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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 COMMISSION FILE NUMBER 0-17224
 DORAL FINANCIAL CORPORATION
  Puerto Rico
    
    66-0312162(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification number)1451 F.D. Roosevelt Avenue,
    
    00920-2717San Juan, Puerto Rico
    
    (Zip Code)(Address of principal executive offices)
   
  o þ
  þ o o
  o þ




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##### 



DORAL FINANCIAL CORPORATION
INDEX PAGE
 PAGEPART I  FINANCIAL INFORMATION
    
    
    4Item 1  Financial Statements
    
    
    4Consolidated Statements of Financial Condition (Unaudited) as of June 30, 2006
and December 31, 2005
    
    
    4Consolidated Statements of (Loss) Income (Unaudited)  Quarters ended June 30,
2006 and June 30, 2005 and six months ended June 30, 2006 and June 30, 2005
    
    
    5Consolidated Statements of Changes in Stockholders Equity (Unaudited)  Six
months ended June 30, 2006 and June 30, 2005
    
    
    6Consolidated Statements of Comprehensive (Loss) Income (Unaudited)  Quarters
ended June 30, 2006 and June 30, 2005 and six months ended June 30, 2006 and June
30, 2005
    
    
    7Consolidated Statements of Cash Flows (Unaudited)  Six months ended June 30,
2006 and June 30, 2005
    
    
    8Notes to Consolidated Financial Statements (Unaudited)
    
    
    9Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    42Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    81Item 4 Controls and Procedures
    
    
    81PART II  OTHER INFORMATION
    
    
    82Item 1 Legal Proceedings
    
    
    82Item 1A Risk Factors
    
    
    82Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    82Item 3 Defaults Upon Senior Securities
    
    
    82Item 4 Submission of Matters to a Vote of Security Holders
    
    
    82Item 5 Other Information
    
    
    82Item 6 Exhibits
    
    
    82SIGNATURES
    
    
    83EX-12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESEX-12.2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHANGES AND PREFERRED STOCK DIVIDENDSEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO
  2




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EXPLANATORY NOTE
  FORWARD LOOKING STATEMENTS
   
    
    Doral Financials ability to attract new clients and retain existing clients;
    
    Doral Financials ability to retain and attract key employees;
    
    Doral Financials ability to successfully implement new business strategies;
    
    potential adverse developments from ongoing enforcement actions by bank
regulatory agencies;
    
    potential adverse developments in connection with ongoing shareholder litigation
against Doral Financial;
    
    risks and uncertainties associated with the refinancing of the Companys $625
million floating rate notes due July 2007;
    
    Doral Financials ability to derive sufficient income to realize the benefits of
its deferred tax asset;
    
    risks associated with the effects of global, national and regional economic and
political conditions, including with respect to fluctuations in interest rates;
    
    risks arising from worsening economic conditions in Puerto Rico;
    
    potential adverse developments in connection with the ongoing grand jury
investigation by the U.S. Attorneys Office for the Southern District of New York;
    
    risks associated with Doral Financials inability to prepare and timely file
financial statements;
    
    risks arising from the downgrade and potential further downgrades in the credit
ratings of Doral Financials securities;
    
    risks arising from material weaknesses in Doral Financials internal control
over financial reporting; and
    
    developments from changes in the regulatory and legal environment for financial
services companies in Puerto Rico and the United States.
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 (IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
 (UNAUDITED)
 JUNE 30,
    
    
    DECEMBER 31,2006
    
    
    2005ASSETSCash and due from banks
    
    $
    211,174
    
    
    $
    192,141Money market investments:Money market investments with creditors right to repledge
    
    
    75,290
    
    
    
    141,391Other money market investments
    
    
    783,704
    
    
    
    1,212,970Total money market investments
    
    
    858,994
    
    
    
    1,354,361Pledged investment securities that can be repledged:Securities held for trading, at fair value (includes fair value of IOs of $3,208 in 2006; $11,257
in 2005)
    
    
    143,620
    
    
    
    202,759Securities available for sale, at fair value
    
    
    3,726,958
    
    
    
    4,219,153Securities held to maturity, at amortized cost (market value of $1,788,301 in 2006; $1,659,237 in
2005)
    
    
    1,919,647
    
    
    
    1,698,264Total pledged investment securities that can be repledged
    
    
    5,790,225
    
    
    
    6,120,176Other investment securities:Securities held for trading, at fair value (includes fair value of IOs of $49,538 in 2006; $62,777
in 2005)
    
    
    143,904
    
    
    
    185,917Securities available for sale, at fair value
    
    
    271,870
    
    
    
    412,420Securities held to maturity, at amortized cost (market value of $158,319 in 2006; $392,214 in 2005)
    
    
    168,237
    
    
    
    401,430Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    76,923
    
    
    
    72,205Total other investment securities
    
    
    660,934
    
    
    
    1,071,972Total investment securities
    
    
    6,451,159
    
    
    
    7,192,148Loans:Mortgage loans held for sale, at lower of cost or market, pledged with creditors right to repledge
    
    
    886,585
    
    
    
    3,515,156Other mortgage loans held for sale, at lower of cost or market
    
    
    1,246,119
    
    
    
    1,807,039Loans receivable, net of allowance for loan and lease losses (2006 - $44,145; 2005 - $35,044)
    
    
    3,435,828
    
    
    
    2,477,960Total loans
    
    
    5,568,532
    
    
    
    7,800,155Receivables and mortgage-servicing advances
    
    
    91,746
    
    
    
    66,909Accrued interest receivable
    
    
    73,785
    
    
    
    85,338Servicing assets, net
    
    
    190,588
    
    
    
    150,576Premises and equipment, net
    
    
    143,468
    
    
    
    150,450Real estate held for sale, net
    
    
    29,096
    
    
    
    17,662Deferred tax asset
    
    
    256,877
    
    
    
    213,217Other assets
    
    
    70,546
    
    
    
    75,792Total assets
    
    $
    13,945,965
    
    
    $
    17,298,749LIABILITIESDeposits:Non-interest-bearing deposits
    
    $
    381,509
    
    
    $
    425,788Interest-bearing deposits
    
    
    3,828,565
    
    
    
    3,811,481Securities sold under agreements to repurchase
    
    
    5,550,171
    
    
    
    6,054,598Advances from FHLB
    
    
    1,069,500
    
    
    
    969,500Loans payable
    
    
    932,849
    
    
    
    3,578,230Notes payable
    
    
    889,291
    
    
    
    965,621Accrued expenses and other liabilities
    
    
    328,151
    
    
    
    343,722Total liabilities
    
    
    12,980,036
    
    
    
    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
    
    
    165,996
    
    
    
    165,609Legal surplus
    
    
    23,596
    
    
    
    23,596Retained earnings
    
    
    345,769
    
    
    
    404,885Accumulated other comprehensive loss, net of income tax benefit of $9,526 in 2006 and $3,809 in 2005
    
    
    (250,630
    )
    
    
    (125,461
    )Total stockholders equity
    
    
    965,929
    
    
    
    1,149,809Total liabilities and stockholders equity
    
    $
    13,945,965
    
    
    $
    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
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest income:Loans
    
    $
    128,695
    
    
    $
    125,984
    
    
    $
    266,567
    
    
    $
    236,717Mortgage-backed securities
    
    
    48,801
    
    
    
    60,306
    
    
    
    99,996
    
    
    
    112,874Interest-only strips (IOs)
    
    
    1,494
    
    
    
    2,541
    
    
    
    3,325
    
    
    
    5,841Investment securities
    
    
    29,767
    
    
    
    31,939
    
    
    
    59,868
    
    
    
    64,768Other interest-earning assets
    
    
    13,919
    
    
    
    17,700
    
    
    
    26,359
    
    
    
    33,799Total interest income
    
    
    222,676
    
    
    
    238,470
    
    
    
    456,115
    
    
    
    453,999Interest expense:Deposits
    
    
    37,507
    
    
    
    23,178
    
    
    
    70,215
    
    
    
    45,635Securities sold under agreements to repurchase
    
    
    62,983
    
    
    
    59,635
    
    
    
    125,212
    
    
    
    110,093Advances from FHLB
    
    
    11,409
    
    
    
    13,055
    
    
    
    21,787
    
    
    
    25,534Loans payable
    
    
    40,622
    
    
    
    52,099
    
    
    
    95,689
    
    
    
    94,286Notes payable
    
    
    14,712
    
    
    
    14,162
    
    
    
    29,153
    
    
    
    27,057Total interest expense
    
    
    167,233
    
    
    
    162,129
    
    
    
    342,056
    
    
    
    302,605Net interest income
    
    
    55,443
    
    
    
    76,341
    
    
    
    114,059
    
    
    
    151,394Provision for loan and lease losses
    
    
    5,872
    
    
    
    3,658
    
    
    
    11,045
    
    
    
    7,705Net interest income after provision for loan and lease losses
    
    
    49,571
    
    
    
    72,683
    
    
    
    103,014
    
    
    
    143,689Non-interest (loss) income:Net (loss) gain on mortgage loan sales and fees
    
    
    (26,841
    )
    
    
    15,387
    
    
    
    (41,534
    )
    
    
    23,327Net loss on securities held for trading, including gains and losses
on the fair value of IOs
    
    
    (7,554
    )
    
    
    (43,063
    )
    
    
    (17,501
    )
    
    
    (36,427
    )Net gain on sale of investment securities
    
    
    
    
    
    
    4,714
    
    
    
    63
    
    
    
    9,558Servicing income (loss), net of amortization and
impairment/recovery
    
    
    1,413
    
    
    
    (19,770
    )
    
    
    6,563
    
    
    
    (11,942
    )Commissions, fees and other income
    
    
    11,512
    
    
    
    8,179
    
    
    
    21,246
    
    
    
    15,945Total non-interest (loss) income
    
    
    (21,470
    )
    
    
    (34,553
    )
    
    
    (31,163
    )
    
    
    461Non-interest expenses:Compensation and benefits
    
    
    23,034
    
    
    
    23,679
    
    
    
    42,625
    
    
    
    49,268Taxes, other than payroll and income taxes
    
    
    3,264
    
    
    
    2,374
    
    
    
    6,572
    
    
    
    4,726Advertising
    
    
    3,226
    
    
    
    4,586
    
    
    
    5,821
    
    
    
    8,928Professional services
    
    
    16,227
    
    
    
    11,263
    
    
    
    33,378
    
    
    
    15,236Communication and information systems
    
    
    4,328
    
    
    
    4,564
    
    
    
    9,555
    
    
    
    9,388Occupancy and other office expenses
    
    
    6,789
    
    
    
    8,182
    
    
    
    13,944
    
    
    
    15,345Depreciation and amortization
    
    
    5,925
    
    
    
    5,129
    
    
    
    11,628
    
    
    
    10,082Other
    
    
    6,028
    
    
    
    5,858
    
    
    
    11,072
    
    
    
    9,069Total non-interest expenses
    
    
    68,821
    
    
    
    65,635
    
    
    
    134,595
    
    
    
    122,042(Loss) Income before income taxes
    
    
    (40,720
    )
    
    
    (27,505
    )
    
    
    (62,744
    )
    
    
    22,108Income tax (expense) benefit
    
    
    (10,205
    )
    
    
    4,718
    
    
    
    28,912
    
    
    
    (5,666
    )Net (loss) income
    
    $
    (50,925
    )
    
    $
    (22,787
    )
    
    $
    (33,832
    )
    
    $
    16,442Net loss attributable to common shareholders
    
    $
    (59,250
    )
    
    $
    (31,112
    )
    
    $
    (50,482
    )
    
    $
    (208
    )Net (loss) income per common share:Basic
    
    $
    (0.55
    )
    
    $
    (0.29
    )
    
    $
    (0.47
    )
    
    $
    0.00Diluted
    
    $
    (0.55
    )
    
    $
    (0.29
    )
    
    $
    (0.47
    )
    
    $
    0.00Dividends per common share
    
    $
    0.00
    
    
    $
    0.18
    
    
    $
    0.08
    
    
    $
    0.36
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 (IN THOUSANDS)
 (UNAUDITED)
 SIX MONTH PERIOD ENDEDJUNE 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
    
    
    310
    
    
    
    4,854Balance at end of period
    
    
    165,996
    
    
    
    166,591LEGAL SURPLUS
    
    
    23,596
    
    
    
    22,716RETAINED EARNINGS:Balance at beginning of period
    
    
    404,885
    
    
    
    492,786Net (loss) income
    
    
    (33,832
    )
    
    
    16,442Cash dividends declared on common stock
    
    
    (8,634
    )
    
    
    (38,852
    )Cash dividends declared on preferred stock
    
    
    (16,650
    )
    
    
    (16,650
    )Balance at end of period
    
    
    345,769
    
    
    
    453,726ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME, NET OF
TAX:Balance at beginning of period
    
    
    (125,461
    )
    
    
    (73,683
    )Other comprehensive (loss) income, net of deferred tax
    
    
    (125,169
    )
    
    
    15,337Balance at end of period
    
    
    (250,630
    )
    
    
    (58,346
    )Total stockholders equity
    
    $
    965,929
    
    
    $
    1,265,867
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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 (IN THOUSANDS)
 (UNAUDITED)
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net (loss) income
    
    $
    (50,925
    )
    
    $
    (22,787
    )
    
    $
    (33,832
    )
    
    $
    16,442Other comprehensive (loss) income, before tax:Unrealized (losses) gains on securities arising during the period
    
    
    (67,002
    )
    
    
    77,770
    
    
    
    (130,845
    )
    
    
    27,086Amortization of unrealized loss on securities reclassified to
held to maturity
    
    
    11
    
    
    
    11
    
    
    
    22
    
    
    
    22Reclassification of realized gains included in net income
    
    
    
    
    
    
    (4,714
    )
    
    
    (63
    )
    
    
    (9,558
    )Other comprehensive (loss) income, before tax
    
    
    (66,991
    )
    
    
    73,067
    
    
    
    (130,886
    )
    
    
    17,550Income tax benefit (expense) related to items of other comprehensive
(loss) income
    
    
    2,910
    
    
    
    (2,654
    )
    
    
    5,717
    
    
    
    (2,213
    )Other comprehensive (loss) income
    
    
    (64,081
    )
    
    
    70,413
    
    
    
    (125,169
    )
    
    
    15,337Comprehensive (loss) income, net of tax
    
    $
    (115,006
    )
    
    $
    47,626
    
    
    $
    (159,001
    )
    
    $
    31,779
  7




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DORAL FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (UNAUDITED)
 SIX MONTH PERIOD ENDEDJUNE 30,2006
    
    
    2005Cash flows from operating activities:Net (loss) income
    
    $
    (33,832
    )
    
    $
    16,442Adjustments to reconcile net income to net cash provided by (used in) operating activities:Stock-based compensation recognized
    
    
    310
    
    
    
    4,854Depreciation and amortization
    
    
    11,628
    
    
    
    10,082Amortization and impairment of servicing assets
    
    
    13,051
    
    
    
    30,514Deferred tax benefit
    
    
    (37,954
    )
    
    
    (4,635
    )Provision for loan and lease losses
    
    
    11,045
    
    
    
    7,705Amortization of premium and accretion of discount on loans, investment securities and debt
    
    
    2,900
    
    
    
    9,972Unrealized loss on mortgage loans held for sale
    
    
    34,857
    
    
    
    Origination and purchases of mortgage loans held for sale
    
    
    (1,432,400
    )
    
    
    (2,825,804
    )Principal repayment and sales of mortgage loans held for sale
    
    
    3,604,984
    
    
    
    1,413,980Gain on sale of securities
    
    
    (3,476
    )
    
    
    (16,666
    )Unrealized loss on securities held for trading
    
    
    3,439
    
    
    
    1,573Purchases of securities held for trading
    
    
    
    
    
    
    (2,005,052
    )Principal repayment and sales of trading securities
    
    
    200,884
    
    
    
    2,403,234Amortization and net loss in the fair value of IOs
    
    
    55,667
    
    
    
    12,675Unrealized (gain) loss on derivative instruments
    
    
    (27,686
    )
    
    
    22,870Net proceeds on derivative instruments
    
    
    7,541
    
    
    
    7,424(Increase) decrease in receivables and mortgage servicing advances
    
    
    (39,199
    )
    
    
    21,591Decrease (increase) in accrued interest receivable
    
    
    11,553
    
    
    
