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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


FORM 10-Q

(MARK ONE)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003o
    
    TRANSITION REPORT
PURSUANT TO SECTION 13 OF 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM            
            TO


COMMISSION FILE NUMBER 0-17224

DORAL FINANCIAL CORPORATION

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


Puerto Rico
    
    
    
    66-0312162(State or other jurisdiction of
    
    
    
    (I.R.S. employerincorporation or organization)
    
    
    
    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) 474-6700Former name, former addressandformer fiscal year, if changed
    
    
    
    Not applicablesince last 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.

YES   x     NO   o

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

YES   x     NO   o

NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT AUGUST 5, 2003: 71,920,273





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DORAL FINANCIAL CORPORATION
INDEX PAGE

|           |  |                                                                                       |  |                                                                                                                                                                   |                                |                             |   |      |  | 
|---------- |  | ------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | --------------------------- | - | ---- |  | 
|           |  |                                                                                       |  |                                                                                                                                                                   |                                |                             |   | PAGE
|           |  |                                                                                       |  |                                                                                                                                                                   | PART I  FINANCIAL INFORMATION |                             |   |      | 
|Item 1 -   |  | Financial Statements                                                                  |  |                                                                                                                                                                   |                                |                            
|           |  |                                                                                       |  | Consolidated Statements of Financial Condition (Unaudited) as of June 30, 2003
and December 31, 2002                                                              |                                |                             | 4 |     
|           |  |                                                                                       |  | Consolidated Statements of Income (Unaudited)  Quarters ended June 30, 2003
and June 30, 2002 and six months ended June 30, 2003 and June 30, 2002               |                                |                             | 5 |     
|           |  |                                                                                       |  | Consolidated Statements of Changes in Stockholders Equity (Unaudited) -
Six months ended June 30, 2003 and June 30, 2002                                         |                                |                             | 6 |     
|           |  |                                                                                       |  | Consolidated Statements of Comprehensive Income (Unaudited)  Quarters ended
June 30, 2003 and June 30, 2002 and six months ended June 30, 2003 and June 30, 2002 |                                |                             | 7 |     
|           |  |                                                                                       |  | Consolidated Statements of Cash Flows (Unaudited)  Six months ended June 30, 2003
and June 30, 2002                                                              |                                |                             | 8 |     
|           |  |                                                                                       |  | Notes to Consolidated Financial Statements (Unaudited)                                                                                                            |                                |                             | 9 |     
|Item 2   - |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |                                                                                                                                                                   | 25                             |                            
|Item 3   - |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                                                                                                   | 57                             |                            
|Item 4   - |  | Controls and Procedures                                                               |  |                                                                                                                                                                   | 57                             |                            
|           |  |                                                                                       |  |                                                                                                                                                                   |                                | PART II  OTHER INFORMATION |   |      |  | 
|Item 1   - |  | Legal Proceedings                                                                     |  |                                                                                                                                                                   | 57                             |                            
|Item 2   - |  | Changes in Securities                                                                 |  |                                                                                                                                                                   | 58                             |                            
|Item 3   - |  | Defaults Upon Senior Securities                                                       |  |                                                                                                                                                                   | 58                             |                            
|Item 4   - |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                                                                                                                                   | 58                             |                            
|Item 5   - |  | Other Information                                                                     |  |                                                                                                                                                                   | 58                             |                            
|Item 6   - |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                                                                                   | 58                             |                            
|SIGNATURES |  |                                                                                       |  |                                                                                                                                                                   | 59                             |                            

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FORWARD LOOKING STATEMENTS

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

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

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

3



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|                                               |                                                                                               |                                                            |            |  |  |  |  | 
|---------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ---------- |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                
|                                               | Item 1  Financial Statements                                                                
|                                               |                                                                                               | CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION            
|                                               |                                                                                               | CONSOLIDATED STATEMENTS OF INCOME                         
|                                               |                                                                                               | CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|                                               |                                                                                               | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME           
|                                               |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                     
|                                               |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)    
|                                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                               | ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                        
|                                               | ITEM 4.    CONTROLS AND PROCEDURES                                                           
|PART II  OTHER INFORMATION                   
|                                               | ITEM 1  LEGAL PROCEEDINGS                                                                   
|                                               | ITEM 2  CHANGES IN SECURITIES                                                               
|                                               | ITEM 3  DEFAULTS UPON SENIOR SECURITIES                                                     
|                                               | ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                 
|                                               | ITEM 5  OTHER INFORMATION                                                                   
|                                               | ITEM 6  EXHIBITS AND REPORTS ON FORM 8-K                                                    
|                                               |                                                                                               |                                                            | SIGNATURES
|EX-12.(A) COMPUTATION OF RATIO EARNINGS       
|EX-12.(B) COMPUTATION OF RATIO EARNINGS, STOCK
|EX-31.(1) SECTION 302 CERTIFICATION OF THE CEO
|EX-31.(2) SECTION 302 CERTIFICATION OF THE CFO
|EX-32.(1) SECTION 906 CERTIFICATION OF THE CEO
|EX-32.(2) SECTION 906 CERTIFICATION OF THE CFO



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

JUNE 30,
    
    DECEMBER 31,2003
    
    2002ASSETSCash and due from banks
    
    $
    293,699
    
    
    $
    156,137Money market investments:Securities purchased under resell agreements
    
    
    2,500
    
    
    
    259,764Time deposits with other banks
    
    
    984,426
    
    
    
    1,157,390Total money market investments
    
    
    986,926
    
    
    
    1,417,154Pledged investment securities that can be re-pledged:Trading securities, at fair value
    
    
    265,911
    
    
    
    783,333Securities available for sale, at fair value
    
    
    865,360
    
    
    
    775,892Securities held to maturity, at amortized cost (market value of $1,091,942 for 2003;
$793,174 for 2002)
    
    
    1,101,041
    
    
    
    788,376Total pledged investment securities
    
    
    2,232,312
    
    
    
    2,347,601Other investment securities:Trading securities, at fair value
    
    
    575,045
    
    
    
    412,846Securities available for sale, at fair value
    
    
    575,899
    
    
    
    86,198Securities held to maturity, at amortized cost (market value of $281,171 for 2003;
$172,085 for 2002)
    
    
    281,581
    
    
    
    172,250Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    84,220
    
    
    
    86,970Total other investment securities
    
    
    1,516,745
    
    
    
    758,264Total investment securities
    
    
    3,749,057
    
    
    
    3,105,865Loans:Mortgage loans held for sale, at lower of cost or market
    
    
    2,008,599
    
    
    
    2,183,399Loans receivable, net of allowance for loan losses of $16,571 (2002 - $9,982)
    
    
    1,210,291
    
    
    
    1,022,342Total loans
    
    
    3,218,890
    
    
    
    3,205,741Receivables and mortgage servicing advances
    
    
    79,840
    
    
    
    66,450Accounts receivable from investment sales
    
    
    678,828
    
    
    
    101,718Accrued interest receivable
    
    
    42,867
    
    
    
    43,158Servicing assets, net
    
    
    156,114
    
    
    
    159,881Premises and equipment, net
    
    
    122,404
    
    
    
    114,916Real estate held for sale, net
    
    
    18,606
    
    
    
    13,057Other assets
    
    
    49,215
    
    
    
    37,612Total assets
    
    $
    9,396,446
    
    
    $
    8,421,689LIABILITIESDeposits:Non-interest-bearing deposits
    
    $
    246,959
    
    
    $
    296,620Interest-bearing deposits
    
    
    2,372,537
    
    
    
    1,920,591Securities sold under agreements to repurchase
    
    
    2,396,609
    
    
    
    2,733,339Loans payable
    
    
    235,425
    
    
    
    211,002Notes payable
    
    
    612,920
    
    
    
    621,303Advances from FHLB
    
    
    1,256,500
    
    
    
    1,311,500Accounts payable from investment purchases
    
    
    848,518
    
    
    
    100,699Accrued expenses and other liabilities
    
    
    276,869
    
    
    
    181,664Total liabilities
    
    
    8,246,337
    
    
    
    7,376,718Commitments and contingenciesSTOCKHOLDERS EQUITYPreferred stock, $1 par value; 10,000,000 shares authorized; 7,635,000 shares issued and
outstanding, at aggregate liquidation preference value
    
    
    228,250
    
    
    
    228,250Common stock, $1 par value; 200,000,000 shares authorized; 71,905,273 and 71,933,348 shares
issued in 2003 and 2002, respectively; 71,905,273 and 71,849,348 shares outstanding in 2003
and 2002, respectively
    
    
    71,905
    
    
    
    71,933Paid-in capital
    
    
    193,871
    
    
    
    191,216Legal surplus
    
    
    10,777
    
    
    
    10,777Retained earnings
    
    
    666,935
    
    
    
    550,554Accumulated other comprehensive loss, net of income tax of $1.0 million (2002 - $2.5 million)
    
    
    (21,629
    )
    
    
    (7,675
    )Treasury stock at par value; 84,000 shares held in 2002
    
    
    
    
    
    
    (84
    )Total stockholders equity
    
    
    1,150,109
    
    
    
    1,044,971Total liabilities and stockholders equity
    
    $
    9,396,446
    
    
    $
    8,421,689


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

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

QUARTER ENDED
    
    SIX MONTH PERIOD ENDEDJUNE 30,
    
    JUNE 30,2003
    
    2002
    
    2003
    
    2002Interest income:Loans
    
    $
    54,291
    
    
    $
    49,393
    
    
    $
    109,331
    
    
    $
    96,516Mortgage-backed securities
    
    
    27,476
    
    
    
    32,324
    
    
    
    55,857
    
    
    
    60,972Investment securities
    
    
    23,375
    
    
    
    19,402
    
    
    
    45,435
    
    
    
    38,221Other interest-earning assets
    
    
    4,062
    
    
    
    4,211
    
    
    
    8,191
    
    
    
    6,704Total interest income
    
    
    109,204
    
    
    
    105,330
    
    
    
    218,814
    
    
    
    202,413Interest expense:Deposits
    
    
    18,994
    
    
    
    18,773
    
    
    
    37,060
    
    
    
    35,464Securities sold under agreements to repurchase
    
    
    23,005
    
    
    
    26,432
    
    
    
    46,942
    
    
    
    51,917Advances from FHLB
    
    
    12,321
    
    
    
    10,114
    
    
    
    24,695
    
    
    
    19,022Loans payable
    
    
    1,930
    
    
    
    1,428
    
    
    
    3,381
    
    
    
    2,758Notes payable
    
    
    13,048
    
    
    
    10,906
    
    
    
    25,553
    
    
    
    19,689Total interest expense
    
    
    69,298
    
    
    
    67,653
    
    
    
    137,631
    
    
    
    128,850Net interest income
    
    
    39,906
    
    
    
    37,677
    
    
    
    81,183
    
    
    
    73,563Provision for loan losses
    
    
    3,618
    
    
    
    989
    
    
    
    8,396
    
    
    
    1,737Net interest income after provision for loan losses
    
    
    36,288
    
    
    
    36,688
    
    
    
    72,787
    
    
    
    71,826Non-interest income:Net gain on mortgage loan sales and fees
    
    
    98,081
    
    
    
    58,247
    
    
    
    175,406
    
    
    
    104,237Trading activities
    
    
    (4,951
    )
    
    
    (6,629
    )
    
    
    (50
    )
    
    
    (11,699
    )Net gain on sales of investment securities
    
    
    7,002
    
    
    
    3,198
    
    
    
    14,089
    
    
    
    5,990Servicing loss,
net of amortization and impairment of $17,104 - 2003 and
$10,511 - 2002 for the quarter, and $29,751 - 2003
and $17,784 - 2002 for the six months
    
    
    (8,353
    )
    
    
    (2,100
    )
    
    
    (12,462
    )
    
    
    (714
    )Commissions, fees and other income
    
    
    7,425
    
    
    
    5,043
    
    
    
    13,640
    
    
    
    9,554Total non-interest income
    
    
    99,204
    
    
    
    57,759
    
    
    
    190,623
    
    
    
    107,368Non-interest expenses:Compensation and benefits
    
    
    21,368
    
    
    
    13,698
    
    
    
    42,567
    
    
    
    26,549Taxes, other than payroll and income taxes
    
    
    1,751
    
    
    
    1,190
    
    
    
    3,508
    
    
    
    2,239Advertising
    
    
    3,597
    
    
    
    2,780
    
    
    
    7,360
    
    
    
    5,211Professional services
    
    
    2,128
    
    
    
    1,758
    
    
    
    4,100
    
    
    
    3,471Communication and information systems
    
    
    3,279
    
    
    
    3,110
    
    
    
    6,297
    
    
    
    5,854Occupancy and other office expenses
    
    
    5,695
    
    
    
    5,141
    
    
    
    11,137
    
    
    
    9,625Depreciation and amortization
    
    
    3,631
    
    
    
    2,860
    
    
    
    7,219
    
    
    
    5,429Other
    
    
    4,518
    
    
    
    3,463
    
    
    
    8,342
    
    
    
    6,250Total non-interest expenses
    
    
    45,967
    
    
    
    34,000
    
    
    
    90,530
    
    
    
    64,628Income before income taxes
    
    
    89,525
    
    
    
    60,447
    
    
    
    172,880
    
    
    
    114,566Income taxes
    
    
    14,548
    
    
    
    8,460
    
    
    
    27,916
    
    
    
    16,039Net income
    
    $
    74,977
    
    
    $
    51,987
    
    
    $
    144,964
    
    
    $
    98,527Net income attributable to common shareholders
    
    $
    70,749
    
    
    $
    49,073
    
    
    $
    136,508
    
    
    $
    93,261Earnings per common share:Basic
    
    $
    0.98
    
    
    $
    0.68
    
    
    $
    1.90
    
    
    $
    1.30Diluted
    
    $
    0.96
    
    
    $
    0.67
    
    
    $
    1.86
    
    
    $
    1.28Dividends per common share
    
    $
    0.14
    
    
    $
    0.10
    
    
    $
    0.28
    
    
    $
    0.20


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

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

SIX MONTH PERIOD ENDEDJUNE 30,2003
    
    2002PREFERRED STOCK:Balance at beginning of period
    
    $
    228,250
    
    
    $
    124,750Shares issued (7.25% noncumulative monthly income, Series C)
    
    
    
    
    
    
    103,500Balance at end of period
    
    
    228,250
    
    
    
    228,250COMMON STOCK:Balance at beginning of period
    
    
    71,933
    
    
    
    47,866Shares issued under stock option plan
    
    
    56
    
    
    
    76Treasury stock canceled and retired
    
    
    (84
    )
    
    
    Balance at end of period
    
    
    71,905
    
    
    
