DORAL FINANCIAL CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(MARK ONE)


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002









[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OF 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-17224

DORAL FINANCIAL CORPORATION

(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)


Puerto Rico		66-0312162

(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)









1451 F.D. Roosevelt Avenue, San Juan, Puerto Rico		00920-2717

(Address of principal executive offices)		(Zip Code)









Registrant’s telephone number, including area code		(787) 474-6700




Former name, former address and Former fiscal year, if changed since last report		Not applicable

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

YES [X] NO [ ]

NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT NOVEMBER 7, 2002: 71,844,848

TABLE OF CONTENTS


PART 1 — FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 1 — LEGAL PROCEEDINGS
	ITEM 2 — CHANGES IN SECURITIES
	ITEM 3 — DEFAULTS UPON SENIOR SECURITIES
	ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5 — OTHER INFORMATION
	ITEM 6 — EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EX-12.(A) COMPUTATION OF RATIO OF EARNINGS
EX-12.(B) COMPUTATION OF RATIO OF EARNINGS

DORAL FINANCIAL CORPORATION
INDEX PAGE


		PAGE
PART I — FINANCIAL INFORMATION





Item 1 —	Financial Statements





	Consolidated Statements of Financial Condition (Unaudited) as of September 30, 2002 and December 31, 2001		4





	Consolidated Statements of Income (Unaudited) — Quarters ended September 30, 2002 and September 30, 2001 and nine months ended September 30, 2002 and September 30, 2001		5





	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) — Nine months ended September 30, 2002 and September 30, 2001		6





	Consolidated Statements of Comprehensive Income (Unaudited) — Quarters ended September 30, 2002 and September 30, 2001 and nine months ended September 30, 2002 and September 30, 2001		7





	Consolidated Statements of Cash Flows (Unaudited) — Nine months ended September 30, 2002 and September 30, 2001		8





	Notes to Consolidated Financial Statements (Unaudited)		9





Item 2 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20





Item 3 —	Quantitative and Qualitative Disclosures About Market Risk		48





Item 4 —	Controls and Procedures		48





PART II — OTHER INFORMATION




Item 1 —	Legal Proceedings		48





Item 2 —	Changes in Securities		48





Item 3 —	Defaults Upon Senior Securities		48





Item 4 —	Submission of Matters to a Vote of Security Holders		49





Item 5 —	Other Information		49





Item 6 —	Exhibits and Reports on Form 8-K		49





SIGNATURES			50





CEO and CFO Certifications

FORWARD LOOKING STATEMENTS

When used in this form 10-Q or future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities, competitive and regulatory factors and legislative changes, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.

The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE INFORMATION)
(UNAUDITED)


					SEPTEMBER 30,			DECEMBER 31,
					2002			2001

ASSETS




	Cash and due from banks				$	62,161		$	45,970

	Money market investments:




			Securities purchased under resell agreements			422,239			54,866




			Time deposits with other banks			1,055,573			493,549

				Total money market investments		1,477,812			548,415

		Pledged investment securities that can be re-pledged:




			Trading securities, at fair value			761,894			756,499




			Securities available for sale, at fair value			298,386			702,136




			Securities held to maturity, at amortized cost			527,425			762,247

				Total pledged investment securities		1,587,705			2,220,882

		Other investment securities:




			Trading securities, at fair value			470,398			236,829




			Securities available for sale, at fair value			160,768			226,043




			Securities held to maturity, at amortized cost			20,979			104,088




			Federal Home Loan Bank of NY (FHLB) stock, at cost			76,445			56,095

				Total other investment securities		728,590			623,055

				Total investment securities and other instruments		2,316,295			2,843,937

Loans:




		Mortgage loans held for sale, at lower of cost or market, net				2,329,624			1,947,494




		Loans receivable, net of allowance for loan losses of $7,973 (2001 - $6,000)				769,393			644,113

				Total loans		3,099,017			2,591,607

		Receivables and mortgage servicing advances				46,480			43,725




		Broker-dealer’s receivable				306,898			274,422




		Accrued interest receivable				37,895			47,039




		Servicing assets, net				153,053			154,340




		Premises and equipment, net				114,130			99,935




		Real estate held for sale, net				11,777			8,414




		Other assets				40,646			36,479

				Total assets	$	7,666,164		$	6,694,283

LIABILITIES




		Securities sold under agreements to repurchase			$	2,276,416		$	2,573,772




		Loans payable				202,080			161,101




		Deposits				2,106,619			1,669,909




		Notes payable				618,711			459,543




		Advances from FHLB				1,061,500			687,500




		Broker-dealer’s payable				233,803			245,573




		Accrued expenses and other liabilities				169,394			134,765

				Total liabilities		6,668,523			5,932,163

		Commitments and contingencies

STOCKHOLDERS’ EQUITY




		Preferred Stock ($1 par value, 10,000,000 shares authorized 7,635,000 and 3,495,000 shares issued and outstanding in 2002 and 2001, respectively) at aggregate liquidation preference value				228,250			124,750




		Common stock, $1 par value, 200,000,000 shares authorized; 71,922,098 (including 23,973,064 shares issued on September 14, 2002 as a result of a three-for-two stock split) and 47,866,334 shares issued in 2002 and 2001, respectively; 71,838,098 and 47,810,334 shares outstanding in 2002 and 2001, respectively				71,922			47,866




		Paid-in capital				191,120			217,594




		Legal surplus				8,423			8,423




		Retained earnings				500,882			375,855




		Accumulated other comprehensive loss, net of income tax benefit of $1,292 - (2001 - $509)				(2,872	)		(12,312	)




		Treasury stock at par value, 84,000 shares held (including 28,000 shares issued on September 14, 2002 as a result of a three-for-two stock split)				(84	)		(56	)

				Total stockholders’ equity		997,641			762,120

				Total liabilities and stockholders’ equity	$	7,666,164		$	6,694,283

The accompanying notes are an integral part of these financial statements.

DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)


			QUARTER ENDED						NINE MONTH PERIOD
			SEPTEMBER 30,						ENDED SEPTEMBER 30,

			2002			2001			2002			2001

Interest income:




	Loans		$	52,467		$	42,994		$	148,983		$	117,926




	Mortgage-backed securities			33,795			26,347			94,767			70,750




	Investment securities			13,694			13,654			51,915			53,721




	Other interest-earning assets			5,413			9,831			12,117			22,323

		Total interest income		105,369			92,826			307,782			264,720

Interest expense:




	Loans payable			1,639			2,697			4,397			12,521




	Securities sold under agreements to repurchase			23,322			31,193			75,239			94,609




	Deposits			18,778			17,676			54,242			53,342




	Other borrowed funds			22,384			16,569			61,095			49,213

		Total interest expense		66,123			68,135			194,973			209,685

		Net interest income		39,246			24,691			112,809			55,035




Provision for loan losses				2,055			1,062			3,792			3,128

		Net interest income after provision for loan losses		37,191			23,629			109,017			51,907

Non-interest income:




	Net gain on mortgage loan sales and fees			53,001			44,803			157,238			136,160




	Trading activities			4,806			(3,539	)		(6,893	)		(18,409	)




	Gain on sale of investment securities			10,119			1,453			16,109			3,668




	Servicing (loss) income, net of amortization and impairment of $14,078 - 2002 and $8,265 - 2001 for the quarter, and $31,862 - 2002 and $18,275 - 2001 for the nine months			(5,596	)		(704	)		(6,310	)		3,791




	Commissions, fees and other income			5,662			5,031			15,216			12,918

		Total non-interest income		67,992			47,044			175,360			138,128

Non-interest expense:




	Compensation and benefits			13,449			11,458			39,998			35,066




	Taxes, other than payroll and income taxes			1,830			1,078			4,069			3,294




	Advertising			2,918			2,560			8,129			7,018




	Professional services			1,778			1,272			5,249			4,102




	Communication and information systems			3,318			2,685			9,172			7,428




	Occupancy and other office expenses			5,546			4,279			15,171			12,403




	Depreciation and amortization			3,263			2,890			8,692			7,634




	Other			3,695			2,304			9,945			4,230

		Total non-interest expense		35,797			28,526			100,425			81,175

		Income before income taxes and cumulative effect of change in accounting principle		69,386			42,147			183,952			108,860




Income taxes				11,102			5,337			27,141			13,389

		Income before cumulative effect of change in accounting principle		58,284			36,810			156,811			95,471




		Cumulative effect of change in accounting principle, net of tax		—			—			—			5,929

Net income:			$	58,284		$	36,810		$	156,811		$	101,400

Net income attributable to common shareholders			$	54,048		$	34,458		$	147,309		$	94,344

Earnings per common share:




	Basic:




		Income before cumulative effect of change in accounting principle	$	0.75		$	0.50		$	2.05		$	1.35




		Cumulative effect of change in accounting principle		—			—			—			0.09

		Net income	$	0.75		$	0.50		$	2.05		$	1.44

	Diluted:




		Income before cumulative effect of change in accounting principle	$	0.74		$	0.49		$	2.02		$	1.33




		Cumulative effect of change in accounting principle		—			—			—			0.08

		Net income	$	0.74		$	0.49		$	2.02		$	1.41

		Dividends per common share	$	0.11		$	0.08		$	0.31		$	0.23

The accompanying notes are an integral part of these financial statements.

DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)


			NINE MONTH PERIOD ENDED
			SEPTEMBER 30,

			2002			2001

PREFERRED STOCK:




	Balance at beginning of period		$	124,750		$	124,750




	Shares issued (7.25% noncumulative monthly income, Series C)			103,500			—

		Balance at end of period		228,250			124,750

COMMON STOCK:




	Balance at beginning of period			47,866			42,449




	Shares issued			—			5,060




	Shares issued under stock option plan			83			351




	Shares issued as a result of three-for-two stock split			23,973			—

		Balance at end of period		71,922			47,860

PAID-IN CAPITAL:




	Balance at beginning of period			217,594			64,319




	Issuance cost of preferred stock			(3,488	)		—




	Common shares issued			—			148,364




	Common shares issued under stock option plan			959			4,815




	Adjustment for three-for-two stock split			(23,945	)		—

		Balance at end of period		191,120			217,498

LEGAL SURPLUS:				8,423			5,982

RETAINED EARNINGS:




	Balance at beginning of period			375,855			265,396




	Net income			156,811			101,400




	Cash dividends declared on common stock			(22,255	)		(15,567	)




	Cash paid in lieu of fractional shares as a result of three-for-two stock split			(27	)		—




	Cash dividends declared on preferred stock			(9,502	)		(7,056	)

		Balance at end of period		500,882			344,173

ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME NET OF TAXES:




	Balance at beginning of period			(12,312	)		2,870




	Net gain in the fair value of investment securities available for sale, net of deferred taxes			9,440			862

		Balance at end of period		(2,872	)		3,732

TREASURY STOCK AT COST:




	Balance at beginning of period			(56	)		(56	)




	Shares issued as a result of three-for-two stock split			(28	)		—

		Balance at end of period		(84	)		(56	)

Total stockholders’ equity			$	997,641		$	743,939

The accompanying notes are an integral part of these financial statements.

DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)


								NINE MONTH
		QUARTER ENDED						PERIOD ENDED
		SEPTEMBER 30,						SEPTEMBER 30,

		2002			2001			2002		2001

Net income		$	58,284		$	36,810		$	156,811	$	101,400

Other comprehensive income (loss), net of tax:




	Unrealized net gains on securities arising during the period (net of taxes of $2.6 million - 2002 and $1.1 million - 2001 for the quarter, and $2.2 million - 2002 and $268 - 2001 for the nine months)		10,736			24,206			4,681		6,906








	Amortization of unrealized losses on securities reclassified to held to maturity (net of taxes of $(153) - 2002 and $(317) - 2001 for the quarter, and $(356) - 2002 and $(403) - 2001 for the nine months)		459			953			1,069		1,210








	Reclassification adjustment for losses (gains) included in net income (net of taxes of $80 - 2002 and $2.5 million - 2001 for the quarter, and $2.4 million - 2002 and $2.9 million - 2001 for the nine months)		(1,377	)		(7,405	)		3,690		(8,854	)

Other comprehensive income (loss) before cumulative effect of change in accounting principle			9,818			17,754			9,440		(738	)

Cumulative effect of change in accounting principle, net of taxes			—			—			—		1,600

Other comprehensive income			9,818			17,754			9,440		862

Comprehensive income, net of taxes		$	68,102		$	54,564		$	166,251	$	102,262

The accompanying notes are an integral part of these financial statements.

DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)


					NINE MONTH PERIOD
					ENDED SEPTEMBER 30,

					2002			2001

Cash flows from operating activities:




	Net income				$	156,811		$	101,400

	Adjustments to reconcile net income to net cash used in operating activities:




		Cumulative effect of change in accounting principle				—			(5,929	)




		Depreciation and amortization				8,692			7,634




		Amortization of interest-only strips				36,069			21,516




		Amortization of servicing assets				31,862			18,275




		Deferred tax provision				7,471			3,880




		Provision for loan losses				3,792			3,128




		Provision for losses on real estate held for sale				2,111			500




		Origination and purchases of mortgage loans held for sale				(3,332,680	)		(2,730,308	)




		Principal repayment and sales of mortgage loans held for sale				1,502,302			1,256,049




		Purchases of securities held for trading				(7,797,401	)		(2,589,693	)




		Principal repayments and sales of trading securities				8,440,009			3,388,251




		Increase in interest only strips, net				(144,164	)		(94,380	)




		Increase in servicing assets				(30,575	)		(33,308	)




		Increase in receivables and mortgage servicing advances				(2,755	)		(11,212	)




		Increase in broker dealer’s receivable				(32,476	)		(125,642	)




		Decrease in accrued interest receivable				9,144			2,872




		Decrease in payable related to short sales				(39,973	)		(21,104	)




		Increase (decrease) in interest payable				161			(10,374	)




		(Decrease) increase in broker dealer’s payable				(11,770	)		124,203




		Increase (decrease) in accrued expenses and other liabilities				31,096			(4,610	)




		Increase in other assets				(4,167	)		(6,118	)

				Total adjustments		(1,323,252	)		(806,370	)

				Net cash used in operating activities		(1,166,441	)		(704,970	)

	Cash flows from investing activities:




		Purchase of securities held to maturity				(41,306	)		(471,841	)




		Principal repayments and maturities of securities held to maturity				359,235			955,102




		Origination of loans receivable				(446,096	)		(333,585	)




		Principal repayments of loans receivable				317,767			149,047




		Purchases of securities available for sale				(3,986,107	)		(2,048,443	)




		Proceeds from sales of securities available for sale				5,118,123			1,722,143




		Principal repayments of securities available for sale				8,634			477,661




		Purchase of FHLB stock				(20,350	)		(8,765	)




		Purchase of premises and equipment				(22,887	)		(29,086	)




		Proceeds from sales of real estate held for sale				2,272			2,437

				Net cash provided by investing activities		1,289,285			414,670

	Cash flows from financing activities:




		Increase in deposits				436,710			275,200




		(Decrease) increase in securities sold under agreements to repurchase				(297,356	)		274,103




		Increase (decrease) in loans payable				80,952			(131,840	)




		Issuance of common stock, net				1,042			158,590




		Issuance of preferred stock, net				100,012			—




		Increase in FHLB advances				374,000			148,500




		Increase in notes payable				159,168			14,959




		Dividends declared and paid				(31,757	)		(22,623	)




		Cash paid in lieu of fractional shares				(27	)		—

				Net cash provided by financing activities		822,744			716,889

	Net increase in cash and cash equivalents					945,588			426,589




	Cash and cash equivalents at beginning of period					594,385			428,319

	Cash and cash equivalents at the end of period				$	1,539,973		$	854,908

	Cash and cash equivalents includes:




			Cash and due from banks		$	62,161		$	63,157




			Money market investments			1,477,812			791,751

					$	1,539,973		$	854,908

	Supplemental schedule of non-cash activities:




		Loan securitizations			$	1,439,760		$	777,266

		Reclassification of investments held to maturity to available for sale category			$	—		$	110,000

		Reclassification of investments held to maturity to trading category			$	—		$	130,000

		Shares issued as a result of a three-for-two stock split			$	23,973		$	—

	Supplemental cash flows information:




		Cash used to pay interest			$	190,417		$	188,487

		Cash used to pay income taxes			$	17,682		$	5,597

The accompanying notes are an integral part of these financial statements.

DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

a. The Consolidated Financial Statements (unaudited) include the accounts of Doral Financial Corporation (“Doral Financial” or “the Company”), Doral Mortgage Corporation (“Doral Mortgage”), SANA Investment Mortgage Bankers, Inc. (“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 International, Inc., Doral Properties, Inc. (“Doral Properties”) and Doral Insurance Agency, Inc. (“Doral Agency”). 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 for the year ended December 31, 2001, and should be read in conjunction with the Notes to the Consolidated Financial Statements appearing in that report. All adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair statement of results for the interim periods have been reflected.

b. The results of operations for the quarter and nine month period ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year.

c. Cash dividends per share paid for the quarter and nine month periods ended September 30, 2002 and 2001, adjusted to reflect the three-for-two stock split effective September 14, 2002, were as follows:


	QUARTER ENDED				NINE MONTH PERIOD
	SEPTEMBER 30,				ENDED SEPTEMBER 30,

	2002		2001		2002		2001

7% Noncumulative Monthly Income Preferred Stock	$	0.88	$	0.88	$	2.64	$	2.64




8.35% Noncumulative Monthly Income Preferred Stock	$	0.52	$	0.52	$	1.56	$	1.56




7.25% Noncumulative Monthly Income Preferred Stock	$	0.455	$	—	$	0.61	$	—




Common Stock	$	0.11	$	0.08	$	0.31	$	0.23

d. At September 30, 2002, escrow funds include approximately $82.1 million deposited with Doral Bank PR. These funds are included in the Company’s financial statements. Escrow funds also include approximately $20.6 million deposited with other banks which are excluded from the Company’s assets and liabilities.

e. The reconciliation of the numerator and denominator, adjusted to reflect three-for-two stock split effective September 14, 2002, of the basic and diluted earnings-per-share follows:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


			QUARTER ENDED						NINE MONTH PERIOD
			SEPTEMBER 30,						ENDED SEPTEMBER 30,

			2002			2001			2002			2001

			(Dollars in thousands, except per share amounts)
Net Income:




	Income before cumulative gain effect of change in accounting principle		$	58,284		$	36,810		$	156,811		$	95,471




	Preferred stock dividend			(4,236	)		(2,352	)		(9,502	)		(7,056	)

	Income available to common shareholders before cumulative gain effect of change in accounting principle		$	54,048		$	34,458		$	147,309		$	88,415




	Cumulative gain effect of change in accounting principle, net of tax			—			—			—			5,929

	Net income attributable to common stock		$	54,048		$	34,458		$	147,309		$	94,344

Weighted Average Shares:




	Basic weighted average number of common shares outstanding			71,835,781			69,133,046			71,782,354			65,667,615




	Incremental shares issuable upon exercise of stock options*			1,201,666			1,126,818			1,130,874			1,043,750

	Diluted weighted average number of common shares outstanding			73,037,447			70,259,864			72,913,228			66,711,365

Net Income per Common Share:




	Basic:




		Income before cumulative gain-effect	$	0.75		$	0.50		$	2.05		$	1.35




		Cumulative gain-effect of change in accounting principle		—			—			—			0.09

		Net income	$	0.75		$	0.50		$	2.05		$	1.44

	Diluted:




		Income before cumulative gain-effect	$	0.74		$	0.49		$	2.02		$	1.33




		Cumulative gain-effect of change in accounting principle		—			—			—			0.08

		Net income	$	0.74		$	0.49		$	2.02		$	1.41

For the quarter and nine month periods ended September 30, 2002 and 2001, all stock options outstanding were included in the computation of weighted average outstanding shares.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

f. Employee costs and other expenses are shown in the Consolidated Statements of Income net of direct loan origination costs which, pursuant to SFAS No. 91, 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 held for investment (loans receivable).

Set forth below is a reconciliation of the application of SFAS No. 91 to employee costs and other expenses:


		QUARTER ENDED						NINE MONTH PERIOD
(In thousands)		SEPTEMBER 30,						ENDED SEPTEMBER 30,

		2002			2001			2002			2001

Employee costs, gross		$	20,779		$	18,905		$	62,855		$	55,543




Deferred costs pursuant to SFAS No. 91			(7,330	)		(7,447	)		(22,857	)		(20,477	)

	Employee cost, net	$	13,449		$	11,458		$	39,998		$	35,066

Other expenses, gross		$	5,624		$	3,660		$	16,383		$	10,111




Deferred costs pursuant to SFAS No. 91			(1,929	)		(1,356	)		(6,438	)		(5,881	)

	Other expenses, net	$	3,695		$	2,304		$	9,945		$	4,230

g. Segment information

The Company operates in four reportable segments identified by line of business: mortgage banking, banking (including thrift operations), institutional securities and investment banking 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 Company monitors the performance of its reportable segments based on pre-established goals for different financial parameters such as net income, interest rate spread, loan production and increase in market share.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following tables present net interest income, non-interest income, net income and identifiable assets for the Company’s Puerto Rico and mainland U.S. operations as well as for each of the Company’s reportable segments for the periods presented.


(In thousands)
	Puerto Rico		Mainland US			Eliminations			Totals

	QUARTER ENDED SEPTEMBER 30, 2002

Net interest income	$	35,172		4,114			(40	)	$	39,246




Non-interest income	$	63,205		4,775			12		$	67,992




Net income	$	54,589		3,722			(27	)	$	58,284




Identifiable assets	$	7,384,445		421,128			(139,409	)	$	7,666,164


	QUARTER ENDED SEPTEMBER 30, 2001

Net interest income	$	22,635		2,141			(85	)	$	24,691




Non-interest income	$	47,094		(50	)		—		$	47,044




Net income	$	36,570		325			(85	)	$	36,810




Identifiable assets	$	6,154,104		251,377			(32,181	)	$	6,373,300


(In thousands)
	Puerto Rico		Mainland US		Eliminations			Totals

	NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002

Net interest income	$	102,777		10,790		(758	)	$	112,809




Non-interest income	$	172,123		5,996		(2,759	)	$	175,360




Net income	$	154,445		5,882		(3,516	)	$	156,811




Identifiable assets	$	7,384,445		421,128		(139,409	)	$	7,666,164


	NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001

Net interest income	$	50,463		4,840		(268	)	$	55,035




Non-interest income	$	137,331		797		—		$	138,128




Net income	$	100,888		780		(268	)	$	101,400




Identifiable assets	$	6,154,104		251,377		(32,181	)	$	6,373,300

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


(In thousands)
					Institutional
					Securities
					and
	Mortgage				Investment		Insurance
	Banking		Banking		Banking		Agency		Eliminations⁽¹⁾			Totals

	QUARTER ENDED SEPTEMBER 30, 2002

Net interest income	$	17,309		20,743		606		277		311		$	39,246




Non-interest income	$	28,729		36,616		3,376		1,953		(2,682	)	$	67,992




Net income	$	20,042		37,331		1,727		1,317		(2,133	)	$	58,284




Identifiable assets	$	3,054,011		4,579,007		436,306		31,928		(435,088	)	$	7,666,164


	QUARTER ENDED SEPTEMBER 30, 2001

Net interest income	$	7,728		19,250		623		240		(3,150	)	$	24,691




Non-interest income	$	38,871		5,280		2,426		1,249		(782	)	$	47,044




Net income	$	23,394		13,128		706		874		(1,292	)	$	36,810




Identifiable assets	$	2,657,507		3,578,677		529,750		27,726		(420,360	)	$	6,373,300


(In thousands)
					Institutional
					Securities
					and
	Mortgage				Investment		Insurance
	Banking		Banking		Banking		Agency		Eliminations⁽¹⁾			Totals

	NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002

Net interest income	$	42,650		67,394		1,833		856		76		$	112,809




Non-interest income	$	114,296		54,859		6,632		5,492		(5,919	)	$	175,360




Net income	$	85,843		69,678		3,238		3,626		(5,574	)	$	156,811




Identifiable assets	$	3,054,011		4,579,007		436,306		31,928		(435,088	)	$	7,666,164


	NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001

Net interest income	$	13,328		43,003		1,784		240		(3,320	)	$	55,035




Non-interest income	$	110,783		20,111		6,468		2,982		(2,216	)	$	138,128




Net income	$	72,112		29,142		1,338		1,699		(2,891	)	$	101,400




Identifiable assets	$	2,657,507		3,578,677		529,750		27,726		(420,360	)	$	6,373,300

(1)		For purposes of the intersegment eliminations in the above table, income includes direct intersegment loan origination costs amortized as yield adjustment and other income derived from intercompany transactions, related principally to fees and commissions paid to the Company’s institutional securities subsidiary. Assets include internal funding and investment in subsidiaries accounted for at cost.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. The following table summarizes Doral Financial’s holdings of trading securities as of September 30, 2002 and December 31, 2001.


TRADING SECURITIES		SEPTEMBER 30,		DECEMBER 31,
(IN THOUSANDS)		2002		2001

Mortgage-backed securities		$	880,028	$	740,797




Interest-only strips			344,563		236,468




Puerto Rico government and agencies			7,407		4,728




Other			294		11,335

	Total	$	1,232,292	$	993,328

2. The following tables summarize amortized costs, unrealized gains and losses, approximate market values, weighted average yield and contractual maturities of available for sale securities as of September 30, 2002 and December 31, 2001.

Expected maturities of certain debt securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


SECURITIES AVAILABLE FOR SALE
AS OF SEPTEMBER 30, 2002
(Dollars in thousands)											WEIGHTED
			AMORTIZED		UNREALIZED		UNREALIZED		MARKET		AVERAGE
			COST		GAINS		LOSSES		VALUE		YIELD

MORTGAGE-BACKED SECURITIES




	GNMA




		Due over ten years	$	63,462	$	1,675	$	662	$	64,475		6.14	%

	FHLMC and FNMA




		Due over ten years		111,673		1,948		932		112,689		5.78	%

DEBT SECURITIES




	FHLB NOTES




		Due over ten years		45,000		338		—		45,338		6.75	%

	FHLB ZERO COUPON




		Due over ten years		104,384		16		—		104,400		6.87	%

	US TREASURY




	Due over ten years			131,279		1,769		796		132,252		5.36	%

			$	455,798	$	5,746	$	2,390	$	459,154		6.05	%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


SECURITIES AVAILABLE FOR SALE
AS OF DECEMBER 31, 2001
(Dollars in thousands)											WEIGHTED
			AMORTIZED		UNREALIZED		UNREALIZED		MARKET		AVERAGE
			COST		GAINS		LOSSES		VALUE		YIELD

MORTGAGE-BACKED SECURITIES




	GNMA




		Due from one to five years	$	1,712	$	12	$	–	$	1,724		4.50	%
		Due over ten years		60,069		136		1,064		59,141		6.38	%

	FHLMC and FNMA




		Due over ten years		424,990		712		4,733		420,969		6.31	%

DEBT SECURITIES




	FHLB NOTES




		Due over ten years		45,000		675		–		45,675		6.75	%

	FHLMC ZERO COUPON




		Due over ten years		62,061		39		–		62,100		7.65	%

	US TREASURY




		Due from five to ten years		49,520		–		145		49,375		5.00	%




		Due over ten years		294,040		85		4,930		289,195		5.37	%

			$	937,392	$	1,659	$	10,872	$	928,179		6.06	%

3. The following tables summarize amortized costs, unrealized gains and losses, approximate market values, weighted average yields and contractual maturities of held to maturity securities as of September 30, 2002 and December 31, 2001.

Expected maturities of certain mortgage-backed and 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


SECURITIES HELD TO MATURITY
AS OF SEPTEMBER 30, 2002
(Dollars in thousands)											WEIGHTED
			AMORTIZED		UNREALIZED		UNREALIZED		MARKET		AVERAGE
			COST		GAINS		LOSSES		VALUE		YIELD

MORTGAGE-BACKED SECURITIES




	GNMA




		Due from five to ten years	$	2,356	$	98	$	—	$	2,454		6.74	%




		Due over ten years		11,829		570		—		12,399		6.99	%









	CMO CERTIFICATES




		Due from one to five years		629		—		1		628		6.55	%




		Due from five to ten years		1,413		—		8		1,405		6.36	%




		Due over ten years		73,858		198		1,308		72,748		5.95	%





DEBT SECURITIES




	FHLB NOTES




		Due over ten years		177,935		2,165		252		179,848		6.28	%









	FHLB ZERO COUPON




		Due over ten years		161,178		2,069		181		163,066		7.02	%









	FHLMC ZERO COUPON




		Due over ten years		36,420		324		602		36,142		7.87	%









	PR HOUSING BANK




		Due from one to five years		5,000		25		—		5,025		6.00	%




		Due over ten years		3,305		—		—		3,305		6.20	%









	U.S. TREASURY




		Due over ten years		61,087		6,759		—		67,846		5.36	%





	P.R. ECONOMIC DEVELOPMENT BANK NOTES




		Due within a year		2,000		—		—		2,000		6.60	%





	OTHER




		Due from one to five years		5,205		2		—		5,207		3.62	%




		Due from five to ten years		4,189		15		—		4,204		5.52	%




		Due over ten years		2,000		25		—		2,025		7.00	%

			$	548,404	$	12,250	$	2,352	$	558,302		6.44	%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


SECURITIES HELD TO MATURITY
AS OF DECEMBER 31, 2001
(Dollars in thousands)											Weighted
			Amortized		Unrealized		Unrealized		Market		Average
			Cost		Gains		Losses		Value		Yield

MORTGAGE-BACKED SECURITIES




	GNMA




		Due from five to ten years	$	2,878	$	52	$	-–	$	2,930		6.75	%




		Due over ten years		15,429		368		-–		15,797		6.99	%









	CMO CERTIFICATES




		Due from one to five years		3,139		-–		15		3,124		6.08	%




		Due from five to ten years		1,836		-–		9		1,827		6.50	%




		Due over ten years		100,936		420		1,598		99,758		5.89	%









DEBT SECURITIES




	FHLB NOTES




		Due from five to ten years		5,000		100		-–		5,100		7.89	%




		Due over ten years		336,492		10,202		-–		346,694		6.46	%









	FHLB ZERO COUPON




		Due over ten years		320,862		—		10,816		310,046		7.16	%









	PR HOUSING BANK




		Due from five to ten years		5,000		—		-–		5,000		6.00	%




		Due over ten years		3,305		17		-–		3,322		6.20	%









	US TREASURY




		Due over ten years		61,088		1,084		1,764		60,408		5.36	%









	P.R. ECONOMIC DEVELOPMENT BANK NOTES




		Due from one to five years		2,000		10		-–		2,010		6.60	%









	OTHER




		Due from one to five years		5,025		-–		-–		5,025		4.09	%




		Due from five to ten years		1,345		10		-–		1,355		6.68	%




		Due over ten years		2,000		15		-–		2,015		7.00	%

			$	866,335	$	12,278	$	14,202	$	864,411		6.58	%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

i. The following table sets forth certain information regarding Doral Financial’s mortgage loans held for sale as of the dates indicated:


MORTGAGE LOANS HELD FOR SALE, NET
(In thousands)	SEPTEMBER 30, 2002		DECEMBER 31, 2001

Conventional single family residential loans	$	1,958,602	$	1,530,601




FHA/VA loans		93,859		98,207




Mortgage loans on residential multifamily		108,196		178,372




Construction and commercial real estate loans		168,916		140,169




Consumer loans secured by mortgages		51		145

	$	2,329,624	$	1,947,494

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)		SEPTEMBER 30, 2002						DECEMBER 31, 2001

