##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(MARK ONE)

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

COMMISSION FILE NUMBER 0-17224

DORAL FINANCIAL CORPORATION

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

|                                                                                 |  |                                        
|-------------------------------------------------------------------------------- |  | ---------------------------------------
|Puerto Rico                                                                      |  | 66-0312162                             
|                                                                                 |  |                                        
|(State or other jurisdiction of
incorporation or organization)                   |  | (I.R.S. employer
identification number)
|                                                                                 |  |                                        
|1451 F.D. Roosevelt Avenue,
San Juan, Puerto Rico                                |  | 00920-2717                             
|                                                                                 |  |                                        
|(Address of principal executive offices)                                         |  | (Zip Code)                             
|                                                                                 |  |                                        
|Registrants telephone number,
including area code                               |  | (787)474-6700                          
|                                                                                 |  |                                        
|                                                                                 |  |                                        
|Former name, former address and
former fiscal year, if changed since last report |  | Not applicable                         

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

YES x  NO 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 NOVEMBER 5, 2003: 71,934,973





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

2



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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 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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##### 



DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE INFORMATION)
(UNAUDITED)


|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |              |           |           |           | 
|-------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | ------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | --------- | ------------- | ---------- | ------------ | --------- | --------- | --------- | 
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           | SEPTEMBER 30, |            | DECEMBER 31,
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           | 2003          |            | 2002        
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|ASSETS               |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     | Cash and due from banks                                                                                                                                                                                        |                               | $                                                                                                       | 219,284                                                                     |           |               | $          | 156,137      |          
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     | Money market investments                                                                                                                                                                                       |                               |                                                                                                         | 901,842                                                                     |           |               |            | 1,417,154    |          
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     | Pledged investment securities that can be re-pledged:                                                                                                                                                          |                               |                                                                                                         |                                                                             |           |               |            |              |          
|                     |                                                                                                                                                                                                                |                               | Trading securities, at fair value                                                                       |                                                                             |           | 243,296       |            |              |           | 783,333   |          
|                     |                                                                                                                                                                                                                |                               | Securities available for sale, at fair value                                                            |                                                                             |           | 2,344,630     |            |              |           | 775,892   |          
|                     |                                                                                                                                                                                                                |                               | Securities held to maturity, at
amortized cost (market value of $1,440,918 for 2003; $793,174 for 2002) |                                                                             |           | 1,505,755     |            |              |           | 788,376   |          
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     |                                                                                                                                                                                                                |                               |                                                                                                         | Total pledged investment securities that can be re-pledged                  |           |               | 4,093,681  |              |           |           | 2,347,601 | 
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     | Other investment securities:                                                                                                                                                                                   |                               |                                                                                                         |                                                                             |           |               |            |              |          
|                     |                                                                                                                                                                                                                |                               | Trading securities, at fair value                                                                       |                                                                             |           | 571,893       |            |              |           | 412,846   |          
|                     |                                                                                                                                                                                                                |                               | Securities available for sale, at fair value                                                            |                                                                             |           | 179,432       |            |              |           | 86,198    |          
|                     |                                                                                                                                                                                                                |                               | Securities held to maturity, at amortized cost (market
value of $182,284 for 2003; $172,085 for 2002)   |                                                                             |           | 186,065       |            |              |           | 172,250   |          
|                     |                                                                                                                                                                                                                |                               | Federal Home Loan Bank of NY (FHLB) stock, at cost                                                      |                                                                             |           | 84,220        |            |              |           | 86,970    |          
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     |                                                                                                                                                                                                                |                               |                                                                                                         | Total other investment securities                                           |           |               | 1,021,610  |              |           |           | 758,264   | 
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     |                                                                                                                                                                                                                |                               |                                                                                                         | Total investment securities                                                 |           |               | 5,115,291  |              |           |           | 3,105,865 | 
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     | Loans:                                                                                                                                                                                                         |                               |                                                                                                         |                                                                             |           |               |            |              |          
|                     |                                                                                                                                                                                                                |                               | Mortgage loans held for sale, at lower of cost or market                                                |                                                                             |           | 1,932,326     |            |              |           | 2,183,399 |          
|                     |                                                                                                                                                                                                                |                               | Loans receivable, net of allowance for loan losses of $18,134 (2002 - $9,982)                           |                                                                             |           | 1,308,860     |            |              |           | 1,022,342 |          
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     |                                                                                                                                                                                                                |                               |                                                                                                         | Total loans                                                                 |           |               | 3,241,186  |              |           |           | 3,205,741 | 
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     | Receivables and mortgage servicing advances                                                                                                                                                                    |                               |                                                                                                         | 58,036                                                                      |           |               |            | 66,450       |          
|                     | Accounts receivable from investment sales                                                                                                                                                                      |                               |                                                                                                         | 814,843                                                                     |           |               |            | 101,718      |          
|                     | Accrued interest receivable                                                                                                                                                                                    |                               |                                                                                                         | 59,318                                                                      |           |               |            | 43,158       |          
|                     | Servicing assets, net                                                                                                                                                                                          |                               |                                                                                                         | 165,720                                                                     |           |               |            | 159,881      |          
|                     | Premises and equipment, net                                                                                                                                                                                    |                               |                                                                                                         | 123,368                                                                     |           |               |            | 114,916      |          
|                     | Real estate held for sale, net                                                                                                                                                                                 |                               |                                                                                                         | 15,437                                                                      |           |               |            | 13,057       |          
|                     | Other assets                                                                                                                                                                                                   |                               |                                                                                                         | 49,404                                                                      |           |               |            | 37,612       |          
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     |                                                                                                                                                                                                                |                               |                                                                                                         | Total assets                                                                |           | $             | 10,763,729 |              |           | $         | 8,421,689 | 
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|LIABILITIES          |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     | Deposits:                                                                                                                                                                                                      |                               |                                                                                                         |                                                                             |           |               |            |              |          
|                     |                                                                                                                                                                                                                | Non-interest-bearing deposits |                                                                                                         | $                                                                           | 235,698   |               |            | $            | 296,620   |          
|                     |                                                                                                                                                                                                                | Interest-bearing deposits     |                                                                                                         |                                                                             | 2,529,157 |               |            |              | 1,920,591 |          
|                     | Securities sold under agreements to repurchase                                                                                                                                                                 |                               |                                                                                                         | 3,374,472                                                                   |           |               |            | 2,733,339    |          
|                     | Loans payable                                                                                                                                                                                                  |                               |                                                                                                         | 206,385                                                                     |           |               |            | 211,002      |          
|                     | Notes payable                                                                                                                                                                                                  |                               |                                                                                                         | 606,921                                                                     |           |               |            | 621,303      |          
|                     | Advances from FHLB                                                                                                                                                                                             |                               |                                                                                                         | 1,256,500                                                                   |           |               |            | 1,311,500    |          
|                     | Accounts payable from investment purchases                                                                                                                                                                     |                               |                                                                                                         | 779,015                                                                     |           |               |            | 100,699      |          
|                     | Accrued expenses and other liabilities                                                                                                                                                                         |                               |                                                                                                         | 267,289                                                                     |           |               |            | 181,664      |          
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     |                                                                                                                                                                                                                |                               |                                                                                                         | Total liabilities                                                           |           |               | 9,255,437  |              |           |           | 7,376,718 | 
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     | Commitments and contingencies                                                                                                                                                                                  |                               |                                                                                                         |                                                                             |           |               |            |              |          
|STOCKHOLDERS EQUITY |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     | Preferred stock, $1 par value; 10,000,000 shares
authorized; 8,835,000 and 7,635,000 shares issued
and outstanding in 2003 and 2002, respectively
at aggregate liquidation preference value:                   |                               |                                                                                                         |                                                                             |           |               |            |              |          
|                     |                                                                                                                                                                                                                |                               |                                                                                                         | Perpetual Noncumulative non-convertible preferred stock (Series A, B and C) |           |               | 228,250    |              |           |           | 228,250   | 
|                     |                                                                                                                                                                                                                |                               |                                                                                                         | Perpetual Cumulative Convertible preferred stock                            |           |               | 300,000    |              |           |           |          | 
|                     | Common stock, $1 par value; 200,000,000 shares authorized; 71,934,973 and 71,933,348 shares
issued in 2003 and 2002, respectively; 71,934,973 and 71,849,348 shares outstanding in
2003 and 2002, respectively |                               |                                                                                                         | 71,935                                                                      |           |               |            | 71,933       |          
|                     | Paid-in capital                                                                                                                                                                                                |                               |                                                                                                         | 187,792                                                                     |           |               |            | 191,216      |          
|                     | Legal surplus                                                                                                                                                                                                  |                               |                                                                                                         | 10,777                                                                      |           |               |            | 10,777       |          
|                     | Retained earnings                                                                                                                                                                                              |                               |                                                                                                         | 734,238                                                                     |           |               |            | 550,554      |          
|                     | Accumulated other comprehensive loss, net of income tax of $5.0 million (2002 - $2.5 million)                                                                                                                  |                               |                                                                                                         | (24,700                                                                     | )         |               |            | (7,675       | )        
|                     | Treasury stock at par value; 84,000 shares held in 2002                                                                                                                                                        |                               |                                                                                                         |                                                                            |           |               |            | (84          | )        
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     |                                                                                                                                                                                                                |                               |                                                                                                         | Total stockholders equity                                                  |           |               | 1,508,292  |              |           |           | 1,044,971 | 
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             
|                     |                                                                                                                                                                                                                |                               |                                                                                                         | Total liabilities and stockholders equity                                  |           | $             | 10,763,729 |              |           | $         | 8,421,689 | 
|                     |                                                                                                                                                                                                                |                               |                                                                                                         |                                                                             |           |               |            |             

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 |         | NINE MONTH PERIOD  
|                                               |                                                                                                                                                                            |                                                     |        | SEPTEMBER 30, |         | ENDED SEPTEMBER 30,
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                    
|                                               |                                                                                                                                                                            |                                                     |        | 2003          |         | 2002                |        | 2003   |         | 2002
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |     
|Interest income:                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|                                               | Loans                                                                                                                                                                      |                                                     | $      | 53,374        |         |                     | $      | 52,467 |         |      | $       | 162,705 |         |   | $       | 148,983 |        
|                                               | Mortgage-backed securities                                                                                                                                                 |                                                     |        | 22,167        |         |                     |        | 33,795 |         |      |         | 78,024  |         |   |         | 94,767  |        
|                                               | Investment securities                                                                                                                                                      |                                                     |        | 31,575        |         |                     |        | 13,694 |         |      |         | 77,010  |         |   |         | 51,915  |        
|                                               | Other interest-earning assets                                                                                                                                              |                                                     |        | 2,636         |         |                     |        | 5,413  |         |      |         | 10,827  |         |   |         | 12,117  |        
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|                                               |                                                                                                                                                                            | Total interest income                               |        |               | 109,752 |                     |        |        | 105,369 |      |         |         | 328,566 |   |         |         | 307,782 | 
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|Interest expense:                              |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|                                               | Deposits                                                                                                                                                                   |                                                     |        | 19,415        |         |                     |        | 18,778 |         |      |         | 56,475  |         |   |         | 54,242  |        
|                                               | Securities sold under agreements to repurchase                                                                                                                             |                                                     |        | 21,148        |         |                     |        | 23,322 |         |      |         | 68,090  |         |   |         | 75,239  |        
|                                               | Advances from FHLB                                                                                                                                                         |                                                     |        | 12,400        |         |                     |        | 10,599 |         |      |         | 37,095  |         |   |         | 29,621  |        
|                                               | Loans payable                                                                                                                                                              |                                                     |        | 1,488         |         |                     |        | 1,639  |         |      |         | 4,869   |         |   |         | 4,397   |        
|                                               | Notes payable                                                                                                                                                              |                                                     |        | 12,368        |         |                     |        | 11,785 |         |      |         | 37,921  |         |   |         | 31,474  |        
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|                                               |                                                                                                                                                                            | Total interest expense                              |        |               | 66,819  |                     |        |        | 66,123  |      |         |         | 204,450 |   |         |         | 194,973 | 
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|                                               |                                                                                                                                                                            | Net interest income                                 |        |               | 42,933  |                     |        |        | 39,246  |      |         |         | 124,116 |   |         |         | 112,809 | 
|Provision for loan losses                      |                                                                                                                                                                            |                                                     | 2,913  |               |         |                     | 2,055  |        |         |      | 11,309  |         |         |   | 3,792   |        
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|                                               |                                                                                                                                                                            | Net interest income after provision for loan losses |        |               | 40,020  |                     |        |        | 37,191  |      |         |         | 112,807 |   |         |         | 109,017 | 
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|Non-interest income:                           |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|                                               | Net gain on mortgage loan sales and fees                                                                                                                                   |                                                     |        | 98,619        |         |                     |        | 53,001 |         |      |         | 274,025 |         |   |         | 157,238 |        
|                                               | Trading activities                                                                                                                                                         |                                                     |        | 15,384        |         |                     |        | 4,806  |         |      |         | 15,334  |         |   |         | (6,893  | )      
|                                               | Net (loss) gain on sales of investment securities                                                                                                                          |                                                     |        | (10,392       | )       |                     |        | 10,119 |         |      |         | 3,697   |         |   |         | 16,109  |        
|                                               | Servicing income (loss), net of amortization and impairment of $8,010 -
2003 and $14,078 - 2002 for the
quarter, and $37,761 - 2003 and $31,862 - 2002 for the nine months |                                                     |        | 933           |         |                     |        | (5,596 | )       |      |         | (11,529 | )       |   |         | (6,310  | )      
|                                               | Commissions, fees and other income                                                                                                                                         |                                                     |        | 6,353         |         |                     |        | 5,662  |         |      |         | 19,993  |         |   |         | 15,216  |        
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|                                               |                                                                                                                                                                            | Total non-interest income                           |        |               | 110,897 |                     |        |        | 67,992  |      |         |         | 301,520 |   |         |         | 175,360 | 
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|Non-interest expenses:                         |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|                                               | Compensation and benefits                                                                                                                                                  |                                                     |        | 21,138        |         |                     |        | 13,449 |         |      |         | 63,705  |         |   |         | 39,998  |        
|                                               | Taxes, other than payroll and income taxes                                                                                                                                 |                                                     |        | 1,879         |         |                     |        | 1,830  |         |      |         | 5,387   |         |   |         | 4,069   |        
|                                               | Advertising                                                                                                                                                                |                                                     |        | 4,053         |         |                     |        | 2,918  |         |      |         | 11,413  |         |   |         | 8,129   |        
|                                               | Professional services                                                                                                                                                      |                                                     |        | 2,098         |         |                     |        | 1,778  |         |      |         | 6,198   |         |   |         | 5,249   |        
|                                               | Communication and information systems                                                                                                                                      |                                                     |        | 3,481         |         |                     |        | 3,318  |         |      |         | 9,778   |         |   |         | 9,172   |        
|                                               | Occupancy and other office expenses                                                                                                                                        |                                                     |        | 5,787         |         |                     |        | 5,546  |         |      |         | 16,924  |         |   |         | 15,171  |        
|                                               | Depreciation and amortization                                                                                                                                              |                                                     |        | 3,746         |         |                     |        | 3,263  |         |      |         | 10,965  |         |   |         | 8,692   |        
|                                               | Other                                                                                                                                                                      |                                                     |        | 6,059         |         |                     |        | 3,695  |         |      |         | 14,401  |         |   |         | 9,945   |        
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|                                               |                                                                                                                                                                            | Total non-interest expenses                         |        |               | 48,241  |                     |        |        | 35,797  |      |         |         | 138,771 |   |         |         | 100,425 | 
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|                                               |                                                                                                                                                                            | Income before income taxes                          |        |               | 102,676 |                     |        |        | 69,386  |      |         |         | 275,556 |   |         |         | 183,952 | 
|Income taxes                                   |                                                                                                                                                                            |                                                     | 20,995 |               |         |                     | 11,102 |        |         |      | 48,911  |         |         |   | 27,141  |        
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|Net income                                     |                                                                                                                                                                            | $                                                   | 81,681 |               |         | $                   | 58,284 |        |         | $    | 226,645 |         |         | $ | 156,811 |        
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|Net income attributable to common shareholders |                                                                                                                                                                            | $                                                   | 77,374 |               |         | $                   | 54,048 |        |         | $    | 213,882 |         |         | $ | 147,309 |        
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|Earnings per common share:                     |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|                                               | Basic                                                                                                                                                                      |                                                     | $      | 1.08          |         |                     | $      | 0.75   |         |      | $       | 2.97    |         |   | $       | 2.05    |        
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|                                               | Diluted                                                                                                                                                                    |                                                     | $      | 1.05          |         |                     | $      | 0.74   |         |      | $       | 2.91    |         |   | $       | 2.02    |        
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        
|Dividends per common share                     |                                                                                                                                                                            | $                                                   | 0.14   |               |         | $                   | 0.11   |        |         | $    | 0.42    |         |         | $ | 0.31    |        
|                                               |                                                                                                                                                                            |                                                     |        |               |         |                     |        |        |         |      |         |         |         |   |         |        

