    7,541
    
    
    
    20,463(Increase) decrease in receivables and mortgage servicing advances
    
    
    (16,328
    )
    
    
    22,890Decrease (increase) in accrued interest receivable
    
    
    18,452
    
    
    
    (3,434
    )Increase in other assets
    
    
    (1,675
    )
    
    
    (20,136
    )(Decrease) increase in accrued expenses and other liabilities
    
    
    (80,037
    )
    
    
    48,189Total adjustments
    
    
    2,460,121
    
    
    
    (680,917
    )Net cash provided by (used in) operating activities
    
    
    2,397,635
    
    
    
    (623,546
    )Cash flows from investing activities:Purchases of securities available for sale
    
    
    (46,023
    )
    
    
    (5,595,630
    )Principal repayment and sales of securities available for sale
    
    
    689,029
    
    
    
    4,226,435Purchases of securities held to maturity
    
    
    (13,000
    )
    
    
    (100,000
    )Principal repayment and maturities of securities held to maturity
    
    
    34,605
    
    
    
    297,081(Increase) decrease in FHLB stock
    
    
    (578
    )
    
    
    13,500Origination of loans receivable
    
    
    (701,781
    )
    
    
    (849,297
    )Principal repayment of loans receivable
    
    
    472,248
    
    
    
    364,550Purchases of servicing assets
    
    
    (210
    )
    
    
    (3,404
    )Purchases of premises and equipment
    
    
    (8,230
    )
    
    
    (20,367
    )Proceeds from sales of real estate held for sale
    
    
    10,791
    
    
    
    34,149Net cash provided by (used in) investing activities
    
    
    436,851
    
    
    
    (1,632,983
    )Cash flows from financing activities:Increase in deposits
    
    
    139,997
    
    
    
    462,245(Decrease) increase in securities sold under agreements to repurchase
    
    
    (803,499
    )
    
    
    1,324,750Proceeds from advances from FHLB
    
    
    100,000
    
    
    
    50,000Repayment of advances from FHLB
    
    
    (35,000
    )
    
    
    (265,000
    )(Decrease) increase in loans payable:Decrease in warehousing lines and other credit facilities
    
    
    
    
    
    
    (238,924
    )Proceeds from secured borrowings, pledged to creditors
    
    
    
    
    
    
    880,746Repayment of secured borrowings, pledged to creditors
    
    
    (2,665,230
    )
    
    
    (517,582
    )Repayment of notes payable
    
    
    (82,375
    )
    
    
    (14,994
    )Consent fees paid
    
    
    (1,297
    )
    
    
    Issuance of common stock, net
    
    
    95
    
    
    
    119Dividends paid
    
    
    (33,608
    )
    
    
    (83,253
    )Net cash (used in) provided by financing activities
    
    
    (3,380,917
    )
    
    
    1,598,107Net decrease in cash and cash equivalents
    
    $
    (546,431
    )
    
    $
    (658,422
    )Cash and cash equivalents at beginning of period
    
    
    1,546,502
    
    
    
    2,535,726Cash and cash equivalents at the end of period
    
    $
    1,000,071
    
    
    $
    1,877,304Cash and cash equivalents includes:Cash and due from banks
    
    $
    144,955
    
    
    $
    81,183Money market investments
    
    
    855,116
    
    
    
    1,796,121$
    1,000,071
    
    
    $
    1,877,304Supplemental schedule of non-cash activities:Loan securitizations
    
    $
    192,054
    
    
    $
    978,775Loans foreclosed
    
    $
    17,931
    
    
    $
    35,142Reclassification of mortgage loans held for sale to loans receivable
    
    $
    885,910
    
    
    $
    Capitalization of servicing assets
    
    $
    48,720
    
    
    $
    32,936Capitalization of IOs from loan sales
    
    $
    
    
    
    $
    10,981Supplemental information for cash flows:Cash used to pay interest
    
    $
    501,318
    
    
    $
    494,157Cash used to pay income taxes
    
    $
    4,469
    
    
    $
    39,748
  8




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##### Table of Contents



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 Consolidated 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) has 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 Consolidated Statements of Income. Previously, prepayment fee
income from the Companys loan portfolio was included as part of servicing income. These
amounts were revised 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 Consolidated Statements 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
Consolidated Statements of Income and Consolidated Statements of Cash Flows in any prior
period.b.
    
    The results of operations for the quarter and nine month period ended September 30, 2006 are
not necessarily indicative of the results to be expected for the full year.c.
    
    At September 30, 2006, escrow funds and custodial accounts included approximately $99.1
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 $50.4
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 $21.3 million, respectively, as of September 30, 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 Ended
    
    
    Nine Month Period EndedSeptember 30,
    
    
    September 30,(Dollars in thousands, except per share amounts)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net (Loss) Income:Net (loss) income
    
    $
    (28,654
    )
    
    $
    40,929
    
    
    $
    (62,486
    )
    
    $
    57,371Convertible preferred stock dividend
    
    
    (4,096
    )
    
    
    (4,096
    )
    
    
    (12,290
    )
    
    
    (12,290
    )Nonconvertible preferred stock dividend
    
    
    (4,228
    )
    
    
    (4,228
    )
    
    
    (12,684
    )
    
    
    (12,684
    )Net (loss) income attributable to common shareholders.
    
    $
    (36,978
    )
    
    $
    32,605
    
    
    $
    (87,460
    )
    
    $
    32,937Weighted-Average Shares(1):Basic weighted-average number of common shares
outstanding (2)
    
    
    107,948,236
    
    
    
    107,930,236
    
    
    
    107,938,807
    
    
    
    107,925,959Average potential common shares(3)
    
    
    
    
    
    
    1,435,617
    
    
    
    
    
    
    
    2,224,044Diluted weighted-average number of common shares
outstanding
    
    
    107,948,236
    
    
    
    109,365,853
    
    
    
    107,938,807
    
    
    
    110,150,003Net (Loss) Income per Common Share:Basic
    
    $
    (0.34
    )
    
    $
    0.30
    
    
    $
    (0.81
    )
    
    $
    0.30Diluted
    
    $
    (0.34
    )
    
    $
    0.30
    
    
    $
    (0.81
    )
    
    $
    0.29
 
 (1)
    
    For the quarter and nine month period ended September 30, 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, unvested shares of restricted stock and unvested
restricted stock units 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, unvested shares of restricted stock and unvested restricted stock units 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. As of September 30, 2006,there were 2,123,439 outstanding stock options that were excluded from the computation of diluted
earnings per common share for the quarter and nine month period ended September 30, 2006 because the Company reported a net loss for such periods. Also, as of
September 30, 2006, there were 50,000 shares of restricted stock and 200,000 restricted stock units that were excluded from the computation of diluted earnings
per common share for the quarter and nine month period ended September 30, 2006 because the Company reported a net loss for both periods. For the quarter and
nine month period ended September 30, 2005, there were 3,327,277 and 1,560,000 weighted-average antidilutive stock options, respectively, that were excluded from
the computation of diluted earnings per common share since their inclusion would have an antidilutive effect. 10




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##### Table of Contents



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 Ended
    
    
    Nine Month Period EndedSeptember 30,
    
    
    September 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Employee costs, gross
    
    $
    28,637
    
    
    $
    34,544
    
    
    $
    88,748
    
    
    $
    104,412Deferred costs pursuant to SFAS 91
    
    
    (6,896
    )
    
    
    (10,905
    )
    
    
    (24,382
    )
    
    
    (31,505
    )Employee cost, net
    
    $
    21,741
    
    
    $
    23,639
    
    
    $
    64,366
    
    
    $
    72,907Other expenses, gross
    
    $
    7,084
    
    
    $
    5,845
    
    
    $
    20,381
    
    
    $
    19,171Deferred costs pursuant to SFAS 91
    
    
    (1,013
    )
    
    
    (2,159
    )
    
    
    (3,238
    )
    
    
    (6,416
    )Other expenses, net
    
    $
    6,071
    
    
    $
    3,686
    
    
    $
    17,143
    
    
    $
    12,755
 As of September 30, 2006, the Company had a net deferred origination fee on mortgage loans
held for sale and loans receivable amounting to approximately $5.9 million ($30.8 million as
of December 31, 2005) and $9.6 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.During 2006, the Company decided to reduce the operations of Doral Securities and sold
substantially all of its investment securities. The Company is still examining the future
viability of this operation. During 2006, the Company also decided to consolidate all of
its mortgage brands into one Doral brand, thus limiting the operations of the mortgage
banking subsidiaries SANA and Centro Hipotecario de Puerto Rico, Inc.The following tables present net interest income (loss), 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)
 MortgageBanking andRisk
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentManagement
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations*
    
    TotalsQUARTER ENDED SEPTEMBER 30, 2006(In thousands)Net interest (loss) income
    
    $
    (3,236
    )
    
    
    46,266
    
    
    
    
    
    
    
    
    
    
    
    1,118
    
    
    $
    44,148Non-interest (loss) income
    
    $
    (4,417
    )
    
    
    11,645
    
    
    
    149
    
    
    
    2,180
    
    
    
    (11,076
    )
    
    $
    (1,519
    )Net (loss) income
    
    $
    (36,464
    )
    
    
    16,489
    
    
    
    (135
    )
    
    
    823
    
    
    
    (9,367
    )
    
    $
    (28,654
    )Identifiable assets
    
    $
    2,803,755
    
    
    
    11,272,925
    
    
    
    1,953
    
    
    
    19,281
    
    
    
    (328,041
    )
    
    $
    13,769,873QUARTER ENDED SEPTEMBER 30, 2005Net interest income
    
    $
    21,474
    
    
    
    44,001
    
    
    
    488
    
    
    
    
    
    
    
    590
    
    
    $
    66,553Non-interest income
    
    $
    69,163
    
    
    
    7,752
    
    
    
    379
    
    
    
    3,294
    
    
    
    (1,577
    )
    
    $
    79,011Net income
    
    $
    28,681
    
    
    
    9,720
    
    
    
    369
    
    
    
    1,750
    
    
    
    409
    
    
    $
    40,929Identifiable assets
    
    $
    7,572,254
    
    
    
    11,768,867
    
    
    
    132,725
    
    
    
    13,796
    
    
    
    (288,200
    )
    
    $
    19,199,442MortgageBanking andRisk
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentManagement
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations*
    
    Totals(In thousands)
    
    NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006Net interest income
    
    $
    4,480
    
    
    
    149,942
    
    
    
    587
    
    
    
    
    
    
    
    3,198
    
    
    $
    158,207Non-interest (loss)
income
    
    $
    (38,568
    )
    
    
    13,959
    
    
    
    (458
    )
    
    
    6,945
    
    
    
    (14,560
    )
    
    $
    (32,682
    )Net (loss) income
    
    $
    (105,950
    )
    
    
    50,307
    
    
    
    (512
    )
    
    
    3,238
    
    
    
    (9,569
    )
    
    $
    (62,486
    )Identifiable assets
    
    $
    2,803,755
    
    
    
    11,272,925
    
    
    
    1,953
    
    
    
    19,281
    
    
    
    (328,041
    )
    
    $
    13,769,873NINE MONTH PERIOD ENDED SEPTEMBER 30, 2005Net interest income
    
    $
    69,615
    
    
    
    142,829
    
    
    
    1,886
    
    
    
    2,001
    
    
    
    1,616
    
    
    $
    217,947Non-interest income
    
    $
    56,183
    
    
    
    47,048
    
    
    
    2,458
    
    
    
    8,905
    
    
    
    (35,122
    )
    
    $
    79,472Net income
    
    $
    1,534
    
    
    
    76,986
    
    
    
    2,213
    
    
    
    6,676
    
    
    
    (30,038
    )
    
    $
    57,371Identifiable assets
    
    $
    7,572,254
    
    
    
    11,768,867
    
    
    
    132,725
    
    
    
    13,796
    
    
    
    (288,200
    )
    
    $
    19,199,442
 
 *
    
    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. During the quarter and nine month period ended September 30,
2006 and 2005, the intersegment eliminations for non-interest income and net income include dividends
paid by Doral Securities to the parent company. For the quarter and nine month period
ended September 30, 2005, the intersegment eliminations for non-interest income
and net income
also included dividends paid by Doral Agency to the parent company. 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)
 Puerto Rico
    
    Mainland US
    
    Eliminations
    
    Totals(In thousands)
    
    QUARTER ENDED SEPTEMBER 30, 2006Net interest income
    
    $
    38,221
    
    
    
    5,893
    
    
    
    34
    
    
    $
    44,148Non-interest (loss) income
    
    $
    (1,859
    )
    
    
    452
    
    
    
    (112
    )
    
    $
    (1,519
    )Net (loss) income
    
    $
    (29,654
    )
    
    
    1,000
    
    
    
    
    
    
    $
    (28,654
    )Identifiable assets
    
    $
    13,193,524
    
    
    
    673,484
    
    
    
    (97,135
    )
    
    $
    13,769,873QUARTER ENDED SEPTEMBER 30, 2005Net interest income
    
    $
    61,400
    
    
    
    5,116
    
    
    
    37
    
    
    $
    66,553Non-interest income
    
    $
    78,641
    
    
    
    713
    
    
    
    (343
    )
    
    $
    79,011Net income
    
    $
    40,110
    
    
    
    1,043
    
    
    
    (224
    )
    
    $
    40,929Identifiable assets
    
    $
    18,588,066
    
    
    
    696,417
    
    
    
    (85,041
    )
    
    $
    19,199,442Puerto Rico
    
    Mainland US
    
    Eliminations
    
    Totals(In thousands)
    
    NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006Net interest income
    
    $
    140,435
    
    
    
    17,684
    
    
    
    88
    
    
    $
    158,207Non-interest (loss) income
    
    $
    (33,371
    )
    
    
    1,011
    
    
    
    (322
    )
    
    $
    (32,682
    )Net (loss) income
    
    $
    (65,964
    )
    
    
    3,479
    
    
    
    (1
    )
    
    $
    (62,486
    )Identifiable assets
    
    $
    13,193,524
    
    
    
    673,484
    
    
    
    (97,135
    )
    
    $
    13,769,873NINE MONTH PERIOD ENDED SEPTEMBER 30, 2005Net interest income
    
    $
    203,891
    
    
    
    13,930
    
    
    
    126
    
    
    $
    217,947Non-interest income
    
    $
    77,874
    
    
    
    2,900
    
    
    
    (1,302
    )
    
    $
    79,472Net income
    
    $
    55,257
    
    
    
    3,062
    
    
    
    (948
    )
    
    $
    57,371Identifiable assets
    
    $
    18,588,066
    
    
    
    696,417
    
    
    
    (85,041
    )
    
    $
    19,199,442
 13




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  MortgageBankingand Risk(In thousands)
    
    Management
    
    
    BankingQUARTER ENDEDSEPTEMBER 30, 2006Net gain on mortgage loan sales and fees
    
    $
    7,021
    
    
    $
    9,541Investment activities
    
    
    (18,166
    )
    
    
    (3,509
    )Servicing (loss) income
    
    
    (1,867
    )
    
    
    215Commissions, fees and other income
    
    
    8,595
    
    
    
    5,398Total non-interest (loss) income
    
    $
    (4,417
    )
    
    $
    11,645QUARTER ENDEDSEPTEMBER 30, 2005Net gain on mortgage loan sales and fees
    
    $
    14,296
    
    
    $
    4,547Investment activities
    
    
    29,681
    
    
    
    (3,612
    )Servicing income
    
    
    24,668
    
    
    
    2Commissions, fees and other income
    
    
    518
    
    
    
    6,815Total non-interest income
    
    $
    69,163
    
    
    $
    7,752MortgageBankingand RiskManagement
    
    
    BankingNINE MONTH PERIOD(In thousands)
    
    ENDED SEPTEMBER 30, 2006Net loss on mortgage loan sales and fees
    
    $
    (12,220
    )
    
    $
    (12,206
    )Investment activities
    
    
    (45,965
    )
    
    
    7,642Servicing income
    
    
    6,922
    
    
    
    264Commissions, fees and other income
    
    
    12,695
    
    
    
    18,259Total non-interest (loss) income
    
    $
    (38,568
    )
    
    $
    13,959NINE MONTH PERIODENDED SEPTEMBER 30, 2005Net gain on mortgage loan sales and fees
    
    $
    6,400
    
    
    $
    34,478Investment activities
    
    
    2,183
    
    
    
    (3,891
    )Servicing income
    
    
    13,989
    
    
    
    6Commissions, fees and other income
    
    
    33,611
    
    
    
    16,455Total non-interest income
    
    $
    56,183
    
    
    $
    47,048
 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.
 14




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1.
    