    (86
    )Decrease (increase) in other assets
    
    
    14,170
    
    
    
    (17,856
    )(Decrease) increase in accrued expenses and other liabilities
    
    
    (18,616
    )
    
    
    166,373Total adjustments
    
    
    2,412,698
    
    
    
    (757,252
    )Net cash provided by (used in) operating activities
    
    
    2,378,866
    
    
    
    (740,810
    )Cash flows from investing activities:Purchases of securities available for sale
    
    
    (46,023
    )
    
    
    (4,663,474
    )Principal repayment and sales of securities available for sale
    
    
    537,925
    
    
    
    3,118,980Purchases of securities held to maturity
    
    
    (5,000
    )
    
    
    (100,000
    )Principal repayment and maturities of securities held to maturity
    
    
    24,036
    
    
    
    227,472(Increase) decrease in FHLB stock
    
    
    (4,718
    )
    
    
    5,250Origination of loans receivable
    
    
    (532,927
    )
    
    
    (580,646
    )Principal repayment of loans receivable
    
    
    346,744
    
    
    
    309,438Purchases of servicing assets
    
    
    (216
    )
    
    
    (2,220
    )Purchases of premises and equipment
    
    
    (4,646
    )
    
    
    (14,962
    )Proceeds from sales of real estate held for sale
    
    
    8,489
    
    
    
    23,413Net cash provided by (used in) investing activities
    
    
    323,664
    
    
    
    (1,676,749
    )Cash flows from financing activities:(Decrease) increase in deposits
    
    
    (27,195
    )
    
    
    345,795(Decrease) increase in securities sold under agreements to repurchase
    
    
    (504,427
    )
    
    
    1,695,591Proceeds from advances from FHLB
    
    
    100,000
    
    
    
    50,000Repayment of advances from FHLB
    
    
    
    
    
    
    (100,000
    )Increase in loans payable:Increase in warehousing lines and other credit facilities
    
    
    
    
    
    
    111,815Proceeds from secured borrowings, pledged to creditors
    
    
    
    
    
    
    880,746Repayment of secured borrowings, pledged to creditors
    
    
    (2,645,381
    )
    
    
    (335,158
    )Repayment of notes payable
    
    
    (75,375
    )
    
    
    (6,805
    )Consent fees paid
    
    
    (1,297
    )
    
    
    Issuance of common stock, net
    
    
    95
    
    
    
    119Dividends paid
    
    
    (25,284
    )
    
    
    (55,502
    )Net cash (used in) provided by financing activities
    
    
    (3,178,864
    )
    
    
    2,586,601Net (decrease) increase in cash and cash equivalents
    
    $
    (476,334
    )
    
    $
    169,042Cash and cash equivalents at beginning of period
    
    
    1,546,502
    
    
    
    2,535,726Cash and cash equivalents at the end of period
    
    $
    1,070,168
    
    
    $
    2,704,768Cash and cash equivalents includes:Cash and due from banks
    
    $
    211,174
    
    
    $
    110,833Money market investments
    
    
    858,994
    
    
    
    2,593,935$
    1,070,168
    
    
    $
    2,704,768Supplemental schedule of non-cash activities:Loan securitizations
    
    $
    135,281
    
    
    $
    702,298Loans foreclosed
    
    $
    14,473
    
    
    $
    23,134Reclassification of mortgage loans held for sale to loans receivable
    
    $
    876,240
    
    
    $
    Capitalization of servicing assets
    
    $
    46,862
    
    
    $
    17,843Capitalization of IOs from loan sales
    
    $
    
    
    
    $
    10,981Supplemental information for cash flows:Cash used to pay interest
    
    $
    346,182
    
    
    $
    280,389Cash used to pay income taxes
    
    $
    1,245
    
    
    $
    32,003
  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 Financial Statements included in
the Companys Annual Report on Form 10-K for the year ended December 31, 2005. Certain
information and note disclosure normally included in the financial statements prepared in
accordance with generally accepted accounting principles in the United States of America
(GAAP) have been condensed or omitted from these statements pursuant to the rules and
regulations of the SEC and, accordingly, these financial statements should be read in
conjunction with the audited Consolidated Financial Statements of the Company for the year
ended December 31, 2005, included in the Companys 2005 Annual Report on Form 10-K. All
adjustments (consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the statement of financial position, results
of operations and cash flows for the interim periods have been reflected.Certain amounts reflected in the 2005 unaudited interim Consolidated Financial Statements
have been reclassified or revised to conform to the presentation for 2006. In particular, for
2005, Doral Financial has revised the presentation of prepayment fee income related to its
loan portfolio on the Statement of Income. Previously, prepayment fee income from the
Companys loan portfolio was included as part of servicing income. These amounts were
reclassified as part of the filing of the Companys 2005 Annual Report on Form 10-K and are now
included in interest income. Also, for the 2005 unaudited interim Consolidated Financial
Statements, the Company has revised the classification for amounts paid in the purchase of
servicing assets and for gains and losses on sale of investment securities on the Statement
of Cash Flows. Previously, the amount paid for the purchase of servicing assets was
classified as part of operating activities and gains and losses on sale of investment
securities were included as part of investing activities. These amounts were reclassified
as part of the filing of the Companys 2005 Annual Report on Form 10-K and the amount paid
for the purchase of servicing assets is included as part of investing activities and gains
and losses on sale of investment securities are included as part of operating activities.
The changes to revise prior amounts were not material to the interim unaudited Statement of
Income or Statement of Cash Flows in any prior period.b.
    
    The results of operations for the quarter and six month period ended June 30, 2006 are not
necessarily indicative of the results to be expected for the full year.c.
    
    At June 30, 2006, escrow funds and custodial accounts included approximately $134.4 million
deposited with Doral Bank PR. These funds are included in the Companys consolidated financial
statements. Escrow funds and custodial accounts also included
approximately $35.3 million
deposited with other banks, which are excluded from the Companys assets and liabilities. The
Company had fidelity bond and errors and omissions coverage of $35.0 million and $21.3
million, respectively, as of June 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
    
    
    Six Month Period EndedJune 30,
    
    
    June 30,(Dollars in thousands, except per share amounts)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net (Loss) Income:Net (loss) income
    
    $
    (50,925
    )
    
    $
    (22,787
    )
    
    $
    (33,832
    )
    
    $
    16,442Convertible preferred stock dividend
    
    
    (4,097
    )
    
    
    (4,097
    )
    
    
    (8,194
    )
    
    
    (8,194
    )Nonconvertible preferred stock dividend
    
    
    (4,228
    )
    
    
    (4,228
    )
    
    
    (8,456
    )
    
    
    (8,456
    )Net loss attributable to common shareholders
    
    $
    (59,250
    )
    
    $
    (31,112
    )
    
    $
    (50,482
    )
    
    $
    (208
    )Weighted-Average Shares(1):Basic weighted-average number of common
shares outstanding (2)
    
    
    107,937,752
    
    
    
    107,930,236
    
    
    
    107,934,015
    
    
    
    107,923,785Average potential common shares(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted weighted-average number of common
shares outstanding
    
    
    107,937,752
    
    
    
    107,930,236
    
    
    
    107,934,015
    
    
    
    107,923,785Net (Loss) Income per Common Share:Basic
    
    $
    (0.55
    )
    
    $
    (0.29
    )
    
    $
    (0.47
    )
    
    $
    0.00Diluted
    
    $
    (0.55
    )
    
    $
    (0.29
    )
    
    $
    (0.47
    )
    
    $
    0.00
 
 (1)
    
    For the quarter and six month period ended June 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 June 30, 2006
and 2005, respectively, there were 1,486,164 and 5,506,164 outstanding stock options that were excluded from the computation of diluted
earnings per common share for the quarter and six month period ended June 30, 2006 and 2005 because the Company reported a net loss
attributable to common shareholders for such periods. Also, as of June 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 six month period ended
June 30, 2006 because the Company reported a net loss for both periods. 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.
 10




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Set forth below is a reconciliation of the application of SFAS 91 to employee costs and
other expenses:
 Quarter Ended
    
    
    Six Month Period EndedJune 30,
    
    
    June 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Employee costs, gross
    
    $
    30,659
    
    
    $
    34,335
    
    
    $
    60,111
    
    
    $
    69,868Deferred costs pursuant to SFAS 91
    
    
    (7,625
    )
    
    
    (10,656
    )
    
    
    (17,486
    )
    
    
    (20,600
    )Employee cost, net
    
    $
    23,034
    
    
    $
    23,679
    
    
    $
    42,625
    
    
    $
    49,268Other expenses, gross
    
    $
    6,908
    
    
    $
    8,037
    
    
    $
    13,297
    
    
    $
    13,326Deferred costs pursuant to SFAS 91
    
    
    (880
    )
    
    
    (2,179
    )
    
    
    (2,225
    )
    
    
    (4,257
    )Other expenses, net
    
    $
    6,028
    
    
    $
    5,858
    
    
    $
    11,072
    
    
    $
    9,069
 As of June 30, 2006, the Company had a net deferred origination fee on mortgage loans held
for sale and loans receivable amounting to approximately $8.5 million ($30.8 million as of
December 31, 2005) and $10.9 million ($15.7 million as of December 31, 2005), respectively.f.
    
    Segment informationThe Company operates in four reportable segments identified by line of business: mortgage
banking and risk management activities, banking (including thrift operations), institutional
securities operations and insurance agency activities. Management made this determination
based on operating decisions particular to each business line and because each one targets
different customers and requires different strategies. The majority of the Companys
operations are conducted in Puerto Rico. The Company also operates in the mainland United
States, principally in the New York City metropolitan area.The following tables present net interest income, non-interest income (loss), net income
(loss) and identifiable assets for each of the Companys reportable segments for the periods
presented, as well as for the Companys Puerto Rico and mainland U.S. operations for the
periods presented.
 11




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (In thousands)
 MortgageBanking andRisk
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentManagement
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations*
    
    TotalsQUARTER ENDED JUNE 30, 2006Net interest income
    
    $
    2,754
    
    
    
    51,332
    
    
    
    222
    
    
    
    
    
    
    
    1,135
    
    
    $
    55,443Non-interest (loss)
income
    
    $
    (22,793
    )
    
    
    1,574
    
    
    
    (969
    )
    
    
    2,058
    
    
    
    (1,340
    )
    
    $
    (21,470
    )Net (loss) income
    
    $
    (69,108
    )
    
    
    17,736
    
    
    
    (954
    )
    
    
    1,022
    
    
    
    379
    
    
    $
    (50,925
    )Identifiable assets
    
    $
    2,982,746
    
    
    
    11,256,028
    
    
    
    18,011
    
    
    
    19,623
    
    
    
    (330,443
    )
    
    $
    13,945,965QUARTER ENDED JUNE 30, 2005Net interest income
    
    $
    25,897
    
    
    
    48,514
    
    
    
    675
    
    
    
    771
    
    
    
    484
    
    
    $
    76,341Non-interest (loss)
income
    
    $
    (22,731
    )
    
    
    11,998
    
    
    
    1,211
    
    
    
    2,869
    
    
    
    (27,900
    )
    
    $
    (34,553
    )Net (loss) income
    
    $
    (26,984
    )
    
    
    26,793
    
    
    
    1,000
    
    
    
    2,251
    
    
    
    (25,847
    )
    
    $
    (22,787
    )Identifiable assets
    
    $
    7,985,064
    
    
    
    12,701,985
    
    
    
    155,801
    
    
    
    11,836
    
    
    
    (519,446
    )
    
    $
    20,335,240(In thousands)MortgageBanking andRisk
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentManagement
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations*
    
    TotalsSIX MONTH PERIOD ENDED JUNE 30, 2006Net interest income
    
    $
    7,716
    
    
    
    103,676
    
    
    
    587
    
    
    
    
    
    
    
    2,080
    
    
    $
    114,059Non-interest (loss)
income
    
    $
    (34,151
    )
    
    
    2,314
    
    
    
    (607
    )
    
    
    4,765
    
    
    
    (3,484
    )
    
    $
    (31,163
    )Net (loss) income
    
    $
    (69,486
    )
    
    
    33,818
    
    
    
    (377
    )
    
    
    2,415
    
    
    
    (202
    )
    
    $
    (33,832
    )Identifiable assets
    
    $
    2,982,746
    
    
    
    11,256,028
    
    
    
    18,011
    
    
    
    19,623
    
    
    
    (330,443
    )
    
    $
    13,945,965SIX MONTH PERIOD ENDED JUNE 30, 2005Net interest income
    
    $
    48,141
    
    
    
    98,828
    
    
    
    1,398
    
    
    
    2,001
    
    
    
    1,026
    
    
    $
    151,394Non-interest (loss)
income
    
    $
    (12,980
    )
    
    
    39,296
    
    
    
    2,079
    
    
    
    5,611
    
    
    
    (33,545
    )
    
    $
    461Net (loss) income (loss)
    
    $
    (27,147
    )
    
    
    67,266
    
    
    
    1,844
    
    
    
    4,926
    
    
    
    (30,447
    )
    
    $
    16,442Identifiable assets
    
    $
    7,985,064
    
    
    
    12,701,985
    
    
    
    155,801
    
    
    
    11,836
    
    
    
    (519,446
    )
    
    $
    20,335,240
 
 *
    
    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 six month period ended June 30, 2005,
the intersegment eliminations for non-interest income also includes dividends paid by
Doral Securities and 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)
 (In thousands)
 Puerto Rico
    
    Mainland US
    
    Eliminations
    
    TotalsQUARTER ENDED JUNE 30, 2006Net interest income
    
    $
    49,473
    
    
    
    5,940
    
    
    
    30
    
    
    $
    55,443Non-interest (loss) income
    
    $
    (21,683
    )
    
    
    315
    
    
    
    (102
    )
    
    $
    (21,470
    )Net (loss) income
    
    $
    (52,132
    )
    
    
    1,205
    
    
    
    2
    
    
    $
    (50,925
    )Identifiable assets
    
    $
    13,283,345
    
    
    
    714,195
    
    
    
    (51,575
    )
    
    $
    13,945,965QUARTER ENDED JUNE 30, 2005Net interest income
    
    $
    71,350
    
    
    
    4,967
    
    
    
    24
    
    
    $
    76,341Non-interest (loss) income
    
    $
    (35,015
    )
    
    
    794
    
    
    
    (332
    )
    
    $
    (34,553
    )Net (loss) income
    
    $
    (23,658
    )
    
    
    1,105
    
    
    
    (234
    )
    
    $
    (22,787
    )Identifiable assets
    
    $
    19,721,628
    
    
    
    690,812
    
    
    
    (77,200
    )
    
    $
    20,335,240(In
thousands)Puerto Rico
    
    Mainland US
    
    Eliminations
    
    TotalsSIX MONTH PERIOD ENDED JUNE 30, 2006Net interest income
    
    $
    102,214
    
    
    
    11,791
    
    
    
    54
    
    
    $
    114,059Non-interest (loss) income
    
    $
    (31,512
    )
    
    
    559
    
    
    
    (210
    )
    
    $
    (31,163
    )Net (loss) income
    
    $
    (36,310
    )
    
    
    2,479
    
    
    
    (1
    )
    
    $
    (33,832
    )Identifiable assets
    
    $
    13,283,345
    
    
    
    714,195
    
    
    
    (51,575
    )
    
    $
    13,945,965SIX MONTH PERIOD ENDED JUNE 30, 2005Net interest income
    
    $
    142,491
    
    
    
    8,814
    
    
    
    89
    
    
    $
    151,394Non-interest (loss) income
    
    $
    (767
    )
    
    
    2,187
    
    
    
    (959
    )
    
    $
    461Net income
    
    $
    15,147
    
    
    
    2,019
    
    
    
    (724
    )
    
    $
    16,442Identifiable assets
    
    $
    19,721,628
    
    
    
    690,812
    
    
    
    (77,200
    )
    
    $
    20,335,240
 13




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  MortgageBankingand Risk(In thousands)
    
    Management
    
    
    BankingQUARTER ENDEDJUNE 30, 2006Net loss on mortgage loan sales and fees
    
    $
    (17,787
    )
    
    $
    (9,042
    )Investment activities
    
    
    (11,311
    )
    
    
    4,687Servicing income
    
    
    2,604
    
    
    