    47,942PAID-IN CAPITAL:Balance at beginning of period
    
    
    191,216
    
    
    
    217,594Issuance cost of preferred stock
    
    
    
    
    
    
    (3,485
    )Common shares issued under stock option plan
    
    
    410
    
    
    
    825Stock-based compensation recognized
    
    
    2,245
    
    
    
    Balance at end of period
    
    
    193,871
    
    
    
    214,934LEGAL SURPLUS
    
    
    10,777
    
    
    
    8,423RETAINED EARNINGS:Balance at beginning of period
    
    
    550,554
    
    
    
    375,855Net income
    
    
    144,964
    
    
    
    98,527Cash dividends declared on common stock
    
    
    (20,127
    )
    
    
    (14,352
    )Cash dividends declared on preferred stock
    
    
    (8,456
    )
    
    
    (5,266
    )Balance at end of period
    
    
    666,935
    
    
    
    454,764ACCUMULATED OTHER COMPREHENSIVE LOSS,
NET OF TAXES:Balance at beginning of period
    
    
    (7,675
    )
    
    
    (12,312
    )Net loss in the fair value of investment securities
available for sale, net
of deferred taxes
    
    
    (13,954
    )
    
    
    (378
    )Balance at end of period
    
    
    (21,629
    )
    
    
    (12,690
    )TREASURY STOCK AT PAR:Balance at beginning of period
    
    
    (84
    )
    
    
    (56
    )Shares canceled and retired
    
    
    84
    
    
    
    Balance at end of period
    
    
    
    
    
    
    (56
    )Total stockholders equity
    
    $
    1,150,109
    
    
    $
    941,567


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

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

SIX MONTHQUARTER ENDED
    
    PERIOD ENDEDJUNE 30,
    
    JUNE 30,2003
    
    2002
    
    2003
    
    2002Net income
    
    $
    74,977
    
    
    $
    51,987
    
    
    $
    144,964
    
    
    $
    98,527Other comprehensive (loss) income, before tax:Unrealized (losses) gains on securities
arising during the period
    
    
    (5,841
    )
    
    
    26,904
    
    
    
    (17,401
    )
    
    
    (5,622
    )Amortization of unrealized loss on
securities reclassified to held to
maturity
    
    
    7
    
    
    
    376
    
    
    
    17
    
    
    
    813Reclassification adjustment for (gains)
losses included in net income
    
    
    (2,208
    )
    
    
    (877
    )
    
    
    1,960
    
    
    
    8,307Other comprehensive (loss) income before taxes
    
    
    (8,042
    )
    
    
    26,403
    
    
    
    (15,424
    )
    
    
    3,498Income tax benefit (expense) related to items
of other comprehensive income
    
    
    400
    
    
    
    (4,772
    )
    
    
    1,470
    
    
    
    (3,876
    )Other comprehensive (loss) income
    
    
    (7,642
    )
    
    
    21,631
    
    
    
    (13,954
    )
    
    
    (378
    )Comprehensive income, net of taxes
    
    $
    67,335
    
    
    $
    73,618
    
    
    $
    131,010
    
    
    $
    98,149


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

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

SIX MONTH PERIODENDED JUNE 30,2003
    
    2002Cash flows from operating activities:Net income
    
    $
    144,964
    
    
    $
    98,527Adjustments to reconcile net income to net cash provided by (used in) operating activities:Stock-based compensation recognized
    
    
    2,245
    
    
    
    Depreciation and amortization
    
    
    7,219
    
    
    
    5,429Amortization of interest-only strips
    
    
    33,849
    
    
    
    23,570Amortization and impairment of servicing assets
    
    
    29,751
    
    
    
    17,784Deferred income tax provision
    
    
    5,684
    
    
    
    2,369Provision for loan losses
    
    
    8,396
    
    
    
    1,737Provision for losses on real estate held for sale
    
    
    682
    
    
    
    891Amortization of premium and accretion of discount on loans and investment securities
    
    
    1,931
    
    
    
    4,676Origination and purchases of mortgage loans held for sale
    
    
    (2,676,597
    )
    
    
    (2,143,847
    )Principal repayments and sales of mortgage loans held for sale
    
    
    1,345,486
    
    
    
    943,065Purchases of securities held for trading
    
    
    (6,334,611
    )
    
    
    (2,489,110
    )Principal repayments and sales of trading securities
    
    
    8,328,803
    
    
    
    2,980,109Increase in interest only strips, net
    
    
    (119,145
    )
    
    
    (101,336
    )Increase in servicing assets
    
    
    (25,984
    )
    
    
    (22,022
    )Increase in receivables and mortgage servicing advances
    
    
    (12,890
    )
    
    
    (3,379
    )Increase in accounts receivable from investment sales
    
    
    (577,110
    )
    
    
    (120,360
    )Decrease (increase) in accrued interest receivable
    
    
    291
    
    
    
    (3,875
    )Increase in other assets
    
    
    (11,603
    )
    
    
    (5,114
    )Increase (decrease) in payable related to short sales
    
    
    195,712
    
    
    
    (20,485
    )(Decrease) increase in interest payable
    
    
    (446
    )
    
    
    4,396Increase (decrease) in accounts payable from investment purchases
    
    
    531,935
    
    
    
    (142,558
    )Increase (decrease) in accrued expenses and other liabilities
    
    
    92,331
    
    
    
    (1,344
    )Total adjustments
    
    
    825,929
    
    
    
    (1,069,404
    )Net cash provided by (used in) operating activities
    
    
    970,893
    
    
    
    (970,877
    )Cash flows from investing activities:Purchases of securities available for sale
    
    
    (5,126,573
    )
    
    
    (1,984,698
    )Proceeds from sales of securities available for sale
    
    
    4,132,362
    
    
    
    2,310,328Principal repayments of securities available for sale
    
    
    338,291
    
    
    
    12,434Purchases of securities held to maturity
    
    
    (672,928
    )
    
    
    (41,306
    )Principal repayments and maturities of securities held to maturity
    
    
    251,011
    
    
    
    123,368Decrease (increase) in FHLB stock
    
    
    2,750
    
    
    
    (14,431
    )Origination of loans receivable
    
    
    (399,374
    )
    
    
    (301,589
    )Principal repayments of loans receivable
    
    
    204,252
    
    
    
    224,334Purchase of premises and equipment
    
    
    (14,707
    )
    
    
    (17,924
    )Proceeds from sales of real estate held for sale
    
    
    2,707
    
    
    
    1,727Net cash (used in) provided by investing activities
    
    
    (1,282,209
    )
    
    
    312,243Cash flows from financing activities:Increase in deposits
    
    
    402,285
    
    
    
    446,199(Decrease) increase in securities sold under agreements to repurchase
    
    
    (336,730
    )
    
    
    328,011Increase in loans payable
    
    
    44,595
    
    
    
    56,995(Decrease) increase in notes payable
    
    
    (8,383
    )
    
    
    97,631(Decrease) increase in FHLB advances
    
    
    (55,000
    )
    
    
    274,000Issuance of common stock, net
    
    
    466
    
    
    
    901Issuance of preferred stock, net
    
    
    
    
    
    
    100,015Dividends declared and paid
    
    
    (28,583
    )
    
    
    (19,618
    )Net cash provided by financing activities
    
    
    18,650
    
    
    
    1,284,134Net (decrease) increase in cash and cash equivalents
    
    
    (292,666
    )
    
    
    625,500Cash and cash equivalents at beginning of period
    
    
    1,573,291
    
    
    
    594,385Cash and cash equivalents at the end of period
    
    $
    1,280,625
    
    
    $
    1,219,885Cash and cash equivalents includes:Cash and due from banks
    
    $
    293,699
    
    
    $
    77,827Money market investments
    
    
    986,926
    
    
    
    1,142,058$
    1,280,625
    
    
    $
    1,219,885Supplemental schedule of non-cash activities:Loan securitizations
    
    $
    1,494,764
    
    
    $
    1,033,074Loans foreclosed
    
    $
    9,438
    
    
    $
    3,669Supplemental information for cash flows:Cash used to pay interest
    
    $
    135,644
    
    
    $
    121,245Cash used to pay income taxes
    
    $
    22,260
    
    
    $
    13,406


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

8



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##### Table of Contents






DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



|a. |  | The Consolidated Financial Statements (unaudited) include the accounts of
Doral Financial Corporation (Doral Financial or the Company), Doral
Mortgage Corporation (Doral Mortgage), SANA Investment Mortgage Bankers,
Inc. (SANA), Centro Hipotecario de Puerto Rico, Inc., Doral Securities,
Inc. (Doral Securities), Doral Bank (Doral Bank PR), Doral Bank, FSB
(Doral Bank NY), Doral Money, Inc. (Doral 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 six month period ended June
30, 2003 are not necessarily indicative of the results to be expected for
the full year.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



|c. |  | Cash dividends per share paid for the quarter and six month periods ended
June 30, 2003 and 2002 were as follows:
|-- |  | -----------------------------------------------------------------------------------------------------------------

QUARTER ENDED
    
    SIX MONTH PERIODJUNE 30,
    
    ENDED JUNE 30,2003
    
    2002
    
    2003
    
    20027% Noncumulative Monthly Income Preferred Stock
    
    $
    0.88
    
    
    $
    0.88
    
    
    $
    1.76
    
    
    $
    1.768.35% Noncumulative Monthly Income Preferred Stock
    
    $
    0.52
    
    
    $
    0.52
    
    
    $
    1.04
    
    
    $
    1.047.25% Noncumulative Monthly Income Preferred Stock
    
    $
    0.45
    
    
    $
    0.16
    
    
    $
    0.90
    
    
    $
    0.16Common Stock
    
    $
    0.14
    
    
    $
    0.10
    
    
    $
    0.28
    
    
    $
    0.20




|d. |  | At June 30, 2003, escrow funds include approximately $147.9 million
deposited with Doral Bank PR. These funds are included in the Companys
financial statements. Escrow funds also include approximately $23.9
million deposited with other banks which are excluded from the Companys
assets and liabilities.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

9



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

QUARTER ENDED
    
    SIX MONTH PERIODJUNE 30,
    
    ENDED JUNE 30,(Dollars in thousands, except per share amounts)
    
    2003
    
    2002
    
    2003
    
    2002Net Income:Net income
    
    $
    74,977
    
    
    $
    51,987
    
    
    $
    144,964
    
    
    $
    98,527Preferred stock dividend
    
    
    (4,228
    )
    
    
    (2,914
    )
    
    
    (8,456
    )
    
    
    (5,266
    )Net income attributable to common stock
    
    $
    70,749
    
    
    $
    49,073
    
    
    $
    136,508
    
    
    $
    93,261Weighted Average Shares:Basic weighted average number of common shares outstanding
    
    
    71,901,020
    
    
    
    71,785,107
    
    
    
    71,885,463
    
    
    
    71,755,199Incremental shares issuable upon exercise of stock options(1)
    
    
    1,706,680
    
    
    
    1,096,587
    
    
    
    1,582,875
    
    
    
    1,105,063Diluted weighted average number of common shares outstanding
    
    
    73,607,700
    
    
    
    72,881,694
    
    
    
    73,468,338
    
    
    
    72,860,262Net Income per Common Share:Basic
    
    $
    0.98
    
    
    $
    0.68
    
    
    $
    1.90
    
    
    $
    1.30Diluted
    
    $
    0.96
    
    
    $
    0.67
    
    
    $
    1.86
    
    
    $
    1.28




---

|(1) |  | For the quarter and six month period ended June 30, 2003, all stock options outstanding were included in the computation of
weighted average outstanding shares. For the quarter and six month period ended June 30, 2002, options to purchase an additional
1,177,500 shares of common stock were outstanding, but were not included in the computation of diluted earnings per share because their
inclusion would have had an antidilutive effect.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



|f. |  | Employee costs and other expenses are shown in the Consolidated
Statements of Income net of direct loan origination costs which, pursuant
to SFAS No. 91, are capitalized as part of the carrying cost of mortgage
loans and are offset against net gains on mortgage loan sales and fees
when the loans are sold or amortized as yield adjustment in the case of
loans held for investment (loans receivable).
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

(In thousands)
    
    QUARTER ENDED
    
    SIX MONTH PERIODJUNE 30,
    
    ENDED JUNE 30,2003
    
    2002
    
    2003
    
    2002Employee costs, gross
    
    $
    27,060
    
    
    $
    21,545
    
    
    $
    53,366
    
    
    $
    42,076Deferred costs pursuant to SFAS No. 91
    
    
    (5,692
    )
    
    
    (7,847
    )
    
    
    (10,799
    )
    
    
    (15,527
    )Employee cost, net
    
    $
    21,368
    
    
    $
    13,698
    
    
    $
    42,567
    
    
    $
    26,549Other expenses, gross
    
    $
    5,733
    
    
    $
    6,043
    
    
    $
    10,580
    
    
    $
    10,759Deferred costs pursuant to SFAS No. 91
    
    
    (1,215
    )
    
    
    (2,580
    )
    
    
    (2,238
    )
    
    
    (4,509
    )Other expenses, net
    
    $
    4,518
    
    
    $
    3,463
    
    
    $
    8,342
    
    
    $
    6,250




| |  | As of June 30, 2003, the Company had a net deferred origination fee on
mortgage loans held for sale and loans receivable amounting to $2.2
million and $10.7 million, respectively (December 31, 2002  $1.6 million and
$13.0 million, respectively).
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|g. |  | 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 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.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(In thousands)Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentBanking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations *
    
    TotalsQUARTER ENDED JUNE 30, 2003Net interest income
    
    $
    11,520
    
    
    
    25,260
    
    
    
    866
    
    
    
    463
    
    
    
    1,797
    
    
    $
    39,906Non-interest income
    
    $
    53,615
    
    
    
    43,601
    
    
    
    3,326
    
    
    
    2,048
    
    
    
    (3,386
    )
    
    $
    99,204Net income
    
    $
    27,317
    
    
    
    45,050
    
    
    
    2,131
    
    
    
    1,469
    
    
    
    (990
    )
    
    $
    74,977Identifiable assets
    
    $
    2,914,952
    
    
    
    6,660,207
    
    
    
    412,431
    
    
    
    35,388
    
    
    
    (626,532
    )
    
    $
    9,396,446


QUARTER ENDED JUNE 30, 2002Net interest income
    
    $
    12,950
    
    
    
    23,023
    
    
    
    592
    
    
    
    269
    
    
    
    843
    
    
    $
    37,677Non-interest income
    
    $
    45,528
    
    
    
    10,026
    
    
    
    2,479
    
    
    
    1,910
    
    
    
    (2,184
    )
    
    $
    57,759Net income
    
    $
    34,633
    
    
    
    15,950
    
    
    
    1,428
    
    
    