    The following table summarizes Doral Financials holdings of securities held for
trading as of September 30, 2006 and December 31, 2005.
 SECURITIES HELD FOR TRADING
 SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2006
    
    
    2005Mortgage-backed securities:GNMA exempt
    
    $
    61,927
    
    
    $
    206,406GNMA taxable
    
    
    31,125
    
    
    
    43,155CMO certificates
    
    
    1,842
    
    
    
    1,846FHLMC and FNMA
    
    
    9,514
    
    
    
    21,305Variable interest-only strips
    
    
    51,424
    
    
    
    72,550Fixed interest-only strips
    
    
    1,111
    
    
    
    1,484FHLB Notes
    
    
    
    
    
    
    11,156Puerto Rico government and agency securities
    
    
    
    
    
    
    5,510Derivatives(1)
    
    
    27,742
    
    
    
    25,241Other
    
    
    23
    
    
    
    23Total
    
    $
    184,708
    
    
    $
    388,676
 
 (1)
    
    Doral Financial uses derivatives to manage its exposure to interest
rate risk caused by changes in interest rates. Derivatives generally 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 amounting to $3.3 million at September 30, 2006 are recorded
as part of accrued expenses and other liabilities. The gross notional amount of derivatives totaled $7.4 billion as
of September 30, 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 September 30, 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. 15




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES AVAILABLE FOR SALE
AS OF SEPTEMBER 30, 2006
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGE(Dollars in thousands)
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    2,174,908
    
    
    $
    18
    
    
    $
    62,588
    
    
    $
    2,112,338
    
    
    
    4.71
    %FHLMC and FNMADue over ten years
    
    
    886,306
    
    
    
    
    
    
    
    21,992
    
    
    
    864,314
    
    
    
    5.32
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    111,969
    
    
    
    
    
    
    
    1,895
    
    
    
    110,074
    
    
    
    5.50
    %FNMA NOTESDue from one to five years
    
    
    46,012
    
    
    
    
    
    
    
    274
    
    
    
    45,738
    
    
    
    4.60
    %U.S. TREASURYDue within a year
    
    
    100,102
    
    
    
    
    
    
    
    1,133
    
    
    
    98,969
    
    
    
    1.97
    %Due from five to ten years
    
    
    761,496
    
    
    
    
    
    
    
    43,292
    
    
    
    718,204
    
    
    
    3.65
    %$
    4,080,793
    
    
    $
    18
    
    
    $
    131,174
    
    
    $
    3,949,637
    
    
    
    4.60
    %
 SECURITIES AVAILABLE FOR SALE
AS OF DECEMBER 31, 2005
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGE(Dollars in thousands)
    
    COST
    
    
    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
    %
 16




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 3.
    
    The following tables summarize the amortized cost, gross unrealized gains and
losses, approximate market value, weighted-average yield and contractual maturities of
securities held to maturity as of September 30, 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.
 17




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES HELD TO MATURITY
AS OF SEPTEMBER 30, 2006
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGE(Dollars in thousands)
    
    COST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue from one to five years
    
    $
    670
    
    
    $
    18
    
    
    $
    
    
    
    $
    688
    
    
    
    6.00
    %Due over ten years
    
    
    3,742
    
    
    
    126
    
    
    
    
    
    
    
    3,868
    
    
    
    6.82
    %FHLMC and FNMADue over ten years
    
    
    303,075
    
    
    
    2,189
    
    
    
    1,151
    
    
    
    304,113
    
    
    
    6.05
    %CMO CERTIFICATESDue over ten years
    
    
    8,580
    
    
    
    
    
    
    
    557
    
    
    
    8,023
    
    
    
    5.80
    %DEBT SECURITIESFHLB NOTESDue within a year
    
    
    100,000
    
    
    
    
    
    
    
    865
    
    
    
    99,135
    
    
    
    2.88
    %Due from one to five years
    
    
    100,715
    
    
    
    
    
    
    
    2,294
    
    
    
    98,421
    
    
    
    4.16
    %Due from five to ten years
    
    
    50,000
    
    
    
    
    
    
    
    625
    
    
    
    49,375
    
    
    
    4.13
    %Due over ten years
    
    
    273,594
    
    
    
    
    
    
    
    14,347
    
    
    
    259,247
    
    
    
    5.10
    %FHLB ZERO COUPONDue over ten years
    
    
    126,531
    
    
    
    
    
    
    
    5,619
    
    
    
    120,912
    
    
    
    6.50
    %FHLMC ZERO COUPONDue over ten years
    
    
    266,043
    
    
    
    
    
    
    
    9,048
    
    
    
    256,995
    
    
    
    5.86
    %FHLMC and FNMA NOTESDue over ten years
    
    
    149,989
    
    
    
    
    
    
    
    4,068
    
    
    
    145,921
    
    
    
    5.65
    %P.R. HOUSING BANKDue within a year
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    6.00
    %Due over ten years
    
    
    7,235
    
    
    
    
    
    
    
    
    
    
    
    7,235
    
    
    
    5.72
    %U.S. TREASURYDue from five to ten years
    
    
    201,238
    
    
    
    
    
    
    
    12,269
    
    
    
    188,969
    
    
    
    3.52
    %Due over ten years
    
    
    472,718
    
    
    
    1,574
    
    
    
    33,550
    
    
    
    440,742
    
    
    
    4.32
    %OTHERDue within a year
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    5.30
    %Due from one to five years
    
    
    11,925
    
    
    
    
    
    
    
    219
    
    
    
    11,706
    
    
    
    4.47
    %Due over ten years
    
    
    8,000
    
    
    
    
    
    
    
    250
    
    
    
    7,750
    
    
    
    5.61
    %$
    2,089,080
    
    
    $
    3,907
    
    
    $
    84,862
    
    
    $
    2,008,125
    
    
    
    4.96
    %
 18




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES HELD TO MATURITY
AS OF DECEMBER 31, 2005
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGE(Dollars in thousands)
    
    COST
    
    
    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 September 30, 2006 and December 31, 2005.
 19




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES
AVAILABLE FOR SALE
(As of September 30, 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
    
    $
    870
    
    
    $
    16
    
    
    $
    2,110,256
    
    
    $
    62,572
    
    
    $
    2,111,126
    
    
    $
    62,588FHLMC and FNMA
    
    
    251,283
    
    
    
    3,550
    
    
    
    613,031
    
    
    
    18,442
    
    
    
    864,314
    
    
    
    21,992Debt SecuritiesFHLB Notes
    
    
    
    
    
    
    
    
    
    
    110,074
    
    
    
    1,895
    
    
    
    110,074
    
    
    
    1,895FNMA Notes
    
    
    45,738
    
    
    
    274
    
    
    
    
    
    
    
    
    
    
    
    45,738
    
    
    
    274U.S. Treasury
    
    
    
    
    
    
    
    
    
    
    817,173
    
    
    
    44,425
    
    
    
    817,173
    
    
    
    44,425$
    297,891
    
    
    $
    3,840
    
    
    $
    3,650,534
    
    
    $
    127,334
    
    
    $
    3,948,425
    
    
    $
    131,174
 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
    20




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES
HELD TO MATURITY
(As of September 30, 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
    
    $
    41,399
    
    
    $
    1,151
    
    
    $
    
    
    
    $
    
    
    
    $
    41,399
    
    
    $
    1,151CMO Certificates
    
    
    875
    
    
    
    13
    
    
    
    6,972
    
    
    
    544
    
    
    
    7,847
    
    
    
    557Debt SecuritiesFHLB Notes
    
    
    49,375
    
    
    
    625
    
    
    
    456,803
    
    
    
    17,506
    
    
    
    506,178
    
    
    
    18,131FHLB Zero Coupon
    
    
    
    
    
    
    
    
    
    
    120,912
    
    
    
    5,619
    
    
    
    120,912
    
    
    
    5,619FHLMC Zero Coupon
    
    
    76,542
    
    
    
    1,351
    
    
    
    180,453
    
    
    
    7,697
    
    
    
    256,995
    
    
    
    9,048FHLMC and FNMA Notes
    
    
    48,764
    
    
    
    1,236
    
    
    
    97,157
    
    
    
    2,832
    
    
    
    145,921
    
    
    
    4,068U.S. Treasury
    
    
    216,063
    
    
    
    19,355
    
    
    
    351,016
    
    
    
    26,464
    
    
    
    567,079
    
    
    
    45,819Other
    
    
    12,687
    
    
    
    313
    
    
    
    3,744
    
    
    
    156
    
    
    
    16,431
    
    
    
    469$
    445,705
    
    
    $
    24,044
    
    
    $
    1,217,057
    
    
    $
    60,818
    
    
    $
    1,662,762
    
    
    $
    84,862
 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
 As of September 30, 2006, securities held to maturity included a net unrealized loss of
$81.0 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 2006 resulted in an increase in the net adverse unrealized loss position as of
September 30, 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 September 30, 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.i.
    
    The following table sets forth certain information regarding Doral Financials mortgage loans
held for sale as of the dates indicated:
 21




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 MORTGAGE LOANS HELD FOR SALE
 (In thousands)
    
    SEPTEMBER 30, 2006
    
    
    DECEMBER 31, 2005Conventional single family residential loans
    
    $
    1,674,984
    
    
    $
    4,555,932FHA/VA loans
    
    
    111,890
    
    
    
    162,338Construction and commercial real estate loans
    
    
    431,619
    
    
    
    603,925$
    2,218,493
    
    
    $
    5,322,195
 Mortgage loans held for sale decreased from $5.3 billion as of December 31, 2005 to $2.2
billion as of September 30, 2006. The decrease reflects the sale during the second quarter
of 2006 of approximately $2.4 billion in loans as part of a restructuring transaction with a
local financial institution.During 2006, the Company performed a review of its mortgage loans held for sale 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, the Company
reassessed its plan to sell certain of its mortgage portfolio classified as held for sale,
specifically loans with low FICO scores or with documentation and compliance issues, and
during the first nine months of 2006 transferred $885.9 million from the mortgage loans held
for sale portfolio to its loan receivable portfolio. This transfer resulted in a $17.3
million charge against earnings for the first nine months of 2006. As
previously reported, during the second quarter of 2006, a market
value adjustment of $17.6 million was taken as a charge against
earnings related to the Company's mortgage loans held for sale
portfolio that was reversed during the third quarter of 2006 due to
decreases in long-term interest rates.At September 30, 2006 and December 31, 2005, loans held for sale for which the creditor has
the right to repledge the collateral amounted to $864.5 million and $3.5 billion,
respectively. Such loans were pledged to secure financing agreements with local financial
institutions.Also, at September 30, 2006 and December 31, 2005, the mortgage loans held for sale
portfolio includes $90.2 million and $74.0 million, respectively, related to defaulted loans
backing GNMA securities for which the Company has an unconditional buy-back option. Payment
on these loans is guaranteed by FHA.
 22




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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
 SEPTEMBER 30, 2006
    
    
    DECEMBER 31, 2005(Dollars in thousands)
    
    AMOUNT
    
    
    PERCENT
    
    
    AMOUNT
    
    
    PERCENTConstruction loans(1)
    
    $
    834,288
    
    
    
    24
    %
    
    $
    795,848
    
    
    
    31
    %Residential mortgage loans(2)
    
    
    1,448,940
    
    
    
    41
    %
    
    
    514,164
    
    
    
    20
    %Commercial  secured by real estate(3)
    
    
    889,233
    
    
    
    25
    %
    
    
    891,795
    
    
    
    35
    %Consumer  other:Personal loans
    
    
    30,431
    
    
    
    1
    %
    
    
    30,453
    
    
    
    1
    %Auto loans
    
    
    491
    
    
    
    0
    %
    
    
    760
    
    
    
    0
    %Credit cards
    
    
    19,988
    
    
    
    1
    %
    
    
    19,278
    
    
    
    1
    %Overdrawn checking accounts
    
    
    436
    
    
    
    0
    %
    
    
    448
    
    
    
    0
    %Revolving lines of credit
    
    
    28,311
    
    
    
    1
    %
    
    
    30,525
    
    
    
    1
    %Lease financing receivables
    
    
    44,983
    
    
    
    1
    %
    
    
    44,636
    
    
    
    2
    %Commercial non-real estate
    
    
    161,666
    
    
    
    5
    %
    
    
    142,909
    
    
    
    6
    %Loans on savings deposits
    
    
    14,119
    
    
    
    0
    %
    
    
    15,082
    
    
    
    1
    %Land secured
    
    
    45,408
    
    
    
    1
    %
    
    
    50,358
    
    
    
    2
    %Loans receivable, gross
    
    
    3,518,294
    
    
    
    100
    %
    
    
    2,536,256
    
    
    
    100
    %Less:Discount on loans transferred(2)
    
    
    (11,700
    )
    
    
    
    
    
    
    Unearned interest and deferred
loan fees, net
    
    
    (15,968
    )
    
    
    
    
    
    
    (23,252
    )Allowance for loan and lease losses
    
    
    (52,918
    )
    
    
    
    
    
    
    (35,044
    )(80,586
    )
    
    
    
    
    
    
    (58,296
    )Loans receivable, net
    
    $
    3,437,708
    
    
    
    
    
    
    $
    2,477,960
 
 (1)
    
    Includes $690.7 million and $670.3 million of construction loans for residential housing
projects as of September 30, 2006 and December 31, 2005, respectively. Also includes $143.6 million and $125.5
million of construction loans for commercial, condominiums and multifamily projects as of September 30, 2006 and
December 31, 2005, respectively.(2)
    
    During 2006, the Company reclassified $885.9 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 $405.0 million and $448.0 million of commercial loans collateralized with 1-to-4
residential mortgage loans, as of September 30, 2006 and December 31, 2005, respectively.    23




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 ALLOWANCE FOR LOAN AND LEASE LOSSES
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(DOLLARS IN THOUSANDS)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    44,145
    
    
    $
    22,672
    
    
    $
    35,044
    
    
    $
    20,881Provision for loan and lease losses
    
    
    10,126
    
    
    
    9,370
    
    
    
    21,171
    
    
    
    17,075Charge-offs
    
    
    (1,460
    )
    
    
    (1,293
    )
    
    
    (3,616
    )
    
    
    (7,437
    )Recoveries
    
    
    200
    
    
    
    133
    
    
    
    399
    
    
    
    415Other
    
    
    (93
    )
    
    
    (24
    )
    
    
    (80
    )
    
    
    (76
    )Balance at end of period
    
    $
    52,918
    
    
    $
    30,858
    
    
    $
    52,918
    
    
    $
    30,858
  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 September 30, 2006, the
outstanding principal balance of the bonds was $50.0 million with fixed interest rates,
ranging from 6.25% to 6.90%, and maturities ranging from December 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 ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    196,971
    
    
    $
    142,955
    
    
    $
    156,812
    
    
    $
    136,024Capitalization of servicing assets
    
    
    1,858
    
    
    
    15,093
    
    
    
    48,720
    
    
    
    32,936Net servicing assets recognized
as part of the mortgage loan sale
transactions restructured
    
    
    
    
    
    
    
    
    
    
    5,985
    
    
    
    Rights (transferred) purchased
    
    
    (6
    )
    
    
    1,184
    
    
    
    210
    
    
    
    3,404Amortization
    
    
    (9,572
    )
    
    
    (6,865
    )
    
    
    (22,476
    )
    
    
    (19,997
    )Balance before valuation
allowance at end of period
    
    
    189,251
    
    
    
    152,367
    
    
    
    189,251
    
    
    
    152,367Valuation allowance for temporary
impairment
    
    
    (11,241
    )
    
    
    (9,462
    )
    
    
    (11,241
    )
    
    
    (9,462
    )Balance at end of period
    
    $
    178,010
    
    
    $
    142,905
    
    
    $
    178,010
    
    
    $
    142,905
  24




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
   QUARTER ENDED
    
    
    NINE MONTH PERIOD ENDEDSEPTEMBER 30,
    
    
    SEPTEMBER 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    6,383
    
    
    $
    29,820
    
    
    $
    6,236
    
    
    $
    12,438Temporary impairment charges
    
    
    5,801
    
    
    
    
    
    
    
    8,642
    
    
    
    21,894Recoveries
    
    
    (943
    )
    
    
    (20,358
    )
    
    
    (3,637
    )
    
    
    (24,870
    )Balance at end of period
    
    $
    11,241
    
    
    $
    9,462
    
    
    $
    11,241
    
    
    $
    9,462
  INTEREST-ONLY STRIPS ACTIVITY
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    52,746
    
    
    $
    125,667
    
    
    $
    74,034
    
    
    $
    127,361Capitalization of IOs from loan sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,981Amortization
    
    
    (2,636
    )
    
    
    (12,153
    )
    
    
    (15,441
    )
    
    
    (40,405
    )Negative IO value eliminated as part
of the mortgage loans sale
transactions restructured (mortgage
loans repurchased)
    
    
    
    
    
    
    
    
    
    
    18,190
    
    
    
    Negative value of IOs sold
    
    
    
    
    
    
    
    
    
    
    16,189
    
    
    