    42Commissions, fees and other income
    
    
    3,701
    
    
    
    5,887Total non-interest (loss) income
    
    $
    (22,793
    )
    
    $
    1,574QUARTER ENDEDJUNE 30, 2005Net gain on mortgage loan sales and fees
    
    $
    5,708
    
    
    $
    10,349Investment activities
    
    
    (35,802
    )
    
    
    (3,354
    )Servicing (loss) income
    
    
    (19,185
    )
    
    
    Commissions, fees and other income
    
    
    26,548
    
    
    
    5,003Total non-interest (loss) income
    
    $
    (22,731
    )
    
    $
    11,998(In thousands)MortgageBankingand RiskManagement
    
    
    BankingSIX MONTH PERIODENDED JUNE 30, 2006Net loss on mortgage loan sales and fees
    
    $
    (19,241
    )
    
    $
    (21,747
    )Investment activities
    
    
    (27,799
    )
    
    
    11,151Servicing income
    
    
    8,789
    
    
    
    49Commissions, fees and other income
    
    
    4,100
    
    
    
    12,861Total non-interest (loss) income
    
    $
    (34,151
    )
    
    $
    2,314SIX MONTH PERIODENDED JUNE 30, 2005Net (loss) gain on mortgage loan sales and fees
    
    $
    (7,896
    )
    
    $
    29,931Investment activities
    
    
    (27,498
    )
    
    
    (279
    )Servicing (loss) income
    
    
    (10,679
    )
    
    
    4Commissions, fees and other income
    
    
    33,093
    
    
    
    9,640Total non-interest (loss) income
    
    $
    (12,980
    )
    
    $
    39,296
 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 June 30, 2006 and December 31, 2005.
 SECURITIES HELD FOR TRADING
    
    JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2006
    
    
    2005Mortgage-backed securities:GNMA exempt
    
    $
    145,296
    
    
    $
    206,406GNMA taxable
    
    
    32,440
    
    
    
    43,155CMO certificates
    
    
    1,932
    
    
    
    1,846FHLMC and FNMA
    
    
    9,701
    
    
    
    21,305Variable interest-only strips
    
    
    51,562
    
    
    
    72,550Fixed interest-only strips
    
    
    1,184
    
    
    
    1,484FHLB Notes
    
    
    
    
    
    
    11,156Puerto Rico government and agency securities
    
    
    
    
    
    
    5,510Derivatives(1)
    
    
    45,386
    
    
    
    25,241Other
    
    
    23
    
    
    
    23Total
    
    $
    287,524
    
    
    $
    388,676
 
 (1)
    
    Doral Financial uses derivatives to manage its exposure to interest
rate risk caused by changes in interest rates. Derivatives include interest
rate swaps and options. Doral Financials general policy is to account for
derivatives on a marked-to-market basis with gains or losses charged to
operations as they occur. The fair value of derivatives is generally reported
net by counterparty, provided that a legally enforceable master netting
agreement exists. Derivatives in a net asset position are recorded as
securities held for trading and derivatives in a net liability position as
liabilities. The gross notional amount of derivatives totaled $2.5 billion as
of June 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 June 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




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES AVAILABLE FOR SALE
AS OF JUNE 30, 2006
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    2,300,520
    
    
    $
    19
    
    
    $
    114,822
    
    
    $
    2,185,717
    
    
    
    4.70
    %FHLMC and FNMADue over ten years
    
    
    914,991
    
    
    
    
    
    
    
    45,771
    
    
    
    869,220
    
    
    
    5.32
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    111,965
    
    
    
    
    
    
    
    6,049
    
    
    
    105,916
    
    
    
    5.50
    %FNMA NOTESDue from one to five years
    
    
    46,017
    
    
    
    
    
    
    
    578
    
    
    
    45,439
    
    
    
    4.60
    %U.S. TREASURYDue within a year
    
    
    100,173
    
    
    
    
    
    
    
    2,032
    
    
    
    98,141
    
    
    
    1.97
    %Due from five to ten years
    
    
    761,819
    
    
    
    
    
    
    
    67,424
    
    
    
    694,395
    
    
    
    3.65
    %$
    4,235,485
    
    
    $
    19
    
    
    $
    236,676
    
    
    $
    3,998,828
    
    
    
    4.61
    %
 SECURITIES AVAILABLE FOR SALE
AS OF DECEMBER 31, 2005
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    2,585,231
    
    
    $
    41
    
    
    $
    43,591
    
    
    $
    2,541,681
    
    
    
    4.76
    %FHLMC and FNMADue over ten years
    
    
    975,960
    
    
    
    233
    
    
    
    18,744
    
    
    
    957,449
    
    
    
    5.32
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    111,961
    
    
    
    
    
    
    
    1,909
    
    
    
    110,052
    
    
    
    5.50
    %U.S. TREASURYDue within a year
    
    
    199,933
    
    
    
    
    
    
    
    1,206
    
    
    
    198,727
    
    
    
    1.58
    %Due from one to five years
    
    
    100,310
    
    
    
    
    
    
    
    2,685
    
    
    
    97,625
    
    
    
    1.97
    %Due from five to ten years
    
    
    762,573
    
    
    
    
    
    
    
    36,534
    
    
    
    726,039
    
    
    
    3.65
    %$
    4,735,968
    
    
    $
    274
    
    
    $
    104,669
    
    
    $
    4,631,573
    
    
    
    4.52
    %
 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 June 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




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES HELD TO MATURITY
AS OF JUNE 30, 2006
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue from one to five years
    
    $
    406
    
    
    $
    3
    
    
    $
    
    
    
    $
    409
    
    
    
    5.76
    %Due from five to ten years
    
    
    304
    
    
    
    3
    
    
    
    
    
    
    
    307
    
    
    
    6.41
    %Due over ten years
    
    
    3,860
    
    
    
    157
    
    
    
    
    
    
    
    4,017
    
    
    
    6.79
    %FHLMC and FNMADue over ten years
    
    
    314,874
    
    
    
    
    
    
    
    7,340
    
    
    
    307,534
    
    
    
    6.05
    %CMO CERTIFICATESDue over ten years
    
    
    8,898
    
    
    
    
    
    
    
    567
    
    
    
    8,331
    
    
    
    5.80
    %DEBT SECURITIESFHLB NOTESDue within a year
    
    
    100,000
    
    
    
    
    
    
    
    1,597
    
    
    
    98,403
    
    
    
    2.89
    %Due from one to five years
    
    
    100,760
    
    
    
    
    
    
    
    4,166
    
    
    
    96,594
    
    
    
    4.15
    %Due from five to ten years
    
    
    50,000
    
    
    
    
    
    
    
    850
    
    
    
    49,150
    
    
    
    4.13
    %Due over ten years
    
    
    273,594
    
    
    
    
    
    
    
    25,909
    
    
    
    247,685
    
    
    
    5.10
    %FHLB ZERO COUPONDue over ten years
    
    
    124,481
    
    
    
    
    
    
    
    4,935
    
    
    
    119,546
    
    
    
    6.50
    %FHLMC ZERO COUPONDue over ten years
    
    
    262,146
    
    
    
    
    
    
    
    11,285
    
    
    
    250,861
    
    
    
    5.86
    %FHLMC and FNMA NOTESDue over ten years
    
    
    149,989
    
    
    
    
    
    
    
    8,028
    
    
    
    141,961
    
    
    
    5.65
    %P.R. HOUSING BANKDue from one to five years
    
    
    5,000
    
    
    
    7
    
    
    
    
    
    
    
    5,007
    
    
    
    6.00
    %Due over ten years
    
    
    7,235
    
    
    
    
    
    
    
    
    
    
    
    7,235
    
    
    
    5.72
    %U.S. TREASURYDue from five to ten years
    
    
    201,279
    
    
    
    
    
    
    
    18,373
    
    
    
    182,906
    
    
    
    3.52
    %Due over ten years
    
    
    473,108
    
    
    
    31
    
    
    
    58,414
    
    
    
    414,725
    
    
    
    4.32
    %OTHERDue from one to five years
    
    
    6,950
    
    
    
    
    
    
    
    252
    
    
    
    6,698
    
    
    
    3.98
    %Due over ten years
    
    
    5,000
    
    
    
    251
    
    
    
    
    
    
    
    5,251
    
    
    
    5.50
    %$
    2,087,884
    
    
    $
    452
    
    
    $
    141,716
    
    
    $
    1,946,620
    
    
    
    4.97
    %
 18




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES HELD TO MATURITY
AS OF DECEMBER 31, 2005
(Dollars in thousands)
 WEIGHTED-AMORTIZED
    
    
    UNREALIZED
    
    
    UNREALIZED
    
    
    MARKET
    
    
    AVERAGECOST
    
    
    GAINS
    
    
    LOSSES
    
    
    VALUE
    
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue from one to five years
    
    $
    508
    
    
    $
    10
    
    
    $
    
    
    
    $
    518
    
    
    
    5.88
    %Due from five to ten years
    
    
    328
    
    
    
    7
    
    
    
    
    
    
    
    335
    
    
    
    6.45
    %Due over ten years
    
    
    4,336
    
    
    
    209
    
    
    
    
    
    
    
    4,545
    
    
    
    6.73
    %FHLMC and FNMADue over ten years
    
    
    337,266
    
    
    
    4,312
    
    
    
    928
    
    
    
    340,650
    
    
    
    6.05
    %CMO CERTIFICATESDue over ten years
    
    
    9,817
    
    
    
    
    
    
    
    581
    
    
    
    9,236
    
    
    
    5.78
    %DEBT SECURITIESFHLB NOTESDue from one to five years
    
    
    200,847
    
    
    
    
    
    
    
    4,145
    
    
    
    196,702
    
    
    
    3.53
    %Due from five to ten years
    
    
    50,000
    
    
    
    125
    
    
    
    
    
    
    
    50,125
    
    
    
    4.13
    %Due over ten years
    
    
    273,594
    
    
    
    
    
    
    
    15,100
    
    
    
    258,494
    
    
    
    5.10
    %FHLB ZERO COUPONDue over ten years
    
    
    120,543
    
    
    
    
    
    
    
    563
    
    
    
    119,980
    
    
    
    6.50
    %FHLMC ZERO COUPONDue over ten years
    
    
    254,647
    
    
    
    7
    
    
    
    1,568
    
    
    
    253,086
    
    
    
    5.86
    %FHLMC and FNMA NOTESDue over ten years
    
    
    149,988
    
    
    
    
    
    
    
    3,813
    
    
    
    146,175
    
    
    
    5.65
    %P.R. HOUSING BANKDue from one to five years
    
    
    5,000
    
    
    
    77
    
    
    
    
    
    
    
    5,077
    
    
    
    6.00
    %Due over ten years
    
    
    2,235
    
    
    
    
    
    
    
    
    
    
    
    2,235
    
    
    
    6.20
    %U.S. TREASURYDue from five to ten years
    
    
    201,361
    
    
    
    
    
    
    
    10,642
    
    
    
    190,719
    
    
    
    3.52
    %Due over ten years
    
    
    473,904
    
    
    
    3,629
    
    
    
    19,057
    
    
    
    458,476
    
    
    
    4.33
    %OTHERDue within a year
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    6.20
    %Due from one to five years
    
    
    8,295
    
    
    
    4
    
    
    
    176
    
    
    
    8,123
    
    
    
    4.42
    %Due over ten years
    
    
    7,000
    
    
    
    
    
    
    
    50
    
    
    
    6,950
    
    
    
    5.93
    %$
    2,099,694
    
    
    $
    8,380
    
    
    $
    56,623
    
    
    $
    2,051,451
    
    
    
    4.98
    %
 h.
    
    The following tables show Doral Financials gross unrealized losses and fair value for
available-for-sale and held-to-maturity investments, aggregated by investment category and
length of time that individual securities have been in a continuous unrealized loss position,
at June 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 June 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
    
    $
    5,263
    
    
    $
    185
    
    
    $
    2,179,800
    
    
    $
    114,637
    
    
    $
    2,185,063
    
    
    $
    114,822FHLMC and FNMA
    
    
    590,322
    
    
    
    26,375
    
    
    
    278,898
    
    
    
    19,396
    
    
    
    869,220
    
    
    
    45,771Debt SecuritiesFHLB Notes
    
    
    105,916
    
    
    
    6,049
    
    
    
    
    
    
    
    
    
    
    
    105,916
    
    
    
    6,049FNMA Notes
    
    
    45,439
    
    
    
    578
    
    
    
    
    
    
    
    
    
    
    
    45,439
    
    
    
    578U.S. Treasury
    
    
    92,852
    
    
    
    6,178
    
    
    
    699,684
    
    
    
    63,278
    
    
    
    792,536
    
    
    
    69,456$
    839,792
    
    
    $
    39,365
    
    
    $
    3,158,382
    
    
    $
    197,311
    
    
    $
    3,998,174
    
    
    $
    236,676
 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
 As of June 30, 2006, securities available for sale included a net unrealized loss of
$236.7 million, which represented the difference between fair value and amortized
cost. The comparable amount at December 31, 2005 was a net unrealized loss of $104.4
million. The adverse impact on bond prices of increases in interest rates during the
first half of 2006 resulted in an increase in the net adverse unrealized loss
position as of June 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 June 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.The Company evaluates its portfolio of securities available for sale in light of
changing market conditions and other factors and, where appropriate, takes steps
intended to improve the overall risk exposure and portfolio objectives.
 20




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SECURITIES
HELD TO MATURITY
(As of June 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
    
    $
    307,534
    
    
    $
    7,340
    
    
    $
    
    
    
    $
    
    
    
    $
    307,534
    
    
    $
    7,340CMO Certificates
    
    
    1,555
    
    
    
    63
    
    
    
    6,583
    
    
    
    504
    
    
    
    8,138
    
    
    
    567Debt SecuritiesFHLB Notes
    
    
    145,744
    
    
    
    5,016
    
    
    
    346,088
    
    
    
    27,506
    
    
    
    491,832
    
    
    
    32,522FHLB Zero Coupon
    
    
    
    
    
    
    
    
    
    
    119,546
    
    
    
    4,935
    
    
    
    119,546
    
    
    
    4,935FHLMC Zero Coupon
    
    
    74,795
    
    
    
    1,930
    
    
    
    176,066
    
    
    
    9,355
    
    
    
    250,861
    
    
    
    11,285FHLMC and FNMA Notes
    
    
    93,786
    
    
    
    6,203
    
    
    
    48,175
    
    
    
    1,825
    
    
    
    141,961
    
    
    
    8,028U.S. Treasury
    
    
    308,079
    
    
    
    41,716
    
    
    
    284,578
    
    
    
    35,071
    
    
    
    592,657
    
    
    
    76,787Other
    
    
    2,949
    
    
    
    51
    
    
    
    3,698
    
    
    
    201
    
    
    
    6,647
    
    
    
    252$
    934,442
    
    
    $
    62,319
    
    
    $
    984,734
    
    
    $
    79,397
    
    
    $
    1,919,176
    
    
    $
    141,716
 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 June 30, 2006, securities held to maturity included a net unrealized loss of $141.3
million, which represented the difference between fair value and amortized cost. The
comparable amount at December 31, 2005 was a net unrealized loss of $48.2 million. The
adverse impact on bond prices of increases in interest rates during the first half of 2006
resulted in an increase in the net adverse unrealized loss position as of June 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 June 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)
 JUNE 30, 2006
    
    
    DECEMBER 31, 2005Conventional single family residential loans
    
    $
    1,607,081
    
    
    $
    4,555,932FHA/VA loans
    
    
    96,339
    
    
    
    162,338Construction and commercial real estate loans
    
    
    429,284
    
    
    
    603,925$
    2,132,704
    
    
    $
    5,322,195
 Mortgage loans held for sale decreased from $5.3 billion as of December 31, 2005 to $2.1
billion as of June 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 the first quarter of 2006, the Company performed a review of its mortgage loans held for
sale portfolio in light of the more stringent requirements of the U.S. secondary mortgage market,
which has now become its principal outlet for non-conforming loans as a result of the reduced
demand for this product from Puerto Rico financial institutions. As a
result of this review, management reassessed its plan to sell certain
of its mortgage portfolio classified as held for sale, specifically
loans with a low FICO or with documentation and compliance issues, and
transferred $876.2 million from the mortgage loans held for sale
portfolio to its loan receivable portfolio. The transfer of mortgage
loans included a market value adjustment of $12.3 million that
was taken as a charge against earnings for the first quarter of 2006.At June 30, 2006 and December 31, 2005, loans held for sale for which the creditor has the
right to repledge the collateral amounted to $886.6 million and $3.5 billion, respectively.
Such loans were pledged to secure financing agreements with local financial institutions.Also, at June 30, 2006 and December 31, 2005, the mortgage loans held for sale portfolio
includes $77.1 million and $74.0 million, respectively, related to defaulted loans backing
GNMA securities for which the Company has an unconditional buy-back option.
 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
(Dollars in thousands)
 JUNE 30, 2006
    