    1,302
    
    
    
    (1,326
    )
    
    $
    51,987Identifiable assets
    
    $
    3,066,774
    
    
    
    4,722,122
    
    
    
    616,534
    
    
    
    30,246
    
    
    
    (514,233
    )
    
    $
    7,921,443


12



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(In thousands)

Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentBanking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations *
    
    TotalsSIX MONTH PERIOD ENDED JUNE 30, 2003Net interest income
    
    $
    22,851
    
    
    
    52,111
    
    
    
    1,644
    
    
    
    863
    
    
    
    3,714
    
    
    $
    81,183Non-interest income
    
    $
    112,272
    
    
    
    77,266
    
    
    
    4,493
    
    
    
    3,842
    
    
    
    (7,250
    )
    
    $
    190,623Net income
    
    $
    62,938
    
    
    
    78,660
    
    
    
    2,970
    
    
    
    2,780
    
    
    
    (2,384
    )
    
    $
    144,964Identifiable assets
    
    $
    2,914,952
    
    
    
    6,660,207
    
    
    
    412,431
    
    
    
    35,388
    
    
    
    (626,532
    )
    
    $
    9,396,446


SIX MONTH PERIOD ENDED JUNE 30, 2002Net interest income
    
    $
    25,341
    
    
    
    46,651
    
    
    
    1,227
    
    
    
    579
    
    
    
    (235
    )
    
    $
    73,563Non-interest income
    
    $
    85,567
    
    
    
    18,243
    
    
    
    3,256
    
    
    
    3,539
    
    
    
    (3,237
    )
    
    $
    107,368Net income
    
    $
    65,801
    
    
    
    32,347
    
    
    
    1,511
    
    
    
    2,309
    
    
    
    (3,441
    )
    
    $
    98,527Identifiable assets
    
    $
    3,066,774
    
    
    
    4,722,122
    
    
    
    616,534
    
    
    
    30,246
    
    
    
    (514,233
    )
    
    $
    7,921,443




---

|* |  | For purposes of the intersegment eliminations in the above tables, income
includes direct intersegment loan origination costs amortized as yield
adjustment and other income derived from intercompany transactions, related
principally to fees and commissions paid to the Companys institutional
securities subsidiary and rental income paid to Doral Properties. Assets
include internal funding and investment in subsidiaries accounted for at cost.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(In thousands)

Puerto Rico
    
    Mainland US
    
    Eliminations
    
    TotalsQUARTER ENDED JUNE 30, 2003Net interest income
    
    $
    37,928
    
    
    
    1,965
    
    
    
    13
    
    
    $
    39,906Non-interest income
    
    $
    98,758
    
    
    
    649
    
    
    
    (203
    )
    
    $
    99,204Net income (loss)
    
    $
    75,509
    
    
    
    (413
    )
    
    
    (119
    )
    
    $
    74,977Identifiable assets
    
    $
    8,952,393
    
    
    
    492,683
    
    
    
    (48,630
    )
    
    $
    9,396,446


QUARTER ENDED JUNE 30, 2002Net interest income
    
    $
    34,381
    
    
    
    3,662
    
    
    
    (366
    )
    
    $
    37,677Non-interest income
    
    $
    59,659
    
    
    
    871
    
    
    
    (2,771
    )
    
    $
    57,759Net income
    
    $
    53,774
    
    
    
    1,350
    
    
    
    (3,137
    )
    
    $
    51,987Identifiable assets
    
    $
    7,650,440
    
    
    
    401,451
    
    
    
    (130,448
    )
    
    $
    7,921,443


(In thousands)

Puerto Rico
    
    Mainland US
    
    Eliminations
    
    TotalsSIX MONTH PERIOD ENDED JUNE 30, 2003Net interest income
    
    $
    75,329
    
    
    
    5,865
    
    
    
    (11
    )
    
    $
    81,183Non-interest income
    
    $
    187,335
    
    
    
    3,542
    
    
    
    (254
    )
    
    $
    190,623Net income
    
    $
    144,039
    
    
    
    1,084
    
    
    
    (159
    )
    
    $
    144,964Identifiable assets
    
    $
    8,952,393
    
    
    
    492,683
    
    
    
    (48,630
    )
    
    $
    9,396,446


SIX MONTH PERIOD ENDED JUNE 30, 2002Net interest income
    
    $
    67,605
    
    
    
    6,676
    
    
    
    (718
    )
    
    $
    73,563Non-interest income
    
    $
    108,918
    
    
    
    1,221
    
    
    
    (2,771
    )
    
    $
    107,368Net income
    
    $
    99,856
    
    
    
    2,160
    
    
    
    (3,489
    )
    
    $
    98,527Identifiable assets
    
    $
    7,650,440
    
    
    
    401,451
    
    
    
    (130,448
    )
    
    $
    7,921,443


14



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



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

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

TRADING SECURITIES
    
    JUNE 30,
    
    DECEMBER 31,(In thousands)
    
    2003
    
    2002Mortgage-backed securities
    
    $
    376,113
    
    
    $
    829,593Interest-only strips (IOs)
    
    
    444,481
    
    
    
    359,185Puerto Rico government and agencies
    
    
    6,194
    
    
    
    6,246Other
    
    
    14,168
    
    
    
    1,155Total
    
    $
    840,956
    
    
    $
    1,196,179


2. 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 June 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.

15



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SECURITIES AVAILABLE FOR SALE
AS OF JUNE 30, 2003
(Dollars in thousands)

WEIGHTEDAMORTIZED
    
    UNREALIZED
    
    UNREALIZED
    
    MARKET
    
    AVERAGECOST
    
    GAINS
    
    LOSSES
    
    VALUE
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    384,194
    
    
    $
    419
    
    
    $
    3,091
    
    
    $
    381,522
    
    
    
    5.51
    %FHLMC and FNMADue over ten years
    
    
    230,786
    
    
    
    559
    
    
    
    724
    
    
    
    230,621
    
    
    
    5.23
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    111,935
    
    
    
    1,211
    
    
    
    17
    
    
    
    113,129
    
    
    
    5.24
    %FHLB ZERO COUPONDue over ten years
    
    
    159,689
    
    
    
    1,386
    
    
    
    75
    
    
    
    161,000
    
    
    
    6.60
    %US TREASURYDue from five to ten years
    
    
    571,482
    
    
    
    
    
    
    
    16,495
    
    
    
    554,987
    
    
    
    3.63
    %$
    1,458,086
    
    
    $
    3,575
    
    
    $
    20,402
    
    
    $
    1,441,259
    
    
    
    4.84
    %


16



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SECURITIES AVAILABLE FOR SALE
AS OF DECEMBER 31, 2002
(Dollars in thousands)

WEIGHTEDAMORTIZED
    
    UNREALIZED
    
    UNREALIZED
    
    MARKET
    
    AVERAGECOST
    
    GAINS
    
    LOSSES
    
    VALUE
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    12,316
    
    
    $
    610
    
    
    $
    146
    
    
    $
    12,780
    
    
    
    6.55
    %FHLMC and FNMADue over ten years
    
    
    171,847
    
    
    
    3,073
    
    
    
    334
    
    
    
    174,586
    
    
    
    5.87
    %DEBT SECURITIESFHLB ZERO COUPONDue over ten years
    
    
    106,194
    
    
    
    
    
    
    
    1,194
    
    
    
    105,000
    
    
    
    6.87
    %FHLMC NOTESDue over ten years
    
    
    25,000
    
    
    
    315
    
    
    
    
    
    
    
    25,315
    
    
    
    6.00
    %US TREASURYDue from five to ten years
    
    
    239,062
    
    
    
    409
    
    
    
    1,162
    
    
    
    238,309
    
    
    
    4.25
    %Due over ten years
    
    
    309,567
    
    
    
    1,054
    
    
    
    4,521
    
    
    
    306,100
    
    
    
    5.37
    %$
    863,986
    
    
    $
    5,461
    
    
    $
    7,357
    
    
    $
    862,090
    
    
    
    5.38
    %


3. 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 June 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.

17



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SECURITIES HELD TO MATURITY
AS OF JUNE 30, 2003
(Dollars in thousands)

WEIGHTEDAMORTIZED
    
    UNREALIZED
    
    UNREALIZED
    
    MARKET
    
    AVERAGECOST
    
    GAINS
    
    LOSSES
    
    VALUE
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue from five to ten years
    
    $
    1,905
    
    
    $
    101
    
    
    $
    
    
    
    $
    2,006
    
    
    
    6.74
    %Due over ten years
    
    
    9,657
    
    
    
    549
    
    
    
    
    
    
    
    10,206
    
    
    
    6.97
    %CMO CERTIFICATESDue from one to five years
    
    
    549
    
    
    
    
    
    
    
    2
    
    
    
    547
    
    
    
    7.26
    %Due from five to ten years
    
    
    809
    
    
    
    
    
    
    
    5
    
    
    
    804
    
    
    
    5.97
    %Due over ten years
    
    
    53,798
    
    
    
    115
    
    
    
    811
    
    
    
    53,102
    
    
    
    6.09
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    517,877
    
    
    
    3,645
    
    
    
    
    
    
    
    521,522
    
    
    
    5.62
    %FHLB ZERO COUPONDue over ten years
    
    
    268,945
    
    
    
    3,339
    
    
    
    2,267
    
    
    
    270,017
    
    
    
    6.78
    %FHLMC ZERO COUPONDue over ten years
    
    
    33,267
    
    
    
    
    
    
    
    1,227
    
    
    
    32,040
    
    
    
    6.01
    %PR HOUSING BANKDue from one to five years
    
    
    5,000
    
    
    
    50
    
    
    
    
    
    
    
    5,050
    
    
    
    6.00
    %Due over ten years
    
    
    2,235
    
    
    
    
    
    
    
    
    
    
    
    2,235
    
    
    
    6.20
    %U.S. TREASURYDue over ten years
    
    
    477,185
    
    
    
    8,386
    
    
    
    21,461
    
    
    
    464,110
    
    
    
    5.37
    %OTHERDue within a year
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    3.51
    %Due from one to five years
    
    
    515
    
    
    
    8
    
    
    
    
    
    
    
    523
    
    
    
    6.54
    %Due from five to ten years
    
    
    3,880
    
    
    
    31
    
    
    
    
    
    
    
    3,911
    
    
    
    5.43
    %Due over ten years
    
    
    2,000
    
    
    
    40
    
    
    
    
    
    
    
    2,040
    
    
    
    7.00
    %$
    1,382,622
    
    
    $
    16,264
    
    
    $
    25,773
    
    
    $
    1,373,113
    
    
    
    5.80
    %


18



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SECURITIES HELD TO MATURITY
AS OF DECEMBER 31, 2002
(Dollars in thousands)

WeightedAmortized
    
    Unrealized
    
    Unrealized
    
    Market
    
    AverageCost
    
    Gains
    
    Losses
    
    Value
    
    YieldMORTGAGE-BACKED SECURITIESGNMADue from five to ten years
    
    $
    2,227
    
    
    $
    101
    
    
    $
    
    
    
    $
    2,328
    
    
    
    6.74
    %Due over ten years
    
    
    11,253
    
    
    
    590
    
    
    
    
    
    
    
    11,843
    
    
    
    6.99
    %CMO CERTIFICATESDue from one to five years
    
    
    274
    
    
    
    
    
    
    
    
    
    
    
    274
    
    
    
    7.62
    %Due from five to ten years
    
    
    1,257
    
    
    
    
    
    
    
    8
    
    
    
    1,249
    
    
    
    6.28
    %Due over ten years
    
    
    67,140
    
    
    
    155
    
    
    
    1,172
    
    
    
    66,123
    
    
    
    5.99
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    394,365
    
    
    
    250
    
    
    
    250
    
    
    
    394,365
    
    
    
    5.59
    %FHLB ZERO COUPONDue over ten years
    
    
    314,202
    
    
    
    54
    
    
    
    54
    
    
    
    314,202
    
    
    
    6.82
    %FHLMC ZERO COUPONDue over ten years
    
    
    37,116
    
    
    
    138
    
    
    
    1,121
    
    
    
    36,133
    
    
    
    7.87
    %FHLMC NOTESDue over ten years
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    6.00
    %PR HOUSING BANKDue from one to five years
    
    
    5,000
    
    
    
    25
    
    
    
    
    
    
    
    5,025
    
    
    
    6.00
    %Due over ten years
    
    
    3,305
    
    
    
    
    
    
    
    
    
    
    
    3,305
    
    
    
    6.20
    %US TREASURYDue over ten years
    
    
    61,092
    
    
    
    5,852
    
    
    
    
    
    
    
    66,944
    
    
    
    5.36
    %P.R. ECONOMIC DEVELOPMENTBANK NOTESDue within a year
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    6.60
    %OTHERDue within a year
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    3.51
    %Due from one to five years
    
    
    355
    
    
    
    5
    
    
    
    
    
    
    
    360
    
    
    
    6.48
    %Due from five to ten years
    
    
    4,040
    
    
    
    38
    
    
    
    
    
    
    
    4,078
    
    
    
    5.48
    %Due over ten years
    
    
    2,000
    
    
    
    30
    
    
    
    
    
    
    
    2,030
    
    
    
    7.00
    %$
    960,626
    
    
    $
    7,238
    
    
    $
    2,605
    
    
    $
    965,259
    
    
    
    6.13
    %


19



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



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

MORTGAGE LOANS HELD FOR SALE(In thousands)
    
    JUNE 30, 2003
    
    DECEMBER 31, 2002Conventional single family residential loans
    
    $
    1,572,542
    
    
    $
    1,789,531FHA/VA loans
    
    
    90,050
    
    
    
    86,109Mortgage loans on residential multifamily
    
    
    89,562
    
    
    
    103,296Construction and commercial real estate loans
    
    
    256,406
    
    
    
    204,423Consumer loans secured by mortgages
    
    
    39
    
    
    
    40$
    2,008,599
    
    
    $
    2,183,399




|j. |  | The following table sets forth certain information regarding Doral
Financials loans receivable as of the dates indicated:
|-- |  | --------------------------------------------------------------------------------------------------------------------------

LOANS RECEIVABLE, NET(Dollars in thousands)
    
    JUNE 30, 2003
    
    DECEMBER 31, 2002AMOUNT
    
    PERCENT
    
    AMOUNT
    
    PERCENTConstruction loans
    
    $
    549,498
    
    
    
    44
    %
    
    $
    474,440
    
    
    
    45
    %Residential mortgage loans
    
    
    421,981
    
    
    
    34
    %
    
    
    282,059
    
    
    
    27
    %Commercial  secured by real estate
    
    
    105,431
    
    
    
    8
    %
    
    
    138,270
    
    
    