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

5



---



##### 



DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY


(IN THOUSANDS OF DOLLARS)
(UNAUDITED)


|                                                    |                                                                                                      |                          |           |                         |         |      |         |         |         |  
|--------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------ | --------- | ----------------------- | ------- | ---- | ------- | ------- | ------- | -
|                                                    |                                                                                                      |                          |           | NINE MONTH PERIOD ENDED
|                                                    |                                                                                                      |                          |           | SEPTEMBER 30,          
|                                                    |                                                                                                      |                          |           |                        
|                                                    |                                                                                                      |                          |           | 2003                    |         | 2002
|                                                    |                                                                                                      |                          |           |                         |         |     
|PREFERRED STOCK:                                    |                                                                                                      |                          |           |                         |         |      |         |        
|                                                    | Balance at beginning of period                                                                       |                          | $         | 228,250                 |         |      | $       | 124,750 |        
|                                                    | Perpetual Cumulative Convertible preferred stock                                                     |                          |           | 300,000                 |         |      |         |        |        
|                                                    | Perpetual Noncumulative non-convertible
preferred stock (Series C)                                   |                          |           |                        |         |      |         | 103,500 |        
|                                                    |                                                                                                      |                          |           |                         |         |      |         |        
|                                                    |                                                                                                      | Balance at end of period |           |                         | 528,250 |      |         |         | 228,250 |  
|                                                    |                                                                                                      |                          |           |                         |         |      |         |        
|COMMON STOCK:                                       |                                                                                                      |                          |           |                         |         |      |         |        
|                                                    | Balance at beginning of period                                                                       |                          |           | 71,933                  |         |      |         | 47,866  |        
|                                                    | Shares issued under stock option plan                                                                |                          |           | 86                      |         |      |         | 83      |        
|                                                    | Treasury stock canceled and retired                                                                  |                          |           | (84                     | )       |      |         |        |        
|                                                    | Shares issued as a result of three-for-two stock split                                               |                          |           |                        |         |      |         | 23,973  |        
|                                                    |                                                                                                      |                          |           |                         |         |      |         |        
|                                                    |                                                                                                      | Balance at end of period |           |                         | 71,935  |      |         |         | 71,922  |  
|                                                    |                                                                                                      |                          |           |                         |         |      |         |        
|PAID-IN CAPITAL:                                    |                                                                                                      |                          |           |                         |         |      |         |        
|                                                    | Balance at beginning of period                                                                       |                          |           | 191,216                 |         |      |         | 217,594 |        
|                                                    | Issuance cost of preferred stock                                                                     |                          |           | (7,425                  | )       |      |         | (3,488  | )      
|                                                    | Common shares issued under stock option plan                                                         |                          |           | 633                     |         |      |         | 959     |        
|                                                    | Stock-based compensation recognized                                                                  |                          |           | 3,368                   |         |      |         |        |        
|                                                    | Adjustment for three-for-two stock split                                                             |                          |           |                        |         |      |         | (23,945 | )      
|                                                    |                                                                                                      |                          |           |                         |         |      |         |        
|                                                    |                                                                                                      | Balance at end of period |           |                         | 187,792 |      |         |         | 191,120 |  
|                                                    |                                                                                                      |                          |           |                         |         |      |         |        
|LEGAL SURPLUS                                       |                                                                                                      |                          | 10,777    |                         |         |      | 8,423   |        
|                                                    |                                                                                                      |                          |           |                         |         |      |         |        
|RETAINED EARNINGS:                                  |                                                                                                      |                          |           |                         |         |      |         |        
|                                                    | Balance at beginning of period                                                                       |                          |           | 550,554                 |         |      |         | 375,855 |        
|                                                    | Net income                                                                                           |                          |           | 226,645                 |         |      |         | 156,811 |        
|                                                    | Cash dividends declared on common stock                                                              |                          |           | (30,198                 | )       |      |         | (22,255 | )      
|                                                    | Cash dividends declared on preferred stock                                                           |                          |           | (12,763                 | )       |      |         | (9,502  | )      
|                                                    | Cash paid in lieu of fractional shares as a result of
three-for-two stock split                      |                          |           |                        |         |      |         | (27     | )      
|                                                    |                                                                                                      |                          |           |                         |         |      |         |        
|                                                    |                                                                                                      | Balance at end of period |           |                         | 734,238 |      |         |         | 500,882 |  
|                                                    |                                                                                                      |                          |           |                         |         |      |         |        
|ACCUMULATED OTHER COMPREHENSIVE LOSS,
NET OF TAXES: |                                                                                                      |                          |           |                         |         |      |         |        
|                                                    | Balance at beginning of period                                                                       |                          |           | (7,675                  | )       |      |         | (12,312 | )      
|                                                    | Net (loss) gain in the fair value of investment
securities available for sale,
net of deferred taxes |                          |           | (17,025                 | )       |      |         | 9,440   |        
|                                                    |                                                                                                      |                          |           |                         |         |      |         |        
|                                                    |                                                                                                      | Balance at end of period |           |                         | (24,700 | )    |         |         | (2,872  | )
|                                                    |                                                                                                      |                          |           |                         |         |      |         |        
|TREASURY STOCK AT PAR:                              |                                                                                                      |                          |           |                         |         |      |         |        
|                                                    | Balance at beginning of period                                                                       |                          |           | (84                     | )       |      |         | (56     | )      
|                                                    | Shares canceled and retired                                                                          |                          |           | 84                      |         |      |         |        |        
|                                                    | Shares issued as a result of three-for-two stock split                                               |                          |           |                        |         |      |         | (28     | )      
|                                                    |                                                                                                      |                          |           |                         |         |      |         |        
|                                                    |                                                                                                      | Balance at end of period |           |                         |        |      |         |         | (84     | )
|                                                    |                                                                                                      |                          |           |                         |         |      |         |        
|Total stockholders equity                          |                                                                                                      | $                        | 1,508,292 |                         |         | $    | 997,641 |        
|                                                    |                                                                                                      |                          |           |                         |         |      |         |        

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

6



---



##### 



DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(IN THOUSANDS OF DOLLARS)
(UNAUDITED)


|                                               |                                                                   |                                                                                |        |               |        |               |        |        |        |      |         |            |         |   |         |        |       | 
|---------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------------------------------------------ | ------ | ------------- | ------ | ------------- | ------ | ------ | ------ | ---- | ------- | ---------- | ------- | - | ------- | ------ | ----- | 
|                                               |                                                                   |                                                                                |        |               |        |               |        |        |        |      |         | NINE MONTH
|                                               |                                                                   |                                                                                |        | QUARTER ENDED |        | PERIOD ENDED 
|                                               |                                                                   |                                                                                |        | SEPTEMBER 30, |        | SEPTEMBER 30,
|                                               |                                                                   |                                                                                |        |               |        |              
|                                               |                                                                   |                                                                                |        | 2003          |        | 2002          |        | 2003   |        | 2002
|                                               |                                                                   |                                                                                |        |               |        |               |        |        |        |     
|Net income                                     |                                                                   | $                                                                              | 81,681 |               |        | $             | 58,284 |        |        | $    | 226,645 |            |         | $ | 156,811 |       
|                                               |                                                                   |                                                                                |        |               |        |               |        |        |        |      |         |            |         |   |         |       
|Other comprehensive income (loss), before tax: |                                                                   |                                                                                |        |               |        |               |        |        |        |      |         |            |         |   |         |       
|                                               |                                                                   | Unrealized (losses) gains on securities arising during the period              |        |               | (4,392 | )             |        |        | 12,469 |      |         |            | (21,793 | ) |         |        | 6,847 | 
|                                               |                                                                   | Amortization of unrealized loss on securities reclassified to held to maturity |        |               | 7      |               |        |        | 612    |      |         |            | 24      |   |         |        | 1,425 | 
|                                               |                                                                   | Reclassification adjustment for losses (gains) included in net income          |        |               | 5,341  |               |        |        | (2,258 | )    |         |            | 7,301   |   |         |        | 6,049 | 
|                                               |                                                                   |                                                                                |        |               |        |               |        |        |        |      |         |            |         |   |         |       
|                                               | Other comprehensive income (loss), before tax                     |                                                                                |        | 956           |        |               |        | 10,823 |        |      |         | (14,468    | )       |   |         | 14,321 |      
|                                               |                                                                   |                                                                                |        |               |        |               |        |        |        |      |         |            |         |   |         |       
|                                               | Income tax expense related to items of other comprehensive income |                                                                                |        | (4,027        | )      |               |        | (1,005 | )      |      |         | (2,557     | )       |   |         | (4,881 | )    
|                                               |                                                                   |                                                                                |        |               |        |               |        |        |        |      |         |            |         |   |         |       
|Other comprehensive (loss) income              |                                                                   |                                                                                | (3,071 | )             |        |               | 9,818  |        |        |      | (17,025 | )          |         |   | 9,440   |       
|                                               |                                                                   |                                                                                |        |               |        |               |        |        |        |      |         |            |         |   |         |       
|Comprehensive income, net of taxes             |                                                                   | $                                                                              | 78,610 |               |        | $             | 68,102 |        |        | $    | 209,620 |            |         | $ | 166,251 |       
|                                               |                                                                   |                                                                                |        |               |        |               |        |        |        |      |         |            |         |   |         |       

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

7



---



##### 



DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS


(IN THOUSANDS OF DOLLARS)
(UNAUDITED)


|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |           |           |            |            |  
|------------------------------------- | ------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------------------------------------------------------ | --------------------------------------------------- | --------- | ------------------- | ---------- | --------- | --------- | ---------- | ---------- | -
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           | NINE MONTH PERIOD  
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           | ENDED SEPTEMBER 30,
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                    
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           | 2003                |            | 2002     
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|Cash flows from operating activities: |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      | Net income                                                                                  |                                                          | $                                                                                    | 226,645                                             |           |                     | $          | 156,811   |          
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      | Adjustments to reconcile net income to net
cash provided by (used in) operating activities: |                                                          |                                                                                      |                                                     |           |                     |            |           |          
|                                      |                                                                                             |                                                          | Stock-based compensation recognized                                                  |                                                     |           | 3,368               |            |           |           |           |           
|                                      |                                                                                             |                                                          | Depreciation and amortization                                                        |                                                     |           | 10,965              |            |           |           | 8,692      |           
|                                      |                                                                                             |                                                          | Amortization of interest-only strips                                                 |                                                     |           | 55,629              |            |           |           | 32,114     |           
|                                      |                                                                                             |                                                          | Amortization and impairment of servicing assets                                      |                                                     |           | 37,761              |            |           |           | 31,862     |           
|                                      |                                                                                             |                                                          | Deferred income tax provision                                                        |                                                     |           | 19,435              |            |           |           | 7,471      |           
|                                      |                                                                                             |                                                          | Provision for loan losses                                                            |                                                     |           | 11,309              |            |           |           | 3,792      |           
|                                      |                                                                                             |                                                          | Provision for losses on real estate held for sale                                    |                                                     |           | 2,218               |            |           |           | 2,111      |           
|                                      |                                                                                             |                                                          | Amortization of premium and accretion of
discount on loans and investment securities |                                                     |           | 6,255               |            |           |           | 6,455      |           
|                                      |                                                                                             |                                                          | Origination and purchases of mortgage loans held for sale                            |                                                     |           | (4,123,093          | )          |           |           | (3,332,680 | )         
|                                      |                                                                                             |                                                          | Principal repayments and sales of mortgage loans held for sale                       |                                                     |           | 2,316,114           |            |           |           | 1,500,873  |           
|                                      |                                                                                             |                                                          | Purchases of securities held for trading                                             |                                                     |           | (7,934,447          | )          |           |           | (7,797,401 | )         
|                                      |                                                                                             |                                                          | Principal repayments and sales of trading securities                                 |                                                     |           | 10,422,166          |            |           |           | 8,439,140  |           
|                                      |                                                                                             |                                                          | Increase in interest only strips, net                                                |                                                     |           | (187,617            | )          |           |           | (144,164   | )         
|                                      |                                                                                             |                                                          | Increase in servicing assets                                                         |                                                     |           | (43,600             | )          |           |           | (30,575    | )         
|                                      |                                                                                             |                                                          | Decrease (increase) in receivables
and mortgage servicing advances                   |                                                     |           | 8,914               |            |           |           | (2,755     | )         
|                                      |                                                                                             |                                                          | Increase in accounts receivable from investment sales                                |                                                     |           | (713,125            | )          |           |           | (32,476    | )         
|                                      |                                                                                             |                                                          | (Increase) decrease in accrued interest receivable                                   |                                                     |           | (16,160             | )          |           |           | 9,144      |           
|                                      |                                                                                             |                                                          | Increase in other assets                                                             |                                                     |           | (11,792             | )          |           |           | (4,167     | )         
|                                      |                                                                                             |                                                          | (Decrease) increase in interest payable                                              |                                                     |           | (6,505              | )          |           |           | 161        |           
|                                      |                                                                                             |                                                          | Increase (decrease) in accounts payable
from investment purchases                    |                                                     |           | 658,144             |            |           |           | (51,743    | )         
|                                      |                                                                                             |                                                          | Increase in accrued expenses and other liabilities                                   |                                                     |           | 73,249              |            |           |           | 31,096     |           
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      |                                                                                             |                                                          |                                                                                      | Total adjustments                                   |           |                     | 589,188    |           |           |            | (1,323,050 | )
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      |                                                                                             |                                                          |                                                                                      | Net cash provided by (used in) operating activities |           |                     | 815,833    |           |           |            | (1,166,239 | )
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      | Cash flows from investing activities:                                                       |                                                          |                                                                                      |                                                     |           |                     |            |           |          
|                                      |                                                                                             |                                                          | Purchases of securities available for sale                                           |                                                     |           | (7,719,044          | )          |           |           | (3,986,107 | )         
|                                      |                                                                                             |                                                          | Proceeds from sales of securities available for sale                                 |                                                     |           | 5,612,582           |            |           |           | 5,118,123  |           
|                                      |                                                                                             |                                                          | Principal repayments of securities available for sale                                |                                                     |           | 462,728             |            |           |           | 11,905     |           
|                                      |                                                                                             |                                                          | Purchases of securities held to maturity                                             |                                                     |           | (1,071,094          | )          |           |           | (41,306    | )         
|                                      |                                                                                             |                                                          | Principal repayments and maturities of
securities held to maturity                   |                                                     |           | 369,937             |            |           |           | 355,755    |           
|                                      |                                                                                             |                                                          | Decrease (increase) in FHLB stock                                                    |                                                     |           | 2,750               |            |           |           | (20,350    | )         
|                                      |                                                                                             |                                                          | Origination of loans receivable                                                      |                                                     |           | (634,447            | )          |           |           | (446,096   | )         
|                                      |                                                                                             |                                                          | Principal repayments of loans receivable                                             |                                                     |           | 337,736             |            |           |           | 317,774    |           
|                                      |                                                                                             |                                                          | Purchase of premises and equipment                                                   |                                                     |           | (19,417             | )          |           |           | (22,887    | )         
|                                      |                                                                                             |                                                          | Proceeds from sales of real estate held for sale                                     |                                                     |           | 4,909               |            |           |           | 2,272      |           
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      |                                                                                             |                                                          |                                                                                      | Net cash (used in) provided by investing activities |           |                     | (2,653,360 | )         |           |            | 1,289,083  |  
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      | Cash flows from financing activities:                                                       |                                                          |                                                                                      |                                                     |           |                     |            |           |          
|                                      |                                                                                             |                                                          | Increase in deposits                                                                 |                                                     |           | 547,644             |            |           |           | 436,710    |           
|                                      |                                                                                             |                                                          | Increase (decrease) in securities sold under
agreements to repurchase                |                                                     |           | 641,133             |            |           |           | (297,356   | )         
|                                      |                                                                                             |                                                          | Increase in loans payable                                                            |                                                     |           | 15,555              |            |           |           | 80,952     |           
|                                      |                                                                                             |                                                          | (Decrease) increase in notes payable                                                 |                                                     |           | (14,382             | )          |           |           | 159,168    |           
|                                      |                                                                                             |                                                          | (Decrease) increase in FHLB advances                                                 |                                                     |           | (55,000             | )          |           |           | 374,000    |           
|                                      |                                                                                             |                                                          | Issuance of common stock, net                                                        |                                                     |           | 719                 |            |           |           | 1,042      |           
|                                      |                                                                                             |                                                          | Issuance of preferred stock, net                                                     |                                                     |           | 292,575             |            |           |           | 100,012    |           
|                                      |                                                                                             |                                                          | Dividends paid                                                                       |                                                     |           | (42,882             | )          |           |           | (31,757    | )         
|                                      |                                                                                             |                                                          | Cash paid in lieu of fractional shares                                               |                                                     |           |                    |            |           |           | (27        | )         
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      |                                                                                             |                                                          |                                                                                      | Net cash provided by financing activities           |           |                     | 1,385,362  |           |           |            | 822,744    |  
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      | Net (decrease) increase in cash and cash equivalents                                        |                                                          |                                                                                      | (452,165                                            | )         |                     |            | 945,588   |          
|                                      | Cash and cash equivalents at beginning of period                                            |                                                          |                                                                                      | 1,573,291                                           |           |                     |            | 594,385   |          
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      | Cash and cash equivalents at the end of period                                              |                                                          | $                                                                                    | 1,121,126                                           |           |                     | $          | 1,539,973 |          
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      | Cash and cash equivalents includes:                                                         |                                                          |                                                                                      |                                                     |           |                     |            |           |          
|                                      |                                                                                             | Cash and due from banks                                  |                                                                                      | $                                                   | 219,284   |                     |            | $         | 62,161    |           
|                                      |                                                                                             | Money market investments                                 |                                                                                      |                                                     | 901,842   |                     |            |           | 1,477,812 |           
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      |                                                                                             | $                                                        | 1,121,126                                                                            |                                                     |           | $                   | 1,539,973  |          
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      | Supplemental schedule of non-cash activities:                                               |                                                          |                                                                                      |                                                     |           |                     |            |           |          
|                                      |                                                                                             | Loan securitizations                                     |                                                                                      | $                                                   | 2,046,390 |                     |            | $         | 1,439,760 |           
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      |                                                                                             | Loans foreclosed                                         |                                                                                      | $                                                   | 9,941     |                     |            | $         | 7,746     |           
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      |                                                                                             | Shares issued as a result of a
three-for-two stock split |                                                                                      | $                                                   |          |                     |            | $         | 23,973    |           
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      | Supplemental information for cash flows:                                                    |                                                          |                                                                                      |                                                     |           |                     |            |           |          
|                                      |                                                                                             | Cash used to pay interest                                |                                                                                      | $                                                   | 212,470   |                     |            | $         | 190,417   |           
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          
|                                      |                                                                                             | Cash used to pay income taxes                            |                                                                                      | $                                                   | 31,221    |                     |            | $         | 17,682    |           
|                                      |                                                                                             |                                                          |                                                                                      |                                                     |           |                     |            |          