		AMOUNT			PERCENT			AMOUNT			PERCENT

Construction loans		$	448,421			56	%	$	368,961			55	%




Residential mortgage loans			64,835			8	%		63,546			9	%




Commercial — secured by real estate			127,534			16	%		123,414			18	%




Consumer — secured by real estate			625			0	%		870			0	%




Consumer — other			59,983			7	%		39,109			6	%




Commercial non-real estate			17,277			2	%		16,874			3	%




Loans on saving deposits			8,850			1	%		10,523			2	%




Land secured			81,467			10	%		46,602			7	%

	Loans receivable, gross		808,992			100	%		669,899			100	%

Less:




	Undisbursed portion of loans in process		(11,837	)					(10,302	)




	Unearned interest and deferred loan fees, net		(19,789	)					(9,484	)




	Allowance for loan losses⁽¹⁾		(7,973	)					(6,000	)

			(39,599	)					(25,786	)

Loans receivable, net		$	769,393					$	644,113

(1)

Does not include $7.1 million and $6.5 million of allowance for loan losses allocated to mortgage loans held for sale as of September 30, 2002 and December 31, 2001, respectively.

k. Doral Financial is the guarantor of various 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, in an aggregate principal amount of $44,765,000, were issued on November 3, 1999 to finance the construction and development of the Doral Financial Center, which became the new headquarters of Doral Financial. The bonds have varying interest rates, ranging from 6.10% to 6.90%, and maturities ranging from June 2003 to December 2029. The bonds are secured by a mortgage on the building and underlying real property. On November 1, 2002, Doral Properties issued an additional $7.6 million in bonds through the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (“AFICA”) to finance additional improvements to the Doral Financial Center. The additional bonds mature, subject to prior amortization requirements, on December 2029, and are also guaranteed by Doral Financial.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

l. The following table shows the changes in the Company’s mortgage servicing assets for each of the periods shown:


MORTGAGE SERVICING ASSETS ACTIVITY
(IN THOUSANDS)
		QUARTER ENDED						NINE MONTH PERIOD
		SEPTEMBER 30,						ENDED SEPTEMBER 30,

		2002			2001			2002			2001

Balance at beginning of period		$	158,578		$	152,683		$	154,340		$	139,795




Capitalization of rights			8,553			10,410			30,575			33,308




Amortization:




	Scheduled		(6,619	)		(5,162	)		(19,262	)		(14,332	)




	Unscheduled and impairment⁽¹⁾		(7,459	)		(3,103	)		(12,600	)		(3,943	)

Balance at end of period		$	153,053		$	154,828		$	153,053		$	154,828

(1)		Includes an impairment allowance of $7.5 million recognized on the third quarter ended September 30, 2002. Prior to July 1, 2002, Doral Financial recorded impairment charges as a direct writedown of servicing assets. Effective July 1, 2002, impairment is recognized through a valuation allowance for each individual stratum of mortgage loans subject to servicing rights. 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.

m.		Adoption of SFAS 133

		The Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (referred to hereafter as “SFAS No. 133”), on January 1, 2001.

		As part of the implementation of SFAS No. 133, the Company reclassified $110 million of its held to maturity securities as available for sale and $130 million as trading securities. As a result of this reclassification, the Company recognized a gain of $1.6 million (net of tax) in other comprehensive income and a gain of $5.9 million (net of tax) in the income statement as cumulative effect of a change in accounting principle. In connection with the adoption of the SFAS No. 133, the Company also recognized in earnings the fair value of $100 million of interest rate swaps previously excluded from the financial statements, valued at an after tax loss of $196,000.

		At September 30, 2002, December 31, 2001 and September 30, 2001, none of the Company’s derivatives were designated as hedges for accounting purposes. Accordingly, such derivatives are carried at fair values with changes therein reflected in earnings for the period.

n.		At September 30, 2002 and December 31, 2001, money market investments include $577.5 million and $273.5 million, respectively, of pledged money market investments. At September 30, 2002 and December 31, 2001, the carrying value of securities purchased under resell agreements included in money market investments was $422.2 million and $54.9 million, respectively. The underlying securities were held on behalf of the Company by the dealers that arranged the transactions. At September 30, 2002 and December 31, 2001, the Company has repledged approximately $219.2 million and $6.7 million, respectively, of the underlying securities.

o.		Certain amounts reflected in the 2001 Consolidated Financial Statements have been reclassified to conform to the presentation for 2002.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Doral Financial Corporation is a financial holding company that, together with its wholly-owned subsidiaries, is engaged in mortgage banking, retail banking (including thrift operations), institutional securities and investment banking operations and insurance agency activities. Doral Financial’s mortgage banking activities (its “mortgage banking business”), include the origination, purchase, sale and servicing of mortgage loans on single-family residences, the issuance and sale of various types of mortgage-backed securities, the holding of mortgage loans, mortgage-backed securities and other investment securities for sale or investment, the purchase and sale of servicing rights associated with such mortgage loans and the origination of construction loans and mortgage loans secured by income producing real estate and land.

Doral Financial is currently in its 30th year of operations and is the leading originator and servicer of mortgage loans on single-family residences in Puerto Rico. The volume of loans originated and purchased by Doral Financial during the quarters ended September 30, 2002 and 2001 was approximately $1.3 billion and $1.1 billion, respectively. For the nine month periods ended September 30, 2002 and 2001, the volume of loans originated and purchased was approximately $3.8 billion and $3.1 billion, respectively. Doral Financial’s mortgage servicing portfolio increased to approximately $10.9 billion as of September 30, 2002, from $9.7 billion as of September 30, 2001. Doral Financial’s strategy is to increase the size of its mortgage servicing portfolio by relying principally on internal loan originations and supplementing such internal originations by purchases of mortgage loans on a servicing released basis.

Doral Financial maintains a substantial portfolio of mortgage-backed securities. At September 30, 2002, Doral Financial held securities for trading with a fair market value of $1.2 billion, approximately $730.7 million of which consisted of Puerto Rico GNMA securities, the interest on which is tax-exempt to the Company. These securities are generally held by Doral Financial for longer periods prior to sale in order to maximize the tax-exempt interest received thereon. Trading securities are reflected on Doral Financial’s consolidated financial statements at their fair market value with resulting gains or losses included in operations as part of trading activities.

As part of its strategy to maximize net interest income, Doral Financial also invests in securities that were classified as available for sale or held to maturity. As of September 30, 2002, Doral Financial held approximately $548.4 million in securities and other investments that were classified as held to maturity. As of September 30, 2002, Doral Financial also held $459.2 million of investment securities that were classified as available for sale and reported at fair value, with unrealized gains or losses included in stockholders’ equity and reported as “Accumulated other comprehensive loss, net of income tax,” in Doral Financial’s consolidated financial statements.

For the quarters ended September 30, 2002 and 2001, Doral Financial’s banking subsidiaries contributed approximately $37.3 million and $13.1 million, or 64% and 36%, respectively, to the Company’s consolidated net income. For the first nine months of 2002 and 2001, Doral Financial’s banking subsidiaries contributed approximately $69.7 million and $29.1 million or 44% and 29%, respectively, to Doral Financial’s consolidated net income.

The Company’s institutional securities and investment banking operation is conducted through Doral Securities, a NASD member subsidiary that provides institutional brokerage, financial advisory and investment banking services in Puerto Rico. For the quarters ended September 30, 2002 and 2001, Doral Securities had net income of approximately $1.7 million and $706,000, respectively. For the nine month periods ended September 30, 2002 and 2001, Doral Securities’ net income was approximately $3.2 million and $1.3 million, respectively.

Doral Financial conducts its insurance agency activities in Puerto Rico through Doral Insurance Agency, Inc. For the quarters ended September 30, 2002 and 2001, Doral Agency’s net income was approximately $1.3 million and $874,000, respectively. For the nine month periods ended September 30, 2002 and 2001, Doral Agency’s net income was approximately $3.6 million and $1.7 million, respectively.

For information regarding net interest income, non-interest income, net income and identifiable assets broken down by Doral Financial’s mortgage banking, banking, institutional securities and investment banking and insurance agency activities segments, please refer to note “g” of the accompanying Consolidated Financial Statements.

Doral Financial has significant assets and operations at the parent company level. HF Mortgage Bankers, one of Doral Financial’s principal mortgage banking units, and Doral Overseas, an international banking entity, are organized as operating divisions within the parent company. As of September 30, 2002, Doral Financial had assets of $3.2 billion at the parent company level.

For a discussion regarding Doral Financial’s critical accounting policies please refer to the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of Doral Financial’s Annual Report on Form 10-K for the year ended December 31, 2001.

RESULTS OF OPERATIONS FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

Doral Financial’s results of operations are mainly the result of: (1) its level of loan production; (2) the behavior of its mortgage loan servicing assets; (3) the relationship between interest rates on its interest-bearing assets and its costs of funds; (4) the credit losses related to loan activities; and (5) its ability to manage its liquidity demands and capital resources. These factors are, in turn, primarily influenced by: (a) the level and direction of interest rates; (b) the level of demand for mortgage credit; and (c) the strength of the economy and housing market in Puerto Rico, Doral Financial’s principal market.

The components of Doral Financial’s revenues are: (1) net interest income; (2) net gain on mortgage loan sales and fees; (3) servicing income; (4) trading activities; (5) gain on sale of investment securities; and (6) commissions, fees and other income.

NET INCOME

Doral Financial’s net income for the quarter ended September 30, 2002 was $58.3 million, an increase of $21.5 million, or 58%, from $36.8 million for the 2001 period. For the first nine months of 2002 and 2001, the Company’s net income amounted to $156.8 million and $101.4 million, respectively, an increase of 55%. The increase for the first nine months of 2002 was $61.3 million or 64% when compared to income before the cumulative gain-effect of a change in accounting principle of $95.5 million for the first nine months of 2001. Consolidated results include the operations of Doral Bank PR and Doral Bank NY, Doral Financial’s retail banking units, which contributed approximately $69.7 million to Doral Financial’s consolidated net income for the nine months ended September 30, 2002, compared to $29.1 million for the respective 2001 period. Doral Securities, Doral Financial’s investment banking and institutional securities unit, contributed $3.2 million to consolidated net income for the nine months ended September 30, 2002, compared to $1.3 million for the respective 2001 period. Doral Agency, Doral Financial’s insurance agency, contributed $3.6 million to consolidated net income for the nine months ended September 30, 2002 compared to $1.7 million for the respective 2001 period. Diluted earnings per common share for the third quarter of 2002 were $0.74, an increase of 51% over the $0.49 per diluted share recorded for the same period a year ago. Diluted earnings per common share for the nine months ended September 30, 2002 were $2.02, an increase of 52% over the $1.33 per diluted share before the cumulative effect of a change in accounting principle recorded for the same period a year ago.

Net Interest Income

Net interest income is the excess of interest earned by Doral Financial on its interest-earning assets over the interest incurred on its interest-bearing liabilities.

Net interest income for the third quarter of 2002 and 2001 was $39.2 million and $24.7 million, respectively, an increase of 59%. For the first nine months of 2002 and 2001 net interest income amounted to $112.8 million and $55.0 million, respectively, an increase of 105%. The increase in net interest income for the third quarter and first nine months of 2002, compared to the respective 2001 periods, was principally due to the combined effect of an increase in

Doral Financial’s average balance of net interest-earning assets and increases in Doral Financial’s net interest spread and margin resulting from the reduction of borrowing costs experienced during the periods.

The Company’s retail banking subsidiaries contributed $20.7 million to the consolidated net interest income for the third quarter of 2002, compared to $19.3 million for the third quarter of 2001. During the first nine months of 2002, the Company’s retail banking subsidiaries contributed approximately $67.4 million to the consolidated net interest income, compared to $43.0 million for the first nine months of 2001.

The following tables present, for the periods indicated, Doral Financial’s average balance sheet, the total dollar amount of interest income from average interest-earning assets and the related yields, as well as the interest expense on average interest-bearing liabilities expressed both in dollars and rates, and the net interest margin. The tables do not reflect any effect of income taxes. All average balances are based on the average daily balances.

TABLE A
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)


			QUARTER ENDED SEPTEMBER 30,

			2002							2001

			AVERAGE				AVERAGE			AVERAGE				AVERAGE
			BALANCE		INTEREST		YIELD/RATE			BALANCE		INTEREST		YIELD/RATE

ASSETS:




Interest-Earning Assets:




	Total Loans⁽¹⁾		$	2,970,270	$	52,467		7.01	%	$	2,256,236	$	42,994		7.56	%




	Mortgage-Backed Securities⁽²⁾			1,563,330		33,795		8.58	%		1,760,976		26,347		5.94	%




	Investment Securities			939,125		13,694		5.79	%		977,480		13,654		5.54	%




	Other Interest-Earning Assets⁽³⁾			1,323,820		5,413		1.62	%		745,980		9,831		5.23	%

		Total Interest-Earning Assets/Interest Income		6,796,545	$	105,369		6.15	%		5,740,672	$	92,826		6.42	%

Total Non-Interest-Earning Assets				606,596							679,269

Total Assets			$	7,403,141						$	6,419,941

LIABILITIES AND STOCKHOLDERS’ EQUITY:




Interest-Bearing Liabilities:




	Loans Payable		$	205,753	$	1,639		3.16	%	$	230,020	$	2,697		4.65	%




	Repurchase Agreements			2,379,665		23,322		3.89	%		2,685,744		31,193		4.61	%




	Deposits			2,126,517		18,778		3.50	%		1,534,892		17,676		4.57	%




	Other Borrowed Funds⁽⁴⁾			1,539,652		22,384		5.77	%		971,541		16,569		6.77	%

		Total Interest-Bearing Liabilities/Interest Expense		6,251,587	$	66,123		4.20	%		5,422,197	$	68,135		4.99	%

Total Non-Interest-Bearing Liabilities				188,865							346,451

Total Liabilities				6,440,452							5,768,648




Stockholders’ Equity				962,689							651,293

Total Liabilities and Stockholders’ Equity			$	7,403,141						$	6,419,941

Net Interest-Earning Assets			$	544,958						$	318,475





Net Interest Income					$	39,246						$	24,691




Interest Rate Spread⁽⁵⁾								1.95	%						1.43	%




Interest Rate Margin⁽⁵⁾								2.29	%						1.71	%




Net Interest-Earning Assets Ratio								108.72	%						105.87	%

(1)		Average loan balances include the average balance of non-accruing loans, on which no interest income is recognized.




(2)		Includes interest income received with respect to interest-only strips (“IOs”).




(3)		Consists of money market instruments, reverse repurchase agreements and deposits in other banks.




(4)		Consists of advances from FHLB-NY and notes payable.




(5)		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. Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets.