    13
    %Consumer  secured by real estate
    
    
    455
    
    
    
    0
    %
    
    
    821
    
    
    
    0
    %Consumer  other:Personal loans
    
    
    30,448
    
    
    
    2
    %
    
    
    28,008
    
    
    
    3
    %Auto loans
    
    
    1,383
    
    
    
    0
    %
    
    
    1,457
    
    
    
    0
    %Credit cards
    
    
    6,328
    
    
    
    1
    %
    
    
    4,924
    
    
    
    1
    %Overdrawn checking accounts
    
    
    1,531
    
    
    
    0
    %
    
    
    2,500
    
    
    
    0
    %Revolving lines of credit
    
    
    25,948
    
    
    
    2
    %
    
    
    25,390
    
    
    
    2
    %Commercial non-real estate
    
    
    16,570
    
    
    
    1
    %
    
    
    13,291
    
    
    
    1
    %Loans on saving deposits
    
    
    9,414
    
    
    
    1
    %
    
    
    8,720
    
    
    
    1
    %Land secured
    
    
    80,783
    
    
    
    7
    %
    
    
    79,996
    
    
    
    7
    %Loans receivable, gross
    
    
    1,249,770
    
    
    
    100
    %
    
    
    1,059,876
    
    
    
    100
    %Less:Undisbursed portion of loans
in process
    
    
    (5,158
    )
    
    
    
    
    
    
    (9,420
    )Unearned interest and deferred
loan fees, net
    
    
    (17,750
    )
    
    
    
    
    
    
    (18,132
    )Allowance for loan losses(1)
    
    
    (16,571
    )
    
    
    
    
    
    
    (9,982
    )(39,479
    )
    
    
    
    
    
    
    (37,534
    )Loans receivable, net
    
    $
    1,210,291
    
    
    
    
    
    
    $
    1,022,342




---

|(1) |  | Does not include $8.7 million and $8.3 million of allowance
for loan losses allocated to mortgage loans held for sale as of June
30, 2003 and December 31, 2002, respectively.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|k. |  | Doral Financial is the guarantor of various serial and term bonds issued
by Doral Properties, a wholly-owned subsidiary, through the Puerto Rico
Industrial, Tourist, Educational, Medical and Environmental Control
Facilities Financing Authority (AFICA). 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, which became the new headquarters of Doral Financial.
The bonds have fixed interest rates, ranging from 6.10% to 6.90%, and
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



| |  | 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.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

MORTGAGE SERVICING ASSETS ACTIVITY
(In thousands)

QUARTER ENDED
    
    SIX MONTH PERIOD ENDEDJUNE 30,
    
    JUNE 30,2003
    
    2002
    
    2003
    
    2002Balance at beginning of period
    
    $
    160,270
    
    
    $
    158,157
    
    
    $
    159,881
    
    
    $
    154,340Capitalization of rights
    
    
    12,948
    
    
    
    10,932
    
    
    
    25,984
    
    
    
    22,022Amortization:Scheduled
    
    
    (7,263
    )
    
    
    (6,443
    )
    
    
    (15,026
    )
    
    
    (12,643
    )Unscheduled and impairment
    
    
    (9,841
    )
    
    
    (4,068
    )
    
    
    (14,725
    )
    
    
    (5,141
    )Balance at end of period
    
    $
    156,114
    
    
    $
    158,578
    
    
    $
    156,114
    
    
    $
    158,578




| |  | 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:
| |  | -------------------------------------------------------------------------

QUARTER ENDED
    
    SIX MONTH PERIOD ENDED(In thousands)
    
    JUNE 30, 2003
    
    JUNE 30, 2003Balance at beginning of period
    
    $
    14,036
    
    
    $
    9,152Impairment charges
    
    
    9,453
    
    
    
    16,945Recoveries
    
    
    (3,849
    )
    
    
    (6,457
    )Balance at end of period
    
    $
    19,640
    
    
    $
    19,640


21



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



| |  | At June 30, 2003, and based on recent prepayment experience, the expected
weighted average life of the Companys servicing assets was 3.8 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.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|m. |  | At June 30, 2003 and December 31, 2002, money market investments include
$211.0 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 June 30, 2003 and December 31, 2002, the
carrying value of securities purchased under resell agreements included in
money market investments was $2.5 million and $259.8 million,
respectively. The underlying securities were held on behalf of the
Company by the dealers that arranged the transactions. At December 31,
2002, the Company has repledged approximately $244.5 million of the
underlying securities. None of the underlying securities was repledged at
June 30, 2003.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|n. |  | 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 second
quarter and first half of 2003 was approximately $1.1 million and $2.2
million, respectively. During the first half of 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 the first half of 2002 because the
exercise price of the options equalled the quoted market price of the
stock on the date of grant.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents





| |  | 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 second quarter and first six months of 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(In thousands, except per share
    
    Quarter Ended
    
    Six Month Period Endedinformation)
    
    June 30, 2002
    
    June 30, 2002Compensation and Benefits:Reported
    
    $
    13,698
    
    
    $
    26,549Pro forma
    
    $
    14,821
    
    
    $
    28,794Net Income:Reported
    
    $
    51,987
    
    
    $
    98,527Pro forma
    
    $
    51,303
    
    
    $
    97,158Basic Earnings Per Share:Reported
    
    $
    0.68
    
    
    $
    1.30Pro forma
    
    $
    0.67
    
    
    $
    1.28Diluted Earnings Per Share:Reported
    
    $
    0.67
    
    
    $
    1.28Pro forma
    
    $
    0.66
    
    
    $
    1.26


o. Guarantees

In November 2002, the FASB issued FIN No. 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 June 30, 2003, the Company had
outstanding $1.7 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.

p. Recent Accounting Pronouncements

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 will 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
is effective for financial

23



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##### Table of Contents



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.



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

24Table of Contents
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------




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

GENERAL

Doral Financial Corporation is a financial holding company that, together
with its wholly-owned subsidiaries, is engaged in mortgage banking, retail
banking (including thrift operations), institutional securities 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 June 30,
2003 and 2002 was approximately $1.6 billion and $1.3 billion, respectively.
For the six month periods ended June 30, 2003 and 2002, the volume of loans
originated and purchased was approximately $3.1 billion and $2.4 billion,
respectively. Doral Financials mortgage servicing portfolio increased to
approximately $12.0 billion as of June 30, 2003, from $10.7 billion as of June
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 June 30, 2003, Doral Financial held securities for trading with
a fair market value of $841.0 million, approximately $260.5 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 June 30, 2003, Doral Financial held approximately $1.4 billion
in securities that were classified as held to maturity and reported at
amortized cost. As of June 30, 2003, Doral Financial also held $1.4 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 banking business and that offer
attractive cross-marketing opportunities. These new lines of business are
making increasing contributions to Doral Financials consolidated earnings.

For the quarters ended June 30, 2003 and 2002, Doral Financials banking
subsidiaries contributed approximately $45.1 million and $16.0 million, or 60%
and 31%, respectively, to the Companys consolidated net income. For the first
half of 2003 and 2002, Doral Financials banking subsidiaries contributed
approximately $78.7 million and $32.3 million or 54% and 33%, 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 June 30, 2003 and 2002, Doral
Securities had net income of

25



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approximately $2.1 million and $1.4 million,
respectively. For the six month periods ended June 30, 2003 and 2002, Doral
Securities net income was approximately $3.0 million and $1.5 million,
respectively.

Doral Financial conducts its insurance agency activities in Puerto Rico
through Doral Agency. For the quarters ended June 30, 2003 and 2002, Doral
Agencys net income was approximately $1.5 million and $1.3 million,
respectively. For the six month periods ended June 30, 2003 and 2002, Doral
Agencys net income was approximately $2.8 million and $2.3 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 g of the accompanying Consolidated Financial
Statements.

Doral Financial has significant assets and operations at the parent
company level. HF Mortgage Bankers, one of Doral Financials principal
mortgage units and Doral Overseas, an international banking entity, are
organized as operating division within the parent company. As of June 30,
2003, Doral Financial had assets of $2.4 billion at the parent company level
(excluding investment in consolidated subsidiaries).

CRITICAL ACCOUNTING POLICIES

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 June 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 SIX MONTHS ENDED JUNE 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.

26



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##### Table of Contents



NET INCOME

Doral Financials net income for the quarter ended June 30, 2003 was $75.0
million, an increase of $23.0 million, or 44%, from $52.0 million for the 2002
period. For the first half of 2003 and 2002, the Companys net income amounted
to $145.0 million and $98.5 million, respectively, an increase of 47%.
Consolidated results include the operations of Doral Bank PR and Doral Bank NY,
Doral Financials retail banking units, which contributed approximately $78.7
million to Doral Financials consolidated net income for the six months ended
June 30, 2003, compared to $32.3 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 $3.0 million to consolidated net income for the six months ended
June 30, 2003, compared to $1.5 million for the respective 2002 period. Doral
Agency, Doral Financials insurance agency, contributed $2.8
million to consolidated net income for the six months ended June 30, 2003
compared to $2.3 million for the respective 2002 period. Diluted earnings per
common share for the second quarter of 2003 were $0.96, an increase of 43%
over the $0.67 per diluted share recorded for the same period a year ago.
Diluted earnings per common share for the six months ended June 30, 2003 were
$1.86, an increase of 45% over the $1.28 per diluted share recorded for the
same period a year ago.

Net Interest Income

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

Net interest income for the second quarter of 2003 and 2002 was $39.9
million and $37.7 million, respectively, an increase of 6%. For the first half
of 2003 and 2002 net interest income amounted to $81.2 million and $73.6
million, respectively, an increase of 10%. The increase in net interest income
for the second quarter and first half 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 17 basis points from
1.87% for the second quarter of 2002 to 1.70% for the second quarter of 2003
and 22 basis points from 1.96% for the first half of 2002 to 1.74% for the
first half of 2003, reflects an accelerated amortization of IOs due to an
anticipation of higher levels of prepayment activity, resulting in a reduction
in the average yields of IOs from 12.71% for the second quarter of 2002 to
8.41% for the second quarter of 2003, and from 13.24% for the first half of
2002 to 9.89% for the first half of 2003. Lower yields were partially offset
by a reduction in the average cost of interest-bearing liabilities, which
decreased from 4.17% for the second quarter of 2002 to 3.71% for the second
quarter of 2003 and from 4.25% for the first half of 2002 to 3.75% for the
first half of 2003, due to decreases in interest rates paid by the
Company on its short-term borrowings.

The Companys retail banking subsidiaries contributed $25.3 million to the
consolidated net interest income for the second quarter of 2003, compared to
$23.0 million for the second quarter of 2002. During the first half of 2003,
the Companys retail banking subsidiaries contributed approximately $52.1
million to the consolidated net interest income, compared to $46.7 million for
the first half 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.

27



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

QUARTER ENDED JUNE 30,2003
    
    2002AVERAGE
    
    
    
    
    
    AVERAGE
    
    AVERAGE
    
    
    
    
    
    AVERAGEBALANCE
    
    INTEREST
    
    YIELD/RATE
    
    BALANCE
    
    INTEREST
    
    YIELD/RATEASSETS:Interest-Earning Assets:Total Loans(1)
    
    $
    3,207,288
    
    
    $
    54,291
    
    
    
    6.79
    %
    
    $
    2,844,485
    
    
    $
    49,393
    
    
    
    6.96
    %Mortgage-Backed Securities(2)
    
    
    1,158,390
    
    
    
    18,532
    
    
    
    6.42
    %
    
    
    1,575,379
    
    
    
    23,823
    
    
    
    6.07
    %Interest-Only Strips(2)
    
    
    426,666
    
    
    
    8,944
    
    
    
    8.41
    %
    
    
    268,181
    
    
    
    8,501
    
    
    
    12.71
    %Investment Securities
    
    
    1,818,362
    
    
    
    23,375
    
    
    
    5.16
    %
    
    
    1,288,251
    
    
    
    19,402
    
    
    
    6.04
    %Other Interest-Earning Assets(3)
    
    
    1,484,391
    
    
    
    4,062
    
    
    
    1.10
    %
    
    
    1,014,994
    
    
    
    4,211
    
    
    
    1.66
    %Total Interest-Earning Assets/Interest Income
    
    
    8,095,097
    
    
    $
    109,204
    
    
    
    5.41
    %
    
    
    6,991,290
    
    
    $
    105,330
    
    
    
    6.04
    %Total Non-Interest-Earning Assets
    
    
    781,058
    
    
    
    
    
    
    
    
    
    
    
    602,753Total Assets
    
    $
    8,876,155
    
    
    
    
    
    
    
    
    
    
    $
    7,594,043LIABILITIES AND STOCKHOLDERS EQUITY:Interest-Bearing Liabilities:Deposits
    
    $
    2,570,179
    
    
    $
    18,994
    
    
    
    2.96
    %
    
    $
    2,055,574
    
    
    $
    18,773
    
    
    
    3.66
    %Repurchase Agreements
    
    
    2,705,803
    
    
    
    23,005
    
    
    
    3.41
    %
    
    
    2,835,685
    
    
    
    26,432
    
    
    
    3.74
    %Advances From FHLB
    
    
    1,256,500
    
    
    
    12,321
    
    
    
    3.93
    %
    
    
    881,012
    
    
    
    10,114
    
    
    
    4.60
    %Loans Payable
    
    
    300,280
    
    
    
    1,930
    
    
    
    2.58
    %
    
    
    203,037
    
    
    
    1,428
    
    
    
    2.82
    %Notes Payable(4)
    
    
    649,553
    
    
    
    13,048
    
    
    
    8.06
    %
    
    
    539,575
    
    
    
    10,906
    
    
    
    8.11
    %Total Interest-Bearing Liabilities/Interest Expense
    
    
    7,482,315
    
    
    $
    69,298
    
    
    
    3.71
    %
    
    
    6,514,883
    
    
    $
    67,653
    
    
    
    4.17
    %Total Non-Interest-Bearing Liabilities
    
    
    269,079
    
    
    
    
    
    
    
    
    
    
    
    241,870Total Liabilities
    
    
    7,751,394
    
    
    
    
    
    
    
    
    
    
    
    6,756,753Stockholders Equity
    
    
    1,124,761
    
    
    
    
    
    
    
    
    
    
    
    837,290Total Liabilities and Stockholders Equity
    
    $
    8,876,155
    
    
    
    
    
    
    
    
    
    
    $
    7,594,043Net Interest-Earning Assets
    
    $
    612,782
    
    
    
    
    
    
    
    
    
    
    $
    476,407Net Interest Income
    
    
    
    
    
    $
    39,906
    
    
    
    
    
    
    
    
    
    
    $
    37,677Interest Rate Spread(5)
    
    
    