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

8



---



##### 



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 nine month period ended
September 30, 2003 are not necessarily indicative of the results to be
expected for the full year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|c. |  | At September 30, 2003, escrow funds included approximately $158.3 million
deposited with Doral Bank PR. These funds are included in the Companys
financial statements. Escrow funds also included approximately $20.7
million deposited with other banks which are excluded from the Companys
assets and liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|d. |  | The reconciliation of the numerator and denominator of the basic and
diluted earnings-per-share follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

9



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

|                                                 |                                                                |      |               |            |                     |      |   |            |   |  |   |            |   |  |   |            |  
|------------------------------------------------ | -------------------------------------------------------------- | ---- | ------------- | ---------- | ------------------- | ---- | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                 |                                                                |      | QUARTER ENDED |            | NINE MONTH PERIOD  
|                                                 |                                                                |      | SEPTEMBER 30, |            | ENDED SEPTEMBER 30,
|                                                 |                                                                |      |               |            |                    
|(Dollars in thousands, except per share amounts) |                                                                | 2003 |               | 2002       |                     | 2003 |   | 2002      
|                                                 |                                                                |      |               |            |                     |      |   |            |  
|Net Income:                                      |                                                                |      |               |            |                     |      |   |            |   |  |   |            |   |  |   |           
|                                                 | Net income                                                     |      | $             | 81,681     |                     |      | $ | 58,284     |   |  | $ | 226,645    |   |  | $ | 156,811    |  
|                                                 | Preferred stock dividend                                       |      |               | (4,307     | )                   |      |   | (4,236     | ) |  |   | (12,763    | ) |  |   | (9,502     | )
|                                                 |                                                                |      |               |            |                     |      |   |            |   |  |   |            |   |  |   |           
|                                                 | Net income attributable to common stock                        |      | $             | 77,374     |                     |      | $ | 54,048     |   |  | $ | 213,882    |   |  | $ | 147,309    |  
|                                                 |                                                                |      |               |            |                     |      |   |            |   |  |   |            |   |  |   |           
|Weighted Average Shares(1):                      |                                                                |      |               |            |                     |      |   |            |   |  |   |            |   |  |   |           
|                                                 | Basic weighted average number of common shares outstanding     |      |               | 71,923,037 |                     |      |   | 71,835,781 |   |  |   | 71,898,125 |   |  |   | 71,782,354 |  
|                                                 | Incremental shares issuable upon exercise of stock options
(2) |      |               | 1,765,994  |                     |      |   | 1,201,666  |   |  |   | 1,654,542  |   |  |   | 1,130,874  |  
|                                                 |                                                                |      |               |            |                     |      |   |            |   |  |   |            |   |  |   |           
|                                                 | Diluted weighted average number of common shares outstanding   |      |               | 73,689,031 |                     |      |   | 73,037,447 |   |  |   | 73,552,667 |   |  |   | 72,913,228 |  
|                                                 |                                                                |      |               |            |                     |      |   |            |   |  |   |            |   |  |   |           
|Net Income per Common Share:                     |                                                                |      |               |            |                     |      |   |            |   |  |   |            |   |  |   |           
|                                                 | Basic                                                          |      | $             | 1.08       |                     |      | $ | 0.75       |   |  | $ | 2.97       |   |  | $ | 2.05       |  
|                                                 |                                                                |      |               |            |                     |      |   |            |   |  |   |            |   |  |   |           
|                                                 | Diluted                                                        |      | $             | 1.05       |                     |      | $ | 0.74       |   |  | $ | 2.91       |   |  | $ | 2.02       |  
|                                                 |                                                                |      |               |            |                     |      |   |            |   |  |   |            |   |  |   |           



---

|(1) |  | For the quarter and nine month period ended September 30, 2003,
1,200,000 shares of 4.75% Perpetual Cumulative Convertible Preferred
Stock that were issued on September 29, 2003 were not included in the
computation of diluted earnings per share because the conditions for
conversion as described below had not been met. Each share of
convertible preferred stock preferred is convertible initially into
4.1904 shares of common stock, subject to adjustment under specific
conditions. The option of the purchasers to convert the convertible
preferred stock into shares of the Companys common stock is
exercisable only if (a) during any fiscal quarter after September 30,
2003, the closing sale price of the Companys common stock for at
least 20 trading days in a period of 30 consecutive trading days
ending on the last trading day of the preceding fiscal quarter exceeds
120% of the conversion price of the convertible preferred stock
(initial conversion price of $59.66 as of September 30, 2003); (b)
upon the occurrence of certain corporate transactions or (c) upon the
delisting of the Companys common stock. On or after September 30,
2008, the Company may, at its option, cause the convertible preferred
stock to be converted into that number of shares of common stock that
are issuable at the conversion price. The Company may only exercise
its conversion right if, for 20 trading days within any period of 30
consecutive trading days ending on a trading day not more than two
trading days prior to the date the Company give notice of conversion,
the closing sale price of the Companys common stock exceeds 130% of
the conversion price of the convertible preferred stock in effect on
each such trading day.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | For the quarter and nine month periods ended September 30, 2003 and
2002, all stock options outstanding were included in the computation
of weighted average outstanding shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

10



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



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

|                                       |                     |      |               |        |                     |      |        |        |  |   |         |        |  |   |         |        | 
|-------------------------------------- | ------------------- | ---- | ------------- | ------ | ------------------- | ---- | ------ | ------ |  | - | ------- | ------ |  | - | ------- | ------ | 
|                                       |                     |      | QUARTER ENDED |        | NINE MONTH PERIOD  
|                                       |                     |      | SEPTEMBER 30, |        | ENDED SEPTEMBER 30,
|                                       |                     |      |               |        |                    
|(In thousands)                         |                     | 2003 |               | 2002   |                     | 2003 |        | 2002  
|                                       |                     |      |               |        |                     |      |        |        | 
|Employee costs, gross                  |                     | $    | 27,094        |        |                     | $    | 20,779 |        |  | $ | 80,460  |        |  | $ | 62,855  |       
|Deferred costs pursuant to SFAS No. 91 |                     |      | (5,956        | )      |                     |      | (7,330 | )      |  |   | (16,755 | )      |  |   | (22,857 | )     
|                                       |                     |      |               |        |                     |      |        |        |  |   |         |        |  |   |         |       
|                                       | Employee cost, net  |      | $             | 21,138 |                     |      | $      | 13,449 |  |   | $       | 63,705 |  |   | $       | 39,998 | 
|                                       |                     |      |               |        |                     |      |        |        |  |   |         |        |  |   |         |       
|Other expenses, gross                  |                     | $    | 7,370         |        |                     | $    | 5,624  |        |  | $ | 17,950  |        |  | $ | 16,383  |       
|Deferred costs pursuant to SFAS No. 91 |                     |      | (1,311        | )      |                     |      | (1,929 | )      |  |   | (3,549  | )      |  |   | (6,438  | )     
|                                       |                     |      |               |        |                     |      |        |        |  |   |         |        |  |   |         |       
|                                       | Other expenses, net |      | $             | 6,059  |                     |      | $      | 3,695  |  |   | $       | 14,401 |  |   | $       | 9,945  | 
|                                       |                     |      |               |        |                     |      |        |        |  |   |         |        |  |   |         |       



|   |  | As of September 30, 2003, the Company had a net deferred origination fee
on mortgage loans held for sale and loans receivable amounting to $2.3
million and $17.0 million, respectively (December 31, 2002  $1.6 million
and $13.0 million, respectively).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|f. |  | Segment information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | The Company operates in four reportable segments identified by line of
business: mortgage banking, banking (including thrift operations),
institutional securities operations and insurance agency activities.
Management made this determination based on operating decisions
particular to each business line and because each one targets different
customers and requires different strategies. The majority of the
Companys operations are conducted in Puerto Rico. The Company also
operates in the mainland United States, principally in the New York City
metropolitan area. Investment activities by Doral Bank PR and by Doral
Financial at the parent company level through their respective
international banking entities are included within the banking and
mortgage banking segments, respectively.
|  
|   |  | The Company monitors the performance of its reportable segments based on
pre-established goals for different financial parameters such as net
income, interest rate spread, loan production and increase in market
share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | The following tables present net interest income, non-interest income,
net income (loss) and identifiable assets for each of the Companys
reportable segments for the periods presented as well as for the
Companys Puerto Rico and mainland U.S. operations for the periods
presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

11



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(In thousands)

|                    |  |                                  |           |         |  |            |           |               |  |               |         |              |  |  |        |  |  |  |          |   |  |   |            | 
|------------------- |  | -------------------------------- | --------- | ------- |  | ---------- | --------- | ------------- |  | ------------- | ------- | ------------ |  |  | ------ |  |  |  | -------- | - |  | - | ---------- | 
|                    |  | Mortgage                         |           |         |  |            |           | Institutional |  | Insurance     |         | Intersegment |  |  |        | 
|                    |  | Banking                          |           | Banking |  | Securities |           | Agency        |  | Eliminations* |         | Totals      
|                    |  |                                  |           |         |  |            |           |               |  |               |         |             
|                    |  | QUARTER ENDED SEPTEMBER 30, 2003
|                    |  |                                 
|Net interest income |  | $                                | 12,285    |         |  |            | 27,069    |               |  |               | 953     |              |  |  | 592    |  |  |  | 2,034    |   |  | $ | 42,933     | 
|Non-interest income |  | $                                | 101,369   |         |  |            | 8,840     |               |  |               | 2,760   |              |  |  | 1,998  |  |  |  | (4,070   | ) |  | $ | 110,897    | 
|Net income          |  | $                                | 65,359    |         |  |            | 14,326    |               |  |               | 1,803   |              |  |  | 1,634  |  |  |  | (1,441   | ) |  | $ | 81,681     | 
|Identifiable assets |  | $                                | 3,555,838 |         |  |            | 7,238,552 |               |  |               | 362,338 |              |  |  | 47,647 |  |  |  | (440,646 | ) |  | $ | 10,763,729 | 
|                   
|                   
|                    |  | QUARTER ENDED SEPTEMBER 30, 2002
|                    |  |                                 
|Net interest income |  | $                                | 17,309    |         |  |            | 20,743    |               |  |               | 606     |              |  |  | 277    |  |  |  | 311      |   |  | $ | 39,246     | 
|Non-interest income |  | $                                | 28,729    |         |  |            | 36,616    |               |  |               | 3,376   |              |  |  | 1,953  |  |  |  | (2,682   | ) |  | $ | 67,992     | 
|Net income          |  | $                                | 20,042    |         |  |            | 37,331    |               |  |               | 1,727   |              |  |  | 1,317  |  |  |  | (2,133   | ) |  | $ | 58,284     | 
|Identifiable assets |  | $                                | 3,054,011 |         |  |            | 4,579,007 |               |  |               | 436,306 |              |  |  | 31,928 |  |  |  | (435,088 | ) |  | $ | 7,666,164  | 

12



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(In thousands)

|                    |  |                                            |           |         |  |            |           |               |  |               |         |              |  |  |        |  |  |  |          |   |  |   |            | 
|------------------- |  | ------------------------------------------ | --------- | ------- |  | ---------- | --------- | ------------- |  | ------------- | ------- | ------------ |  |  | ------ |  |  |  | -------- | - |  | - | ---------- | 
|                    |  | Mortgage                                   |           |         |  |            |           | Institutional |  | Insurance     |         | Intersegment |  |  |        | 
|                    |  | Banking                                    |           | Banking |  | Securities |           | Agency        |  | Eliminations* |         | Totals      
|                    |  |                                            |           |         |  |            |           |               |  |               |         |             
|                    |  | NINE MONTH PERIOD ENDED SEPTEMBER 30, 2003
|                    |  |                                           
|Net interest income |  | $                                          | 35,136    |         |  |            | 79,180    |               |  |               | 2,597   |              |  |  | 1,455  |  |  |  | 5,748    |   |  | $ | 124,116    | 
|Non-interest income |  | $                                          | 213,641   |         |  |            | 86,106    |               |  |               | 7,253   |              |  |  | 5,840  |  |  |  | (11,320  | ) |  | $ | 301,520    | 
|Net income          |  | $                                          | 128,297   |         |  |            | 92,986    |               |  |               | 4,773   |              |  |  | 4,414  |  |  |  | (3,825   | ) |  | $ | 226,645    | 
|Identifiable assets |  | $                                          | 3,555,838 |         |  |            | 7,238,552 |               |  |               | 362,338 |              |  |  | 47,647 |  |  |  | (440,646 | ) |  | $ | 10,763,729 | 
|                   
|                   
|                    |  | NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002
|                    |  |                                           
|Net interest income |  | $                                          | 42,650    |         |  |            | 67,394    |               |  |               | 1,833   |              |  |  | 856    |  |  |  | 76       |   |  | $ | 112,809    | 
|Non-interest income |  | $                                          | 114,296   |         |  |            | 54,859    |               |  |               | 6,632   |              |  |  | 5,492  |  |  |  | (5,919   | ) |  | $ | 175,360    | 
|Net income          |  | $                                          | 85,843    |         |  |            | 69,678    |               |  |               | 3,238   |              |  |  | 3,626  |  |  |  | (5,574   | ) |  | $ | 156,811    | 
|Identifiable assets |  | $                                          | 3,054,011 |         |  |            | 4,579,007 |               |  |               | 436,306 |              |  |  | 31,928 |  |  |  | (435,088 | ) |  | $ | 7,666,164  | 



---

|* |  | 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, the Companys subsidiary that owns the Corporate
headquarters facilities. Assets include internal funding and
investment in subsidiaries accounted for at cost.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(In thousands)

|                    |  |                                            |            |    |  |              |         |        |  |  |          |   |  |   |            | 
|------------------- |  | ------------------------------------------ | ---------- | -- |  | ------------ | ------- | ------ |  |  | -------- | - |  | - | ---------- | 
|                    |  |                                            |            |    |  | Mainland     |         |        |  |  |          |   |  |  
|                    |  | Puerto Rico                                |            | US |  | Eliminations |         | Totals
|                    |  |                                            |            |    |  |              |         |       
|                    |  | QUARTER ENDED SEPTEMBER 30, 2003          
|                    |  |                                           
|Net interest income |  | $                                          | 40,755     |    |  |              | 2,148   |        |  |  | 30       |   |  | $ | 42,933     | 
|Non-interest income |  | $                                          | 110,848    |    |  |              | 99      |        |  |  | (50      | ) |  | $ | 110,897    | 
|Net income (loss)   |  | $                                          | 82,121     |    |  |              | (470    | )      |  |  | 30       |   |  | $ | 81,681     | 
|Identifiable assets |  | $                                          | 10,298,059 |    |  |              | 519,431 |        |  |  | (53,761  | ) |  | $ | 10,763,729 | 
|                   
|                   
|                    |  | QUARTER ENDED SEPTEMBER 30, 2002          
|                    |  |                                           
|Net interest income |  | $                                          | 35,172     |    |  |              | 4,114   |        |  |  | (40      | ) |  | $ | 39,246     | 
|Non-interest income |  | $                                          | 63,205     |    |  |              | 4,775   |        |  |  | 12       |   |  | $ | 67,992     | 
|Net income          |  | $                                          | 54,589     |    |  |              | 3,722   |        |  |  | (27      | ) |  | $ | 58,284     | 
|Identifiable assets |  | $                                          | 7,384,445  |    |  |              | 421,128 |        |  |  | (139,409 | ) |  | $ | 7,666,164  | 
|                   
|                   
|(In thousands)     
|                   
|                   
|                    |  |                                            |            |    |  | Mainland     |         |        |  |  |          |   |  |  
|                    |  | Puerto Rico                                |            | US |  | Eliminations |         | Totals
|                    |  |                                            |            |    |  |              |         |       
|                    |  | NINE MONTH PERIOD ENDED SEPTEMBER 30, 2003
|                    |  |                                           
|Net interest income |  | $                                          | 116,084    |    |  |              | 8,013   |        |  |  | 19       |   |  | $ | 124,116    | 
|Non-interest income |  | $                                          | 298,183    |    |  |              | 3,641   |        |  |  | (304     | ) |  | $ | 301,520    | 
|Net income          |  | $                                          | 226,160    |    |  |              | 614     |        |  |  | (129     | ) |  | $ | 226,645    | 
|Identifiable assets |  | $                                          | 10,298,059 |    |  |              | 519,431 |        |  |  | (53,761  | ) |  | $ | 10,763,729 | 
|                   
|                   
|                    |  | NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002
|                    |  |                                           
|Net interest income |  | $                                          | 102,777    |    |  |              | 10,790  |        |  |  | (758     | ) |  | $ | 112,809    | 
|Non-interest income |  | $                                          | 172,123    |    |  |              | 5,996   |        |  |  | (2,759   | ) |  | $ | 175,360    | 
|Net income          |  | $                                          | 154,445    |    |  |              | 5,882   |        |  |  | (3,516   | ) |  | $ | 156,811    | 
|Identifiable assets |  | $                                          | 7,384,445  |    |  |              | 421,128 |        |  |  | (139,409 | ) |  | $ | 7,666,164  | 

14



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



|g. |  | 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
September 30, 2003 and December 31, 2002.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------

|                                    |       |               |         |              |  |   |         |           | 
|----------------------------------- | ----- | ------------- | ------- | ------------ |  | - | ------- | --------- | 
|TRADING SECURITIES                  |       | SEPTEMBER 30, |         | DECEMBER 31,
|(In thousands)                      |       | 2003          |         | 2002        
|                                    |       |               |         |             
|Mortgage-backed securities          |       | $             | 305,166 |              |  | $ | 829,593 |          
|Interest-only strips (IOs)        |       |               | 491,173 |              |  |   | 359,185 |          
|Puerto Rico government and agencies |       |               | 6,073   |              |  |   | 6,246   |          
|Other                               |       |               | 12,777  |              |  |   | 1,155   |          
|                                    |       |               |         |              |  |   |         |          
|                                    | Total |               | $       | 815,189      |  |   | $       | 1,196,179 | 
|                                    |       |               |         |              |  |   |         |          



| | 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 September
30, 2003 and December 31, 2002.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