TABLE B
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)


			NINE MONTH PERIOD ENDED SEPTEMBER 30,

			2002							2001

			AVERAGE				AVERAGE			AVERAGE				AVERAGE
			BALANCE		INTEREST		YIELD/RATE			BALANCE		INTEREST		YIELD/RATE

ASSETS:




Interest-Earning Assets:




	Total Loans⁽¹⁾		$	2,851,064	$	148,983		6.99	%	$	2,081,941	$	117,926		7.57	%




	Mortgage-Backed Securities⁽²⁾			1,674,480		94,767		7.57	%		1,558,007		70,750		6.07	%




	Investment Securities			1,125,295		51,915		6.17	%		1,093,941		53,721		6.57	%




	Other Interest-Earning Assets⁽³⁾			997,800		12,117		1.62	%		585,880		22,323		5.09	%

		Total Interest-Earning Assets/Interest Income		6,648,639	$	307,782		6.19	%		5,319,769	$	264,720		6.65	%

Total Non-Interest-Earning Assets				591,410							639,580

Total Assets			$	7,240,049						$	5,959,349

LIABILITIES AND STOCKHOLDERS’ EQUITY:




Interest-Bearing Liabilities:




	Loans Payable		$	193,048	$	4,397		3.05	%	$	284,660	$	12,521		5.88	%




	Repurchase Agreements			2,585,526		75,239		3.89	%		2,446,625		94,609		5.17	%




	Deposits			1,985,966		54,242		3.65	%		1,427,660		53,342		5.00	%




	Other Borrowed Funds⁽⁴⁾			1,400,294		61,095		5.83	%		984,751		49,213		6.68	%

		Total Interest-Bearing Liabilities/Interest Expense		6,164,834	$	194,973		4.23	%		5,143,696	$	209,685		5.45	%

Total Non-Interest-Bearing Liabilities				216,470							241,622

Total Liabilities				6,381,304							5,385,318




Stockholders’ Equity				858,745							574,031

Total Liabilities and Stockholders’ Equity			$	7,240,049						$	5,959,349

Net Interest-Earning Assets			$	483,805						$	176,073

Net Interest Income					$	112,809						$	55,035




Interest Rate Spread⁽⁵⁾								1.96	%						1.20	%




Interest Rate Margin⁽⁵⁾								2.27	%						1.38	%




Net Interest-Earning Assets Ratio								107.85	%						103.42	%

(1)		Average loan balances include the average balance of non-accruing loans, on which no interest income is recognized.




(2)		Includes interest income received with respect to IOs.




(3)		Consists of money market instruments, reverse repurchase agreements and deposits in other banks.




(4)		Consists of advances from FHLB-NY and notes payable.




(5)		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. Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets.

The following tables describe the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected Doral Financial’s interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in volume (change in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by current year volume), and (iii) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated in proportion to the absolute dollar amounts of the changes due to rate and volume.

TABLE C
NET INTEREST INCOME VARIANCE ANALYSIS
(IN THOUSANDS)


		QUARTER ENDED
		SEPTEMBER 30,

		2002 COMPARED TO 2001
		INCREASE (DECREASE) DUE TO:

		VOLUME			RATE			TOTAL

INTEREST INCOME VARIANCE




	TOTAL LOANS	$	13,495		$	(4,022	)	$	9,473




	MORTGAGE-BACKED SECURITIES		(2,935	)		10,383			7,448




	INVESTMENT SECURITIES		(531	)		571			40




	OTHER INTEREST EARNING ASSETS		7,555			(11,973	)		(4,418	)

TOTAL INTEREST INCOME VARIANCE		$	17,584		$	(5,041	)	$	12,543

INTEREST EXPENSE VARIANCE




	LOANS PAYABLE		(282	)		(776	)		(1,058	)




	REPURCHASE AGREEMENTS		(3,528	)		(4,343	)		(7,871	)




	DEPOSITS		6,759			(5,657	)		1,102




	OTHER BORROWED FUNDS		9,615			(3,800	)		5,815

TOTAL INTEREST EXPENSE VARIANCE			12,564			(14,576	)		(2,012	)

NET INTEREST INCOME VARIANCE		$	5,020		$	9,535		$	14,555

TABLE D
NET INTEREST INCOME VARIANCE ANALYSIS
(IN THOUSANDS)


		NINE MONTH PERIOD ENDED
		SEPTEMBER 30,

		2002 COMPARED TO 2001
		INCREASE (DECREASE) DUE TO:

		VOLUME			RATE			TOTAL

INTEREST INCOME VARIANCE




	TOTAL LOANS	$	43,667		$	(12,610	)	$	31,057




	MORTGAGE-BACKED SECURITIES		5,302			18,715			24,017




	INVESTMENT SECURITIES		1,545			(3,351	)		(1,806	)




	OTHER INTEREST EARNING ASSETS		15,725			(25,931	)		(10,206	)

TOTAL INTEREST INCOME VARIANCE		$	66,239		$	(23,177	)	$	43,062

INTEREST EXPENSE VARIANCE




	LOANS PAYABLE		(4,040	)		(4,084	)		(8,124	)




	REPURCHASE AGREEMENTS		5,386			(24,756	)		(19,370	)




	DEPOSITS		20,936			(20,036	)		900




	OTHER BORROWED FUNDS		20,819			(8,937	)		11,882

TOTAL INTEREST EXPENSE VARIANCE		$	43,101		$	(57,813	)	$	(14,712	)

NET INTEREST INCOME VARIANCE		$	23,138		$	34,636		$	57,774

INTEREST INCOME

Total interest income increased from $92.8 million during the third quarter of 2001, to $105.4 million during the third quarter of 2002, an increase of 14%. For the nine months ended September 30, 2002 interest income increased by approximately $43.1 million to $307.8 million compared to $264.7 million for the first nine months of 2001. The increases in interest income during both periods are primarily related to the increase in Doral Financial’s total average balance of interest-earning assets, which increased from $5.3 billion for the nine months ended September 30, 2001 to $6.6 billion for the nine months ended September 30, 2002.

Interest income on loans increased by $9.5 million or 22% during the third quarter of 2002, compared to the respective 2001 period. For the first nine months of 2002, interest income on loans increased by $31.1 million or 26% as compared to the respective 2001 period. The increases during 2002 reflect an increase in the level of loans held by Doral Financial compared to 2001, due to the increased volume of loan originations and purchases.

Interest income on mortgage-backed securities, including IOs, for the third quarter of 2002 increased by 29% compared to the respective 2001 period. For the quarters ended September 30, 2002 and 2001, interest income on mortgage-backed securities amounted to $33.8 million and $26.3 million, respectively. During the first nine months of 2002, interest income on mortgage-backed securities was $94.8 million, versus $70.8 million for the comparable 2001 period. The results for the 2002 periods reflect increased yields on the Company's holdings of IOs. Doral Financial creates IOs in connection with the sale of mortgage loans in bulk. See “Amortization of IOs and Servicing Assets.” During the first nine months of 2002, Doral Financial was generally able to collect higher amounts on its IOs net of amortization because the pass-through rates paid to investors tied to floating rates tended to decline more than the weighted average interest rates of the loans (generally non-conforming loans) underlying the IOs, thereby increasing the interest rate spread earned by Doral Financial on its IOs. The increase also reflects increased holdings of tax-exempt Puerto Rico GNMA securities, U.S. FHLMC/FNMA mortgage-backed securities and IOs. The interest earned on such U.S. mortgage-backed securities is tax-exempt to Doral Financial’s international banking entities under Puerto Rico law and is not subject to U.S. income taxation because such entities are considered foreign corporations for U.S. income tax purposes and are entitled to the portfolio interest deduction with respect to interest earned on these securities.

Interest income on investment securities amounted to $13.7 million during the third quarter of 2002, and was essentially unchanged, as compared to the respective 2001 period. For the first nine months of 2002, interest income on investment securities decreased by $1.8 million or 3%, as compared to the respective 2001 period. The decrease in interest income on investment securities during this period reflects the redemption prior to their stated maturity of a significant amount of callable debt securities.

Interest income on other interest-earning assets decreased by $4.4 million or 45% during the third quarter ended September 30, 2002 as compared to the same quarter of 2001. Interest income on other interest-earning assets was $12.1 million for the nine months ended September 30, 2002, as compared to $22.3 million for the comparable period of 2001. Other interest-earning assets consist primarily of money market instruments, overnight deposits, term deposits, and reverse repurchase agreements. The decrease from 2001 to 2002 was due primarily to reductions in short-term interest rates.

INTEREST EXPENSE

Total interest expense decreased to $66.1 million during the third quarter of 2002, from $68.1 million for the respective 2001 period, a reduction of 3%. Total interest expense for the first nine months of 2002 was $195.0 million, compared to $209.7 million for the same period of 2001, a decrease of 7%. The decrease in interest expense for the 2002 periods was due to a decrease in the average cost of borrowings due to the declining interest rate environment that was partly offset by increased borrowings to finance Doral Financial’s loan production and investment activities. Average balance of interest-bearing liabilities increased to $6.2 billion at an average cost of 4.23% for the nine month period ended September 30, 2002, compared to $5.1 billion at an average cost of 5.45% for the nine month period ended September 30, 2001.

Interest expense related to loans payable decreased by $1.1 million or 39% during the third quarter of 2002 compared to the same period of 2001. For the first nine months of 2002 interest expense related to loans payable was $4.4 million, a decrease of 65% compared to $12.5 million for the same period of 2001. The decrease in interest expense on loans payable was principally due to the decrease in the average balance of loans payable outstanding from $284.7 million to $193.0 million for the nine month period ended September 30, 2001 and September 30, 2002, respectively. The decrease in loans payable reflects Doral Financial’s use of alternative funding sources such as repurchase agreements and FHLB advances to fund its activities. The weighted-average interest rate cost for borrowings under Doral Financial’s loans payable was 3.16% and 4.65% for the third quarters of 2002 and 2001, respectively, and 3.05% and 5.88% for the nine month periods then ended, respectively.

Interest expense related to securities sold under agreements to repurchase decreased by $7.9 million or 25% during the third quarter of 2002 compared to the same period of 2001. During the first nine months of 2002 interest expense related to securities sold under agreements to repurchase was $75.2 million versus $94.6 million for the corresponding 2001 period, a decrease of 21%. The decrease in interest expense on securities sold under agreements to repurchase during the third quarter of 2002 reflected lower borrowing costs, as compared to the respective 2001 period. The weighted average interest rate cost of borrowings under repurchase agreements was 3.89% and 4.61% for the third quarter of 2002 and 2001, respectively. For the first nine months of 2002, the decrease in interest expense on securities sold under agreements to repurchase reflected lower borrowing costs that were offset in part by increased borrowings to finance mortgage-backed securities and other investment securities. The weighted average interest rate cost of borrowings under repurchase agreements was 3.89% and 5.17% for the nine month periods ended September 30, 2002 and 2001, respectively.

Interest expense on deposits increased by $1.1 million, or 6%, for the third quarter of 2002 as compared to the respective 2001 period. The increase in interest expense on deposits reflects the increase in deposits held at Doral Financial’s retail banking subsidiaries. The average balance of deposits increased to $2.1 billion for the quarter ended September 30, 2002, from $1.5 billion for the third quarter of 2001. For the first nine months of 2002, interest expense on deposits was $54.2 million, an increase of 2% as compared to $53.3 million recorded for the same period of 2001. This increase is primarily related to the increase in the average balance of deposits during the period. The average balance of deposits was $2.0 billion for the nine month period ended September 30, 2002, compared to $1.4 billion for

the nine month period ended September 30, 2001, an increase of 43%. The average interest cost on deposits was 3.50% and 3.65%, respectively, for the quarter and nine month periods ended September 30, 2002, compared to 4.57% and 5.00% for the respective 2001 periods.

Interest expense on other borrowed funds was $22.4 million for the quarter ended September 30, 2002, compared to $16.6 million for the same period a year ago, an increase of 35%. For the first nine months of 2002, interest expense on other borrowed funds increased by 24% to $61.1 million from $49.2 million in 2001. This increase is due to an increase in FHLB advances of $524.0 million from September 30, 2001 to September 30, 2002 and in notes payable of $159.0 million from September 30, 2001 to September 30, 2002. For the third quarter and first nine months of 2002, the weighted average interest rate for other borrowed funds was 5.77% and 5.83%, respectively, compared to 6.77% and 6.68%, for the corresponding 2001 periods.

PROVISION FOR LOSSES

The provision for loan losses relates to loans held by Doral Financial. The provision is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on Doral Financial’s loss experience, current delinquency rates, known and inherent risk in the loan portfolio, the estimated value and equity of any underlying collateral, and an assessment of current economic conditions. While management believes that the current provision for loan losses is sufficient, future additions to the allowance for loan losses could be necessary if economic conditions change substantially from the assumptions used by Doral Financial in determining the allowance for loan losses. Doral Financial made provisions to its allowance for loan losses of $2.1 and $3.8 million, respectively, for the quarter and nine month periods ended September 30, 2002, compared to approximately $1.1 million and $3.1 million for the respective 2001 periods.

NON-INTEREST INCOME

Net Gains on Mortgage Loan Sales and Fees. Net gains from mortgage loan sales and fees increased by 18% during the third quarter of 2002 to $53.0 million, compared to $44.8 million for the same period of 2001. For the nine month periods ended September 30, 2002 and 2001, mortgage loans sales and fees were $157.2 million and $136.2 million, respectively, an increase of 15%. The increase for 2002 was mainly the result of a greater volume of loan securitizations and sales and the ability of the Company to obtain higher profitability through higher loan fees and the creation of interest-only strips (“IOs”) in connection with bulk sales of mortgage loans to institutional investors. See “Amortization of IOs and Servicing Assets.”

Servicing Income. Servicing income represents revenues earned for administering mortgage loans. The main component of Doral Financial’s servicing income is loan servicing fees, which depend on the type of mortgage loan being serviced. The fees on residential mortgage loans generally range from 0.25% to 0.50% of the declining outstanding principal amount of the serviced loan. As of September 30, 2002, the weighted average servicing fee rate for the entire portfolio was 0.34%. The size of Doral Financial’s loan servicing portfolio has increased substantially since its inception as a result of increases in loan production and bulk purchases of servicing rights. Net servicing losses, for the quarters ended September 30, 2002 and 2001 was approximately $5.6 million and $704,000, respectively. For the nine month period ended September 30, 2002, net servicing loss was approximately $6.3 million compared to a gain of $3.8 million for the corresponding period of 2001.

The decrease in the amount of loan servicing income for the third quarter and first nine months of 2002 was primarily due to the increase in the amortization and impairment of mortgage servicing assets. Increased amortization and impairment offset the increase in gross servicing fees of 12% and 16% for the third quarter and first nine months of 2002, respectively, compared to the respective 2001 periods, produced by the increase in the size of the servicing portfolio. The increase in amortization was the result of a larger servicing portfolio and an increase in unscheduled amortization and impairment related to actual and expected increases in prepayments due to declining mortgage interest rates. Prior to July 1, 2002, Doral Financial recorded impairment charges as a direct write down of servicing assets. Effective July 1, 2002, impairment is recognized through a valuation allowance for each individual stratum of mortgage loans subject to servicing rights. 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. Total amortization and impairment charges were $14.1 million and $8.3 million for the quarters ended September 30, 2002 and 2001, respectively. For the first nine months of 2002 and 2001 total amortization and impairment charges were $31.9 million and $18.3 million, respectively. Doral Financial recognized unscheduled amortization of $5.1 million plus an impairment charge of $7.5 million during the first nine months of 2002, due to the increase in prepayment estimates associated with falling interest rates. See Note 1 to the unaudited consolidated financial statements contained herein. The mortgage servicing portfolio was approximately $10.9 billion at September 30, 2002, compared to $9.7 billion as of September 30, 2001. The value of the servicing asset assigned to a mortgage loan reduces the basis of the related mortgage loan and thereby results in increased “Net Gains on Mortgage Loans Sales and Fees” at the time of sale. During the nine months ended September 30, 2002 and 2001, Doral Financial recognized servicing assets of $25.8 million and $29.2 million, respectively, in connection with the sale of internally originated loans.