    
    DECEMBER 31, 2005AMOUNT
    
    
    PERCENT
    
    
    AMOUNT
    
    
    PERCENTConstruction loans(1)
    
    $
    817,669
    
    
    
    23
    %
    
    $
    795,848
    
    
    
    31
    %Residential mortgage loans(2)
    
    
    1,469,211
    
    
    
    42
    %
    
    
    514,164
    
    
    
    20
    %Commercial  secured by real estate
    
    
    881,343
    
    
    
    25
    %
    
    
    891,795
    
    
    
    35
    %Consumer  other:Personal loans
    
    
    26,843
    
    
    
    1
    %
    
    
    30,453
    
    
    
    1
    %Auto loans
    
    
    568
    
    
    
    0
    %
    
    
    760
    
    
    
    0
    %Credit cards
    
    
    19,401
    
    
    
    1
    %
    
    
    19,278
    
    
    
    1
    %Overdrawn checking accounts
    
    
    406
    
    
    
    0
    %
    
    
    448
    
    
    
    0
    %Revolving lines of credit
    
    
    28,955
    
    
    
    1
    %
    
    
    30,525
    
    
    
    1
    %Lease financing receivables
    
    
    45,813
    
    
    
    1
    %
    
    
    44,636
    
    
    
    2
    %Commercial non-real estate
    
    
    158,142
    
    
    
    5
    %
    
    
    142,909
    
    
    
    6
    %Loans on savings deposits
    
    
    12,201
    
    
    
    0
    %
    
    
    15,082
    
    
    
    1
    %Land secured
    
    
    49,015
    
    
    
    1
    %
    
    
    50,358
    
    
    
    2
    %Loans receivable, gross
    
    
    3,509,567
    
    
    
    100
    %
    
    
    2,536,256
    
    
    
    100
    %Less:Discount on
loans transferred(2)
    
    
    (11,898
    )
    
    
    
    
    
    
    Unearned interest and deferred
loan fees, net
    
    
    (17,696
    )
    
    
    
    
    
    
    (23,252
    )Allowance for loan and lease losses
    
    
    (44,145
    )
    
    
    
    
    
    
    (35,044
    )(73,739
    )
    
    
    
    
    
    
    (58,296
    )Loans receivable, net
    
    $
    3,435,828
    
    
    
    
    
    
    $
    2,477,960
 
 (1)
    
    Includes $673.8 million and $670.3 million of construction loans for residential
housing projects as of June 30, 2006 and December 31, 2005, respectively. Also includes $143.9
million and $125.5 million of construction loans for commercial, condominiums and multifamily projects
as of June 30, 2006 and December 31, 2005, respectively.(2)
    
    During the first quarter of 2006, the Company reclassified $876.2 million from its
mortgage loans held for sale portfolio to its loans receivable portfolio, as a result of a review of
its mortgage loans held for sale portfolio.(3)
    
    Includes $415.6 million and $448.0 million of commercial loans collateralized with
1-to-4 residential mortgage loans, as of June 30, 2006 and December 31, 2005, respectively. The following table summarizes certain information regarding Doral Financials
allowance for loan and lease losses for both Doral Financials banking and mortgage banking
business for the periods indicated.
 23




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 ALLOWANCE FOR LOAN AND LEASE LOSSES
(DOLLARS IN THOUSANDS)
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    

ENDED JUNE 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    39,330
    
    
    $
    24,255
    
    
    $
    35,044
    
    
    $
    20,881Provision for loan and lease losses
    
    
    5,872
    
    
    
    3,658
    
    
    
    11,045
    
    
    
    7,705Charge-offs
    
    
    (1,151
    )
    
    
    (5,409
    )
    
    
    (2,156
    )
    
    
    (6,144
    )Recoveries
    
    
    94
    
    
    
    220
    
    
    
    199
    
    
    
    282Other
    
    
    
    
    
    
    (52
    )
    
    
    13
    
    
    
    (52
    )Balance at end of period
    
    $
    44,145
    
    
    $
    22,672
    
    
    $
    44,145
    
    
    $
    22,672
 At June 30, 2006 and December 31, 2005,
the Companys total loans portfolio included $293.7 million
and $506.3 million, respectively, of mortgage loans with a
loan-to-value over 90% without mortgage insurance.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 June 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
(In thousands)
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    154,859
    
    
    $
    137,916
    
    
    $
    156,812
    
    
    $
    136,024Capitalization of servicing assets
    
    
    42,613
    
    
    
    11,293
    
    
    
    46,862
    
    
    
    17,843Net servicing assets recognized
as part of the mortgage loan sale
transactions restructured
    
    
    5,985
    
    
    
    
    
    
    
    5,985
    
    
    
    Rights purchased
    
    
    
    
    
    
    1,140
    
    
    
    216
    
    
    
    2,220Amortization
    
    
    (6,486
    )
    
    
    (7,394
    )
    
    
    (12,904
    )
    
    
    (13,132
    )Balance before valuation
allowance at end of period
    
    
    196,971
    
    
    
    142,955
    
    
    
    196,971
    
    
    
    142,955Valuation allowance for temporary
impairment
    
    
    (6,383
    )
    
    
    (29,820
    )
    
    
    (6,383
    )
    
    
    (29,820
    )Balance at end of period
    
    $
    190,588
    
    
    $
    113,135
    
    
    $
    190,588
    
    
    $
    113,135
 Impairment charges are recognized through a valuation allowance for each individual stratum
of servicing assets. The valuation allowance is adjusted to reflect the amount, if any, by
which the cost basis of the servicing asset for a given stratum of loans being serviced
exceeds its fair value. Any fair value in excess of the cost basis of the servicing asset
for a given stratum is not recognized. Other-than-temporary impairment, if any, is
recognized as a direct write-down of the servicing asset, and the valuation allowance
 24




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 is applied to reduce the cost basis of the servicing asset. The Companys policy is to test for permanent
impairment at least annually.Changes in the impairment allowance for servicing assets were as follows:
 (In thousands)
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    4,057
    
    
    $
    8,220
    
    
    $
    6,236
    
    
    $
    12,438Temporary impairment charges
    
    
    2,841
    
    
    
    21,621
    
    
    
    2,841
    
    
    
    21,894Recoveries
    
    
    (515
    )
    
    
    (21
    )
    
    
    (2,694
    )
    
    
    (4,512
    )Balance at end of period
    
    $
    6,383
    
    
    $
    29,820
    
    
    $
    6,383
    
    
    $
    29,820
 At June 30, 2006, and based on recent prepayment experience, the expected weighted-average
remaining life of the Companys servicing assets was 6 years. Any projection of the
expected weighted-average remaining life of servicing assets is limited by conditions that
existed at the time the calculations were performed, and may not be indicative of actual
amortization expense that will be recorded in future periods.
 INTEREST-ONLY STRIPS ACTIVITY
(In thousands)
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    38,702
    
    
    $
    96,313
    
    
    $
    74,034
    
    
    $
    127,361Capitalization of IOs from loan sales
    
    
    
    
    
    
    5,658
    
    
    
    
    
    
    
    10,981Amortization
    
    
    (4,076
    )
    
    
    (14,827
    )
    
    
    (12,805
    )
    
    
    (28,252
    )Negative IO value eliminated as part
of the mortgage loans sale
transactions restructured (mortgage loans repurchased)
    
    
    18,190
    
    
    
    
    
    
    
    18,190
    
    
    
    Negative
value of IOs sold
    
    
    16,189
    
    
    
    
    
    
    
    16,189
    
    
    
    Gains (losses) on the IO value
    
    
    (16,259
    )
    
    
    38,523
    
    
    
    (42,862
    )
    
    
    15,577Balance at end of period
    
    $
    52,746
    
    
    $
    125,667
    
    
    $
    52,746
    
    
    $
    125,667
 At June 30, 2006, fair values of the Companys retained interests were based on external and
internal valuation models that incorporate market driven assumptions, adjusted by the
particular characteristics of the Companys servicing portfolio, regarding discount rates,
mortgage prepayment rates, and implied forward LIBOR rates (in the case of variable IOs).
These models resulted in constant prepayment rates of 12.56% and 17.88% for the Companys
servicing assets and 12.87% and 17.64% for the Companys IOs, for the second quarters of
2006 and 2005, respectively, and in discount rates of 11.47% and 9.94% for the Companys
servicing assets and 13.07% and 9.16% for the Companys IOs, for the second quarters of 2006
and 2005, respectively. During the first quarter of 2006, the Company performed a review of
the assumptions used to estimate the discount rate used to value its portfolio of IOs. The
IO internal valuation model utilizes a Z-spread approach to calculate discount rates. The
Z-spread is the market recognized spread over the swap curve that takes into consideration
additional yield requirements based on the risk characteristics of a particular instrument.
The Z-spread incorporates a premium for prepayment optionality and liquidity risk over the
period-end swap curve. As a result of the review, management reassessed the liquidity premium incorporated in the model in
light of the more stringent requirements of the U.S. secondary mortgage market, which has now
become its principal outlet for non-conforming loans as a result of the reduced demand for this
product from Puerto Rico financial institutions, and incorporated an additional 300 basis points of
liquidity premium to the discount calculation. The weighted-averages of the key economic assumptions used by the
Company in its external and internal valuation models and the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 sensitivity of the current
fair value of residual cash flows to immediate 10 percent and 20 percent adverse changes in
those assumptions for mortgage loans at June 30, 2006, were as follows:
 (Dollars in thousands)
 Servicing
    
    Interest-onlyAssets
    
    stripsCarrying amount of retained interest
    
    $
    190,588
    
    
    $
    52,746Weighted-average expected life (in years)
    
    
    6.0
    
    
    
    5.1Constant prepayment rate (weighted-average
annual rate)
    
    
    12.56
    %
    
    
    12.87
    %Decrease in fair value due to 10% adverse
change
    
    $
    (5,255
    )
    
    $
    (2,323
    )Decrease in fair value due to 20% adverse
change
    
    $
    (10,122
    )
    
    $
    (4,489
    )Residual cash flow discount rate
(weighted-average annual rate)
    
    
    11.47
    %
    
    
    13.07
    %Decrease in fair value due to 10% adverse
change
    
    $
    (7,708
    )
    
    $
    (1,576
    )Decrease in fair value due to 20% adverse
change
    
    $
    (14,838
    )
    
    $
    (3,060
    )
 These sensitivities are hypothetical and should be used with caution. As the figures
indicate, changes in fair value based on a 10 percent variation in assumptions generally
cannot be extrapolated because the relationship of the change in assumption to the change in
fair value may not be linear. Also, in the table above, the effect of a variation in a
particular assumption on the fair value of the retained interest is calculated without
changing any other assumption. In reality, changes in one factor may results in changes in
another (for example, increases in market interest rates may result in lower prepayments),
which may magnify or counteract the sensitivities.The following table summarizes the estimated change in the fair value of the Companys IOs,
the constant prepayment rate and the weighted-average expected life under the Companys
valuation model, given several hypothetical (instantaneous and parallel) increases or
decreases in the yield curve. For mortgage loan sales contracts that are not subject to
interest rate caps, to the extent that the interest rate payable to investors on the
mortgage loans underlying the floating rate IOs exceeds the weighted-average coupon on such
mortgage loans, the change in the fair value of the Companys floating rate IOs may exceed
the carrying value of the IOs, creating a liability instead of an asset.
 (Dollars in thousands)
 Weighted-averageexpected life
    
    Change in FairChange in yield curve (basis points)
    
    Constant prepayment rate
    
    (Years)
    
    Value of IOs
    
    % Change+200
    
    10.83%
    
    5.7
    
    $(2,965)
    
    (6)%+100
    
    11.60%
    
    5.5
    
    (1,416)
    
    (3)%+50
    
    12.15%
    
    5.3
    
    (687)
    
    (1)%Base
    
    12.87%
    
    5.1
    
    0
    
    0.0%-50
    
    13.88%
    
    4.8
    
    383
    
    1%-100
    
    15.41%
    
    4.4
    
    280
    
    1%-200
    
    18.55%
    
    3.8
    
    1,303
    
    2%
 26




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 m.
    
    Stock Option and Other Incentive Plans.From April 16, 1997, to April 20, 2004, the
Company offered an employee stock option plan (the Old Plan). This plan, as amended in 2001,
allowed for the granting of up to 6,750,000 purchase options on shares of the Companys common
stock to employees, including officers and directors who are also employees of the Company.
The Compensation Committee of the Board of Directors (the Compensation Committee) had the
authority and absolute discretion to determine the number of stock options to be granted,
their vesting rights, and the option exercise price. The vesting rights, however, could not
exceed ten years, and the exercise price may not be lower than the market value at the date of
the grant.The Old Plan also permitted the Compensation Committee to grant rights to optionees (stock
appreciation rights) under which an optionee may surrender any exercisable stock option in
return for cash equal to the excess of the fair value of the common stock to which the
option is related at the time of exercise over the option price of the common stock at grant
date. The Old Plan provided for a proportional adjustment in the exercise price and the
number of shares that can be purchased in the event of a stock split, reclassifications of
stock and a merger or reorganization.Effective April 21, 2004, the Company adopted the Doral Financial Corporation Omnibus
Incentive Plan (the Omnibus Plan). The Omnibus Plan provides for equity-based compensation
incentives (the awards) through the grant of stock options, stock appreciation rights,
restricted stock, restricted stock units and dividend equivalents, as well as cash and
equity-based performance awards. This plan allows the issuance of up to 4,000,000 shares of
common stock subject to adjustments for stock splits, reorganization and other similar
events (as described below), to any employee, including officers and directors who are also
employees of the Company. The Compensation Committee has full authority and absolute
discretion to determine those eligible to receive awards and to establish the terms and
conditions of any awards; however, the Omnibus Plan has various limits and vesting
restrictions that apply to individual and aggregate awards. In case of a stock split,
reorganization, merger or other similar event affecting the common stock, the Compensation
Committee, in its discretion, shall adjust appropriately (a) the aggregate number of shares
of common stock available for awards, (b) the aggregate limitations on the number of shares
that may be awarded as a particular type of award or that may be awarded to any particular
participant in any particular period, and (c) the aggregate number of shares subject to
outstanding awards and the respective exercise prices or base prices applicable to
outstanding awards. During the first quarter of 2006, the Company granted 50,000 shares of
restricted stock with a fair value of $10.79 under the Omnibus Plan to the Companys Chief
Financial Officer. The restrictions on such restricted stock award lapse ratably on an
annual basis over a five-year period commencing on March 27, 2007. During the quarter and
six month period ended June 30, 2006, the Company recognized $ 26,975 and
$27,874, respectively, of stock-based compensation expense related to the
aforementioned restricted stock award. The total unrecognized compensation cost related to
these nonvested shares of restricted stock was $511,626 and is expected to be recognized
over a period of 4.75 years.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 ended June 30, 2006, the Company
recognized $35,613 of stock-based compensation expense related to the
aforementioned restricted stock unit award. The total unrecognized compensation cost
related to these nonvested restricted stock units was $1.35 million and is
expected to be recognized over a period of 4 years.On January 1, 2006, the Company adopted SFAS No. 123R Share-Based Payment, 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
compensation expense associated with expensing stock options for the second quarter and
first six months of 2006 was approximately $173,255 and $247,004 respectively, compared to
$2.4
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 million and $4.9 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. When unvested options are
forfeited, any compensation expense previously recognized on the forfeited unvested options
is reversed in the period of the forfeiture.The activity of stock options during the first six months of 2006 is set forth below:
 For the six month period endedJune 30, 2006Weighted-AverageRemaining
    
    
    AggregateNumber of
    
    
    Weighted-Average
    
    
    Contractual Term
    
    
    IntrinsicOptions
    
    
    Exercise Price
    
    
    (Years)
    