15



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SECURITIES AVAILABLE FOR SALE
AS OF SEPTEMBER 30, 2003

|                           |                |                            |           |           |           |            |       |            |       |        |        |         |        |   |           |   |           |  |      |          |      |  
|-------------------------- | -------------- | -------------------------- | --------- | --------- | --------- | ---------- | ----- | ---------- | ----- | ------ | ------ | ------- | ------ | - | --------- | - | --------- |  | ---- | -------- | ---- | -
|                           |                |                            |           |           |           |            |       |            |       |        |        |         |        |   |           |   |           |  |      | WEIGHTED
|                           |                |                            |           | AMORTIZED |           | UNREALIZED |       | UNREALIZED |       | MARKET |        | AVERAGE
|(Dollars in thousands)     |                | COST                       |           | GAINS     |           | LOSSES     |       | VALUE      |       | YIELD 
|                           |                |                            |           |           |           |            |       |            |       |        |        |        
|MORTGAGE-BACKED SECURITIES |                |                            |           |           |           |            |       |            |       |        |        |         |        |   |           |   |           |  |      |         
|                           | GNMA           |                            |           |           |           |            |       |            |       |        |        |         |        |   |           |   |           |  |      |          |     
|                           |                | Due over ten years         |           | $         | 592,762   |            |       | $          | 2,697 |        |        | $       | 3,981  |   |           | $ | 591,478   |  |      |          | 5.61 | %
|                           | FHLMC and FNMA |                            |           |           |           |            |       |            |       |        |        |         |        |   |           |   |           |  |      |          |     
|                           |                | Due over ten years         |           |           | 548,138   |            |       |            | 176   |        |        |         | 8,250  |   |           |   | 540,064   |  |      |          | 5.17 | %
|DEBT SECURITIES            |                |                            |           |           |           |            |       |            |       |        |        |         |        |   |           |   |           |  |      |         
|                           | FHLB NOTES     |                            |           |           |           |            |       |            |       |        |        |         |        |   |           |   |           |  |      |          |     
|                           |                | Due over ten years         |           |           | 111,938   |            |       |            |      |        |        |         | 106    |   |           |   | 111,832   |  |      |          | 5.24 | %
|                           | US TREASURY    |                            |           |           |           |            |       |            |       |        |        |         |        |   |           |   |           |  |      |          |     
|                           |                | Due from five to ten years |           |           | 1,023,458 |            |       |            | 4,882 |        |        |         | 16,090 |   |           |   | 1,012,250 |  |      |          | 4.07 | %
|                           |                | Due over ten years         |           |           | 267,120   |            |       |            | 1,318 |        |        |         |       |   |           |   | 268,438   |  |      |          | 5.38 | %
|                           |                |                            |           |           |           |            |       |            |       |        |        |         |        |   |           |   |           |  |      |         
|                           |                | $                          | 2,543,416 |           |           | $          | 9,073 |            |       | $      | 28,427 |         |        | $ | 2,524,062 |   |           |  | 4.86 | %       
|                           |                |                            |           |           |           |            |       |            |       |        |        |         |        |   |           |   |           |  |      |         

16



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SECURITIES AVAILABLE FOR SALE
AS OF DECEMBER 31, 2002

|                           |                  |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |      |  
|-------------------------- | ---------------- | -------------------------- | ------- | --------- | ------- | ---------- | ----- | ---------- | ----- | ------ | ----- | ------- | ----- | - | ------- | - | ------- |  | ---- | -------- | ---- | -
|                           |                  |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      | WEIGHTED
|                           |                  |                            |         | AMORTIZED |         | UNREALIZED |       | UNREALIZED |       | MARKET |       | AVERAGE
|(Dollars in thousands)     |                  | COST                       |         | GAINS     |         | LOSSES     |       | VALUE      |       | YIELD 
|                           |                  |                            |         |           |         |            |       |            |       |        |       |        
|MORTGAGE-BACKED SECURITIES |                  |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |         
|                           | GNMA             |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |     
|                           |                  | Due over ten years         |         | $         | 12,316  |            |       | $          | 610   |        |       | $       | 146   |   |         | $ | 12,780  |  |      |          | 6.55 | %
|                           | FHLMC and FNMA   |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |     
|                           |                  | Due over ten years         |         |           | 171,847 |            |       |            | 3,073 |        |       |         | 334   |   |         |   | 174,586 |  |      |          | 5.87 | %
|DEBT SECURITIES            |                  |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |         
|                           | FHLB ZERO COUPON |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |     
|                           |                  | Due over ten years         |         |           | 106,194 |            |       |            |      |        |       |         | 1,194 |   |         |   | 105,000 |  |      |          | 6.87 | %
|                           | FHLMC NOTES      |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |     
|                           |                  | Due over ten years         |         |           | 25,000  |            |       |            | 315   |        |       |         |      |   |         |   | 25,315  |  |      |          | 6.00 | %
|                           | US TREASURY      |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |     
|                           |                  | Due 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 September 30,
2003 and December 31, 2002.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

17



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SECURITIES HELD TO MATURITY
AS OF SEPTEMBER 30, 2003

|                           |                   |                            |           |           |         |            |       |            |       |        |        |         |        |   |           |   |         |  |      |          |      |  
|-------------------------- | ----------------- | -------------------------- | --------- | --------- | ------- | ---------- | ----- | ---------- | ----- | ------ | ------ | ------- | ------ | - | --------- | - | ------- |  | ---- | -------- | ---- | -
|                           |                   |                            |           |           |         |            |       |            |       |        |        |         |        |   |           |   |         |  |      | WEIGHTED
|                           |                   |                            |           | AMORTIZED |         | UNREALIZED |       | UNREALIZED |       | MARKET |        | AVERAGE
|(Dollars in thousands)     |                   | COST                       |           | GAINS     |         | LOSSES     |       | VALUE      |       | YIELD 
|                           |                   |                            |           |           |         |            |       |            |       |        |        |        
|MORTGAGE-BACKED SECURITIES |                   |                            |           |           |         |            |       |            |       |        |        |         |        |   |           |   |         |  |      |         
|                           | GNMA              |                            |           |           |         |            |       |            |       |        |        |         |        |   |           |   |         |  |      |          |     
|                           |                   | Due from five to ten years |           | $         | 1,753   |            |       | $          | 93    |        |        | $       |       |   |           | $ | 1,846   |  |      |          | 6.75 | %
|                           |                   | Due over ten years         |           |           | 8,736   |            |       |            | 491   |        |        |         |       |   |           |   | 9,227   |  |      |          | 6.96 | %
|                           | CMO CERTIFICATES  |                            |           |           |         |            |       |            |       |        |        |         |        |   |           |   |         |  |      |          |     
|                           |                   | Due from one to five years |           |           | 484     |            |       |            |      |        |        |         |       |   |           |   | 484     |  |      |          | 7.25 | %
|                           |                   | Due from five to ten years |           |           | 775     |            |       |            |      |        |        |         |       |   |           |   | 775     |  |      |          | 5.97 | %
|                           |                   | Due over ten years         |           |           | 47,939  |            |       |            | 84    |        |        |         | 595    |   |           |   | 47,428  |  |      |          | 6.07 | %
|DEBT SECURITIES            |                   |                            |           |           |         |            |       |            |       |        |        |         |        |   |           |   |         |  |      |         
|                           | FHLB NOTES        |                            |           |           |         |            |       |            |       |        |        |         |        |   |           |   |         |  |      |          |     
|                           |                   | Due over ten years         |           |           | 617,919 |            |       |            | 1,972 |        |        |         | 381    |   |           |   | 619,510 |  |      |          | 5.68 | %
|                           | FHLB ZERO COUPON  |                            |           |           |         |            |       |            |       |        |        |         |        |   |           |   |         |  |      |          |     
|                           |                   | Due over ten years         |           |           | 283,515 |            |       |            |      |        |        |         | 20,697 |   |           |   | 262,818 |  |      |          | 6.63 | %
|                           | FHLMC ZERO COUPON |                            |           |           |         |            |       |            |       |        |        |         |        |   |           |   |         |  |      |          |     
|                           |                   | Due over ten years         |           |           | 33,773  |            |       |            |      |        |        |         | 5,210  |   |           |   | 28,563  |  |      |          | 6.01 | %
|                           | PR HOUSING BANK   |                            |           |           |         |            |       |            |       |        |        |         |        |   |           |   |         |  |      |          |     
|                           |                   | Due from one to five years |           |           | 5,000   |            |       |            | 50    |        |        |         |       |   |           |   | 5,050   |  |      |          | 6.00 | %
|                           |                   | Due over ten years         |           |           | 2,235   |            |       |            |      |        |        |         |       |   |           |   | 2,235   |  |      |          | 6.20 | %
|                           | U.S. TREASURY     |                            |           |           |         |            |       |            |       |        |        |         |        |   |           |   |         |  |      |          |     
|                           |                   | Due from five to ten years |           |           | 201,684 |            |       |            |      |        |        |         | 5,371  |   |           |   | 196,313 |  |      |          | 3.63 | %
|                           |                   | Due over ten years         |           |           | 476,612 |            |       |            | 5,094 |        |        |         | 44,212 |   |           |   | 437,494 |  |      |          | 5.37 | %
|                           | OTHER             |                            |           |           |         |            |       |            |       |        |        |         |        |   |           |   |         |  |      |          |     
|                           |                   | Due within a year          |           |           | 5,000   |            |       |            |      |        |        |         |       |   |           |   | 5,000   |  |      |          | 2.76 | %
|                           |                   | Due from one to five years |           |           | 3,515   |            |       |            | 8     |        |        |         |       |   |           |   | 3,523   |  |      |          | 5.27 | %
|                           |                   | Due from five to ten years |           |           | 880     |            |       |            | 16    |        |        |         |       |   |           |   | 896     |  |      |          | 6.71 | %
|                           |                   | Due over ten years         |           |           | 2,000   |            |       |            | 40    |        |        |         |       |   |           |   | 2,040   |  |      |          | 7.00 | %
|                           |                   |                            |           |           |         |            |       |            |       |        |        |         |        |   |           |   |         |  |      |         
|                           |                   | $                          | 1,691,820 |           |         | $          | 7,848 |            |       | $      | 76,466 |         |        | $ | 1,623,202 |   |         |  | 5.53 | %       
|                           |                   |                            |           |           |         |            |       |            |       |        |        |         |        |   |           |   |         |  |      |         

18



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SECURITIES HELD TO MATURITY
AS OF DECEMBER 31, 2002

|                           |                                      |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |      |  
|-------------------------- | ------------------------------------ | -------------------------- | ------- | --------- | ------- | ---------- | ----- | ---------- | ----- | ------ | ----- | ------- | ----- | - | ------- | - | ------- |  | ---- | -------- | ---- | -
|                           |                                      |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      | WEIGHTED
|                           |                                      |                            |         | AMORTIZED |         | UNREALIZED |       | UNREALIZED |       | MARKET |       | AVERAGE
|(Dollars in thousands)     |                                      | COST                       |         | GAINS     |         | LOSSES     |       | VALUE      |       | YIELD 
|                           |                                      |                            |         |           |         |            |       |            |       |        |       |        
|MORTGAGE-BACKED SECURITIES |                                      |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |         
|                           | GNMA                                 |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |     
|                           |                                      | Due from five to ten years |         | $         | 2,227   |            |       | $          | 101   |        |       | $       |      |   |         | $ | 2,328   |  |      |          | 6.74 | %
|                           |                                      | Due over ten years         |         |           | 11,253  |            |       |            | 590   |        |       |         |      |   |         |   | 11,843  |  |      |          | 6.99 | %
|                           | CMO CERTIFICATES                     |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |     
|                           |                                      | Due 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 SECURITIES            |                                      |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |         
|                           | FHLB NOTES                           |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |     
|                           |                                      | Due over ten years         |         |           | 394,365 |            |       |            | 250   |        |       |         | 250   |   |         |   | 394,365 |  |      |          | 5.59 | %
|                           | FHLB ZERO COUPON                     |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |     
|                           |                                      | Due over ten years         |         |           | 314,202 |            |       |            | 54    |        |       |         | 54    |   |         |   | 314,202 |  |      |          | 6.82 | %
|                           | FHLMC ZERO COUPON                    |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |     
|                           |                                      | Due over ten years         |         |           | 37,116  |            |       |            | 138   |        |       |         | 1,121 |   |         |   | 36,133  |  |      |          | 7.87 | %
|                           | FHLMC NOTES                          |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |     
|                           |                                      | Due over ten years         |         |           | 50,000  |            |       |            |      |        |       |         |      |   |         |   | 50,000  |  |      |          | 6.00 | %
|                           | PR HOUSING BANK                      |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |     
|                           |                                      | Due from one to five years |         |           | 5,000   |            |       |            | 25    |        |       |         |      |   |         |   | 5,025   |  |      |          | 6.00 | %
|                           |                                      | Due over ten years         |         |           | 3,305   |            |       |            |      |        |       |         |      |   |         |   | 3,305   |  |      |          | 6.20 | %
|                           | US TREASURY                          |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |     
|                           |                                      | Due over ten years         |         |           | 61,092  |            |       |            | 5,852 |        |       |         |      |   |         |   | 66,944  |  |      |          | 5.36 | %
|                           | P.R. ECONOMIC DEVELOPMENT BANK NOTES |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |     
|                           |                                      | Due within a year          |         |           | 2,000   |            |       |            |      |        |       |         |      |   |         |   | 2,000   |  |      |          | 6.60 | %
|                           | OTHER                                |                            |         |           |         |            |       |            |       |        |       |         |       |   |         |   |         |  |      |          |     
|                           |                                      | Due 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



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



|h. |  | 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)                                |  | SEPTEMBER 30, 2003 |           | DECEMBER 31, 2002
|                                              |  |                    |           |                  
|Conventional single family residential loans  |  | $                  | 1,505,096 |                   |  | $ | 1,789,531 | 
|FHA/VA loans                                  |  |                    | 89,909    |                   |  |   | 86,109    | 
|Mortgage loans on residential multifamily     |  |                    | 87,191    |                   |  |   | 103,296   | 
|Construction and commercial real estate loans |  |                    | 250,104   |                   |  |   | 204,423   | 
|Consumer loans secured by mortgages           |  |                    | 26        |                   |  |   | 40        | 
|                                              |  |                    |           |                   |  |   |           | 
|                                              |  | $                  | 1,932,326 |                   |  | $ | 2,183,399 | 
|                                              |  |                    |           |                   |  |   |           | 



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

LOANS RECEIVABLE, NET

|                                    |                       |                             |                                               |           |                    |           |                   |         |   |     |         |           |        |           |    |   |   |     |  
|----------------------------------- | --------------------- | --------------------------- | --------------------------------------------- | --------- | ------------------ | --------- | ----------------- | ------- | - | --- | ------- | --------- | ------ | --------- | -- | - | - | --- | -
|                                    |                       |                             |                                               |           | SEPTEMBER 30, 2003 |           | DECEMBER 31, 2002
|                                    |                       |                             |                                               |           |                    |           |                  
|(Dollars in thousands)              |                       | AMOUNT                      |                                               | PERCENT   |                    | AMOUNT    |                   | PERCENT
|                                    |                       |                             |                                               |           |                    |           |                   |         |   |     |        
|Construction loans(1)               |                       | $                           | 558,736                                       |           |                    |           | 41                | %       |   | $   | 474,440 |           |        |           | 45 | %
|Residential mortgage loans          |                       |                             | 487,615                                       |           |                    |           | 36                | %       |   |     | 282,059 |           |        |           | 27 | %
|Commercial  secured by real estate |                       |                             | 115,872                                       |           |                    |           | 9                 | %       |   |     | 138,270 |           |        |           | 13 | %
|Consumer  secured by real estate   |                       |                             | 373                                           |           |                    |           | 0                 | %       |   |     | 821     |           |        |           | 0  | %
|Consumer  other:                   |                       |                             |                                               |           |                    |           |                   |         |   |     |         |           |        |           |    |  
|                                    |                       | Personal loans              |                                               |           | 31,207             |           |                   |         | 2 | %   |         |           | 28,008 |           |    |   | 3 | %  
|                                    |                       | Auto loans                  |                                               |           | 1,275              |           |                   |         | 0 | %   |         |           | 1,457  |           |    |   | 0 | %  
|                                    |                       | Credit cards                |                                               |           | 7,179              |           |                   |         | 1 | %   |         |           | 4,924  |           |    |   | 1 | %  
|                                    |                       | Overdrawn checking accounts |                                               |           | 602                |           |                   |         | 0 | %   |         |           | 2,500  |           |    |   | 0 | %  
|                                    |                       | Revolving lines of credit   |                                               |           | 25,546             |           |                   |         | 2 | %   |         |           | 25,390 |           |    |   | 2 | %  
|Commercial non-real estate          |                       |                             | 19,883                                        |           |                    |           | 1                 | %       |   |     | 13,291  |           |        |           | 1  | %
|Loans on saving deposits            |                       |                             | 9,514                                         |           |                    |           | 1                 | %       |   |     | 8,720   |           |        |           | 1  | %
|Land secured                        |                       |                             | 88,892                                        |           |                    |           | 7                 | %       |   |     | 79,996  |           |        |           | 7  | %
|                                    |                       |                             |                                               |           |                    |           |                   |         |   |     |         |           |        |           |    |  
|                                    |                       |                             | Loans receivable, gross                       |           |                    | 1,346,694 |                   |         |   | 100 | %       |           |        | 1,059,876 |    |   |   | 100 | %
|                                    |                       |                             |                                               |           |                    |           |                   |         |   |     |         |           |        |           |    |  
|Less:                               |                       |                             |                                               |           |                    |           |                   |         |   |     |         |           |        |           |    |  
|                                    |                       |                             | Undisbursed portion of loans
in process       |           |                    | (2,738    | )                 |         |   |     |         |           |        | (9,420    | )  |   |   |     |  
|                                    |                       |                             | Unearned interest and deferred
loan fees, net |           |                    | (16,962   | )                 |         |   |     |         |           |        | (18,132   | )  |   |   |     |  
|                                    |                       |                             | Allowance
for loan losses(2)                  |           |                    | (18,134   | )                 |         |   |     |         |           |        | (9,982    | )  |   |   |     |  
|                                    |                       |                             |                                               |           |                    |           |                   |         |   |     |         |           |        |           |    |  
|                                    |                       |                             | (37,834                                       | )         |                    |           |                   |         |   |     | (37,534 | )         |        |           |    |  
|                                    |                       |                             |                                               |           |                    |           |                   |         |   |     |         |           |        |           |    |  
|                                    | Loans receivable, net |                             | $                                             | 1,308,860 |                    |           |                   |         |   |     | $       | 1,022,342 |        |           |    |   |  
|                                    |                       |                             |                                               |           |                    |           |                   |         |   |     |         |           |        |           |    |  