Trading Activities. Trading activities include all gains or losses, whether realized or unrealized, in the market value of Doral Financial’s trading securities, as well as gains or losses on options, future contracts and other derivative instruments used for interest rate management purposes. Trading activities for the quarters ended September 30, 2002 resulted in a gain of $4.8 million compared to a loss of $3.5 million for the third quarter of 2001. Gain on trading activities was related primarily to realized and unrealized gains with respect to trading securities, partly offset by realized and unrealized losses on derivative instruments. Net realized gains on sale of trading securities was $47.6 million for the quarter ended September 30, 2002 compared to a loss of approximately $250,000 for the 2001 period. The increase in realized gains was primarily tied to increased volume in trading activities at the Company’s international banking entities. Trading activities for the quarters ended September 30, 2002 and 2001, included $2.7 million of unrealized gains and $1.9 million of unrealized losses, respectively, on the value of its trading securities pursuant to SFAS No. 115. For the quarters ended September 30, 2002 and 2001, net realized and unrealized losses on derivative instruments were $45.5 million and $1.4 million, respectively. The higher losses sustained on derivative instruments during the 2002 period resulted from derivative contracts entered into to protect Doral Financial’s net interest income and the value of its trading assets from a possible rise in interest rates that did not materialize during the period. Trading activities for the nine month period ended September 30, 2002, resulted in losses of $6.9 million compared to $18.4 million in losses during the respective 2001 period. For the nine month period ended September 30, 2002, net realized gains on sales of trading securities were $59.2 million compared to losses of $2.7 million for 2001 period. For the nine months ended September 30, 2002 and 2001 net realized and unrealized losses on derivative instruments were $75.7 million and $8.2 million, respectively. Trading activities for the nine month periods ended September 30, 2002 and 2001 included $9.6 million of unrealized gains and $7.5 million of unrealized losses, respectively, on the value of its trading securities pursuant to SFAS No. 115. Set forth below is a summary of the components of gains and losses from trading activities:

TABLE E
COMPONENTS OF TRADING ACTIVITIES
(DOLLARS IN THOUSANDS)


	QUARTER ENDED						NINE MONTH PERIOD
	SEPTEMBER 30,						ENDED SEPTEMBER 30

	2002			2001			2002			2001

Net realized gains and (losses) on sales of trading securities	$	47,581		$	(250	)	$	59,185		$	(2,650	)




Net unrealized gains and (losses) on trading securities		2,721			(1,878	)		9,602			(7,533	)




Net realized and unrealized losses on derivative instruments		(45,496	)		(1,411	)		(75,680	)		(8,226	)

Total	$	4,806		$	(3,539	)	$	(6,893	)	$	(18,409	)

Gain on Sale of Investment Securities. Gain on sale of investment securities represents the impact on income of transactions involving the sales of securities classified as available for sale. For the third quarter and first nine months of 2002, sale of investment securities resulted in a gain of $10.1 million and $16.1 million, respectively, compared to gains of $1.5 million and $3.7 million, respectively, for the corresponding 2001 periods, reflecting increased sales activities and favorable pricing due to the declining interest rate environment. Proceeds from sales of securities available for sale amounted to $5.1 billion for the first nine months of 2002 compared to $1.7 billion for the first nine months of 2001.

Commissions, Fees and Other Income. Other income, commissions and fees increased 14% during the third quarter of 2002 from $5.0 million for the quarter ended September 30, 2001 to $5.7 million for the quarter ended September 30, 2002. For the first nine months of 2002, commissions, fees and other income increased 18%, compared to the respective 2001 period. The increases during the 2002 periods were due primarily to increased commissions and fees earned by Doral Financial’s retail banking and insurance agency subsidiaries. For the third quarter and first nine months of 2002, insurance agency activities produced commissions of $1.8 million and $5.0 million, respectively, compared to $1.2 million and $2.9 million for the corresponding 2001 periods. Deposit and other retail banking fees increased from $1.5 million for the third quarter of 2001 to $2.0 million for the third quarter of 2002 and from $3.5 million for the first nine months of 2001 to $5.6 million for the first nine months of 2002. Set forth below is a summary of Doral Financial’s principal sources of fees and commissions.

TABLE F
FEES AND COMMISSIONS
(DOLLARS IN THOUSANDS)


	QUARTER ENDED						NINE MONTH PERIOD
	SEPTEMBER 30,						ENDED SEPTEMBER 30,

	2002			2001			2002			2001

Deposit and other retail banking fees	$	2,015		$	1,459		$	5,570		$	3,507




Securities fees and commissions		2,824			1,449			4,492			3,409




Insurance fees and commissions		1,759			1,185			5,027			2,918




Other Income		2,821			3,587			5,785			5,733




Eliminations intersegment⁽¹⁾		(3,757	)		(2,649	)		(5,658	)		(2,649	)

Total	$	5,662		$	5,031		$	15,216		$	12,918

(1)

Related primarily to fees and commissions paid to the Company’s institutional securities subsidiary, intercompany rental income and other miscellaneous income.

NON-INTEREST EXPENSE

Total non-interest expense increased by 25% during the third quarter ended September 30, 2002, compared to the respective 2001 period. The increase reflects increases in compensation, advertising, occupancy and other expenses resulting from the continued expansion of Doral Financial’s retail mortgage banking and banking franchises and expenses related to increased loan originations and servicing. For the nine months period ended September 30, 2002 total non-interest expense increased by 24% from the comparable 2001 period. For the quarter and nine months ended

September 30, 2002, compensation and benefits, which is the largest component of non-interest expense, increased by 17% and 14%, respectively, due to increases in salaries and incentives. As of September 30, 2002, Doral Financial had 2,000 employees compared to 1,831 employees as of September 30, 2001.

INCOME TAXES

The maximum statutory corporate income tax rate in Puerto Rico is 39%. For the third quarters of 2002 and 2001, the effective income tax rate of Doral Financial was 16% and 13%, respectively. For the nine month periods ended September 30, 2002 and 2001, the effective income tax rate of Doral Financial was 15% and 12%, respectively. The increase in the effective tax rates for the 2002 periods reflected increased revenues from the Company’s non-tax advantaged operations such as its insurance agency and institutional securities operations.

The lower effective tax rates experienced by Doral Financial compared to the maximum statutory rates reflect the fact that the portion of the net interest income derived from certain FHA and VA mortgage loans secured by properties located in Puerto Rico and on GNMA securities backed by such mortgage loans is exempt from income tax under Puerto Rico law. Doral Financial also invests in U.S. Treasury and agency securities that are exempt from Puerto Rico taxation and are not subject to federal income taxation because Doral Financial is entitled to rely on the portfolio interest deduction. In addition, Doral Financial’s international banking entities may invest in various U.S. securities the income on which is exempt from Puerto Rico income taxation and excluded from federal income taxation on the basis of the portfolio interest deduction. Net income tax savings to Doral Financial attributable to tax-exempt income amounted to approximately $56.1 million and $32.5 million for the nine month periods ended September 30, 2002 and 2001, respectively.

Except for the operations of Doral Bank-NY and Doral Money, substantially all of the Company’s operations are conducted through Puerto Rico subsidiaries in Puerto Rico. Doral Bank-NY and Doral Money are US corporations and are subject to U.S. income-tax on their income derived from all sources. For the nine month periods ended September 30, 2002 and 2001, the provision for income taxes for the Company’s U.S. subsidiaries amounted to approximately $4.6 million and $246,000, respectively.

AMORTIZATION OF IOs AND SERVICING ASSETS

Whenever Doral Financial sells a mortgage loan, it allocates the cost of the loan between the loan, the related mortgage servicing right (the “servicing asset” or “mortgage servicing right”) and any IOs retained in connection with such sale based on their relative fair values. Doral Financial creates IOs in connection with the sale of loans in bulk or in securitization transactions. IOs are created on the sale of mortgage loans with servicing retained and represent the estimated present value of the cash flows that Doral Financial expects to receive in the future on the economic interest it retains on loans sold or securitized. The value of IOs reflects the present value of the excess of the weighted-average coupon on the loans sold over the sum of: (i) the pass-through interest paid to the investor and (ii) a servicing fee generally equal to 25 basis points, after adjusting such amount for expected losses and prepayments. The pass-through interest rate payable to the investor may be a fixed rate or a floating rate, which in the later case is generally based on a spread over the three-month LIBOR rate. The IOs are recorded at the time of the sale of the related loans as an adjustment to the carrying basis of the loans sold. To compute the value of the IOs, Doral Financial multiplies the interest spread it is entitled to retain on the loans sold by the principal balance of the mortgage pool being sold. The resulting product is then multiplied by a market factor which Doral Financial obtains from an independent third party financial institution that in turn derives the factor by reference to internal valuation models that incorporate assumptions regarding discount rates and mortgage prepayment rates. The market factor used by Doral Financial to value IOs ranged from 4.25% to 5.50% during the first nine months of 2002 compared to 5.50% during the first nine months of 2001. While Doral Financial has consistently sold some IOs in private sales, currently there is no liquid market for the purchase and sale of IOs.

The value assigned to the IOs reduces the basis of the related mortgage loan sold and thereby results in increased “Net Gain on Mortgage Loan Sales and Fees” at the time of sale. Doral Financial recognized IOs with a value of approximately $48.8 million during the third quarter of 2002, compared to $36.3 million for the third quarter of 2001. For the nine month periods ended September 30, 2002 and 2001, the Company recorded IOs in the amount of $139.4 million and $103.4 million, respectively.

The initial recorded value of IOs is amortized over the expected life of the asset, and the amortization is recorded as a reduction of interest income. The amortization of IOs is based on the amount and timing of estimated future cash flows to be received with respect to the IOs. Throughout the life of the IOs, Doral Financial continues to monitor changes in interest rates to determine whether the assumptions selected to value the IOs are still appropriate in light of changes in market conditions. It also attempts to corroborate the value assigned to the IOs through use of internal valuation models that incorporate assumptions regarding the direction of interest rates and prepayment rates. The reasonableness of management’s assumptions are confirmed through independent valuations performed by third parties on a quarterly basis. To the extent changes in interest rates or prepayment rates so warrant, Doral Financial will increase or decrease the recorded value of the IOs and increase or decrease the level of amortization. Amortization of IOs for each of the quarters ended September 30, 2002 and 2001, was approximately $9.5 million and $8.7 million, respectively. For the nine month periods ended September 30, 2002 and 2001 amortization of IOs was approximately $36.1 million and $21.5 million, respectively. The increase in the amortization for the nine month period ended September 30, 2002 compared to the corresponding 2001 period is due to the increase in the amount of IOs as well as increased amortization resulting from increased mortgage prepayment rates tied to decreases in interest rates. The carrying amount of the IOs is reflected in Doral Financial’s consolidated statements of condition as a component of “Trading securities, at fair value.” As of September 30 2002 and 2001, the carrying amount of IOs and other residual interests retained in securitization transactions recorded on Doral Financial’s financial statements was $344.6 million and $230.9 million, respectively.

The servicing asset represents the present value of the servicing fees expected to be received on the loan over the expected term of the loan. Doral Financial determines the fair value of its servicing assets by reference to prices paid by independent third parties in market transactions for similar mortgage servicing rights. During the first nine months of 2002 and 2001, the market prices used to value Doral Financial’s servicing assets varied from 1.50% to 2.30% of the principal amount of the loans subject to the servicing rights, with GNMA, FNMA and FHLMC servicing rights generally having higher prices than servicing rights for non-conforming loans. In addition, the value of Doral Financial’s FNMA, FHLMC and GNMA mortgage servicing portfolio is evaluated on a periodic basis by an independent third party.

The value of the servicing asset assigned to a mortgage loan reduces the basis of the related mortgage loan and thereby results in increased “Net Gain on Mortgage Loan Sales and Fees” at the time of sale. During the nine months ended September 30, 2002 and 2001, Doral Financial recognized servicing assets of $25.8 million, and $29.2 million, respectively, in connection with the sale of internally originated loans. Servicing assets purchased in bulk from third parties are initially recorded on Doral Financial’s financial statement at the amount paid for such assets. The unamortized balance of the servicing assets is reflected on Doral Financial’s Consolidated Statements of Financial Condition. No servicing assets have been recognized for the portion of Doral Financial’s mortgage servicing portfolio consisting of loans internally originated by Doral Financial prior to the adoption in 1995 of SFAS No. 122 amounting to approximately $525.7 million.

Doral Financial’s servicing assets are amortized in proportion to, and over the period of, estimated servicing income. Amortization of servicing assets is included as a component of “Servicing Income” in Doral Financial’s Consolidated Statements of Income.

For additional information regarding the unamortized balance of Doral Financial’s servicing assets and amortization for the quarters and nine month periods ended September 30, 2002 and 2001, please refer to Note l to the unaudited consolidated financial statements contained herein.

Increases in prepayment rates or credit loss rates over anticipated levels used in calculating the value of IOs and servicing assets can adversely affect Doral Financial’s revenues and liquidity by increasing the amortization rates for servicing assets and IOs, as well as requiring Doral Financial to recognize an impairment against income over and above scheduled amortization. See “Interest Rate Risk Management.”

BALANCE SHEET AND OPERATING DATA ANALYSIS

LOAN PRODUCTION

The following table sets forth the number and dollar amount of Doral Financial’s loan production for the periods indicated:

TABLE G
LOAN PRODUCTION
(Dollars in Thousands,
Except for Average Initial Loan Balance)


		QUARTER ENDED				NINE MONTH PERIOD
		SEPTEMBER 30,				ENDED SEPTEMBER 30,

		2002		2001		2002		2001

FHA/VA mortgage loans




	Number of loans		1,405		1,369		4,694		4,466




	Volume of loans	$	125,415	$	111,042	$	413,657	$	394,490




	Percent of total volume		9%		10%		11%		13%





Conventional conforming mortgage loans




	Number of loans		3,454		2,924		10,490		8,405




	Volume of loans	$	511,672	$	451,656	$	1,511,815	$	1,036,767




	Percent of total volume		39%		41%		40%		34%





Conventional non — conforming mortgage loans⁽¹⁾⁽²⁾




	Number of loans		6,849		5,895		17,362		15,253




	Volume of loans	$	523,631	$	380,778	$	1,350,611	$	1,249,843




	Percent of total volume		39%		35%		36%		41%





Other⁽³⁾




	Number of loans		534		378		1,473		1,201




	Volume of loans	$	168,545	$	149,847	$	494,947	$	378,386




	Percent of total volume		13%		14%		13%		12%





Total loans




	Number of loans		12,242		10,566		34,019		29,325




	Volume of loans	$	1,329,263	$	1,093,323	$	3,771,030	$	3,059,486





Average initial loan balance		$	108,582	$	103,475	$	110,851	$	104,330

(1)		Includes $15.1 million and $13.7 million in second mortgages for the quarters ended September 30, 2002 and 2001, respectively and $44.1 million and $43.3 million in second mortgages for the nine month periods ended September 30, 2002 and 2001, respectively.




(2)		Includes $30.7 million and $24.9 million in home equity or personal loans secured by real estate mortgages of up to $40,000 for the quarters ended September 30, 2002 and 2001, respectively and $69.7 million and $98.7 million for the nine month periods ended September 30, 2002 and 2001, respectively.




(3)		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.

A substantial portion of Doral Financial’s total mortgage loan originations has consistently been comprised of refinance loans. For the nine months ended September 30, 2002 and 2001, refinance loans represented approximately 55% and 50%, respectively, of the total dollar volume of mortgage loans originated (excluding loans purchased from third parties) for both periods. Doral Financial’s future results could be adversely affected by a significant increase in mortgage interest rates that may reduce refinancing activity. However, the Company believes that refinancing activity

is less sensitive to interest rate changes in Puerto Rico than in the mainland United States because a significant amount of refinance loans are made for debt consolidation purposes.

The following table sets forth the sources of Doral Financial’s loan production as a percentage of total loan originations for the periods indicated:

TABLE H
LOAN ORIGINATION SOURCES


	NINE MONTH PERIOD ENDED SEPTEMBER 30,

	2002									2001

	Puerto Rico			US			Total			Puerto Rico			US			Total

Retail		54	%		–			54	%		56	%		–			56	%




Wholesale⁽¹⁾		31	%		1	%		32	%		30	%		–			30	%




New Housing Developments		10	%		–			10	%		8	%		1	%		9	%




Multi-family		–			1	%		1	%		–			1	%		1	%




Other⁽²⁾		2	%		1	%		3	%		3	%		1	%		4	%

(1)		Refers to purchases of mortgage loans from other financial institutions and mortgage lenders. Puerto Rico wholesale purchases include U.S. mortgage loans purchased by Doral Financial’s Puerto Rico based companies.




