DORAL FINANCIAL CORP - 10-Q Quarterly Report

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.

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).

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 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.

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 Money”), 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, 2002, 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 presentation of financial position, results of operations and cash flows for the interim periods have been reflected.

b.		The results of operations for the quarter and nine month period ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year.

c.		At September 30, 2003, escrow funds included approximately $158.3 million deposited with Doral Bank PR. These funds are included in the Company’s financial statements. Escrow funds also included approximately $20.7 million deposited with other banks which are excluded from the Company’s assets and liabilities.

d.		The reconciliation of the numerator and denominator of the basic and diluted earnings-per-share follows:

e.		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:

		As of September 30, 2003, the Company had a net deferred origination fee on mortgage loans held for sale and loans receivable amounting to $2.3 million and $17.0 million, respectively (December 31, 2002 — $1.6 million and $13.0 million, respectively).

f.		Segment information

		The Company operates in four reportable segments identified by line of business: mortgage banking, banking (including thrift operations), institutional securities operations and insurance agency activities. Management made this determination based on operating decisions particular to each business line and because each one targets different customers and requires different strategies. The majority of the Company’s operations are conducted in Puerto Rico. The Company also operates in the mainland United States, principally in the New York City metropolitan area. Investment activities by Doral Bank PR and by Doral Financial at the parent company level through their respective international banking entities are included within the banking and mortgage banking segments, respectively.

		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.

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

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.

The following table summarizes Doral Financial’s holdings of trading securities as of September 30, 2003 and December 31, 2002.

The following tables summarize the amortized cost, unrealized gains and losses, approximate market values, weighted average yield and contractual maturities of securities available for sale as of September 30, 2003 and December 31, 2002.


	The weighted average yield is computed based on amortized cost and, therefore, does not give effect to changes in fair value. Expected maturities of mortgage-backed securities and certain debt securities might differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

The following tables summarize the amortized cost, unrealized gains and losses, approximate market values, weighted average yield and contractual maturities of securities held to maturity as of September 30, 2003 and December 31, 2002.


	The weighted average yield is computed based on amortized cost and, therefore, does not give effect to changes in fair value. Expected maturities of mortgage-backed securities and certain debt securities might differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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

The following table sets forth certain information regarding Doral Financial’s loans receivable as of the dates indicated:

j.		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”). 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 Plaza, the new headquarters of Doral Financial. The bonds have fixed 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 AFICA to finance additional improvements to the Doral Financial Plaza. The additional bonds mature, subject to prior amortization requirements, in December 2029, and are also guaranteed by Doral Financial but are not secured by a mortgage on the property.

k.		The Company routinely originates, securitizes and sells mortgage loans into the secondary market. As a result of this process, the Company typically retains the servicing rights and may retain interest-only strips. The Company’s retained interests are subject to prepayment and interest rate risks. The following tables show the changes in the Company’s mortgage servicing assets and interest-only strips for each of the periods shown:

		Effective July 1, 2002, an impairment charge 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 exceeds its fair value. Any fair value in excess of the cost basis of the servicing asset for a given stratum is not recognized. Prior to July 1, 2002, Doral Financial recorded impairment charges as a direct writedown of servicing assets.

		Changes in the impairment allowance for servicing assets were as follows:

At September 30, 2003, and based on recent prepayment experience, the expected weighted average life of the Company’s servicing assets was 5.6 years. Any projection of the expected weighted average life of servicing assets is limited by conditions that existed at the time the calculations were performed, and may not be indicative of actual amortization expense that will be recorded in future periods.

l.		At September 30, 2003 and December 31, 2002, money market investments included $301.5 million and $578.9 million, respectively, of pledged money market investments. Such money market investments secured short-term borrowings generally due within 90 days. At September 30, 2003 and December 31, 2002, the carrying value of securities purchased under resell agreements included in money market investments was $153.2 million and $259.8 million, respectively. The underlying securities were held on behalf of the Company by the dealers that arranged the transactions. At September 30, 2003 and December 31, 2002, the Company had repledged approximately $103.8 million and $244.5 million, respectively, of the underlying securities.

m.		Effective January 1, 2003, the Company expenses the fair value of stock options granted to employees using the “modified prospective” method described in SFAS No. 148. Under this method, the Company expenses the fair value of all employee stock options granted after January 1, 2003, as well as the unvested portions of previously granted options. The before-tax expense associated with expensing stock options for the third quarter and first nine months of 2003 was approximately $1.1 million and $3.4 million, respectively. During 2002, the Company used the intrinsic value method to account for its stock option plan. Under the intrinsic value-based method, compensation expense is recognized for the excess, if any, of the quoted market price of the stock on the grant date over the amount an employee must pay to acquire the stock. The Company did not recognize any compensation cost in 2002 because the exercise price of the options equaled the quoted market price of the stock on the date of grant.

The following table illustrates the effect on net income and earnings per common share if compensation had been recognized using the fair value method in the third quarter and first nine months of 2002.

n.		Guarantees

		In November 2002, the Financial Accounting Standards Board’s (“FASB”) issued Interpretation No. 45, (“FIN 45”) “Guarantor’s Accounting and Disclosure Requirements for Guarantees.” This interpretation requires a guarantor of certain types of guarantees to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The provisions for initial recognition are effective for guarantees that are issued or modified after December 31, 2002. As of September 30, 2003, the Company had outstanding $3.2 million in commercial and financial standby letters of credit. The adoption of FIN No. 45 did not have a material impact on Doral Financial’s Consolidated Financial Statements.

o.		Recent Accounting Pronouncements

		In January 17, 2003, the FASB issued Interpretation No. 46 (“FIN 46”). This interpretation provides guidance on how to identify a variable interest entity and determine when the assets, liabilities, noncontrolling interests and results of operations of a variable interest entity should be consolidated by the primary beneficiary. The primary beneficiary is the enterprise that will absorb a majority of the variable entity’s expected losses or receive a majority of the expected residual returns as a result of holding variable interests. The recognition and measurement provisions of this Interpretation apply at inception any variable interest entity formed after January 31, 2003, and become effective for existing variable interest entities on the first interim or annual reporting period beginning after June 15, 2003. The Company adopted the provisions of FIN 46 for variable interest entities formed on or after February 1, 2003, which did not have a material effect on the Company’s Consolidated Financial Statements. The Company adopted the provisions of FIN 46 for existing variable interest entities on July 1, 2003, however, the adoption of this Interpretation has not had a material impact on the Company’s financial position or results of operations.

		Derivatives and Hedging Activities. In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 primarily provides clarification on the definition of derivative instruments within the scope of FASB Statement No. 133. Generally, this Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this statement did not have a material impact on Doral Financial’s Consolidated Financial Statements.

		Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The provisions of this statement are effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have any impact on Doral Financial’s Consolidated Financial Statements.

p.		Certain amounts reflected in the 2002 Consolidated Financial Statements have been reclassified to conform to the presentation for 2003.

q.		Subsequent Event

		On October 15, 2003, 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 will be effected in the form of a stock dividend of one additional share of common stock to be issued on December 11, 2003, for every two shares of common stock held of record on November 21, 2003. Fractional shares will be settled in cash on the basis of the average of the high and low sales price of the common stock on November 21, 2003. The stock split will require retroactive restatement of all historical per share data in the fourth quarter ended December 31, 2003. Set forth below are Doral Financial’s pro-forma per share data giving retroactive effect to the three-for-two stock split in the form of a stock dividend announced:

On October 8, 2003, Doral Financial Corporation sold 180,000 additional shares of its 4.75% Perpetual Cumulative Convertible Preferred Stock (liquidation preference $250 per share) at an aggregate price to the ultimate purchasers of $45.0 million in a private offering to qualified institutional buyers pursuant to Rule 144A. The shares were sold pursuant to an option granted in conjunction with the sale to the initial purchasers of 1,200,000 shares of preferred stock that closed on September 29, 2003.

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

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 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 31st year of operations. Doral Financial’s core business remains mortgage banking and it continues to be Puerto Rico’s largest residential mortgage lender. The volume of loans originated and purchased by Doral Financial during the quarters ended September 30, 2003 and 2002 was approximately $1.7 billion and $1.3 billion, respectively. For the nine month periods ended September 30, 2003 and 2002, the volume of loans originated and purchased was approximately $4.7 billion and $3.8 billion, respectively. Doral Financial’s mortgage servicing portfolio increased to approximately $12.3 billion as of September 30, 2003, from $10.9 billion as of September 30, 2002. 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 loan originations by purchases of mortgage loans on a servicing released basis.

Doral Financial maintains a substantial portfolio of mortgage-backed securities. At September 30, 2003, Doral Financial held securities for trading with a fair market value of $815.2 million, approximately $262.2 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 are classified as available for sale or held to maturity. As of September 30, 2003, Doral Financial held approximately $1.7 billion in securities that were classified as held to maturity and reported at amortized cost. As of September 30, 2003, Doral Financial also held $2.5 billion 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.

In recent years, Doral Financial has diversified its revenue sources by expanding into new lines of business as well as expanding geographically by opening a federal thrift institution in New York City. Doral Financial has expanded into new lines of business such as banking and insurance that have natural synergies with its core mortgage lending business and that offer attractive cross-marketing opportunities. These new lines of business are making significant contributions to Doral Financial’s consolidated earnings.

For the quarters ended September 30, 2003 and 2002, Doral Financial’s banking subsidiaries contributed approximately $14.3 million and $37.3 million, or 18% and 64%, respectively, to the Company’s consolidated net income. The reduction in contribution to the consolidated net income was primarily due to decreased investments gains in Doral Bank PR and its international banking entity subsidiary. For the first nine months of 2003 and 2002, Doral Financial’s banking subsidiaries contributed approximately $93.0 million and $69.7 million or 41% and 44%, respectively, to Doral Financial’s consolidated net income.

The Company’s institutional securities operation is conducted through Doral Securities, a NASD member subsidiary headquartered in San Juan, Puerto Rico, that sells securities to institutional customers and provides investment banking services. For the quarters ended September 30, 2003 and 2002, Doral Securities had net income of approximately $1.8 million and $1.7 million, respectively. For the nine month periods ended September 30, 2003 and 2002, Doral Securities’ net income was approximately $4.8 million and $3.2 million, respectively.

Doral Financial conducts its insurance agency activities in Puerto Rico through Doral Agency. For the quarters ended September 30, 2003 and 2002, Doral Agency’s net income was approximately $1.6 million and $1.3 million, respectively. For the nine month periods ended September 30, 2003 and 2002, Doral Agency’s net income was approximately $4.4 million and $3.6 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 insurance agency activities segments, please refer to Note f 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 units and Doral Overseas, an international banking entity, are organized as operating divisions within the parent company. As of September 30, 2003, Doral Financial had assets of $2.9 billion at the parent company level (excluding investment in consolidated subsidiaries).

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make a number of judgements, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the Company’s Consolidated Financial Statements and accompanying notes. The Company believes that the judgments, estimates and assumptions used in the preparation of its Consolidated Financial Statements are appropriate given the factual circumstances as of September 30, 2003. However, given the sensitivity of Doral Financial’s Consolidated Financial Statements to these estimates, the use of other judgments, estimates and assumptions could result in material differences in the Company’s results of operations or financial condition.

Various elements of Doral Financial’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. For a discussion regarding Doral Financial’s critical accounting policies, particularly for those relating to its mortgage securitization and sales activities and the ongoing valuation of retained interests, particularly mortgage servicing rights and IOs, that arise from those activities and are critical to an understanding of the Company’s Consolidated Financial Statements, 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, 2002.

RESULTS OF OPERATIONS FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

Doral Financial’s results of operations have historically been influenced primarily by the level of demand for mortgage loans, which is affected by external factors such as prevailing mortgage rates and the strength of the Puerto Rico housing market. Changes in interest rates also significantly influence Doral Financial’s results of operations by affecting the difference between the rates it earns on its interest-earning assets and the rates it pays on its interest-bearing liabilities, as well as impacting the gains and losses it obtains from its mortgage loan sales and trading activities.

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.