    Gains (losses ) on the IO value
    
    
    2,425
    
    
    
    (25,263
    )
    
    
    (40,437
    )
    
    
    (9,686
    )Balance at end of period
    
    $
    52,535
    
    
    $
    88,251
    
    
    $
    52,535
    
    
    $
    88,251
  25




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Servicing
    
    Interest-only(Dollars in thousands)
    
    Assets
    
    stripsCarrying amount of retained interest
    
    $
    178,010
    
    
    $
    52,535Weighted-average expected life (in years)
    
    
    5.1
    
    
    
    4.9Constant prepayment rate
(weighted-average annual rate)
    
    
    14.90
    %
    
    
    13.28
    %Decrease in fair value due to 10%
adverse change
    
    $
    (5,197
    )
    
    $
    (2,428
    )Decrease in fair value due to 20%
adverse change
    
    $
    (9,920
    )
    
    $
    (4,683
    )Residual cash flow discount rate
(weighted-average annual rate)
    
    
    11.29
    %
    
    
    12.44
    %Decrease in fair value due to 10%
adverse change
    
    $
    (6,454
    )
    
    $
    (1,462
    )Decrease in fair value due to 20%
adverse change
    
    $
    (12,469
    )
    
    $
    (2,846
    )
   26




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (Dollars in thousands)Weighted-averageexpected life
    
    Change in FairChange in yield curve (basis points)
    
    Constant prepayment rate
    
    (Years)
    
    Value of IOs
    
    % Change+200
    
    
    10.49
    %
    
    
    5.7
    
    
    $
    (2,262
    )
    
    
    (4.3
    )%+100
    
    
    11.19
    %
    
    
    5.5
    
    
    
    (315
    )
    
    
    (0.6
    )%+  50
    
    
    11.97
    %
    
    
    5.2
    
    
    
    199
    
    
    
    0.4
    %Base
    
    
    13.28
    %
    
    
    4.9
    
    
    
    0
    
    
    
    0.0
    %-  50
    
    
    15.49
    %
    
    
    4.3
    
    
    
    (1,359
    )
    
    
    (2.6
    )%-100
    
    
    17.68
    %
    
    
    3.9
    
    
    
    (2,197
    )
    
    
    (4.2
    )%-200
    
    
    20.98
    %
    
    
    3.4
    
    
    
    (520
    )
    
    
    (1.0
    )%
 The Company's IOs included in the table above are primarily
variable rate IOs, subject to interest rate caps. Accordingly, in a
declining interest rate scenario (as shown in the table), decreases
in the fair values of the interest rate caps more than offsets the
otherwise positive impact that declining interest rates would have on
the fair values of the IOs. This results in a net reduction in the
fair values of the IOs.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 former
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, 2006. During the quarter and
nine month period ended September 30, 2006, the Company recognized $26,975 and $54,849,
respectively, of stock-based compensation expense related to the aforementioned restricted
stock award.During the second quarter of 2006, the Company granted 200,000 restricted stock units
with a fair value of $6.93 under the Omnibus Plan to the Companys Chief Executive Officer.
The restrictions on such restricted stock units lapse on an annual basis over a four-year
period commencing on May 23, 2006. During the quarter and nine month period ended September
30, 2006, the Company recognized $86,625 and $122,238, respectively, of
stock-based compensation expense related to the aforementioned restricted stock
 27




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 unit award. The total unrecognized compensation cost related to these non-vested restricted stock
units was $1.3 million and is expected to be recognized over a period of 3.75
years.On January 1, 2006, the Company adopted SFAS No. 123R Share-Based Payment (SFAS 123R),
without a material effect on the Consolidated Financial Statements of the Company since in
2003, Doral Financial started to expense the fair value of stock options granted to
employees using the modified prospective method described in SFAS No. 148 Accounting for
Stock-Based Compensation  Transition and Disclosure  an amendment of FASB Statement No.
123. Under this method, the Company expenses the fair value of all employee stock options
granted after January 1, 2003, as well as the unvested portions of previously granted
options. The net compensation expense associated with expensing stock options for the third
quarter and first nine months of 2006 was approximately $131,991 and $378,995, respectively,
compared to $2.4 million and $7.3 million for the comparable 2005 periods. During the
second half of 2005, the departures of certain former members of senior management resulted
in the forfeiture of 535,000 unvested stock options. SFAS 123R requires the Company to
develop an estimate of the number of share-based awards which will be forfeited due to
employee turnover. Quarterly changes in the estimated forfeiture rate may have a
significant effect on share-based compensation, as the effect of adjusting the rate for all
expense amortization after April 1, 2006 is recognized in the period the forfeiture estimate
is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate,
then an adjustment is made to increase the estimated forfeiture rate, which will result in a
decrease to the expense recognized in the financial statements. If the actual forfeiture
rate is lower than the estimated forfeiture rate, then an adjustment is made to decrease the
estimated forfeiture rate, which will result in an increase to the expense recognized in the
financial statements. The effect of forfeiture adjustments in the third quarter of 2006
was immaterial. When unvested options, shares of restricted stock or restricted stock units
are forfeited, any compensation expense previously recognized on the forfeited awards is
reversed in the period of the forfeiture.The activity of stock options during the first nine months of 2006 is set forth below:
 For the nine month period endedSeptember 30, 2006Weighted-AverageRemaining
    
    
    AggregateNumber of
    
    
    Weighted-Average
    
    
    Contractual Term
    
    
    IntrinsicOptions
    
    
    Exercise Price
    
    
    (Years)
    
    
    ValueBeginning of period
    
    
    2,306,414
    
    
    $
    14.84Options granted
    
    
    1,280,000
    
    
    
    6.29Options exercised
    
    
    (18,000
    )
    
    
    5.28Options purchased
    
    
    
    
    
    
    Options expired and unexercised
    
    
    (1,414,975
    )
    
    
    17.82Unvested options
forfeited
    
    
    (30,000
    )
    
    
    5.26End of period
    
    
    2,123,439
    
    
    $
    7.91
    
    
    
    7.74
    
    
    $
    Exercisable at period end
    
    
    873,439
    
    
    $
    10.20
    
    
    
    4.72
    
    
    $
    
  28




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Weighted-AverageNonvested Shares
    
    Number of Options
    
    
    Grant Date Fair ValueNonvested at beginning of period
    
    
    107,500
    
    
    $
    3.59Granted
    
    
    1,280,000
    
    
    
    2.78Vested
    
    
    (107,500
    )
    
    
    3.59Nonvested shares forfeited
    
    
    (30,000
    )
    
    
    1.60Nonvested at period end
    
    
    1,250,000
    
    
    $
    2.81
  2006
    
    2005Weighted-average exercise price
    
    $
    6.29
    
    
    $
    12.76Stock option estimated fair value
    
    $
    1.42 - $4.00
    
    
    $
    2.95Weighted-average estimated fair value
    
    $
    2.78
    
    
    $
    2.95Expected stock option term (years)
    
    
    1.9 - 7.9
    
    
    
    4.8Expected volatility
    
    
    38% - 40
    %
    
    
    38
    %Weighted-average volatility
    
    
    39
    %
    
    
    38
    %Expected dividend yield
    
    
    0.00
    %
    
    
    5.76
    %Risk-free interest rate
    
    
    4.56% -5.19
    %
    
    
    4.28
    %Weighted-average
risk free interest rate
    
    
    4.83
    %
    
    
    4.28
    %
 Expected volatility is based on the historical volatility of the Companys common stock over
a ten-year period. The Company uses empirical research data to estimate options exercise
and employee termination within the valuation model; separate groups of employees that have
similar historical exercise behavior are considered separately for valuation purposes. The
risk-free rate for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant.The total intrinsic value of options exercised during the first nine months of 2006 and 2005
was approximately $27,760 and $620,724, respectively. Cash proceeds from options exercised
during 2006 and 2005 amounted to approximately $95,000 and $119,495, respectively.n.
    
    The following table summarizes deposit balances:
 DECEMBER 31,(In thousands)
    
    SEPTEMBER 30, 2006
    
    
    2005Certificates of deposit
    
    $
    3,061,301
    
    
    $
    2,749,643Regular savings
    
    
    461,548
    
    
    
    449,449NOW accounts
    
    
    515,644
    
    
    
    612,389Non interest-bearing deposits
    
    
    338,773
    
    
    
    425,788$
    4,377,266
    
    
    $
    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 Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (SFAS 140). Accordingly, the amounts received under these agreements represent borrowings,
and the securities
 29




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 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:
 September 30,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005Non-callable repurchase
agreements with maturities less
than or equal to 90 days, at
various fixed rates averaging
5.24% and 4.10% at September 30,
2006 and December 31, 2005,
respectively.
    
    $
    675,421
    
    
    $
    1,039,345Non-callable repurchase
agreements with maturities
ranging from June 2007 to June
2010, at various fixed rates
averaging 4.10% and 4.09% at
September 30, 2006 and December
31, 2005, respectively.
    
    
    1,110,000
    
    
    
    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 5.61% and
4.39% at September 30, 2006 and
December 31, 2005, respectively.
    
    
    364,800
    
    
    
    528,375Callable repurchases
agreements with maturities
ranging from March 2009 to
February 2014 (2005  September
2008 to February 2014), at
various fixed rates averaging,
5.25% and 5.21% at September 30,
2006 and December 31, 2005,
respectively, callable at
various dates beginning on
October 1, 2006.
    
    
    1,000,878
    
    
    
    1,086,878Callable repurchases
agreements due on March 22,
2015, at various fixed rates
during non-callable period
averaging 3.22% at September 30,
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 5.11% at December 31,
2005.
    
    
    
    
    
    
    200,000Callable repurchase
agreements with maturities
ranging from October to November
2014, tied to 3-month LIBOR
adjustable quarterly, averaging
4.69% and 3.56% at September 30,
2006 and December 31, 2005,
respectively, callable at
various dates beginning on
October 23, 2006.(1)
    
    
    600,000
    
    
    
    600,000$
    5,251,099
    
    
    $
    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%. 30




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 p.
    Advances from the FHLB consisted of the following:
 SEPTEMBER 30,
    
    
    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 September 30, 2006 and December 31,
2005, respectively.
    
    $
    267,000
    
    
    $
    167,000Non-callable advances due on September 14,
2007, tied to 1-month LIBOR adjustable
monthly (5.34% and 4.38% at September 30,
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 4.06% and 4.09% at
September 30, 2006 and December 31, 2005,
respectively, callable at various dates
beginning on October 1, 2006.
    
    
    667,500
    
    
    
    702,500$
    1,034,500
    
    
    $
    969,500
 At September 30, 2006, the Company had pledged qualified collateral in the form of first
mortgage notes, investments and mortgage-backed securities with a market value of $1.2
billion to secure the above advances from the FHLB, which generally the counterparty is not
permitted to sell or repledge.
 q.
    At September 30, 2006 and December 31, 2005, loans payable consisted of financing agreements
with local financial institutions secured by mortgage loans.Outstanding loans payable consisted of the following:
 SEPTEMBER 30,
    
    
    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
6.77% and 5.71% at September 30, 2006 and
December 31, 2005, respectively.
    
    $
    841,377
    
    
    $
    3,498,638Secured borrowings with local financial
institutions, collateralized by real
estate mortgage loans at fixed interest
rates averaging 7.77% and 7.70% at
September 30, 2006 and December 31, 2005,
respectively.
    
    
    29,935
    
    
    
    37,585Secured borrowings with a local financial
institution, collateralized by IOs at a
fixed interest rate of 7.75%.
    
    
    41,688
    
    
    
    42,007$
    913,000
    
    
    $
    3,578,230
 At September 30, 2006 and December 31, 2005, loans held for sale amounting to $864.5 million
and $3.5 billion, respectively, were pledged to secure financing agreements with local
financial institutions, such loans can be repledged by the
counterparties.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 r.
    
    Notes payable consisted of the following:
 SEPTEMBER 30,
    
    
    DECEMBER 31,(In thousands)
    
    2006
    
    
    2005$625 million floating rate senior notes tied to 3-month LIBOR (6.33%
and 5.00% at September 30, 2006 and December 31, 2005, respectively),
due on July 20, 2007, paying interest quarterly
    
    $
    624,735
    
    
    $
    625,337$100 million notes, net of discount, bearing interest at 7.65%, due on
March 26, 2016, paying interest monthly
    
    
    98,132
    
    
    
    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
    
    
    29,547
    
    
    
    29,570$40 million notes, net of discount, bearing interest at 7.10%, due on
April 26, 2017, paying interest monthly
    
    
    39,260
    
    
    
    39,320$30 million notes, net of discount, bearing interest at 7.15%, due on
April 26, 2022, paying interest monthly
    
    
    29,395
    
    
    
    29,450Senior term notes at a fixed rate of 8.55% (2005 - ranging from 8.50%
to 8.55%) due in August 2007 (2005 - maturities ranging from August
2006 to August 2007), paying interest semiannually on February 28 and
August 31
    
    
    9,000
    
    
    
    16,000Bonds payable secured by mortgage on building at fixed rates ranging
from 6.25% to 6.90%, with maturities ranging from December 2006 to
December 2029 (2005  June 2006 to December 2029), paying interest
monthly
    
    
    42,380
    
    
    
    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
    
    
    2,423
    
    
    
    2,323$
    882,472
    
    
    $
    965,621
 During the first quarter of 2006, the Company paid a consent fee of approximately $1.3
million in the aggregate to holders of the Companys $625 million floating rate senior notes
due 2007, $100 million 7.65% senior notes due 2016, $30 million 7.00% senior notes due 2012,
$40 million 7.10% senior notes due 2017 and $30 million 7.15% senior notes due 2022 in
connection with a consent solicitation pursuant to which these holders agreed to temporarily
forbear their right to declare an event of default as a result of the Companys failure to
timely file its quarterly reports on Form 10-Q for the first three quarters of 2005. The
consent fees paid were included as part of the balance payable on the notes and are
amortized over the life of the related indebtedness.Doral Financial will need significant outside financing during 2007, principally for the
refinancing of its $625 million floating rate senior notes that mature in July 2007 and to
meet certain other working capital and contractual needs of the holding company.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 The Company has selected advisors to assist in reviewing a number of possible alternatives
to refinance this indebtedness and in examining alternatives to restructure its balance
sheet in order to enhance its future earnings potential and reduce the high level of
interest rate risk and volatility inherent in its balance sheet.The Company must undertake a number of initiatives during 2007 in order to satisfy its
capital and liquidity requirements. These initiatives could include the issuance of
significant additional equity, the issuance of high-yield debt and the sale or pledge of
assets. The issuance of additional equity could result in significant dilution to the
existing shareholders. The Companys ability to implement these initiatives and the terms
thereof are subject to risks and uncertainties and may be adversely affected by the
Companys current credit ratings, the ongoing shareholder litigation, the Companys
deteriorated earnings and balance sheet composition, the Companys holding company structure
and restrictions under the existing cease and desist orders and banking regulations on the
ability of the Company to rely on the liquidity of its banking
subsidiaries. The failure to implement these strategies or to
otherwise refinance the $625 million senior notes that mature in
July 2007 and recapitalize the holding company would have a material
adverse effect on, and impair, the holding companys financial
condition.Although the Company is formulating and taking steps to implement a plan to address its
capital and liquidity needs, the Company cannot provide assurance that it will be ultimately
be successful in executing these initiatives.
 s.
    