(2)		Refers to commercial, consumer and land loans originated through the retail banking subsidiaries and other specialized units.

MORTGAGE LOAN SERVICING

Doral Financial’s principal source of servicing rights has traditionally been its internal mortgage loan production. However, Doral Financial also purchases mortgage loans on a servicing released basis as well as servicing rights in bulk. During the third quarters of 2002 and 2001, Doral Financial purchased servicing rights to approximately $83.1 million and $99.9 million, respectively, in principal amount of mortgage loans. For the nine month periods ended September 30, 2002 and 2001, the Company purchased servicing rights to approximately $275.2 million and $259.3 million, respectively, in principal amount of mortgage loans. Doral Financial intends to continue growing its mortgage servicing portfolio by internal loan originations and wholesale purchases of loans on a servicing released basis but will also continue to seek and consider attractive opportunities for bulk purchases of servicing rights from third parties.

The following table sets forth certain information regarding the total mortgage loan servicing portfolio of Doral Financial for the periods indicated:

TABLE I
MORTGAGE LOAN SERVICING
(Dollars in Thousands, Except for Average Size of Loans Prepaid)


		AS OF SEPTEMBER 30,

		2002			2001

COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END:




GNMA		$	3,185,036		$	3,279,140




FHLMC/FNMA			2,724,419			2,594,788




Doral Financial grantor trusts			53,432			70,164




Other conventional mortgage loans⁽¹⁾			4,960,373			3,781,089

Total servicing portfolio		$	10,923,260		$	9,725,181

SELECTED DATA REGARDING MORTGAGE LOANS SERVICED:




Number of loans			140,061			133,952




Weighted average interest rate			7.47	%		7.67	%




Weighted average remaining maturity (months)			255			253




Weighted average servicing fee rate			.3378	%		.3231	%




Average servicing portfolio		$	10,583,886		$	9,279,544




Principal prepayments		$	1,187,139		$	927,219




Prepayments to average portfolio (annualized)			15	%		13	%




Average size of loans prepaid		$	76,937		$	68,693




DELINQUENT MORTGAGE LOANS AND PENDING FORECLOSURES AT PERIOD END:




60-89 days past due			1.30	%		1.45	%




90 days or more past due			2.04	%		2.15	%

Total delinquencies excluding foreclosures			3.34	%		3.60	%

Foreclosures pending			1.57	%		1.31	%

SERVICING PORTFOLIO ACTIVITY:




Beginning servicing portfolio		$	10,006,380		$	8,804,706




Add:




	Loans funded and purchased⁽²⁾		2,167,514			1,907,052




	Bulk servicing acquired		275,236			259,348




Less:




	Servicing sales transferred		59,219			138,548




	Run-off⁽³⁾		1,466,651			1,107,377

Ending servicing portfolio		$	10,923,260		$	9,725,181

(1)		Includes $2.0 billion and $1.2 billion of loans owned by Doral Financial at September 30, 2002 and 2001, respectively, which represented 18% and 12% of the total servicing portfolio as of such dates.




(2)		Excludes approximately $1.6 billion and $1.2 billion of commercial, consumer, construction and other loans not included in Doral Financial’s mortgage servicing portfolio as of September 30, 2002 and 2001, respectively.




(3)		Run-off refers to regular amortization of loans, prepayments and foreclosures.

Substantially all of the mortgage loans in Doral Financial’s servicing portfolio are secured by single (one-to-four) family residences secured by real estate located in Puerto Rico. At September 30, 2002 and 2001, approximately 4% and 5%, respectively, of Doral Financial’s mortgage servicing portfolio was related to mortgages secured by real property located outside Puerto Rico in the U.S. mainland.

The amount of principal prepayments on mortgage loans serviced by Doral Financial was $1.2 billion and $927.2 million for the nine months ended September 30, 2002 and 2001, respectively. This represented approximately 15% and 13%, respectively, on an annualized basis of the average principal amount of mortgage loans serviced. Doral

Financial reduces the sensitivity of its servicing income to increases in prepayment rates through a strong retail origination network that has permitted Doral Financial to increase or maintain the size of its servicing portfolio even during periods of declining interest rates and high prepayments.

CREDIT RISKS RELATED TO LOAN ACTIVITIES

With respect to mortgage loans originated for sale as part of its mortgage banking business, Doral Financial is generally at risk for any mortgage loan default from the time it originates the mortgage loan until the time it sells the loan or packages it into a mortgage-backed security. With respect to FHA loans, Doral Financial is fully insured as to principal by the FHA against foreclosure loss. VA loans are guaranteed up to 25% to 50% of the principal amount of the loan subject to a maximum, ranging from $22,500 to $50,750. Loan-to-value ratios for residential mortgage loans generally do not exceed 80% (85% for certain qualifying home purchase transactions through Doral Bank PR) unless private mortgage insurance is obtained.

Loans that do not qualify for the insurance or guarantee programs of FHA and VA, or the sale or exchange programs of FNMA or FHLMC (“non-conforming loans”), including loans secured by multi-family projects, are often sold to investors on a partial or full recourse basis. In such cases, Doral Financial retains part or all of the credit risk associated with such loan after sale. As of September 30, 2002, the outstanding principal balance of loans sold subject to full recourse or partial recourse was $2.2 billion. The maximum amount of loans that Doral Financial would have been required to repurchase if all loans subject to recourse defaulted was $1.4 billion. As of September 30, 2002, Doral Financial maintained a reserve of $2.8 million for potential losses from such arrangements which is included in “Accrued expenses and other liabilities” in Doral Financial’s Consolidated Financial Statements.

Loans secured by income-producing residential and commercial properties involve greater credit risk because they are larger in size and more risk is concentrated in a single borrower. The properties securing these loans are also more difficult to dispose of in case of foreclosure.

Doral Financial is also subject to credit risk with respect to its portfolio of loans receivable. Loans receivable represent loans that Doral Financial holds for investment and, therefore, Doral Financial is at risk for the term of the loan. As of September 30, 2002, approximately 56% or $448.4 million of Doral Financial’s gross loans receivable portfolio totaling $809.0 million consisted of construction loans, primarily for residential projects.

Doral Financial manages credit risk by maintaining sound underwriting standards, monitoring the quality of the loan portfolio, assessing reserves and loan concentrations, recruiting qualified credit officers, implementing and monitoring lending policies and collateral requirements, maintaining appropriate collection procedures and instituting procedures to ensure appropriate actions to comply with laws and regulations. Doral Financial’s collateral requirements for loans depend on the financial strength of the borrower and the type of loan involved. Acceptable collateral principally includes cash, deposit and investment accounts and real estate, and, to a lesser extent, liens on accounts receivable, lease receivables, inventory and personal property. In the case of non-conforming loans sold subject to recourse, Doral Financial also generally requires lower loan-to-value ratios to protect itself from possible losses on foreclosure.

Because most of Doral Financial’s loans are made to borrowers located in Puerto Rico and secured by properties located in Puerto Rico, Doral Financial is subject to greater credit risks tied to adverse economic, political or business developments and natural hazards, such as hurricanes, that may affect Puerto Rico. For example, if Puerto Rico’s real estate market were to experience an overall decline in property values, the Company’s rates of loss on foreclosure would probably increase.

NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES

Non-performing assets (“NPAs”) consist of loans past due 90 days and still accruing, loans on a non-accrual basis and other real estate owned. Beginning in the second quarter of 2002, conventional mortgage loans held for sale by Doral Financial’s mortgage banking units are placed on a non-accrual basis after they have been delinquent for more than 180 days to the extent concern exists as to ultimate collectibility based on the loan-to-value ratio. When the loan is placed

on non-accrual, its accrued interest to date is fully reserved. Prior to the second quarter of 2002, mortgage loans held-for-sale by Doral Financial’s mortgage banking units were placed on a non-accrual basis if they had been delinquent for over a year and concern existed as to ultimate collectibility based on loan-to-value ratios and only accrued interest over one year was fully reserved. This change in policy resulted in an increase in the amount of residential mortgage loans held by the mortgage banking units classified as non-accrual as reflected in the table below. Doral Financial believes that its non-accrual policy for mortgage loans held for sale in its mortgage banking units is reasonable because these loans are adequately secured by real estate, usually have a low loan-to-value ratio, and the amounts due on the loans have historically been recovered through the sale of the property after foreclosure or negotiated settlements with borrowers. Doral Financial’s banking subsidiaries place all loans more than 90 days past due on a non-accrual basis, at which point a reserve for all unpaid interest previously accrued is established. Interest income is recognized when the borrower makes a payment, and the loan will return to an accrual basis when it is no longer more than 90 days delinquent and collectibility is reasonably assured. As of September 30, 2002 and 2001, Doral Financial would have recognized $5.0 million and $1.4 million, respectively, in additional interest income had all delinquent loans been accounted for on an accrual basis. Doral Financial evaluates loans receivable for impairment. Impaired loans as of September 30, 2002 and December 31, 2001 amounted to approximately $497,000 and $2.1 million, respectively. Under the sale agreement, Doral Financial is required to advance scheduled payments of principal and interest on the loans. During the nine months ended September 30, 2002, the Company sold approximately $64.0 million of residential FHA insured or VA guaranteed delinquent loans. No FHA/VA delinquent loans were sold during the third quarter of 2002. Doral Financial determined that, given the fair value of the loans’ collateral, no impairment allowance was necessary at September 30, 2002 or December 31, 2001.

The following table sets forth information with respect to Doral Financial’s non-accrual loans, other real estate owned (“OREO”) and other non-performing assets as of the dates indicated. Doral Financial did not have any troubled debt restructurings as of any of the periods presented.

TABLE J
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)


			AS OF			AS OF
			SEPTEMBER 30, 2002			DECEMBER 31, 2001

Mortgage banking business:




	Non-accrual loans:




		Construction loans	$	497		$	705




		Residential mortgage loans⁽¹⁾		13,883			3,742




	Construction loans past due 90 days and still accruing			2,101			—




	Loans held-for-sale past due 90 days and still accruing⁽²⁾			56,519			55,966




	OREO			10,834			7,924

	Total NPAs of mortgage banking business			83,834			68,337

Other lending activities through banking subsidiaries:




	Non-accrual loans:




		Construction		654			1,184




		Residential mortgage loans		8,081			5,276




		Commercial real estate		4,152			1,651




		Consumer		1,028			463




		Commercial non-real estate		30			418




		Land loans		—			70

	Total non-accrual loans			13,945			9,062

	Residential mortgage loans past due 90 days and still accruing			506			—

	Construction loans past due 90 days and still accruing			49			—

	OREO			943			490

	Total NPAs of banking subsidiaries			15,443			9,552

	Total NPAs of Doral Financial (consolidated)		$	99,277		$	77,889

	Total NPAs of banking subsidiaries as a percentage of their loans receivable, net, and OREO			2.14	%		1.58	%

	Total NPAs of Doral Financial as a percentage of consolidated total assets			1.30	%		1.16	%

	Ratio of allowance for loan losses to total non-performing loans at end of period (consolidated)			17.26	%		17.95	%

(1)		During the second quarter of 2002, the Company adopted a new policy in which mortgage loans held-for-sale by its mortgage banking units are placed on a non-accrual basis after they are delinquent for more than 180 days and if the loan-to-value ratio indicates that there is a concern as to the ultimate collectibility of the loan. Prior to the second quarter of 2002, mortgage loans held-for-sale by Doral Financial’s mortgage banking units were placed on a non-accrual basis if they had been delinquent for over a year and if the loan-to-value ratio indicated concern as to the ultimate collectibility of the loan.

(2)		Does not include approximately $26.5 million and $12.7 million of 90 days past due FHA/VA loans as of September 30, 2002 and December 31, 2001, respectively, which are not considered non-performing assets by Doral Financial because the principal balance of these loans is insured or guaranteed under applicable FHA and VA programs and interest is, in most cases, fully recovered in foreclosure proceedings.

The following table summarizes certain information regarding Doral Financial’s allowance for loan losses and losses on other real estate owned (“OREO”), for both Doral Financial’s banking and mortgage banking business for the periods indicated.

TABLE K
ALLOWANCE FOR LOAN LOSSES AND OREO
(DOLLARS IN THOUSANDS)


		QUARTER ENDED						NINE MONTH PERIOD
		SEPTEMBER 30,						ENDED SEPTEMBER 30,

		2002			2001			2002			2001

OREO:




Balance at beginning of period		$	2,280		$	1,588		$	1,365		$	1,530




Provision for losses			1,220			230			2,111			500




Net gains, charge-offs and others			(391	)		185			(367	)		(27	)

Balance at end of period		$	3,109		$	2,003		$	3,109		$	2,003

Allowance for Loan Losses:




Balance at beginning of period		$	13,531		$	10,907		$	12,472		$	9,387




Provision for loan losses			2,055			1,062			3,792			3,128

Charge — offs:




	Mortgage loans held-for-sale		—			—			(90	)		(234	)




	Construction		—			—			—			—




	Residential mortgage loans		—			—			—			—




	Commercial real estate		—			—			—			—




	Consumer		(471	)		(143	)		(997	)		(530	)




	Commercial non-real estate		(78	)		(37	)		(98	)		(47	)




	Other		(19	)		—			(116	)		—

Total Charge-offs			(568	)		(180	)		(1,301	)		(811	)

Recoveries:




	Mortgage loans held-for-sale		—			—			—			—




	Construction		—			—			—			—




	Residential mortgage loans		—			—			14			—




	Commercial real estate		1			—			1			—




	Consumer		61			44			112			96




	Commercial non-real estate		11			—			14			33




	Other		—			—			11			—

Total recoveries			73			44			152			129

Net charge-offs			(495	)		(136	)		(1,149	)		(682	)

Other Adjustments			12			(148	)		(12	)		(148	)

Balance at end of period⁽¹⁾		$	15,103		$	11,685		$	15,103		$	11,685

Allowance for loan losses as a percentage of total loans outstanding at the end of period			0.49	%		0.50	%		0.49	%		0.50	%




Net charge-offs to average loans outstanding			0.02	%		0.01	%		0.04	%		0.03	%

(1)

Includes the allowance of mortgage loans held-for-sale of $7.1 million for 2002 and $5.9 million for 2001 and the allowance for loans receivable held for investment of $8.0 million for 2002 and $5.8 million for 2001.

The allowance for loan losses relating to loans held by Doral Financial was $15.1 million at September 30, 2002, compared to $11.7 million as of September 30, 2001. The increase in the allowance was primarily the result of the increase in the size of the loan portfolio.

LIQUIDITY AND CAPITAL RESOURCES

Doral Financial has an ongoing need for capital to finance its lending, servicing and investing activities. This need is expected to increase as the volume of the loan originations and investing activity increases. Doral Financial’s cash requirements arise mainly from loan originations and purchases, purchases and holding of securities, repayments of debt upon maturity, payments of operating and interest expenses and servicing advances and loan repurchases pursuant to recourse or warranty obligations.

Servicing agreements relating to the mortgage-backed securities programs of FNMA, FHLMC and GNMA, and to mortgage loans sold to certain other investors, require Doral Financial to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. While Doral Financial generally recovers funds advanced pursuant to these arrangements within 30 days, it must absorb the cost of the funds it advances during the time the advance is outstanding. During the nine month period ended September 30, 2002, the monthly average amount of funds advanced by Doral Financial under such servicing agreements was approximately $8.6 million, compared to $10.1 million for the same period during 2001.