Doral Financial’s net income for the quarter ended September 30, 2003 was $81.7 million, an increase of $23.4 million, or 40%, from $58.3 million for the comparable 2002 period. For the first nine months of 2003 and 2002, the Company’s net income amounted to $226.6 million and $156.8 million, respectively, an increase of 45%. Consolidated results include the operations of Doral Bank PR and Doral Bank NY, Doral Financial’s retail banking units, which contributed approximately $93.0 million to Doral Financial’s consolidated net income for the nine months ended September 30, 2003, compared to $69.7 million for the respective 2002 period. The contribution of the banking sector includes the investment activities of Doral International, Inc., Doral Bank PR’s international banking subsidiary. Doral Securities, Doral Financial’s institutional securities unit, contributed approximately $4.8 million to consolidated net income for the nine months ended September 30, 2003, compared to $3.2 million for the respective 2002 period. Doral Agency, Doral Financial’s insurance agency, contributed $4.4 million to consolidated net income for the nine months ended September 30, 2003 compared to $3.6 million for the respective 2002 period. Diluted earnings per common share for the third quarter of 2003 were $1.05, an increase of 42% over the $0.74 per diluted share recorded for the same period a year ago. Diluted earnings per common share for the nine months ended September 30, 2003 were $2.91, an increase of 44% over the $2.02 per diluted share recorded for the same period a year ago.

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 2003 and 2002 was $42.9 million and $39.2 million, respectively, an increase of 9%. For the first nine months of 2003 and 2002 net interest income amounted to $124.1 million and $112.8 million, respectively, an increase of 10%. The increase in net interest income for the third quarter and first nine months of 2003, compared to the respective 2002 periods, was due to an increase in Doral Financial’s average balance of net interest-earning assets, partially offset by a reduction in the interest rate spread. The contraction of the spread, which declined by 34 basis points from 1.95% for the third quarter of 2002 to 1.61% for the third quarter of 2003 and 26 basis points from 1.96% for the first nine months of 2002 to 1.70% for the first nine months of 2003, reflects an accelerated amortization of IOs due to actual and anticipated higher levels of prepayment activity, resulting in a reduction in the average yields of IOs from 18.08% for the third quarter of 2002 to 6.79% for the third quarter of 2003, and from 15.12% for the first nine months of 2002 to 8.72% for the first nine months of 2003. Lower yields were partially offset by a reduction in the average cost of interest-bearing liabilities, which decreased from 4.20% for the third quarter of 2002 to 3.36% for the third quarter of 2003 and from 4.23% for the first nine months of 2002 to 3.61% for the first nine months of 2003, due to decreases in interest rates paid by the Company on its short-term borrowings.

The Company’s retail banking subsidiaries contributed $27.1 million to the consolidated net interest income for the third quarter of 2003, compared to $20.7 million for the third quarter of 2002. During the first nine months of 2003, the Company’s retail banking subsidiaries contributed approximately $79.2 million to the consolidated net interest income, compared to $67.4 million for the first nine months of 2002.

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,

			2003							2002

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

ASSETS:
Interest-earning assets:
	Total loans⁽¹⁾		$	3,199,179	$	53,374		6.62	%	$	2,970,270	$	52,467		7.01	%
	Mortgage-backed securities⁽²⁾			1,219,272		13,977		4.55	%		1,253,381		19,674		6.23	%
	Interest-only strips⁽²⁾			478,693		8,190		6.79	%		309,949		14,121		18.08	%
	Investment securities			2,703,306		31,575		4.63	%		939,125		13,694		5.79	%
	Money market investments			1,169,386		2,636		0.89	%		1,323,820		5,413		1.62	%

		Total interest-earning assets/interest income		8,769,836	$	109,752		4.97	%		6,796,545	$	105,369		6.15	%

Total non-interest-earning assets				616,139							606,596

Total assets			$	9,385,975						$	7,403,141

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities:
	Deposits		$	2,742,348	$	19,415		2.81	%	$	2,126,517	$	18,778		3.50	%
	Repurchase agreements			3,033,273		21,148		2.77	%		2,379,665		23,322		3.89	%
	Advances from FHLB			1,256,500		12,400		3.92	%		977,752		10,599		4.30	%
	Loans payable			245,265		1,488		2.41	%		205,753		1,639		3.16	%
	Notes payable			610,102		12,368		8.04	%		561,900		11,785		8.32	%

		Total interest-bearing liabilities/interest expense		7,887,488	$	66,819		3.36	%		6,251,587	$	66,123		4.20	%

Total non-interest-bearing liabilities				299,610							188,865

Total liabilities				8,187,098							6,440,452
Stockholders’ equity				1,198,877							962,689

Total liabilities and stockholders’ equity			$	9,385,975						$	7,403,141

Net interest-earning assets			$	882,348						$	544,958
Net interest income					$	42,933						$	39,246
Interest rate spread⁽³⁾								1.61	%						1.95	%
Interest rate margin⁽⁴⁾								1.94	%						2.29	%
Net interest-earning assets ratio								111.19	%						108.72	%

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


			NINE MONTH PERIOD ENDED SEPTEMBER 30,

			2003							2002

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

ASSETS:
Interest-earning assets:
	Total loans⁽¹⁾		$	3,228,301	$	162,705		6.74	%	$	2,851,064	$	148,983		6.99	%
	Mortgage-backed securities⁽²⁾			1,196,811		50,034		5.59	%		1,405,537		64,355		6.12	%
	Interest-only strips⁽²⁾			428,959		27,990		8.72	%		268,943		30,412		15.12	%
	Investment securities			2,094,316		77,010		4.92	%		1,125,295		51,915		6.17	%
	Money market investments			1,321,950		10,827		1.10	%		997,800		12,117		1.62	%

		Total interest-earning assets/interest income		8,270,337	$	328,566		5.31	%		6,648,639	$	307,782		6.19	%

Total non-interest-earning assets				700,460							591,410

Total assets			$	8,970,797						$	7,240,049

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities:
	Deposits		$	2,557,874	$	56,475		2.95	%	$	1,985,966	$	54,242		3.65	%
	Repurchase agreements			2,869,815		68,090		3.17	%		2,585,526		75,239		3.89	%
	Advances from FHLB			1,260,676		37,095		3.93	%		878,766		29,621		4.51	%
	Loans payable			254,117		4,869		2.56	%		193,048		4,397		3.05	%
	Notes payable			626,630		37,921		8.09	%		521,528		31,474		8.07	%

		Total interest-bearing liabilities/interest expense		7,569,112	$	204,450		3.61	%		6,164,834	$	194,973		4.23	%

Total non-interest-bearing liabilities				270,655							216,470

Total liabilities				7,839,767							6,381,304
Stockholders’ equity				1,131,030							858,745

Total liabilities and stockholders’ equity			$	8,970,797						$	7,240,049

Net interest-earning assets			$	701,225						$	483,805
Net interest income					$	124,116						$	112,809
Interest rate spread⁽³⁾								1.70	%						1.96	%
Interest rate margin⁽⁴⁾								2.01	%						2.27	%
Net interest-earning assets ratio								109.26	%						107.85	%

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.


		QUARTER ENDED
		SEPTEMBER 30,

		2003 COMPARED TO 2002
		INCREASE (DECREASE) DUE TO:

		VOLUME			RATE			TOTAL

INTEREST INCOME VARIANCE
	Total loans	$	4,012		$	(3,105	)	$	907
	Mortgage-backed securities		(531	)		(5,166	)		(5,697	)
	Interest-only strips		7,627			(13,558	)		(5,931	)
	Investment securities		25,537			(7,656	)		17,881
	Money market investments		(625	)		(2,152	)		(2,777	)

TOTAL INTEREST INCOME VARIANCE			36,020			(31,637	)		4,383

INTEREST EXPENSE VARIANCE
	Deposits		5,389			(4,752	)		637
	Repurchase agreements		6,356			(8,530	)		(2,174	)
	Advances From FHLB		2,997			(1,196	)		1,801
	Loans payable		312			(463	)		(151	)
	Notes payable		1,003			(420	)		583

TOTAL INTEREST EXPENSE VARIANCE			16,057			(15,361	)		696

NET INTEREST INCOME VARIANCE		$	19,963		$	(16,276	)	$	3,687


		NINE MONTH PERIOD ENDED
		SEPTEMBER 30,

		2003 COMPARED TO 2002
		INCREASE (DECREASE) DUE TO:

		VOLUME			RATE			TOTAL

INTEREST INCOME VARIANCE
	Total loans	$	19,777		$	(6,055	)	$	13,722
	Mortgage-backed securities		(9,581	)		(4,740	)		(14,321	)
	Interest-only strips		18,146			(20,568	)		(2,422	)
	Investment securities		44,841			(19,746	)		25,095
	Money market investments		3,938			(5,228	)		(1,290	)

TOTAL INTEREST INCOME VARIANCE			77,121			(56,337	)		20,784

INTEREST EXPENSE VARIANCE
	Deposits		15,656			(13,423	)		2,233
	Repurchase agreements		8,294			(15,443	)		(7,149	)
	Advances from FHLB		12,918			(5,444	)		7,474
	Loans payable		1,397			(925	)		472
	Notes payable		6,361			86			6,447

TOTAL INTEREST EXPENSE VARIANCE			44,626			(35,149	)		9,477

NET INTEREST INCOME VARIANCE		$	32,495		$	(21,188	)	$	11,307

Total interest income increased from $105.4 million during the third quarter of 2002, to $109.8 million during the third quarter of 2003, an increase of 4%. For the nine months ended September 30, 2003 interest income increased by approximately $20.8 million to $328.6 million compared to $307.8 million for the first nine months of 2002. 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 $6.6 billion at September 30, 2002 to $8.3 billion at September 30, 2003.

Interest income on loans increased by approximately $907,000 or 2% during the third quarter of 2003, compared to the respective 2002 period. For the first nine months of 2003, interest income on loans increased by $13.7 million or 9% as compared to the respective 2002 period. The increases during 2003 reflect an increase in the level of loans held by Doral Financial compared to 2002, due to the increased volume of loan originations and purchases.

Interest income on mortgage-backed securities for the third quarter of 2003 decreased by approximately $5.7 million or 29% compared to the respective 2002 period. For the quarters ended September 30, 2003 and 2002, interest income on mortgage-backed securities amounted to $14.0 million and $19.7 million, respectively. During the first nine months of 2003, interest income on mortgage-backed securities was $50.0 million, versus $64.4 million for the comparable 2002 period. The results for the 2003 periods reflect a decrease in the Company’s average balance of mortgage-backed securities, which decreased approximately $34.1 million for the third quarter of 2003 and $208.7 million for the first nine months of 2003, compared to the respective 2002 periods. The decrease in interest income on mortgage-backed securities during 2003 reflects a higher volume of sales of instruments with lower coupon rates during these periods, including a

bulk sale of approximately $250 million in Puerto Rico GNMA securities to a local mutual fund, during the second quarter of 2003. The Company continues to maximize tax-exempt interest income by holding a significant amount of tax-exempt Puerto Rico GNMA securities and U.S. FHLMC/FNMA mortgage-backed securities. 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 those securities.

Interest income on IOs decreased by approximately $5.9 million to $8.2 million during the third quarter of 2003, from $14.1 million for the respective 2002 period. For the first nine months of 2003, interest income on IOs decreased by $2.4 million or 8%, as compared to the respective 2002 period. The decreases during 2003 periods when compared to the respective 2002 periods reflect a reduction in average yields, from 18.08% for the third quarter of 2002 to 6.79% for the third quarter of 2003 and from 15.12% for the first nine months of 2002 to 8.72% for the first nine months of 2003, which reflects an accelerated amortization of IOs due to actual and anticipated higher levels of prepayment activity as a result of the continuing low mortgage rate environment. See “Amortization and Impairment of Servicing Assets and Valuation of IOs.” However, actual cash flow obtained on the Company’s portfolio of IOs, particularly its floating rate IOs, increased to $30.0 million for the third quarter of 2003, compared to $22.4 million for the third quarter of 2002. For the first nine months of 2003, actual cash flow obtained from the Company’s portfolio of IOs amounted to $83.6 million, compared to $61.7 million for the respective 2002 period. Under floating rate IOs, the purchaser of a mortgage pool is entitled to a pass-through rate based on a floating rate tied to short-term LIBOR rates. The Company is entitled to retain the difference between the floating rate paid to the investor and the actual amount of interest received from the underlying mortgage loans. As short-term interest rates decrease, the spread received on the Company’s retained interest increases. At the same time, the value of the IOs is adversely affected by accelerated prepayments also caused by the lower interest rates. The increase in actual cash flow obtained on IOs was related in part to the increase in the average balance of IOs, which increased from $309.9 million during the third quarter of 2002 to $478.7 million during the third quarter of 2003 and from $268.9 million for the first nine months of 2002 to $429.0 million for the first nine months of 2003 and to the lower LIBOR rates experienced during the first nine months of 2003. The increase in interest-only strips resulted from a higher volume of loan sales and securitization activities during 2003.

