##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION    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 MARCH 31,
2004
 [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OF 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM     TO
 COMMISSION FILE NUMBER 0-17224 DORAL FINANCIAL CORPORATION (EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER) Puerto Rico
    
    66-0312162(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification number)1451 F.D. Roosevelt Avenue,San Juan, Puerto Rico
    
    00920-2717(Address of principal executive offices)
    
    (Zip Code)
 (787) 474-6700 
 (Registrants telephone number, including area code) 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 [   ] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES [X]   NO [   ] NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT APRIL 26, 2004: 107,907,512




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DORAL FINANCIAL CORPORATION
INDEX PAGE PAGEPART I - FINANCIAL INFORMATIONItem 1 - Financial StatementsConsolidated Statements of Financial Condition (Unaudited) as of March 31, 2004 and December 31, 2003
    
    
    4Consolidated Statements of Income (Unaudited) - Quarters ended March 31, 2004 and March 31, 2003
    
    
    5Consolidated Statements of Changes in Stockholders Equity (Unaudited) - Quarters ended March 31, 2004 and March 31, 2003
    
    
    6Consolidated Statements of Comprehensive Income (Unaudited) - Quarters ended March 31, 2004 and March 31, 2003
    
    
    7Consolidated Statements of Cash Flows (Unaudited) - Quarters ended March 31, 2004 and March 31, 2003
    
    
    8Notes to Consolidated Financial Statements (Unaudited)
    
    
    9Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3 - Quantitative and Qualitative Disclosures About Market Risk
    
    
    53Item 4 - Controls and Procedures
    
    
    53PART II - OTHER INFORMATIONItem 1 - Legal Proceedings
    
    
    53Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    53Item 3 - Defaults Upon Senior Securities
    
    
    53Item 4 - Submission of Matters to a Vote of Security Holders
    
    
    53Item 5 - Other Information
    
    
    54Item 6 - Exhibits and Reports on Form 8-K
    
    
    55SIGNATURESEX-3(A) AMENDMENT TO CERTIFICATE OF INCORPORATIONEX-3.(B) BY-LAWSEX-10(A) OMNIBUS INCENTIVE PLANEX-12.(A) COMPUTATION OF RATIO OF EARNINGSEX-12.(B) COMPUTATION OF RATIO OF EARNINGSEX-31.(1) SECTION 302 CERTIFICATION OF CEOEX-31.(2) SECTION 302 CERTIFICATION OF CFOEX-32.(1) SECTION 906 CERTIFICATION OF CEOEX-32.(2) SECTION 906 CERTIFICATION OF CFO
     Table of Contents  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
    Table of Contents  DORAL FINANCIAL CORPORATION 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS OF DOLLARS, EXCEPT FOR SHARE INFORMATION)
(UNAUDITED)
 MARCH 31,
    
    DECEMBER 31,2004
    
    2003ASSETSCash and due from banks
    
    $
    139,278
    
    
    $
    84,713Money market investments
    
    
    1,882,222
    
    
    
    870,009Pledged investment securities that can be re-pledged:Trading securities, at fair value
    
    
    228,156
    
    
    
    272,046Securities available for sale, at fair value
    
    
    1,545,824
    
    
    
    2,205,951Securities held to maturity, at amortized cost (market value of $1,828,047 for 2004;
$1,405,634 for 2003)
    
    
    1,857,547
    
    
    
    1,452,035Total pledged investment securities that can be re-pledged
    
    
    3,631,527
    
    
    
    3,930,032Other investment securities:Trading securities, at fair value
    
    
    764,527
    
    
    
    672,104Securities available for sale, at fair value
    
    
    1,087,186
    
    
    
    644,647Securities held to maturity, at amortized cost (market value of $200,026 for 2004;
$178,468 for 2003)
    
    
    200,100
    
    
    
    188,874Federal Home Loan Bank of NY (FHLB) stock, at cost
    
    
    86,120
    
    
    
    81,720Total other investment securities
    
    
    2,137,933
    
    
    
    1,587,345Total investment securities
    
    
    5,769,460
    
    
    
    5,517,377Loans:Mortgage loans held for sale, at lower of cost or market
    
    
    1,882,128
    
    
    
    1,966,608Loans receivable, net of allowance for loan losses of $16,667 (2003 - $19,709)
    
    
    1,497,008
    
    
    
    1,410,849Total loans
    
    
    3,379,136
    
    
    
    3,377,457Receivables and mortgage servicing advances
    
    
    88,009
    
    
    
    90,835Accounts receivable from investment sales
    
    
    335,285
    
    
    
    19,520Accrued interest receivable
    
    
    54,528
    
    
    
    63,771Servicing assets, net
    
    
    176,401
    
    
    
    167,498Premises and equipment, net
    
    
    136,427
    
    
    
    136,037Real estate held for sale, net
    
    
    18,564
    
    
    
    19,253Other assets
    
    
    33,277
    
    
    
    47,526Total assets
    
    $
    12,012,587
    
    
    $
    10,393,996LIABILITIESDeposits:Non-interest-bearing deposits
    
    $
    414,913
    
    
    $
    364,292Interest-bearing deposits
    
    
    2,788,897
    
    
    
    2,606,980Securities sold under agreements to repurchase
    
    
    3,475,129
    
    
    
    3,602,942Advances from FHLB
    
    
    1,294,500
    
    
    
    1,206,500Loans payable
    
    
    283,925
    
    
    
    178,334Notes payable
    
    
    599,760
    
    
    
    602,581Accounts payable from investment purchases
    
    
    1,166,045
    
    
    
    2,245Accrued expenses and other liabilities
    
    
    271,385
    
    
    
    237,682Total liabilities
    
    
    10,294,554
    
    
    
    8,801,556Commitments and contingenciesSTOCKHOLDERS EQUITYPreferred stock, $1 par value; 10,000,000 shares authorized; 9,015,000 shares issued and
outstanding in 2004 and 2003, at aggregate liquidation preference value:Perpetual noncumulative nonconvertible preferred stock (Series A, B and C)
    