    Income TaxesIncome taxes include Puerto Rico income taxes as well as applicable federal and state taxes.
As Puerto Rico corporations, Doral Financial and all of its Puerto Rico subsidiaries are
generally required to pay federal income taxes only with respect to their income derived
from the active conduct of a trade or business in the United States (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. Except for the operations of Doral
Bank NY and Doral Money, substantially all of the Companys operations are conducted through
subsidiaries in Puerto Rico. Doral Bank NY and Doral Money are U.S. corporations and are
subject to U.S. income-tax on their income derived from all sources.The maximum statutory corporate income tax rate in Puerto Rico is 41.5% for the taxable year
ending 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. The additional tax related to the
income earned from January 1 to the date of enactment of the law was fully recorded in the
third quarter of 2005 net of the impact in the deferred taxes. In addition, in May 2006,
the Government of Puerto Rico approved an additional transitory tax applicable only to the
banking industry that raised the maximum statutory tax rate to 43.5% for taxable years
commenced during calendar year 2006. For taxable years beginning after December 31, 2006,
the maximum statutory tax rate will be 39%.Doral Financial enjoys income tax exemption on interest income derived from FHA and VA
mortgage loans financing the original acquisition of newly constructed housing in Puerto
Rico and securities backed by such mortgage loans. Doral Financial also invests in U.S.
Treasury and agency securities that are exempt from Puerto Rico taxation and are not subject
to federal income taxation because of the portfolio interest deduction to which Doral
Financial is entitled as a foreign corporation. In addition, Doral Financial uses its
international banking entity subsidiary to invest in various U.S. securities and U.S.
mortgage-backed securities, which interest income and gain on sale, if any, is exempt from
Puerto Rico income taxation and excluded from federal income taxation on the basis of the
portfolio interest deduction in the case of interest, and in the case of capital gains,
because the gains are sourced outside the United States.For the third quarter and first nine months of 2006, Doral Financial recognized an income
tax expense and an income tax benefit of $0.8 million and $28.1 million, respectively,
compared to an income tax expense of $25.0 million and $30.7 million for the comparable 2005
periods. The decrease in the tax provision for the first nine months of 2006 is
principally due to pre-tax losses recognized during 2006, combined with an increase in the
Companys net deferred tax asset as a result of the various agreements entered into with the
Puerto Rico Treasury Department (as discussed below).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 During 2006, the Company entered into two separate agreements with the Puerto Rico Treasury
Department regarding the Companys deferred tax asset related to prior intercompany
transfers of IOs ( the IO Tax Asset). The first agreement, executed during the first
quarter, confirmed the previously established tax basis of all the IO transfers within the
Doral Financial corporate group. The second agreement, executed during the third quarter,
clarified that for Puerto Rico income tax purposes, the IO Tax Asset is a stand-alone
intangible asset subject to a straight-line amortization based on a useful life of 15 years.
Furthermore, the agreement provided that the IO Tax Asset could be transferred to any
entity within Doral Financial corporate group, including the Puerto Rico banking subsidiary.
The confirmation of the previously established tax basis of all IO
transfers within the Doral Financial corporate group and the ability to use the IO tax asset at the Companys profitable subsidiaries resulted in an
increase in the deferred tax asset net of the valuation allowance and in a net tax benefit
for the first nine months of 2006.In assessing the realization of deferred tax assets, the Company considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be
realized. The Company considers the expected realization of its deferred tax assets and
liabilities, projected future taxable income, and tax planning strategies in making this
assessment. In the case of the IO Tax Asset, the realization of the deferred tax asset is
dependent upon the existence of, or generation of, taxable income during the 15 year period
in which the amortization deduction is available.Under the Puerto Rico Internal Revenue Code of 1994, as
amended (PR Code), Doral Financial is not permitted to file consolidated tax returns and,
thus, Doral Financial is not able to utilize losses from one subsidiary to offset gains in
another subsidiary. Accordingly, in order to obtain a tax benefit from a net operating
loss, a particular subsidiary must be able to demonstrate sufficient taxable income within
the applicable carry forward period (7 years under the PR Code). During the nine month
period ended September 30, 2006, net operating losses of $190.9 million were recognized at
the subsidiary level that, based on the forecasted future taxable income, such subsidiaries
could not utilize to offset future income. This resulted in the creation of a valuation
allowance. At September 30, 2006, the deferred tax asset, net of its valuation allowance of
$157.5 million, amounted to approximately $242.9 million, compared to $213.2 million at
December 31, 2005.Failure to achieve sufficient projected taxable income might affect the ultimate realization
of the net deferred tax asset. Factors that may affect the Companys ability to achieve
sufficient forecasted taxable income include, but are not limited to
increased competition, a decline in margins and loss of market share.
 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 September 30, 2006, the Company had outstanding $7.2 million
in commercial and financial standby letters of credit. The fair value on these commitments
is not significant.Certain of the Companys loan sale activities involve 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 September 30, 2006, the outstanding principal balance of loans
sold subject to full or partial recourse was $1.2 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 $985.0 million. 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 $8.7 million, as of
September 30, 2006, for estimated losses from such recourse agreements, which is included in
Accrued expenses and other liabilities.
 34




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 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
September 30, 2006, commitments to extend credit amounted to approximately $406.9 million
and commitments to sell mortgage-backed securities and loans at fair
value amounted to approximately
$278.9 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 September 30, 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.
 35




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 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 (MDL Panel) for
coordinated or consolidated pretrial proceedings with the actions previously filed there
before Judge Richard Owen.On February 8, 2006, Judge Owen entered an order appointing the West Virginia Investment
Management Board as lead plaintiff and approving the selection of Lerach Coughlin Stoia
Geller Rudman & Robbins LLP as lead plaintiffs counsel. On June 22, 2006, the lead
plaintiff filed a consolidated amended complaint alleging securities fraud during the period
between March 15, 2000 and October 25, 2005, based on allegations similar to those noted
above, as well as based on the reversal of certain transactions entered into by Doral
Financial with other Puerto Rico financial institutions and on weaknesses in Doral
Financials control environment as described in the Companys amended annual report on Form
10-K for 2004. The consolidated amended complaint seeks unspecified compensatory damages
(including interest), costs and expenses, and injunctive relief.All defendants have moved to dismiss the amended complaint based on contentions that, as a
matter of law, the allegations of the amended complaint fail to state a claim upon which
relief may be granted, and the lead plaintiff has filed an opposition to the motions. The
Court has not yet set a date for oral argument on the motions.Shareholder Derivative Lawsuits.Certain officers and directors and former officers
and directors of the Company are named as defendants in four shareholder derivative actions
currently pending before Judge Owen in the U.S. District Court for the Southern District of
New York. Three of these actions were filed in June 2005 and one was filed in September
2006. These derivative actions purport to bring claims on behalf of the Company based
principally on allegations that Doral Financials officers and directors allowed Doral
Financial to use inadequate procedures and financial controls in connection with the
Companys financial statements and made misstatements to the public concerning the Companys
financial controls and financial performance. These derivative lawsuits have been
consolidated with the class actions during pretrial proceedings. The relief sought in these
derivative actions includes contribution in respect of the securities actions, unspecified
compensatory damages on behalf of Doral Financial, disgorgement of defendants profits and
compensation, equitable and/or injunctive relief, costs and other expenses. On April 27,
2006, Judge Owen appointed Rosenbaum Capital, LLC as lead derivative plaintiff and the law
firm of Federman & Sherwood as lead derivative plaintiffs counsel.On August 15, 2006, an additional shareholder derivative action was filed against the
Company and various other current and former officers and directors in the Commonwealth
Court of Puerto Rico. The allegations of the complaint and the relief sought are similar to
the other shareholder derivative lawsuits. The action was subsequently removed to the U.S.
District Court for the District of Puerto Rico, but the plaintiff has moved to remand the
case to the Commonwealth Court of Puerto Rico. On November 20, 2006, upon request of the
Company and other defendants, the MDL Panel conditionally transferred this action to
the U.S. District Court for the Southern District of New York. The Company and other
defendants have filed motions requesting that
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 the U.S. District Court for the District of
Puerto Rico stay proceedings pending the final resolution of this transfer order. The U.S.
District Court for the District of Puerto Rico has not yet ruled on these motions.Other Lawsuits.On June 21, 2005, a lawsuit was filed against Doral Financial and
certain of its officers and directors and former officers and directors in the U.S. District
Court for the District of Puerto Rico. Between June 29, 2005 and August 30, 2005, plaintiff
filed three amended complaints. The suit as amended concerns a divorce settlement entered by
the former Chairman and chief executive officer of Doral Financial and also alleges, among
other things, violations of federal securities laws, Racketeer Influenced and Corrupt
Organizations (RICO) Act violations, as well as fraud and breach of contract under Puerto
Rico law, some of which are stated in the alternative as derivative claims on behalf of
Doral Financial. Plaintiff seeks an award of damages, costs, and expenses. All defendants
have moved to dismiss the complaint as amended, and such motions have not been decided. The
court is currently considering a second motion by plaintiff for reconsideration of an order
denying her request to file a fourth amended complaint. Defendants have filed oppositions to
the plaintiffs motion.In addition, on October 14, 2005, the Company, a director and certain former officers and
directors of the Company were named as defendants in an action brought by an individual
plaintiff filed in the U.S. District Court for the Southern District of New York, alleging
violations of federal securities laws and various Kentucky state laws similar to those
alleged in the class action lawsuits. Plaintiff seeks compensatory damages in the amount of
$292,000 for losses the plaintiff allegedly incurred in connection with Doral Financial
securities purchased between January 19, 2005 and March 18, 2005, as well as unspecified
punitive damages, interest, costs and other expenses. This action is at a very early stage,
is pending before Judge Owen and has been consolidated with the class and derivative actions
for pretrial proceedings.Doral Financial cannot predict the outcome of the lawsuits described above and is unable to
ascertain the ultimate aggregate amount of monetary liability or financial impact to Doral
Financial of these lawsuits. Accordingly, no reserve is being established in Doral
Financials financial statements at this time. Doral Financial cannot determine whether
these lawsuits will, individually or collectively, have a material adverse effect on the
business, results of operations, financial condition and liquidity of Doral Financial.Other Legal MattersOn April 19, 2005, the SEC informed Doral Financial that it was conducting an inquiry into
Doral Financials accounting and disclosure practices related to the April 19, 2005
announcement that it would restate its financial results, and the underlying issues related
to the restatement. Subsequently, the SEC issued a formal order of investigation in
connection with the previously announced informal inquiry into the Companys restatement of
its consolidated financial statements.On September 19, 2006, Doral Financial publicly announced that the SEC had approved a final
settlement with the Company, which resolved the SECs investigation of the Company. Under
the settlement approved by the SEC, Doral Financial agreed, without admitting or denying any
wrongdoing, to be enjoined from future violations of certain provisions of the securities
laws. Doral Financial also agreed to pay a $25 million civil penalty and the disgorgement of
$1 to the SEC. The staff of the SEC may request that the civil penalty be distributed to
investors under a plan of distribution to be established by the SEC, as authorized under the
Sarbanes-Oxley Act of 2002.The settlement also provides that the amounts to be paid as civil penalty shall be treated
by Doral Financial as penalties paid to the government for all purposes, including tax
purposes, and that Doral Financial shall not seek to be reimbursed or indemnified for such
payments through insurance or any other source, or use
such payment to setoff or reduce any award of compensatory damages to plaintiffs in related
securities litigation pending against the Company. In connection with the settlement, Doral
Financial consented to the entry of a final judgment to implement the terms of the
agreement. In December, 2006, the United States District Court for the Southern District of
New York entered the final judgment. Doral Financial must pay the civil penalty within 45
business days of the final judgment.
 37




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Doral Financial had reserved during the fourth quarter of
2005 $25 million in its consolidated financial statements in
connection with the settlement of the SECs investigation of the Company.On August 24, 2005, the U.S. Attorneys Office for the Southern District of New York served
Doral Financial with a grand jury subpoena seeking the production of certain documents
relating to issues arising from the restatement, including financial statements and
corporate, auditing and accounting records prepared during the period January 1, 2000 to the
date of the subpoena. Doral Financial is cooperating with the U.S. Attorneys Office in this
matter, including by producing documents and other information in response to the subpoena.
Doral Financial cannot predict the outcome of this matter and is unable to ascertain the
ultimate aggregate amount of monetary liability or financial impact to Doral Financial of
this matter. Accordingly, no reserve has been established in Doral Financials financial
statements.On March 17, 2006, Doral Financial and its principal Puerto Rico banking subsidiary, Doral
Bank PR, entered into consent orders with the Board of Governors of the Federal Reserve
System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC) and the
Commissioner of Financial Institutions of Puerto Rico (Office of the Commissioner). The
mutually agreed upon orders require Doral Financial and Doral Bank PR to conduct reviews of
their mortgage portfolios, and to submit plans regarding the maintenance of capital adequacy
and liquidity. Doral Financial and Doral Bank PR have complied with these requirements. No
fines or monetary penalties were assessed against Doral Financial or Doral Bank PR under the
orders.Under the terms of the consent order with the FDIC and the Office of the Commissioner, Doral
Bank PR may not pay a dividend or extend credit to, or enter into certain asset purchase and
sale transactions with Doral Financial or its subsidiaries, without the prior consent of the
FDIC and the Office of the Commissioner.The consent order with the Federal Reserve contains similar restrictions on Doral Financial
from obtaining extensions of credit from, or entering into certain asset purchase and sale
transactions with, Doral Bank PR, without the prior approval of the Federal Reserve. The
consent order also restricts Doral Financial from paying dividends on its capital stock
without the prior written approval of the Federal Reserve. Doral Financial is required to
request permission for the payment of dividends on its common stock and preferred stock not
less than 30 days prior to a proposed dividend declaration date.On August 23, 2006, Doral Bank PR entered into a Memorandum of Understanding (MOU) with
the Office of the Commissioner and the FDIC. The MOU relates to certain weaknesses
identified by the regulators with respect to the Doral Bank PRs compliance with the Bank
Secrecy Act (BSA). Doral Bank PR was not required to pay any civil monetary penalties in
connection with this MOU. An MOU is characterized by regulatory authorities as an informal
action that is neither published nor made publicly available by agencies and is used when
circumstance warrant a milder form of action than a formal supervisory action, such as a
formal written agreement of a cease and desist order.Under the terms of the MOU, Doral Bank PR is required to correct certain violations of law,
including certain violations regarding the BSA, within various timeframes. In particular,
the MOU confirms the understanding that Doral Bank PR will operate with adequate management
supervision and Board of Directors oversight on BSA related matters and will develop, adopt,
and implement a system of internal controls designed to ensure full compliance with the BSA
and certain other statutes, regulations, rules and/or guidelines issued or administered by
the United States Department of Treasurys Office of Foreign Assets Control (OFAC). The
implementation of the MOU will include: revisions of the Doral Bank PRs
policies, procedures and processes with respect to independent testing and training programs
to ensure full compliance with BSA and OFAC; designating a BSA and OFAC Officer; amending
existing policies, procedures, and processes relating to internal and external audits to
review compliance with BSA and OFAC provisions as part of routine auditing; and engaging
independent consultants to review account and transaction activity from September 1, 2005
through March 31, 2006 to determine compliance with suspicious activity reporting
requirements and to review the effectiveness of the corrective actions taken in
response to the MOU.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Doral Financial expects that the implementation of the MOU will result in additional
BSA-compliance expenses for Doral Bank PR. However, these expenses are not anticipated to
have a material financial impact on the Company or Doral Bank PR.On October 3, 2006, Doral Financial was notified by the Federal Reserve that it no longer
satisfies the financial holding company requirements for purposes of the GrammLeachBliley
Act. Doral Financial is required to enter into an agreement with the Federal Reserve that
will require it to correct certain deficiencies at Doral Bank PR within a 180 day period
from receipt of the notice or such longer period as may be permitted by the Federal Reserve.
Doral Financial is taking corrective actions to remain as a financial holding company and
does not believe that the loss of financial holding company status would have a direct
material adverse effect upon Doral Financials consolidated financial position or results of
operations.On October 23, 2006, Doral Bank PR entered into an MOU with the FDIC regarding certain
deficiencies in Doral Bank PRs compliance with the data reporting requirements of the Home
Mortgage Disclosure Act, and weaknesses in its policies and procedures regarding flood
insurance disclosures. Doral Bank PR anticipates that it will be required to pay civil
monetary penalties of up to approximately $230,000 to the FDIC related to the deficiencies
in compliance with the data reporting requirements of the Home Mortgage Disclosure Act.
 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 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.Accounting for Certain Hybrid Financial Instruments.On February 16, 2006, the FASB issued
SFAS No. 155, Accounting for Certain Hybrid Financial Instruments an amendment of FASB
Statements No. 133 and 140 (SFAS 155), which resolves issues addressed in Statement 133
Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets (DIG Issue D1). SFAS 155 amends SFAS 133 to simplify the
accounting for certain derivatives embedded in other financial instruments (a hybrid
financial instrument) by permitting fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise required bifurcation,
provided that the entire hybrid financial instrument is accounted for on a fair value basis.
SFAS 155 also establishes the requirement to evaluate interests in securitized financial
assets to identify interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, which replaces the
interim guidance in DIG Issue D1. SFAS 155 amends SFAS 140 to allow a qualifying
special-purpose entity to hold a derivative financial instrument that pertains to beneficial
interests other than another derivative financial instrument. SFAS 155 is effective for all
financial instruments acquired or issued after the beginning of the first fiscal year that
begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an
entitys fiscal year, provided the entity has not yet issued financial statements for any
period of the fiscal year. The Company is currently evaluating the effect, if any, that the
adoption of SFAS 155 will have on its financial statements.Accounting for Servicing of Financial Assets.In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets (SFAS 156). This statement amends SFAS 140
with respect to the accounting for separately recognized servicing assets and liabilities.
This statement: (1) requires an entity to recognize a servicing asset or liability each time
it undertakes and obligation to service a financial asset by entering into a servicing
contract, (2) requires all separately recognized servicing assets and servicing liabilities
to be initially measured at fair value, if practicable, (3) permits an entity to choose
between an amortization method or a fair value measure for subsequent recognition for each
class of separately recognized servicing assets and servicing liabilities, (4) at its
initial adoption, permits a one-time
reclassification of available-for-sale securities to trading securities by entities with
recognized servicing rights, (5) requires separate presentation of servicing assets and
servicing liabilities subsequently measured at fair value in the statement of financial
position, and additional disclosures. SFAS 156 is effective as of the beginning of the
Companys first fiscal year that begins after September 16, 2006. Earlier adoption is
permitted as of the beginning of an entitys fiscal year, provided the entity has not yet
issued financial statements, including interim financial statements, for any period of that
fiscal year. The Company is currently evaluating the possible impact of the adoption of
SFAS 156 on its financial statements, commencing on January 1, 2007.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Accounting for Uncertainty in Income Taxes. In June 2006, the FASB issued Interpretation
No. 48, Accounting for Uncertainty in Income Taxes- an Interpretation of FASB Statement
109 (FIN 48), which prescribes a comprehensive model for how a company should recognize,
measure, present, and disclose in its financial statements uncertain tax positions that the
company has taken or expects to take on a tax return (including a decision whether to file
or not to file a return in a particular jurisdiction). Under the Interpretation, the
financial statements will reflect expected future tax consequences of such positions
presuming the taxing authorities full knowledge of the position and all relevant facts, but
without considering time values. FIN 48 is applicable to all uncertain positions for taxes
accounted for under SFAS 109, Accounting for Income Taxes, and is not intended to be
applied by analogy to other taxes, such as sales taxes, value-added taxes, or property
taxes. Significant elements of the new guidance include the following:
 
    
    Recognition: A tax benefit from an uncertain position may be recognized only
if it is more likely than not that the position is sustainable, based on its
technical merits.
    