Interest income on investment securities increased by $17.9 million from the third quarter of 2002 to the third quarter of 2003. For the first nine months of 2003, interest income on investment securities increased by $25.1 million or 48%, as compared to the respective 2002 period. The increase in interest income on investment securities during these periods reflects Doral Financial’s strategy to increase its tax-exempt interest income by investing in U.S. Treasury and agency securities, the interest on which is tax-exempt to the Company under Puerto Rico law and is not subject to U.S. income taxation because of Doral Financial’s status as a foreign corporation for U.S. income tax purposes. The average balance of investment securities increased from $939.1 million for the third quarter of 2002 to $2.7 billion for the third quarter of 2003. For the first nine months of 2003 the average balance of investment securities was $2.1 billion compared to $1.1 billion for the first nine months of 2002, an increase of 86%. The Company’s higher balances in investment securities was partially offset by a reduction in the average yield of 116 basis points and 125 basis points for the third quarter and first nine months of 2003, respectively, as compared to the corresponding 2002 periods. These reductions reflect that yields on debt securities continued to move downward from the higher interest levels in effect in the early part of 2002 as higher yielding securities sold, called or matured were replaced by lower yielding securities.

Interest income on money market investments decreased by $2.8 million from the third quarter of 2002 to the third quarter of 2003. For the first nine months of 2003, interest income on money market investments decreased by $1.3 million or 11%, as compared to the respective 2002 period. Money market investments consist of fixed income securities whose original maturity is less than three months including overnight deposits, term deposits, and reverse repurchase agreements. The decrease for the 2003 periods reflects lower short-term interest rates. The average yield on money market investments declined by 73 basis points from 1.62% for the third quarter of 2002 to 0.89% for the third quarter of 2003 and 52 basis points from 1.62% for the first nine months of 2002 to 1.10% for the first nine months of 2003.

Total interest expense increased to $66.8 million during the third quarter of 2003, from $66.1 million for the respective 2002 period, an increase of 1%. Total interest expense for the first nine months of 2003 was $204.5 million, compared to $195.0 million for the same period of 2002, an increase of 5%. The increase in interest expense for the 2003 periods was due to an increased volume of borrowings to finance Doral Financial’s loan production and investment activities that was partly offset by a decrease in the average cost of borrowings due to the low interest rate environment. Average interest-bearing liabilities increased to $7.6 billion at an average cost of 3.61% for the nine month period ended September 30, 2003, compared to $6.2 billion at an average cost of 4.23% for the nine month period ended September 30, 2002.

Interest expense on deposits amounted to $19.4 million during the third quarter of 2003, an increase of 3% as compared to the respective 2002 period. For the first nine months of 2003, interest expense on deposits increased by $2.2 million or 4%, as compared to the respective 2002 period. The increase in interest expense on deposits reflects a larger deposit base held at Doral Financial’s retail banking subsidiaries that was partly offset by a decrease in the average cost of borrowings. The average balance of deposits increased to $2.6 billion for the nine month period ended September 30, 2003, from $2.0 billion for the nine month period ended September 30, 2002. The average interest cost on deposits was 2.81% and 2.95%, respectively, for the quarter and nine month period ended September 30, 2003, compared to 3.50% and 3.65% for the respective 2002 periods.

Interest expense related to securities sold under agreements to repurchase decreased by $2.2 million or 9% during the third quarter of 2003 compared to the same period of 2002. During the first nine months of 2003 the interest expense related to securities sold under agreements to repurchase was $68.1 million versus $75.2 million for the corresponding 2002 period, a decrease of 10%. The decrease in interest expense on securities sold under agreements to repurchase during these periods reflected lower borrowing costs, as compared to the respective 2002 period. The weighted average interest rate cost of borrowings under repurchase agreements was 2.77% and 3.89% for the third quarter of 2003 and 2002, respectively, and 3.17% and 3.89% for the nine month periods ended September 30, 2003 and 2002, respectively.

Interest expense on advances from FHLB increased by $1.8 million, or 17%, for the third quarter of 2003 as compared to the respective 2002 period. For the first nine months of 2003, interest expense on advances from FHLB increased by 25% to $37.1 million from $29.6 million for the respective 2002 period. The increase in interest expense on advances from FHLB during these periods reflects an increase in the average balance of borrowings to finance the Company’s retail banking operations. The average balance of advances from FHLB increased to $1.3 billion at an average cost of 3.93% for the nine month period ended September 30, 2003, compared to $878.8 million at an average cost of 4.51% for the nine month period ended September 30, 2002.

Interest expense related to loans payable amounted to $1.5 million for the second quarter of 2003, compared to $1.6 million for the comparative 2002 period. For the first nine months of 2003 interest expense related to loans payable was $4.9 million, an increase of 11% compared to $4.4 million for the same period of 2002. The increase in interest expense on loans payable was principally due to the increase in the average balance of loans payable outstanding from $193.0 million to $254.1 million for the nine month periods ended September 30, 2002 and 2003, respectively. The increase in loans payable was partly offset by a decrease in the average cost of borrowings. The weighted-average interest rate cost for borrowings under Doral Financial’s loans payable was 2.41% and 3.16% for the third quarter of 2003 and 2002, respectively, and 2.56% and 3.05% for the nine month periods ended September 30, 2003 and 2002, respectively.

Interest expense on notes payable was $12.4 million for the third quarter of 2003, compared to $11.8 million for the same period a year ago, an increase of 5%. For the first nine months of 2003 interest expense on notes payable was $37.9 million, an increase of 20% compared to $31.5 million for the same period of 2002. The increase in interest expense on notes payable is due to the increase in the average balance, for the first nine months of 2003, of $105.1 million from September 30, 2002 to September 30, 2003. During the second quarter of 2002, Doral Financial closed the sale of $30.0

million of its 7.00% Senior Notes due 2012, $40.0 million of its 7.10% Senior Notes due 2017 and $30.0 million of its 7.15% Senior Notes due 2022. The notes were sold at a price to the public of 97.976% of the principal amount thereof, resulting in proceeds to Doral Financial, after selling commissions, but before expenses, of approximately $97.7 million.

The provision for loan losses 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, an assessment of individual problem loans, the estimated value of an equity in 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 or if credit losses increase substantially from the assumptions used by Doral Financial in determining the allowance for loan losses. Unanticipated increases in the allowance for loan losses could result in reductions in Doral Financial’s net income. As of September 30, 2003, more than 97% of the loan portfolio was secured 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 made provisions to its allowance for loan losses of $2.9 million and $11.3 million, respectively, for the quarter and nine months period ended September 30, 2003, as compared to $2.1 million and $3.8 million for the respective 2002 periods. The increase from 2002 to 2003 is primarily related to an increase in the size of Doral Financial’s loan portfolio as well as an increase in the number of construction loans, commercial real estate and other commercial loans that carry a higher allowance due to the inherent risk associated with these type of lending activities. The increase also reflects an increase in non-performing loans as well as in the allowance for construction loans in light of current economic conditions. See “Non-Performing Assets and Allowance for Loan Losses.”

Net Gain on Mortgage Loan Sales and Fees. Net gain from mortgage loan sales and fees increased by 86% during the third quarter of 2003 to $98.6 million, compared to $53.0 million for the same period of 2002. For the nine month periods ended September 30, 2003 and 2002, mortgage loan sales and fees were $274.0 million and $157.2 million, respectively, an increase of 74%. The increase for 2003 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 IOs in connection with bulk sales of mortgage loans to institutional investors. See “Amortization and Impairment of Servicing Assets and Valuation of IOs.”

Loan sales and securitizations were $1.4 billion for the third quarter of 2003, compared to $891.7 million for the third quarter of 2002. For the nine months ended September 30, 2003 loan sales were $3.8 billion, compared to $2.7 billion for the respective 2002 period. Doral Financial recognized IOs as part of its sales activities of $75.0 million and $191.1 million for the third quarter and first nine months of 2003, respectively, compared to $48.8 million and $139.4 million for the respective 2002 periods. During the third quarter of 2003, Doral Financial also recorded $15.6 million in connection with the recognition of mortgage servicing rights as part of its loan sale and securitization activities, compared to $7.1 million for the respective 2002 period. For the first nine months of 2003, Doral Financial recognized $34.1 million in mortgage servicing rights, compared to $25.8 million for the respective 2002 period. Loan origination fees were $18.5 million and $53.0 million for the third quarter and first nine months of 2003, respectively, compared to $14.2 million and $48.5 million for the comparable 2002 periods.

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 servicing fees on residential mortgage loans generally range from 0.25% to 0.44%, net of guarantee fees, of the declining outstanding principal amount of the serviced loan. As of September 30, 2003, the weighted average servicing fee rate for the entire portfolio was 0.32%. 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. For the quarter ended September 30, 2003, net servicing income was approximately $933,000 compared to a loss of $5.6 million for the corresponding period of 2002. For the nine month periods ended September 30, 2003 and 2002, net servicing losses were approximately $11.5 million and $6.3 million, respectively.

The net servicing loss for the first nine months of 2003 was the result of increased amortization and impairment of mortgage servicing assets. The increase in amortization was the result of a larger servicing portfolio and the increase in impairment related to increases in prepayments due to declining mortgage interest rates. Total amortization and impairment charges for the third quarter and first nine months of 2003 were $8.0 million and $37.8 million, respectively, compared to $14.1 million and $31.9 million for the respective 2002 periods. Doral Financial recognized a net impairment charge of $10.3 million for the first nine months of 2003, due to the increase in prepayment estimates associated with falling interest rates. See Note k to the unaudited consolidated financial statements contained herein for additional information. Gross servicing fees remain at stable levels, amounting to $8.9 million for the third quarter of 2003, compared to $8.5 million for the third quarter of 2002. For the first nine months of 2003, gross servicing fees amounted to $26.2 million, compared to $25.6 million for the respective 2002 period. The Company’s mortgage servicing portfolio, including its own portfolio, was approximately $12.3 billion at September 30, 2003, compared to $10.9 billion as of September 30, 2002. The value of the servicing asset retained in the sale of a mortgage loan reduces the basis of the related mortgage loan and thereby results in increased “Net Gain on Mortgage Loans Sales and Fees” at the time of sale. During the quarter ended September 30, 2003 and 2002, Doral Financial recognized servicing assets of $15.6 million and $7.1 million, respectively, in connection with the sale of loans. For the first nine months of 2003 and 2002, Doral Financial recognized servicing assets of $34.1 million and $25.8 million, respectively, in connection with the sale of internally originated loans. Set forth below is a summary of the components of the net servicing income (loss):


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

(In thousands)		2003			2002			2003			2002

Servicing fees		$	6,480		$	6,257		$	19,244		$	19,253
Late charges			1,782			1,625			5,157			4,828
Prepayment penalties			1,416			1,127			3,947			3,044
Interest loss			(796	)		(543	)		(2,292	)		(1,688	)
Other servicing fees			61			16			176			115
Amortization and impairment of servicing assets			(8,010	)		(14,078	)		(37,761	)		(31,862	)

	Total net servicing income (loss)	$	933		$	(5,596	)	$	(11,529	)	$	(6,310	)

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, futures contracts and other derivative instruments used for interest rate management purposes. Trading activities for the quarter ended September 30, 2003 resulted in a gain of $15.4 million compared to $4.8 million for the third quarter of 2002. Gain on trading activities was related primarily to realized gains with respect to both trading securities and derivative instruments. Net realized gains on sale of trading securities and derivative instruments for the third quarter of 2003 was $21.1 million and $39.9 million, respectively, partly offset by unrealized losses on trading securities and derivative instruments of $10.0 million and $35.7 million, respectively. For the nine month periods ended September 30, 2003 trading activities resulted in a gain of $15.3 million compared to a loss of $6.9 million for the first nine months of 2002. Gain on trading activities for the first nine months of 2003 includes realized gains on sale of trading securities of $117.1 million compared to $59.2 million for the comparable 2002 period. Realized gains on sale of trading securities for the first nine months of 2003 was partially offset by a realized and unrealized losses of $28.8 million and $36.5 million, respectively on derivative instruments. For the first nine months of 2002 realized and unrealized losses on derivative instruments amounted to $37.1 million and $38.6 million, respectively. Trading activities for the quarters ended September 30, 2003 and 2002, included $10.0 million of unrealized losses and $2.7 million

of unrealized gains, respectively, on the value of its trading securities. Trading activities for the nine month periods ended September 30, 2003 and 2002 included $36.4 million of unrealized losses and $9.6 million of unrealized gains, respectively, on the value of its trading securities. Increased realized gains on trading securities during 2003 reflect increased volume of trading activities and higher profits, particularly in Doral Financial’s international banking entities as well as a pre-tax gain of approximately $12.2 million on bulk sale of $250 million Puerto Rico GNMAs. Net realized gains on sale of trading securities was $117.1 million for the nine months ended September 30, 2003 compared to $59.2 million for the 2002 period.