---

|(1) |  | Includes $369.2 million and $360.9 million of construction
loans for residential housing projects as of September 30, 2003 and
December 31, 2002, respectively. Also includes $189.5 million and
$113.5 million of construction loans for commercial, condominiums and
multifamily projects.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Does not include $9.3 million and $8.3 million of allowance
for loan losses allocated to mortgage loans held for sale as of
September 30, 2003 and December 31, 2002, respectively.                                                                                                         

20



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



|j. |  | Doral Financial is the guarantor of various serial and term bonds issued
by Doral Properties, a wholly-owned subsidiary, through the Puerto Rico
Industrial, Tourist, Educational, Medical and Environmental Control
Facilities Financing Authority (AFICA). Bonds, in an aggregate
principal amount of $44,765,000, were issued on November 3, 1999 to
finance the construction and development of the Doral Financial Plaza, the
new headquarters of Doral Financial. The bonds have fixed interest rates,
ranging from 6.10% to 6.90%, and maturities ranging from June 2003 to
December 2029. The bonds are secured by a mortgage on the building and
underlying real property. On November 1, 2002, Doral Properties issued an
additional $7.6 million in bonds through AFICA to finance additional
improvements to the Doral Financial Plaza. The additional bonds mature,
subject to prior amortization requirements, in December 2029, and are also
guaranteed by Doral Financial but are not secured by a mortgage on the
property.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|k. |  | The Company routinely originates, securitizes and sells mortgage loans
into the secondary market. As a result of this process, the Company
typically retains the servicing rights and may retain interest-only
strips. The Companys retained interests are subject to prepayment and
interest rate risks. The following tables show the changes in the
Companys mortgage servicing assets and interest-only strips for each of
the periods shown:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                   |                            |               |               |                   |                     |   |         |        |      |   |         |         |   |   |         |         |  
|---------------------------------- | -------------------------- | ------------- | ------------- | ----------------- | ------------------- | - | ------- | ------ | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                   |                            |               |               |                   |                     |   |         |        |      |   |         |         |   |   |         |         |  
|MORTGAGE SERVICING ASSETS ACTIVITY |                            | QUARTER ENDED |               | NINE MONTH PERIOD
|                                   |                            |               | SEPTEMBER 30, |                   | ENDED SEPTEMBER 30,
|(In thousands)                     |                            |               |               |                  
|                                   |                            |               | 2003          |                   | 2002                |   | 2003    |        | 2002
|                                   |                            |               |               |                   |                     |   |         |        |     
|Balance at beginning of period     |                            | $             | 156,114       |                   |                     | $ | 158,578 |        |      | $ | 159,881 |         |   | $ | 154,340 |        
|Capitalization of rights           |                            |               | 17,616        |                   |                     |   | 8,553   |        |      |   | 43,600  |         |   |   | 30,575  |        
|Amortization:                      |                            |               |               |                   |                     |   |         |        |      |   |         |         |   |   |         |        
|                                   | Scheduled                  |               |               | (7,789            | )                   |   |         | (6,619 | )    |   |         | (22,815 | ) |   |         | (19,262 | )
|                                   | Unscheduled and impairment |               |               | (221              | )                   |   |         | (7,459 | )    |   |         | (14,946 | ) |   |         | (12,600 | )
|                                   |                            |               |               |                   |                     |   |         |        |      |   |         |         |   |   |         |        
|Balance at end of period           |                            | $             | 165,720       |                   |                     | $ | 153,053 |        |      | $ | 165,720 |         |   | $ | 153,053 |        
|                                   |                            |               |               |                   |                     |   |         |        |      |   |         |         |   |   |         |        



| |  | 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 |        | NINE MONTH PERIOD  
|                               |  | SEPTEMBER 30, |        | ENDED SEPTEMBER 30,
|                               |  |               |        |                    
|(In thousands)                 |  | 2003          |        | 2002                |  | 2003 |       | 2002
|                               |  |               |        |                     |  |      |       |     
|Balance at beginning of period |  | $             | 19,640 |                     |  | $    |      |      |  | $ | 9,152  |   |  | $ |      | 
|Impairment charges             |  |               |       |                     |  |      | 7,459 |      |  |   | 16,945 |   |  |   | 7,459 | 
|Recoveries                     |  |               | (208   | )                   |  |      |      |      |  |   | (6,665 | ) |  |   |      | 
|                               |  |               |        |                     |  |      |       |      |  |   |        |   |  |   |       | 
|Balance at end of period       |  | $             | 19,432 |                     |  | $    | 7,459 |      |  | $ | 19,432 |   |  | $ | 7,459 | 
|                               |  |               |        |                     |  |      |       |      |  |   |        |   |  |   |       | 

21



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



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

INTEREST-ONLY STRIPS ACTIVITY(1)
(In thousands)

|                               |  |               |         |                     |  |      |         |      |  |   |         |   |  |   |         |  
|------------------------------ |  | ------------- | ------- | ------------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                               |  | QUARTER ENDED |         | NINE MONTH PERIOD  
|                               |  | SEPTEMBER 30, |         | ENDED SEPTEMBER 30,
|                               |  |               |         |                    
|                               |  | 2003          |         | 2002                |  | 2003 |         | 2002
|                               |  |               |         |                     |  |      |         |     
|Balance at beginning of period |  | $             | 444,481 |                     |  | $    | 297,209 |      |  | $ | 359,185 |   |  | $ | 218,848 |  
|IOs on loan sales              |  |               | 74,988  |                     |  |      | 48,828  |      |  |   | 191,116 |   |  |   | 139,444 |  
|Amortization                   |  |               | (21,780 | )                   |  |      | (8,277  | )    |  |   | (55,629 | ) |  |   | (31,252 | )
|Valuation adjustment           |  |               | (6,516  | )                   |  |      | (6,000  | )    |  |   | (13,473 | ) |  |   | (6,000  | )
|Purchases of IOs               |  |               |        |                     |  |      |        |      |  |   | 9,974   |   |  |   | 10,720  |  
|                               |  |               |         |                     |  |      |         |      |  |   |         |   |  |   |         |  
|Balance at end of period       |  | $             | 491,173 |                     |  | $    | 331,760 |      |  | $ | 491,173 |   |  | $ | 331,760 |  
|                               |  |               |         |                     |  |      |         |      |  |   |         |   |  |   |         |  



---

|(1) |  | Excludes interest only certificates and other residual
interests retained in securitization transactions.
|--- |  | ---------------------------------------------------------------------------------------------------------



|l. |  | At September 30, 2003 and December 31, 2002, money market investments
included $301.5 million and $578.9 million, respectively, of pledged money
market investments. Such money market investments secured short-term
borrowings generally due within 90 days. At September 30, 2003 and
December 31, 2002, the carrying value of securities purchased under resell
agreements included in money market investments was $153.2 million and
$259.8 million, respectively. The underlying securities were held on
behalf of the Company by the dealers that arranged the transactions. At
September 30, 2003 and December 31, 2002, the Company had repledged
approximately $103.8 million and $244.5 million, respectively, of the
underlying securities.                                                                                                                                                                                                                                                                                     
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|m. |  | Effective January 1, 2003, the Company expenses the fair value of stock
options granted to employees using the modified prospective method
described in SFAS No. 148. Under this method, the Company expenses the
fair value of all employee stock options granted after January 1, 2003, as
well as the unvested portions of previously granted options. The
before-tax expense associated with expensing stock options for the third
quarter and first nine months of 2003 was approximately $1.1 million and
$3.4 million, respectively. During 2002, the Company used the intrinsic
value method to account for its stock option plan. Under the intrinsic
value-based method, compensation expense is recognized for the excess, if
any, of the quoted market price of the stock on the grant date over the
amount an employee must pay to acquire the stock. The Company did not
recognize any compensation cost in 2002 because the exercise price of the
options equaled the quoted market price of the stock on the date of grant.

22



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



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

|                                             |           |                    |               |                    |                         |  |   |         | 
|-------------------------------------------- | --------- | ------------------ | ------------- | ------------------ | ----------------------- |  | - | ------- | 
|                                             |           |                    | Quarter Ended |                    | Nine Month Period Ended
|(In thousands, except per share information) |           | September 30, 2002 |               | September 30, 2002
|                                             |           |                    |               |                    |                        
|Compensation and Benefits:                   |           |                    |               |                    |                         |  |   |        
|                                             | Reported  |                    | $             | 13,449             |                         |  | $ | 39,998  | 
|                                             | Pro forma |                    | $             | 14,572             |                         |  | $ | 43,366  | 
|Net Income:                                  |           |                    |               |                    |                         |  |   |        
|                                             | Reported  |                    | $             | 58,284             |                         |  | $ | 156,811 | 
|                                             | Pro forma |                    | $             | 57,599             |                         |  | $ | 154,757 | 
|Basic Earnings Per Share:                    |           |                    |               |                    |                         |  |   |        
|                                             | Reported  |                    | $             | 0.75               |                         |  | $ | 2.05    | 
|                                             | Pro forma |                    | $             | 0.74               |                         |  | $ | 2.02    | 
|Diluted Earnings Per Share:                  |           |                    |               |                    |                         |  |   |        
|                                             | Reported  |                    | $             | 0.74               |                         |  | $ | 2.02    | 
|                                             | Pro forma |                    | $             | 0.73               |                         |  | $ | 1.99    | 



|n. |  | Guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In November 2002, the Financial Accounting Standards Boards (FASB)
issued Interpretation No. 45, (FIN 45) Guarantors Accounting and
Disclosure Requirements for Guarantees. This interpretation requires a
guarantor of certain types of guarantees to recognize, at the inception
of the guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The provisions for initial
recognition are effective for guarantees that are issued or modified
after December 31, 2002. As of September 30, 2003, the Company had
outstanding $3.2 million in commercial and financial standby letters of
credit. The adoption of FIN No. 45 did not have a material impact on
Doral Financials Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|o. |  | Recent Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | In January 17, 2003, the FASB issued Interpretation No. 46 (FIN 46).
This interpretation provides guidance on how to identify a variable
interest entity and determine when the assets, liabilities,
noncontrolling interests and results of operations of a variable interest
entity should be consolidated by the primary beneficiary. The primary
beneficiary is the enterprise that will absorb a majority of the variable
entitys expected losses or receive a majority of the expected residual
returns as a result of holding variable interests. The recognition and
measurement provisions of this Interpretation apply at inception any
variable interest entity formed after January 31, 2003, and become
effective for existing variable interest entities on the first interim or
annual reporting period beginning after June 15, 2003. The Company
adopted the provisions of FIN 46 for variable interest entities formed on
or after February 1, 2003, which did not have a material effect on the
Companys Consolidated Financial Statements. The Company adopted the
provisions of FIN 46 for existing variable interest entities on July 1,
2003, however, the adoption of this Interpretation has not had a material
impact on the Companys financial position or results of operations.

23



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



|   |  | Derivatives and Hedging Activities.In April 2003, the FASB issued SFAS
No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS No. 149 primarily provides clarification on
the definition of derivative instruments within the scope of FASB
Statement No. 133. Generally, this Statement is effective for contracts
entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of this
statement did not have a material impact on Doral Financials
Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity.In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. SFAS No. 150 establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. The provisions of this statement
are effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this
statement did not have any impact on Doral Financials Consolidated
Financial Statements.
|  
|p. |  | Certain amounts reflected in the 2002 Consolidated Financial Statements
have been reclassified to conform to the presentation for 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|q. |  | Subsequent Event                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | On October 15, 2003, Doral Financial announced that the Companys Board
of Directors had declared a three-for-two stock split on the Companys
common stock. The stock split will be effected in the form of a stock
dividend of one additional share of common stock to be issued on December
11, 2003, for every two shares of common stock held of record on November
21, 2003. Fractional shares will be settled in cash on the basis of the
average of the high and low sales price of the common stock on November
21, 2003. The stock split will require retroactive restatement of all
historical per share data in the fourth quarter ended December 31, 2003.
Set forth below are Doral Financials pro-forma per share data giving
retroactive effect to the three-for-two stock split in the form of a
stock dividend announced:                                                                                                                       

|                                     |         |   |               |             |                     |   |             |             |      |   |             |             |  |   |             |             | 
|------------------------------------ | ------- | - | ------------- | ----------- | ------------------- | - | ----------- | ----------- | ---- | - | ----------- | ----------- |  | - | ----------- | ----------- | 
|                                     |         |   | QUARTER ENDED |             | NINE MONTH PERIOD  
|                                     |         |   | SEPTEMBER 30, |             | ENDED SEPTEMBER 30,
|                                     |         |   |               |             |                    
|                                     |         |   | 2003          |             | 2002                |   | 2003        |             | 2002
|                                     |         |   |               |             |                     |   |             |             |     
|Earnings per common share:           |         |   |               |             |                     |   |             |             |      |   |             |             |  |   |             |            
|                                     | Basic   |   | $             | 0.72        |                     |   | $           | 0.50        |      |   | $           | 1.98        |  |   | $           | 1.37        | 
|                                     |         |   |               |             |                     |   |             |             |      |   |             |             |  |   |             |             | 
|                                     | Diluted |   | $             | 0.70        |                     |   | $           | 0.49        |      |   | $           | 1.94        |  |   | $           | 1.35        | 
|                                     |         |   |               |             |                     |   |             |             |      |   |             |             |  |   |             |             | 
|Book value per share outstanding     |         | $ | 9.08          |             |                     | $ | 7.14        |             |      | $ | 9.08        |             |  | $ | 7.14        |            
|                                     |         |   |               |             |                     |   |             |             |      |   |             |             |  |   |             |             | 
|Weighted average shares outstanding: |         |   |               |             |                     |   |             |             |      |   |             |             |  |   |             |            
|                                     | Basic   |   |               | 107,884,556 |                     |   |             | 107,753,672 |      |   |             | 107,847,188 |  |   |             | 107,673,531 | 
|                                     | Diluted |   |               | 110,533,547 |                     |   |             | 109,556,171 |      |   |             | 110,329,001 |  |   |             | 109,369,842 | 
|Shares outstanding at end of period  |         |   | 107,902,460   |             |                     |   | 107,757,147 |             |      |   | 107,902,460 |             |  |   | 107,757,147 |            

24



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##### 





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

25



---



##### 



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 September
30, 2003 and 2002 was approximately $1.7 billion and $1.3 billion,
respectively. For the nine month periods ended September 30, 2003 and 2002,
the volume of loans originated and purchased was approximately $4.7 billion and
$3.8 billion, respectively. Doral Financials mortgage servicing portfolio
increased to approximately $12.3 billion as of September 30, 2003, from $10.9
billion as of September 30, 2002. Doral Financials strategy is to increase
the size of its mortgage servicing portfolio by relying principally on internal
loan originations and supplementing such internal loan originations by
purchases of mortgage loans on a servicing released basis.

Doral Financial maintains a substantial portfolio of mortgage-backed
securities. At September 30, 2003, Doral Financial held securities for trading
with a fair market value of $815.2 million, approximately $262.2 million of
which consisted of Puerto Rico GNMA securities, the interest on which is
tax-exempt to the Company. These securities are generally held by Doral
Financial for longer periods prior to sale in order to maximize the tax-exempt
interest received thereon. Trading securities are reflected on Doral
Financials consolidated financial statements at their fair market value with
resulting gains or losses included in operations as part of trading activities.

As part of its strategy to maximize net interest income, Doral Financial
also invests in securities that are classified as available for sale or held to
maturity. As of September 30, 2003, Doral Financial held approximately $1.7
billion in securities that were classified as held to maturity and reported at
amortized cost. As of September 30, 2003, Doral Financial also held $2.5
billion of investment securities that were classified as available for sale and
reported at fair value, with unrealized gains or losses included in
stockholders equity and reported as Accumulated other comprehensive loss, net
of income tax, in Doral Financials consolidated financial statements.

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

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

26



---



##### 



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

Doral Financial conducts its insurance agency activities in Puerto Rico
through Doral Agency. For the quarters ended September 30, 2003 and 2002,
Doral Agencys net income was approximately $1.6 million and $1.3 million,
respectively. For the nine month periods ended September 30, 2003 and 2002,
Doral Agencys net income was approximately $4.4 million and $3.6 million,
respectively.

For information regarding net interest income, non-interest income, net
income and identifiable assets broken down by Doral Financials mortgage
banking, banking, institutional securities and insurance agency activities
segments, please refer to Note f of the accompanying Consolidated Financial
Statements.

Doral Financial has significant assets and operations at the parent
company level. HF Mortgage Bankers, one of Doral Financials principal
mortgage units and Doral Overseas, an international banking entity, are
organized as operating divisions within the parent company. As of September
30, 2003, Doral Financial had assets of $2.9 billion at the parent company
level (excluding investment in consolidated subsidiaries).