    Measurement: The tax benefit of a qualifying position is the largest amount
of tax benefit that is greater than 50 percent likely of being realized upon
ultimate settlement with a taxing authority having full knowledge of all
relevant information.
    
    Change in judgment: The assessment of the recognition threshold and the
measurement of the associated tax benefit might change as new information
becomes available. Unrecognized tax benefits should be recognized in the period
that the position reaches the recognition threshold, which might occur prior to
absolute finality of the matter. Similarly, recognized tax benefits should be
derecognized in the period in which the position falls below the threshold.
    
    Interest/Penalties: A taxpayer is required to accrue interest and penalties
that, under relevant tax law, the taxpayer would be regarded as having
incurred. Accordingly, under FIN 48, interest would start to accrue in the
period that it would begin accruing under the relevant tax law, and penalties
should be accrued in the first period for which a position is taken (or is
expected to be taken) on a tax return that would give rise to the penalty. How
a company classifies interest and penalties in the income statement is an
accounting policy decision. The company should disclose that policy and the
amounts recognized.
    
    Disclosures: FIN 48 requires qualitative and quantitative disclosures,
including discussion of reasonably possible changes that might occur in the
recognized tax benefits over the next 12 months; a description of open tax
years by major jurisdictions; and a roll-forward of all unrecognized tax
benefits, presented as a reconciliation of the beginning and ending balances of
the unrecognized tax benefits on a worldwide aggregated basis.
 After considering other applicable guidance (such as the guidance that the Emerging Issues
Task Force specifies in Issue 93-7, Uncertainties Related to Income Taxes in a Purchase
Business Combination), a company should record the change in net assets that results from
the application of FIN 48 as an adjustment to retained earnings.The accounting provisions of FIN 48 will be effective for the Company beginning January 1,
2007. The Company is in the process of determining the impact, if any, that the adoption of
this accounting interpretation may have on its financial condition and results of
operations.Fair Value Measurements. In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS 157). This Statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously concluded in
those accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 The definition of fair value retains the exchange price notion in earlier definitions of
fair value. This Statement clarifies that the exchange price is the price in an orderly
transaction between market participants to sell the asset or transfer the liability in the
principal (or most advantageous) market for the asset or liability. The transaction to sell
the asset or transfer the liability is a hypothetical transaction at the measurement date,
considered from the perspective of a market participant that holds the asset or owes the
liability. Therefore, the definition focuses on the price that would be received to sell the
asset or paid to transfer the liability at the measurement date (an exit price), not the
price that would be paid to acquire the asset or received to assume the liability at the
measurement date (an entry price).This Statement emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Therefore, a fair value measurement should be determined based
on the assumptions that market participants would use in pricing the asset or liability. As
a basis for considering market participant assumptions in fair value measurements, this
Statement establishes a fair value hierarchy that distinguishes between (1) market
participant assumptions developed based on market data obtained from sources independent of
the reporting entity (observable inputs) and (2) the reporting entitys own assumptions
about market participant assumptions developed based on the best information available in
the circumstances (unobservable inputs). The notion of unobservable inputs is intended to
allow for situations in which there is little, if any, market activity for the asset or
liability at the measurement date. In those situations, the reporting entity need not
undertake all possible efforts to obtain information about market participant assumptions.
However, the reporting entity must not ignore information about market participant
assumptions that is reasonably available without undue cost and effort.This Statement expands disclosures about the use of fair value to measure assets and
liabilities in interim and annual periods subsequent to initial recognition. The disclosures
focus on the inputs used to measure fair value and for recurring fair value measurements
using significant unobservable inputs (within Level 3 of the fair value hierarchy), the
effect of the measurements on earnings (or changes in net assets) for the period. This
Statement encourages entities to combine the fair value information disclosed under this
Statement with the fair value information disclosed under other accounting pronouncements,
including FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
where practicable.This Statement is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Earlier application is
encouraged, provided that the reporting entity has not yet issued financial statements for
that fiscal year, including financial statements for an interim period within that fiscal
year. The Company is currently evaluating the effect, if any, of the adoption of this
Statement on its financial statements, commencing on January 1, 2008.Accounting for Defined Benefit Pension and Other Postretirement Plans.In September 2006,
the FASB issued SFAS No. 158, EmployersAccounting for Defined Benefit Pension and Other
Postretirement Plans(SFAS 158). This accounting standard requires employers to fully
recognize the obligations associated with single-employer defined benefit pension, retiree
healthcare and other post-retirement plans in their financial statements. Under past
accounting standards, the funded status of an employers post-retirement benefit plan (i.e.,
the difference between the plan assets and obligations) was not always
completely reported in the balance sheet. Past standards only required an employer to
disclose the complete funded status of its plans in the notes to the financial statements.
Specifically, SFAS 158 requires an employer to:
 
    
    Recognize in its statement of financial position an asset for a plans overfunded
status or a liability for a plans underfunded status.
    
    Measure a plans assets and its obligations that determine its funded status as of
the end of the employers fiscal year (with limited exceptions).
    
    Recognize changes in the funded status of a defined benefit postretirement plan in
the year in which the changes occur. Those changes will be reported in comprehensive
income of a business entity and in changes in net assets of a not-for-profit
organization.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 The requirement to recognize the funded status of a benefit plan and the disclosure
requirements are effective for the Company as of December 31, 2006. As of September 30,
2006, the Company had no defined benefit or post-employment benefit plans. The adoption of
SFAS 158 will not have an impact on the Companys consolidated financial statements.Taxes Collected from Customers and Remitted to Governmental Authorities.In June 2006, the
Emerging Issues Tax Force (EITF) reached a consensus on EITF Issue No. 06-03, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That Is, Gross versus Net Presentation (EITF 06-03). EITF 06-03
provides that the presentation of taxes assessed by a governmental authority that is
directly imposed on a revenue-producing transaction between a seller and a customer on
either a gross basis (included in revenues and costs) or on a net basis (excluded from
revenues) is an accounting policy decision that should be disclosed. The provisions of EITF
06-03 will be effective for the Company as of January 1, 2007. The adoption of EITF 06-03
is not expected to have a material impact on the Companys consolidated financial
statements.Accounting for Purchases of Life Insurance.In September 2006, the EITF reached a
consensus on EITF Issue No. 06-5 Accounting for Purchases of Life Insurance  Determining
the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4,
Accounting for Purchases of Life Insurance (EITF 06-5). EITF 06-5 focuses on how an
entity should determine the amount that could be realized under the insurance contract at
the balance sheet date in applying FTB 85-4, and whether the determination should be on an
individual or group policy basis.At the September 2006 meeting, the EITF affirmed as a final consensus that the cash
surrender value and any additional amounts provided by the contractual terms of the
insurance policy that are realizable at the balance sheet date should be considered in
determining the amount that could be realized under FTB 85-4, and any amounts that are not
immediately payable to the policyholder in cash should be discounted to their present value.
Additionally, the EITF affirmed as a final consensus the tentative conclusion that in
determining the amount that could be realized companies should assume that policies will
be surrendered on an individual-by-individual basis, rather than surrendering the entire
group policy. Also, the EITF reached a consensus that contractual limitations on the ability
to surrender a policy do not affect the amount to be reflected under FTB 85-4, but, if
significant, the nature of those restrictions should be disclosed.The Company is currently evaluating any impact that the adoption of Issue 06-5 may have on
its statement of financial condition or results of operations.Effects of Prior Year Misstatements.In September 2006, the SEC issued Staff Accounting
Bulletin No. 108 Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108) expressing the SEC staffs
views regarding the process of quantifying financial statement misstatements and the build
up of improper amounts on the balance sheet. SAB 108 requires that registrants quantify
errors using both a balance sheet and income statement approach and
evaluate whether either approach results in a misstated amount that, when all relevant
quantitative and qualitative factors are considered, is material. The built up
misstatements, while not considered material
in the individual years in which the misstatements were built up, may be considered material
in a subsequent year if a company were to correct those misstatements through current period
earnings. The cumulative effect of the initial application should be reported in the
carrying amounts of assets and liabilities as of the beginning of that fiscal year and the
offsetting adjustment, net of tax, should be made to the opening balance of retained
earnings for that year. Registrants will need to disclose the nature and amount of each
item, when and how each error being corrected arose, and the fact that the errors were
previously considered immaterial. SAB 108 is effective for the Companys annual financial
statements for the year ended December 31, 2006. The Company is currently evaluating any
impact that the adoption of SAB 108 may have on its consolidated financial statements.Issuers Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt
Instrument. In November 2006, the FASB ratified the consensus reached by the EITF on EITF
Issue No. 06-7, Issuers
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Accounting for a Previously Bifurcated Conversion Option in a
Convertible Debt Instrument When the Conversion Option No Longer Meets the Bifurcation
Criteria in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities (EITF 06-07). The consensus provides that a previously bifurcated conversion
option in a convertible debt instrument for which the embedded conversion option no longer
meets the bifurcation criteria in SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133), should be reclassified (at its fair value on the date of
reclassification) to stockholders equity. Any debt discount recognized when the conversion
option was bifurcated from the convertible debt instrument should continue to be amortized.
EITF 06-07 should be applied to all previously bifurcated conversion options in convertible
debt instruments that no longer meet the bifurcation criteria in SFAS 133, in interim or
annual periods beginning after December 15, 2006. As of September 30, 2006 the Company does
not have any convertible debt instrument.w.
    
    Subsequent Events
 Restructuring of Balance Sheet
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 INTERNAL CONTROL OVER FINANCIAL REPORTING
   SUBSEQUENT EVENTS
   Changes in Senior Management.
 
    
    On October 24, 2006, the Company announced the appointment of Gerardo Leiva as
Executive Vice President in charge of Operations. Mr. Leiva is a Six Sigma Green Belt
certified executive. In addition, Mr. Leiva is also certified in Advanced Information
Management and the Acceleration Leadership Program, among others. He also has an
Engineering degree with majors in Electronics and Communications.
    
    On October 31, 2006, the Board of Directors appointed Mr. Marangal I. Domingo to the
position of Chief Financial Officer effective November 1, 2006, following Lidio
Sorianos resignation as Chief Financial Officer. Mr. Domingo assumed the duties of
Chief Financial Officer in addition to his duties of Chief Investment Officer and
Treasurer. On November 4, 2006, the Company entered into an agreement with Lidio
Soriano to assist the Company during a 90-day transition period.
    
    On November 1, 2006, the Board of Directors appointed César Ortiz as the Controller
and Chief Accounting Officer of the Company. Mr. Arturo Tous, who previously served as
the Chief Accounting Officer, remains with the Company as Senior Vice President,
reporting directly to the CFO. Prior to
his appointment as Controller and Chief Accounting Officer, Mr. Ortiz was serving as
Senior Vice President and Director of Internal Audit of the Company since August 2006.
The Company is searching for a replacement to head the Internal Audit Department.
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
    
    Mr. Calixto García-Vélez assumed the duties of President of Doral Bank PR in
addition to his current duties as Chairman and Chief Executive Officer of Doral Bank PR
following the resignation of José G. Vigoreaux as the Doral Bank
PRs president effective
November 3, 2006.
 Liquidity and Capital Needs of the Holding Company
   Restructuring of Balance Sheet
   OVERVIEW OF RESULTS OF OPERATIONS
   
    
    Net loss for the third quarter of 2006 amounted to $28.7 million, or a
diluted loss per share of $0.34, compared to a net income of $ 40.9 million, or a
diluted earnings per share of $0.30, for the third quarter of 2005.
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
    
    Net interest income for the third quarter of 2006 was $44.1 million,
compared to $66.6 million for the same period in 2005, resulting
from a decrease in average interest-earning assets from $19.0 billion
for the third quarter of 2005 to $13.1 billion for the comparable
period of 2006, coupled with a decrease in net
interest margin from 1.39% in the third quarter of 2005 to 1.34% in the third quarter
of 2006, (see
Tables A through D below for information regarding the Companys net interest income).
This reduction in net interest margin resulted 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 reduction in average interest-earning assets reflects the sale
during the second quarter of 2006 of approximately $2.4 billion in
mortgage loans as part of a previously reported  restructuring of
loan transfer transactions with a local financial institution. It
also reflects the discontinuance of the practice of purchasing whole
loans for subsequent securitization into mortgage-backed securities.
    
    Non-interest loss for the third quarter of 2006 was $1.5 million, compared
to non-interest income of $79.0 million for the same period in 2005. The
non-interest loss for the third quarter of 2006 was principally driven by losses on
trading activities, a net servicing loss and lower gains on sales of mortgage loans.
The losses on trading activities for the third quarter of 2006 were principally due to
realized and unrealized losses from derivative instruments undertaken for risk
management purposes, as well as realized losses on the sale of securities held for
trading. As medium- and long-term rates decreased during the third quarter of 2006,
the Company experienced a decrease in the market value of its derivative portfolio. The
net servicing loss for the quarter reflected principally a decrease in the Companys
MSRs valuation due in turn to an increase in anticipated mortgage prepayment rates.
This resulted in a temporary net impairment of $4.9 million and amortization of $9.6
million during the third quarter of 2006 compared to a net recovery in value of $20.4
million and an amortization of $6.9 million during the same period in 2005. Lower gains
on sales of mortgage loans were due to a decrease in the volume of mortgage loan sales
during the third quarter of 2006, partially offset by a $17.6 million
lower-of-cost -or-market positive valuation adjustment of the Companys loans held for sale portfolio as a
result of decreases in long-term interest rates during the quarter. Total loan sales
and securitizations for the third quarter of 2006 amounted to $85.7 million compared to
$542.0 million for the third quarter of 2005.
    
    Non-interest expenses for the third quarter of 2006 were
$60.3 million compared to
$70.3 million for the same period in 2005. Non-interest expenses for the quarter
reflect a decrease in expenses for professional services associated with the
restatement of the Companys prior period financial statements and related legal and
accounting matters, partially offset by increased expenses associated with advisory
services relating to the reengineering of the Companys business and operating
practices.
    
    For the third quarter of 2006, Doral Financial recorded income tax expense
of $0.8 million, compared to income tax expense of $25.0 million for the corresponding
period in 2005. The decrease in the tax provision for 2006 is
principally due to pre-tax losses recognized during 2006, combined
with an increase in the Companys net deferred tax asset as a
result of the various agreements entered into with the Puerto Rico
Treasury Department.
    
    During the third quarter of 2006, the Company had other comprehensive
income of approximately $99.2 million related principally to the positive impact of the
decrease in long-term interest rates on the value of the Companys portfolio of available for
sale securities. As of September 30, 2006, the Companys accumulated other
comprehensive loss (net of income tax benefit) was $151.4 million, compared to $250.6
million as of June 30, 2006.
    
    Doral Financials loan production for the third quarter of 2006 was $329.1
million, compared to $1.4 billion for the comparable period in 2005, a decrease of
approximately 76%. The decrease in Doral Financials loan production is due to a
number of factors including changes in the underwriting standards, economic conditions
in Puerto Rico, and competition from other financial institutions. Doral Financial has
decided to implement uniform, automated and rules-based underwriting standards.
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The implementation of these standards has caused disruption in the Companys loan
originations. The Company, however, believes that these changes will
allow it to more efficiently underwrite assets with better credit quality and more
appropriately price its loan products in the future. The Company anticipates that, for
the foreseeable future, loan production will continue below historical levels as these
new underwriting standards are implemented and new product offerings are developed.
 