The value of Doral Financial’s trading securities and derivatives are generally very sensitive to interest rate changes and the reported fair values of certain of these assets such as IOs are based on assumptions regarding the direction of interest rates and prepayment rates on mortgage loans. As a result, changes in interest rates and prepayment rates for mortgage loans can result in substantial volatility in the components of the trading account. Doral Financial attempts to mitigate the risk to the value of its trading securities by entering into transactions involving the purchase of derivatives such as options and futures contracts. During 2002 and 2003, Doral Financial’s risk management strategy has been principally directed to protect the value of its securities and income from a rising interest rate scenario. During the early part of 2003 and 2002, Doral Financial has experienced losses on its derivatives because interest rates have remained at historic low levels. These losses have been generally offset by increases in realized gains on trading securities and gains on sale of mortgage loans. However net realized and unrealized gains on derivative instruments for the third quarter of 2003 amounted to $4.2 million compared to a loss of $45.5 million for the third quarter of 2002, positively impacted by the increase in the long-term interest rates experienced in this quarter. Set forth below is a summary of the components of gains and losses from trading activities:


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

(In thousands)	2003			2002			2003			2002

Net realized gains on sales of trading securities	$	21,146		$	47,581		$	117,059		$	59,185
Net unrealized (losses) and gains on trading securities		(9,994	)		2,721			(36,428	)		9,602
Net realized and unrealized gains (losses) on derivative instruments		4,232			(45,496	)		(65,297	)		(75,680	)

Total	$	15,384		$	4,806		$	15,334		$	(6,893	)

Gain (Loss) on Sale of Investment Securities. Gain (loss) on sale of investment securities represents the impact on income of transactions involving the sale of securities classified as available for sale. For the third quarter of 2003, sale of investment securities resulted in a loss of $10.4 million compared to a gain of $10.1 million for the corresponding 2002 period, a decrease mostly related to the sale of securities whose market value was negatively impacted by the increase in the long-term interest rates experienced during the quarter. However increased sales activities resulted in proceeds from sales of securities available for sale of $5.6 billion for the first nine months of 2003 compared to $5.1 billion for the first nine months of 2002. Gain on sale of investment securities amounted to $3.7 million for the first nine months of 2003 compared to $16.1 million for the first nine months of 2002.

Commissions, Fees and Other Income. Commissions, Fees and Other income increased 12% during the third quarter of 2003 from $5.7 million for the quarter ended September 30, 2002 to $6.4 million for the quarter ended September 30, 2003. For the first nine months of 2003, commissions, fees and other income increased 31%, compared to the respective 2002 period. The increase during 2003 was due primarily to increased commissions and fees earned by Doral Financial’s retail banking, institutional securities and insurance agency operations. Set forth below is a summary of Doral Financial’s principal sources of commissions, fees and other income.


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

	2003		2002		2003		2002

Deposit and other retail banking fees	$	3,047	$	2,015	$	8,067	$	5,570
Brokerage and asset management fees and commissions		912		744		2,626		1,289
Insurance agency commissions		2,039		1,759		5,762		5,027
Other income		355		1,144		3,538		3,330

Total	$	6,353	$	5,662	$	19,993	$	15,216

Total non-interest expenses increased by 35% during the third quarter ended September 30, 2003, compared to the respective 2002 period. This 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 quarter and nine months ended September 30, 2003, compensation and benefits, which is the largest component of non-interest expense, increased by 57% and 59%, respectively, due mainly to increases in headcount as well as increases in the costs of compensation and fringe benefits. For the first nine months of 2003, compensation expense also includes $3.4 million, associated with the expensing of the fair value of stock options. As of September 30, 2003, Doral Financial had 2,318 employees compared to 2,000 employees as of September 30, 2002. For the nine month period ended September 30, 2003 total non-interest expenses increased by 38% from the comparable 2002 period.

Income taxes include Puerto Rico income taxes as well as applicable federal and state taxes. As a Puerto Rico corporation, Doral Financial is generally required to pay federal income tax only with respect to its income derived from the active conduct of a trade or business in the United States (excluding Puerto Rico) and certain investment income derived from U.S. assets. The maximum statutory corporate income tax rate in Puerto Rico is 39%. For the first nine months of 2003 and 2002, the effective income tax rate of Doral Financial was 18% and 15%, respectively. The increase in the effective tax rate for 2003 reflected increased pre-tax income from the Company’s non-tax advantaged operations including its insurance agency and institutional securities operations.

The lower effective tax rates (compared to the maximum statutory rate) were primarily the result of the tax-exemption enjoyed by Doral Financial on 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. Doral Financial also invests in U.S. Treasury and agency securities that are exempt from Puerto Rico taxation and are not subject to federal income taxation because of the portfolio interest deduction to which Doral Financial is entitled as a foreign corporation. In addition, Doral Financial uses its international banking entities to invest in various U.S. securities, the interest income and gain on which is exempt from Puerto Rico income taxation and excluded from federal income taxation on the basis of the portfolio interest deduction in the case of interest, and in the case of capital gains because the gains are sourced outside the United States. Net income tax savings to Doral Financial attributable to tax-exempt income amounted to approximately $55.6 million and $56.1 million for the nine month periods ended September 30, 2003 and 2002, 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 U.S. corporations

and are subject to U.S. income-tax on their income derived from all sources. For the first nine month periods ended September 30, 2003 and 2002, the provision for income taxes for the Company’s U.S. subsidiaries amounted to approximately $2.1 million and $4.6 million, respectively.

As part of its mortgage sale activities, Doral Financial generally retains the right to service the mortgage loans it sells. Also in connection with the sale of non-conforming mortgage loan pools and, to a lesser extent, the sale of FNMA and FHLMC securities, Doral Financial retains the right to receive any interest payments on such loans above the contractual pass-through rate payable to the investor and also retains its compensation for servicing the loans or mortgage-backed securities. Doral Financial determines the gain on sale of a mortgage-backed security or loan pool by allocating the acquisition cost of the underlying mortgage loans between the mortgage-backed security or mortgage loan pool sold and its retained interests, based on their relative estimated fair values. The reported gain or loss is the difference between the cash proceeds from the sale of the security or mortgage pool and its allocated cost after allocating a portion of the cost to the retained interests.

Doral Financial’s sale and securitization activities generally result in the recording of two types of retained interests: mortgage-servicing rights (“MSRs”) and IOs. MSRs represent the estimated present value of the normal servicing fees (net of related servicing costs) expected to be received on the loan over the expected term of the loan. IOs represent the estimated present value of the excess of the weighted-average coupon of the loans underlying the mortgage pool sold over the sum of (1) the rate required to be paid to investors and (2) a normal servicing fee after adjusting such amount for expected losses and prepayments. The contractual rate payable to investors may be either a fixed or floating rate. In the case of non-conforming loans pools, it is generally a floating rate based on a spread over the 90-day London Interbank Offered Rate (“LIBOR”). MSRs are classified as servicing assets and IOs are classified as trading securities in Doral Financial’s Consolidated Statements of Financial Condition.

The determination of the fair values of MSRs and IOs at their initial recording and on an ongoing basis requires considerable management judgment. Unlike U.S. Treasury and agency mortgage-backed securities, the fair value of MSRs and IOs cannot be determined with precision because they are not traded in active securities markets. For MSRs, Doral Financial determines their initial fair values on the basis of prices paid for comparable mortgage servicing rights. Doral Financial also receives on a quarterly basis a third party valuation of its MSRs related to its FNMA, FHLMC and GNMA servicing portfolio. During the first nine months of 2003, the market prices used to value Doral Financial’s MSRs varied from 1.40% to 2.30% of the principal amount of the loans subject to the servicing rights, with servicing rights for GNMA (FHA/VA loans) mortgage-backed securities having higher values than comparable servicing rights for conventional loans. For the first nine months of 2002, the market prices used varied from 1.50% to 2.30%. The unamortized balance of Doral Financial’s servicing asset reflected in Doral Financial’s Consolidated Financial Statements as of September 30, 2003 and December 31, 2002 was $165.7 million and $159.9 million, respectively. 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, 2003 and 2002, please refer to Note k to the unaudited consolidated financial statements contained herein.

To determine the fair value of its IOs, Doral Financial, on a quarterly basis, obtains dealer quotes for comparable instruments and compares these quotes with external and internal valuations based on discounted cash flow models that incorporate assumptions regarding discount rates and mortgage prepayment rates. Doral Financial generally uses the lowest valuation obtained from these methods. 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 market multiple used by Doral Financial to value IOs ranged from 4.75 to 5.50 during the first nine months of 2003, compared to a range of 4.25 to 5.50 during the first nine months of 2002. As of September 30, 2003 and December 31, 2002, the carrying value of IOs and other residual interests retained in securitization transactions reflected in Doral Financial’s Consolidated Financial Statements was $491.2 million and $359.2 million, respectively. The initial recorded value of IOs is amortized over the expected life of the asset, and is recorded as a reduction of interest income. The amortization is based on the amount and timing of estimated future cash

flows to be received with respect to IOs. For additional information regarding the carrying value of Doral Financial’s IOs and amortization for the quarters and nine month periods ended September 30, 2003 and 2002, please refer to Note k to the unaudited consolidated financial statements contained herein.

The value of Doral Financial’s MSRs and IOs is very sensitive to interest rate changes. Once recorded, Doral Financial periodically evaluates its MSRs for impairment. Impairment is defined generally as a reduction in current fair value below carrying value. If the MSRs are impaired, the impairment is recognized in current period earnings. Prior to July 1, 2002, Doral Financial recorded impairment charges as a direct write down of servicing assets. Effective July 1, 2002, Doral Financial records impairment of MSRs through a valuation allowance. The valuation allowance is adjusted to reflect the amount, if any, by which the cost basis of MSRs exceeds their fair value. If the value of MSRs subsequently increases, the valuation allowance is decreased through a credit to current period earnings. As of September 30, 2003, the impairment allowance for MSRs was $19.4 million. As discussed above, changes in the fair value of IOs are recognized in current period earnings as a component of trading activities. In the case of MSRs, Doral Financial stratifies the mortgage loans underlying a mortgage pool or mortgage-backed security on the basis of their predominant risk characteristics, which Doral Financial has determined to be type of loan (government, conventional, conforming and non-conforming) interest rates and terms. Doral Financial measures MSR impairment by estimating the fair value of each stratum.

MSRs are also subject to periodic amortization. The amortization of MSRs is based on the amount and timing of estimated cash flows to be recovered with respect to the MSRs over their expected lives. To the extent changes in interest rates or prepayment rates warrant, Doral Financial will increase or decrease the level of amortization. Amortization of MSRs is recorded as a reduction of servicing income. For impairment and valuation purposes, Doral Financial continues to monitor changes in interest rates to determine whether the assumptions used to value the MSRs and IOs are still appropriate in light of market conditions. It also attempts to corroborate the values assigned to these assets through the use of internal valuation models that incorporate assumptions regarding the direction of interest rates and mortgage prepayment rates. The reasonableness of management’s assumptions is corroborated through valuations performed by independent third parties on a quarterly basis.

Doral Financial reviews all major valuation assumptions periodically using recent empirical and market data available, and makes adjustments where warranted.

Increases in prepayment rates or credit loss rates over anticipated levels used in calculating the value of IOs and MSRs 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.

Loan production includes loans internally originated by Doral Financial as well as residential mortgage loans purchased from third parties. The following table sets forth the number and dollar amount of Doral Financial’s loan production for the periods indicated:

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


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

		2003			2002			2003			2002

FHA/VA mortgage loans
	Number of loans		1,081			1,405			2,982			4,694
	Volume of loans	$	99,636		$	125,415		$	275,586		$	413,657
	Percent of total volume		6	%		9	%		6	%		11	%
	Average initial loan balance	$	92,170		$	89,263		$	92,416		$	88,125
Conventional conforming mortgage loans
	Number of loans		5,723			3,454			13,932			10,490
	Volume of loans	$	836,679		$	511,672		$	2,090,074		$	1,511,815
	Percent of total volume		50	%		39	%		44	%		40	%
	Average initial loan balance	$	146,196		$	148,139		$	150,020		$	144,120
Conventional non-conforming mortgage loans⁽¹⁾⁽²⁾
	Number of loans		5,759			6,849			17,876			17,362
	Volume of loans	$	512,491		$	523,631		$	1,681,700		$	1,350,611
	Percent of total volume		30	%		39	%		35	%		36	%
	Average initial loan balance	$	88,990		$	76,454		$	94,076		$	77,791
Other⁽³⁾
	Number of loans		576			534			1,651			1,473
	Volume of loans	$	232,193		$	168,545		$	700,173		$	494,947
	Percent of total volume		14	%		13	%		15	%		13	%
Total loans
	Number of loans		13,139			12,242			36,441			34,019
	Volume of loans	$	1,680,999		$	1,329,263		$	4,747,533		$	3,771,030

A substantial portion of Doral Financial’s total residential mortgage loan originations has consistently been composed of refinance loans. For the nine months ended September 30, 2003 and 2002, refinance loans represented approximately 64% and 55%, respectively, of the total dollar volume of mortgage loans originated (excluding loans purchased from third parties). 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 rather than interest savings and because interest cost on mortgage loans is tax deductible for borrowers. Also consumers tend to prefer long-term mortgage loan rates that are generally well below short-term higher cost consumer debt in periods of high interest rates.