    
    ValueBeginning of period
    
    
    2,306,414
    
    
    $
    14.84Options granted
    
    
    400,000
    
    
    
    7.60Options exercised
    
    
    (18,000
    )
    
    
    5.28Options purchased
    
    
    
    
    
    
    Options expired and unexercised
    
    
    (1,202,250
    )
    
    
    16.85Unvested options
forfeited
    
    
    
    
    
    
    End of period
    
    
    1,486,164
    
    
    $
    11.38
    
    
    
    6.54
    
    
    $
    Exercisable at period end
    
    
    1,086,164
    
    
    $
    12.77
    
    
    
    5.31
    
    
    $
    
 During the second quarter of 2006, the Company granted 400,000 stock options under the
Omnibus Plan to the Companys current Chief Executive Officer that vest annually over a
period of four years commencing on May 30, 2006. During the quarter ended June 30, 2006,
the Company recognized approximately $25,753 of stock-based compensation related with stock
options granted during 2006. As of June 30, 2006, there was approximately $1.4 million of
total unrecognized compensation cost related to nonvested stock options granted. That cost
is expected to be recognized over a period of 4 years.A summary of the status of the Companys nonvested stock options as of June 30, 2006 and
changes during the first six months of 2006 is presented below:
 Weighted-AverageGrant Date FairNonvested Shares
    
    Number of Options
    
    
    ValueNonvested at beginning of period
    
    
    107,500
    
    
    $
    3.59Granted
    
    
    400,000
    
    
    
    3.56Vested
    
    
    (107,500
    )
    
    
    3.59Nonvested at period end
    
    
    400,000
    
    
    $
    3.56
 The fair value of the options granted in 2006 and 2005 was estimated using the Binomial Tree
option-pricing model, with the following assumptions:
 28




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 2006
    
    2005Stock price at grant date and exercise price
    
    $
    7.60
    
    
    $
    12.76Stock option estimated fair value
    
    $
    3.09 - $4.00
    
    
    $
    2.95Weighted-average estimated fair value
    
    $
    3.56
    
    
    $
    2.95Expected stock option term (years)
    
    
    4.9  7.9
    
    
    
    4.8Expected volatility
    
    
    38
    %
    
    
    38
    %Expected dividend yield
    
    
    0.00
    %
    
    
    5.76
    %Risk-free interest rate
    
    
    4.87% - 5.19
    %
    
    
    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 half 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:
 (In thousands)
    
    JUNE 30, 2006
    
    
    DECEMBER 31, 2005Certificates of deposit
    
    $
    2,845,552
    
    
    $
    2,749,643Regular savings
    
    
    459,895
    
    
    
    449,449NOW accounts
    
    
    523,118
    
    
    
    612,389Non interest-bearing deposits
    
    
    381,509
    
    
    
    425,788$
    4,210,074
    
    
    $
    4,237,269
 o.
    
    The Company routinely enters into financing agreements to sell securities under agreements
to repurchase. The Company retains control over such securities according to the provisions of
SFAS No. 140. Accordingly, the amounts received under these agreements represent borrowings,
and the securities underlying the agreements remain in the asset accounts. These transactions
are carried at the amounts at which transactions will be settled. The counterparties to the
contracts generally have the right to repledge the securities received as collateral. Those
securities are presented in the Consolidated Statements of Financial Condition as part of
pledged investment securities. Securities sold under agreements to repurchase consisted of
the following:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 June 30,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005Non-callable repurchase
agreements with maturities less
than or equal to 90 days, at
various fixed rates averaging
4.97% and 4.10% at June 30, 2006
and December 31, 2005,
respectively
    
    $
    817,493
    
    
    $
    1,039,345Non-callable repurchase
agreements with maturities
ranging from June 2007 to June
2010, at various fixed rates
averaging 4.09% at June 30, 2006
and December 31, 2005
    
    
    1,100,000
    
    
    
    1,100,000Non-callable repurchase
agreement with maturities
ranging from March 2007 to
January 2008 (2005  January
2006 to January 2008), tied to
3-month LIBOR adjustable
quarterly, averaging 5.36% and
4.39% at June 30, 2006 and
December 31, 2005, respectively
    
    
    364,800
    
    
    
    528,375Callable repurchase
agreements with maturities
ranging from March 2008 to
February 2014 (2005  September
2008 to February 2014), at
various fixed rates averaging,
5.22% and 5.21% at June 30, 2006
and December 31, 2005,
respectively, callable at
various dates beginning on July
1, 2006
    
    
    1,067,878
    
    
    
    1,086,878Callable repurchase
agreements due on March 22,
2015, at various fixed rates
during non-callable period
averaging 3.22% at June 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 due on February 1,
2008 (2005 - maturities ranging
February to March 2008),
variable annually at different
pre-determined fixed rates,
averaging 5.21% and 5.11% at
June 30, 2006 and December 31,
2005, respectively, callable on
August 1, 2006
    
    
    100,000
    
    
    
    200,000Callable repurchase
agreement with maturities
ranging October to November
2014, tied to 3-month LIBOR
adjustable quarterly, averaging
4.40% and 3.56% at June 30, 2006
and December 31, 2005,
respectively, callable at
various dates beginning on
October 23, 2006(1)
    
    
    600,000
    
    
    
    600,000$
    5,550,171
    
    
    $
    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:
 JUNE 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 June 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 (5.20% and 4.38% at June 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 4.09% at June 30 2006
and December 31, 2005, callable at various
dates beginning on July 1, 2006
    
    
    702,500
    
    
    
    702,500$
    1,069,500
    
    
    $
    969,500
 At June 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 $1.1 billion to
secure the above advances from the FHLB, which generally the counterparty is not permitted
to sell or repledge.q.
    
    At June 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:
 JUNE 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 6.60% and 5.71% at
June 30, 2006 and December 31, 2005,
respectively
    
    $
    868,201
    
    
    $
    3,498,638Secured borrowings with local financial
institutions, collateralized by real estate
mortgage loans at fixed interest rates
averaging 7.68% and 7.70% at June 30, 2006 and
December 31, 2005, respectively
    
    
    22,881
    
    
    
    37,585Secured borrowings with a local financial
institution, collateralized by IOs at a fixed
interest rate of 7.75%
    
    
    41,767
    
    
    
    42,007$
    932,849
    
    
    $
    3,578,230
 At June 30, 2006 and December 31, 2005, loans held for sale amounting to $886.6 million and
$3.5 billion, respectively, were pledged to secure financing agreements with local financial
institutions, such loans can be repledged by the counterparty.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 r.
    
    Notes payable consisted of the following:
 JUNE 30,
    
    
    DECEMBER 31,(In thousands)
    
    2006
    
    
    2005$625 million floating rate senior notes tied to 3-month LIBOR (5.91%
and 5.00% at June 30, 2006 and December 31, 2005, respectively), due on
July 20, 2007, paying interest quarterly
    
    $
    624,655
    
    
    $
    625,337$100 million notes, net of discount, bearing interest at 7.65%, due on
March 26, 2016, paying interest monthly
    
    
    98,099
    
    
    
    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
    
    
    29,530
    
    
    
    29,570$40 million notes, net of discount, bearing interest at 7.10%, due on
April 26, 2017, paying interest monthly
    
    
    39,248
    
    
    
    39,320$30 million notes, net of discount, bearing interest at 7.15%, due on
April 26, 2022, paying interest monthly
    
    
    29,390
    
    
    
    29,450Senior term notes at fixed rates ranging from 8.50% to 8.55% with
maturities ranging from August 2006 to August 2007, paying interest
semiannually on February 28 and August 31
    
    
    16,000
    
    
    
    16,000Bonds payable secured by mortgage on building at fixed rates ranging
from 6.25% to 6.90%, with maturities ranging from 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
    
    
    2,389
    
    
    
    2,323$
    889,291
    
    
    $
    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 are amortized over the
life of the related indebtedness.s.
    
    Income TaxesExcept for the operations of Doral Bank NY and Doral Money, substantially all of the
Companys operations are conducted through subsidiaries in Puerto Rico. Doral Bank NY and
Doral Money are U.S. corporations and are subject to U.S. income-tax on their income derived
from all sources.Income taxes include Puerto Rico income taxes as well as applicable federal and state taxes.
As Puerto Rico corporations, Doral Financial and all of its Puerto Rico subsidiaries are
generally required to pay federal income taxes only with respect to their income derived
from the active conduct of a trade or business in the United States (excluding Puerto Rico)
and certain investment income derived from U.S. assets. Any such tax is creditable, with
certain limitations, against Puerto Rico income taxes. The maximum statutory corporate
income tax rate in Puerto Rico is 41.5% for the taxable year ended December 31, 2006. In
August 2005, the Government of Puerto Rico approved an increase in the maximum statutory tax
rate from 39.0% to 41.5% to corporations and partnerships for a two-year period. The tax
rate was applied retroactively effective January 1, 2005 to all of the Companys
subsidiaries doing business in Puerto Rico. The additional tax related to the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  t.
    
    GuaranteesIn November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation
No. 45, (FIN 45) Guarantors Accounting and Disclosure Requirements for Guarantees.
This interpretation requires a guarantor of certain types of guarantees to recognize, at the
inception of the guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. As of June 30, 2006, the Company had outstanding $6.7 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 June 30, 2006, the outstanding principal balance of loans sold
subject to full or partial recourse was $1.3 billion. As of such date, the maximum
contractual exposure in principal amount of loans that Doral Financial would have been
required to repurchase if all loans subject to recourse defaulted was $1.0 billion. Doral
Financials contingent obligation with respect to such recourse provision is not reflected
on the Companys Consolidated Financial Statements, except for a liability of $9.0 million,
as of June 30, 2006, for estimated losses from such recourse agreements, which is included
in Accrued expenses and other liabilities.u.
    
    Commitments and ContingenciesThe Company enters into financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
may include commitments to extend credit and sell mortgage-backed securities and loans. At
June 30, 2006, commitments to extend credit amounted to approximately $469.2 million and
commitments to sell mortgage-backed securities and loans amounted to approximately $352.1
million. Commitments to extend credit are agreements to lend to a customer as long as the
conditions established in the contract are met. Commitments generally have fixed expiration
dates or other termination clauses. Generally, the Company does not enter into interest
rate lock agreements with borrowers.As of June 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.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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
    Shareholder
Derivative Lawsuits.
 Other Lawsuits.
  35




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Other Legal Matters
        36




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 v.
    
    Recent Accounting PronouncementsShare-Based Payments. In December 2004, the FASB issued SFAS 123R. This statement is a
revision of SFAS No. 123, Accounting for Stock-Based Compensation and it also supersedes
APB No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance. This statement focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. SFAS 123R requires companies
to (1) use fair value to measure stock-based compensation awards and (2) cease using the
intrinsic value method of accounting, which APB 25 allowed and resulted in no expense for
many awards of stock options for which the exercise price of the option did not exceed the
price of the underlying stock at the grant date. In addition, SFAS 123R retains the modified
grant date model from SFAS No. 123. Under that model, compensation cost is measured at the
grant date fair value of the award and is adjusted to reflect anticipated forfeitures and
the expected outcome of certain conditions. The fair value of an award is not remeasured
after its initial estimation on the grant date, except in the case of a liability award or
if the award is modified, based on specific criteria included in SFAS 123R. Also, SFAS 123R
clarifies the financial impact of vesting and/or acceleration clauses due at retirement.
Under the revised SFAS, the expense should be fully accrued for any employee that is
eligible to retire regardless of the actual retirement experience of the employer. The
adoption of this statement on January 1, 2006 did not have a material effect on the
Consolidated Financial Statements of the Company since in 2003, Doral Financial started to
expense the fair value of stock options granted to employees using the modified
prospective method under SFAS 148. Under this method, the Company expenses the fair value
of all employee stock options granted after January 1, 2003, as well as the unvested
portions of previously granted options.Exchanges of Nonmonetary Assets.In December 2004, the FASB issued SFAS No. 153, Exchanges
of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions. This statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The entitys future cash flows are
expected to significantly change if either of the following criteria is met: a) The
configuration (risk, timing, and amount) of the future cash flows of the asset(s) received
differs significantly from the configuration of the future cash flows of the asset(s)
transferred; b) The entity-specific value of the asset(s) received differs from the
entity-specific value of the asset(s) transferred, and the difference is significant in
relation to the fair values of the assets exchanged. A qualitative assessment will, in some
cases, be conclusive in determining that the estimated cash flows of the entity are expected
to significantly change as a result of the exchange. This statement is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. This
statement did not have a material impact on the Companys Consolidated Financial Statements
upon adoption in 2006.Accounting Changes and Error Corrections.In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Errors Corrections. This Statement replaces APB Opinion No. 20,
Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of a change
in accounting principle. This statement requires retrospective application to prior periods
financial statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the change. This
statement also requires that a change in depreciation, amortization, or depletion method for
long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected
by a change in accounting principle. Opinion 20 previously required that such changes in
accounting principle be reported as a change in accounting principle by including in net
income of the period of the change the cumulative effect of changing to the new accounting
principle. This statement does not change the transition provisions of any existing
accounting pronouncements, including those that are in a transition phase as of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Accounting for Certain Hybrid Financial Instruments.
 Accounting for Servicing of Financial Assets.
 Accounting for Uncertainty in Income Taxes
 
    
    Recognition: A tax benefit from an uncertain position may be recognized only
if it is more likely than not that the position is sustainable, based on its
technical merits.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
    
    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.
   Fair Value Measurements
   40




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
    41




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 INTERNAL CONTROL OVER FINANCIAL REPORTING
   SUBSEQUENT EVENTS
   Changes in Senior Management.
 
    
    On August 22, 2006, the Company announced the appointment of Calixto García-Vélez as
Chairman and Chief Executive Officer of Doral Bank PR. Mr. García-Vélez joined the
Company from Citigroup, where he previously served as President of Citibank West, FSB.
Prior to serving as President of Citibank West, Mr. García-Vélez was president of
Citibank Florida and business manager of Citibank North Americas South division, which
included Florida, the Mid-Atlantic region, Puerto Rico and Texas. Mr. García-Vélez
succeeded Antonio Faría, former Chief Executive Officer of Doral Bank PR, who resigned
from his position effective October 15, 2006.
    
    On September 8, 2006, the Company announced the appointment of Marangal I. Domingo
as Executive Vice President  Chief Investment Officer and Treasurer. Prior to joining
the Company, Mr. Domingo served as Executive Vice President, Finance & Strategy at
Countrywide Bank, N.A., a member of the Countrywide Financial Corporation family of
companies. Prior to Countrywide, he served as President and Chief Executive Officer of
Downey Financial Corporation, where he was responsible for setting the banks strategic
direction and managing day-to-day operations. Before Downey Savings, Mr. Domingo was
with Washington Mutual as Executive Vice President of Capital Markets and was
responsible for all of its mortgage capital markets businesses. He also served as
Treasurer for Washington Mutual. Mr. Domingo succeeded Julio Micheo, the former
Executive Vice President and Treasurer of the Company, who resigned from his position
effective August 23, 2006.
    
    On September 13, 2006, the Company announced the appointment of Enrique R. Ubarri as
Executive Vice President and General Counsel, Lesbia Blanco-Diaz as Executive Vice
President and Corporate
Human Resources Director, and Olga Mayoral-Wilson as Executive Vice President and
Corporate Communications Director.
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Regulatory Matters.
    Restructuring of Certain Prior Mortgage Loan Transfers.
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OVERVIEW OF RESULTS OF OPERATIONS
   
    
    Net loss for the second quarter of 2006 amounted to $50.9 million, or a
diluted loss per share of $0.55, compared to a net loss of $22.8 million, or a diluted
loss per share of $0.29, for the second quarter of 2005.
    