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 September 30, 2003. However, given the sensitivity
of Doral Financials Consolidated Financial Statements to these estimates, the
use of other judgments, estimates and assumptions could result in material
differences in the Companys results of operations or financial
condition.

Various elements of Doral Financials accounting policies, by their
nature, are inherently subject to estimation techniques, valuation assumptions
and other subjective assessments. For a discussion regarding Doral Financials
critical accounting policies, particularly for those relating to its mortgage
securitization and sales activities and the ongoing valuation of retained
interests, particularly mortgage servicing rights and IOs, that arise from
those activities and are critical to an understanding of the Companys
Consolidated Financial Statements, please refer to the Managements Discussion
and Analysis of Financial Condition and Results of Operations section of Doral
Financials Annual Report on Form 10-K for the year ended
December 31, 2002.

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

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

27



---



##### 



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

NET INCOME

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

Net Interest Income

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

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

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

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

28



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##### 



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

QUARTER ENDED SEPTEMBER 30,2003
    
    2002AVERAGE
    
    
    
    
    
    AVERAGE
    
    AVERAGE
    
    
    
    
    
    AVERAGEBALANCE
    
    INTEREST
    
    YIELD/RATE
    
    BALANCE
    
    INTEREST
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)
    
    $
    3,199,179
    
    
    $
    53,374
    
    
    
    6.62
    %
    
    $
    2,970,270
    
    
    $
    52,467
    
    
    
    7.01
    %Mortgage-backed securities(2)
    
    
    1,219,272
    
    
    
    13,977
    
    
    
    4.55
    %
    
    
    1,253,381
    
    
    
    19,674
    
    
    
    6.23
    %Interest-only strips(2)
    
    
    478,693
    
    
    
    8,190
    
    
    
    6.79
    %
    
    
    309,949
    
    
    
    14,121
    
    
    
    18.08
    %Investment securities
    
    
    2,703,306
    
    
    
    31,575
    
    
    
    4.63
    %
    
    
    939,125
    
    
    
    13,694
    
    
    
    5.79
    %Money market investments
    
    
    1,169,386
    
    
    
    2,636
    
    
    
    0.89
    %
    
    
    1,323,820
    
    
    
    5,413
    
    
    
    1.62
    %Total interest-earning assets/interest income
    
    
    8,769,836
    
    
    $
    109,752
    
    
    
    4.97
    %
    
    
    6,796,545
    
    
    $
    105,369
    
    
    
    6.15
    %Total non-interest-earning assets
    
    
    616,139
    
    
    
    
    
    
    
    
    
    
    
    606,596Total assets
    
    $
    9,385,975
    
    
    
    
    
    
    
    
    
    
    $
    7,403,141LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    2,742,348
    
    
    $
    19,415
    
    
    
    2.81
    %
    
    $
    2,126,517
    
    
    $
    18,778
    
    
    
    3.50
    %Repurchase agreements
    
    
    3,033,273
    
    
    
    21,148
    
    
    
    2.77
    %
    
    
    2,379,665
    
    
    
    23,322
    
    
    
    3.89
    %Advances from FHLB
    
    
    1,256,500
    
    
    
    12,400
    
    
    
    3.92
    %
    
    
    977,752
    
    
    
    10,599
    
    
    
    4.30
    %Loans payable
    
    
    245,265
    
    
    
    1,488
    
    
    
    2.41
    %
    
    
    205,753
    
    
    
    1,639
    
    
    
    3.16
    %Notes payable
    
    
    610,102
    
    
    
    12,368
    
    
    
    8.04
    %
    
    
    561,900
    
    
    
    11,785
    
    
    
    8.32
    %Total interest-bearing liabilities/interest expense
    
    
    7,887,488
    
    
    $
    66,819
    
    
    
    3.36
    %
    
    
    6,251,587
    
    
    $
    66,123
    
    
    
    4.20
    %Total non-interest-bearing liabilities
    
    
    299,610
    
    
    
    
    
    
    
    
    
    
    
    188,865Total liabilities
    
    
    8,187,098
    
    
    
    
    
    
    
    
    
    
    
    6,440,452Stockholders equity
    
    
    1,198,877
    
    
    
    
    
    
    
    
    
    
    
    962,689Total liabilities and stockholders equity
    
    $
    9,385,975
    
    
    
    
    
    
    
    
    
    
    $
    7,403,141Net interest-earning assets
    
    $
    882,348
    
    
    
    
    
    
    
    
    
    
    $
    544,958Net interest income
    
    
    
    
    
    $
    42,933
    
    
    
    
    
    
    
    
    
    
    $
    39,246Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.61
    %
    
    
    
    
    
    
    
    
    
    
    1.95
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    1.94
    %
    
    
    
    
    
    
    
    
    
    
    2.29
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    111.19
    %
    
    
    
    
    
    
    
    
    
    
    108.72
    %




---

|(1) |  | Average loan balances include the average balance of non-accruing loans, on which no interest income is recognized.                                                                      
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Interest-only strips and the interest income thereon are included within mortgage-backed securities on Doral Financials Consolidated Statements of Income.                              
|   
|(3) |  | Interest rate spread represents the difference between Doral Financials weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities.
|   
|(4) |  | Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets.                                                           

29



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##### 



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

NINE MONTH PERIOD ENDED SEPTEMBER 30,2003
    
    2002AVERAGE
    
    
    
    
    
    AVERAGE
    
    AVERAGE
    
    
    
    
    
    AVERAGEBALANCE
    
    INTEREST
    
    YIELD/RATE
    
    BALANCE
    
    INTEREST
    
    YIELD/RATEASSETS:Interest-earning assets:Total loans(1)
    
    $
    3,228,301
    
    
    $
    162,705
    
    
    
    6.74
    %
    
    $
    2,851,064
    
    
    $
    148,983
    
    
    
    6.99
    %Mortgage-backed securities(2)
    
    
    1,196,811
    
    
    
    50,034
    
    
    
    5.59
    %
    
    
    1,405,537
    
    
    
    64,355
    
    
    
    6.12
    %Interest-only strips(2)
    
    
    428,959
    
    
    
    27,990
    
    
    
    8.72
    %
    
    
    268,943
    
    
    
    30,412
    
    
    
    15.12
    %Investment securities
    
    
    2,094,316
    
    
    
    77,010
    
    
    
    4.92
    %
    
    
    1,125,295
    
    
    
    51,915
    
    
    
    6.17
    %Money market investments
    
    
    1,321,950
    
    
    
    10,827
    
    
    
    1.10
    %
    
    
    997,800
    
    
    
    12,117
    
    
    
    1.62
    %Total interest-earning assets/interest income
    
    
    8,270,337
    
    
    $
    328,566
    
    
    
    5.31
    %
    
    
    6,648,639
    
    
    $
    307,782
    
    
    
    6.19
    %Total non-interest-earning assets
    
    
    700,460
    
    
    
    
    
    
    
    
    
    
    
    591,410Total assets
    
    $
    8,970,797
    
    
    
    
    
    
    
    
    
    
    $
    7,240,049LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    2,557,874
    
    
    $
    56,475
    
    
    
    2.95
    %
    
    $
    1,985,966
    
    
    $
    54,242
    
    
    
    3.65
    %Repurchase agreements
    
    
    2,869,815
    
    
    
    68,090
    
    
    
    3.17
    %
    
    
    2,585,526
    
    
    
    75,239
    
    
    
    3.89
    %Advances from FHLB
    
    
    1,260,676
    
    
    
    37,095
    
    
    
    3.93
    %
    
    
    878,766
    
    
    
    29,621
    
    
    
    4.51
    %Loans payable
    
    
    254,117
    
    
    
    4,869
    
    
    
    2.56
    %
    
    
    193,048
    
    
    
    4,397
    
    
    
    3.05
    %Notes payable
    
    
    626,630
    
    
    
    37,921
    
    
    
    8.09
    %
    
    
    521,528
    
    
    
    31,474
    
    
    
    8.07
    %Total interest-bearing liabilities/interest
expense
    
    
    7,569,112
    
    
    $
    204,450
    
    
    
    3.61
    %
    
    
    6,164,834
    
    
    $
    194,973
    
    
    
    4.23
    %Total non-interest-bearing liabilities
    
    
    270,655
    
    
    
    
    
    
    
    
    
    
    
    216,470Total liabilities
    
    
    7,839,767
    
    
    
    
    
    
    
    
    
    
    
    6,381,304Stockholders equity
    
    
    1,131,030
    
    
    
    
    
    
    
    
    
    
    
    858,745Total liabilities and stockholders equity
    
    $
    8,970,797
    
    
    
    
    
    
    
    
    
    
    $
    7,240,049Net interest-earning assets
    
    $
    701,225
    
    
    
    
    
    
    
    
    
    
    $
    483,805Net interest income
    
    
    
    
    
    $
    124,116
    
    
    
    
    
    
    
    
    
    
    $
    112,809Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    1.70
    %
    
    
    
    
    
    
    
    
    
    
    1.96
    %Interest rate margin(4)
    
    
    
    
    
    
    
    
    
    
    2.01
    %
    
    
    
    
    
    
    
    
    
    
    2.27
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    109.26
    %
    
    
    
    
    
    
    
    
    
    
    107.85
    %




---

|(1) |  | Average loan balances include the average balance of non-accruing loans, on which no interest income is recognized.                                                                      
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Interest-only strips and the interest income thereon are included within mortgage-backed securities on Doral Financials Consolidated Statements of Income.                              
|   
|(3) |  | Interest rate spread represents the difference between Doral Financials weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities.
|   
|(4) |  | Interest rate margin represents net interest income on an annualized basis as a percentage of average interest-earning assets.                                                           

30



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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 ENDEDSEPTEMBER 30,2003 COMPARED TO 2002INCREASE (DECREASE) DUE TO:VOLUME
    
    RATE
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    4,012
    
    
    $
    (3,105
    )
    
    $
    907Mortgage-backed securities
    
    
    (531
    )
    
    
    (5,166
    )
    
    
    (5,697
    )Interest-only strips
    
    
    7,627
    
    
    
    (13,558
    )
    
    
    (5,931
    )Investment securities
    
    
    25,537
    
    
    
    (7,656
    )
    
    
    17,881Money market investments
    
    
    (625
    )
    
    
    (2,152
    )
    
    
    (2,777
    )TOTAL INTEREST INCOME VARIANCE
    
    
    36,020
    
    
    
    (31,637
    )
    
    
    4,383INTEREST EXPENSE VARIANCEDeposits
    
    
    5,389
    
    
    
    (4,752
    )
    
    
    637Repurchase agreements
    
    
    6,356
    
    
    
    (8,530
    )
    
    
    (2,174
    )Advances From FHLB
    
    
    2,997
    
    
    
    (1,196
    )
    
    
    1,801Loans payable
    
    
    312
    
    
    
    (463
    )
    
    
    (151
    )Notes payable
    
    
    1,003
    
    
    
    (420
    )
    
    
    583TOTAL INTEREST EXPENSE VARIANCE
    
    
    16,057
    
    
    
    (15,361
    )
    
    
    696NET INTEREST INCOME VARIANCE
    
    $
    19,963
    
    
    $
    (16,276
    )
    
    $
    3,687


31



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##### 



TABLE D
NET INTEREST INCOME VARIANCE ANALYSIS
(IN THOUSANDS)

NINE MONTH PERIOD ENDEDSEPTEMBER 30,2003 COMPARED TO 2002INCREASE (DECREASE) DUE TO:VOLUME
    
    RATE
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    19,777
    
    
    $
    (6,055
    )
    
    $
    13,722Mortgage-backed securities
    
    
    (9,581
    )
    
    
    (4,740
    )
    
    
    (14,321
    )Interest-only strips
    
    
    18,146
    
    
    
    (20,568
    )
    
    
    (2,422
    )Investment securities
    
    
    44,841
    
    
    
    (19,746
    )
    
    
    25,095Money market investments
    
    
    3,938
    
    
    
    (5,228
    )
    
    
    (1,290
    )TOTAL INTEREST INCOME VARIANCE
    
    
    77,121
    
    
    
    (56,337
    )
    
    
    20,784INTEREST EXPENSE VARIANCEDeposits
    
    
    15,656
    
    
    
    (13,423
    )
    
    
    2,233Repurchase agreements
    
    
    8,294
    
    
    
    (15,443
    )
    
    
    (7,149
    )Advances from FHLB
    
    
    12,918
    
    
    
    (5,444
    )
    
    
    7,474Loans payable
    
    
    1,397
    
    
    
    (925
    )
    
    
    472Notes payable
    
    
    6,361
    
    
    
    86
    
    
    
    6,447TOTAL INTEREST EXPENSE VARIANCE
    
    
    44,626
    
    
    
    (35,149
    )
    
    
    9,477NET INTEREST INCOME VARIANCE
    
    $
    32,495
    
    
    $
    (21,188
    )
    
    $
    11,307


INTEREST INCOME

Total interest income increased from $105.4 million during the third
quarter of 2002, to $109.8 million during the third quarter of 2003, an
increase of 4%. For the nine months ended September 30, 2003 interest income
increased by approximately $20.8 million to $328.6 million compared to $307.8
million for the first nine months of 2002. The increases in interest income
during both periods are primarily related to the increase in Doral Financials
total average balance of interest-earning assets, which increased from $6.6
billion at September 30, 2002 to $8.3 billion at September 30, 2003.

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

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

32



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##### 



bulk sale of approximately
$250 million in Puerto Rico GNMA securities to a local mutual fund, during the
second quarter of 2003. The Company continues to maximize tax-exempt interest
income by holding a significant amount of tax-exempt Puerto Rico GNMA
securities and U.S. FHLMC/FNMA mortgage-backed securities. The interest earned
on such U.S. mortgage-backed securities is tax-exempt to Doral Financials
international banking entities under Puerto Rico law and is not subject to U.S.
income taxation because such entities are considered foreign corporations for
U.S. income tax purposes and are entitled to the portfolio interest deduction
with respect to interest earned on those securities.

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

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

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

33



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##### 



INTEREST EXPENSE

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

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

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

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

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

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

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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 of an equity in underlying collateral, and an assessment of
current economic conditions. While management believes that the current
provision for loan losses is sufficient, future additions to the allowance for
loan losses could be necessary if economic conditions change or if credit
losses increase substantially from the assumptions used by Doral Financial in
determining the allowance for loan losses. Unanticipated increases in the
allowance for loan losses could result in reductions in Doral Financials net
income. As of September 30, 2003, more than 97% of the loan portfolio was
secured and the amounts due on the loans have historically been recovered
through the sale of the property after foreclosure or negotiated settlements
with borrowers.

Doral Financial made provisions to its allowance for loan losses of $2.9
million and $11.3 million, respectively, for the quarter and nine months period
ended September 30, 2003, as compared to $2.1 million and $3.8 million for the
respective 2002 periods. The increase from 2002 to 2003 is primarily related
to an increase in the size of Doral Financials loan portfolio as well as an
increase in the number of construction loans, commercial real estate and other
commercial loans that carry a higher allowance due to the inherent risk
associated with these type of lending activities. The increase also reflects an
increase in non-performing loans as well as in the allowance for
construction loans in light of current economic conditions. See
Non-Performing Assets and Allowance for Loan Losses.

NON-INTEREST INCOME

Net Gain on Mortgage Loan Sales and Fees.Net gain from mortgage loan
sales and fees increased by 86% during the third quarter of 2003 to $98.6
million, compared to $53.0 million for the same period of 2002. For the nine
month periods ended September 30, 2003 and 2002, mortgage loan sales and fees
were $274.0 million and $157.2 million, respectively, an increase of 74%. The
increase for 2003 was mainly the result of a greater volume of loan
securitizations and sales and the ability of the Company to obtain higher
profitability through higher loan fees and the creation of IOs in connection
with bulk sales of mortgage loans to institutional investors. See
Amortization and Impairment of Servicing Assets and Valuation of IOs.

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

Servicing Income.Servicing income represents revenues earned for
administering mortgage loans. The main component of Doral Financials
servicing income is loan servicing fees, which depend on the type of mortgage
loan being serviced. The servicing fees on residential mortgage loans
generally range from 0.25% to 0.44%, net of guarantee fees, of the declining
outstanding principal amount of the serviced loan. As of September 30, 2003,
the weighted average servicing fee rate for the entire portfolio was 0.32%.
The size of Doral Financials loan servicing portfolio has increased

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substantially since its inception as a result of increases in loan production
and bulk purchases of servicing rights. For the quarter ended September 30,
2003, net servicing income was approximately $933,000 compared to a loss of
$5.6 million for the corresponding period of 2002. For the nine month periods
ended September 30, 2003 and 2002, net servicing losses were approximately
$11.5 million and $6.3 million, respectively.