    
    
    
    
    
    
    
    1.70
    %
    
    
    
    
    
    
    
    
    
    
    1.87
    %Interest Rate Margin(6)
    
    
    
    
    
    
    
    
    
    
    1.98
    %
    
    
    
    
    
    
    
    
    
    
    2.16
    %Net Interest-Earning Assets Ratio
    
    
    
    
    
    
    
    
    
    
    108.19
    %
    
    
    
    
    
    
    
    
    
    
    107.31
    %




---

|(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) |  | Consists of money market instruments, reverse repurchase agreements and deposits in other banks.                                                                                         
|   
|(4) |  | Average yields consider accretion of discounts and amortization of debt issue costs.                                                                                                     
|   
|(5) |  | Interest rate spread represents the difference between Doral Financials weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities.
|   
|(6) |  | Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets.                                                           

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

SIX MONTH PERIOD ENDED JUNE 30,2003
    
    2002AVERAGE
    
    
    
    
    
    AVERAGE
    
    AVERAGE
    
    
    
    
    
    AVERAGEBALANCE
    
    INTEREST
    
    YIELD/RATE
    
    BALANCE
    
    INTEREST
    
    YIELD/RATEASSETS:Interest-Earning Assets:Total Loans(1)
    
    $
    3,243,164
    
    
    $
    109,331
    
    
    
    6.80
    %
    
    $
    2,793,557
    
    
    $
    96,516
    
    
    
    6.97
    %Mortgage-Backed Securities(2)
    
    
    1,187,121
    
    
    
    36,057
    
    
    
    6.13
    %
    
    
    1,473,116
    
    
    
    44,681
    
    
    
    6.12
    %Interest-Only Strips(2)
    
    
    403,680
    
    
    
    19,800
    
    
    
    9.89
    %
    
    
    248,106
    
    
    
    16,291
    
    
    
    13.24
    %Investment Securities
    
    
    1,725,338
    
    
    
    45,435
    
    
    
    5.31
    %
    
    
    1,229,435
    
    
    
    38,221
    
    
    
    6.27
    %Other Interest-Earning Assets(3)
    
    
    1,478,346
    
    
    
    8,191
    
    
    
    1.12
    %
    
    
    832,029
    
    
    
    6,704
    
    
    
    1.62
    %Total Interest-Earning Assets/Interest Income
    
    
    8,037,649
    
    
    $
    218,814
    
    
    
    5.49
    %
    
    
    6,576,243
    
    
    $
    202,413
    
    
    
    6.21
    %Total Non-Interest-Earning Assets
    
    
    722,828
    
    
    
    
    
    
    
    
    
    
    
    577,866Total Assets
    
    $
    8,760,477
    
    
    
    
    
    
    
    
    
    
    $
    7,154,109LIABILITIES AND STOCKHOLDERS EQUITY:Interest-Bearing Liabilities:Deposits
    
    $
    2,463,906
    
    
    $
    37,060
    
    
    
    3.03
    %
    
    $
    1,914,205
    
    
    $
    35,464
    
    
    
    3.74
    %Repurchase Agreements
    
    
    2,787,769
    
    
    
    46,942
    
    
    
    3.40
    %
    
    
    2,689,501
    
    
    
    51,917
    
    
    
    3.89
    %Advances From FHLB
    
    
    1,262,798
    
    
    
    24,695
    
    
    
    3.94
    %
    
    
    828,599
    
    
    
    19,022
    
    
    
    4.63
    %Loans Payable
    
    
    259,812
    
    
    
    3,381
    
    
    
    2.62
    %
    
    
    186,576
    
    
    
    2,758
    
    
    
    2.98
    %Notes Payable(4)
    
    
    635,030
    
    
    
    25,553
    
    
    
    8.11
    %
    
    
    501,008
    
    
    
    19,689
    
    
    
    7.92
    %Total Interest-Bearing Liabilities/Interest
Expense
    
    
    7,409,315
    
    
    $
    137,631
    
    
    
    3.75
    %
    
    
    6,119,889
    
    
    $
    128,850
    
    
    
    4.25
    %Total Non-Interest-Bearing Liabilities
    
    
    255,381
    
    
    
    
    
    
    
    
    
    
    
    227,617Total Liabilities
    
    
    7,664,696
    
    
    
    
    
    
    
    
    
    
    
    6,347,506Stockholders Equity
    
    
    1,095,781
    
    
    
    
    
    
    
    
    
    
    
    806,603Total Liabilities and Stockholders Equity
    
    $
    8,760,477
    
    
    
    
    
    
    
    
    
    
    $
    7,154,109Net Interest-Earning Assets
    
    $
    628,334
    
    
    
    
    
    
    
    
    
    
    $
    456,354Net Interest Income
    
    
    
    
    
    $
    81,183
    
    
    
    
    
    
    
    
    
    
    $
    73,563Interest Rate Spread(5)
    
    
    
    
    
    
    
    
    
    
    1.74
    %
    
    
    
    
    
    
    
    
    
    
    1.96
    %Interest Rate Margin(6)
    
    
    
    
    
    
    
    
    
    
    2.04
    %
    
    
    
    
    
    
    
    
    
    
    2.26
    %Net Interest-Earning Assets Ratio
    
    
    
    
    
    
    
    
    
    
    108.48
    %
    
    
    
    
    
    
    
    
    
    
    107.46
    %




---

|(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) |  | Consists of money market instruments, reverse repurchase agreements and deposits in other banks.                                                                                         
|   
|(4) |  | Average yields consider accretion of discounts and amortization of debt issue costs.                                                                                                     
|   
|(5) |  | Interest rate spread represents the difference between Doral Financials weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities.
|   
|(6) |  | Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets.                                                           

29



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

TABLE C
NET INTEREST INCOME VARIANCE ANALYSIS
(IN THOUSANDS)

QUARTER ENDEDJUNE 30,2003 COMPARED TO 2002INCREASE (DECREASE) DUE TO:VOLUME
    
    RATE
    
    TOTALINTEREST INCOME VARIANCETOTAL LOANS
    
    $
    6,313
    
    
    $
    (1,415
    )
    
    $
    4,898MORTGAGE-BACKED SECURITIES
    
    
    (6,328
    )
    
    
    1,037
    
    
    
    (5,291
    )INTEREST-ONLY STRIPS
    
    
    5,036
    
    
    
    (4,593
    )
    
    
    443INVESTMENT SECURITIES
    
    
    8,005
    
    
    
    (4,032
    )
    
    
    3,973OTHER INTEREST EARNING ASSETS
    
    
    1,948
    
    
    
    (2,097
    )
    
    
    (149
    )TOTAL INTEREST INCOME VARIANCE
    
    
    14,974
    
    
    
    (11,100
    )
    
    
    3,874INTEREST EXPENSE VARIANCEDEPOSITS
    
    
    4,709
    
    
    
    (4,488
    )
    
    
    221REPURCHASE AGREEMENTS
    
    
    (1,214
    )
    
    
    (2,213
    )
    
    
    (3,427
    )ADVANCES FROM FHLB
    
    
    4,318
    
    
    
    (2,111
    )
    
    
    2,207LOANS PAYABLE
    
    
    686
    
    
    
    (184
    )
    
    
    502NOTES PAYABLE
    
    
    2,230
    
    
    
    (88
    )
    
    
    2,142TOTAL INTEREST EXPENSE VARIANCE
    
    
    10,729
    
    
    
    (9,084
    )
    
    
    1,645NET INTEREST INCOME VARIANCE
    
    $
    4,245
    
    
    $
    (2,016
    )
    
    $
    2,229


30



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TABLE D
NET INTEREST INCOME VARIANCE ANALYSIS
(IN THOUSANDS)

SIX MONTH PERIOD ENDEDJUNE 30,2003 COMPARED TO 2002INCREASE (DECREASE) DUE TO:VOLUME
    
    RATE
    
    TOTALINTEREST INCOME VARIANCETOTAL LOANS
    
    $
    15,669
    
    
    $
    (2,854
    )
    
    $
    12,815MORTGAGE-BACKED SECURITIES
    
    
    (8,751
    )
    
    
    127
    
    
    
    (8,624
    )INTEREST-ONLY STRIPS
    
    
    10,299
    
    
    
    (6,790
    )
    
    
    3,509INVESTMENT SECURITIES
    
    
    15,547
    
    
    
    (8,333
    )
    
    
    7,214OTHER INTEREST EARNING ASSETS
    
    
    5,235
    
    
    
    (3,748
    )
    
    
    1,487TOTAL INTEREST INCOME VARIANCE
    
    
    37,999
    
    
    
    (21,598
    )
    
    
    16,401INTEREST EXPENSE VARIANCEDEPOSITS
    
    
    10,279
    
    
    
    (8,683
    )
    
    
    1,596REPURCHASE AGREEMENTS
    
    
    1,911
    
    
    
    (6,886
    )
    
    
    (4,975
    )ADVANCES FROM FHLB
    
    
    10,052
    
    
    
    (4,379
    )
    
    
    5,673LOANS PAYABLE
    
    
    1,091
    
    
    
    (468
    )
    
    
    623NOTES PAYABLE
    
    
    5,307
    
    
    
    557
    
    
    
    5,864TOTAL INTEREST EXPENSE VARIANCE
    
    
    28,640
    
    
    
    (19,859
    )
    
    
    8,781NET INTEREST INCOME VARIANCE
    
    $
    9,359
    
    
    $
    (1,739
    )
    
    $
    7,620


INTEREST INCOME

Total interest income increased from $105.3 million during the second
quarter of 2002, to $109.2 million during the second quarter of 2003, an
increase of 4%. For the six months ended June 30, 2003 interest income
increased by approximately $16.4 million to $218.8 million compared to $202.4
million for the first six 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 June 30, 2002 to $8.0 billion at June 30, 2003.

Interest income on loans increased by $4.9 million or 10% during the
second quarter of 2003, compared to the respective 2002 period. For the first
half of 2003, interest income on loans increased by $12.8 million or 13% 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 second quarter of
2003 decreased by approximately $5.3 million or 22% compared to the respective
2002 period. For the quarters ended June 30, 2003 and 2002, interest income on
mortgage-backed securities amounted to $18.5 million and $23.8 million,
respectively. During the first half of 2003, interest income on
mortgage-backed securities was $36.1 million, versus $44.7 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 $417.0 million for the second quarter of 2003 and $286.0 million
for the first half 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. 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 these securities.

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Interest income on IOs increased by approximately $443,000 to $8.9 million
during the second quarter of 2003, from $8.5 million for the respective 2002
period. For the first half of 2003, interest income on IOs increased by $3.5
million or 22%, as compared to the respective 2002 period. The increases
during 2003 periods when compared to the respective 2002 periods reflect an
increase in the average balance of IOs, which increased from $268.2 million
during the second quarter of 2002 to $426.7 million during the second quarter
of 2003 and from $248.1 million for the first half of 2002 to $403.7 million
for the first six months of 2003. The increase in interest-only strips
resulted from a higher volume of sale and securitization activities during
2003. The increase in volume was partially offset by a reduction in average
yields, from 12.71% for the second quarter of 2002 to 8.41% for the second
quarter of 2003 and from 13.24% for the first half of 2002 to 9.89% for the
first half of 2003, which reflects an accelerated amortization of IOs due to an
anticipation of higher levels of prepayment activity due to the continuing low
mortgage rates environment. See Amortization and Impairment of Servicing Assets
and Valuation of IOs.

Interest income on investment securities increased by $4.0 million or 20%
from the second quarter of 2002 to the second quarter of 2003. For the first
half of 2003, interest income on investment securities increased by $7.2
million or 19%, 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 $1.3
billion for the second quarter of 2002 to $1.8 billion for the second quarter
of 2003, an increase of 39%. For the first half of 2003 the average balance of
investment securities was $1.7 billion compared to $1.2 billion for the first
half of 2002, an increase of 42%. The Companys higher balances in investment
securities was partly offset by a reduction in the average yield of 88 basis
points and 96 basis points for the second quarter and first half 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 are sold, called or mature and replaced by lower yielding
securities.

Interest income on other interest-earning assets amounted to $4.1 million
during the second quarter of 2003, a slight decrease, as compared to the
respective 2002 period. For the first six months of 2003, interest income on
other interest-earning assets increased by $1.5 million or 22%, as compared to
the respective 2002 period. Other interest-earning assets consist primarily of
money market instruments, overnight deposits, term deposits, and reverse
repurchase agreements. The increase from the first half 2002 to the first half
of 2003 reflects Doral Financials higher average balances in these captions
due to the Companys decision to maintain higher levels of liquidity in
anticipation of a rise in interest rates and was partly offset by a
reduction in the average yield of 56 basis points and 50 basis points for the
second quarter and first half of 2003, respectively, as compared to the
corresponding 2002 periods. These reductions reflect recent drops in
short-term interest rates.

INTEREST EXPENSE

Total interest expense increased to $69.3 million during the second
quarter of 2003, from $67.7 million for the respective 2002 period, an increase
of 2%. Total interest expense for the first half of 2003 was $137.6 million,
compared to $128.9 million for the same period of 2002, an increase of 7%. 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 level interest rate environment. Average balance
of interest-bearing liabilities increased to $7.4 billion at an average cost of
3.75% for the six month period ended June 30, 2003, compared to $6.1 billion
at an average cost of 4.25% for the six month period ended June 30, 2002.

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Interest expense on deposits amounted to $19.0 million during the second
quarter of 2003, a slight increase as compared to the respective 2002 period.
For the first half of 2003, interest expense on deposits increased by $1.6
million or 5%, as compared to the respective 2002 period. The increase in
interest expense on deposits reflects a larger deposits 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
$2.5 billion for the six month period ended June 30, 2003, from $1.9 billion
for the six month period ended June 30, 2002. The average interest cost on
deposits was 2.96% and 3.03%, respectively, for the quarter and six month
period ended June 30, 2003, compared to 3.66% and 3.74% for the respective 2002
periods.

Interest expense related to securities sold under agreements to repurchase
decreased by $3.4 million or 13% during the second quarter of 2003 compared to
the same period of 2002. During the first six months of 2003 the interest
expense related to securities sold under agreements to repurchase was $46.9
million versus $51.9 million for the corresponding 2002 period, a decrease of
11%. 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 3.41% and 3.74% for the second
quarter of 2003 and 2002, respectively, and 3.40% and 3.89% for the six month
periods then ended, respectively.

Interest expense on advances from FHLB increased by $2.2 million, or 22%,
for the second quarter of 2003 as compared to the respective 2002 period. For
the first half of 2003, interest expense on advances from FHLB increased by 30%
to $24.7 million from $19.0 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 3.94% for the six month period
ended June 30, 2003, compared to $828.6 million at an average cost of 4.63% for
the six month period ended June 30, 2002.