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

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 2003 and 2002, Doral Financial purchased servicing rights to approximately $116.3 million and $83.1 million, respectively, in principal amount of mortgage loans. For the nine month periods ended September 30, 2003 and 2002, the Company purchased servicing rights to approximately $527.2 million and $275.2 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 J
MORTGAGE LOAN SERVICING
(Dollars in Thousands, Except for Average Size of Loans Prepaid)


		AS OF SEPTEMBER 30,

		2003			2002

COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END:
GNMA		$	2,805,134		$	3,185,036
FHLMC/FNMA			3,383,533			2,724,419
Doral Financial grantor trusts			39,796			53,432
Other conventional mortgage loans⁽¹⁾⁽²⁾			6,100,443			4,960,373

Total servicing portfolio		$	12,328,906		$	10,923,260

SELECTED DATA REGARDING MORTGAGE LOANS SERVICED:
Number of loans			147,999			140,061
Weighted average interest rate			7.11	%		7.47	%
Weighted average remaining maturity (months)			257			255
Weighted average servicing fee rate			.3197	%		.3378	%
Average servicing portfolio		$	11,886,186		$	10,583,886
Principal prepayments		$	1,851,879		$	1,187,139
Prepayments to average portfolio (annualized)			20.77	%		14.96	%
Average size of loans prepaid		$	92,106		$	76,937
Servicing assets, net reflected on Consolidated Statement of Financial Condition		$	165,720		$	153,053
DELINQUENT MORTGAGE LOANS AND PENDING FORECLOSURES AT PERIOD END:
60-89 days past due			1.14	%		1.30	%
90 days or more past due			2.17	%		2.04	%

Total delinquencies excluding foreclosures			3.31	%		3.34	%

Foreclosures pending			1.70	%		1.57	%

SERVICING PORTFOLIO ACTIVITY:
Beginning servicing portfolio		$	11,241,523		$	10,006,380
Add:
	Loans funded and purchased⁽³⁾		2,774,569			2,167,514
	Bulk servicing acquired		527,176			275,236
Less:
	Servicing sales transferred		2,450			59,219
	Run-off⁽⁴⁾		2,211,912			1,466,651

Ending servicing portfolio		$	12,328,906		$	10,923,260

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, 2003 and 2002, approximately 2% and 4%, respectively, of Doral Financial’s mortgage-servicing portfolio was related to mortgages secured by real property located on the U.S. mainland.

The amount of principal prepayments on mortgage loans serviced by Doral Financial was $1.9 billion and $1.2 billion for the nine months ended September 30, 2003 and 2002, respectively. This represents approximately 21% and 15%, 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.

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.

In the ordinary course of business, the Company sells loans on a partial or full recourse basis. When the Company sells a loan with recourse, it commits, if the loan defaults, to make payments to remedy the default or to repurchase the defaulted loan.

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. 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 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 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, leases receivable, 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 (“NPAs”) consist of loans past due 90 days and still accruing, loans on a non-accrual basis and other real estate owned. 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, all accrued but unpaid interest to date is fully reserved. 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, generally have low loan-to-value ratios, 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, 2003 and 2002, Doral Financial would have recognized $7.5 million and $5.0 million, respectively, in additional interest income had all delinquent loans been accounted for on an accrual basis. Doral Financial evaluates loans for impairment on a periodical basis. Impaired loans as of September 30, 2003 and December 31, 2002 amounted to approximately $31.1 million and $2.0 million, respectively. At September 30, 2003 an impairment allowance of approximately $300,000 was allocated to certain impaired loans with an aggregate principal outstanding balance of $1.5 million. No specific reserve was deemed necessary by the Company for the remaining impaired loans as of September 30, 2003 since such loans were fully collateralized and the Company expects to recover all principal and interest on such loans.

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.


			AS OF			AS OF
			SEPTEMBER 30, 2003			DECEMBER 31, 2002

Mortgage banking business:
	Non-accrual loans:
		Construction loans	$	2,897		$	497
		Residential mortgage loans		20,018			17,153
	Construction loans past due 90 days and still accruing			—			2,413
	Loans held-for-sale past due 90 days and still accruing⁽¹⁾			64,113			60,054
	OREO			14,322			12,375

	Total NPAs of mortgage banking business			101,350			92,492

Other lending activities through banking subsidiaries:
	Non-accrual loans:
		Construction loans		7,251			638
		Residential mortgage loans		10,975			8,746
		Commercial real estate		11,204			5,152
		Consumer loans		1,570			1,152
		Commercial non-real estate loans		596			676

	Total non-accrual loans			31,596			16,364
	Construction loans past due 90 days and still accruing			7,422			—
	Consumer loans past due 90 days and still accruing			302			—
	OREO			1,115			682

	Total NPAs of banking subsidiaries			40,435			17,046

	Total NPAs of Doral Financial (consolidated)		$	141,785		$	109,538

	Total NPAs of banking subsidiaries as a percentage of their loans portfolio, net, and OREO			1.49	%		0.62	%
	Total NPAs of Doral Financial as a percentage of consolidated total assets			1.32	%		1.30	%
	Total Non-performing loans to total loans			3.87	%		2.99	%
	Ratio of allowance for loan losses to total non-performing loans at end of period (consolidated)			21.67	%		18.91	%

The following table summarizes certain information regarding Doral Financial’s allowance for loan losses and losses on OREO, for both Doral Financial’s banking and mortgage banking business for the periods indicated.


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

		2003			2002			2003			2002

OREO:
Balance at beginning of period		$	2,050		$	2,280		$	2,772		$	1,365
Provision for losses			1,536			1,220			2,218			2,111
Net gains (losses), charge-offs and others			199			(391	)		(1,205	)		(367	)

Balance at end of period		$	3,785		$	3,109		$	3,785		$	3,109

Allowance for Loan Losses:
Balance at beginning of period		$	25,256		$	13,531		$	18,243		$	12,472
Provision for loan losses			2,913			2,055			11,309			3,792

Charge-offs:
	Mortgage loans held-for-sale		(17	)		—			(37	)		(90	)
	Construction loans		—			—			—			—
	Residential mortgage loans		(13	)		—			(13	)		—
	Commercial real estate loans		—			—			—			—
	Consumer loans		(743	)		(471	)		(2,270	)		(997	)
	Commercial non-real estate loans		(72	)		(78	)		(165	)		(98	)
	Other		—			(19	)		—			(116	)

Total charge-offs			(845	)		(568	)		(2,485	)		(1,301	)

Recoveries:
	Mortgage loans held-for-sale		—			—			—			—
	Construction loans		—			—			—			—
	Residential mortgage loans		—			—			—			14
	Commercial real estate loans		—			1			—			1
	Consumer loans		58			61			163			112
	Commercial non-real estate loans		2			11			8			14
	Other		—			—			—			11

Total recoveries			60			73			171			152

Net charge-offs			(785	)		(495	)		(2,314	)		(1,149	)

Other adjustments			—			12			146			(12	)

Balance at end of period⁽¹⁾		$	27,384		$	15,103		$	27,384		$	15,103

Allowance for loan losses as a percentage of total loans outstanding at the end of period			0.84	%		0.49	%		0.84	%		0.49	%
Net charge-offs to average loans outstanding			0.02	%		0.02	%		0.07	%		0.04	%

The allowance for loan losses relating to loans held by Doral Financial was $27.4 million at September 30, 2003, compared to $15.1 million as of September 30, 2002. The increase in the allowance was primarily the result of the increase in the size of the loan portfolio as well as an increase in the amount of construction, consumer, commercial real estate and other commercial loans that carry greater credit risk. The increase also reflects an increase in non-performing loans as well as an increase in the allowance for construction loans in light of current economic conditions.

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, 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, 2003, the monthly average amount of funds advanced by Doral Financial under such servicing agreements was approximately $14.4 million, compared to $8.6 million for the same period during 2002. To the extent the mortgage loans underlying Doral Financial’s servicing portfolio experience increased delinquencies, Doral Financial would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts. In recent years, Doral Financial has sold pools of delinquent FHA and VA mortgage loans. Under these arrangements, as under GNMA servicing requirements, Doral Financial is required to advance the scheduled payments whether or not collected from the underlying borrower. While Doral Financial expects to recover the amounts advanced through foreclosure or under the applicable FHA and VA programs, the amounts advanced tend to be greater than normal arrangements because of the delinquent status of the loans. As of September 30, 2003, the outstanding principal balance of such FHA/VA loans was $240.3 million and the aggregate monthly amounts of funds advanced by Doral Financial was $12.5 million. During the first nine months of 2003 and 2002, the Company sold approximately $107.1 million and $64.0 million, respectively, of residential FHA insured or VA guaranteed delinquent loans.

When Doral Financial sells mortgage loans to third parties it generally makes customary representations and warranties regarding the characteristics of the loans sold. To the extent Doral Financial breaches any of these warranties, investors are generally entitled to obligate Doral Financial to repurchase the loan subject of the breach.

In addition to its servicing and warranty obligations, Doral Financial’s loan sale activities include the sale of non-conforming mortgage loans subject to recourse arrangements that generally obligate Doral Financial to repurchase the loans if the loans are 90 days or more past due or otherwise in default. To the extent the delinquency ratios of the loans sold subject to recourse are greater than anticipated and Doral Financial is required to repurchase more loans than anticipated, Doral Financial’s liquidity requirements would increase. See “Off-Balance Sheet Activities” for additional information on these arrangements.

Doral Financial’s primary sources of liquidity are revenues from operations, sales in the secondary mortgage market of the loans it originates and purchases, deposits, advances from the FHLB-NY, short-term borrowings under warehouse, gestation and repurchase agreement lines of credit secured by pledges of its loans and mortgage-backed securities. Other sources of liquidity include proceeds from privately-placed and publicly offered debt and equity financings in the capital markets. During the third quarter of 2003, Doral Financial sold 1,200,000 shares of its 4.75% Perpetual Cumulative Convertible Preferred Stock (liquidation preference $250 per share) in a private offering to qualified institutional buyers pursuant to Rule 144A. The net proceeds to Doral Financial after the underwriting discounts and

expenses were approximately $292.6 million. On October 8, 2003, Doral Financial sold 180,000 additional shares of its 4.75% Perpetual Cumulative Convertible Preferred Stock pursuant to an option granted to the initial purchasers resulting in additional net proceeds of approximately $43.9 million.

The following table shows Doral Financial’s sources of borrowings and the related average interest rate as of September 30, 2003 and December 31, 2002:


	AS OF SEPTEMBER 30, 2003					AS OF DECEMBER 31, 2002

	AMOUNT		AVERAGE			AMOUNT		AVERAGE
	OUTSTANDING		RATE			OUTSTANDING		RATE

Deposits	$	2,764,855		2.57	%	$	2,217,211		2.85	%
Repurchase Agreements		3,374,472		2.61	%		2,733,339		3.46	%
Loans Payable		206,385		2.13	%		211,002		2.62	%
Notes Payable		606,921		7.75	%		621,303		7.75	%
Advances from FHLB		1,256,500		3.86	%		1,311,500		3.93	%

Doral Financial had warehousing, gestation and repurchase agreements lines of credit totaling $10.0 billion as of September 30, 2003, of which $4.8 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 $2.3 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, 2003, Doral Financial was in compliance with all such financial covenants and ratios.