    Net interest income for the second quarter of 2006 was $55.4 million,
compared to $76.3 million for the same period in 2005. The decrease in net interest
income resulted from a decrease in net interest margin from 1.70% in the second quarter
of 2005 to 1.47% for the second quarter of 2006, coupled with a decrease in average
interest-earning assets from $18.0 billion for the second quarter of 2005 to $15.2
billion for the second quarter of 2006, principally due to a decrease in investment and
mortgage-backed securities as well as a decrease in money market investments (see
Tables A through D below for information regarding the Companys net interest income).
The reduction in net interest margin resulted principally from the flattening of the yield curve,
as on average, the Companys interest bearing liabilities, principally wholesale
funding and loans payable, re-priced at higher frequency and rates than the Companys
interest-earning assets. The decrease in the Companys interest margin has been
particularly significant with respect to its portfolio of investment securities.
Assuming a funding cost equal to the weighted-average cost of the Companys repurchase
agreements, the interest rate spread on the Companys portfolio of investment securities
was approximately 0.36% for the quarter ended June 30, 2006, compared to 1.34% for the
Companys interest earning assets taken as a whole.
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##### Table of Contents




    
    The provision for loan and lease losses for the second quarter of 2006 was
$5.9 million, compared to $3.7 million for the comparable 2005 period. The increase in
the provision for loan and lease losses reflects primarily an increase in the allowance for the Companys construction loan portfolio, as well
as an increase in the delinquency trends of the Companys overall loan portfolio. During 2006, a number of key
economic indicators suggest that the Puerto Rico economy is suffering a slowdown, as a
result of, among other things, high levels of oil prices, the upward trend in
short-term interest rates and the flattening of the yield curve, the depreciation of
the dollar and the deceleration of public investment due to the Commonwealths current
fiscal situation. In particular, the increase in short-term rates and the reduction in
public investment have had an adverse effect in construction activity, which has been a
key contributor to economic growth in recent years. These factors contributed to
increases in delinquency rates and the loan loss provision.
    
    Non-interest loss for the second quarter of 2006 was $21.5 million,
compared to a loss of $34.6 million for the same period in 2005. Lower non-interest
loss was principally driven by gains on the Companys derivative
instruments and higher servicing
income related with an increase in the Companys MSRs valuation due to a decrease in
anticipated mortgage prepayment rates. These factors were partially offset by losses on sales of
mortgage loans driven by the Companys decision to restructure previous mortgage loan
transfers to local financial institutions, a $17.5 million charge against earnings
related to a market valuation adjustment of the Companys loans held for sale
portfolio and losses on the IO valuation.
    
    Non-interest expenses for the second quarter and first half of 2006 were
$68.8 and $134.6 million, respectively, compared to $65.6 million and $122.0 million
for the same periods in 2005. Non-interest expenses for 2006 continue to reflect
significant expenses for professional services associated with the restatement of the
Companys prior period financial statements and related legal and accounting matters.
Non-interest expenses for the second quarter of 2006 also reflect significant expenses
associated with advisory services relating to the reengineering of the Companys
business and operating practices.
    
    For the second quarter and first half of 2006, Doral Financial recognized
an income tax expense of $10.2 million and an income tax benefit of $28.9 million,
respectively, compared to an income tax benefit of $4.7 million and a tax expense of
$5.7 million for the corresponding periods in 2005.
    
    During the second quarter of 2006, the Company had other comprehensive loss of
approximately $64.1 million related principally to the adverse impact of the increase
in interest rates on the value of the Companys portfolio of available for sale
securities. As of June 30, 2006, the Companys accumulated other comprehensive loss
(net of income tax benefit) reached $250.6 million.
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
    
    Doral Financials loan production for the second quarter of 2006 was $487.0
million, compared to $1.5 billion for the comparable period in 2005, a decrease of
approximately 68%. The decrease in Doral Financials loan production is due to a
number of factors including changes in the underwriting processes, economic conditions
in Puerto Rico, and competition from other financial institutions. Doral Financial has
decided to implement uniform, automated and rules-based underwriting procedures. The
implementation of these procedures has caused disruption in the Companys
loan originations. The Company believes that these underwriting standards will
allow it to more efficiently underwrite assets with better credit quality and risk
price its loan products in the future.
    
    The Companys greatest liquidity challenge is the
refinancing of its $625 million floating rate senior notes that mature in July 2007.
Doral Financial will require outside financing or other sources of capital to repay
this indebtedness at maturity. Accordingly, it is in the process of selecting an
advisor to assist the Company in reviewing a number of possible alternatives to
refinance this indebtedness and in examining alternatives to restructure its balance
sheet in order to enhance future earnings. See Liquidity and Capital Resources.
    
    Under the direction of the Companys new management team, the Company has
begun the process of transforming the business and operational strategies of the
Company. The goal is to develop more stable and transparent streams of earnings. To
achieve this goal the Company intends to place greater emphasis on lending activities
and less emphasis on trading and investment activities. The Company also intends to
reduce non-interest expenses through more efficient administrative and product delivery
systems. The Company is in the process of developing and implementing new and better
underwriting and processing procedures. These procedures are designed to produce
higher quality and more marketable assets. The development and implementation of these
procedures has caused disruption in the Companys loan originations. The
Company anticipates that, for the foreseeable future, loan production volume will
continue to be below historical levels as these new underwriting procedures are
implemented and new product offerings are developed.
  CRITICAL ACCOUNTING POLICIES
   RESULTS OF OPERATIONS FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
  46




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NET INTEREST INCOME
   
    
    The continued pressure on the Companys net interest margin caused by the
compressed margin from the Companys large portfolio of investment securities.
Assuming a funding cost equal to the weighted-average cost of the Companys
repurchase agreements, the average interest rate spread on the Companys investment
securities during the second quarter and first six months of 2006 were 0.36% and
0.41%, respectively, compared to 1.08% and 1.27%, respectively, for the second
quarter and first six months of 2005.
    
    The decrease in interest income on IOs was attributable to lower average volume
due to increases in short-term interest rates and the flattening of the yield
curve. The following table presents a detail of the cash flows received on Doral
Financials portfolio of IOs for the second quarter and first half of 2006 and
2005:
 47




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##### Table of Contents



Quarter Ended
    
    
    Six Month PeriodJune 30,
    
    
    Ended June 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Total cash flows received on IO portfolio
    
    $
    5,570
    
    
    $
    17,368
    
    
    $
    16,130
    
    
    $
    34,093Amortization of IOs, as offset to cash flows
    
    
    (4,076
    )
    
    
    (14,827
    )
    
    
    (12,805
    )
    
    
    (28,252
    )Net cash flows recognized as interest income
    
    $
    1,494
    
    
    $
    2,541
    
    
    $
    3,325
    
    
    $
    5,841
 
    
    Increased deposits at Doral Financials banking subsidiaries, including brokered
deposits, and increased costs of its repurchase agreements and notes payable. The
increase in cost on notes payable reflects the re-pricing nature of most of the
Companys notes payable, which are floating rate notes indexed to 3-month LIBOR.
   48




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TABLE A
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
 QUARTER ENDED JUNE 30,2006
    
    
    2005AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEBALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    7,288,374
    
    
    $
    128,695
    
    
    
    7.08
    %
    
    $
    7,271,065
    
    
    $
    125,984
    
    
    
    6.95
    %Mortgage-backed securities
    
    
    3,861,107
    
    
    
    48,801
    
    
    
    5.07
    %
    
    
    4,873,325
    
    
    
    60,306
    
    
    
    4.96
    %Interest-only strips
    
    
    45,849
    
    
    
    1,494
    
    
    
    13.07
    %
    
    
    111,266
    
    
    
    2,541
    
    
    
    9.16
    %Investment securities
    
    
    2,785,387
    
    
    
    29,767
    
    
    
    4.29
    %
    
    
    3,269,654
    
    
    
    31,939
    
    
    
    3.92
    %Other interest-earning assets
    
    
    1,184,132
    
    
    
    13,919
    
    
    
    4.71
    %
    
    
    2,516,832
    
    
    
    17,700
    
    
    
    2.82
    %Total interest-earning assets/interest income
    
    
    15,164,849
    
    
    $
    222,676
    
    
    
    5.89
    %
    
    
    18,042,142
    
    
    $
    238,470
    
    
    
    5.30
    %Total non-interest-earning assets
    
    
    2,023,472
    
    
    
    
    
    
    
    
    
    
    
    838,655Total assets
    
    $
    17,188,321
    
    
    
    
    
    
    
    
    
    
    $
    18,880,797LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    4,228,946
    
    
    $
    37,507
    
    
    
    3.56
    %
    
    $
    3,601,919
    
    
    $
    23,178
    
    
    
    2.58
    %Repurchase agreements
    
    
    5,766,150
    
    
    
    62,983
    
    
    
    4.38
    %
    
    
    6,918,520
    
    
    
    59,635
    
    
    
    3.46
    %Advances from the FHLB
    
    
    1,069,500
    
    
    
    11,409
    
    
    
    4.28
    %
    
    
    1,244,566
    
    
    
    13,055
    
    
    
    4.21
    %Loans payable
    
    
    2,798,749
    
    
    
    40,622
    
    
    
    5.82
    %
    
    
    4,508,201
    
    
    
    52,099
    
    
    
    4.64
    %Notes payable
    
    
    889,413
    
    
    
    14,712
    
    
    
    6.63
    %
    
    
    1,089,151
    
    
    
    14,162
    
    
    
    5.22
    %Total interest-bearing liabilities/interest expense
    
    
    14,752,758
    
    
    $
    167,233
    
    
    
    4.55
    %
    
    
    17,362,357
    
    
    $
    162,129
    
    
    
    3.75
    %Total non-interest-bearing liabilities
    
    
    940,468
    
    
    
    
    
    
    
    
    
    
    
    278,457Total liabilities
    
    
    15,693,226
    
    
    
    
    
    
    
    
    
    
    
    17,640,814Stockholders equity
    
    
    1,495,095
    
    
    
    
    
    
    
    
    
    
    
    1,239,983Total liabilities and stockholders equity
    
    $
    17,188,321
    
    
    
    
    
    
    
    
    
    
    $
    18,880,797Net interest-earning assets
    
    $
    412,091
    
    
    
    
    
    
    
    
    
    
    $
    679,785Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    55,443
    
    
    
    
    
    
    
    
    
    
    $
    76,341Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.34
    %
    
    
    
    
    
    
    
    
    
    
    1.55
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.47
    %
    
    
    
    
    
    
    
    
    
    
    1.70
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    102.79
    %
    
    
    
    
    
    
    
    
    
    
    103.92
    %
 
 (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 $0.8 million and $1.1 million for the second 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. 49




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TABLE B
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
 SIX MONTH PERIOD ENDED JUNE 30,2006
    
    
    2005AVERAGE
    
    
    
    
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    
    
    
    
    AVERAGEBALANCE
    
    
    INTEREST
    
    
    YIELD/RATE
    
    
    BALANCE
    
    
    INTEREST
    
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)(2)
    
    $
    7,660,942
    
    
    $
    266,567
    
    
    
    7.02
    %
    
    $
    6,907,742
    
    
    $
    236,717
    
    
    
    6.91
    %Mortgage-backed securities
    
    
    3,969,735
    
    
    
    99,996
    
    
    
    5.08
    %
    
    
    4,650,120
    
    
    
    112,874
    
    
    
    4.89
    %Interest-only strips
    
    
    51,420
    
    
    
    3,325
    
    
    
    13.04
    %
    
    
    114,246
    
    
    
    5,841
    
    
    
    10.31
    %Investment securities
    
    
    2,879,039
    
    
    
    59,868
    
    
    
    4.19
    %
    
    
    3,271,269
    
    
    
    64,768
    
    
    
    3.99
    %Other interest-earning assets
    
    
    1,167,059
    
    
    
    26,359
    
    
    
    4.55
    %
    
    
    2,591,403
    
    
    
    33,799
    
    
    
    2.63
    %Total interest-earning assets/interest income
    
    
    15,728,195
    
    
    $
    456,115
    
    
    
    5.85
    %
    
    
    17,534,780
    
    
    $
    453,999
    
    
    
    5.22
    %Total non-interest-earning assets
    
    
    1,916,005
    
    
    
    
    
    
    
    
    
    
    
    841,004Total assets
    
    $
    17,644,200
    
    
    
    
    
    
    
    
    
    
    $
    18,375,784LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    4,193,112
    
    
    $
    70,215
    
    
    
    3.38
    %
    
    $
    3,584,596
    
    
    $
    45,635
    
    
    
    2.57
    %Repurchase agreements
    
    
    5,872,291
    
    
    
    125,212
    
    
    
    4.30
    %
    
    
    6,829,562
    
    
    
    110,093
    
    
    
    3.25
    %Advances from the FHLB
    
    
    1,035,798
    
    
    
    21,787
    
    
    
    4.24
    %
    
    
    1,238,732
    
    
    
    25,534
    
    
    
    4.16
    %Loans payable
    
    
    3,359,374
    
    
    
    95,689
    
    
    
    5.74
    %
    
    
    4,062,513
    
    
    
    94,286
    
    
    
    4.68
    %Notes payable
    
    
    902,832
    
    
    
    29,153
    
    
    
    6.51
    %
    
    
    1,092,737
    
    
    
    27,057
    
    
    
    4.99
    %Total interest-bearing liabilities/interest expense
    
    
    15,363,407
    
    
    $
    342,056
    
    
    
    4.49
    %
    
    
    16,808,140
    
    
    $
    302,605
    
    
    
    3.63
    %Total non-interest-bearing liabilities
    
    
    731,532
    
    
    
    
    
    
    
    
    
    
    
    305,593Total liabilities
    
    
    16,094,939
    
    
    
    
    
    
    
    
    
    
    
    17,113,733Stockholders equity
    
    
    1,549,261
    
    
    
    
    
    
    
    
    
    
    
    1,262,051Total liabilities and stockholders equity
    
    $
    17,644,200
    
    
    
    
    
    
    
    
    
    
    $
    18,375,784Net interest-earning assets
    
    $
    364,788
    
    
    
    
    
    
    
    
    
    
    $
    726,640Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    114,059
    
    
    
    
    
    
    
    
    
    
    $
    151,394Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.36
    %
    
    
    
    
    
    
    
    
    
    
    1.59
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.46
    %
    
    
    
    
    
    
    
    
    
    
    1.74
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    102.37
    %
    
    
    
    
    
    
    
    
    
    
    104.32
    %
 
 (1)
    
    Average loan balances include the average balance of non-accruing loans, on which interest income is recognized when collected. Also includes the average balance of GNMA defaulted loans for
which the Company has an unconditional buy-back option.(2)
    
    Interest income on loans includes $1.8 million and $2.1 million for the first six 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. 50




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TABLE C
NET INTEREST INCOME VARIANCE ANALYSIS
(IN THOUSANDS)
 QUARTER ENDEDJUNE 30,2006 COMPARED TO 2005INCREASE (DECREASE) DUE TO:VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    306
    
    
    $
    2,405
    
    
    $
    2,711Mortgage-backed securities
    
    
    (12,566
    )
    
    
    1,061
    
    
    
    (11,505
    )Interest-only strips
    
    
    (1,496
    )
    
    
    449
    
    
    
    (1,047
    )Investment securities
    
    
    (4,747
    )
    
    
    2,575
    
    
    
    (2,172
    )Other interest-earning assets
    
    
    (9,383
    )
    
    
    5,602
    
    
    
    (3,781
    )TOTAL INTEREST INCOME VARIANCE
    
    
    (27,886
    )
    
    
    12,092
    
    
    
    (15,794
    )INTEREST EXPENSE VARIANCEDeposits
    
    
    4,023
    
    
    
    10,306
    
    
    
    14,329Repurchase agreements
    
    
    (9,945
    )
    
    
    13,293
    
    
    
    3,348Advances from the FHLB
    
    
    (1,834
    )
    
    
    188
    
    
    
    (1,646
    )Loans payable
    
    
    (19,762
    )
    
    
    8,285
    
    
    
    (11,477
    )Notes payable
    
    
    (2,597
    )
    
    
    3,147
    
    
    
    550TOTAL INTEREST EXPENSE VARIANCE
    
    
    (30,115
    )
    
    
    35,219
    
    
    
    5,104NET INTEREST INCOME VARIANCE
    
    $
    2,229
    
    
    $
    (23,127
    )
    
    $
    (20,898
    )
 51




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TABLE D
NET INTEREST INCOME VARIANCE ANALYSIS
(IN THOUSANDS)
 SIX MONTH PERIOD ENDEDJUNE 30,2006 COMPARED TO 2005INCREASE (DECREASE) DUE TO:VOLUME
    
    
    RATE
    
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    25,690
    
    
    $
    4,160
    
    
    $
    29,850Mortgage-backed securities
    
    
    (16,646
    )
    