Interest expense related to loans payable amounted to $1.9 million for the
second quarter of 2003, compared to $1.4 million for the comparative 2002
period. For the first half of 2003 interest expense related to loans payable
was $3.4 million, an increase of 21% compared to $2.8 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 $203.0 million to $300.3 million for the quarters ended June
30, 2002 and 2003, respectively, and from $186.6 million to $259.8 million for
the six month periods ended June 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 2.58% and 2.82% for the second quarter of 2003
and 2002, respectively, and 2.62% and 2.98% for the six month periods then
ended, respectively.

Interest expense on notes payable was $13.0 million for the second quarter
of 2003, compared to $10.9 million for the same period a year ago, an increase
of 19%. For the first half of 2003 interest expense on notes payable was $25.6
million, an increase of 30% compared to $19.7 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 half of 2003, of $134.0 million from June
30, 2002 to June 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.

PROVISION FOR LOAN LOSSES

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 and equity of any underlying collateral, and an assessment
of current economic conditions. While management believes that the current
provision for loan losses is sufficient, future additions to the allowance for
loan losses could be necessary if economic

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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 June 30, 2003, more than 97% of the loan portfolio was secured
by real estate 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 $3.6
million and $8.4 million, respectively, for the quarter and six months period
ended June 30, 2003, as compared to approximately $989,000 and $1.7 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.

NON-INTEREST INCOME

Net Gain on Mortgage Loan Sales and Fees.Net gain from mortgage loan
sales and fees increased by 69% during the second quarter of 2003 to $98.1
million, compared to $58.2 million for the same period of 2002. For the six
month periods ended June 30, 2003 and 2002, mortgage loan sales and fees were
$175.4 million and $104.2 million, respectively, an increase of 68%. 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 were $1.5 billion for the second quarter of 2003, compared to
$987.1 million for the second quarter of 2002. For the six months ended June
30, 2003 loan sales were $2.4 billion, compared to $1.8 billion for the
respective 2002 period. Doral Financial recognized IOs as part of its sales
activities of $64.2 million and $116.1 million for the second quarter and first
six months of 2003, respectively, compared to $52.1 million and $90.6 million
for the respective 2002 periods. During the second quarter of 2003, Doral
Financial also recorded $11.3 million in connection with the recognition of
mortgage servicing rights as part of its loan sale and securitization
activities, compared to $9.4 million for the respective 2002 period. For the
first half of 2003, Doral Financial recognized $18.5 million in connection with
the recognition of mortgage servicing rights, compared to $18.8 million for the
respective 2002 period. Loan origination fees were $18.5 million
and $34.5 million for
the second quarter and first six months of 2003, respectively, compared to
$18.1 million and $34.3 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 June 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 June 30, 2003, net
servicing loss was $8.4 million compared to a loss of $2.1 million for the
corresponding period of 2002. For the six month periods ended June 30, 2003
and 2002, net servicing losses were approximately $12.5 million and $714,000,
respectively.

The net servicing loss for the second quarter and first six 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 actual and expected
increases in prepayments due to declining mortgage interest rates. Total
amortization and impairment charges for the second quarter and first six months
of 2003 were $17.1 million and $29.8 million, respectively, compared to $10.5
million and $17.8 million for the respective 2002 periods. Doral Financial
recognized a net impairment charge of $5.6 million during the second quarter of
2003 and

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of $10.5 million for the first half of 2003, due to the increase in
prepayment estimates associated with falling interest rates. See Note l to the
unaudited consolidated financial statements contained herein for additional
information. Gross servicing fees remain at stable levels, amounting to $8.8
million for the second quarter of 2003, compared to $8.4 million for the second
quarter of 2002. For the first half of 2003, gross servicing fees amounted to
$17.3 million, compared to $17.1 million for the respective 2002 period. The
Companys mortgage servicing portfolio, including its own portfolio, was
approximately $12.0 billion at June 30, 2003, compared to $10.7 billion as of
June 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 June 30, 2003 and 2002, Doral Financial
recognized servicing assets of $11.3 million and $9.4 million, respectively, in
connection with the sale of loans. For the first six
months of 2003 and 2002, Doral Financial recognized servicing assets of $18.5
million and $18.8 million, respectively, in connection with the sale of
loans. Set forth below is a summary of the components of
the net servicing loss:

TABLE E
NET SERVICING LOSS

QUARTER ENDED
    
    SIX MONTH PERIODJUNE 30,
    
    ENDED JUNE 30,(In thousands)
    
    2003
    
    2002
    
    2003
    
    2002Servicing fees
    
    $
    6,402
    
    
    $
    6,394
    
    
    $
    12,764
    
    
    $
    12,996Late charges
    
    
    1,687
    
    
    
    1,636
    
    
    
    3,375
    
    
    
    3,203Prepayment penalties
    
    
    1,471
    
    
    
    1,053
    
    
    
    2,531
    
    
    
    1,917Interest
loss on GNMA serial notes
    
    
    (852
    )
    
    
    (672
    )
    
    
    (1,496
    )
    
    
    (1,145
    )Other servicing fees
    
    
    43
    
    
    
    
    
    
    
    115
    
    
    
    99Amortization and impairment
of servicing assets
    
    
    (17,104
    )
    
    
    (10,511
    )
    
    
    (29,751
    )
    
    
    (17,784
    )Total net servicing loss
    
    $
    (8,353
    )
    
    $
    (2,100
    )
    
    $
    (12,462
    )
    
    $
    (714
    )


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 June 30, 2003 resulted in a loss of
$5.0 million compared to a loss of $6.6 million for the second quarter of 2002.
Trading activities losses were related primarily to both realized losses on
derivative instruments and unrealized losses with respect to trading
securities, partly offset by realized gains on trading securities. For the
quarter ended June 30, 2003, net realized and unrealized losses on derivative
instruments were $54.9 million, compared to a loss of $27.9 million for the
corresponding 2002 period. For the six month periods ended June 30, 2003 and
2002, net realized and unrealized losses on derivative instruments were $69.5
million and $30.2 million, respectively. Trading activities for the quarters
ended June 30, 2003 and 2002, included $26.0 million of unrealized losses and
$7.1 million of unrealized gains, respectively, on the value of its trading
securities pursuant to SFAS No. 115. Trading activities for the six month
periods ended June 30, 2003 and 2002 included $26.4 million of unrealized
losses and $6.9 million of unrealized gains, respectively, on the value of its
trading securities pursuant to SFAS No. 115. 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 the Puerto
Rico GNMAs bulk sale of $250 million. Net realized gains on sale of trading
securities was $75.9 million for the quarter ended June 30, 2003 compared to
$14.2 million for the 2002 period. For the six months ended June 30, 2003, net
realized gains on sale of trading securities were $95.9 million, compared to
$11.6 million for the respective 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. Because
interest rates have remained at historic low levels, Doral Financial has
experienced losses on its derivatives, but these losses have been generally
offset by increases on realized gains on trading securities and gains on sale
of mortgage loans. Set forth below is a summary of the components of gains and
losses from trading activities:

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TABLE F
COMPONENTS OF TRADING ACTIVITIES

QUARTER ENDED
    
    SIX MONTH PERIODJUNE 30,
    
    ENDED JUNE 30,(In thousands)
    
    2003
    
    2002
    
    2003
    
    2002Net realized gains on sales of trading securities
    
    $
    75,902
    
    
    $
    14,155
    
    
    $
    95,913
    
    
    $
    11,604Net unrealized (losses) and gains on trading securities
    
    
    (25,982
    )
    
    
    7,134
    
    
    
    (26,434
    )
    
    
    6,881Net realized and unrealized losses on derivative instruments
    
    
    (54,871
    )
    
    
    (27,918
    )
    
    
    (69,529
    )
    
    
    (30,184
    )Total
    
    $
    (4,951
    )
    
    $
    (6,629
    )
    
    $
    (50
    )
    
    $
    (11,699
    )


Gain on Sale of Investment Securities.Gain on sale of investment
securities represents the impact on income of transactions involving the sale
of securities classified as available for sale. For the second quarter and
first six months of 2003, sale of investment securities resulted in a gain of
$7.0 million and $14.1 million, respectively, compared to a gain of $3.2
million and $6.0 million, respectively, for the corresponding 2002 periods,
reflecting increased sales activities and favorable pricing due to the
declining interest rate environment. Proceeds from sales of securities
available for sale amounted to $4.1 billion for the first half of 2003 compared
to $2.3 billion for the first half of 2002.

Commissions, Fees and Other Income.Commissions, Fees and Other income increased 48% during the second quarter of 2003 from $5.0
million for the quarter ended June 30, 2002 to $7.4 million for the quarter
ended June 30, 2003. For the first half of 2003, commissions, fees and other
income increased 43%, 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.

TABLE G
COMMISSIONS FEES AND OTHER INCOME
(IN THOUSANDS)

QUARTER ENDED
    
    SIX MONTH PERIODJUNE 30,
    
    ENDED JUNE 30,2003
    
    2002
    
    2003
    
    2002Deposit and other retail banking fees
    
    $
    2,410
    
    
    $
    1,787
    
    
    $
    5,020
    
    
    $
    3,555Securities fees and commissions
    
    
    1,492
    
    
    
    284
    
    
    
    1,714
    
    
    
    545Insurance agency fees and commissions
    
    
    1,936
    
    
    
    1,663
    
    
    
    3,723
    
    
    
    3,268Other income
    
    
    1,587
    
    
    
    1,309
    
    
    
    3,183
    
    
    
    2,186Total
    
    $
    7,425
    
    
    $
    5,043
    
    
    $
    13,640
    
    
    $
    9,554


NON-INTEREST EXPENSES

Total non-interest expenses increased by 35% during the second quarter
ended June 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 six months ended June 30,
2003, compensation and benefits, which is the largest component of non-interest
expense, increased by 56% and 60%, respectively, due mainly to increases in
headcount as well as increases in the costs of compensation and fringe
benefits. For the first half

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of 2003, it also includes $2.2 million,
associated with the expensing of the fair value of stock options. As of June
30, 2003, Doral Financial had 2,175 employees compared to 1,965 employees as of
June 30, 2002. For the six month period ended June 30, 2003 total
non-interest expenses increased by 40% from the comparable 2002 period.

INCOME TAXES

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 half of 2003 and 2002, the effective income tax rate of Doral Financial
was 16% and 14%, respectively. The increase in the effective tax rate for 2003
reflected increased revenues from the Companys non-tax advantaged operations
such as its insurance agency and institutional securities operations.

The lower effective tax rates (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s international banking entities may 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 $41.9 million and $29.5 million for the six month
periods ended June 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
quarters ended June 30, 2003 and 2002, the provision for income taxes for the
Companys U.S. subsidiaries amounted to approximately $206,000 and $998,000,
respectively. For the first six month periods ended June 30, 2003 and 2002,
the provision for income taxes for the Companys U.S. subsidiaries amounted to
approximately $2.3 million and $1.6 million, respectively.

AMORTIZATION AND IMPAIRMENT OF SERVICING ASSETS AND VALUATION OF IOs

As part of its mortgage sale activities, Doral Financial generally retains
the right to service the mortgage loans sold. 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 interest: 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.

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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 half 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 half 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 June 30, 2003 and December 31, 2002 was
$156.1 million and $159.9 million, respectively. These amounts do not include
the fair value of servicing rights with respect to approximately $422.4 million
in loans internally originated prior to 1995, which under prior accounting
rules are not reflected in Doral Financials Consolidated Financial Statements.
For additional information regarding the unamortized balance of Doral
Financials servicing assets and amortization for the quarters and six month
periods ended June 30, 2003 and 2002, please refer to Note l to the unaudited
consolidated financial statements contained herein.

To determine the fair value of its IOs, Doral Financial obtains dealer
quotes for comparable instruments and uses 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. Doral Financial recognized IOs with
recorded fair values of $64.2 million and $52.1 million for the quarters ended
June 30, 2003 and 2002, respectively. For the first half of 2003, Doral
Financial recognized IOs with recorded fair values of $116.1 million, compared
to $90.6 million for the comparable 2002 period. The market factor used by
Doral Financial to value IOs ranged from 4.75 to 5.50 during the first half of
2003, compared to a range of 4.25 to 5.50 during the first half of 2002. As of
June 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 $444.5 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.

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 June 30, 2003, the impairment
allowance for MSRs was $19.6 million. As discussed above, changes in the fair
value of IOs are recognized in current 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 (conventional, conforming and non-conforming) and interest rates.
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

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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.

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BALANCE SHEET AND OPERATING DATA ANALYSIS

LOAN PRODUCTION

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
    
    SIX MONTH PERIODJUNE 30,
    
    ENDED JUNE 30,2003
    
    2002
    
    2003
    
    2002FHA/VA mortgage loansNumber of loans
    
    
    1,049
    
    
    
    1,564
    
    
    
    1,901
    
    
    
    3,289Volume of loans
    
    $
    97,765
    
    
    $
    138,246
    
    
    $
    175,950
    
    
    $
    288,242Percent of total volume
    
    
    6
    %
    
    
    11
    %
    
    
    6
    %
    
    
    12
    %Average initial loan balance
    
    $
    93,198
    
    
    $
    88,393
    
    
    $
    92,557
    
    
    $
    87,638Conventional conforming mortgage loansNumber of loans
    
    
    4,323
    
    
    
    3,214
    
    
    
    8,209
    
    
    
    7,036Volume of loans
    
    $
    675,115
    
    
    $
    466,498
    
    
    $
    1,253,395
    
    
    $
    1,000,143Percent of total volume
    
    
    42
    %
    
    
    37
    %
    
    
    41
    %
    
    
    41
    %Average initial loan balance
    
    $
    156,168
    
    
    $
    145,146
    
    
    $
    152,685
    
    
    $
    142,147Conventional non-conforming mortgage loans(1)(2)Number of loans
    
    
    6,349
    
    
    
    5,743
    
    
    
    12,117
    
    
    
    10,513Volume of loans
    
    $
    606,850
    
    
    $
    454,998
    
    
    $
    1,169,209
    
    
    $
    826,980Percent of total volume
    
    
    38
    %
    
    
    37
    %
    
    
    38
    %
    
    
    34
    %Average initial loan balance
    
    $
    95,582
    
    
    $
    79,227
    
    
    $
    96,493
    
    
    $
    78,663Other(3)Number of loans
    
    
    510
    
    
    
    489
    
    
    
    1,075
    
    
    
    939Volume of loans
    
    $
    226,248
    
    
    $
    191,760
    
    
    $
    467,980
    
    
    $
    326,402Percent of total volume
    
    
    14
    %
    
    
    15
    %
    
    
    15
    %
    
    
    13
    %Total loansNumber of loans
    
    
    12,231
    
    
    
    11,010
    
    
    
    23,302
    
    
    
    21,777Volume of loans
    
    $
    1,605,978
    
    
    $
    1,251,502
    
    
    $
    3,066,534
    
    
    $
    2,441,767




---

|(1) |  | Includes $14.0 million and $18.0 million in second mortgages for
the quarters ended June 30, 2003 and 2002, respectively, and $27.6
million and $29.0 million in second mortgages for the six month periods
ended June 30, 2003 and 2002, respectively.                                           
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes $34.0 million and $19.3 million in home equity or personal
loans secured by real estate mortgages of up to $40,000 for the
quarters ended June 30, 2003 and 2002, respectively, and $58.0 million
and $39.0 million for the six month periods ended June 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.                                                                                                                    

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A substantial portion of Doral Financials total residential mortgage loan
originations has consistently been composed of refinance loans. For the six
months ended June 30, 2003 and 2002, refinance loans represented approximately
65% and 53%, 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 is made for debt consolidation purposes and because
interest cost on mortgage loans is tax deductible for borrowers.