    
    228,250
    
    
    
    228,250Perpetual cumulative convertible preferred stock
    
    
    345,000
    
    
    
    345,000Common stock, $1 par value; 200,000,000 shares authorized; 107,907,512 and 107,903,912
shares issued and outstanding in 2004 and 2003, respectively
    
    
    107,908
    
    
    
    107,904Additional paid-in capital
    
    
    154,350
    
    
    
    151,902Legal surplus
    
    
    13,806
    
    
    
    13,806Retained earnings
    
    
    886,822
    
    
    
    804,518Accumulated other comprehensive loss, net of income tax (benefit) expense of ($1.2 million)
(2003 - $568)
    
    
    (18,103
    )
    
    
    (58,940
    )Total stockholders equity
    
    
    1,718,033
    
    
    
    1,592,440Total liabilities and stockholders equity
    
    $
    12,012,587
    
    
    $
    10,393,996
 The accompanying notes are an integral part of these financial statements. 4
    Table of Contents  DORAL FINANCIAL CORPORATION 
 CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
 QUARTER ENDEDMARCH 31,2004
    
    2003Interest income:Loans
    
    $
    60,136
    
    
    $
    55,040Mortgage-backed securities
    
    
    17,470
    
    
    
    17,525Interest-only strips (IOs)
    
    
    12,384
    
    
    
    10,856Investment securities
    
    
    32,592
    
    
    
    22,060Other interest-earning assets
    
    
    3,517
    
    
    
    4,129Total interest income
    
    
    126,099
    
    
    
    109,610Interest expense:Deposits
    
    
    18,982
    
    
    
    18,066Securities sold under agreements to repurchase
    
    
    22,672
    
    
    
    23,937Advances from FHLB
    
    
    11,786
    
    
    
    12,374Loans payable
    
    
    1,405
    
    
    
    1,451Notes payable
    
    
    12,201
    
    
    
    12,505Total interest expense
    
    
    67,046
    
    
    
    68,333Net interest income
    
    
    59,053
    
    
    
    41,277Provision for loan losses
    
    
    1,561
    
    
    
    4,778Net interest income after
provision for loan losses
    
    
    57,492
    
    
    
    36,499Non-interest income:Net gain on mortgage loan sales and fees
    
    
    136,856
    
    
    
    77,325Trading activities
    
    
    (48,614
    )
    
    
    4,901Net gain on sale of investment securities
    
    
    16,150
    
    
    
    7,087Servicing income (loss), net of amortization
and impairment of $7,801 and
$12,647 in 2004 and 2003, respectively
    
    
    1,689
    
    
    
    (4,109
    )Commissions, fees and other income
    
    
    8,681
    
    
    
    6,215Total non-interest income
    
    
    114,762
    
    
    
    91,419Non-interest expenses:Compensation and benefits
    
    
    19,757
    
    
    
    21,199Taxes, other than payroll and income taxes
    
    
    2,210
    
    
    
    1,757Advertising
    
    
    3,190
    
    
    
    3,763Professional services
    
    
    2,422
    
    
    
    1,972Communication and information systems
    
    
    3,280
    
    
    
    3,018Occupancy and other office expenses
    
    
    5,689
    
    
    
    5,442Depreciation and amortization
    
    
    4,272
    
    
    
    3,588Other
    
    
    5,120
    
    
    
    3,824Total non-interest expenses
    
    
    45,940
    
    
    
    44,563Income before income taxes
    
    
    126,314
    
    
    
    83,355Income taxes
    
    
    22,737
    
    
    
    13,368Net income
    
    $
    103,577
    
    
    $
    69,987Net income attributable to common shareholders
    
    $
    95,252
    
    
    $
    65,759Earnings per common share:Basic
    
    $
    0.88
    
    
    $
    0.61Diluted
    
    $
    0.86
    
    
    $
    0.60Dividends per common share
    
    $
    0.12
    
    
    $
    0.09
 The accompanying notes are an integral part of these financial statements. 5
    Table of Contents  DORAL FINANCIAL CORPORATION 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY IN THOUSANDS OF DOLLARS)
(UNAUDITED
 QUARTER ENDEDMARCH 31,2004
    
    2003PREFERRED STOCK
    
    $
    573,250
    
    
    $
    228,250COMMON STOCK:Balance at beginning of period
    
    
    107,904
    
    
    
    71,933Shares issued under stock option plan
    
    
    4
    
    
    
    47Balance at end of period
    
    
    107,908
    
    
    
    71,980PAID-IN CAPITAL:Balance at beginning of period
    
    
    151,902
    
    
    
    191,216Common shares issued under stock option plan
    
    
    21
    
    
    
    341Stock-based compensation recognized
    
    
    2,427
    
    
    
    1,122Balance at end of period
    
    
    154,350
    
    
    
    192,679LEGAL SURPLUS
    
    
    13,806
    
    
    
    10,777RETAINED EARNINGS:Balance at beginning of period
    
    
    804,518
    
    
    
    550,554Net income
    
    
    103,577
    
    
    
    69,987Cash dividends declared on common stock
    
    
    (12,948
    )
    
    
    (10,062
    )Cash dividends declared on preferred stock
    
    
    (8,325
    )
    
    
    (4,228
    )Balance at end of period
    
    
    886,822
    
    
    
    606,251ACCUMULATED OTHER COMPREHENSIVE LOSS,
NET OF TAX:Balance at beginning of period
    
    
    (58,940
    )
    
    
    (7,675
    )Net unrealized gain (loss) on investment securities
available for sale, net of deferred tax
    
    
    40,837
    
    
    
    (6,312
    )Balance at end of period
    
    
    (18,103
    )
    
    
    (13,987
    )TREASURY STOCK AT PAR
    
    
    
    
    
    
    (84
    )Total stockholders equity
    
    $
    1,718,033
    
    
    $
    1,095,866
 The accompanying notes are an integral part of these financial statements. 6
    Table of Contents  DORAL FINANCIAL CORPORATION 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
 QUARTER ENDEDMARCH 31,2004
    