Doral Financial’s investment grade credit ratings on its debt securities have allowed it to obtain liquidity in the capital markets through public and private offerings of its debt securities. To the extent Doral Financial’s credit ratings on its debt securities were to fall below investment grade, Doral Financial’s ability to obtain liquidity through the capital markets would be materially adversely affected. A decrease in Doral Financial’s credit ratings could also make it more difficult for it to sell non-conforming loans subject to recourse provisions since the purchasers of loans subject to recourse provisions rely in part on the credit of Doral Financial when purchasing such loans. A decrease in recourse sales could adversely affect the liquidity of Doral Financial because the secondary market for non-conforming loans is not as liquid as the secondary market for loans that qualify for the sale or guarantee programs of FHA, VA, FNMA and FHLMC. A decrease in Doral Financial’s credit ratings could also adversely affect its liquidity because lending institutions may be less inclined to renew or enter into new lending arrangements with Doral Financial. A ratings downgrade would also adversely affect liquidity because counterparties to repurchase agreements used for funding loan origination activities or to derivative contracts used for interest rate risk management purposes could increase the applicable margin requirements under such agreements.

Under Doral Financial’s repurchase lines of credit and derivative contracts, Doral Financial is required to deposit cash or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral decline because of changes in interest rates, Doral Financial will be required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity.

A considerable amount of Doral Financial’s liquidity is derived from the sale of mortgage loans in the secondary mortgage market. The U.S. (including Puerto Rico) secondary mortgage market is the most liquid in the world in large part because of the sale or guarantee programs maintained by FHA, VA, HUD, FNMA and FHLMC. To the extent these programs were curtailed or the standard for insuring or selling loans under such programs were materially increased or for any reason Doral Financial failed to qualify for such programs, Doral Financial’s ability to sell mortgage loans and consequently its liquidity would be materially adversely affected.

Doral Financial maintains a considerable investment in MSRs and IOs generated as part of its mortgage sale activities. While the servicing assets and IOs are recorded at the time of sale of the related mortgage loans, the cash related to such retained interest is received over the life of the asset and, therefore, does not generally provide immediate liquidity that is available to Doral Financial to fund its operations or to pay dividends.

Doral Financial’s banking subsidiaries obtain funding for their lending activities through the receipt of deposits, FHLB-NY advances and from other borrowings, such as term notes backed by FHLB-NY letters of credit. As of September 30, 2003, Doral Financial’s banking subsidiaries held approximately $2.8 billion in deposits at a weighted-average interest rate of 2.57%.

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


		NINE MONTH
		PERIOD ENDED					YEAR ENDED
		SEPTEMBER 30, 2003					DECEMBER 31, 2002

		AVERAGE		AVERAGE			AVERAGE		AVERAGE
		BALANCE		RATE			BALANCE		RATE

Certificates of deposit		$	1,539,484		3.21	%	$	1,168,984		3.84	%
Regular passbook savings			246,367		2.40	%		183,074		2.81	%
NOW accounts			490,451		2.09	%		411,837		2.23	%
Non-interest bearing			281,572		—			273,708		—

	Total deposits	$	2,557,874		2.95	%	$	2,037,603		3.57	%

The following table sets forth the maturities of certificates of deposit having principal amounts of $100,000 or more at September 30, 2003.

As of September 30, 2003 and December 31, 2002, Doral Financial’s banking subsidiaries had approximately $824.7 million and $654.5 million, respectively, in 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, 2003, 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 financial 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, and its banking subsidiaries’ regulatory capital ratios as of September 30, 2003, based on existing Federal Reserve, FDIC and OTS guidelines.

As of September 30, 2003, 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.

Failure to meet minimum regulatory capital requirements could result in the initiation of certain mandatory and additional discretionary actions by banking regulators against Doral Financial and its banking subsidiaries that, if undertaken, could have a material adverse effect on Doral Financial.

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 rule 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. 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 rule 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 rule for IOs.

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, 2003, Doral Financial’s outstanding balance of loans sold with full or partial recourse was $2.2 billion.

Substantially all of Doral Financial’s recourse obligations and IOs are recorded at the holding company level and, accordingly, the new rule only impacts the regulatory requirements applicable to Doral Financial as a financial holding company and had no impact on the banking subsidiaries. While the implementation of the new rule reduces 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.

Doral Financial expects that it will continue to have adequate liquidity, financing arrangements and capital resources to finance its operations. Doral Financial 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.

At September 30, 2003, Doral Financial’s total assets were $10.8 billion compared to $8.4 billion at December 31, 2002. The increase in assets was due primarily to an increase in the investment securities portfolio of approximately $2.0 billion and an increase of $713.1 million in accounts receivable from investment sales, which were offset in part by a decrease of $515.3 million in money market investments resulting from replacement of short-term investments with higher yielding investment securities. Total liabilities were $9.3 billion at September 30, 2003, compared to $7.4 billion at December 31, 2002. The increase in liabilities was largely the result of an increase in deposit accounts, repurchase agreements and accounts payable from investment purchases. At September 30, 2003, deposit accounts totaled $2.8 billion, compared to $2.2 billion at December 31, 2002. As of September 30, 2003, Doral Financial’s retail banking subsidiaries had $7.2 billion in assets, compared to $5.5 billion at December 31, 2002.

In the ordinary course of business, 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 multifamily 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. Doral Financial’s contingent obligation with respect to such recourse provisions is not reflected on Doral Financial’s consolidated financial statements. As of September 30, 2003, the outstanding principal balance of loans sold subject to full recourse or partial recourse was $2.2 billion. As of such date the maximum principal amount of loans that Doral Financial would have been required to repurchase if all loans subject to recourse defaulted was $1.7 billion. As of September 30, 2003, Doral Financial maintained a reserve of $3.8 million for potential losses from such recourse arrangements, which is included in “Accrued expenses and other liabilities” in Doral Financial’s consolidated financial statements. During the first nine months of 2003, Doral Financial repurchased approximately $84.0 million of loans subject to recourse. Historically, losses on recourse obligations have not been significant. As of September 30, 2003, approximately $129.1 million or 6% of the principal amount of loans sold with recourse were 60 days or more past due.

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments may include commitments to extend credit and sell mortgage-backed securities and loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position.

The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit or for forward sales is represented by the contractual amount of these instruments. The Company uses the same credit policies in making these commitments as it does for on-balance sheet instruments. At September 30, 2003, commitments to extend credit and commercial and financial standby letters of credit amounted to approximately $530.0 million and $3.2 million, respectively, and commitments to sell mortgage-backed securities and loans amounted to approximately $1.3 billion. Management believes that the Company has the ability

to meet these commitments and that no loss will result from the same. Commitments to extend credit are agreements to lend to a customer as long as the conditions established in the contract are met. Commitments generally have fixed expiration dates or other termination clauses.

A letter of credit is an arrangement that represents an obligation on the part of the Company to a designated third party, contingent upon the failure of the Company’s customer to perform under the terms of the underlying contract with a third party. Under the terms of a letter of credit, an obligation arises only when the underlying event fails to occur as intended, and the obligation is generally up to a stipulated amount and with specified terms and conditions.

The tables below summarize Doral Financial’s contractual obligations, on the basis of contractual maturity or first call date, whichever is earlier, and other commercial commitments as of September 30, 2003.


(IN THOUSANDS)	PAYMENT DUE BY PERIOD

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

Deposits	$	2,764,855	$	1,936,467	$	443,730	$	383,787	$	871
Repurchase and warehousing lines of credit⁽¹⁾		3,580,857		2,875,432		240,625		464,800		—
Notes Payable		606,921		212,327		16,980		87,635		289,979
Advances from FHLB⁽¹⁾		1,256,500		604,500		305,000		347,000		—
Non-cancellable Operating Leases		64,336		6,215		11,312		11,028		35,781

Total Contractual Cash Obligations	$	8,273,469	$	5,634,941	$	1,017,647	$	1,294,250	$	326,631


(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

Commitments to extend credit	$	529,998	$	299,057	$	230,888	$	—	$	53
Commitments to sell mortgage-backed securities and loans		1,254,066		1,254,066		—		—		—
Commercial and financial standby letters of credit		3,167		3,167		—		—		—
Standby repurchase (recourse) obligations		1,711,253		366,972		786,832		—		557,449

Total	$	3,498,484	$	1,923,262	$	1,017,720	$	—	$	557,502

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, 2002 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. Doral Financial employs a variety of measurement techniques to identify and manage its interest rate risk including the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on actual cash flows and repricing characteristics for on-balance sheet and certain off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes senior management’s projections for activity levels in each of the product lines offered by Doral Financial. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. This sensitivity analysis is limited by the fact that it is performed at a particular point in time, is subject to the accuracy of various assumptions, including prepayment forecasts, and does not incorporate other factors that could impact Doral Financial’s overall performance in such scenario. Accordingly, the estimates resulting from the use of the model should not be viewed as an earnings forecast. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

The Risk Management Committee, which comprises members of senior management and reports to Doral Financial’s Board of Directors, monitors interest rate risk within Board-approved policy limits. Doral Financial’s current interest rate risk policy limits are determined by measuring the anticipated change in net interest income over a 12-month horizon assuming a 100 and 200 basis point linear increase or decrease in all interest rates. Current policy limits this exposure to plus or minus 60% of net interest income for a 12-month horizon.

The following table shows Doral Financial’s net interest income sensitivity profile as of September 30, 2003, and December 31, 2002:

Given a linear 100 and 200 basis point increase in the yield curve used in the simulation model, it is estimated net interest income for Doral Financial would increase by 9% and 15% over one year beginning on September 30, 2003. The model assumes that Doral’s portfolio of loans and trading and available for sale securities reprice at least twice a year, as such assets are sold and replaced with new assets at current market rates. A 200 basis point linear decrease in interest rates would decrease net interest income by 8% over one year beginning on September 30, 2003. All these estimated changes in net interest income are within the policy guidelines established by Doral Financial’s Board of Directors. In addition to the sales assumptions mentioned above, the model does not assume full 100 or 200 basis points decrease in rates in short-term assets and liabilities, principally due to the current low level of short-term rates. In such cases, the yield curve was assigned a minimum (floor) value. Also, in both upward and downward rate scenarios, the increase or decrease in rates was modeled over a specific time period (3-6 months) rather than an instantaneous changes in rates, in order to reflect what has been the historical trend of changes in rates.

While the sensitivity model serves as a useful tool for measuring short-term risk to future net interest income, it does not measure the sensitivity of the market value of Doral Financial’s assets or other sources of income such as trading activities and mortgage loan sales to changes in interest rates.

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 July 2003, Doral Financial purchased an interest rate collar, designated to protect the Company against rising interest rates, with a notional amount of $300 million expiring in July 2008. Under the terms of the collar, Doral Financial is entitled to receive the excess between the 3 month LIBOR and 5.0% provided that the 3 month LIBOR is less than 8.0%. Doral Financial will not receive any payments if the 3 month LIBOR is less than 5.0% or greater than 8.0%. The premium paid by Doral Financial amounted to approximately $2.7 million and the fair value of the collar as of September 30, 2003 was approximately $2.4 million. 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.

The following table summarizes the Company’s interest rate collars outstanding at September 30, 2003.


			ENTITLED PAYMENT
NOTIONAL AMOUNT		MATURITY DATE	CONDITIONS	PREMIUM PAID		FAIR VALUE

$	200,000	June 2006	Excess 3-month LIBOR and 5.0%		$4,865	$	560
$	400,000	March 2007	Excess 3-month LIBOR and 5.5% provided that 3-month LIBOR is less than 8.5%		$5,760	$	1,000
$	600,000	September 2007	Excess 3-month LIBOR and 5.5% provided that 3-month LIBOR is less than 8.5%		$5,570	$	1,950
$	100,000	February 2008	Excess 3-month LIBOR and 5.5% provided that 3-month LIBOR is less than 8.0%		$ 955	$	650
$	100,000	April 2008	Excess 3-month LIBOR and 5.0% provided that 3-month LIBOR is less than 8.0%		$1,000	$	699
$	200,000	April 2008	Excess 3-month LIBOR and 8.0% provided that 3-month LIBOR is less than 10.0%		$ 353	$	200
$	300,000	July 2008	Excess 3-month LIBOR and 5.0% provided that 3-month LIBOR is less than 8.0%		$2,715	$	2,400

Doral Bank PR enters into interest rate swap agreements in managing its interest rate exposure. Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payment obligations without the exchange

of the underlying principal. Non-performance by the counterparty exposes Doral Bank PR to interest rate and credit risk. At September 30, 2003, Doral Bank PR had outstanding two interest rate swaps agreements (each with a notional principal amount of $100,000,000) designated to protect Doral Bank PR from the repricing of its short-term liabilities. These agreements end on 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 1.14% as of September 30, 2003. The fixed interest rate to be paid by Doral Bank under these agreements was 3.69% and 3.655%, respectively, as of September 30, 2003. At September 30, 2003, the agreements had an aggregate negative fair value of $6.4 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 mark-to-market basis with gains or losses charged to current operations as they occur and may, therefore, increase the volatility of Doral Financial’s future earnings. Contracts with positive fair values are recorded as assets and contracts with negative fair values as liabilities, after the application of netting arrangements. Fair values of derivatives such as interest rate future contracts or options are determined by reference to market prices. Fair values of derivatives purchased in the over-the-counter market are determined by prices provided by external sources or valuation models. For the nine month period ended September 30, 2003 average assets and liabilities related to derivatives were $47.3 million and $44.1 million, respectively. The notional amounts of assets and liabilities related to these derivatives totaled $29.1 billion and $22.3 billion, respectively, as of September 30, 2003. 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 as the source of the fair values.