    
    3,768
    
    
    
    (12,878
    )Interest-only strips
    
    
    (3,222
    )
    
    
    706
    
    
    
    (2,516
    )Investment securities
    
    
    (7,791
    )
    
    
    2,891
    
    
    
    (4,900
    )Other interest-earning assets
    
    
    (18,676
    )
    
    
    11,236
    
    
    
    (7,440
    )TOTAL INTEREST INCOME VARIANCE
    
    
    (20,645
    )
    
    
    22,761
    
    
    
    2,116INTEREST EXPENSE VARIANCEDeposits
    
    
    7,749
    
    
    
    16,831
    
    
    
    24,580Repurchase agreements
    
    
    (15,608
    )
    
    
    30,727
    
    
    
    15,119Advances from the FHLB
    
    
    (4,166
    )
    
    
    419
    
    
    
    (3,747
    )Loans payable
    
    
    (16,429
    )
    
    
    17,832
    
    
    
    1,403Notes payable
    
    
    (4,749
    )
    
    
    6,845
    
    
    
    2,096TOTAL INTEREST EXPENSE VARIANCE
    
    
    (33,203
    )
    
    
    72,654
    
    
    
    39,451NET INTEREST INCOME VARIANCE
    
    $
    12,558
    
    
    $
    (49,893
    )
    
    $
    (37,335
    )
 PROVISION FOR LOAN AND LEASE LOSSES
   52




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NON-INTEREST INCOME
  Net (Loss) Gain on
Mortgage Loan Sales and Fees.
      53




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##### Table of Contents



FOR THE
    
    FOR THE
    
    FOR THE
    
    FOR THEQUARTER
    
    QUARTER
    
    SIX MONTH
    
    SIX MONTHENDED
    
    ENDED
    
    PERIOD ENDED
    
    PERIOD ENDEDJUNE 30,
    
    JUNE 30,
    
    JUNE 30,
    
    JUNE 30,(In thousands)
    
    2006
    
    2005
    
    2006
    
    2005Total loan sales and securitizations
    
    $
    3,377,462
    
    
    $
    749,438
    
    
    $
    3,609,033
    
    
    $
    1,571,303Total loans sales resulting in the
recording of IOs
    
    $
    
    
    
    $
    192,938
    
    
    $
    
    
    
    $
    732,650IOs capitalized
    
    $
    
    
    
    $
    5,658
    
    
    $
    
    
    
    $
    10,981MSRs capitalized
    
    $
    42,613
    
    
    $
    11,293
    
    
    $
    46,862
    
    
    $
    17,843
 Net Servicing Income.
  TABLE E
NET SERVICING INCOME (LOSS)
 QUARTER ENDED
    
    
    SIX MONTH PERIOD ENDEDJUNE 30,
    
    
    JUNE 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Servicing fees (net of guarantee fees)
    
    $
    8,773
    
    
    $
    7,786
    
    
    $
    16,525
    
    
    $
    15,364Late charges
    
    
    2,310
    
    
    
    2,048
    
    
    
    4,753
    
    
    
    4,305Prepayment penalties
    
    
    244
    
    
    
    663
    
    
    
    763
    
    
    
    1,035Interest loss
    
    
    (1,180
    )
    
    
    (1,373
    )
    
    
    (2,567
    )
    
    
    (2,331
    )Other servicing fees
    
    
    78
    
    
    
    100
    
    
    
    140
    
    
    
    199Servicing income, gross
    
    
    10,225
    
    
    
    9,224
    
    
    
    19,614
    
    
    
    18,572Amortization of servicing assets
    
    
    (6,486
    )
    
    
    (7,394
    )
    
    
    (12,904
    )
    
    
    (13,132
    )Net impairment of servicing assets
    
    
    (2,326
    )
    
    
    (21,600
    )
    
    
    (147
    )
    
    
    (17,382
    )Total net servicing income (loss)
    
    $
    1,413
    
    
    $
    (19,770
    )
    
    $
    6,563
    
    
    $
    (11,942
    )
  Trading Activities.
  54




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TABLE F
COMPONENTS OF TRADING ACTIVITIES
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net realized gains on sales of securities held for trading
    
    $
    522
    
    
    $
    9,300
    
    
    $
    3,413
    
    
    $
    7,108(Losses ) gains on the IO valuation
    
    
    (16,259
    )
    
    
    38,523
    
    
    
    (42,862
    )
    
    
    15,577Net unrealized losses on trading securities, excluding IOs
    
    
    (4,199
    )
    
    
    (1,177
    )
    
    
    (3,439
    )
    
    
    (1,573
    )Net realized and unrealized gains (losses) on derivative instruments
    
    
    12,382
    
    
    
    (89,709
    )
    
    
    25,387
    
    
    
    (57,539
    )Total
    
    $
    (7,554
    )
    
    $
    (43,063
    )
    
    $
    (17,501
    )
    
    $
    (36,427
    )
    Net Gain on Sale of Investment Securities.
 Commissions, Fees and Other Income.
 55




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TABLE G
COMMISSIONS, FEES AND OTHER INCOME
 QUARTER
    
    
    SIX MONTH PERIODENDED JUNE 30,
    
    
    ENDED JUNE 30,(In Thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Retail banking fees
    
    $
    4,947
    
    
    $
    4,357
    
    
    $
    9,759
    
    
    $
    8,335Securities brokerage and asset
management fees and
commissions
    
    
    449
    
    
    
    340
    
    
    
    720
    
    
    
    673Insurance agency commissions
    
    
    2,057
    
    
    
    3,029
    
    
    
    4,759
    
    
    
    5,976Other income
    
    
    4,059
    
    
    
    453
    
    
    
    6,008
    
    
    
    961Total
    
    $
    11,512
    
    
    $
    8,179
    
    
    $
    21,246
    
    
    $
    15,945
     56




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NON-INTEREST EXPENSE S
  TABLE H
NON INTEREST EXPENSES
 QUARTER
    
    
    SIX MONTH PERIOD ENDEDENDED JUNE 30,
    
    
    JUNE 30,(In Thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Compensation and employee benefits
    
    $
    23,034
    
    
    $
    23,679
    
    
    $
    42,625
    
    
    $
    49,268Taxes, other than payroll and income taxes
    
    
    3,264
    
    
    
    2,374
    
    
    
    6,572
    
    
    
    4,726Advertising
    
    
    3,226
    
    
    
    4,586
    
    
    
    5,821
    
    
    
    8,928Professional services  excluding
restatement expenses
    
    
    7,767
    
    
    
    3,857
    
    
    
    13,841
    
    
    
    7,830Professional services  restatement expenses
    
    
    8,460
    
    
    
    7,406
    
    
    
    19,537
    
    
    
    7,406Communication and information systems
    
    
    4,328
    
    
    
    4,564
    
    
    
    9,555
    
    
    
    9,388Occupancy and other office expenses
    
    
    6,789
    
    
    
    8,182
    
    
    
    13,944
    
    
    
    15,345Depreciation and amortization
    
    
    5,925
    
    
    
    5,129
    
    
    
    11,628
    
    
    
    10,082Other
    
    
    6,028
    
    
    
    5,858
    
    
    
    11,072
    
    
    
    9,069Total non-interest expenses
    
    $
    68,821
    
    
    $
    65,635
    
    
    $
    134,595
    
    
    $
    122,042
   INCOME TAXES
   57




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58




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BALANCE SHEET AND OPERATING DATA ANALYSIS
 LOAN PRODUCTION
  TABLE I
LOAN PRODUCTION
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,(Dollars in Thousands, Except for Average Initial Loan Balance)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005FHA/VA mortgage loansNumber of loans
    
    
    539
    
    
    
    1,029
    
    
    
    1,022
    
    
    
    2,362Volume of loans
    
    $
    55,829
    
    
    $
    86,732
    
    
    $
    102,198
    
    
    $
    196,924Percent of total volume
    
    
    12
    %
    
    
    6
    %
    
    
    8
    %
    
    
    7
    %Average initial loan balance
    
    $
    103,579
    
    
    $
    84,288
    
    
    $
    99,998
    
    
    $
    83,372Conventional conforming mortgage loansNumber of loans
    
    
    341
    
    
    
    3,864
    
    
    
    851
    
    
    
    5,422Volume of loans
    
    $
    38,697
    
    
    $
    463,310
    
    
    $
    97,558
    
    
    $
    647,171Percent of total volume
    
    
    8
    %
    
    
    30
    %
    
    
    7
    %
    
    
    23
    %Average initial loan balance
    
    $
    113,481
    
    
    $
    119,904
    
    
    $
    114,639
    
    
    $
    119,360Conventional non  conforming mortgage loans(1)Number of loans
    
    
    1,807
    
    
    
    4,935
    
    
    
    7,304
    
    
    
    11,331Volume of loans
    
    $
    187,187
    
    
    $
    556,843
    
    
    $
    778,572
    
    
    $
    1,262,977Percent of total volume
    
    
    38
    %
    
    
    36
    %
    
    
    57
    %
    
    
    44
    %Average initial loan balance
    
    $
    103,590
    
    
    $
    112,835
    
    
    $
    106,595
    
    
    $
    111,462Other(2)Number of loans
    
    
    766
    
    
    
    4,360
    
    
    
    1,780
    
    
    
    8,421Volume of loans
    
    $
    205,279
    
    
    $
    438,550
    
    
    $
    384,406
    
    
    $
    740,046Percent of total volume
    
    
    42
    %
    
    
    28
    %
    
    
    28
    %
    
    
    26
    %Total loansNumber of loans
    
    
    3,453
    
    
    
    14,188
    
    
    
    10,957
    
    
    
    27,536Volume of loans
    
    $
    486,992
    
    
    $
    1,545,435
    
    
    $
    1,362,734
    
    
    $
    2,847,118
 
 (1)
    
    Includes $16.7 million and $59.3 million in second mortgages for the quarters ended June 30, 2006 and 2005, respectively, and
$58.9 million and $103.7 million in second mortgages for the six month periods ended June 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.  59




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TABLE J
LOAN ORIGINATION SOURCES
 SIX MONTH PERIOD ENDED JUNE 30,2006
    
    
    2005Puerto Rico
    
    
    US
    
    
    Total
    
    
    Puerto Rico
    
    
    US
    
    
    TotalRetail
    
    
    65
    %
    
    
    
    
    
    
    65
    %
    
    
    69
    %
    
    
    1
    %
    
    
    70
    %Wholesale(1).
    
    
    6
    %
    
    
    
    
    
    
    6
    %
    
    
    8
    %
    
    
    
    
    
    
    8
    %New Housing Developments
    
    
    16
    %
    
    
    2
    %
    
    
    18
    %
    
    
    10
    %
    
    
    2
    %
    
    
    12
    %Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
  60




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TABLE K
MORTGAGE LOAN SERVICING
(Dollars in Thousands, Except for Average Size of Loans)
 AS OF JUNE 30,2006
    
    
    2005COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END:GNMA
    
    $
    2,166,764
    
    
    $
    2,283,219FHLMC/FNMA
    
    
    4,111,432
    
    
    
    3,900,242Other conventional mortgage loans(1)(2)
    
    
    9,440,443
    
    
    
    8,802,444Total servicing portfolio
    
    $
    15,718,639
    
    
    $
    14,985,905SELECTED DATA REGARDING MORTGAGE LOANS SERVICED:Number of loans
    
    
    173,247
    
    
    
    168,556Weighted  average interest rate
    
    
    6.60
    %
    
    
    6.67
    %Weighted  average remaining maturity (months)
    
    
    255
    
    
    
    256Weighted
 average gross servicing fee rate  loans serviced to others
    
    
    0.3861
    %
    
    
    0.3941
    %Average servicing portfolio(3)
    
    $
    15,776,895
    
    
    $
    14,600,323Principal prepayments
    
    $
    798,093
    
    
    $
    1,166,390Constant prepayment rate
    
    
    9
    %
    
    
    14
    %Average size of loans
    
    $
    90,730
    
    
    $
    88,908Servicing assets, net
    
    $
    190,588
    
    
    $
    113,135DELINQUENT MORTGAGE LOANS AND PENDING
FORECLOSURES AT PERIOD END:60-89 days past due
    
    
    1.44
    %
    
    
    1.19
    %90 days or more past due
    
    
    1.48
    %
    
    
    1.62
    %Total delinquencies excluding foreclosures
    
    
    2.92
    %
    
    
    2.81
    %Foreclosures pending
    
    
    2.09
    %
    
    
    1.59
    %SERVICING PORTFOLIO ACTIVITY:Beginning servicing portfolio
    
    $
    15,727,604
    
    
    $
    14,264,367Add:Loans funded and purchased(4)
    
    
    973,325
    
    
    
    2,104,577Bulk servicing acquired
    
    
    16,376
    
    
    
    99,775Less:Servicing sales
    
    
    33,005
    
    
    
    2,537Run-off(5)
    
    
    965,661
    
    
    
    1,480,277Ending servicing portfolio
    
    $
    15,718,639
    
    
    $
    14,985,905
 
 (1)
    
    Includes $2.3 billion and $5.5 billion of loans owned by Doral Financial at June 30, 2006 and 2005, respectively, which represented 15%and 37% of the total servicing portfolio as of such dates.(2)
    
    Includes portfolios of $261.8 million and $300.3 million at June 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 $5.2 billion and
$4.4 billion at June 30, 2006 and 2005, respectively.(4)
    
    Excludes approximately $389.4 million and $742.5 million of commercial, consumer, construction and other non-mortgage loans originated by Doral Financial but not part of the mortgage
servicing-portfolio as of June 30, 2006 and 2005, respectively.(5)
    
    Run-off refers to regular amortization of loans, prepayments and foreclosures. 61




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LIQUIDITY AND CAPITAL RESOURCES
        62




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63




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TABLE L
SOURCES OF BORROWINGS
(DOLLARS IN THOUSANDS)
 AS OF JUNE 30, 2006
    
    AS OF DECEMBER 31, 2005AMOUNT
    
    AVERAGE
    
    AMOUNT
    
    AVERAGEOUTSTANDING
    
    RATE
    
    OUTSTANDING
    
    RATEDeposits
    
    $
    4,210,074
    
    
    
    3.54
    %
    
    $
    4,237,269
    
    
    
    2.98
    %Repurchase Agreements
    
    
    5,550,171
    
    
    
    4.34
    %
    
    
    6,054,598
    
    
    
    4.08
    %Advances from FHLB
    
    
    1,069,500
    
    
    
    4.27
    %
    
    
    969,500
    
    
    
    4.08
    %Loans Payable
    
    
    932,849
    
    
    
    6.34
    %
    
    
    3,578,230
    
    
    
    5.75
    %Notes Payable
    
    
    889,291
    
    
    
    6.33
    %
    
    
    965,621
    
    
    
    5.86
    %
      64




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TABLE M
AVERAGE DEPOSIT BALANCE
(DOLLARS IN THOUSANDS)
 SIX MONTH PERIODENDED
    
    
    YEAR ENDEDJUNE 30, 2006
    
    
    DECEMBER 31, 2005AVERAGE
    
    
    AVERAGE
    
    
    AVERAGE
    
    
    AVERAGEBALANCE
    
    
    RATE
    
    
    BALANCE
    
    
    RATECertificates of deposit
    
    $
    2,828,874
    
    
    
    4.07
    %
    
    $
    2,248,530
    
    
    
    3.56
    %Regular passbook savings
    
    
    444,195
    
    
    
    2.96
    %
    
    
    476,600
    
    
    
    2.34
    %NOW accounts
    
    
    553,116
    
    
    
    2.43
    %
    
    
    673,755
    
    
    
    2.22
    %Non-interest bearing
    
    
    366,927
    
    
    
    
    
    
    
    442,940
    
    
    
    Total deposits
    
    $
    4,193,112
    
    
    
    3.38
    %
    
    $
    3,841,825
    
    
    
    2.76
    %
  TABLE N
CERTIFICATES OF DEPOSIT MATURITIES
(IN THOUSANDS)
 AMOUNTCertificates of deposit maturing:Three months or less
    
    $
    326,263Over three through six months
    
    
    446,013Over six through twelve months
    
    
    649,360Over twelve months
    
    
    878,487Total
    
    $
    2,300,123
  REGULATORY CAPITAL RATIOS
  65




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TABLE O
REGULATORY CAPITAL RATIOS
 DORAL
    