    2003Net income
    
    $
    103,577
    
    
    $
    69,987Other comprehensive income (loss), before tax:Unrealized gains (losses)on securities
arising during the period
    
    
    55,228
    
    
    
    (11,560
    )Amortization of unrealized loss on
securities reclassified to held to
maturity
    
    
    11
    
    
    
    10Reclassification adjustment for (gains)
losses included in net income
    
    
    (16,150
    )
    
    
    4,168Other comprehensive income (loss), before tax
    
    
    39,089
    
    
    
    (7,382
    )Income tax benefit related to items of other
comprehensive income
    
    
    1,748
    
    
    
    1,070Other comprehensive income (loss)
    
    
    40,837
    
    
    
    (6,312
    )Comprehensive income, net of taxes
    
    $
    144,414
    
    
    $
    63,675
 The accompanying notes are an integral part of these financial statements. 7
    Table of Contents  DORAL FINANCIAL CORPORATION 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
 QUARTER ENDEDMARCH 31,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    103,577
    
    
    $
    69,987Adjustments to reconcile net income to net cash provided by (used in) operating activities:Stock-based compensation recognized
    
    
    2,427
    
    
    
    1,122Depreciation and amortization
    
    
    4,272
    
    
    
    3,588Amortization of interest-only strips
    
    
    23,005
    
    
    
    14,601Amortization and impairment of servicing assets
    
    
    7,801
    
    
    
    12,647Deferred income tax provision
    
    
    12,939
    
    
    
    5,376Provision for loan losses
    
    
    1,561
    
    
    
    4,778Provision for losses on real estate held for sale
    
    
    300
    
    
    
    270Amortization of premium and accretion of discount on loans and investment securities
    
    
    2,333
    
    
    
    1,975Origination and purchases of mortgage loans held for sale
    
    
    (1,595,762
    )
    
    
    (1,270,174
    )Principal repayment and sales of mortgage loans held for sale
    
    
    947,250
    
    
    
    805,482Purchases of securities held for trading
    
    
    (1,414,323
    )
    
    
    (2,151,154
    )Principal repayment and sales of trading securities
    
    
    2,005,602
    
    
    
    2,351,564Increase in interestonly strips, net
    
    
    (123,010
    )
    
    
    (66,470
    )Increase in servicing assets
    
    
    (16,704
    )
    
    
    (13,036
    )Decrease (increase) in receivables and mortgage servicing advances
    
    
    2,044
    
    
    
    (2,044
    )Decrease (increase) in accrued interest receivable
    
    
    9,243
    
    
    
    (530
    )Decrease in other assets
    
    
    14,249
    
    
    
    354Increase in accrued expenses and other liabilities
    
    
    21,300
    
    
    
    104,771Total adjustments
    
    
    (95,473
    )
    
    
    (196,880
    )Net cash provided by (used in) operating activities
    
    
    8,104
    
    
    
    (126,893
    )Cash flows from investing activities:Purchases of securities available for sale
    
    
    (3,054,109
    )
    
    
    (1,229,103
    )Proceeds from sales of securities available for sale
    
    
    3,835,377
    
    
    
    1,115,484Principal repayment of securities available for sale
    
    
    33,431
    
    
    
    3,041Purchases of securities held to maturity
    
    
    (32,981
    )
    
    
    (99,794
    )Principal repayment and maturities of securities held to maturity
    
    
    94,153
    
    
    
    133,553(Increase) decrease in FHLB stock
    
    
    (4,400
    )
    
    
    2,750Origination of loans receivable
    
    
    (250,144
    )
    
    
    (192,201
    )Principal repayment of loans receivable
    
    
    162,478
    
    
    
    85,867Purchase of premises and equipment
    
    
    (4,662
    )
    
    
    (5,530
    )Proceeds from sales of real estate held for sale
    
    
    5,284
    
    
    
    712Net cash
provided by (used in) investing activities
    
    
    784,427
    
    
    
    (185,221
    )Cash flows from financing activities:Increase in deposits
    
    
    232,538
    
    
    
    252,952Decrease in securities sold under agreements to repurchase
    
    
    (127,813
    )
    
    
    (124,523
    )Increase in loans payable
    
    
    105,591
    
    
    
    48,686Decrease in notes payable
    
    
    (2,821
    )
    
    
    (3,151
    )Increase (decrease) in FHLB advances
    
    
    88,000
    
    
    
    (55,000
    )Issuance of common stock, net
    
    
    25
    
    
    
    388Dividends paid
    
    
    (21,273
    )
    
    
    (14,290
    )Net cash provided by financing activities
    
    
    274,247
    
    
    
    105,062Net increase (decrease) in cash and cash equivalents
    
    
    1,066,778
    
    
    
    (207,052

    )Cash and cash equivalents at beginning of period
    
    
    954,722
    
    
    
    1,573,291Cash and cash equivalents at the end of period
    
    $
    2,021,500
    
    
    $
    1,366,239Cash and cash equivalents includes:Cash and due from banks
    
    $
    139,278
    
    
    $
    191,467Money market investments
    
    
    1,882,222
    
    
    
    1,174,772$
    2,021,500
    
    
    $
    1,366,239Supplemental schedule of non-cash activities:Loan securitizations
    
    $
    728,791
    
    
    $
    591,037Loans foreclosed
    
    $
    4,485
    
    
    $
    1,819Supplemental information for cash flows:Cash used to pay interest
    
    $
    68,891
    
    
    $
    57,804Cash used to pay income taxes
    
    $
    382
    
    
    $
    3,830
 The accompanying notes are an integral part of these financial statements. 8
    Table of Contents  DORAL FINANCIAL CORPORATION 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  a.
    