	FOR THE NINE MONTH
	PERIOD ENDED
(IN THOUSANDS)	SEPTEMBER 30, 2003

Fair value of contracts outstanding at the beginning of the period	$	(3,815	)
Contracts realized or otherwise settled during the period		(29,834	)
Fair value of new contracts entered into during the period		42,868
Changes in fair values during the period		(36,529	)

Fair value of contracts outstanding at the end of the period	$	(27,310	)


(IN THOUSANDS)	PAYMENT DUE BY PERIOD

	MATURITY								MATURITY
AS OF SEPTEMBER 30, 2003	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	$	(28,299	)	$	(283	)	$	188	$	—	$	(28,394	)
Prices provided by other external sources		42			560			482		—		1,084

	$	(28,257	)	$	277		$	670	$	—	$	(27,310	)

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. 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.

General and administrative expenses generally 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, 2002 for a discussion of the effects of changes of interest rates on Doral Financial’s operations.

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.”

An evaluation was carried out as of September 30, 2003 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-15(e)and 15d-15(e) 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.

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.

On September 29, 2003 and October 8, 2003, Doral Financial issued 1,200,000 shares and 180,000 shares, respectively, of its 4.75% Perpetual Cumulative Convertible Preferred Stock (the “convertible preferred stock”) having a liquidation preference of $250 per share. The convertible preferred stock ranks on parity with Doral Financial’s 7.00% Noncumulative Monthly Income Preferred Stock, Series A, 8.35% Noncumulative Monthly Income Preferred Stock, Series B and 7.25% Noncumulative Monthly Income Preferred Stock, Series C, with respect to dividend rights and rights upon liquidation, winding up or dissolution. The terms of the convertible preferred stock do not permit Doral Financial to declare, set apart or pay any dividends or make any other distribution of assets on, or redeem, purchase, set apart or otherwise acquire shares of the Company’s common stock, or any other class of the Company’s stock ranking junior to the convertible preferred stock unless all accrued and unpaid dividends on the convertible preferred stock and any parity stock, at the time those dividends are payable, have been paid and the full dividend on the convertible preferred stock for the current quarterly dividend period is contemporaneously declared and paid or set aside for payment. The terms of the convertible preferred stock provide that if Doral Financial is unable to pay in full dividends on the convertible preferred stock and other shares of stock of equal rank as to the payment of dividends, all dividends declared upon the convertible preferred stock and such other shares of stock be declared pro rata.

Three-for-Two Stock Split. On October 15, 2003, 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 will be effected in the form of a stock dividend of one additional share of common stock to be issued on December 11, 2003, for every two shares of common stock held of record on November 21, 2003. Fractional shares will be settled in cash on the basis of the average of the high and low sales price of the common stock on November 21, 2003. See Note q to the accompanying consolidated financial statements, which sets forth Doral Financial’s pro-forma per share data giving retroactive effect to the three-for-two stock split.

Declaration of Cash Dividend. On October 15, 2003, the Board of Directors of Doral Financial also voted to declare a cash dividend of $0.18 per common share payable on December 4, 2003, to shareholders of record on November 14, 2003. The dividend represent a 29% increase in the Company’s quarterly dividend and follows a 27% increase in the common stock dividend previously announced on February 3, 2003. The additional shares issued as part of the stock split will not be entitled to receive the cash dividend payable on December 4, 2003. Following the effective date of the stock split described above, the regular quarterly dividend on the common stock will be adjusted from $0.18 per share to $0.12 per share, to reflect the additional shares issued as part of the stock split.

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.

(i)

Current Report on Form 8-K, dated August 1, 2003, (a) reporting under Items 7 and 9 the issuance of a press release addressing the impact of the recent increase in mortgage rates on the Company’s loan production in Puerto Rico market and (b) filing as an exhibit under Item 7 a copy of the related press release dated August 1, 2003.

(ii)

Current Report on Form 8-K, dated September 10, 2003, (a) reporting under Items 7 and 9 the issuance of a press release stating that contrary to recent announcements by several large U.S. mortgage lenders, the Company was not experiencing a drop in mortgage production and (b) filing as an exhibit under Item 7 a copy of the related press release dated September 10, 2003.

(iii)

Current Report on Form 8-K, dated September 23, 2003, (a) reporting under Items 7 and 9 the issuance of a press release announcing that it had entered into an agreement, subject to standard closing conditions, to sell $300,000,000 of its 4.75% Perpetual Cumulative Convertible Preferred Stock in a private offering to qualified institutional buyers pursuant to Rule 144A. Doral Financial Corporation also granted the initial purchasers of the preferred stock an option to purchase up to an additional $45,000,000 of preferred stock and (b) filing as an exhibit under Item 7 a copy of the related press release dated September 23, 2003.

(iv)

Current Report on Form 8-K, dated September 30, 2003, (a) reporting under Items 5 and 7 stating that the Company closed the sale of 1,200,000 shares of its 4.75% Perpetual Cumulative Convertible Preferred Stock in a private offering to qualified institutional buyers pursuant to Rule 144A. Doral Financial Corporation also granted the initial purchasers of the preferred stock an option to purchase up to an additional 180,000 shares of preferred stock and (b) filing as exhibits under Item 7 thereof the Purchase Agreement, dated as of September 23, 2003 and the Certificate of Designation, dated September 25, 2003, including the form of 4.75% Perpetual Cumulative Convertible Preferred Stock.

(v)

Current Report on Form 8-K, dated October 8, 2003, (a) reporting under Items 5 and 7 the issuance of a press release announcing that it had sold 180,000 additional shares of its 4.75% Perpetual Cumulative Convertible Preferred Stock at an aggregate offering price of $45 million in a private offering to qualified institutional buyers pursuant to Rule 144A and (b) filing as an exhibit under Item 7 a copy of the related press release dated October 8, 2003.

(vi)

Current Report on Form 8-K, dated October 15, 2003, reporting under Items 5,7 and 12 (a) the issuance of a press release announcing a three-for-two stock split on the Company’s common stock, an increase in the quarterly dividend on the common stock and certain changes in the Board of Directors; (b) the issuance of a press release announcing the unaudited earnings results for the quarter ended September 30, 2003, and (c) filing as exhibits under Item 7 copies of the relevant press releases dated October 15, 2003.

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, 2003		/s/ Salomón Levis

		Salomón Levis Chairman of the Board and Chief Executive Officer

Date: November 13, 2003		/s/ Richard F. Bonini

		Richard F. Bonini Senior Executive Vice President and Chief Financial Officer

Date: November 13, 2003		/s/ Ricardo Meléndez

		Ricardo Meléndez Executive Vice President and Principal Accounting Officer


Exhibit
Number		Description

1	- -	Purchase Agreement, dated September 23, 2003, between Doral Financial Corporation and Wachovia Securities LLC, as Representative of the Initial Purchasers named therein. (Incorporated by reference to the Exhibit 1 to the Current Report on Form 8-K of the Company dated September 30, 2003)

4	- -	Certificate of Designation, dated as of September 25, 2003 designating the terms of the 4.75% Perpetual Cumulative Convertible Preferred Stock. (Incorporated by reference to the Exhibit 4 to the Current Report on Form 8-K of the Company dated September 30, 2003)

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

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

31(1)	- -	CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31(2)	- -	CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32(1)	- -	CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32(2)	- -	CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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


		PAGE

PART I — FINANCIAL INFORMATION
Item 1 - Financial Statements
	Consolidated Statements of Financial Condition (Unaudited) as of September 30, 2003 and December 31, 2002		4
	Consolidated Statements of Income (Unaudited) — Quarters ended September 30, 2003 and September 30, 2002 and nine month period ended September 30, 2003 and September 30, 2002		5
	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) - Nine month period ended September 30, 2003 and September 30, 2002		6
	Consolidated Statements of Comprehensive Income (Unaudited) — Quarters ended September 30, 2003 and September 30, 2002 and nine month period ended September 30, 2003 and September 30, 2002		7
	Consolidated Statements of Cash Flows (Unaudited) — Nine month period ended September 30, 2003 and September 30, 2002		8
	Notes to Consolidated Financial Statements (Unaudited)		9
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3 - Quantitative and Qualitative Disclosures About Market Risk			58
Item 4 - Controls and Procedures			58
PART II — OTHER INFORMATION
Item 1 - Legal Proceedings			59
Item 2 - Changes in Securities			59
Item 3 - Defaults Upon Senior Securities			59
Item 4 - Submission of Matters to a Vote of Security Holders			59
Item 5 - Other Information			59
Item 6 - Exhibits and Reports on Form 8-K			60
SIGNATURES


					SEPTEMBER 30,			DECEMBER 31,
					2003			2002

ASSETS
	Cash and due from banks				$	219,284		$	156,137

	Money market investments					901,842			1,417,154

	Pledged investment securities that can be re-pledged:
			Trading securities, at fair value			243,296			783,333
			Securities available for sale, at fair value			2,344,630			775,892
			Securities held to maturity, at amortized cost (market value of $1,440,918 for 2003; $793,174 for 2002)			1,505,755			788,376

				Total pledged investment securities that can be re-pledged		4,093,681			2,347,601

	Other investment securities:
			Trading securities, at fair value			571,893			412,846
			Securities available for sale, at fair value			179,432			86,198
			Securities held to maturity, at amortized cost (market value of $182,284 for 2003; $172,085 for 2002)			186,065			172,250
			Federal Home Loan Bank of NY (FHLB) stock, at cost			84,220			86,970

				Total other investment securities		1,021,610			758,264

				Total investment securities		5,115,291			3,105,865

	Loans:
			Mortgage loans held for sale, at lower of cost or market			1,932,326			2,183,399
			Loans receivable, net of allowance for loan losses of $18,134 (2002 - $9,982)			1,308,860			1,022,342

				Total loans		3,241,186			3,205,741

	Receivables and mortgage servicing advances					58,036			66,450
	Accounts receivable from investment sales					814,843			101,718
	Accrued interest receivable					59,318			43,158
	Servicing assets, net					165,720			159,881
	Premises and equipment, net					123,368			114,916
	Real estate held for sale, net					15,437			13,057
	Other assets					49,404			37,612

				Total assets	$	10,763,729		$	8,421,689

LIABILITIES
	Deposits:
		Non-interest-bearing deposits			$	235,698		$	296,620
		Interest-bearing deposits				2,529,157			1,920,591
	Securities sold under agreements to repurchase					3,374,472			2,733,339
	Loans payable					206,385			211,002
	Notes payable					606,921			621,303
	Advances from FHLB					1,256,500			1,311,500
	Accounts payable from investment purchases					779,015			100,699
	Accrued expenses and other liabilities					267,289			181,664

				Total liabilities		9,255,437			7,376,718

	Commitments and contingencies
STOCKHOLDERS’ EQUITY
	Preferred stock, $1 par value; 10,000,000 shares authorized; 8,835,000 and 7,635,000 shares issued and outstanding in 2003 and 2002, respectively at aggregate liquidation preference value:
				Perpetual Noncumulative non-convertible preferred stock (Series A, B and C)		228,250			228,250
				Perpetual Cumulative Convertible preferred stock		300,000			—
	Common stock, $1 par value; 200,000,000 shares authorized; 71,934,973 and 71,933,348 shares issued in 2003 and 2002, respectively; 71,934,973 and 71,849,348 shares outstanding in 2003 and 2002, respectively					71,935			71,933
	Paid-in capital					187,792			191,216
	Legal surplus					10,777			10,777
	Retained earnings					734,238			550,554
	Accumulated other comprehensive loss, net of income tax of $5.0 million (2002 - $2.5 million)					(24,700	)		(7,675	)
	Treasury stock at par value; 84,000 shares held in 2002					—			(84	)