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

TABLE I
LOAN ORIGINATION SOURCES

SIX MONTH PERIOD ENDED JUNE 30,2003
    
    2002Puerto Rico
    
    US
    
    Total
    
    Puerto Rico
    
    US
    
    TotalRetail
    
    
    54
    %
    
    
    
    
    
    
    54
    %
    
    
    55
    %
    
    
    
    
    
    
    55
    %Wholesale(1)
    
    
    6
    %
    
    
    24
    %
    
    
    30
    %
    
    
    7
    %
    
    
    24
    %
    
    
    31
    %New Housing Developments
    
    
    11
    %
    
    
    
    
    
    
    11
    %
    
    
    10
    %
    
    
    
    
    
    
    10
    %Multi-family(2)
    
    
    
    
    
    
    2
    %
    
    
    2
    %
    
    
    
    
    
    
    
    
    
    
    Other(3)
    
    
    2
    %
    
    
    1
    %
    
    
    3
    %
    
    
    2
    %
    
    
    2
    %
    
    
    4
    %




---

|(1) |  | Refers to purchases of mortgage loans from other financial institutions
and mortgage lenders.                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Less than one percent for 2002.                                                                                              
|   
|(3) |  | Refers to commercial, consumer and land loans originated through the
retail banking subsidiaries and other specialized units.

MORTGAGE LOAN SERVICING

Doral Financials principal source of servicing rights has traditionally
been its internal mortgage loan production. However, Doral Financial also
purchases mortgage loans on a servicing- released basis as well as servicing
rights in bulk. During the second quarters of 2003 and 2002, Doral Financial
purchased servicing rights to approximately $94.0 million and
$83.9 million,
respectively, in principal amount of mortgage loans. For the six month periods
ended June 30, 2003 and 2002, the Company purchased servicing rights to
approximately $410.9 million and $192.2 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.

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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 JUNE 30,2003
    
    2002COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END:GNMA
    
    $
    2,881,215
    
    
    $
    3,231,397FHLMC/FNMA
    
    
    3,092,780
    
    
    
    2,759,615Doral Financial grantor trusts
    
    
    43,023
    
    
    
    56,938Other conventional mortgage loans(1)(2)
    
    
    5,983,119
    
    
    
    4,626,450Total servicing portfolio
    
    $
    12,000,137
    
    
    $
    10,674,400SELECTED DATA REGARDING MORTGAGE LOANS SERVICED:Number of loans
    
    
    146,059
    
    
    
    138,870Weighted average interest rate
    
    
    7.21
    %
    
    
    7.32
    %Weighted average remaining maturity (months)
    
    
    256
    
    
    
    250Weighted average servicing fee rate
    
    
    .3206
    %
    
    
    .3434
    %Average servicing portfolio
    
    $
    11,720,176
    
    
    $
    10,453,126Principal prepayments
    
    $
    1,201,914
    
    
    $
    761,951Prepayments to average portfolio (annualized)
    
    
    21
    %
    
    
    15
    %Average size of loans prepaid
    
    $
    92,612
    
    
    $
    75,605Servicing assets, net reflected on Consolidated Statement
of Financial Condition
    
    $
    156,114
    
    
    $
    158,578DELINQUENT MORTGAGE LOANS AND PENDING
FORECLOSURES AT PERIOD END:60-89 days past due
    
    
    1.20
    %
    
    
    1.22
    %90 days or more past due
    
    
    2.05
    %
    
    
    2.06
    %Total delinquencies excluding foreclosures
    
    
    3.25
    %
    
    
    3.28
    %Foreclosures pending
    
    
    1.71
    %
    
    
    1.54
    %SERVICING PORTFOLIO ACTIVITY:Beginning servicing portfolio
    
    $
    11,241,523
    
    
    $
    10,006,380Add:Loans funded and purchased(3)
    
    
    1,784,881
    
    
    
    1,418,321Bulk servicing acquired
    
    
    410,858
    
    
    
    192,176Less:Servicing sales transferred
    
    
    2,450
    
    
    
    59,219Run-off(4)
    
    
    1,434,675
    
    
    
    883,258Ending servicing portfolio
    
    $
    12,000,137
    
    
    $
    10,674,400




---

|(1) |  | Includes $2.4 billion and $1.8 billion of loans owned by Doral
Financial at June 30, 2003 and 2002, respectively, which represented
20% and 17% of the total servicing portfolio as of such dates.                                 
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes portfolios of $246.0 million and $87.1
million at June 30, 2003 and 2002, respectively, insured FHA/VA
delinquent loans sold to third parties.                                                                            
|   
|(3) |  | Excludes approximately $1.3 billion and $1.0 billion of
conventional, commercial, consumer, construction and other loans not
included in Doral Financials mortgage servicing-portfolio as of June
30, 2003 and 2002, respectively.
|   
|(4) |  | Run-off refers to regular amortization of loans, prepayments
and foreclosures.                                                                                                                                                     

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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 June 30, 2003 and 2002, approximately 3% 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 $1.2 billion and $762.0 million for the six months ended June 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.

CREDIT RISKS RELATED TO LOAN ACTIVITIES

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

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 instituting procedures to ensure
appropriate actions to comply with laws and regulations. Doral Financials
collateral requirements for loans depend on the financial strength of the
borrower and the type of loan involved. Acceptable collateral principally
includes cash, deposit and investment accounts and real estate, and to a lesser
extent, liens on accounts receivable, 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.

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NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES

Non-performing assets (NPAs) consist of loans past due 90 days and still
accruing, loans on a non-accrual basis and other real estate owned.
Conventional mortgage loans held for sale by Doral Financials mortgage banking
units are placed on a non-accrual basis after they have been delinquent for
more than 180 days to the extent concern exists as to ultimate collectibility
based on the loan-to-value ratio. When the loan is placed on non-accrual, its
accrued interest to date is fully reserved. 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 June 30, 2003
and 2002, Doral Financial would have recognized $7.3 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 receivable
for impairment. Impaired loans as of June 30, 2003 and December 31, 2002
amounted to approximately $39.7 million and $2.0 million, respectively. At June
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.

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.

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##### Table of Contents



TABLE K
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)

AS OF
    
    AS OFJUNE 30, 2003
    
    DECEMBER 31, 2002Mortgage banking business:Non-accrual loans:Construction loans
    
    $
    2,601
    
    
    $
    497Residential mortgage loans
    
    
    19,825
    
    
    
    17,153Construction loans past due 90 days and still accruing
    
    
    470
    
    
    
    2,413Loans held-for-sale past due 90 days and still accruing(1)
    
    
    63,413
    
    
    
    60,054OREO
    
    
    17,688
    
    
    
    12,375Total NPAs of mortgage banking business
    
    
    103,997
    
    
    
    92,492Other lending activities through banking subsidiaries:Non-accrual loans:Construction loans
    
    
    2,011
    
    
    
    638Residential mortgage loans
    
    
    11,531
    
    
    
    8,746Commercial real estate
    
    
    5,795
    
    
    
    5,152Consumer loans
    
    
    1,269
    
    
    
    1,152Commercial non-real estate loans
    
    
    390
    
    
    
    676Land loans
    
    
    2,746
    
    
    
    Total non-accrual loans
    
    
    23,742
    
    
    
    16,364Construction loans past due 90 days and still accruing
    
    
    1,503
    
    
    
    Consumer loans past due 90 days and still accruing
    
    
    257
    
    
    
    OREO
    
    
    918
    
    
    
    682Total NPAs of banking subsidiaries
    
    
    26,420
    
    
    
    17,046Total NPAs of Doral Financial (consolidated)
    
    $
    130,417
    
    
    $
    109,538Total NPAs of banking subsidiaries as a percentage
of their loans portfolio, net, and OREO
    
    
    0.99
    %
    
    
    0.62
    %Total NPAs of Doral Financial as a percentage of
consolidated total assets
    
    
    1.39
    %
    
    
    1.30
    %Total Non-performing loans to total loans
    
    
    3.45
    %
    
    
    2.99
    %Ratio of allowance for loan losses to total
non-performing loans at end of period (consolidated)
    
    
    22.59
    %
    
    
    18.91
    %




---

|(1) |  | Does not include approximately $11.8 million and $13.4 million of 90 days
past due FHA/VA loans as of June 30, 2003 and December 31, 2002,
respectively, which are not considered non-performing assets by Doral
Financial because the principal balance of these loans is insured or
guaranteed under applicable FHA and VA programs and interest is, in most
cases, fully recovered in foreclosure proceedings.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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.

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

QUARTER ENDED
    
    SIX MONTH PERIODJUNE 30,
    
    ENDED JUNE 30,2003
    
    2002
    
    2003
    
    2002OREO:Balance at beginning of period
    
    $
    2,426
    
    
    $
    1,671
    
    
    $
    2,772
    
    
    $
    1,365Provision for losses
    
    
    412
    
    
    
    651
    
    
    
    682
    
    
    
    891Net gains (losses), charge-offs and others
    
    
    (788
    )
    
    
    (42
    )
    
    
    (1,404
    )
    
    
    24Balance at end of period
    
    $
    2,050
    
    
    $
    2,280
    
    
    $
    2,050
    
    
    $
    2,280Allowance for Loan Losses:Balance at beginning of period
    
    $
    22,299
    
    
    $
    13,071
    
    
    $
    18,243
    
    
    $
    12,472Provision for loan losses
    
    
    3,618
    
    
    
    989
    
    
    
    8,396
    
    
    
    1,737Charge-offs:Mortgage loans held-for-sale
    
    
    
    
    
    
    (52
    )
    
    
    (20
    )
    
    
    (90
    )Construction loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential mortgage loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer loans
    
    
    (828
    )
    
    
    (393
    )
    
    
    (1,527
    )
    
    
    (526
    )Commercial non-real estate loans
    
    
    (41
    )
    
    
    (5
    )
    
    
    (93
    )
    
    
    (20
    )Other
    
    
    
    
    
    
    (85
    )
    
    
    
    
    
    
    (97
    )Total charge-offs
    
    
    (869
    )
    
    
    (535
    )
    
    
    (1,640
    )
    
    
    (733
    )Recoveries:Mortgage loans held-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential mortgage loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Commercial real estate loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer loans
    
    
    60
    
    
    
    18
    
    
    
    105
    
    
    
    51Commercial non-real estate loans
    
    
    2
    
    
    
    1
    
    
    
    6
    
    
    
    3Other
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    11Total recoveries
    
    
    62
    
    
    
    30
    
    
    
    111
    
    
    
    79Net charge-offs
    
    
    (807
    )
    
    
    (505
    )
    
    
    (1,529
    )
    
    
    (654
    )Other adjustments
    
    
    146
    
    
    
    (24
    )
    
    
    146
    
    
    
    (24
    )Balance at end of period(1)
    
    $
    25,256
    
    
    $
    13,531
    
    
    $
    25,256
    
    
    $
    13,531Allowance for loan losses as a percentage of
total loans outstanding at the end of period
    
    
    0.78
    %
    
    
    0.48
    %
    
    
    0.78
    %
    
    
    0.48
    %Net charge-offs to average loans outstanding
    
    
    0.03
    %
    
    
    0.02
    %
    
    
    0.05
    %
    
    
    0.02
    %




---

|(1) |  | Includes the allowance of mortgage loans held-for-sale of $8.7 million
for 2003 and $7.0 million for 2002 and the allowance for loans receivable held
for investment of $16.6 million for 2003 and $6.5 million for 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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The allowance for loan losses relating to loans held by Doral Financial
was $25.3 million at June 30, 2003, compared to $13.5 million as of June 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.

LIQUIDITY AND CAPITAL RESOURCES

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

Servicing agreements relating to the mortgage-backed securities programs
of FNMA, FHLMC and GNMA, and to mortgage loans sold to certain other investors,
require Doral Financial to advance funds to make scheduled payments of
principal, interest, taxes and insurance, if such payments have not been
received from the borrowers. While Doral Financial generally recovers funds
advanced pursuant to these arrangements within 30 days, it must absorb the cost
of the funds it advances during the time the advance is outstanding. During
the six month period ended June 30, 2003, the monthly average amount of funds
advanced by Doral Financial under such servicing agreements was approximately
$11.8 million, compared to $7.1 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. 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 June 30, 2003, the outstanding principal balance of such
FHA/VA loans was $246.0 million and the aggregate monthly amounts of funds
advanced by Doral Financial was $9.8 million. During the first half 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
financings and public offerings of preferred and common stock.

47



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##### Table of Contents



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

TABLE M
SOURCES OF BORROWINGS
(DOLLARS IN THOUSANDS)

AS OF JUNE 30, 2003
    
    AS OF DECEMBER 31, 2002AMOUNT
    
    AVERAGE
    
    AMOUNT
    
    AVERAGEOUTSTANDING
    
    RATE
    
    OUTSTANDING
    
    RATEDeposits
    
    $
    2,619,496
    
    
    
    2.66
    %
    
    $
    2,217,211
    
    
    
    2.85
    %Repurchase Agreements
    
    
    2,396,609
    
    
    
    3.38
    %
    
    
    2,733,339
    
    
    
    3.46
    %Loans Payable
    
    
    235,425
    
    
    
    2.25
    %
    
    
    211,002
    
    
    
    2.62
    %Notes Payable
    
    
    612,920
    
    
    
    7.75
    %
    
    
    621,303
    
    
    
    7.75
    %Advances from FHLB
    
    
    1,256,500
    
    
    
    3.88
    %
    
    
    1,311,500
    
    
    
    3.93
    %


Doral Financial had warehousing, gestation and repurchase agreements lines
of credit totaling $9.3 billion as of June 30, 2003, of which $3.9 billion was
outstanding as of such date (includes advances from FHLB-NY). 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
June 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.