    The Consolidated Financial Statements (unaudited) include
the accounts of Doral Financial Corporation (Doral Financial
or the Company), Doral Mortgage Corporation (Doral
Mortgage), SANA Investment Mortgage Bankers, Inc. (SANA),
Centro Hipotecario de Puerto Rico, Inc., Doral Securities, Inc.
(Doral Securities), Doral Bank (Doral Bank PR), Doral Bank,
FSB (Doral Bank NY), Doral Money, Inc. (Doral Money), Doral
International, Inc. (Doral International), 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, 2003, 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. Certain amounts
reflected in the Companys Consolidated Financial Statements
for the 2003 periods, have been reclassified to conform to the
presentation of 2004.  b.
    
    The results of operations for the quarter ended March 31,
2004 are not necessarily indicative of the results to be
expected for the full year.  c.
    
    At March 31, 2004, escrow funds included approximately
$161.6 million deposited with Doral Bank PR. These funds are
included in the Companys consolidated financial statements.
Escrow funds also included approximately $31.2 million
deposited with other banks which are excluded from the
Companys assets and liabilities. At March 31, 2004, the
Company had fidelity bond coverage of $15.0 million and errors
and omissions coverage of $15.0 million.  d.
    
    The reconciliation of the numerator and denominator of
the basic and diluted earnings-per-share follows: 9
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) QUARTER ENDEDMARCH 31,(Dollars in thousands, except per
share amounts)
    
    2004
    
    2003Net Income:Net income
    
    $
    103,577
    
    
    $
    69,987Convertible preferred stock dividend
    
    
    (4,097
    )
    
    
    Nonconvertible preferred stock dividend
    
    
    (4,228
    )
    
    
    (4,228
    )Net income attributable to common stock
    
    $
    95,252
    
    
    $
    65,759Weighted Average Shares(1):Basic weighted average number of common shares outstanding
    
    
    107,906,276
    
    
    
    107,804,556Incremental shares issuable upon exercise of stock options(2)
    
    
    2,852,249
    
    
    
    2,121,468Diluted weighted average number of common shares outstanding
    
    
    110,758,525
    
    
    
    109,926,024Net Income per Common Share:Basic
    
    $
    0.88
    
    
    $
    0.61Diluted
    
    $
    0.86
    
    
    $
    0.60
   (1)
    
    For the quarter ended March 31, 2004, 1,380,000 shares of the Companys 4.75% Perpetual cumulative
convertible preferred stock that were issued in the second half of 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 is currently convertible into 6.2856 shares of
common stock , subject to adjustment under specific conditions. The option of the purchasers to convert
the convertible preferred stock into shares of the Companys common stock is exercisable only (a) if
during any fiscal quarter after September 30, 2003, the closing sale price of the Companys common stock
for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of
the preceding fiscal quarter exceeds 120% of the conversion price of the convertible preferred stock
(conversion price of $39.77 as of March 31, 2004); (b) upon the occurrence of certain corporate
transactions; or (c) upon the delisting of the Companys common stock. On or after September 30, 2008,
the Company may, at its option, cause the convertible preferred stock to be converted into the number of
shares of common stock that are issuable at the conversion price. The Company may only exercise its
conversion right if the closing sale price of the Companys common stock exceeds 130% of the conversion
price of the convertible preferred stock in effect for 20 trading days within any period of 30
consecutive trading days ending on a trading day not more than two trading days prior to the date the
Company gives notice of conversion.(2)
    
    For the quarter ended March 31, 2004, options to purchase an additional 15,000 shares of common stock
were outstanding, but were not included in the computation of diluted earnings per share because their
inclusion would have had an antidilutive effect. For the quarter ended March 31, 2003, all stock options
outstanding were included in the computation of weighted average outstanding shares. 10
    Table of Contents  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 ENDEDMARCH 31,(In thousands)
    
    2004
    
    2003Employee costs, gross
    
    $
    31,052
    
    
    $
    26,306Deferred costs pursuant to SFAS No. 91
    
    
    (11,295
    )
    
    
    (5,107
    )Employee cost, net
    
    $
    19,757
    
    
    $
    21,199Other expenses, gross
    
    $
    6,405
    
    
    $
    4,847Deferred costs pursuant to SFAS No. 91
    
    
    (1,285
    )
    
    
    (1,023
    )Other expenses, net
    
    $
    5,120
    
    
    $
    3,824
 As of March 31, 2004, the Company had a net
deferred origination cost on mortgage loans held for
sale amounting to approximately $477,000 and a net
deferred origination fee on loans receivable
amounting to $8.7 million (December 31, 2003 a net
deferred origination cost on mortgage loans held for
sale amounting to $1.4 million and a net deferred
origination fee on loans receivable amounting to
$18.0 million).  f.
    
    Segment informationThe 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.The results of the mortgage banking segment for the quarters
ended March 31, 2004 and 2003 include the results of Doral
Overseas, an international banking entity organized as a
division at the parent company level. In connection with
local legislation passed on January 8, 2004, designed to
encourage international banking entities to operate as
separate legal entities rather than operating divisions, Doral
Financial has made a decision to phase out the operations of
Doral Overseas. At the same time, the Company has increased
the investment activities of Doral International, another
international banking entity and a wholly-owned subsidiary of
Doral Bank PR. The operations of Doral International are
included within the banking segment.For the quarter ended March 31, 2003, the operations of Doral
Overseas contributed $1.3 million of the total net interest
income, $6.8 million of total non-interest income and $7.8
million of total net income of the mortgage banking segment.
Accordingly, the phase out of Doral Overseas operations
resulted in a diminishing contribution of the mortgage banking
segment and a corresponding increase in the contribution of
the banking segment to the overall net interest income,
non-interest income and net income of Doral Financial for the
first quarter of 2004.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 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
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (In thousands) Mortgage
    
    
    
    
    
    Institutional
    
    Insurance
    
    IntersegmentBanking
    
    Banking
    
    Securities
    
    Agency
    
    Eliminations *
    
    TotalsQUARTER ENDED MARCH 31, 2004Net interest income
    
    $
    18,988
    
    
    
    33,322
    
    
    
    950
    
    
    
    981
    
    
    
    4,812
    
    
    $
    59,053Non-interest income
    
    $
    55,808
    
    
    
    56,297
    
    
    
    1,472
    
    
    
    2,877
    
    
    