Doral Financial’s primary sources of liquidity are sales in the secondary mortgage market of the loans it originates and purchases, short-term borrowings under warehouse, gestation and repurchase agreement lines of credit secured by pledges of its loans and mortgage-backed securities and revenues from operations. Doral Financial’s banking subsidiaries also rely on deposits and borrowings from the FHLB-NY. Doral Financial has also relied on privately-placed and publicly offered debt financings and public offerings of preferred and common stock. During the second quarter of 2002, Doral Financial sold 4,140,000 shares of nonconvertible noncumulative perpetual preferred stock at a price to the public of $25.00 per share pursuant to a public underwritten offering. The net proceeds to Doral Financial after the underwriting discounts and expenses were approximately $100,013,000.

The following table shows Doral Financial’s sources of borrowings and the related average interest rate as of September 30, 2002 and December 31, 2001:

TABLE L
SOURCES OF BORROWINGS
(DOLLARS IN THOUSANDS)


	AS OF SEPTEMBER 30, 2002					AS OF DECEMBER 31, 2001

	AMOUNT		AVERAGE			AMOUNT		AVERAGE
	OUTSTANDING		RATE			OUTSTANDING		RATE

Repurchase Agreements	$	2,276,416		3.91	%	$	2,573,772		4.00	%




Loans Payable		202,080		2.84	%		161,101		3.67	%




Deposits		2,106,619		3.02	%		1,669,909		3.65	%




Notes Payable		618,711		7.79	%		459,543		7.98	%




Advances from FHLB		1,061,500		4.14	%		687,500		4.80	%

Doral Financial had warehousing, gestation and repurchase agreements lines of credit totaling $7.6 billion as of September 30, 2002, of which $2.5 billion was outstanding as of such date. Of the aggregate amount of funding available under Doral Financial’s warehousing and repurchase lines of credit, approximately $1.9 billion represented committed facilities under which the lender is committed to advance funds subject to compliance with various conditions. The remaining funding was available under uncommitted lines pursuant to which advances are made at the discretion of the lender. Doral Financial’s committed lines of credit generally require Doral Financial to comply with various financial covenants and ratios. Failure to comply with any of these covenants permits the lender to require immediate

repayment of all amounts previously advanced and to stop making any further advances to Doral Financial. As of September 30, 2002, Doral Financial was in compliance with all such financial covenants and ratios.

The following table presents the average balance and the annualized average rate paid on each deposit type for the periods indicated:

TABLE M
AVERAGE DEPOSIT BALANCE
(DOLLARS IN THOUSANDS)


		NINE MONTH PERIOD					YEAR ENDED
		ENDED SEPTEMBER 30, 2002					DECEMBER 31, 2001

		AVERAGE		AVERAGE			AVERAGE		AVERAGE
		BALANCE		RATE			BALANCE		RATE

Certificates of deposit		$	1,137,763		4.07	%	$	904,910		4.87	%




Regular passbook savings			178,270		2.98	%		101,038		4.33	%




Now accounts			406,598		2.30	%		299,486		2.80	%




Non-interest bearing			263,335		—			177,862		–





	Total deposits	$	1,985,966		3.65	%	$	1,483,296		4.75	%

The following table sets forth the maturities of certificates of deposit having principal amounts of $100,000 or more at September 30, 2002.

TABLE N
DEPOSIT MATURITIES
(IN THOUSANDS)


		AMOUNT

Certificates of deposit maturing




	Three months or less	$	186,893




	Over three through six months		127,614




	Over six through twelve months		164,176




	Over twelve months		451,907

	Total	$	930,590

As of September 30, 2002 and December 31, 2001, Doral Financial’s retail banking subsidiaries had approximately $687.4 million and $418.1 million, respectively, in brokered deposits obtained through broker-dealers. Brokered deposits are used by Doral Financial’s banking subsidiaries as a source of long-term funds. Brokered deposits, however, are generally considered a less stable source of funding than core deposits obtained through retail bank branches. Investors that invest in brokered deposits are generally very sensitive to interest rates and will generally move funds from one depository institution to another based on minor differences in rates offered on deposits.

As of September 30, 2002, Doral Financial, Doral Bank PR and Doral Bank NY were in compliance with all the regulatory capital requirements that were applicable to them as a bank holding company, state non-member bank and Federal savings bank, respectively (i.e., total capital and Tier 1 capital to risk weighted assets of at least 8% and 4%, respectively, and Tier 1 capital to average assets of at least 4%). Set forth below are Doral Financial’s, Doral Bank PR’s and Doral Bank NY’s regulatory capital ratios as of September 30, 2002, based on existing Federal Reserve, FDIC and OTS guidelines, respectively.

TABLE O
REGULATORY CAPITAL RATIOS


	DORAL			DORAL			DORAL
	FINANCIAL			BANK PR			BANK NY⁽¹⁾

Tier 1 Capital Ratio (Tier 1 capital to risk weighted assets)		18.6	%		14.3	%		23.1	%




Total Capital (total capital to risk weighted assets)		18.9	%		14.6	%		23.2	%




Leverage Ratio⁽²⁾		13.4	%		7.4	%		11.3	%

(1)		In connection with the chartering of Doral Bank NY in October 1999, the FDIC required that it be initially capitalized with $25 million. As Doral Bank NY continues to increase its assets, its capital ratios can be expected to decline.




(2)		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.

As of September 30, 2002, Doral Bank PR and Doral Bank NY were considered well-capitalized banks for purposes of the prompt corrective action regulations adopted by the FDIC pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991. To be considered a well capitalized institution under the FDIC’s regulations, an institution must maintain a Leverage Ratio of at least 5%, a Tier 1 Capital Ratio of at least 6% and a Total Capital Ratio of at least 10% and not be subject to any written agreement or directive to meet a specific capital ratio.

On November 29, 2001, the federal banking and thrift regulatory agencies adopted a final rule that changes the regulatory capital treatment of recourse obligations, residual interests and direct credit substitutes. The new rules became effective on January 1, 2002, for transactions settled on or after January 1, 2002. For transactions entered into before January 1, 2002, Doral Financial is not required to implement the rule until December 31, 2002. The new rule attempts to more consistently treat recourse obligations for the agencies’ risk-based capital requirements. The rule also imposes a new dollar-for-dollar capital requirement on residual interests retained in sale or securitization transactions and a 25% limit on the amount of Tier 1 capital that may consist of credit-enhancing interest-only strips, a subset of residual interests.

The rule clarifies that, subject to certain exceptions, the entire amount of assets sold with recourse, not just the contractual amount of the recourse obligation is converted into an on-balance sheet credit equivalent amount. The credit equivalent amount, less any recourse liability reflected on the balance sheet, is then risk weighted for purposes of applying the applicable capital requirement. The risk weighting for residential mortgage loans is currently 50%. As of September 30, 2002, Doral Financial’s outstanding balance of loans sold with full or partial recourse was $2.2 billion.

Currently, most of the IOs created in connection with the sale by Doral Financial of its non-conforming loans are treated as credit-enhancing interest-only strips under the new rules and thus are subject to a dollar-for-dollar capital requirement for risk based capital purposes and to the 25% concentration limit for Tier 1 capital purposes. The capital ratios set forth above incorporate the impact of the new capital rules for IOs created after January 1, 2002.

Substantially all of Doral Financial’s recourse obligations and IOs are recorded at the parent company level and, accordingly, the new rule only directly impacts the regulatory requirements applicable to Doral Financial as a bank holding company. While the full implementation of the new rule effective on December 31, 2002 is expected to reduce Doral Financial’s regulatory capital ratios at the holding company level, Doral Financial anticipates that it will continue to comply with all applicable capital requirements. Set forth below, are Doral Financial’s pro-forma capital ratios for risk-based capital purposes as of September 30, 2002 assuming full implementation of the new rules as of such date.


	DORAL FINANCIAL

Tier 1 Capital Ratio		15.0	%




Total Capital Ratio		15.2	%




Leverage Ratio		12.3	%

Doral Financial expects that it will continue to have adequate liquidity, financing arrangements and capital resources to finance its operations and will continue to explore alternative and supplementary methods of financing its operations, including both debt and equity financing. There can be no assurance, however, that Doral Financial will be successful in consummating any such transactions.

ASSETS AND LIABILITIES

At September 30, 2002, Doral Financial’s total assets were $7.7 billion compared to $6.7 billion at December 31, 2001. The increase in assets was due primarily to a net increase in the loan portfolio of approximately $507.4 million and a net increase in money market investments of approximately $929.4 million which were offset in part by a decrease of $548.0 million in the investment securities portfolio. Total liabilities were $6.7 billion at September 30, 2002, compared to $5.9 billion at December 31, 2001. The increase in liabilities was largely the result of an increase in deposit accounts, notes payable and advances from FHLB which were offset in part by a decrease of $297.4 million in securities sold under agreements to repurchase. At September 30, 2002, deposit accounts totaled $2.1 billion, compared to $1.7 billion at December 31, 2001. As of September 30, 2002, Doral Financial’s retail banking subsidiaries had $4.6 billion in assets, compared to $3.7 billion at December 31, 2001.

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

The tables below summarize Doral Financial’s contractual obligations and other commercial commitments as of September 30, 2002.

TABLE P
CONTRACTUAL OBLIGATIONS
(DOLLARS IN THOUSANDS)


	PAYMENT DUE BY PERIOD

			LESS THAN						AFTER 5
CONTRACTUAL OBLIGATIONS	TOTAL		1 YEAR		1-3 YEARS		3-5 YEARS		YEARS

Repurchase and warehousing lines of credit⁽¹⁾	$	2,478,496	$	1,336,618	$	55,000	$	200,000	$	886,878




Deposits		2,106,619		1,585,860		302,574		216,704		1,481




Other borrowed funds		1,680,211		163,775		641,995		104,407		770,034




Non-cancellable operating leases		52,605		4,976		8,688		8,289		30,652

Total Contractual Cash Obligations	$	6,317,931	$	3,091,229	$	1,008,257	$	529,400	$	1,689,045

(1)

Includes $1.1 billion of long-term repurchase agreement with call features.

TABLE Q
OTHER COMMERCIAL COMMITMENTS
(DOLLARS IN THOUSANDS)


	AMOUNT OF COMMITMENT EXPIRATION PER PERIOD

	TOTAL
	AMOUNT		LESS THAN						AFTER 5
OTHER COMMERCIAL COMMITMENTS	COMMITTED		1 YEAR		1-3 YEARS		3-5 YEARS		YEARS

Standby Repurchase (Recourse) Obligations	$	1,362,382	$	352,278	$	333,105	$	23,491	$	653,508

INTEREST RATE RISK MANAGEMENT

General. Interest rate fluctuation is the primary market risk affecting Doral Financial. The effect of changes in interest rates on the volume of mortgage loan originations, the net interest income earned on Doral Financial’s portfolio of loans and securities, the amount of gain on sale of loans, and the value of Doral Financial’s loan servicing portfolio and securities holdings, as well as Doral Financial’s strategies to manage such effects, are discussed in Doral Financial’s Annual Report to Shareholders, which information is also incorporated by reference into the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Risk Management.”

In the future, Doral Financial may use alternative hedging techniques including futures, options, interest rate swap agreements or other hedge instruments to help mitigate interest rate and market risk. However, there can be no assurance that any of the above hedging techniques will be successful. To the extent they are not successful, Doral Financial’s profitability may be adversely affected. For additional information on the use of derivatives to manage interest rate risk, see “Derivatives” below.

Interest Rate Sensitivity Analysis. The following table summarizes the contractual maturities or repricing of Doral Financial’s interest-earning assets and interest-bearing liabilities as of September 30, 2002. Condensed information as of December 31, 2001 is also shown. In addition, investments held by Doral Financial which have call features are presented according to their contractual maturity date. Interest rate swap agreements are presented on the basis of the notional amounts used to calculate the contractual amounts to be exchanged under such swap agreements.

TABLE R
INTEREST RATE SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)


													NON-
													INTEREST
		1 YEAR			1 TO 3			3 TO 5			OVER 5		RATE
AS OF SEPTEMBER 30, 2002		OR LESS			YEARS			YEARS			YEARS		BEARING			TOTAL

ASSETS




	Cash and Money Market	$	1,539,973		$	—		$	—		$	—	$	—		$	1,539,973




	Total Loans		468,296			254,327			165,605			2,210,789		—			3,099,017




	Securities Held-for-Trading		326,809			1,616			11,241			892,626		—			1,232,292




	Securities Available for Sale		—			—			—			459,154		—			459,154




	Securities Held-to-Maturity		2,000			5,077			5,757			535,570		—			548,404




	FHLB Stock		—			—			—			76,445		—			76,445




	Other Assets		—			—			—			—		710,879			710,879

	Total Assets	$	2,337,078		$	261,020		$	182,603		$	4,174,584	$	710,879		$	7,666,164

LIABILITIES AND STOCKHOLDERS’ EQUITY




	Loans Payable	$	202,080		$	—		$	—		$	—	$	—		$	202,080




	Repurchase Agreements		1,134,538			55,000			200,000			886,878		—			2,276,416




	Deposits		1,315,568			302,574			216,704			1,481		270,292			2,106,619




	Other Borrowed Funds		163,775			641,995			104,407			770,034		—			1,680,211




	Other Liabilities		—			—			—			—		403,197			403,197




	Stockholders’ Equity		—			—			—			—		997,641			997,641

	Total Liabilities and Stockholders’ Equity	$	2,815,961		$	999,569		$	521,111		$	1,658,393	$	1,671,130		$	7,666,164

Notional amount of -




Interest Rate Swaps		$	200,000		$	—		$	(200,000	)	$	—




Interest Rate Sensitivity Gap			(278,883	)		(738,549	)		(538,508	)		2,516,191		(960,251	)




Cumulative Interest Rate Sensitivity Gap			(278,883	)		(1,017,432	)		(1,555,940	)		960,251




Cumulative Gap to Interest-Earning Asset			(4.01%	)		(14.63%	)		(22.37%	)		13.81%


CONDENSED INTEREST RATE
SENSITIVITY ANALYSIS
AS OF DECEMBER 31, 2001		1 YEAR			1 TO 3			3 TO 5			OVER 5
(DOLLARS IN THOUSANDS)		OR LESS			YEARS			YEARS			YEARS

Off-Balance Sheet Instruments -




	Interest Rate Swaps	$	50,000		$	(50,000	)	$	—		$	—




Interest Rate Sensitivity Gap			(2,035,260	)		(189,331	)		(431,058	)		3,357,634




Cumulative Interest Rate Sensitivity Gap			(2,035,260	)		(2,224,591	)		(2,655,649	)		701,985




Cumulative Gap to Interest-Earning Assets			(33.75%	)		(36.89%	)		(44.04%	)		11.64%

Gap analysis measures the volume of assets and liabilities at a point in time and their repricing during future periods. The net balance of assets and liabilities (the “gap”) repricing during future periods is an indicator of the degree of interest rate risk being assumed by the Company. A positive gap generally denotes asset sensitivity and that increases in interest rates would have a positive effect on net interest income while a decrease in interest rates would have a negative effect on net interest income. A negative gap generally denotes liability sensitivity and means that an increase in interest rates would have a negative effect on net interest income while a decrease in rates would have a positive effect on net interest income. While static gap analysis may be a useful measure for determining short-term risk to future net interest income under certain circumstances, it does not measure the sensitivity of the market value of assets and liabilities to changes in interest rates. In addition, since the static gap analysis is presented on the basis of contractual maturities, it does not take into account that a large portion of Doral Financial’s loans held for sale and trading securities will be sold or prepaid before their contractual maturities.

Derivatives. Doral Financial uses derivatives to manage its exposure to interest rate risk caused by changes in interest rates beyond the control of management. Derivatives include interest rate swaps, interest rate collars, futures, forwards and options. Derivatives are generally either privately-negotiated over-the-counter (“OTC”) or standard contracts transacted through regulated exchanges. OTC contracts generally consist of swaps, forwards and options. Exchange traded derivatives include futures and options.