    
    Total assets as of September 30, 2006 were $13.8 billion, a decrease of 20%
compared to $17.3 billion as of December 31, 2005. The decrease in total assets was
principally the result of the previously reported sale of mortgage
loans as part of a restructuring of various loan
transfer transactions with a local financial institution during the second quarter of
2006 and a reduction of its investment securities portfolio.
 CRITICAL ACCOUNTING POLICIES
   RESULTS OF OPERATIONS FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
   NET INTEREST INCOME
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
    
    Higher cost of short-term borrowings as a result of the Federal Reserves
tightening monetary policy, raising the federal funds target rate 150 basis points
from October 1, 2005 to June 30, 2006, leaving it flat at 5.25% for the third
quarter of 2006.
    
    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 third quarter and first nine months of 2006 were 0.25% and
0.35%, respectively, compared to 0.60% and 1.02%, respectively, for the third
quarter and first nine months of 2005.
    
    The decrease in the Companys net interest margin is magnified by the current
mismatch in the duration of the Companys assets and liabilities. The Companys
interest-earning assets include a large portfolio of fixed-rate long-term
investments securities and mortgage loans that were generally financed with
short-term or callable liabilities. This mismatch exposes the Company to
significant interest rate risk in a rising rate environment because, as these
short-term or callable liabilities re-price at higher market rates, the Companys
interest rate margin is further compressed. The Companys interest rate risk
exposure is further complicated by the negative convexity (i.e. the tendency for
the duration of the Companys assets to decrease through prepayments as interest
rates decline) inherent in the Companys portfolio of fixed rate mortgage-backed
securities and mortgage loans. The combination of this negative convexity and the
current composition of the Companys liabilities exposes the Company to margin
compression risks even during certain declining interest rate environments.
    
    The decrease in interest income on IOs was principally attributable to a significant decrease in the average balance of outstanding
IOs as a result of the restructuring of certain mortgage loan sales during the
first half of 2006 and, to a lesser extent, to increases in short-term interest
rates as compared to 2005. The following table presents a detail of the cash flows
received on Doral Financials portfolio of IOs for the third quarter and first nine
months of 2006 and 2005:
 49




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##### Table of Contents



Quarter Ended
    
    
    Nine Month PeriodSeptember 30,
    
    
    Ended September 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Total cash flows received on IO portfolio
    
    $
    4,267
    
    
    $
    14,952
    
    
    $
    20,397
    
    
    $
    49,045Amortization of IOs, as offset to cash flows
    
    
    (2,636
    )
    
    
    (12,153
    )
    
    
    (15,441
    )
    
    
    (40,405
    )Net cash flows recognized as interest income
    
    $
    1,631
    
    
    $
    2,799
    
    
    $
    4,956
    
    
    $
    8,640
 
    
    Increased deposits at Doral Financials banking subsidiaries, including brokered
deposits, coupled with a more competitive deposit pricing environment, as well as
increased costs of its repurchase agreements and notes payable. The increase in
cost of notes payable reflects the re-pricing nature of most of the Companys notes
payable, which are floating rate notes indexed to 3-month LIBOR.
   50




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TABLE A
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
 QUARTER ENDED SEPTEMBER 30,2006
    
    
    2005AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGE(DOLLARS IN THOUSANDS)
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    5,684,980
    
    
    $
    97,821
    
    
    
    6.83
    %
    
    $
    7,394,426
    
    
    $
    126,809
    
    
    
    6.80
    %Mortgage-backed securities
    
    
    3,608,227
    
    
    
    45,617
    
    
    
    5.02
    %
    
    
    4,846,714
    
    
    
    56,741
    
    
    
    4.64
    %Interest-only strips
    
    
    52,016
    
    
    
    1,631
    
    
    
    12.44
    %
    
    
    106,062
    
    
    
    2,799
    
    
    
    10.47
    %Investment securities
    
    
    2,782,123
    
    
    
    29,969
    
    
    
    4.27
    %
    
    
    4,183,459
    
    
    
    41,324
    
    
    
    3.92
    %Other interest-earning assets
    
    
    968,472
    
    
    
    12,257
    
    
    
    5.02
    %
    
    
    2,479,859
    
    
    
    20,847
    
    
    
    3.34
    %Total interest-earning assets/interest income
    
    
    13,095,818
    
    
    $
    187,295
    
    
    
    5.67
    %
    
    
    19,010,520
    
    
    $
    248,520
    
    
    
    5.19
    %Total non-interest-earning assets
    
    
    1,175,237
    
    
    
    
    
    
    
    
    
    
    
    851,012Total assets
    
    $
    14,271,055
    
    
    
    
    
    
    
    
    
    
    $
    19,861,532LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    4,270,692
    
    
    $
    41,125
    
    
    
    3.82
    %
    
    $
    4,066,558
    
    
    $
    29,326
    
    
    
    2.86
    %Repurchase agreements
    
    
    5,392,295
    
    
    
    60,375
    
    
    
    4.44
    %
    
    
    7,905,510
    
    
    
    73,957
    
    
    
    3.71
    %Advances from the FHLB
    
    
    1,037,924
    
    
    
    11,394
    
    
    
    4.36
    %
    
    
    1,185,152
    
    
    
    12,397
    
    
    
    4.15
    %Loans payable
    
    
    932,594
    
    
    
    14,948
    
    
    
    6.36
    %
    
    
    4,071,922
    
    
    
    51,051
    
    
    
    4.97
    %Notes payable
    
    
    886,994
    
    
    
    15,305
    
    
    
    6.85
    %
    
    
    1,086,094
    
    
    
    15,236
    
    
    
    5.57
    %Total interest-bearing liabilities/interest expense
    
    
    12,520,499
    
    
    $
    143,147
    
    
    
    4.54
    %
    
    
    18,315,236
    
    
    $
    181,967
    
    
    
    3.94
    %Total non-interest-bearing liabilities
    
    
    316,996
    
    
    
    
    
    
    
    
    
    
    
    282,459Total liabilities
    
    
    12,837,495
    
    
    
    
    
    
    
    
    
    
    
    18,597,695Stockholders equity
    
    
    1,433,560
    
    
    
    
    
    
    
    
    
    
    
    1,263,837Total liabilities and stockholders equity
    
    $
    14,271,055
    
    
    
    
    
    
    
    
    
    
    $
    19,861,532Net interest-earning assets
    
    $
    575,319
    
    
    
    
    
    
    
    
    
    
    $
    695,284Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    44,148
    
    
    
    
    
    
    
    
    
    
    $
    66,553Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.13
    %
    
    
    
    
    
    
    
    
    
    
    1.25
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.34
    %
    
    
    
    
    
    
    
    
    
    
    1.39
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    104.60
    %
    
    
    
    
    
    
    
    
    
    
    103.80
    %
 
 (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 $0.3 million and $1.4 million for the third 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. 51




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TABLE B
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
 NINE MONTH PERIOD ENDED SEPTEMBER 30,2006
    
    
    
    
    
    
    2005AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGE(DOLLARS IN THOUSANDS)
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    7,194,665
    
    
    $
    364,388
    
    
    
    6.77
    %
    
    $
    7,071,753
    
    
    $
    363,526
    
    
    
    6.87
    %Mortgage-backed securities
    
    
    3,847,985
    
    
    
    145,613
    
    
    
    5.06
    %
    
    
    4,716,362
    
    
    
    169,615
    
    
    
    4.81
    %Interest-only strips
    
    
    51,686
    
    
    
    4,956
    
    
    
    12.82
    %
    
    
    111,610
    
    
    
    8,640
    
    
    
    10.35
    %Investment securities
    
    
    2,846,379
    
    
    
    89,837
    
    
    
    4.22
    %
    
    
    3,578,767
    
    
    
    106,092
    
    
    
    3.96
    %Other interest-earning assets
    
    
    1,101,986
    
    
    
    38,616
    
    
    
    4.69
    %
    
    
    2,553,803
    
    
    
    54,646
    
    
    
    2.86
    %Total interest-earning assets/interest income
    
    
    15,042,701
    
    
    $
    643,410
    
    
    
    5.72
    %
    
    
    18,032,295
    
    
    $
    702,519
    
    
    
    5.21
    %Total non-interest-earning assets
    
    
    1,446,874
    
    
    
    
    
    
    
    
    
    
    
    851,399Total assets
    
    $
    16,489,575
    
    
    
    
    
    
    
    
    
    
    $
    18,883,694LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    4,219,329
    
    
    $
    111,340
    
    
    
    3.53
    %
    
    $
    3,746,995
    
    
    $
    74,961
    
    
    
    2.67
    %Repurchase agreements
    
    
    5,710,534
    
    
    
    185,587
    
    
    
    4.35
    %
    
    
    7,192,152
    
    
    
    184,050
    
    
    
    3.42
    %Advances from the FHLB
    
    
    1,036,515
    
    
    
    33,181
    
    
    
    4.28
    %
    
    
    1,220,676
    
    
    
    37,931
    
    
    
    4.15
    %Loans payable
    
    
    2,510,349
    
    
    
    110,637
    
    
    
    5.89
    %
    
    
    4,055,800
    
    
    
    145,337
    
    
    
    4.79
    %Notes payable
    
    
    897,494
    
    
    
    44,458
    
    
    
    6.62
    %
    
    
    1,090,295
    
    
    
    42,293
    
    
    
    5.19
    %Total interest-bearing liabilities/interest expense
    
    
    14,374,221
    
    
    $
    485,203
    
    
    
    4.51
    %
    
    
    17,305,918
    
    
    $
    484,572
    
    
    
    3.74
    %Total non-interest-bearing liabilities
    
    
    605,316
    
    
    
    
    
    
    
    
    
    
    
    315,383Total liabilities
    
    
    14,979,537
    
    
    
    
    
    
    
    
    
    
    
    17,621,301Stockholders equity
    
    
    1,510,038
    
    
    
    
    
    
    
    
    
    
    
    1,262,393Total liabilities and stockholders equity
    
    $
    16,489,575
    
    
    
    
    
    
    
    
    
    
    $
    18,883,694Net interest-earning assets
    
    $
    668,480
    
    
    
    
    
    
    
    
    
    
    $
    726,377Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    158,207
    
    
    
    
    
    
    
    
    
    
    $
    217,947Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.21
    %
    
    
    
    
    
    
    
    
    
    
    1.47
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.41
    %
    
    
    
    
    
    
    
    
    
    
    1.62
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    104.65
    %
    
    
    
    
    
    
    
    
    
    
    104.20
    %
 
 (1)
    
    Average loan balances include the average balance of non-accruing loans, on which interest income is recognized when collected. Also includes the average balance of GNMA defaulted loans for which the Company has an unconditional
buy-back option.(2)
    
    Interest income on loans includes $2.2 million and $3.5 million for the first nine months 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. 52




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TABLE C
NET INTEREST INCOME VARIANCE ANALYSIS
 QUARTER ENDEDSEPTEMBER 30,2006 COMPARED TO 2005INCREASE (DECREASE) DUE TO:(IN THOUSANDS)
    
    VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    (29,409
    )
    
    $
    421
    
    
    $
    (28,988
    )Mortgage-backed securities
    
    
    (14,516
    )
    
    
    3,392
    
    
    
    (11,124
    )Interest-only strips
    
    
    (1,423
    )
    
    
    255
    
    
    
    (1,168
    )Investment securities
    
    
    (13,781
    )
    
    
    2,426
    
    
    
    (11,355
    )Other interest-earning assets
    
    
    (12,649
    )
    
    
    4,059
    
    
    
    (8,590
    )TOTAL INTEREST INCOME VARIANCE
    
    
    (71,778
    )
    
    
    10,553
    
    
    
    (61,225
    )INTEREST EXPENSE VARIANCEDeposits
    
    
    1,471
    
    
    
    10,328
    
    
    
    11,799Repurchase agreements
    
    
    (23,389
    )
    
    
    9,807
    
    
    
    (13,582
    )Advances from the FHLB
    
    
    (1,544
    )
    
    
    541
    
    
    
    (1,003
    )Loans payable
    
    
    (39,318
    )
    
    
    3,215
    
    
    
    (36,103
    )Notes payable
    
    
    (2,771
    )
    
    
    2,840
    
    
    
    69TOTAL INTEREST EXPENSE VARIANCE
    
    
    (65,551
    )
    
    
    26,731
    
    
    
    (38,820
    )NET INTEREST INCOME VARIANCE
    
    $
    (6,227
    )
    
    $
    (16,178
    )
    
    $
    (22,405
    )
 53




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TABLE D
NET INTEREST INCOME VARIANCE ANALYSIS
 NINE MONTH PERIOD ENDEDSEPTEMBER 30,2006 COMPARED TO 2005INCREASE (DECREASE) DUE TO:(IN THOUSANDS)
    
    VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    6,293
    
    
    $
    (5,431
    )
    
    $
    862Mortgage-backed securities
    
    
    (31,237
    )
    
    
    7,235
    
    
    
    (24,002
    )Interest-only strips
    
    
    (4,643
    )
    
    
    959
    
    
    
    (3,684
    )Investment securities
    
    
    (21,794
    )
    
    
    5,539
    
    
    
    (16,255
    )Other interest-earning assets
    
    
    (31,150
    )
    
    
    15,120
    
    
    
    (16,030
    )TOTAL INTEREST INCOME VARIANCE
    
    
    (82,531
    )
    
    
    23,422
    
    
    
    (59,109
    )INTEREST EXPENSE VARIANCEDeposits
    
    
    9,382
    
    
    
    26,997
    
    
    
    36,379Repurchase agreements
    
    
    (38,146
    )
    
    
    39,683
    
    
    
    1,537Advances from the FHLB
    
    
    (5,757
    )
    
    
    1,007
    
    
    
    (4,750
    )Loans payable
    
    
    (55,440
    )
    
    
    20,740
    
    
    
    (34,700
    )Notes payable
    
    
    (7,486
    )
    
    
    9,651
    
    
    
    2,165TOTAL INTEREST EXPENSE VARIANCE
    
    
    (97,447
    )
    
    
    98,078
    
    
    
    631NET INTEREST INCOME VARIANCE
    
    $
    14,916
    
    
    $
    (74,656
    )
    
    $
    (59,740
    )
 PROVISION FOR LOAN AND LEASE LOSSES
   54




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NON-INTEREST INCOME
  Net Gain (Loss) on Mortgage Loan Sales and Fees.
      55




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##### Table of Contents



FOR THE
    
    FOR THE
    
    FOR THE
    
    FOR THEQUARTER
    
    QUARTER
    
    NINE MONTH
    
    NINE MONTHENDED
    
    ENDED
    
    PERIOD ENDED
    
    PERIOD ENDEDSEPTEMBER 30,
    
    SEPTEMBER 30,
    
    SEPTEMBER 30,
    
    SEPTEMBER 30,(In thousands)
    
    2006
    
    2005
    
    2006
    
    2005Total loan sales and securitizations
    
    $
    85,700
    
    
    $
    541,953
    
    
    $
    3,694,733
    
    
    $
    2,113,256Total loans sales resulting in the
recording of IOs
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    732,650IOs capitalized
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    10,981MSRs capitalized
    
    $
    1,858
    
    
    $
    15,093
    
    
    $
    48,720
    
    
    $
    32,936
 Net Servicing Income.
  TABLE E
 NET SERVICING (LOSS) INCOME
 NINE MONTH PERIODQUARTER ENDED
    
    
    ENDEDSEPTEMBER 30,
    
    
    SEPTEMBER 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Servicing fees (net of guarantee fees)
    
    $
    10,018
    
    
    $
    7,950
    
    
    $
    26,543
    
    
    $
    23,314Late charges
    
    
    2,344
    
    
    
    2,176
    
    
    
    7,097
    
    
    
    6,481Prepayment penalties
    
    
    121
    
    
    
    725
    
    
    
    884
    
    
    
    1,760Interest loss
    
    
    (1,076
    )
    
    
    (418
    )
    
    
    (3,643
    )
    
    
    (2,749
    )Other servicing fees
    
    
    60
    
    
    
    120
    
    
    
    200
    
    
    
    319Servicing income, gross
    
    
    11,467
    
    
    
    10,553
    
    
    
    31,081
    
    
    
    29,125Amortization of servicing assets
    
    
    (9,572
    )
    
    
    (6,865
    )
    
    
    (22,476
    )
    
    
    (19,997
    )Net (impairment) recovery of servicing assets
    
    
    (4,858
    )
    
    
    20,358
    
    
    
    (5,005
    )
    
    
    2,976Total net servicing (loss) income
    
    $
    (2,963
    )
    
    $
    24,046
    
    
    $
    3,600
    
    
    $
    12,104
  Trading Activities.
 56




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TABLE F
 COMPONENTS OF TRADING ACTIVITIES
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net realized (losses) gains on sales of securities held for trading
    