    (1,692
    )
    
    $
    114,762Net income
    
    $
    37,700
    
    
    
    60,399
    
    
    
    1,376
    
    
    
    2,624
    
    
    
    1,478
    
    
    $
    103,577Identifiable assets
    
    $
    3,461,156
    
    
    
    8,484,805
    
    
    
    357,627
    
    
    
    115,509
    
    
    
    (406,510
    )
    
    $
    12,012,587QUARTER ENDED MARCH 31, 2003Net interest income
    
    $
    11,331
    
    
    
    26,851
    
    
    
    778
    
    
    
    400
    
    
    
    1,917
    
    
    $
    41,277Non-interest income
    
    $
    58,657
    
    
    
    33,665
    
    
    
    1,167
    
    
    
    1,794
    
    
    
    (3,864
    )
    
    $
    91,419Net income
    
    $
    35,621
    
    
    
    33,610
    
    
    
    839
    
    
    
    1,311
    
    
    
    (1,394
    )
    
    $
    69,987Identifiable assets
    
    $
    2,959,805
    
    
    
    5,951,164
    
    
    
    274,107
    
    
    
    35,200
    
    
    
    (453,439
    )
    
    $
    8,766,837
 * The intersegment eliminations in the above table, include
direct intersegment loan origination costs amortized as yield
adjustment (mainly related with origination costs paid by the banking
segment to the mortgage banking segment) and other income derived from
intercompany transactions, related principally to 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. During the quarter ended March
31, 2004, the intersegment eliminations for net income also include
realized losses recognized by the mortgage banking segment on sale of
investment securities to the banking segment. Assets include internal
funding and investment in subsidiaries accounted for at cost. 12
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (In thousands) MainlandPuerto Rico
    
    US
    
    Eliminations
    
    TotalsQUARTER ENDED MARCH 31, 2004Net interest income
    
    $
    56,351
    
    
    
    2,688
    
    
    
    14
    
    
    $
    59,053Non-interest income
    
    $
    114,048
    
    
    
    876
    
    
    
    (162
    )
    
    $
    114,762Net income
    
    $
    103,449
    
    
    
    209
    
    
    
    (81
    )
    
    $
    103,577Identifiable assets
    
    $
    11,582,008
    
    
    
    532,287
    
    
    
    (101,708
    )
    
    $
    12,012,587QUARTER ENDED MARCH 31, 2003Net interest income
    
    $
    37,401
    
    
    
    3,900
    
    
    
    (24
    )
    
    $
    41,277Non-interest income
    
    $
    88,577
    
    
    
    2,893
    
    
    
    (51
    )
    
    $
    91,419Net income
    
    $
    68,530
    
    
    
    1,497
    
    
    
    (40
    )
    
    $
    69,987Identifiable assets
    
    $
    8,363,289
    
    
    
    525,346
    
    
    
    (121,798
    )
    
    $
    8,766,837
  The breakdown of non-interest income from the mortgage banking
and banking segments, for the periods presented, follows:  (In thousands) MortgageBanking
    
    BankingQUARTER ENDED MARCH 31, 2004Net gain on mortgage loan sales and fees
    
    $
    106,988
    
    
    $
    32,051Investment activities
    
    
    (56,109
    )
    
    
    20,701Servicing income
    
    
    2,752
    
    
    
    1Commissions, fees and other income
    
    
    2,177
    
    
    
    3,544Total non-interest income
    
    $
    55,808
    
    
    $
    56,297QUARTER ENDED MARCH 31, 2003Net gain on mortgage loan sales and fees
    
    $
    63,953
    
    
    $
    14,650Investment activities
    
    
    (2,766
    )
    
    
    15,086Servicing loss
    
    
    (3,096
    )
    
    
    (244
    )Commissions, fees and other income
    
    
    566
    
    
    
    4,173Total non-interest income
    
    $
    58,657
    
    
    $
    33,665
 13
    Table of Contents  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
March 31, 2004 and December 31, 2003. TRADING SECURITIES
    
    MARCH 31,
    
    DECEMBER 31,(In thousands)
    
    2004
    
    2003Mortgage-backed securities
    
    $
    294,861
    
    
    $
    346,597Interest-only strips
    
    
    678,129
    
    
    
    578,124Puerto Rico government and agencies
    
    
    7,626
    
    
    
    5,646Other
    
    
    12,067
    
    
    
    13,783Total
    
    $
    992,683
    
    
    $
    944,150
 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 March 31, 2004 and December 31, 2003. 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. 14
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SECURITIES AVAILABLE FOR SALE
AS OF MARCH 31, 2004
(Dollars in thousands) WEIGHTEDAMORTIZED
    
    UNREALIZED
    
    UNREALIZED
    
    MARKET
    
    AVERAGECOST
    
    GAINS
    
    LOSSES
    
    VALUE
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    411,969
    
    
    $
    332
    
    
    $
    2,628
    
    
    $
    409,673
    
    
    
    5.59
    %FHLMC and FNMADue over ten years
    
    
    435,895
    
    
    
    274
    
    
    
    5,372
    
    
    
    430,797
    
    
    
    5.15
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    111,942
    
    
    
    3,717
    
    
    
    
    
    
    
    115,659
    
    
    
    5.51
    %US TREASURYDue from one to five years
    
    
    500,094
    
    
    
    86
    
    
    
    16
    
    
    
    500,164
    
    
    
    1.66
    %Due from five to ten years
    
    
    970,981
    
    
    
    1,261
    
    
    
    13,650
    
    
    
    958,592
    
    
    
    3.66
    %Due over ten years
    
    
    220,164
    
    
    
    59
    
    
    
    2,098
    
    
    
    218,125
    
    
    
    4.71
    %$
    2,651,045
    
    
    $
    5,729
    
    
    $
    23,764
    
    
    $
    2,633,010
    
    
    
    3.99
    %
 15
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SECURITIES AVAILABLE FOR SALE
AS OF DECEMBER 31, 2003
(Dollars in thousands) WEIGHTEDAMORTIZED
    