48



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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, some of
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 June
30, 2003, Doral Financials banking subsidiaries held approximately $2.6
billion in deposits at a weighted-average interest rate of 2.66%.

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

TABLE N
AVERAGE DEPOSIT BALANCE
(DOLLARS IN THOUSANDS)

SIX MONTHPERIOD ENDED
    
    YEAR ENDEDJUNE 30, 2003
    
    DECEMBER 31, 2002AVERAGE
    
    AVERAGE
    
    AVERAGE
    
    AVERAGEBALANCE
    
    RATE
    
    BALANCE
    
    RATECertificates of deposit
    
    $
    1,472,689
    
    
    
    3.35
    %
    
    $
    1,168,984
    
    
    
    3.84
    %Regular passbook savings
    
    
    234,753
    
    
    
    2.57
    %
    
    
    183,074
    
    
    
    2.81
    %NOW accounts
    
    
    462,716
    
    
    
    2.15
    %
    
    
    411,837
    
    
    
    2.23
    %Non-interest bearing
    
    
    293,748
    
    
    
    
    
    
    
    273,708
    
    
    
    Total deposits
    
    $
    2,463,906
    
    
    
    3.03
    %
    
    $
    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 June 30, 2003.

TABLE O
DEPOSIT MATURITIES
(IN THOUSANDS)

AMOUNTCertificates of deposit maturingThree months or less
    
    $
    353,919Over three through six months
    
    
    79,229Over six through twelve months
    
    
    202,786Over twelve months
    
    
    693,892Total
    
    $
    1,329,826


As of June 30, 2003 and December 31, 2002, Doral Financials banking
subsidiaries had approximately $779.4 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.

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As of June 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 June 30, 2003, based on
existing Federal Reserve, FDIC and OTS guidelines.

TABLE P
REGULATORY CAPITAL RATIOS

DORAL
    
    DORAL
    
    DORALFINANCIAL
    
    BANK PR
    
    BANK NYTier 1 Capital Ratio (Tier 1 capital to risk weighted assets)
    
    
    15.3
    %
    
    
    16.5
    %
    
    
    19.7
    %Total Capital (Total capital to risk weighted assets)
    
    
    15.7
    %
    
    
    17.2
    %
    
    
    19.9
    %Leverage Ratio(1)
    
    
    11.6
    %
    
    
    7.2
    %
    
    
    8.7
    %




---

|(1) |  | Tier 1 capital to average assets in the case of Doral Financial and Doral
Bank PR and Tier 1 capital to adjusted total assets in the case of Doral
Bank NY.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

As of June 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 June 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.

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ASSETS AND LIABILITIES

At June 30, 2003, Doral Financials total assets were $9.4 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 $643.2 million and an increase of $577.1 million in accounts
receivable from investment sales. Total liabilities were $8.2 billion at June
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 and
accounts payable from
investment purchases, which were offset in part by a decrease of $336.7 million
in securities sold under agreements to repurchase. At June 30, 2003, deposit
accounts totaled $2.6 billion, compared to $2.2 billion at December 31, 2002.
As of June 30, 2003, Doral Financials retail banking subsidiaries had $6.7
billion in assets, compared to $5.5 billion at December 31, 2002.

OFF-BALANCE SHEET ACTIVITIES

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 June 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 $1.6 billion. As of June 30, 2003, Doral Financial
maintained a reserve of $3.4 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 six
months of 2003, Doral Financial repurchased approximately $59.9 million of
loans subject to recourse. Historically, losses on recourse obligations have
not been significant. As of June 30, 2003, approximately $131.1 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 June 30, 2003, commitments to extend
credit and commercial and financial standby letters of credit amounted to
approximately $497.2 million and $1.7 million, respectively, and commitments to
sell mortgage-backed securities and loans amounted to approximately $1.1
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.

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CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

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 June 30, 2003.

TABLE Q
CONTRACTUAL OBLIGATIONS
(IN THOUSANDS)

PAYMENT DUE BY PERIODLESS THAN
    
    
    
    
    
    
    
    
    
    AFTER 5CONTRACTUAL OBLIGATIONS
    
    TOTAL
    
    1 YEAR
    
    1-3 YEARS
    
    3-5 YEARS
    
    YEARSDeposits
    
    $
    2,619,496
    
    
    $
    1,894,043
    
    
    $
    391,880
    
    
    $
    333,175
    
    
    $
    398Repurchase and warehousing lines of credit
    
    
    2,632,034
    
    
    
    1,923,458
    
    
    
    243,776
    
    
    
    464,800
    
    
    
    Notes Payable
    
    
    612,920
    
    
    
    1,621
    
    
    
    221,923
    
    
    
    94,602
    
    
    
    294,774Advances from FHLB
    
    
    1,256,500
    
    
    
    604,500
    
    
    
    305,000
    
    
    
    347,000
    
    
    
    Non-cancellable Operating Leases
    
    
    63,184
    
    
    
    6,163
    
    
    
    10,969
    
    
    
    10,601
    
    
    
    35,451Total Contractual Cash Obligations
    
    $
    7,184,134
    
    
    $
    4,429,785
    
    
    $
    1,173,548
    
    
    $
    1,250,178
    
    
    $
    330,623


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##### Table of Contents



TABLE R
OTHER COMMERCIAL COMMITMENTS(1)
(IN THOUSANDS)

AMOUNT OF COMMITMENT EXPIRATION PER PERIODTOTALAMOUNT
    
    LESS THAN
    
    
    
    
    
    
    
    
    
    AFTER 5OTHER COMMERCIAL COMMITMENTS
    
    COMMITTED
    
    1 YEAR
    
    1-3 YEARS
    
    3-5 YEARS
    
    YEARSStandby Repurchase (Recourse) Obligations
    
    $
    1,601,794
    
    
    $
    307,859
    
    
    $
    712,241
    
    
    $
    
    
    
    $
    581,694




---

|(1) |  | Refer to Off-Balance Sheet Activities for additional information
regarding other commercial commitments of the Company.
|--- |  | -------------------------------------------------------------------------------------------------------------------------

INTEREST RATE RISK MANAGEMENT

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

53



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

TABLE S
INTEREST RATE SENSITIVITY
AS OF JUNE 30, 2003

PERCENTAGE CHANGECHANGE IN INTEREST RATES
    
    IN 12-MONTH(BASIS POINTS)
    
    NET INTEREST INCOME+200
    
    
    17
    %+100
    
    
    8
    %-100
    
    
    (10
    %)-200
    
    
    (19
    %)


INTEREST RATE SENSITIVITY
AS OF DECEMBER 31, 2002

PERCENTAGE CHANGECHANGE IN INTEREST RATES
    
    IN 12-MONTH(BASIS POINTS)
    
    NET INTEREST INCOME+200
    
    
    21
    %+100
    
    
    10
    %-100
    
    
    (8
    %)-200
    
    
    (16
    %)


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 8% and 17%, respectively, over one year as of June 30, 2003. The model
assumes that the portfolios 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 19% over one year as of
June 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 assumes a
full 100 or 200 basis points decrease in rates in short-term assets and
liabilities, principally due to the 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 April 2003, Doral Financial purchased an interest rate collar,
designated to protect the Company against rising interest rates, with a
notional amount of $100 million expiring in April 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 $1.0 million and the fair value of the collar as of June 30, 2003
was approximately $537,000. The collar is accounted for at fair value with
changes in the fair value accounted for in the trading activities of the
statements of income.

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In April 2003, Doral Financial purchased two interest rate collars,
designated to protect the Company against rising interest rates, with an
aggregate notional amount of $200 million expiring in April 2008. Under the
terms of the collars, Doral Financial is entitled to receive the excess between
the 3 month LIBOR and 8.0% provided that the 3 month LIBOR is less than 10.0%.
Doral Financial will not receive any payments if the 3 month LIBOR is less than
8.0% or greater than 10.0%. The premium paid by Doral Financial amounted to
approximately $352,500 and the fair value of the collars as of June 30, 2003
was approximately $158,000. These collars are accounted for at fair value with
changes in the fair value accounted for in the trading activities of the
statements of income.

The following table summarizes interest rate collars outstanding at June
30, 2003.

TABLE T
INTEREST RATE COLLARS
(DOLLARS IN THOUSANDS)

ENTITLED PAYMENT
    
    PREMIUM
    
    FAIRNOTIONAL AMOUNT
    
    MATURITY DATE
    
    CONDITIONS
    
    PAID
    
    VALUE$200,000
    
    June 2006
    
    Excess 3-month LIBOR
and 5.0%
    
    $
    4,865
    
    
    $
    332$400,000
    
    March 2007
    
    Excess 3-month LIBOR
and 5.5% provided
that 3-month LIBOR is
less than 8.5%
    
    $
    5,760
    
    
    $
    748$600,000
    
    September 2007
    
    Excess 3-month LIBOR
and 5.5% provided
that 3-month LIBOR
is less than 8.5%
    
    $
    5,570
    
    
    $
    1,830$100,000
    
    February 2008
    
    Excess 3-month LIBOR
and 5.5% provided
that 3-month LIBOR
is less than 8.0%
    
    $
    955
    
    
    $
    470$100,000
    
    April 2008
    
    Excess 3-month LIBOR
and 5.0% provided
that 3-month LIBOR
is less than 8.0%
    
    $
    1,000
    
    
    $
    537$200,000
    
    April 2008
    
    Excess 3-month LIBOR
and 8.0% provided
that 3-month LIBOR
is less than 10.0%
    
    $
    353
    
    
    $
    158


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 June 30, 2003,
Doral Bank PR had outstanding two interest rate swaps agreements (notional
principal amount of $100,000,000, each one) 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

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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 1.20% and 1.18%, respectively, as of June 30, 2003. The fixed
interest rate to be paid by Doral Bank under these agreements was 3.69% and
3.655%, respectively, as of June 30, 2003. At June 30, 2003, the agreements
had an aggregate negative fair value of $9.7 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
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 six month period ended June 30, 2003 average assets and liabilities related
to derivatives were $33.0 million and $35.8 million, respectively. The
notional amounts of assets and liabilities related to these derivatives totaled
$27.3 billion and $19.3 billion, respectively, as of June 30, 2003. Notional
amounts indicate the volume of derivatives activity but do not represent Doral
Financials exposure to market or credit risk.

The
tables below summarize the fair values of Doral Financials
derivatives, as well as the source of the fair values.

TABLE U
FAIR VALUE RECONCILIATION
(IN THOUSANDS)

FOR THE SIX MONTHPERIOD ENDEDJUNE 30, 2003Fair value of contracts outstanding at the beginning of the period
    
    $
    (3,815
    )Contracts realized or otherwise settled during the period
    
    
    (64,638
    )Fair value of new contracts entered into during the period
    
    
    77,209Other changes in fair values
    
    
    (5,350
    )Fair value of contracts outstanding at the end of the period
    
    $
    3,406


TABLE V
SOURCE OF FAIR VALUE
(IN THOUSANDS)

PAYMENT DUE BY PERIODMATURITY
    
    
    
    
    
    
    
    
    
    MATURITYAS OF JUNE 30, 2003
    
    LESS THAN
    
    MATURITY
    
    MATURITY
    
    IN EXCESS
    
    TOTAL FAIRSOURCE OF FAIR VALUE
    
    1 YEAR
    
    1-3 YEARS
    
    3-5 YEARS
    
    OF 5 YEARS
    
    VALUEPrices actively quoted
    
    $
    10,085
    
    
    $
    (1,088
    )
    
    $
    
    
    
    $
    
    
    
    $
    8,997Prices provided by other external sources
    
    
    
    
    
    
    332
    
    
    
    (5,923
    )
    
    
    
    
    
    
    (5,591
    )$
    10,085
    
    
    $
    (756
    )
    
    $
    (5,923
    )
    
    $
    
    
    
    $
    3,406


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.

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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.

INFLATION

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.




ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding market risk to which the Company is exposed, see
the information contained under the caption Managements Discussion and
Analysis of Financial Condition and Results of Operations  Interest Rate Risk
Management.




ITEM 4.    CONTROLS AND PROCEDURES

Disclosure Control and Procedures

An evaluation was carried out as of June 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. No significant changes were made in our internal
controls during the quarter that has materially affected or is reasonably
likely to affect the Companys internal controls over financial reporting.

Internal Control Over Financial Reporting

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.




PART II  OTHER INFORMATION




ITEM 1  LEGAL PROCEEDINGS

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

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ITEM 2  CHANGES IN SECURITIES

Not applicable.




ITEM 3  DEFAULTS UPON SENIOR SECURITIES

Not applicable.




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

The matters submitted to the annual meeting of shareholders of Doral
Financial held on April 23, 2003, and the results of the voting thereon, were
reported under Item 4 of Doral Financials Quarterly Report on Form 10-Q for
the quarter ended March 31, 2003, and are incorporated herein by reference.




ITEM 5  OTHER INFORMATION

Declaration of Cash Dividend.On April 23, 2003, the Board of Directors
of Doral Financial voted to declare a cash dividend of $0.14 per common share
payable on June 6, 2003, to shareholders of record on
May 15, 2003. On August 8, 2003, the Board of Directors of
Doral Financial voted to declare a cash dividend of $0.14 per common
share payable on September 6, 2003, to shareholders of record
on August 18, 2003.




ITEM 6  EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits
| | --- |  | --------

Exhibit 12(a)
    
    -
    
    Computation of Ratio of Earnings to Fixed Charges.Exhibit 12(b)
    
    -
    
    Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.Exhibit 31(1)
    
    -
    
    CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 31(2)
    
    -
    
    CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 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.Exhibit 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.


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



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



| | (i) |  | Current Report on Form 8-K, dated May 15, 2003,
reporting under Items 7 and 9 the filing of the CEO and CFO
Certifications required by Section 906 of the Sarbanes-Oxley
Act.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) |  | Current Report on Form 8-K, dated July 10, 2003,
reporting under Items 9 and 12 the issuance of a press release
announcing the unaudited earnings results for the quarter ended
June 30, 2003.
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURES

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

DORAL FINANCIAL CORPORATION
(Registrant)Date: August 13, 2003/s/ Salomón
LevisSalomón Levis
Chairman of the Board
and Chief Executive OfficerDate: August 13, 2003/s/ Richard F. BoniniRichard F. Bonini
Senior Executive Vice President
and Chief Financial OfficerDate: August 13, 2003/s/ Ricardo MeléndezRicardo Meléndez
Executive Vice President
Principal Accounting Officer






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INDEX TO EXHIBITS

ExhibitNumber
    
    Description12(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.