				Total stockholders’ equity		1,508,292			1,044,971

				Total liabilities and stockholders’ equity	$	10,763,729		$	8,421,689


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

			2003			2002			2003			2002

Interest income:
	Loans		$	53,374		$	52,467		$	162,705		$	148,983
	Mortgage-backed securities			22,167			33,795			78,024			94,767
	Investment securities			31,575			13,694			77,010			51,915
	Other interest-earning assets			2,636			5,413			10,827			12,117

		Total interest income		109,752			105,369			328,566			307,782

Interest expense:
	Deposits			19,415			18,778			56,475			54,242
	Securities sold under agreements to repurchase			21,148			23,322			68,090			75,239
	Advances from FHLB			12,400			10,599			37,095			29,621
	Loans payable			1,488			1,639			4,869			4,397
	Notes payable			12,368			11,785			37,921			31,474

		Total interest expense		66,819			66,123			204,450			194,973

		Net interest income		42,933			39,246			124,116			112,809
Provision for loan losses				2,913			2,055			11,309			3,792

		Net interest income after provision for loan losses		40,020			37,191			112,807			109,017

Non-interest income:
	Net gain on mortgage loan sales and fees			98,619			53,001			274,025			157,238
	Trading activities			15,384			4,806			15,334			(6,893	)
	Net (loss) gain on sales of investment securities			(10,392	)		10,119			3,697			16,109
	Servicing income (loss), net of amortization and impairment of $8,010 - 2003 and $14,078 - 2002 for the quarter, and $37,761 - 2003 and $31,862 - 2002 for the nine months			933			(5,596	)		(11,529	)		(6,310	)
	Commissions, fees and other income			6,353			5,662			19,993			15,216

		Total non-interest income		110,897			67,992			301,520			175,360

Non-interest expenses:
	Compensation and benefits			21,138			13,449			63,705			39,998
	Taxes, other than payroll and income taxes			1,879			1,830			5,387			4,069
	Advertising			4,053			2,918			11,413			8,129
	Professional services			2,098			1,778			6,198			5,249
	Communication and information systems			3,481			3,318			9,778			9,172
	Occupancy and other office expenses			5,787			5,546			16,924			15,171
	Depreciation and amortization			3,746			3,263			10,965			8,692
	Other			6,059			3,695			14,401			9,945

		Total non-interest expenses		48,241			35,797			138,771			100,425

		Income before income taxes		102,676			69,386			275,556			183,952
Income taxes				20,995			11,102			48,911			27,141

Net income			$	81,681		$	58,284		$	226,645		$	156,811

Net income attributable to common shareholders			$	77,374		$	54,048		$	213,882		$	147,309

Earnings per common share:
	Basic		$	1.08		$	0.75		$	2.97		$	2.05

	Diluted		$	1.05		$	0.74		$	2.91		$	2.02

Dividends per common share			$	0.14		$	0.11		$	0.42		$	0.31


			NINE MONTH PERIOD ENDED
			SEPTEMBER 30,

			2003			2002

PREFERRED STOCK:
	Balance at beginning of period		$	228,250		$	124,750
	Perpetual Cumulative Convertible preferred stock			300,000			—
	Perpetual Noncumulative non-convertible preferred stock (Series C)			—			103,500

		Balance at end of period		528,250			228,250

COMMON STOCK:
	Balance at beginning of period			71,933			47,866
	Shares issued under stock option plan			86			83
	Treasury stock canceled and retired			(84	)		—
	Shares issued as a result of three-for-two stock split			—			23,973

		Balance at end of period		71,935			71,922

PAID-IN CAPITAL:
	Balance at beginning of period			191,216			217,594
	Issuance cost of preferred stock			(7,425	)		(3,488	)
	Common shares issued under stock option plan			633			959
	Stock-based compensation recognized			3,368			—
	Adjustment for three-for-two stock split			—			(23,945	)

		Balance at end of period		187,792			191,120

LEGAL SURPLUS				10,777			8,423

RETAINED EARNINGS:
	Balance at beginning of period			550,554			375,855
	Net income			226,645			156,811
	Cash dividends declared on common stock			(30,198	)		(22,255	)
	Cash dividends declared on preferred stock			(12,763	)		(9,502	)
	Cash paid in lieu of fractional shares as a result of three-for-two stock split			—			(27	)

		Balance at end of period		734,238			500,882

ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAXES:
	Balance at beginning of period			(7,675	)		(12,312	)
	Net (loss) gain in the fair value of investment securities available for sale, net of deferred taxes			(17,025	)		9,440

		Balance at end of period		(24,700	)		(2,872	)

TREASURY STOCK AT PAR:
	Balance at beginning of period			(84	)		(56	)
	Shares canceled and retired			84			—
	Shares issued as a result of three-for-two stock split			—			(28	)

		Balance at end of period		—			(84	)

Total stockholders’ equity			$	1,508,292		$	997,641


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

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

(1)		For the quarter and nine month period ended September 30, 2003, 1,200,000 shares of 4.75% Perpetual Cumulative Convertible Preferred Stock that were issued on September 29, 2003 were not included in the computation of diluted earnings per share because the conditions for conversion as described below had not been met. Each share of convertible preferred stock preferred is convertible initially into 4.1904 shares of common stock, subject to adjustment under specific conditions. The option of the purchasers to convert the convertible preferred stock into shares of the Company’s common stock is exercisable only if (a) during any fiscal quarter after September 30, 2003, the closing sale price of the Company’s common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter exceeds 120% of the conversion price of the convertible preferred stock (initial conversion price of $59.66 as of September 30, 2003); (b) upon the occurrence of certain corporate transactions or (c) upon the delisting of the Company’s common stock. On or after September 30, 2008, the Company may, at its option, cause the convertible preferred stock to be converted into that number of shares of common stock that are issuable at the conversion price. The Company may only exercise its conversion right if, for 20 trading days within any period of 30 consecutive trading days ending on a trading day not more than two trading days prior to the date the Company give notice of conversion, the closing sale price of the Company’s common stock exceeds 130% of the conversion price of the convertible preferred stock in effect on each such trading day.

(2)		For the quarter and nine month periods ended September 30, 2003 and 2002, all stock options outstanding were included in the computation of weighted average outstanding shares.


	Mortgage				Institutional		Insurance		Intersegment
	Banking		Banking		Securities		Agency		Eliminations*			Totals

	QUARTER ENDED SEPTEMBER 30, 2003

Net interest income	$	12,285		27,069		953		592		2,034		$	42,933
Non-interest income	$	101,369		8,840		2,760		1,998		(4,070	)	$	110,897
Net income	$	65,359		14,326		1,803		1,634		(1,441	)	$	81,681
Identifiable assets	$	3,555,838		7,238,552		362,338		47,647		(440,646	)	$	10,763,729


	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


			Mainland
	Puerto Rico		US			Eliminations			Totals

	QUARTER ENDED SEPTEMBER 30, 2003

Net interest income	$	40,755		2,148			30		$	42,933
Non-interest income	$	110,848		99			(50	)	$	110,897
Net income (loss)	$	82,121		(470	)		30		$	81,681
Identifiable assets	$	10,298,059		519,431			(53,761	)	$	10,763,729


	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


(In thousands)


			Mainland
	Puerto Rico		US			Eliminations			Totals

	NINE MONTH PERIOD ENDED SEPTEMBER 30, 2003

Net interest income	$	116,084		8,013			19		$	124,116
Non-interest income	$	298,183		3,641			(304	)	$	301,520
Net income	$	226,160		614			(129	)	$	226,645
Identifiable assets	$	10,298,059		519,431			(53,761	)	$	10,763,729


	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


TRADING SECURITIES		SEPTEMBER 30,		DECEMBER 31,
(In thousands)		2003		2002

Mortgage-backed securities		$	305,166	$	829,593
Interest-only strips (“IOs”)			491,173		359,185
Puerto Rico government and agencies			6,073		6,246
Other			12,777		1,155

	Total	$	815,189	$	1,196,179


											WEIGHTED
			AMORTIZED		UNREALIZED		UNREALIZED		MARKET		AVERAGE
(Dollars in thousands)			COST		GAINS		LOSSES		VALUE		YIELD

MORTGAGE-BACKED SECURITIES
	GNMA
		Due over ten years	$	592,762	$	2,697	$	3,981	$	591,478		5.61	%
	FHLMC and FNMA
		Due over ten years		548,138		176		8,250		540,064		5.17	%
DEBT SECURITIES
	FHLB NOTES
		Due over ten years		111,938		—		106		111,832		5.24	%
	US TREASURY
		Due from five to ten years		1,023,458		4,882		16,090		1,012,250		4.07	%
		Due over ten years		267,120		1,318		—		268,438		5.38	%

			$	2,543,416	$	9,073	$	28,427	$	2,524,062		4.86	%

(1)		Includes $369.2 million and $360.9 million of construction loans for residential housing projects as of September 30, 2003 and December 31, 2002, respectively. Also includes $189.5 million and $113.5 million of construction loans for commercial, condominiums and multifamily projects.

(2)		Does not include $9.3 million and $8.3 million of allowance for loan losses allocated to mortgage loans held for sale as of September 30, 2003 and December 31, 2002, respectively.



MORTGAGE SERVICING ASSETS ACTIVITY		QUARTER ENDED						NINE MONTH PERIOD
		SEPTEMBER 30,						ENDED SEPTEMBER 30,
(In thousands)
		2003			2002			2003			2002

Balance at beginning of period		$	156,114		$	158,578		$	159,881		$	154,340
Capitalization of rights			17,616			8,553			43,600			30,575
Amortization:
	Scheduled		(7,789	)		(6,619	)		(22,815	)		(19,262	)
	Unscheduled and impairment		(221	)		(7,459	)		(14,946	)		(12,600	)

Balance at end of period		$	165,720		$	153,053		$	165,720		$	153,053


		Quarter Ended		Nine Month Period Ended
(In thousands, except per share information)		September 30, 2002		September 30, 2002

Compensation and Benefits:
	Reported	$	13,449	$	39,998
	Pro forma	$	14,572	$	43,366
Net Income:
	Reported	$	58,284	$	156,811
	Pro forma	$	57,599	$	154,757
Basic Earnings Per Share:
	Reported	$	0.75	$	2.05
	Pro forma	$	0.74	$	2.02
Diluted Earnings Per Share:
	Reported	$	0.74	$	2.02
	Pro forma	$	0.73	$	1.99

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

(2)		Interest-only strips and the interest income thereon are included within mortgage-backed securities on Doral Financial’s Consolidated Statements of Income.

(3)		Interest rate spread represents the difference between Doral Financial’s weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities.

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

(1)		Includes $21.0 million and $15.1 million in second mortgages for the quarters ended September 30, 2003 and 2002, respectively, and $48.6 million and $44.1 million in second mortgages for the nine month periods ended September 30, 2003 and 2002, respectively.

(2)		Includes $48.5 million and $30.7 million in home equity or personal loans secured by real estate mortgages of up to $40,000 for the quarters ended September 30, 2003 and 2002, respectively, and $106.4 million and $69.7 million for the nine month periods ended September 30, 2003 and 2002, 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.

(1)		Refers to purchases of mortgage loans from other financial institutions and mortgage lenders. U.S. wholesale purchases normally do not include the related servicing right.

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

(1)		Includes $2.4 billion and $2.0 billion of loans owned by Doral Financial at September 30, 2003 and 2002, respectively, which represented 19% and 18% of the total servicing portfolio as of such dates.

(2)		Includes portfolios of $240.3 million and $86.8 million at September 30, 2003 and 2002, respectively, of insured FHA/VA delinquent loans sold to third parties.

(3)		Excludes approximately $2.0 billion and $1.6 billion of conventional, commercial, consumer, construction and other loans not included in Doral Financial’s mortgage servicing-portfolio as of September 30, 2003 and 2002, respectively.

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


		AMOUNT

Certificates of deposit maturing
	Three months or less	$	362,849
	Over three through six months		138,052
	Over six through twelve months		144,857
	Over twelve months		755,723

	Total	$	1,401,481


	DORAL			DORAL			DORAL
	FINANCIAL			BANK PR			BANK NY

Tier 1 Capital Ratio (Tier 1 capital to risk weighted assets)		21.9	%		17.4	%		19.6	%
Total Capital (Total capital to risk weighted assets)		22.4	%		18.1	%		19.8	%
Leverage Ratio⁽¹⁾		15.3	%		7.1	%		8.2	%


	PERCENTAGE CHANGE IN 12-MONTH
CHANGE IN INTEREST RATES (BASIS POINTS)	NET INTEREST INCOME

+200		15	%
+100		9	%
-100		(3	)%
-200		(8	)%