    UNREALIZED
    
    UNREALIZED
    
    MARKET
    
    AVERAGECOST
    
    GAINS
    
    LOSSES
    
    VALUE
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue over ten years
    
    $
    467,451
    
    
    $
    553
    
    
    $
    5,096
    
    
    $
    462,908
    
    
    
    5.70
    %FHLMC and FNMADue over ten years
    
    
    539,034
    
    
    
    196
    
    
    
    13,360
    
    
    
    525,870
    
    
    
    5.17
    %DEBT SECURITIESFHLB NOTESDue over ten years
    
    
    111,940
    
    
    
    
    
    
    
    1,847
    
    
    
    110,093
    
    
    
    5.25
    %US TREASURYDue from one to five years
    
    
    149,897
    
    
    
    291
    
    
    
    
    
    
    
    150,188
    
    
    
    1.84
    %Due from five to ten years
    
    
    1,375,706
    
    
    
    
    
    
    
    35,144
    
    
    
    1,340,562
    
    
    
    3.87
    %Due over ten years
    
    
    266,962
    
    
    
    
    
    
    
    5,985
    
    
    
    260,977
    
    
    
    4.92
    %$
    2,910,990
    
    
    $
    1,040
    
    
    $
    61,432
    
    
    $
    2,850,598
    
    
    
    4.45
    %
 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 March 31, 2004 and December
31, 2003. 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. 16
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SECURITIES HELD TO MATURITY
AS OF MARCH 31, 2004
(Dollars in thousands) WEIGHTEDAMORTIZED
    
    UNREALIZED
    
    UNREALIZED
    
    MARKET
    
    AVERAGECOST
    
    GAINS
    
    LOSSES
    
    VALUE
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue from five to ten years
    
    $
    1,553
    
    
    $
    82
    
    
    $
    
    
    
    $
    1,635
    
    
    
    6.76
    %Due over ten years
    
    
    7,163
    
    
    
    426
    
    
    
    
    
    
    
    7,589
    
    
    
    6.99
    %CMO CERTIFICATESDue within a year
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    8.25
    %Due from one to five years
    
    
    1,079
    
    
    
    
    
    
    
    
    
    
    
    1,079
    
    
    
    6.37
    %Due over ten years
    
    
    38,902
    
    
    
    
    
    
    
    531
    
    
    
    38,371
    
    
    
    6.24
    %DEBT SECURITIESFHLB NOTESDue from one to five years
    
    
    100,000
    
    
    
    
    
    
    
    188
    
    
    
    99,812
    
    
    
    2.90
    %Due over ten years
    
    
    575,454
    
    
    
    10,609
    
    
    
    
    
    
    
    586,063
    
    
    
    5.57
    %FNMA NOTESDue over ten years
    
    
    99,988
    
    
    
    958
    
    
    
    
    
    
    
    100,946
    
    
    
    5.75
    %FHLB ZERO COUPONDue over ten years
    
    
    267,069
    
    
    
    530
    
    
    
    6,066
    
    
    
    261,533
    
    
    
    6.59
    %FHLMC ZERO COUPONDue over ten years
    
    
    270,707
    
    
    
    2,442
    
    
    
    3,765
    
    
    
    269,384
    
    
    
    5.90
    %PR HOUSING BANKDue from one to five years
    
    
    5,000
    
    
    
    50
    
    
    
    
    
    
    
    5,050
    
    
    
    6.00
    %Due over ten years
    
    
    2,235
    
    
    
    22
    
    
    
    
    
    
    
    2,257
    
    
    
    6.20
    %U.S. TREASURYDue from five to ten years
    
    
    201,617
    
    
    
    
    
    
    
    2,898
    
    
    
    198,719
    
    
    
    3.52
    %Due over ten years
    
    
    475,449
    
    
    
    1,386
    
    
    
    32,691
    
    
    
    444,144
    
    
    
    4.34
    %OTHERDue from one to five years
    
    
    3,680
    
    
    
    11
    
    
    
    4
    
    
    
    3,687
    
    
    
    5.33
    %Due from five to ten years
    
    
    715
    
    
    
    13
    
    
    
    
    
    
    
    728
    
    
    
    6.73
    %Due over ten years
    
    
    7,000
    
    
    
    40
    
    
    
    
    
    
    
    7,040
    
    
    
    5.93
    %$
    2,057,647
    
    
    $
    16,569
    
    
    $
    46,143
    
    
    $
    2,028,073
    
    
    
    5.16
    %
 17
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SECURITIES HELD TO MATURITY
AS OF DECEMBER 31, 2003
(Dollars in thousands) WEIGHTEDAMORTIZED
    
    UNREALIZED
    
    UNREALIZED
    
    MARKET
    
    AVERAGECOST
    
    GAINS
    
    LOSSES
    
    VALUE
    
    YIELDMORTGAGE-BACKED SECURITIESGNMADue from five to ten years
    
    $
    1,682
    
    
    $
    89
    
    
    $
    
    
    
    $
    1,771
    
    
    
    6.75
    %Due over ten years
    
    
    7,908
    
    
    
    482
    
    
    
    
    
    
    
    8,390
    
    
    
    6.97
    %CMO CERTIFICATESDue within a year
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    8.25
    %Due from one to five years
    
    
    677
    
    
    
    
    
    
    
    2
    
    
    
    675
    
    
    
    6.78
    %Due from five to ten years
    
    
    462
    
    
    
    
    
    
    
    3
    
    
    
    459
    
    
    
    5.80
    %Due over ten years
    
    
    43,182
    
    
    
    2
    
    
    
    781
    
    
    
    42,403
    
    
    
    6.23
    %DEBT SECURITIESFHLB NOTESDue from one to five years
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    3.05
    %Due over ten years
    
    
    517,960
    
    
    
    2,051
    
    
    
    
    
    
    
    520,011
    
    
    
    5.58
    %FHLB ZERO COUPONDue over ten years
    
    
    288,253
    
    
    
    
    
    
    
    1,099
    
    
    
    287,154
    
    
    