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

TABLE E
NET SERVICING INCOME (LOSS)

QUARTER ENDED
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2003
    
    2002
    
    2003
    
    2002Servicing fees
    
    $
    6,480
    
    
    $
    6,257
    
    
    $
    19,244
    
    
    $
    19,253Late charges
    
    
    1,782
    
    
    
    1,625
    
    
    
    5,157
    
    
    
    4,828Prepayment penalties
    
    
    1,416
    
    
    
    1,127
    
    
    
    3,947
    
    
    
    3,044Interest loss
    
    
    (796
    )
    
    
    (543
    )
    
    
    (2,292
    )
    
    
    (1,688
    )Other servicing fees
    
    
    61
    
    
    
    16
    
    
    
    176
    
    
    
    115Amortization and impairment of
servicing assets
    
    
    (8,010
    )
    
    
    (14,078
    )
    
    
    (37,761
    )
    
    
    (31,862
    )Total net servicing income (loss)
    
    $
    933
    
    
    $
    (5,596
    )
    
    $
    (11,529
    )
    
    $
    (6,310
    )


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

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

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

TABLE F
COMPONENTS OF TRADING ACTIVITIES

QUARTER ENDED
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    ENDED SEPTEMBER 30,(In thousands)
    
    2003
    
    2002
    
    2003
    
    2002Net realized gains on sales of trading securities
    
    $
    21,146
    
    
    $
    47,581
    
    
    $
    117,059
    
    
    $
    59,185Net unrealized (losses) and gains on trading securities
    
    
    (9,994
    )
    
    
    2,721
    
    
    
    (36,428
    )
    
    
    9,602Net realized and unrealized gains (losses) on derivative instruments
    
    
    4,232
    
    
    
    (45,496
    )
    
    
    (65,297
    )
    
    
    (75,680
    )Total
    
    $
    15,384
    
    
    $
    4,806
    
    
    $
    15,334
    
    
    $
    (6,893
    )


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

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

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TABLE G
COMMISSIONS FEES AND OTHER INCOME
(IN THOUSANDS)

QUARTER ENDED
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    ENDED SEPTEMBER 30,2003
    
    2002
    
    2003
    
    2002Deposit and other retail banking fees
    
    $
    3,047
    
    
    $
    2,015
    
    
    $
    8,067
    
    
    $
    5,570Brokerage and asset management fees
and commissions
    
    
    912
    
    
    
    744
    
    
    
    2,626
    
    
    
    1,289Insurance agency commissions
    
    
    2,039
    
    
    
    1,759
    
    
    
    5,762
    
    
    
    5,027Other income
    
    
    355
    
    
    
    1,144
    
    
    
    3,538
    
    
    
    3,330Total
    
    $
    6,353
    
    
    $
    5,662
    
    
    $
    19,993
    
    
    $
    15,216


NON-INTEREST EXPENSES

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

INCOME TAXES

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

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

Except for the operations of Doral Bank NY and Doral Money, substantially
all of the Companys operations are conducted through Puerto Rico subsidiaries
in Puerto Rico. Doral Bank NY and Doral Money are U.S. corporations

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

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

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

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

To determine the fair value of its IOs, Doral Financial, on a quarterly
basis, obtains dealer quotes for comparable instruments and compares these
quotes with external and internal valuations based on discounted cash flow
models that incorporate assumptions regarding discount rates and mortgage
prepayment rates. Doral Financial generally uses the lowest valuation obtained
from these methods. While Doral Financial has consistently sold some IOs in
private sales, currently there is no liquid market for the purchase and sale of
IOs. The market multiple used by Doral Financial to value IOs ranged from 4.75
to 5.50 during the first nine months of 2003, compared to a range of 4.25 to
5.50 during the first nine months of 2002. As of September 30, 2003 and
December 31, 2002, the carrying value of IOs and other residual interests
retained in securitization transactions reflected in Doral Financials
Consolidated Financial Statements was $491.2 million and $359.2 million,
respectively. The initial recorded value of IOs is amortized over the expected
life of the asset, and is recorded as a reduction of interest income. The
amortization is based on the amount and timing of estimated future cash

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

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

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

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

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

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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
    
    NINE MONTH PERIODSEPTEMBER 30,
    
    ENDED SEPTEMBER 30,2003
    
    2002
    
    2003
    
    2002FHA/VA mortgage loansNumber of loans
    
    
    1,081
    
    
    
    1,405
    
    
    
    2,982
    
    
    
    4,694Volume of loans
    
    $
    99,636
    
    
    $
    125,415
    
    
    $
    275,586
    
    
    $
    413,657Percent of total volume
    
    
    6
    %
    
    
    9
    %
    
    
    6
    %
    
    
    11
    %Average initial loan balance
    
    $
    92,170
    
    
    $
    89,263
    
    
    $
    92,416
    
    
    $
    88,125Conventional conforming mortgage loansNumber of loans
    
    
    5,723
    
    
    
    3,454
    
    
    
    13,932
    
    
    
    10,490Volume of loans
    
    $
    836,679
    
    
    $
    511,672
    
    
    $
    2,090,074
    
    
    $
    1,511,815Percent of total volume
    
    
    50
    %
    
    
    39
    %
    
    
    44
    %
    
    
    40
    %Average initial loan balance
    
    $
    146,196
    
    
    $
    148,139
    
    
    $
    150,020
    
    
    $
    144,120Conventional non-conforming mortgage loans(1)(2)Number of loans
    
    
    5,759
    
    
    
    6,849
    
    
    
    17,876
    
    
    
    17,362Volume of loans
    
    $
    512,491
    
    
    $
    523,631
    
    
    $
    1,681,700
    
    
    $
    1,350,611Percent of total volume
    
    
    30
    %
    
    
    39
    %
    
    
    35
    %
    
    
    36
    %Average initial loan balance
    
    $
    88,990
    
    
    $
    76,454
    
    
    $
    94,076
    
    
    $
    77,791Other(3)Number of loans
    
    
    576
    
    
    
    534
    
    
    
    1,651
    
    
    
    1,473Volume of loans
    
    $
    232,193
    
    
    $
    168,545
    
    
    $
    700,173
    
    
    $
    494,947Percent of total volume
    
    
    14
    %
    
    
    13
    %
    
    
    15
    %
    
    
    13
    %Total loansNumber of loans
    
    
    13,139
    
    
    
    12,242
    
    
    
    36,441
    
    
    
    34,019Volume of loans
    
    $
    1,680,999
    
    
    $
    1,329,263
    
    
    $
    4,747,533
    
    
    $
    3,771,030




---

|(1) |  | Includes $21.0 million and $15.1 million in second mortgages for
the quarters ended September 30, 2003 and 2002, respectively, and
$48.6 million and $44.1 million in second mortgages for the nine
month periods ended September 30, 2003 and 2002, respectively.                                            
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes $48.5 million and $30.7 million in home equity or
personal loans secured by real estate mortgages of up to $40,000 for
the quarters ended September 30, 2003 and 2002, respectively, and
$106.4 million and $69.7 million for the nine month periods ended
September 30, 2003 and 2002, respectively.
|   
|(3) |  | Consists of construction loans on residential projects, mortgage
loans secured by multi-family and commercial properties as well as
other commercial, land and consumer loans.                                                                                                                                

41



---



##### 



A substantial portion of Doral Financials total residential mortgage loan
originations has consistently been composed of refinance loans. For the nine
months ended September 30, 2003 and 2002, refinance loans represented
approximately 64% and 55%, respectively, of the total dollar volume of mortgage
loans originated (excluding loans purchased from third parties). Doral
Financials future results could be adversely affected by a significant
increase in mortgage interest rates that may reduce refinancing activity.
However, the Company believes that refinancing activity is less sensitive to
interest rate changes in Puerto Rico than in the mainland United States because
a significant amount of refinance loans are made for debt consolidation
purposes rather than interest savings and because interest cost on mortgage
loans is tax deductible for borrowers. Also consumers tend to prefer long-term mortgage loan rates that
are generally well below short-term higher cost consumer debt in periods of high interest rates.

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

TABLE I
LOAN ORIGINATION SOURCES

NINE MONTH PERIOD ENDED SEPTEMBER 30,2003
    
    2002Puerto Rico
    
    US
    
    Total
    
    Puerto Rico
    
    US
    
    TotalRetail
    
    
    53
    %
    
    
    
    
    
    
    53
    %
    
    
    54
    %
    
    
    
    
    
    
    54
    %Wholesale(1)
    
    
    8
    %
    
    
    23
    %
    
    
    31
    %
    
    
    6
    %
    
    
    26
    %
    
    
    32
    %New Housing Developments
    
    
    11
    %
    
    
    
    
    
    
    11
    %
    
    
    10
    %
    
    
    
    
    
    
    10
    %Multi-family
    
    
    
    
    
    
    2
    %
    
    
    2
    %
    
    
    
    
    
    
    1
    %
    
    
    1
    %Other(2)
    
    
    2
    %
    
    
    1
    %
    
    
    3
    %
    
    
    2
    %
    
    
    1
    %
    
    
    3
    %




---

|(1) |  | Refers to purchases of mortgage loans from other financial institutions
and mortgage lenders. U.S. wholesale purchases normally do not include the
related servicing right.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Refers to commercial, consumer and land loans originated through the
retail banking subsidiaries and other specialized units.                                              

MORTGAGE LOAN SERVICING

Doral Financials principal source of servicing rights has traditionally
been its internal mortgage loan production. However, Doral Financial also
purchases mortgage loans on a servicing- released basis as well as servicing
rights in bulk. During the third quarters of 2003 and 2002, Doral Financial
purchased servicing rights to approximately $116.3 million and $83.1 million,
respectively, in principal amount of mortgage loans. For the nine month
periods ended September 30, 2003 and 2002, the Company purchased servicing
rights to approximately $527.2 million and $275.2 million, respectively, in
principal amount of mortgage loans. Doral Financial intends to continue
growing its mortgage-servicing portfolio by internal loan originations and
wholesale purchases of loans on a servicing-released basis but will also
continue to seek and consider attractive opportunities for bulk purchases of
servicing rights from third parties.

42



---



##### 



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

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

AS OF SEPTEMBER 30,2003
    
    2002COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END:GNMA
    
    $
    2,805,134
    
    
    $
    3,185,036FHLMC/FNMA
    
    
    3,383,533
    
    
    
    2,724,419Doral Financial grantor trusts
    
    
    39,796
    
    
    
    53,432Other conventional mortgage loans(1)(2)
    
    
    6,100,443
    
    
    
    4,960,373Total servicing portfolio
    
    $
    12,328,906
    
    
    $
    10,923,260SELECTED DATA REGARDING MORTGAGE LOANS SERVICED:Number of loans
    
    
    147,999
    
    
    
    140,061Weighted average interest rate
    
    
    7.11
    %
    
    
    7.47
    %Weighted average remaining maturity (months)
    
    
    257
    
    
    
    255Weighted average servicing fee rate
    
    
    .3197
    %
    
    
    .3378
    %Average servicing portfolio
    
    $
    11,886,186
    
    
    $
    10,583,886Principal prepayments
    
    $
    1,851,879
    
    
    $
    1,187,139Prepayments to average portfolio (annualized)
    
    
    20.77
    %
    
    
    14.96
    %Average size of loans prepaid
    
    $
    92,106
    
    
    $
    76,937Servicing assets, net reflected on Consolidated Statement
of Financial Condition
    
    $
    165,720
    
    
    $
    153,053DELINQUENT MORTGAGE LOANS AND PENDING
FORECLOSURES AT PERIOD END:60-89 days past due
    
    
    1.14
    %
    
    
    1.30
    %90 days or more past due
    
    
    2.17
    %
    
    
    2.04
    %Total delinquencies excluding foreclosures
    
    
    3.31
    %
    
    
    3.34
    %Foreclosures pending
    
    
    1.70
    %
    
    
    1.57
    %SERVICING PORTFOLIO ACTIVITY:Beginning servicing portfolio
    
    $
    11,241,523
    
    
    $
    10,006,380Add:Loans funded and purchased(3)
    
    
    2,774,569
    
    
    
    2,167,514Bulk servicing acquired
    
    
    527,176
    
    
    
    275,236Less:Servicing sales transferred
    
    
    2,450
    
    
    
    59,219Run-off(4)
    
    
    2,211,912
    
    
    
    1,466,651Ending servicing portfolio
    
    $
    12,328,906
    
    
    $
    10,923,260




---

|(1) |  | Includes $2.4 billion and $2.0 billion of loans owned by
Doral Financial at September 30, 2003 and 2002, respectively, which
represented 19% and 18% of the total servicing portfolio as of such
dates.                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes portfolios of $240.3 million and $86.8
million at September 30, 2003 and 2002, respectively, of insured
FHA/VA delinquent loans sold to third parties.                                                                         
|   
|(3) |  | Excludes approximately $2.0 billion and $1.6 billion of
conventional, commercial, consumer, construction and other loans not
included in Doral Financials mortgage servicing-portfolio as of
September 30, 2003 and 2002, respectively.
|   
|(4) |  | Run-off refers to regular amortization of loans, prepayments and
foreclosures.                                                                                                                                                          

43



---



##### 



Substantially all of the mortgage loans in Doral Financials servicing
portfolio are secured by single (one-to-four) family residences secured by real
estate located in Puerto Rico. At September 30, 2003 and 2002, approximately
2% and 4%, respectively, of Doral Financials mortgage-servicing portfolio was
related to mortgages secured by real property located on the U.S. mainland.

The amount of principal prepayments on mortgage loans serviced by Doral
Financial was $1.9 billion and $1.2 billion for the nine months ended September
30, 2003 and 2002, respectively. This represents approximately 21% and 15%,
respectively, on an annualized basis of the average principal amount of
mortgage loans serviced. Doral Financial reduces the sensitivity of its
servicing income to increases in prepayment rates through a strong retail
origination network that has permitted Doral Financial to increase or maintain
the size of its servicing portfolio even during periods of declining interest
rates and high prepayments.

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 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.

44



---



##### 



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, all
accrued but unpaid interest to date is fully reserved. Doral Financial
believes that its non-accrual policy for mortgage loans held for sale in its
mortgage banking units is reasonable because these loans are adequately secured
by real estate, generally have low loan-to-value ratios, and the amounts due on
the loans have historically been recovered through the sale of the property
after foreclosure or negotiated settlements with borrowers. Doral Financials
banking subsidiaries place all loans more than 90 days past due on a
non-accrual basis, at which point a reserve for all unpaid interest previously
accrued is established. Interest income is recognized when the borrower makes a
payment, and the loan will return to an accrual basis when it is no longer more
than 90 days delinquent and collectibility is reasonably assured. As of
September 30, 2003 and 2002, Doral Financial would have recognized $7.5 million
and $5.0 million, respectively, in additional interest income had all
delinquent loans been accounted for on an accrual basis. Doral Financial
evaluates loans for impairment on a periodical basis. Impaired loans as of September 30, 2003 and
December 31, 2002 amounted to approximately $31.1 million and $2.0 million,
respectively. At September 30, 2003 an impairment allowance of approximately
$300,000 was allocated to certain impaired loans with an aggregate principal
outstanding balance of $1.5 million. No specific reserve was
deemed necessary by the Company for the remaining impaired loans as
of September 30, 2003 since such loans were fully collateralized
and the Company expects to recover all principal and interest on such
loans.

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

45



---



##### 



TABLE K
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)

AS OF
    
    AS OFSEPTEMBER 30, 2003
    
    DECEMBER 31, 2002Mortgage banking business:Non-accrual loans:Construction loans
    
    $
    2,897
    
    
    $
    497Residential mortgage loans
    
    
    20,018
    
    
    
    17,153Construction loans past due 90 days and still accruing
    
    
    
    
    
    
    2,413Loans held-for-sale past due 90 days and still accruing(1)
    
    
    64,113
    
    
    
    60,054OREO
    
    
    14,322
    
    
    
    12,375Total NPAs of mortgage banking business
    
    
    101,350
    
    
    
    92,492Other lending activities through banking subsidiaries:Non-accrual loans:Construction loans
    
    
    7,251
    
    
    
    638Residential mortgage loans
    
    
    10,975
    
    
    
    8,746Commercial real estate
    
    
    11,204
    
    
    
    5,152Consumer loans
    
    
    1,570
    
    
    
    1,152Commercial non-real estate loans
    
    
    596
    
    
    
    676Total non-accrual loans
    
    
    31,596
    
    
    
    16,364Construction loans past due 90 days and still accruing
    
    
    7,422
    
    
    
    Consumer loans past due 90 days and still accruing
    
    
    302
    
    
    
    OREO
    
    
    1,115
    
    
    
    682Total NPAs of banking subsidiaries
    
    
    40,435
    
    
    
    17,046Total NPAs of Doral Financial (consolidated)
    
    $
    141,785
    
    
    $
    109,538Total NPAs of banking subsidiaries as a percentage
of their loans portfolio, net, and OREO
    
    
    1.49
    %
    
    
    0.62
    %Total NPAs of Doral Financial as a percentage of
consolidated total assets
    
    
    1.32
    %
    
    
    1.30
    %Total Non-performing loans to total loans
    
    
    3.87
    %
    
    
    2.99
    %Ratio of allowance for loan losses to total
non-performing loans at end of period (consolidated)
    
    
    21.67
    %
    
    
    18.91
    %




---

|(1) |  | Does not include approximately $11.5 million and $13.4 million of 90 days
past due FHA/VA loans as of September 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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

46



---



##### 



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
    
    NINE MONTH PERIOD ENDEDSEPTEMBER 30,
    
    SEPTEMBER 30,2003
    
    2002
    
    2003
    
    2002OREO:Balance at beginning of period
    
    $
    2,050
    
    
    $
    2,280
    
    
    $
    2,772
    
    
    $
    1,365Provision for losses
    
    
    1,536
    
    
    
    1,220
    
    
    
    2,218
    
    
    
    2,111Net gains (losses), charge-offs and others
    
    
    199
    
    
    
    (391
    )
    
    
    (1,205
    )
    
    
    (367
    )Balance at end of period
    
    $
    3,785
    
    
    $
    3,109
    
    
    $
    3,785
    
    
    $
    3,109Allowance for Loan Losses:Balance at beginning of period
    
    $
    25,256
    
    
    $
    13,531
    
    
    $
    18,243
    
    
    $
    12,472Provision for loan losses
    
    
    2,913
    
    
    
    2,055
    
    
    
    11,309
    
    
    
    3,792Charge-offs:Mortgage loans held-for-sale
    
    
    (17
    )
    
    
    
    
    
    
    (37
    )
    
    
    (90
    )Construction loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential mortgage loans
    
    
    (13
    )
    
    
    
    
    
    
    (13
    )
    
    
    Commercial real estate loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer loans
    
    
    (743
    )
    
    
    (471
    )
    
    
    (2,270
    )
    
    
    (997
    )Commercial non-real estate loans
    
    
    (72
    )
    
    
    (78
    )
    
    
    (165
    )
    
    
    (98
    )Other
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    (116
    )Total charge-offs
    
    
    (845
    )
    
    
    (568
    )
    
    
    (2,485
    )
    
    
    (1,301
    )Recoveries:Mortgage loans held-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential mortgage loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Commercial real estate loans
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Consumer loans
    
    
    58
    
    
    
    61
    
    
    
    163
    
    
    
    112Commercial non-real estate loans
    
    
    2
    
    
    
    11
    
    
    
    8
    
    
    
    14Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11Total recoveries
    
    
    60
    
    
    
    73
    
    
    
    171
    
    
    
    152Net charge-offs
    
    
    (785
    )
    
    
    (495
    )
    
    
    (2,314
    )
    
    
    (1,149
    )Other adjustments
    
    
    
    
    
    
    12
    
    
    
    146
    
    
    
    (12
    )Balance at end of period(1)
    
    $
    27,384
    
    
    $
    15,103
    
    
    $
    27,384
    
    
    $
    15,103Allowance for loan losses as a percentage of
total loans outstanding at the end of period
    
    
    0.84
    %
    
    
    0.49
    %
    
    
    0.84
    %
    
    
    0.49
    %Net charge-offs to average loans outstanding
    
    
    0.02
    %
    
    
    0.02
    %
    
    
    0.07
    %
    
    
    0.04
    %




---

|(1) |  | Includes the allowance of mortgage loans held-for-sale of $9.3 million
for 2003 and $7.1 million for 2002 and the allowance for loans receivable held
for investment of $18.1 million for 2003 and $8.0 million for 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

47



---



##### 



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

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, servicing advances and
loan repurchases pursuant to recourse or warranty obligations.