    $
    (8,892
    )
    
    $
    3,178
    
    
    $
    (5,479
    )
    
    $
    10,286Gains (losses ) on the IO valuation
    
    
    2,425
    
    
    
    (25,263
    )
    
    
    (40,437
    )
    
    
    (9,686
    )Net unrealized gains (losses) on trading securities, excluding IOs
    
    
    733
    
    
    
    (117
    )
    
    
    (2,706
    )
    
    
    (1,690
    )Net realized and unrealized (losses) gains on derivative instruments
    
    
    (15,811
    )
    
    
    50,296
    
    
    
    9,576
    
    
    
    (7,243
    )Total
    
    $
    (21,545
    )
    
    $
    28,094
    
    
    $
    (39,046
    )
    
    $
    (8,333
    )
   Net Gain on Sale of Investment Securities.
 57




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##### Table of Contents



Commissions, Fees and Other Income.
 TABLE G
 COMMISSIONS, FEES AND OTHER INCOME
 QUARTER
    
    
    NINE MONTH PERIODENDED SEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In Thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Retail banking fees
    
    $
    4,731
    
    
    $
    4,618
    
    
    $
    14,490
    
    
    $
    12,953Securities brokerage and asset
management fees and
commissions
    
    
    148
    
    
    
    330
    
    
    
    868
    
    
    
    1,003Insurance agency commissions
    
    
    2,095
    
    
    
    3,244
    
    
    
    6,854
    
    
    
    9,220Other income
    
    
    418
    
    
    
    2,098
    
    
    
    6,426
    
    
    
    3,059Total
    
    $
    7,392
    
    
    $
    10,290
    
    
    $
    28,638
    
    
    $
    26,235
     58




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##### Table of Contents



NON-INTEREST EXPENSE S
  TABLE H
 NON INTEREST EXPENSES
 QUARTER
    
    
    NINE MONTH PERIODENDED SEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(In Thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Compensation and employee benefits
    
    $
    21,741
    
    
    $
    23,639
    
    
    $
    64,366
    
    
    $
    72,907Taxes, other than payroll and income taxes
    
    
    2,807
    
    
    
    2,787
    
    
    
    9,379
    
    
    
    7,513Advertising
    
    
    2,593
    
    
    
    4,044
    
    
    
    8,414
    
    
    
    12,972Professional
services  excluding restatement
expenses
    
    
    10,133
    
    
    
    4,366
    
    
    
    23,974
    
    
    
    12,196Professional
services  restatement related expenses
    
    
    404
    
    
    
    13,619
    
    
    
    19,941
    
    
    
    21,025Communication and information systems
    
    
    4,430
    
    
    
    4,391
    
    
    
    13,985
    
    
    
    13,779Occupancy and other office expenses
    
    
    6,747
    
    
    
    8,320
    
    
    
    20,691
    
    
    
    23,665Depreciation and amortization
    
    
    5,392
    
    
    
    5,424
    
    
    
    17,020
    
    
    
    15,506Other
    
    
    6,071
    
    
    
    3,686
    
    
    
    17,143
    
    
    
    12,755Total non-interest expenses
    
    $
    60,318
    
    
    $
    70,276
    
    
    $
    194,913
    
    
    $
    192,318
   INCOME TAXES
  59




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60




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BALANCE SHEET AND OPERATING DATA ANALYSIS
 LOAN PRODUCTION
  TABLE I
 LOAN PRODUCTION
 QUARTER ENDED
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    ENDED SEPTEMBER 30,(Dollars in Thousands, Except for Average Initial Loan Balance)
    
    2006
    
    2005
    
    2006
    
    2005FHA/VA mortgage loansNumber of loans
    
    
    493
    
    
    
    876
    
    
    
    1,515
    
    
    
    3,238Volume of loans
    
    $
    50,259
    
    
    $
    76,924
    
    
    $
    152,457
    
    
    $
    273,848Percent of total volume
    
    
    15
    %
    
    
    6
    %
    
    
    9
    %
    
    
    6
    %Average initial loan balance
    
    $
    101,945
    
    
    $
    87,813
    
    
    $
    100,632
    
    
    $
    84,573Conventional conforming mortgage loansNumber of loans
    
    
    316
    
    
    
    2,162
    
    
    
    1,167
    
    
    
    7,584Volume of loans
    
    $
    34,851
    
    
    $
    272,352
    
    
    $
    132,409
    
    
    $
    919,523Percent of total volume
    
    
    11
    %
    
    
    19
    %
    
    
    8
    %
    
    
    22
    %Average initial loan balance
    
    $
    110,288
    
    
    $
    125,972
    
    
    $
    113,461
    
    
    $
    121,245Conventional non  conforming mortgage loans(1)Number of loans
    
    
    751
    
    
    
    6,714
    
    
    
    8,055
    
    
    
    18,045Volume of loans
    
    $
    77,878
    
    
    $
    719,828
    
    
    $
    856,450
    
    
    $
    1,982,805Percent of total volume
    
    
    24
    %
    
    
    52
    %
    
    
    51
    %
    
    
    47
    %Average initial loan balance
    
    $
    103,699
    
    
    $
    107,213
    
    
    $
    106,325
    
    
    $
    109,881Other(2)Number of loans
    
    
    699
    
    
    
    3,540
    
    
    
    2,479
    
    
    
    11,961Volume of loans
    
    $
    166,131
    
    
    $
    328,292
    
    
    $
    550,537
    
    
    $
    1,068,338Percent of total volume
    
    
    50
    %
    
    
    23
    %
    
    
    32
    %
    
    
    25
    %Total loansNumber of loans
    
    
    2,259
    
    
    
    13,292
    
    
    
    13,216
    
    
    
    40,828Volume of loans
    
    $
    329,119
    
    
    $
    1,397,396
    
    
    $
    1,691,853
    
    
    $
    4,244,514
 
 (1)
    
    Includes $8.6 million and $60.5 million in second mortgages for the quarters ended September 30, 2006 and 2005, respectively, and
$67.5 million and $164.2 million in second mortgages for the nine month periods ended September 30, 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. 61




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TABLE J
 LOAN ORIGINATION SOURCES
 NINE MONTH PERIOD ENDED SEPTEMBER 30,2006
    
    2005Puerto Rico
    
    US
    
    Total
    
    Puerto Rico
    
    US
    
    TotalRetail
    
    
    62
    %
    
    
    
    
    
    
    62
    %
    
    
    69
    %
    
    
    1
    %
    
    
    70
    %Wholesale(1)
    
    
    4
    %
    
    
    
    
    
    
    4
    %
    
    
    8
    %
    
    
    
    
    
    
    8
    %New Housing Developments
    
    
    19
    %
    
    
    3
    %
    
    
    22
    %
    
    
    10
    %
    
    
    2
    %
    
    
    12
    %Multi-family
    
    
    
    
    
    
    1
    %
    
    
    1
    %
    
    
    
    
    
    
    
    
    
    
    Other(2)
    
    
    9
    %
    
    
    2
    %
    
    
    11
    %
    
    
    7
    %
    
    
    3
    %
    
    
    10
    %
 
 (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
  62




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TABLE K
 MORTGAGE LOAN SERVICING
 AS OF SEPTEMBER 30,(Dollars in Thousands, Except for Average Size of Loans)
    
    2006
    
    
    2005COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END:GNMA
    
    $
    2,168,023
    
    
    $
    2,240,558FHLMC/FNMA
    
    
    4,033,627
    
    
    
    3,979,137Other conventional mortgage loans(1)(2)
    
    
    9,304,017
    
    
    
    9,189,884Total servicing portfolio
    
    $
    15,505,667
    
    
    $
    15,409,579SELECTED DATA REGARDING MORTGAGE LOANS SERVICED:Number of loans
    
    
    171,059
    
    
    
    171,770Weighted-average interest rate
    
    
    6.59
    %
    
    
    6.64
    %Weighted-average remaining maturity (months)
    
    
    254
    
    
    
    257Weighted-average
gross servicing fee rate - loans serviced to others
    
    
    0.3950
    %
    
    
    0.3903
    %Average servicing portfolio(3)
    
    $
    15,709,088
    
    
    $
    14,802,637Principal prepayments
    
    $
    1,102,310
    
    
    $
    1,769,424Constant prepayment rate
    
    
    9
    %
    
    
    14
    %Average size of loans
    
    $
    90,645
    
    
    $
    89,711Servicing assets, net
    
    $
    178,010
    
    
    $
    142,905DELINQUENT MORTGAGE LOANS AND PENDING
FORECLOSURES AT PERIOD END:60-89 days past due
    
    
    1.59
    %
    
    
    1.27
    %90 days or more past due
    
    
    1.73
    %
    
    
    1.66
    %Total delinquencies excluding foreclosures
    
    
    3.32
    %
    
    
    2.93
    %Foreclosures pending
    
    
    2.22
    %
    
    
    1.62
    %SERVICING PORTFOLIO ACTIVITY:Beginning servicing portfolio
    
    $
    15,727,604
    
    
    $
    14,264,367Add:Loans funded and purchased(4)
    
    
    1,144,559
    
    
    
    3,231,905Bulk servicing acquired
    
    
    16,376
    
    
    
    181,712Less:Servicing sales
    
    
    39,891
    
    
    
    7,583Run-off(5)
    
    
    1,342,981
    
    
    
    2,260,822Ending servicing portfolio
    
    $
    15,505,667
    
    
    $
    15,409,579
 
 (1)
    
    Includes $3.6 billion and $5.7 billion of loans owned by Doral Financial at September 30, 2006 and 2005, respectively, which represented 23%and 37% of
the total servicing portfolio as of such dates.(2)
    
    Includes portfolios of $253.7 million and $287.7 million at September 30, 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 $4.8 billion and $5.4 billion at September 30, 2006 and 2005, respectively.(4)
    
    Excludes approximately $547.3 million and $1.0 billion of commercial, consumer, construction and other non-mortgage loans originated by Doral Financial
but not part of the mortgage servicing-portfolio as of September 30, 2006 and 2005, respectively.(5)
    
    Run-off refers to regular amortization of loans, prepayments and foreclosures. 63




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LIQUIDITY AND CAPITAL RESOURCES
      64




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65




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TABLE L
 SOURCES OF BORROWINGS
 AS OF SEPTEMBER 30, 2006
    
    AS OF DECEMBER 31, 2005AMOUNT
    
    AVERAGE
    
    AMOUNT
    
    AVERAGE(DOLLARS IN THOUSANDS)
    
    OUTSTANDING
    
    RATE
    
    OUTSTANDING
    
    RATEDeposits
    
    $
    4,377,266
    
    
    
    3.80
    %
    
    $
    4,237,269
    
    
    
    2.98
    %Repurchase Agreements
    
    
    5,251,099
    
    
    
    4.39
    %
    
    
    6,054,598
    
    
    
    4.08
    %Advances from FHLB
    
    
    1,034,500
    
    
    
    4.27
    %
    
    
    969,500
    
    
    
    4.08
    %Loans Payable
    
    
    913,000
    
    
    
    6.85
    %
    
    
    3,578,230
    
    
    
    5.75
    %Notes Payable
    
    
    882,472
    
    
    
    6.61
    %
    
    
    965,621
    
    
    
    5.86
    %
     66




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TABLE M
 AVERAGE DEPOSIT BALANCE
 NINE MONTH PERIODENDED
    
    
    YEAR ENDEDSEPTEMBER 30, 2006
    
    
    DECEMBER 31, 2005AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE(DOLLARS IN THOUSANDS)
    
    BALANCE
    
    
    RATE
    
    
    BALANCE
    
    
    RATECertificates of deposit
    
    $
    2,878,774
    
    
    
    4.18
    %
    
    $
    2,248,530
    
    
    
    3.56
    %Regular passbook savings
    
    
    449,755
    
    
    
    3.18
    %
    
    
    476,600
    
    
    
    2.34
    %NOW accounts
    
    
    536,749
    
    
    
    2.64
    %
    
    
    673,755
    
    
    
    2.22
    %Non-interest bearing
    
    
    354,051
    
    
    
    
    
    
    
    442,940
    
    
    
    Total deposits
    
    $
    4,219,329
    
    
    
    3.53
    %
    
    $
    3,841,825
    
    
    
    2.76
    %
  TABLE N
 CERTIFICATES OF DEPOSIT MATURITIES
 (IN THOUSANDS)
    
    AMOUNTCertificates of deposit maturing:Three months or less
    
    $
    491,726Over three through six months
    
    
    250,633Over six through twelve months
    
    
    1,046,669Over twelve months
    
    
    744,403Total
    
    $
    2,533,431
  REGULATORY CAPITAL RATIOS
  67




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TABLE O
 REGULATORY CAPITAL RATIOS
 DORAL
    
    DORAL
    
    DORALFINANCIAL
    
    BANK PR
    
    BANK NYTotal Capital (Total capital to risk-weighted assets)
    
    
    14.9
    %
    
    
    20.2%
    
    
    
    16.1
    %Tier 1 Capital Ratio (Tier 1 capital to risk-weighted assets)
    
    
    13.0
    %
    
    
    19.0%
    
    
    
    15.6
    %Leverage Ratio(1)
    
    
    6.1
    %
    
    
    7.1%
    
    
    
    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
   68




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OFF-BALANCE SHEET ACTIVITIES
   TABLE P
LOANS SUBJECT TO RECOURSE BY LOAN TYPE
 Loans Past Due  Over 90Days Without Insurance,Outstanding
    
    
    Weighted-average
    
    
    and Loan-To-Value Over(In thousands)
    
    Balance
    
    
    Loan to Value
    
    
    80%Loan Type:Conventional loans
    
    $
    1,223,230
    
    
    
    76.2
    %
    
    $
    10,268Commercial loans
    
    
    2,958
    
    
    
    68.5
    %
    
    
    Total
    
    $
    1,226,188
    
    
    
    76.2
    %
    
    $
    10,268
   69




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70




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CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
  TABLE Q
CONTRACTUAL OBLIGATIONS
 (IN THOUSANDS)
    
    PAYMENT DUE BY PERIODLESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTERCONTRACTUAL OBLIGATIONS(1)
    
    TOTAL
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSDeposits
    
    $
    4,377,266
    
    
    $
    3,563,644
    
    
    $
    702,528
    
    
    $
    90,328
    
    
    $
    20,766Repurchase agreements(2)
    
    
    5,251,099
    
    
    
    1,996,299
    
    
    
    2,454,800
    
    
    
    800,000
    
    
    
    Advances from the FHLB(2)
    
    
    1,034,500
    
    
    
    767,500
    
    
    
    217,000
    
    
    
    50,000
    
    
    
    Loans payable(3)
    
    
    913,000
    
    
    
    141,062
    
    
    
    224,174
    
    
    
    163,783
    
    
    
    383,981Notes payable
    
    
    882,472
    
    
    
    636,937
    
    
    
    1,715
    
    
    
    765
    
    
    
    243,055Other liabilities
    
    
    198,395
    
    
    
    195,395
    
    
    
    2,000
    
    
    
    1,000
    
    
    
    Non-cancelable operating leases
    
    
    66,915
    
    
    
    7,634
    
    
    
    13,917
    
    
    
    11,328
    
    
    
    34,036Total Contractual Cash Obligations
    
    $
    12,723,647
    
    
    $
    7,308,471
    
    
    $
    3,616,134
    
    
    $
    1,117,204
    
    
    $
    681,838
 
 (1)
    
    Amounts included in the table above do not include interest.(2)
    
    Includes $3.1 billion of repurchase agreements with an average rate of 4.16% and $667.5 million in advances from the
FHLB-NY with an average rate of 4.06%,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 March 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 $841.4 million 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 14.3% to estimate the repayments. TABLE R
OTHER COMMERCIAL COMMITMENTS(1)
 (IN THOUSANDS)
    
    AMOUNT OF COMMITMENT EXPIRATION PER PERIODTOTALAMOUNT
    
    
    LESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTEROTHER COMMERCIAL COMMITMENTS
    
    COMMITTED
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSCommitments to extend credit
    
    $
    406,881
    
    
    $
    267,213
    
    
    $
    117,052
    
    
    $
    22,402
    
    
    $
    214Commitments to sell mortgage-backed
securities and loans
    
    
    278,930
    
    
    
    278,930
    
    
    
    
    
    
    
    
    
    
    
    Commercial and financial standby letters of credit
    
    
    7,241
    
    
    
    3,354
    
    
    
    3,887
    
    
    
    
    
    
    
    Maximum contractual recourse exposure
    
    
    985,017
    
    
    
    99,121
    
    
    
    650,963
    
    
    
    
    
    
    
    234,933Total
    
    $
    1,678,069
    
    
    $
    648,618
    
    
    $
    771,902
    
    
    $
    22,402
    
    
    $
    235,147
 
 (1)
    