    6.63
    %FHLMC ZERO COUPONDue over ten years
    
    
    34,287
    
    
    
    
    
    
    
    5,500
    
    
    
    28,787
    
    
    
    6.01
    %PR HOUSING BANKDue from one to five years
    
    
    5,000
    
    
    
    50
    
    
    
    
    
    
    
    5,050
    
    
    
    6.00
    %Due over ten years
    
    
    2,235
    
    
    
    
    
    
    
    
    
    
    
    2,235
    
    
    
    6.20
    %US TREASURYDue from five to ten years
    
    
    201,661
    
    
    
    
    
    
    
    9,161
    
    
    
    192,500
    
    
    
    3.51
    %Due over ten years
    
    
    476,167
    
    
    
    3,503
    
    
    
    46,498
    
    
    
    433,172
    
    
    
    4.38
    %OTHERDue from one to five years
    
    
    3,680
    
    
    
    11
    
    
    
    4
    
    
    
    3,687
    
    
    
    5.33
    %Due from five to ten years
    
    
    715
    
    
    
    13
    
    
    
    
    
    
    
    728
    
    
    
    6.73
    %Due over ten years
    
    
    7,000
    
    
    
    40
    
    
    
    
    
    
    
    7,040
    
    
    
    5.93
    %$
    1,640,909
    
    
    $
    6,241
    
    
    $
    63,048
    
    
    $
    1,584,102
    
    
    
    5.13
    %
 18
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  h.
    
    The following table shows Doral Financials available for
sale and held to maturity investments gross unrealized losses
and fair value, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized
loss position, at March 31, 2004. LESS THAN 12 MONTHS
    
    12 MONTHS OR MORE
    
    TOTALFAIR
    
    UNREALIZED
    
    FAIR
    
    UNREALIZED
    
    FAIR
    
    UNREALIZED(Dollars in thousands)
    
    VALUE
    
    LOSSES
    
    VALUE
    
    LOSSES
    
    VALUE
    
    LOSSESMortgage-Backed
SecuritiesGNMA
    
    $
    389,041
    
    
    $
    2,628
    
    
    $
    
    
    
    $
    
    
    
    $
    389,041
    
    
    $
    2,628FHLMC and
FNMA
    
    
    405,755
    
    
    
    5,372
    
    
    
    
    
    
    
    
    
    
    
    405,755
    
    
    
    5,372CMO
Certificates
    
    
    8,321
    
    
    
    175
    
    
    
    25,094
    
    
    
    356
    
    
    
    33,415
    
    
    
    531Debt SecuritiesFHLB Notes
    
    
    99,812
    
    
    
    188
    
    
    
    
    
    
    
    
    
    
    
    99,812
    
    
    
    188FHLB Zero
Coupon
    
    
    53,438
    
    
    
    1,429
    
    
    
    103,700
    
    
    
    4,637
    
    
    
    157,138
    
    
    
    6,066FHLMC Zero
Coupon
    
    
    31,038
    
    
    
    3,765
    
    
    
    
    
    
    
    
    
    
    
    31,038
    
    
    
    3,765U.S. Treasury
    
    
    1,291,271
    
    
    
    51,353
    
    
    
    
    
    
    
    
    
    
    
    1,291,271
    
    
    
    51,353Other
    
    
    2,996
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    2,996
    
    
    
    4$
    2,281,672
    
    
    $
    64,914
    
    
    $
    128,794
    
    
    $
    4,993
    
    
    $
    2,410,466
    
    
    $
    69,907
  The securities held by the Company are principally
mortgage-backed securities, U.S. Treasury and agency
securities. Thus a substantial portion of these
instruments is guaranteed by either mortgages, a U.S.
government sponsored entity or the full faith and credit of
the U.S. government and, therefore, principal and interest
on the securities are deemed recoverable. The Company has
the ability to hold the securities until maturity or until
the unrealized losses are recovered. Therefore, an other
than temporary impairment loss has not been recognized.i.
    
    The following table sets forth certain information
regarding Doral Financials mortgage loans held for sale as
of the dates indicated: MORTGAGE LOANS HELD FOR SALE (In thousands)
    
    MARCH 31, 2004
    
    DECEMBER 31, 2003Conventional single family residential loans
    
    $
    1,490,093
    
    
    $
    1,532,149FHA/VA loans
    
    
    90,733
    
    
    
    87,810Mortgage loans on residential multifamily
    
    
    76,145
    
    
    
    79,641Construction and commercial real estate loans
    
    
    225,131
    
    
    
    266,982Consumer loans secured by mortgages
    
    
    26
    
    
    
    26$
    1,882,128
    
    
    $
    1,966,608
 19
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  j.
    
    The following table sets forth certain information
regarding Doral Financials loans receivable as of the dates
indicated: LOANS RECEIVABLE, NET MARCH 31, 2004
    
    DECEMBER 31, 2003(Dollars in thousands)
    
    AMOUNT
    
    PERCENT
    
    AMOUNT
    
    PERCENTConstruction
loans(1)
    
    $
    590,971
    
    
    
    38
    %
    
    $
    613,680
    
    
    
    42
    %Residential mortgage loans
    
    
    542,717
    
    
    
    35
    %
    
    
    529,147
    
    
    
    36
    %Commercial  secured by real estate
    
    
    237,817
    
    
    
    16
    %
    
    
    152,016
    
    
    
    10
    %Consumer  secured by real estate
    
    
    255
    
    
    
    0
    %
    
    
    375
    
    
    
    0
    %Consumer  other:Personal loans
    
    
    30,576
    
    
    
    2
    %
    
    
    31,083
    
    
    
    2
    %Auto loans
    
    
    1,219
    
    
    
    0
    %
    
    
    1,291
    
    
    
    0
    %Credit cards
    
    
    9,123
    
    
    
    1
    %
    
    
    8,367
    
    
    
    1
    %Overdrawn checking accounts
    
    
    370
    
    
    
    0
    %
    
    
    357
    
    
    
    0
    %Revolving lines of credit
    
    
    25,937
    
    
    