    DORAL
    
    DORALFINANCIAL
    
    BANK PR
    
    BANK NYTotal Capital (Total capital to risk- weighted assets)
    
    
    15.4
    %
    
    
    20.0
    %
    
    
    16.1
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    13.7
    %
    
    
    18.9
    %
    
    
    15.6
    %Leverage Ratio(1)
    
    
    5.3
    %
    
    
    6.8
    %
    
    
    9.0
    %
 
 (1)
    
    Tier 1 capital to average assets in the case of Doral Financial and Doral Bank PR and
Tier 1 capital to adjusted total assets in the case of Doral Bank NY.     ASSETS AND LIABILITIES
   66




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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
    
    $
    1,284,931
    
    
    
    76.6
    %
    
    $
    8,802Commercial loans
    
    
    2,996
    
    
    
    68.9
    %
    
    
    Total
    
    $
    1,287,927
    
    
    
    76.6
    %
    
    $
    8,802
   67




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CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
  68




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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
    
    $
    4,210,074
    
    
    $
    3,248,706
    
    
    $
    834,799
    
    
    $
    112,384
    
    
    $
    14,185Repurchase agreements(2)
    
    
    5,550,171
    
    
    
    2,305,371
    
    
    
    2,444,800
    
    
    
    800,000
    
    
    
    Advances from the FHLB(2)
    
    
    1,069,500
    
    
    
    702,500
    
    
    
    317,000
    
    
    
    50,000
    
    
    
    Loans payable(3)
    
    
    932,849
    
    
    
    127,959
    
    
    
    210,043
    
    
    
    160,501
    
    
    
    434,346Notes payable
    
    
    889,291
    
    
    
    10,169
    
    
    
    635,370
    
    
    
    765
    
    
    
    242,987Other liabilities
    
    
    255,538
    
    
    
    252,538
    
    
    
    2,000
    
    
    
    1,000
    
    
    
    Non-cancelable operating leases
    
    
    66,733
    
    
    
    7,586
    
    
    
    13,826
    
    
    
    11,514
    
    
    
    33,807Total Contractual Cash Obligations
    
    $
    12,974,156
    
    
    $
    6,654,829
    
    
    $
    4,457,838
    
    
    $
    1,136,164
    
    
    $
    725,325
 
 (1)
    
    Amounts included in the table above do not include interest.(2)
    
    Includes $3.4 billion of repurchase agreements with an average rate of 4.15% and $702.5 million in advances from the
FHLB-NY with an average rate of 4.09%,which the lenders have the right to call before their contractual maturities. The majority of
such repurchase agreements and advances from the FHLB-NY are included in the less than one year category in the above table but have
actual contractual maturities ranging from February 2008 to March, 2015.They are included on the first call date basis because
increases in interest rates over the average rate of the Companys callable borrowings may induce the lenders to exercise their call
right.(3)
    
    Includes $868.2 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 12.3% to estimate the repayments. TABLE R
OTHER COMMERCIAL COMMITMENTS(1)
(IN THOUSANDS)
 AMOUNT OF COMMITMENT EXPIRATION PER PERIODTOTALOTHER COMMERCIAL
    
    AMOUNT
    
    
    LESS THAN
    
    
    
    
    
    
    
    
    
    
    AFTERCOMMITMENTS
    
    COMMITTED
    
    
    1 YEAR
    
    
    1-3 YEARS
    
    
    3-5 YEARS
    
    
    5 YEARSCommitments to extend credit
    
    $
    469,185
    
    
    $
    308,259
    
    
    $
    160,221
    
    
    $
    485
    
    
    $
    220Commitments to sell mortgage-backed
securities and loans
    
    
    352,080
    
    
    
    352,080
    
    
    
    
    
    
    
    
    
    
    
    Commercial and financial standby letters of credit
    
    
    6,679
    
    
    
    6,679
    
    
    
    
    
    
    
    
    
    
    
    Maximum contractual recourse exposure
    
    
    1,033,440
    
    
    
    103,266
    
    
    
    687,770
    
    
    
    
    
    
    
    242,404Total
    
    $
    1,861,384
    
    
    $
    770,284
    
    
    $
    847,991
    
    
    $
    485
    
    
    $
    242,624
 
 (1)
    
    Refer to Off-Balance Sheet Activities above for additional information regarding other commercial commitments of the Company. RISK MANAGEMENT
  Interest Rate and Market Risk Management
  69




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Doral Financials Risk Profile
    Market Value
    
    Net InterestAs of June 30, 2006
    
    of Equity Risk
    
    Income Risk1+ 100 BPS
    
    
    (40.2
    )%
    
    
    (1.1
    )%- 100 BPS
    
    
    25.4
    %
    
    
    1.9
    %
 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.   70




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(In thousands)
    
    June 30, 2006
    
    December 31, 2005Change in Fair
    
    Change in
    
    Change in Fair
    
    Change inValue of
    
    Fair Value of
    
    Value of
    
    Fair Value ofAvailable for Sale
    
    Held to
    
    Available for Sale
    
    Held toChange in yield
    
    Securities and
    
    Maturity
    
    Securities and
    
    Maturitycurve (basis points)
    
    FHLB Stock
    
    Securities
    
    FHLB Stock
    
    Securities+200
    
    $
    (416,147
    )
    
    $
    (308,018
    )
    
    $
    (425,632
    )
    
    $
    (290,743
    )+100
    
    
    (206,571
    )
    
    
    (148,729
    )
    
    
    (200,611
    )
    
    
    (140,570
    )50
    
    
    (101,630
    )
    
    
    (72,956
    )
    
    
    (94,944
    )
    
    
    (68,916
    )Base
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -50
    
    
    96,090
    
    
    
    67,305
    
    
    
    79,585
    
    
    
    62,654-100
    
    
    179,130
    
    
    
    131,123
    
    
    
    137,066
    
    
    
    121,809-200
    
    
    278,852
    
    
    
    241,261
    
    
    
    212,629
    
    
    
    232,626
   Derivatives.
  71




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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
    
    
    5.170
    %
    
    
    4.430
    %
    
    $
    7,185$550,000
    
    August, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    5.171
    %
    
    
    4.443
    %
    
    $
    7,117$100,000
    
    September, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    5.300
    %
    
    
    3.688
    %
    
    $
    2,241$100,000
    
    September, 2007
    
    To fix the cost of
short-term funding
sources in a rising
interest rate
environment
    
    
    5.300
    %
    
    
    3.655
    %
    
    $
    2,282$200,000
    
    November, 2009
    
    To protect the
spread of the
variable IOs
    
    
    5.160
    %
    
    
    3.773
    %
    
    $
    11,158$200,000
    
    November, 2009
    
    To protect the
spread of the
variable IOs
    
    
    5.173
    %
    
    
    3.975
    %
    
    $
    9,982
   72




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TABLE T
FAIR VALUE RECONCILIATION
 Six Month Period ended(In thousands)
    
    June 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
    
    
    27,686Fair value of contracts outstanding at the end of the period
    
    $
    45,386
 TABLE U
SOURCE OF FAIR VALUE
 (In thousands)
    
    Payment Due by PeriodMaturity
    
    
    
    
    
    
    
    
    
    
    Maturityless than
    
    
    Maturity
    
    
    Maturity
    
    
    in excess
    
    
    Total FairAs of June 30, 2006
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    of 5 Years
    
    
    ValueSource of Fair ValuePrices actively quoted
    
    $
    5,421
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,421Prices provided by
other external
sources
    
    
    
    
    
    
    18,825
    
    
    
    21,140
    
    
    
    
    
    
    
    39,965$
    5,421
    
    
    $
    18,825
    
    
    $
    21,140
    
    
    $
    
    
    
    $
    45,386
  73




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TABLE V
DERIVATIVE COUNTERPARTY CREDIT EXPOSURE
 (Dollars in thousands)
    
    June 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
    
    
    $
    650,000
    
    
    $
    23,471
    
    
    $
    
    
    
    $
    23,471
    
    
    
    2.09A+
    
    
    3
    
    
    
    1,800,000
    
    
    
    9,921
    
    
    
    
    
    
    
    9,921
    
    
    
    0.83Subtotal
    
    
    4
    
    
    $
    2,450,000
    
    
    $
    33,392
    
    
    $
    
    
    
    $
    33,392
    
    
    
    1.17
 
 (1)
    
    Based on the S&P Long Term Issuer Credit Ratings.(2)
    
    Based on legal entities. Affiliated legal entities are reported separately.(3)
    
    For each counterparty, this amount includes derivatives with a positive fair value including the related accrued interest receivable/payable (net). (Dollars in thousands)
    
    December 31, 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. 74




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Credit Risk
         75




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##### Table of Contents



As of
    
    
    As of(In thousands)
    
    June 30, 2006
    
    
    December 31, 2005Construction loans(1)
    
    $
    817,669
    
    
    $
    795,848Total undisbursed funds under existing commitments
    
    $
    372,086
    
    
    $
    375,694Non-performing construction loans
    
    $
    23,389
    
    
    $
    9,212Net charge
offs  Construction loans
    
    $
    
    
    
    $
    4,938Allowance
for loan losses  Construction loans
    
    $
    27,310
    
    
    $
    20,748Non-performing construction loans to total construction loans
    
    
    2.86
    %
    
    
    1.16
    %Allowance
for loan losses  construction loans to total
construction loans
    
    
    3.34
    %
    
    
    2.61
    %Net charge-offs to total construction loans
    
    
    0.00
    %
    
    
    0.62
    %
 
 (1)
    
    Includes $673.8 million and $670.3 million of construction loans for residential
housing projects as of June 30, 2006 and December 31, 2005, respectively. Also includes $143.9 million
and $125.5 million of construction loans for commercial, condominiums and multi-family projects as of
June 30, 2006 and December 31, 2005, respectively. Non-performing assets and allowance for loan and lease losses
    76




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TABLE W
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
 AS OF
    
    
    AS OFJUNE 30, 2006
    
    
    DECEMBER 31, 2005Mortgage banking business:Non-accrual loans:Construction loans
    
    $
    1,389
    
    
    $
    1,557Residential mortgage loans(1)
    
    
    110,538
    
    
    
    162,902Construction loans past due 90 days and still accruing
    
    
    
    
    
    
    170OREO
    
    
    26,635
    
    
    
    16,351Total NPAs of mortgage banking business
    
    
    138,562
    
    
    
    180,980Other lending activities through banking subsidiaries:Non-accrual loans:Construction loans
    
    
    22,000
    
    
    
    7,485Residential mortgage loans
    
    
    24,525
    
    
    
    12,300Commercial real estate loans
    
    
    16,887
    
    
    
    11,517Consumer loans
    
    
    2,648
    
    
    
    1,932Commercial non-real estate loans
    
    
    955
    
    
    
    1,056Lease financing receivable
    
    
    492
    
    
    
    158Land loans
    
    
    81
    
    
    
    Total non-accrual loans
    
    
    67,588
    
    
    
    34,448OREO
    
    
    2,461
    
    
    
    1,311Total NPAs of banking subsidiaries
    
    
    70,049
    
    
    
    35,759Total NPAs of Doral Financial (consolidated)
    
    $
    208,611
    
    
    $
    216,739Total NPAs of banking subsidiaries as a percentage
of their loans portfolio, net, and OREO
    
    
    1.68
    %
    
    
    0.97
    %Total NPAs of Doral Financial as a percentage of
consolidated total assets
    
    
    1.50
    %
    
    
    1.25
    %Total non-performing loans to total loans (excluding
GNMA defaulted loans)
    
    
    3.24
    %
    
    
    2.57
    %Ratio of allowance for loan and lease losses to total
non-performing loans (excluding non-performing
loans held for sale) at end of period(2)
    
    
    48.11
    %
    
    
    96.87
    %
 
 (1)
    
    Does not include approximately $77.1 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 June 30, 2006 and December 31, 2005, respectively.(2)
    
    During the first quarter of 2006, the Company reclassified
$876.2 million from its mortgage loans held for sale portfolio to
its loans receivable portfolio, as a result of a review of its mortgage loans held for sale
portfolio. As of June 30, 2006, there was a $11.9 million
discount related with the loan transferred.  77




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TABLE X
ALLOWANCE FOR LOAN AND LEASE LOSSES
(DOLLARS IN THOUSANDS)
 QUARTER ENDED
    
    
    SIX MONTH PERIODJUNE 30,
    
    
    ENDED JUNE 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Allowance for Loan and Lease Losses:Balance at beginning of period
    
    $
    39,330
    
    
    $
    24,255
    
    
    $
    35,044
    
    
    $
    20,881Provision (recovery) for loan and lease losses:Construction loans
    
    
    2,763
    
    
    
    2,086
    
    
    
    6,562
    
    
    
    2,572Residential mortgage loans
    
    
    205
    
    
    
    (168
    )
    
    
    788
    
    
    
    (377
    )Commercial real estate loans
    
    
    1,129
    
    
    
    723
    
    
    
    635
    
    
    
    1,636Consumer loans
    
    
    1,348
    
    
    
    721
    
    
    
    2,328
    
    
    
    2,883Lease financing
    
    
    225
    
    
    
    142
    
    
    
    433
    
    
    
    375Commercial non-real estate loans
    
    
    177
    
    
    
    226
    
    
    
    230
    
    
    
    569Land secured loans
    
    
    25
    
    
    
    (72
    )
    
    
    69
    
    
    
    47Total provision for loan and lease losses
    
    
    5,872
    
    
    
    3,658
    
    
    
    11,045
    
    
    
    7,705Charge  offs:Construction loans
    
    
    
    
    
    
    (4,717
    )
    
    
    
    
    
    
    (4,717
    )Residential mortgage loans
    
    
    
    
    
    
    (79
    )
    
    
    
    
    
    
    (79
    )Commercial real estate loans
    
    
    (90
    )
    
    
    
    
    
    
    (133
    )
    
    
    (29
    )Consumer loans
    
    
    (958
    )
    
    
    (560
    )
    
    
    (1,730
    )
    
    
    (1,089
    )Lease financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial non-real estate loans
    
    
    (103
    )
    
    
    (53
    )
    
    
    (293
    )
    
    
    (230
    )Land secured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    (1,151
    )
    
    
    (5,409
    )
    
    
    (2,156
    )
    
    
    (6,144
    )Recoveries:Construction loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential mortgage loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate loans
    
    
    6
    
    
    
    153
    
    
    
    6
    
    
    
    153Consumer loans
    
    
    73
    
    
    
    43
    
    
    
    127
    
    
    
    99Lease financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial non-real estate loans
    
    
    15
    
    
    
    24
    
    
    
    66
    
    
    
    30Land secured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    94
    
    
    
    220
    
    
    
    199
    
    
    
    282Net charge-offs
    
    
    (1,057
    )
    
    
    (5,189
    )
    
    
    (1,957
    )
    
    
    (5,862
    )Other
    
    
    
    
    
    
    (52
    )
    
    
    13
    
    
    
    (52
    )Balance at end of period
    
    $
    44,145
    
    
    $
    22,672
    
    
    $
    44,145
    
    
    $
    22,672Allowance for loan losses as a percentage of
loans receivable outstanding at the end of period(1)
    
    
    1.44
    %
    
    
    1.47
    %
    
    
    1.44
    %
    
    
    1.47
    %Net charge-offs to average loans receivable outstanding on an annualized basis
    
    
    0.13
    %
    
    
    1.09
    %
    
    
    0.13
    %
    
    
    0.64
    %
 
 (1)
    
    Does not include loans secured by real estate of $415.6 million and $477.5 million as of June 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. 78




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##### Table of Contents



Operational Risk
  Overview of Operational Risk Management
   Internal Control Over Financial Reporting
  Liquidity Risk
   79




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##### Table of Contents



General Business, Economic and Political Conditions
         80




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Control and Procedures
     Changes in Internal Control Over Financial Reporting
  81




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
    82




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##### Table of Contents



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

Glen WakemanChief Executive Officer and PresidentDate:
October 23, 2006
    
    /s/ Lidio SorianoLidio SorianoExecutive Vice President andChief Financial Officer
 83




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    
    
    Description12.1
    
    
    
    Computation of Ratio of Earnings to Fixed Charges.12.2
    
    
    
    Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.31.1
    
    
    
    CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    
    CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    
    CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 84