In March 2002, Doral Financial purchased two interest rate collars, designated to protect the Company against rising interest rates, with an aggregate notional amount of $200 million expiring in March 2007. Under the terms of the collars, Doral Financial is entitled to receive the excess between the 3 month LIBOR and 5.5% provided that the 3 month LIBOR is less than 8.5%. Doral Financial will not receive any payments if the 3 month LIBOR is less than 5.5% or greater than 8.5%. The premium paid by Doral Financial amounted to $3,680,000 and the fair value of the collars as of September 30, 2002 was approximately $849,000. These collars are accounted for at fair value with changes in the fair value accounted for in the trading activities of the statements of income.

In June 2002, Doral Financial purchased an interest rate collar, designated to protect the Company against rising interest rates, with a notional amount of $200 million expiring in June 2006. Under the terms of the collar, Doral Financial is entitled to receive the excess between the 3 month LIBOR and 5.0%. Doral Financial will not receive any payments if the 3 month LIBOR, is less than 5.0%. The premium paid by Doral Financial amounted to $4,865,000 and the fair value of the collar as of September 30, 2002 was approximately $1,914,000. The collar is accounted for at fair value with changes in the fair value accounted for in the trading activities of the statements of income.

In August 2002, Doral Financial Corporation purchased an interest rates collar, designated to protect the Company against rising interest rates, with a notional amount of $200 million expiring in March 2007. Under the terms of the collar, Doral Financial is entitled to receive the excess between the 3 month LIBOR and 5.5% provided that the 3 month LIBOR is less than 8.5%. Doral Financial will not receive any payments if the 3 month LIBOR is less than 5.5% or greater than 8.5%. The premium paid by Doral Financial amounted to $2,080,000, and the fair value of the collar as of September 30, 2002, was approximately $849,000. The collar is accounted for at fair value with the changes in the fair value accounted for in the trading activities of the statements of income.

In September 2002, Doral Financial Corporation purchased five interest rates collars, designated to protect the Company against rising interest rates, with an aggregate notional amount of $600 million expiring in September 2007. Under the terms of the collars, Doral Financial is entitled to receive the excess between the 3 month LIBOR and 5.5% provided that the 3 month LIBOR is less than 8.5%. Doral Financial will not receive any payments if the 3 month LIBOR is less than 5.5% or greater than 8.5%. The premium paid by Doral Financial amounted to $5,570,000, and the fair value of the collars as of September 30, 2002, was $3,840,000. These collars are accounted for at fair value with the changes in the fair value accounted for in the trading activities of the statements of income.

Doral Bank PR utilizes interest rate swap agreements to manage its interest rate exposure. Interest rate swap agreements generally involve an agreement between two parties to exchange payments that are based, respectively, on fixed and floating interest rates that are calculated on the basis of a specified amount of principal (the “notional amount”). The parties are not, however, required to make any payments of principal. Non-performance by the counterparty exposes Doral Bank PR to interest rate and credit risk. At September 30, 2002, Doral Bank PR had

outstanding four interest rate swaps agreements. The agreements are for a notional principal amount of $50,000,000, $50,000,000, $100,000,000 and $100,000,000, respectively, and are designated to protect Doral Bank PR from the repricing of its short-term liabilities during a rising interest rate environment. These agreements end on November 5, 2002, January 16, 2003, September 11, 2007, and September 12, 2007, respectively. The interest rate to be received by Doral Bank PR under each of the swaps agreements is 100% of the three-month LIBOR rate. The rates being received by Doral Bank on these swap agreements was 1.81%, 1.86%, 1.80%, and 1.82%, respectively, as of September 30, 2002. The fixed interest rate to be paid by Doral Bank under these agreements was 6.125%, 5.495%, 3.69% and 3.655%, respectively, as of September 30, 2002. At September 30, 2002, the agreements had an aggregate negative fair value of $5.1 million which is recorded as a liability in Doral Financial’s Consolidated Financial Statements.

Although Doral Financial uses derivatives to manage market risk, for financial reporting purposes its general policy is to account for such instruments on a marked-to-market basis with gains or losses charged to operations as they occur. Contracts with positive fair values are recorded as assets and contracts with negative fair values as liabilities, after the application of netting arrangements. For the nine months ended September 30, 2002 average assets and liabilities related to derivatives were $18.2 million and $16.3 million, respectively. The notional amounts of assets and liabilities related to these derivatives totaled $102.5 billion and $80.3 billion, respectively, as of September 30, 2002. Notional amounts indicate the volume of derivatives activity but do not represent Doral Financial’s exposure to market or credit risk.

The table below summarizes the fair values of Doral Financial’s derivatives, as well the source of the fair values.

TABLE S
FAIR VALUE RECONCILIATION
(DOLLARS IN THOUSANDS)


Fair value of contracts outstanding at the beginning of the period	$	1,534




Contracts realized or otherwise settled during the period		(33,093	)




Fair value of new contracts entered into during the period		19,108

Fair value of contracts outstanding at the end of the period	$	(12,451	)

TABLE T
SOURCE OF FAIR VALUE
(DOLLARS IN THOUSANDS)


	PAYMENT DUE BY PERIOD

	MATURITY								MATURITY
	LESS THAN			MATURITY			MATURITY		IN EXCESS		TOTAL FAIR
SOURCE OF FAIR VALUE	1 YEAR			1-3 YEARS			3-5 YEARS		OF 5 YEARS		VALUE

Prices actively quoted	$	(13,155	)	$	(1,655	)	$	—	$	—	$	(14,810	)




Prices provided by other external sources		(1,097	)		—			3,456		—		2,359

	$	(14,252	)	$	(1,655	)	$	3,456	$	—	$	(12,451	)

The use of derivatives involves market and credit risk. The market risk of derivatives arises principally from the potential for changes in the value of derivative contracts based on changes in interest rates. Doral Financial generally manages its risks by taking risk-offsetting positions.

The credit risk of derivatives arises from the potential of a counterparty to default on its contractual obligations. Credit risk related to derivatives depend on the following: the current fair value of outstanding contracts with an entity; the potential credit exposure on the derivative over time; the extent to which legally enforceable netting arrangements

allow the offsetting of contracts with the same entity to be netted against each other; the extent to which collateral held against the contract reduces credit risk; and the likelihood of defaults by the counterparty.

To manage this credit risk, Doral Financial deals with counterparties of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. Master netting agreements incorporate rights of set-off that provide for the net settlement of contracts with the same counterparty in the event of default. The credit risk associated with futures contracts is also limited due to daily cash settlement of the net change in the value of open contracts with the exchange on which the contract is traded.

INFLATION

General and administrative expenses increase with inflation. However, the increase in real estate values in Puerto Rico in recent years has been a positive factor for Doral Financial’s mortgage banking business. The average size of loans originated tends to increase as home values appreciate, which serves to increase loan origination fees and servicing income faster than the cost of providing such services. Additionally, appreciation in real estate property values reduces the loan-to-value ratios of existing loans. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. See “Interest Rate Risk Management” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 for a discussion of the effects of changes of interest rates on Doral Financial’s operations.

CHANGES IN ACCOUNTING STANDARDS

Goodwill and Intangible Assets. On January 1, 2002, Doral Financial adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, “Intangible Assets.” It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. SFAS No. 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.

Under SFAS No. 142, goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, but without the constraint of an arbitrary ceiling. SFAS No. 142 provides specific guidance for testing goodwill for impairment. In addition, it provides specific guidance on testing intangible assets that will not be amortized for impairment and thus removes those intangible assets from the scope of other impairment guidance. In connection with the adoption of SFAS No. 142, Doral Financial assessed the value of its existing goodwill which had a carrying value of $9.1 million and determined that its goodwill was not impaired. Doral Financial also ceased amortizing this goodwill. For the nine month period ended September 30, 2001, amortization of goodwill amounted to approximately $466,000.

Accounting for the Impairment or Disposal of Long-Lived Assets. On January 1, 2002, Doral Financial adopted SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement supersedes SFAS No. 121 and APB 30 and develops an accounting model for long-lived assets that are to be disposed of by sale. Doral Financial’s adoption of this statement did not have any effect on its consolidated financial statements.

Accounting for Asset Retirement Obligations. In June 2001, the FASB issued SFAS No. 143 “Accounting for Asset Retirement Obligations.” This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. Management believes that the adoption of this statement will not have a material effect on the consolidated financial statements of Doral Financial.

Rescission of FASB Statements No. 4, 44 and 64, Amendment of SFAS No. 13 and Technical Corrections. In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of SFAS No. 13 and Technical Corrections.” SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt, an amendment of APB Opinion No. 30,” which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as extraordinary item, net of related income tax effect. As a result, the criteria in Opinion No. 30 will now be used to classify those gains and losses. This amendment became effective on July 1, 2002. Doral Financial’s adoption of this statement did not have any effect on its consolidated financial statements.

SFAS No. 145 also amends SFAS No. 13, “Accounting for Leases,” which requires that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This amendment became effective for transactions occurring after May 15, 2002. The adoption of this statement did not have a significant effect on the consolidated financial statements of Doral Financial.

Accounting for Costs Associated with Exit or Disposal Activities. In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Management believes that the adoption of this statement will not have a significant effect on the consolidated financial statements of Doral Financial.

Acquisitions of Certain Financial Institutions. In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions.” SFAS No. 147 removes financial acquisitions of financial institutions from the scope of both SFAS No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions”, and FASB Interpretation No. 9, “Applying APB Opinions No. 16 and 17, When a Savings and Loan Association or a Similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method” and requires that those transactions be accounted for in accordance with FASB Statements No. 141, “Business Combinations”, and No. 142, “Goodwill and Other Intangible Assets”. In addition, SFAS No. 147 amends FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. SFAS No. 147’s transition provisions require affected institutions to reclassify their SFAS No. 72 goodwill as SFAS No. 142 goodwill as of the date the company initially applied SFAS No. 142 in its entirety. The adoption of SFAS No. 147 will not have a material impact on the Company’s financial condition or results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding market risk to which the Company is exposed, see the information contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Risk Management.”

ITEM 4. CONTROLS AND PROCEDURES

Within the 90-day period prior to the filing of this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of Doral Financial’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II — OTHER INFORMATION

ITEM 1 — LEGAL PROCEEDINGS

In the opinion of the Company’s management, the pending and threatened legal proceedings of which management is aware will not have a material adverse effect on the financial condition of the Company.

ITEM 2 — CHANGES IN SECURITIES

Not applicable.

ITEM 3 — DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5 — OTHER INFORMATION

Three-for-Two Stock Split. On August 9, 2002, Doral Financial announced that the Company’s Board of Directors had declared a three-for-two stock split on the Company’s common stock. The stock split was effected in the form of a stock dividend of one additional share of common stock issued on September 14, 2002, for every two shares of common stock held of record on August 30, 2002. Fractional shares were settled in cash on the basis of the average of the high and low sales price of the common stock on August 30, 2002. The per share data contained in this Quarterly Report on Form 10-Q for periods prior to the quarter ended September 30, 2002, has been adjusted to reflect the three-for-two stock split.

Declaration of Cash Dividend. On August 9, 2002, the Board of Directors of Doral Financial also voted to declare a cash dividend of $0.165 per common share paid on September 6, 2002, to shareholders of record on August 23, 2002. The dividend represents a 10% increase in the Company’s quarterly dividend and follows a 20% increase in the common stock dividend previously announced on January 21, 2002. The additional shares issued as part of the stock split were not be entitled to receive the cash dividend paid on September 6, 2002. Following the effective date of the stock split, the regular quarterly dividend on the common stock was adjusted from $0.165 per share to $0.11 per share, to reflect the additional shares issued as part of the stock split.

ITEM 6 — EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit 12(a) — Computation of Ratio of Earnings to Fixed Charges.

Exhibit 12(b) — Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.

The Company has not filed as exhibits certain instruments defining the rights of holders of debt of the Company not exceeding 10% of the total assets of the Company and its consolidated subsidiaries. The Company will furnish copies of any such instruments to the Securities and Exchange Commission upon request.

(b) Reports on Form 8-K

(i) Current Report on Form 8-K, dated July 10, 2002, reporting under Item 5 the issuance of a press release announcing the unaudited earnings results for the quarter and six months ended June 30, 2002.

(ii) Current Report on Form 8-K, dated August 14, 2002, reporting under Item 9 the filing of the CEO and CFO Certifications required by Section 906 of the Sarbanes-Oxley Act.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


		DORAL FINANCIAL CORPORATION (Registrant)









Date: November 13, 2002		/s/ Salomón Levis









		Salomón Levis




		Chairman of the Board




		and Chief Executive Officer









Date: November 13, 2002		/s/Richard F. Bonini









		Richard F. Bonini




		Senior Executive Vice President




		and Chief Financial Officer









Date: November 13, 2002		/s/ Ricardo Meléndez









		Ricardo Meléndez




		Executive Vice President




		Principal Accounting Officer

I, Salomón Levis, Chairman of the Board and Chief Executive Officer of Doral Financial Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Doral Financial Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: November 13, 2002		/s/ Salomón Levis









		Salomón Levis

I, Richard F. Bonini, Senior Executive Vice President and Chief Financial Officer of Doral Financial Corporation, certify that:


Date: November 13, 2002









		/s/ Richard F. Bonini




		Richard F. Bonini

INDEX TO EXHIBITS


Exhibit
Number		Description

12(a)	- -	Computation of Ratio of Earnings to Fixed Charges.




12(b)	- -	Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.

a.		The Consolidated Financial Statements (unaudited) include the accounts of Doral Financial Corporation (“Doral Financial” or “the Company”), Doral Mortgage Corporation (“Doral Mortgage”), SANA Investment Mortgage Bankers, Inc. (“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 International, Inc., Doral Properties, Inc. (“Doral Properties”) and Doral Insurance Agency, Inc. (“Doral Agency”). 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 for the year ended December 31, 2001, and should be read in conjunction with the Notes to the Consolidated Financial Statements appearing in that report. All adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair statement of results for the interim periods have been reflected.

b.		The results of operations for the quarter and nine month period ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year.

c.		Cash dividends per share paid for the quarter and nine month periods ended September 30, 2002 and 2001, adjusted to reflect the three-for-two stock split effective September 14, 2002, were as follows:

d.		At September 30, 2002, escrow funds include approximately $82.1 million deposited with Doral Bank PR. These funds are included in the Company’s financial statements. Escrow funds also include approximately $20.6 million deposited with other banks which are excluded from the Company’s assets and liabilities.

e.		The reconciliation of the numerator and denominator, adjusted to reflect three-for-two stock split effective September 14, 2002, of the basic and diluted earnings-per-share follows:

f.		Employee costs and other expenses are shown in the Consolidated Statements of Income net of direct loan origination costs which, pursuant to SFAS No. 91, 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 held for investment (loans receivable).

		Set forth below is a reconciliation of the application of SFAS No. 91 to employee costs and other expenses:

g.		Segment information

		The Company operates in four reportable segments identified by line of business: mortgage banking, banking (including thrift operations), institutional securities and investment banking 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 Company monitors the performance of its reportable segments based on pre-established goals for different financial parameters such as net income, interest rate spread, loan production and increase in market share.

	(a)		Exhibits

			Exhibit 12(a) — Computation of Ratio of Earnings to Fixed Charges.

			Exhibit 12(b) — Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.

	(i)		Current Report on Form 8-K, dated July 10, 2002, reporting under Item 5 the issuance of a press release announcing the unaudited earnings results for the quarter and six months ended June 30, 2002.

	(ii)		Current Report on Form 8-K, dated August 14, 2002, reporting under Item 9 the filing of the CEO and CFO Certifications required by Section 906 of the Sarbanes-Oxley Act.

1.		I have reviewed this quarterly report on Form 10-Q of Doral Financial Corporation;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a.		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b.		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c.		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	a.		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b.		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and