    Refer to Off-Balance Sheet Activities above for additional information regarding other commercial commitments of the Company. RISK MANAGEMENT
  71




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Interest Rate and Market Risk Management
  Doral Financials Risk Profile
    Market Value
    
    Net InterestAs of September 30, 2006
    
    of Equity Risk
    
    Income Risk1+ 100 BPS
    
    
    (31.4
    )%
    
    
    2.3
    %- 100 BPS
    
    
    11.0
    %
    
    
    (2.0
    )%
 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.   72




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September 30, 2006
    
    December 31, 2005Change in Fair
    
    Change in
    
    Change in Fair
    
    Change inValue of
    
    Fair Value of
    
    Value of
    
    Fair Value ofAvailable for
    
    Held to
    
    Available for
    
    Held to(In thousands)
    
 
    Sale Securities
    
    Maturity
    
    Sale Securities
    
    MaturityChange in yield curve (basis points)
    
 
    and FHLB Stock
    
    Securities
    
    and FHLB Stock
    
    Securities+200
    
 
    $
    (383,782
    )
    
    $
    (329,838
    )
    
    $
    (425,632
    )
    
    $
    (290,743
    )+100
    
 
    
    (184,068
    )
    
    
    (153,851
    )
    
    
    (200,611
    )
    
    
    (140,570
    )+50
    
 
    
    (88,285
    )
    
    
    (74,004
    )
    
    
    (94,944
    )
    
    
    (68,916
    )Base
    
 
    
    
    
    
    
    
    
    
    
    
    
    
    
    -50
    
 
    
    76,570
    
    
    
    65,812
    
    
    
    79,585
    
    
    
    62,654-100
    
 
    
    133,419
    
    
    
    124,833
    
    
    
    137,066
    
    
    
    121,809-200
    
 
    
    200,059
    
    
    
    225,881
    
    
    
    212,629
    
    
    
    232,626
   Derivatives.
  73




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TABLE S
INTEREST RATE SWAPS
(DOLLARS IN THOUSANDS)
 INTEREST
    
    INTERESTNOTIONAL
    
    MATURITY
    
    
    
    RATE
    
    RATE
    
    FAIRAMOUNT
    
    DATE
    
    PURPOSE
    
    RECEIVED
    
    PAID
    
    VALUE$550,000
    
    August, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    5.416
    %
    
    
    4.430
    %
    
    $
    4,325$550,000
    
    August, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    5.426
    %
    
    
    4.443
    %
    
    $
    4,295$100,000
    
    September, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    5.390
    %
    
    
    3.688
    %
    
    $
    1,514$100,000
    
    September, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    5.390
    %
    
    
    3.655
    %
    
    $
    1,547$200,000
    
    November, 2009
    
    To protect the
spread of the
variable IOs
    
    
    5.499
    %
    
    
    3.773
    %
    
    $
    7,345$200,000
    
    November, 2009
    
    To protect the
spread of the
variable IOs
    
    
    5.410
    %
    
    
    3.975
    %
    
    $
    6,216
   74




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TABLE T
FAIR VALUE RECONCILIATION
 Nine Month Period ended(In thousands)
    
    September 30, 2006Fair value of contracts outstanding at the beginning of the period
    
    $
    25,241Contracts realized or otherwise settled during the period
    
    
    (7,572
    )Fair value of new contracts entered into during the period
    
    
    31Changes in fair values during the period
    
    
    6,776Fair value of contracts outstanding at the end of the period
    
    $
    24,476
 TABLE U
SOURCE OF FAIR VALUE
 (In thousands)
    
    Payment Due by PeriodMaturity
    
    
    
    
    
    
    
    
    
    
    Maturityless than
    
    
    Maturity
    
    
    Maturity
    
    
    in excess
    
    
    Total FairAs of September 30, 2006
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    of 5 Years
    
    
    ValueSource of Fair ValuePrices actively quoted
    
    $
    (2,266
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (2,266
    )Prices provided by
other external sources
    
    
    13,181
    
    
    
    
    
    
    
    13,561
    
    
    
    
    
    
    
    26,742$
    10,915
    
    
    $
    
    
    
    $
    13,561
    
    
    $
    
    
    
    $
    24,476
  75




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TABLE V
DERIVATIVE COUNTERPARTY CREDIT EXPOSURE
 (Dollars in thousands)
    
    September 30, 2006Weighted AverageNumber of
    
    
    
    
    
    
    Total Exposure
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    At Fair Value(3)
    
    
    Values
    
    
    Total Fair Value
    
    
    (in years)AA-
    
    
    1
    
    
    $
    1,150,000
    
    
    $
    17,963
    
    
    $
    
    
    
    $
    17,963
    
    
    
    1.67A+
    
    
    3
    
    
    
    1,250,000
    
    
    
    4,971
    
    
    
    (2,266
    )
    
    
    2,705
    
    
    
    0.41Subtotal
    
    
    4
    
    
    
    2,400,000
    
    
    $
    22,934
    
    
    $
    (2,266
    )
    
    $
    20,668
    
    
    
    1.01Other derivatives(4)
    
    
    
    
    
    
    5,000,000Total Derivatives
    
    
    
    
    
    $
    7,400,000
 
 (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)
    
    During the third quarter of 2006 the Company recognized a net
unrealized gain of $1.5 million from a derivative resulting from
certain gain sharing agreements created in connection with the previously reported restructuring of various loan
transfer transactions. Pursuant to
the agreements executed in connection with certain of those sales,
the Company has the right to share, on a limited basis, the  gains realized by
the buyers of such loans within specified time periods from
subsequent sales or securitizations. (Dollars in thousands)
    
    December 31, 2005Weighted AverageNumber of
    
    
    
    
    
    
    Total Exposure
    
    
    Negative Fair
    
    
    
    
    
    
    Contractual MaturityRating(1)
    
    Counterparties(2)
    
    
    Notional
    
    
    At Fair 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. 76




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Credit Risk
        77




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As ofSeptember 30,
    
    
    As of(In thousands)
    
    2006
    
    
    December 31, 2005Construction loans(1)
    
    $
    834,288
    
    
    $
    795,848Total undisbursed funds under existing commitments
    
    $
    325,441
    
    
    $
    375,694Non-performing construction loans
    
    $
    36,084
    
    
    $
    9,212Net charge
offs  Construction loans
    
    $
    
    
    
    $
    4,938Allowance
for loan losses  Construction loans
    
    $
    28,704
    
    
    $
    20,748Non-performing construction loans to total construction loans
    
    
    4.33
    %
    
    
    1.16
    %Allowance
for loan losses  construction loans to total
construction loans
    
    
    3.44
    %
    
    
    2.61
    %Net charge-offs to total construction loans
    
    
    0.00
    %
    
    
    0.62
    %
 
 (1)
    
    Includes $690.7 million and $670.3 million of construction loans for residential
housing projects as of September 30, 2006 and December 31, 2005, respectively. Also includes $143.6
million and $125.5 million of construction loans for commercial, condominiums and multi-family
projects as of September 30, 2006 and December 31, 2005, respectively. Non-performing assets and allowance for loan and lease losses
    78




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79




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TABLE W
NON-PERFORMING ASSETS
 AS OF
    
    
    AS OF(DOLLARS IN THOUSANDS)
    
    SEPTEMBER 30, 2006
    
    
    DECEMBER 31, 2005Non-accrual loans:Residential
mortgage loans  held for sale (1)
    
    $
    81,807
    
    
    $
    171,298Residential
mortgage loans  held for investment (2)
    
    
    77,902
    
    
    
    3,904Total non-accrual residential mortgage loans
    
    
    159,709
    
    
    
    175,202Other lending activities:Construction loans
    
    
    36,084
    
    
    
    9,042Commercial real estate loans
    
    
    16,047
    
    
    
    8,594Commercial
real estate loans  held for sale
    
    
    9,438
    
    
    
    2,923Consumer loans
    
    
    3,059
    
    
    
    1,932Commercial non-real estate loans
    
    
    2,575
    
    
    
    1,056Lease financing receivable
    
    
    788
    
    
    
    158Total non-accrual other lending activities(3)
    
    
    67,991
    
    
    
    23,705Total non-accrual loans
    
    
    227,700
    
    
    
    198,907Construction loans past due 90 days and still accruing
    
    
    
    
    
    
    170Total non-performing loans
    
    
    227,700
    
    
    
    199,077OREO
    
    
    29,830
    
    
    
    17,662Total NPAs of Doral Financial (consolidated)
    
    $
    257,530
    
    
    $
    216,739Total NPAs as a percentage of the loans portfolio, net, and OREO
    
    
    4.53
    %
    
    
    2.77
    %Total NPAs of Doral Financial as a percentage of consolidated total
assets
    
    
    1.87
    %
    
    
    1.25
    %Total non-performing loans to total loans (excluding GNMA defaulted
loans)
    
    
    4.05
    %
    
    
    2.57
    %Ratio of allowance for loan and lease losses to total non-performing
loans (excluding 
non-performing residential mortgage loans and other
non-performing loans held for sale) at end of period(4)
    
    
    83.28
    %
    
    
    162.18
    %
 
 (1)
    
    Does not include approximately $90.2 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 September 30, 2006 and December 31, 2005, respectively.(2)
    
    During 2006, the Company reclassified $885.9 million from
its mortgage loans held for sale portfolio to its loans receivable portfolio. The loans transferred were recognized in
the Companys loan receivable portfolio discounted at their market value.(3)
    
    Refer to  non-performing assets and
allowance for loan and lease losses above for additional information regarding the Companys methodology for assessing
the adequacy of the allowance for loan and lease losses.(4)
    
    The proportion of the allowance for loan losses allocated to
residential mortgage loans to total residential mortgage loans portfolio historically has been lower than in other
lending activities. A substantial part of the amounts due on delinquent residential mortgage loans has been
historically recovered through sale of the property after foreclosure or negotiated settlements with borrowers. For
purpose of comparability with the industry, the ratio of allowance for loan and lease losses to total non-performing
loans excludes the allowance allocated to residential mortgage loans from the numerator and the total residential
mortgage loans portfolio and other non-performing loans held for sale from the denominator. 80




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81




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TABLE X

ALLOWANCE FOR LOAN AND LEASE LOSSES
 QUARTER ENDED
    
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    
    ENDED SEPTEMBER 30,(DOLLARS IN THOUSANDS)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Allowance for Loan and Lease Losses:Balance at beginning of period
    
    $
    44,145
    
    
    $
    22,672
    
    
    $
    35,044
    
    
    $
    20,881Provision (recovery) for loan and lease losses:Construction loans
    
    
    1,394
    
    
    
    6,045
    
    
    
    7,956
    
    
    
    8,617Residential mortgage loans
    
    
    2,383
    
    
    
    731
    
    
    
    3,171
    
    
    
    354Commercial real estate loans
    
    
    3,918
    
    
    
    945
    
    
    
    4,553
    
    
    
    2,581Consumer loans
    
    
    1,441
    
    
    
    1,013
    
    
    
    3,769
    
    
    
    3,896Lease financing
    
    
    246
    
    
    
    442
    
    
    
    679
    
    
    
    817Commercial non-real estate loans
    
    
    862
    
    
    
    237
    
    
    
    1,092
    
    
    
    806Land secured loans
    
    
    (118
    )
    
    
    (43
    )
    
    
    (49
    )
    
    
    4Total provision for loan and lease losses
    
    
    10,126
    
    
    
    9,370
    
    
    
    21,171
    
    
    
    17,075Charge-offs:Construction loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,717
    )Residential mortgage loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (79
    )Commercial real estate loans
    
    
    
    
    
    
    
    
    
    
    (133
    )
    
    
    (29
    )Consumer loans
    
    
    (1,263
    )
    
    
    (789
    )
    
    
    (2,993
    )
    
    
    (1,878
    )Lease financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial non-real estate loans
    
    
    (197
    )
    
    
    (504
    )
    
    
    (490
    )
    
    
    (734
    )Land secured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    (1,460
    )
    
    
    (1,293
    )
    
    
    (3,616
    )
    
    
    (7,437
    )Recoveries:Construction loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential mortgage loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate loans
    
    
    8
    
    
    
    20
    
    
    
    14
    
    
    
    173Consumer loans
    
    
    51
    
    
    
    80
    
    
    
    178
    
    
    
    179Lease financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial non-real estate loans
    
    
    141
    
    
    
    33
    
    
    
    207
    
    
    
    63Land secured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    200
    
    
    
    133
    
    
    
    399
    
    
    
    415Net charge-offs
    
    
    (1,260
    )
    
    
    (1,160
    )
    
    
    (3,217
    )
    
    
    (7,022
    )Other
    
    
    (93
    )
    
    
    (24
    )
    
    
    (80
    )
    
    
    (76
    )Balance at end of period
    
    $
    52,918
    
    
    $
    30,858
    
    
    $
    52,918
    
    
    $
    30,858Allowance for loan losses as a percentage of loans receivable
outstanding at the end of period(1)
    
    
    1.52
    %
    
    
    1.38
    %
    
    
    1.52
    %
    
    
    1.38
    %Net charge-offs to average loans receivable outstanding on an
annualized basis
    
    
    0.14
    %
    
    
    0.22
    %
    
    
    0.13
    %
    
    
    0.49
    %Provision
for loan losses to net charge-offs on an annualized basis
    
    
    803.65
    %
    
    
    807.76
    %
    
    
    658.15
    %
    
    
    243.16
    %
 
 (1)
    
    For purposes of this ratio, the denominator includes loans secured by real estate of $405.0 million and $464.7 million as of September 30, 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. Also includes the unamortized balance of mortgage loans transferred during 2006 from
the mortgage loans held for sale portfolio to the loans receivable
portfolio amounting to $844.0 million as of September 30, 2006. The loans transferred were recognized in
the Companys loan receivable portfolio discounted at its market value. The Company has increased its provision for loan losses by $2.1 million for the nine
months ended September 30, 2006 due to overall deterioration of the loans since the time of transfer. 82




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Operational Risk
  Overview of Operational Risk Management
   Internal Control Over Financial Reporting
  Liquidity Risk
    83




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General Business, Economic and Political Conditions
        84




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Control and Procedures
     85




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Changes in Internal Control Over Financial Reporting
   
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  Doral Financial will need significant outside financing during 2007
   86




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The economy of Puerto Rico is slowing down
       
 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
  87




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Election of Directors
 NOMINEES FOR ONE-YEAR TERM
    
    VOTES FOR
    
    
    VOTES WITHHELDJohn A. Ward, III
    
    
    86,137,721
    
    
    
    9,621,232Glen R. Wakeman
    
    
    92,475,734
    
    
    
    3,283,219Dennis G. Buchert
    
    
    91,751,797
    
    
    
    4,007,156Edgar M. Cullman, Jr.
    
    
    86,637,195
    
    
    
    9,121,758John L. Ernst
    
    
    88,941,635
    
    
    
    6,817,318Peter A. Hoffman
    
    
    90,240,297
    
    
    
    5,518,656John B. Hughes
    
    
    89,375,289
    
    
    
    6,383,664Efraim Kier
    
    
    89,351,559
    
    
    
    6,407,394Adolfo Marzol
    
    
    91,736,397
    
    
    
    4,022,556Manuel Peña-Morros
    
    
    92,499,627
    
    
    
    3,259,326Harold D. Vicente
    
    
    89,252,716
    
    
    
    6,506,237
 Ratification
of the Appointment of PricewaterhouseCoopers LLP as the
Companys Independent Registered Public Accounting Firm for 2006
 For:
    
    
    84,147,290Against:
    
    
    11,385,293Abstain:
    
    
    226,370Broker Non-Votes:
    
    
    0
 
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
    88




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SIGNATURES
  DORAL FINANCIAL CORPORATION(Registrant)Date: December 29, 2006
    
    /s/ Glen WakemanGlen WakemanChief Executive Officer and PresidentDate: December 29, 2006
    
    /s/ Marangal I. DomingoMarangal I. DomingoExecutive Vice President andChief Financial Officer
 89




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    
    
    Description10.1
    
    
    
    Employment Agreement, dated as of August 14, 2006, between Doral Financial
Corporation and Lesbia Blanco.10.2
    
    
    
    Employment Agreement, dated as of August 21, 2006, between Doral Financial
Corporation and Calixto García-Vélez.10.3
    
    
    
    Employment Agreement, dated as of September 25, 2006, between Doral Financial
Corporation and Marangal I. Domingo.10.4
    
    
    
    Employment Agreement, dated as of September 18, 2006, between Doral Financial
Corporation and Olga Mayoral-Wilson.10.5
    
    
    
    Employment Agreement, dated as of October 16, 2006, between Doral Financial
Corporation and Gerardo Leiva.10.6
    
    
    
    Employment Agreement, dated as of October 2, 2006, between Doral Financial
Corporation and Enrique R. Ubarri, Esq.12.1
    
    -
    
    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.
 90