Servicing agreements relating to the mortgage-backed securities programs
of FNMA, FHLMC and GNMA, and to mortgage loans sold to certain other investors,
require Doral Financial to advance funds to make scheduled payments of
principal, interest, taxes and insurance, if such payments have not been
received from the borrowers. While Doral Financial generally recovers funds
advanced pursuant to these arrangements within 30 days, it must absorb the cost
of the funds it advances during the time the advance is outstanding. During
the nine month period ended September 30, 2003, the monthly average amount of
funds advanced by Doral Financial under such servicing agreements was
approximately $14.4 million, compared to $8.6 million for the same period
during 2002. To the extent the mortgage loans underlying Doral Financials
servicing portfolio experience increased delinquencies, Doral Financial would
be required to dedicate additional cash resources to comply with its obligation
to advance funds as well as incur additional administrative costs related to
increases in collection efforts. In recent years, Doral Financial has sold
pools of delinquent FHA and VA mortgage loans. Under these arrangements, as
under GNMA servicing requirements, Doral Financial is required to advance the
scheduled payments whether or not collected from the underlying borrower. While
Doral Financial expects to recover the amounts advanced through foreclosure or
under the applicable FHA and VA programs, the amounts advanced tend to be
greater than normal arrangements because of the delinquent status of the loans.
As of September 30, 2003, the outstanding principal balance of such FHA/VA
loans was $240.3 million and the aggregate monthly amounts of funds advanced by
Doral Financial was $12.5 million. During the first nine months of 2003 and
2002, the Company sold approximately $107.1 million and $64.0 million,
respectively, of residential FHA insured or VA guaranteed delinquent loans.

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

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

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

48



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

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

TABLE M
SOURCES OF BORROWINGS
(DOLLARS IN THOUSANDS)

AS OF SEPTEMBER 30, 2003
    
    AS OF DECEMBER 31, 2002AMOUNT
    
    AVERAGE
    
    AMOUNT
    
    AVERAGEOUTSTANDING
    
    RATE
    
    OUTSTANDING
    
    RATEDeposits
    
    $
    2,764,855
    
    
    
    2.57
    %
    
    $
    2,217,211
    
    
    
    2.85
    %Repurchase Agreements
    
    
    3,374,472
    
    
    
    2.61
    %
    
    
    2,733,339
    
    
    
    3.46
    %Loans Payable
    
    
    206,385
    
    
    
    2.13
    %
    
    
    211,002
    
    
    
    2.62
    %Notes Payable
    
    
    606,921
    
    
    
    7.75
    %
    
    
    621,303
    
    
    
    7.75
    %Advances from FHLB
    
    
    1,256,500
    
    
    
    3.86
    %
    
    
    1,311,500
    
    
    
    3.93
    %


Doral Financial had warehousing, gestation and repurchase agreements lines
of credit totaling $10.0 billion as of September 30, 2003, of which $4.8
billion was outstanding as of such date. Of the aggregate amount of funding
available under Doral Financials warehousing and repurchase lines of credit,
approximately $2.3 billion represented committed facilities under which the
lender is committed to advance funds subject to compliance with various
conditions. The remaining funding was available under uncommitted lines
pursuant to which advances are made at the discretion of the lender. Doral
Financials committed lines of credit generally require Doral Financial to
comply with various financial covenants and ratios. Failure to comply with any
of these covenants permits the lender to require immediate repayment of all
amounts previously advanced and to stop making any further advances to Doral
Financial. As of September 30, 2003, Doral Financial was in compliance with
all such financial covenants and ratios.

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

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

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

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

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

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

TABLE N
AVERAGE DEPOSIT BALANCE
(DOLLARS IN THOUSANDS)

NINE MONTHPERIOD ENDED
    
    YEAR ENDEDSEPTEMBER 30, 2003
    
    DECEMBER 31, 2002AVERAGE
    
    AVERAGE
    
    AVERAGE
    
    AVERAGEBALANCE
    
    RATE
    
    BALANCE
    
    RATECertificates of deposit
    
    $
    1,539,484
    
    
    
    3.21
    %
    
    $
    1,168,984
    
    
    
    3.84
    %Regular passbook savings
    
    
    246,367
    
    
    
    2.40
    %
    
    
    183,074
    
    
    
    2.81
    %NOW accounts
    
    
    490,451
    
    
    
    2.09
    %
    
    
    411,837
    
    
    
    2.23
    %Non-interest bearing
    
    
    281,572
    
    
    
    
    
    
    
    273,708
    
    
    
    Total deposits
    
    $
    2,557,874
    
    
    
    2.95
    %
    
    $
    2,037,603
    
    
    
    3.57
    %


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

TABLE O
DEPOSIT MATURITIES
(IN THOUSANDS)

AMOUNTCertificates of deposit maturingThree months or less
    
    $
    362,849Over three through six months
    
    
    138,052Over six through twelve months
    
    
    144,857Over twelve months
    
    
    755,723Total
    
    $
    1,401,481


50



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As of September 30, 2003 and December 31, 2002, Doral Financials banking
subsidiaries had approximately $824.7 million and $654.5 million, respectively,
in deposits obtained through broker-dealers. Brokered deposits are used by
Doral Financials banking subsidiaries as a source of long-term funds. Brokered
deposits, however, are generally considered a less stable source of funding
than core deposits obtained through retail bank branches. Investors that
invest in brokered deposits are generally very sensitive to interest rates and
will generally move funds from one depository institution to another based on
minor differences in rates offered on deposits.

As of September 30, 2003, Doral Financial, Doral Bank PR and Doral Bank NY
were in compliance with all the regulatory capital requirements that were
applicable to them as a financial holding company, state non-member bank and
federal savings bank, respectively (i.e., total capital and Tier 1 capital to
risk weighted assets of at least 8% and 4%, respectively, and Tier 1 capital to
average assets of at least 4%). Set forth below are Doral Financials, and its
banking subsidiaries regulatory capital ratios as of September 30, 2003,
based on existing Federal Reserve, FDIC and OTS guidelines.

TABLE P
REGULATORY CAPITAL RATIOS

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




---

|(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 September 30, 2003, Doral Bank PR and Doral Bank NY were considered
well-capitalized banks for purposes of the prompt corrective action regulations
adopted by the FDIC pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991. To be considered a well capitalized institution under
the FDICs regulations, an institution must maintain a Leverage Ratio of at
least 5%, a Tier 1 Capital Ratio of at least 6% and a Total Capital Ratio of at
least 10% and not be subject to any written agreement or directive to meet a
specific capital ratio.

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

On November 29, 2001, the federal banking and thrift regulatory agencies
adopted a final rule that changes the regulatory capital treatment of recourse
obligations, residual interests and direct credit substitutes. The rule imposes
a new dollar-for-dollar capital requirement on residual interests retained in
sale or securitization transactions and a 25% limit on the amount of Tier 1
capital that may consist of credit-enhancing interest-only strips, a subset of
residual interests. Currently, most of the IOs created in connection with the
sale by Doral Financial of its non-conforming loans are treated as
credit-enhancing interest-only strips under the new rule and thus are subject
to a dollar-for-dollar capital requirement for risk based capital purposes and
to the 25% concentration limit for Tier 1 capital purposes. The capital ratios
set forth above incorporate the impact of the new capital rule for IOs.

The rule clarifies that, subject to certain exceptions, the entire amount
of assets sold with recourse, not just the contractual amount of the recourse
obligation, is converted into an on-balance sheet credit equivalent amount.
The credit equivalent amount, less any recourse liability reflected on the
balance sheet, is then risk weighted for purposes of applying the applicable
capital requirement. The risk weighting for residential mortgage loans is
currently 50%. As of September 30, 2003, Doral Financials outstanding balance
of loans sold with full or partial recourse was $2.2 billion.

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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.

ASSETS AND LIABILITIES

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

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

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

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

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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.

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 September 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
    
    $
    2,764,855
    
    
    $
    1,936,467
    
    
    $
    443,730
    
    
    $
    383,787
    
    
    $
    871Repurchase and warehousing lines of credit(1)
    
    
    3,580,857
    
    
    
    2,875,432
    
    
    
    240,625
    
    
    
    464,800
    
    
    
    Notes Payable
    
    
    606,921
    
    
    
    212,327
    
    
    
    16,980
    
    
    
    87,635
    
    
    
    289,979Advances from FHLB(1)
    
    
    1,256,500
    
    
    
    604,500
    
    
    
    305,000
    
    
    
    347,000
    
    
    
    Non-cancellable Operating Leases
    
    
    64,336
    
    
    
    6,215
    
    
    
    11,312
    
    
    
    11,028
    
    
    
    35,781Total Contractual Cash Obligations
    
    $
    8,273,469
    
    
    $
    5,634,941
    
    
    $
    1,017,647
    
    
    $
    1,294,250
    
    
    $
    326,631


---

|(1) |  | Includes $1.6 billion of repurchase agreements with an
average rate of 4.39% and $872.5 million in advances from the
FHLB-NY with
an average rate of 4.50% for which the lenders have the right to
call before their contractual maturities. The majority of such
repurchase agreements and advances from FHLB-NY are included under the
less than 1 year category in the above table but have actual
contractual maturities ranging from October 2004 to March 2013.
The above table denotes that increases in interest rates
over the average rate of the Companys callable borrowings may
induce the lenders to exercise their call right.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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
    
    YEARSCommitments to extend credit
    
    $
    529,998
    
    
    $
    299,057
    
    
    $
    230,888
    
    
    $
    
    
    
    $
    53Commitments to sell
mortgage-backed
securities and loans
    
    
    1,254,066
    
    
    
    1,254,066
    
    
    
    
    
    
    
    
    
    
    
    Commercial and financial
standby letters of credit
    
    
    3,167
    
    
    
    3,167
    
    
    
    
    
    
    
    
    
    
    
    Standby repurchase (recourse)
obligations
    
    
    1,711,253
    
    
    
    366,972
    
    
    
    786,832
    
    
    
    
    
    
    
    557,449Total
    
    $
    3,498,484
    
    
    $
    1,923,262
    
    
    $
    1,017,720
    
    
    $
    
    
    
    $
    557,502




---

|(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.

54



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

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

TABLE S
INTEREST RATE SENSITIVITY
AS OF SEPTEMBER 30, 2003

PERCENTAGE CHANGE IN 12-MONTHCHANGE IN INTEREST RATES (BASIS POINTS)
    
    NET INTEREST INCOME+200
    
    
    15
    %+100
    
    
    9
    %-100
    
    
    (3
    )%-200
    
    
    (8
    )%


INTEREST RATE SENSITIVITYAS OF DECEMBER 31, 2002

PERCENTAGE CHANGE IN 12-MONTHCHANGE IN INTEREST RATES (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 9% and 15% over one year beginning on September 30, 2003. The model
assumes that Dorals portfolio of loans and trading and available for sale
securities reprice at least twice a year, as such assets are sold and replaced
with new assets at current market rates. A 200 basis point linear decrease in
interest rates would decrease net interest income by 8% over one year
beginning on
September 30, 2003. All these estimated changes in net interest income are
within the policy guidelines established by Doral Financials Board of
Directors. In addition to the sales assumptions mentioned above, the model
does not assume full 100 or 200 basis points decrease in rates in short-term
assets and liabilities, principally due to the current low level of short-term
rates. In such cases, the yield curve was assigned a minimum (floor) value.
Also, in both upward and downward rate scenarios, the increase or decrease in
rates was modeled over a specific time period (3-6 months) rather than an
instantaneous changes in rates, in order to reflect what has been the
historical trend of changes in rates.

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

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

55



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

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

TABLE T
INTEREST RATE COLLARS
(DOLLARS IN THOUSANDS)

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


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

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of the underlying principal.
Non-performance by the counterparty exposes Doral Bank PR to interest rate and
credit risk. At September 30, 2003, Doral Bank PR had outstanding two interest
rate swaps agreements (each with a notional principal amount of $100,000,000)
designated to protect Doral Bank PR from the repricing of its short-term
liabilities. These agreements end on September 11, 2007 and September 12,
2007, respectively. The interest rate to be received by Doral Bank PR under
each of the swaps agreements is 100% of the three-month LIBOR rate. The rates
being received by Doral Bank on these swap agreements was 1.14% as of September
30, 2003. The fixed interest rate to be paid by Doral Bank under these
agreements was 3.69% and 3.655%, respectively, as of September 30, 2003. At
September 30, 2003, the agreements had an aggregate negative fair value of $6.4
million which is recorded as a liability in Doral Financials Consolidated
Financial Statements.

Although Doral Financial uses derivatives to manage market risk, for
financial reporting purposes its general policy is to account for such
instruments on a mark-to-market basis with gains or losses charged to current
operations as they occur and may, therefore, increase the volatility of Doral
Financials future earnings. Contracts with positive fair values are recorded
as assets and contracts with negative fair values as liabilities, after the
application of netting arrangements. Fair values of derivatives such as
interest rate future contracts or options are determined by reference to market
prices. Fair values of derivatives purchased in the over-the-counter market
are determined by prices provided by external sources or valuation models. For
the nine month period ended September 30, 2003 average assets and liabilities
related to derivatives were $47.3 million and $44.1 million, respectively. The
notional amounts of assets and liabilities related to these derivatives totaled
$29.1 billion and $22.3 billion, respectively, as of September 30, 2003.
Notional amounts indicate the volume of derivatives activity but do not
represent Doral Financials exposure to market or credit risk.

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

TABLE U
FAIR VALUE RECONCILIATION

FOR THE NINE MONTHPERIOD ENDED(IN THOUSANDS)
    
    SEPTEMBER 30, 2003Fair value of contracts outstanding at the beginning of the period
    
    $
    (3,815
    )Contracts realized or otherwise settled during the period
    
    
    (29,834
    )Fair value of new contracts entered into during the period
    
    
    42,868Changes
in fair values during the period
    
    
    (36,529
    )Fair value of contracts outstanding at the end of the period
    
    $
    (27,310
    )


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TABLE V
SOURCE OF FAIR VALUE

(IN THOUSANDS)
    
    PAYMENT DUE BY PERIODMATURITY
    
    
    
    
    
    
    
    
    
    MATURITYAS OF SEPTEMBER 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
    
    $
    (28,299
    )
    
    $
    (283
    )
    
    $
    188
    
    
    $
    
    
    
    $
    (28,394
    )Prices provided by other external sources
    
    
    42
    
    
    
    560
    
    
    
    482
    
    
    
    
    
    
    
    1,084$
    (28,257
    )
    
    $
    277
    
    
    $
    670
    
    
    $
    
    
    
    $
    (27,310
    )


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

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

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 September 30, 2003 under the
supervision and with the participation of Doral Financials management,
including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e)and 15d-15(e)
under the Securities Exchange Act of 1934). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the design
and operation of these disclosure controls and procedures were
effective.

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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.

ITEM 2  CHANGES IN SECURITIES

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

ITEM 3  DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

ITEM 5  OTHER INFORMATION

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

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

ITEM 6   EXHIBITS AND REPORTS
ON FORM 8-K

(a) Exhibits

See Exhibit Index.

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



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

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



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



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



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

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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:  November 13, 2003
    
    /s/ Salomón LevisSalomón Levis
Chairman of the Board
and Chief Executive OfficerDate:  November 13, 2003
    
    /s/ Richard F. BoniniRichard F. Bonini
Senior Executive Vice President
and Chief Financial OfficerDate:  November 13, 2003
    
    /s/ Ricardo MeléndezRicardo Meléndez
Executive Vice President
and Principal Accounting Officer






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##### 



INDEX TO EXHIBITS

ExhibitNumber
    
    
    
    Description1
    
    -
    
    Purchase Agreement, dated September 23, 2003, between Doral Financial
Corporation and Wachovia Securities LLC, as Representative of the Initial
Purchasers named therein. (Incorporated by reference to the Exhibit 1 to the
Current Report on Form 8-K of the Company dated September 30, 2003)4
    
    -
    
    Certificate of Designation, dated as of September 25, 2003 designating the
terms of the 4.75% Perpetual Cumulative Convertible Preferred
Stock. (Incorporated by reference to the Exhibit 4 to the Current Report on Form
8-K of the Company dated September 30, 2003)12(a)
    
    -
    
    Computation of Ratio of Earnings to Fixed Charges.12(b)
    
    -
    
    Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.31(1)
    
    -
    
    CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31(2)
    
    -
    
    CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32(1)
    
    -
    
    CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32(2)
    
    -
    
    CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.