    2
    %
    
    
    25,418
    
    
    
    2
    %Commercial non-real estate
    
    
    22,521
    
    
    
    1
    %
    
    
    22,006
    
    
    
    2
    %Loans on saving deposits
    
    
    9,818
    
    
    
    1
    %
    
    
    8,769
    
    
    
    1
    %Land secured
    
    
    60,265

    
    
    
    4
    %
    
    
    65,818
    
    
    
    4
    %Loans receivable, gross
    
    
    1,531,589
    
    
    
    100
    %
    
    
    1,458,327
    
    
    
    100
    %Less:Undisbursed portion of loans
in process
    
    
    (9,197
    )
    
    
    
    
    
    
    (9,771
    )Unearned interest and deferred
loan fees, net
    
    
    (8,717
    )
    
    
    
    
    
    
    (17,998
    )Allowance
for loan losses(2)
    
    
    (16,667
    )
    
    
    
    
    
    
    (19,709
    )(34,581
    )
    
    
    
    
    
    
    (47,478
    )Loans receivable, net
    
    $
    1,497,008
    
    
    
    
    
    
    $
    1,410,849
  (1)
    
    Includes $442.3 million and $406.9
million of construction loans for residential housing
projects as of March 31, 2004 and December 31, 2003,
respectively. Also includes $148.7 million and $206.8
million of construction loans for commercial,
condominiums and multifamily projects as of March 31,
2004 and December 31, 2003, respectively.(2)
    
    Does not include $11.7 million and $8.5
million of allowance for loan losses allocated to
mortgage loans held for sale as of March 31, 2004 and
December 31, 2003, respectively. During the first
quarter of 2004, $3.2 million of the allowance for loan
losses previously allocated to loans receivable was
transferred to mortgage loans held for sale. 20
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  k.
    
    Doral Financial is the guarantor of various serial and
term bonds issued by Doral Properties, a wholly-owned
subsidiary, through the Puerto Rico Industrial, Tourist,
Educational, Medical and Environmental Control Facilities
Financing Authority (AFICA). The bonds were issued to
finance the construction and development of the Doral
Financial Plaza, the headquarters facility of Doral
Financial. As of March 31, 2004, the outstanding principal
balance of the bonds was $51.7 million with fixed interest
rates, ranging from 6.15% to 6.90%, and maturities ranging
from June 2004 to December 2029. Certain series of the
bonds are secured by a mortgage on the building and
underlying real property.  l.
    
    The Company routinely originates, securitizes and
sells mortgage loans into the secondary market. As a result
of this process, the Company typically retains the servicing
rights and may retain interest-only strips. The Companys
retained interests are subject to prepayment and interest
rate risks. The following tables show the changes in the
Companys mortgage servicing assets and interest-only strips
for each of the periods shown: MORTGAGE SERVICING ASSETS
ACTIVITY
(In thousands) QUARTER ENDEDMARCH 31,2004
    
    2003Balance at beginning of period
    
    $
    167,498
    
    
    $
    159,881Capitalization of rights
    
    
    16,704
    
    
    
    13,036Amortization:Scheduled
    
    
    (5,964
    )
    
    
    (7,763
    )Unscheduled and impairment
    
    
    (1,837
    )
    
    
    (4,884
    )Balance at end of period
    
    $
    176,401
    
    
    $
    160,270
  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 of loans
being serviced exceeds its fair value. Any fair value in
excess of the cost basis of the servicing asset for a given
stratum is not recognized. A direct write-down of
servicing assets is recognized for any given stratum on
which an impairment allowance has been provided for three
consecutive quarters. 21
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  Changes in the impairment allowance for servicing assets
were as follows: QUARTER ENDEDMARCH 31,(In thousands)
    
    2004
    
    2003Balance at beginning of period
    
    $
    11,392
    
    
    $
    9,152Impairment charges
    
    
    4,807
    
    
    
    7,492Direct write-down
    
    
    (4,806
    )
    
    
    Recoveries
    
    
    (3,457
    )
    
    
    (2,608
    )Balance at end of period
    
    $
    7,936
    
    
    $
    14,036
  At March 31, 2004, and based on recent prepayment
experience, the expected weighted average life of the
Companys servicing assets was 10 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
(In thousands) QUARTER ENDEDMARCH 31,2004
    
    2003Balance at beginning of period
    
    $
    578,124
    
    
    $
    359,185IOs on loan sales
    
    
    113,554
    
    
    
    51,865Amortization
    
    
    (23,005
    )
    
    
    (14,601
    )Valuation adjustment
    
    
    (14,360
    )
    
    
    4,631Purchases of IOs
    
    
    23,816
    
    
    
    9,974Balance at end of period
    
    $
    678,129
    
    
    $
    411,054
  m.
    
    At March 31, 2004 and December 31, 2003, money market
investments included $469.4 million and $198.8 million,
respectively, of pledged money market investments. Such
money market investments secured short-term borrowings
generally due within 90 days. At March 31, 2004 and December
31, 2003, the carrying value of securities purchased under
resell agreements included in money market investments was
$151.3 million and $50.0 million, respectively. The
underlying securities were held on behalf of the Company by
the dealers that arranged the transactions. At March
31,2004 and December 31, 2003, the Company had repledged
approximately $50.0 million, in both periods, of the
underlying securities.  n.
    
    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
first quarter of 2004 and 2003 was approximately $2.4
million and $1.1 million, respectively. 22
    Table of Contents  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  o.
    
    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. As of
March 31, 2004, the Company had outstanding $3.0 million in
commercial and financial standby letters of credit.  p.
    
    Contingencies  The Company is subject to legal proceedings and claims
that have arisen in the ordinary course of business and have not been
adjudicated. Management believes that these actions, when concluded, will not have a material adverse effect upon the financial
position, results of operations or cash flows of the Company. For
further details, refer to Part II  Other Information,
Item 1  Legal Proceedings.  q.
    
    Recent Accounting Pronouncements  Accounting for Certain Loans or Debt Securities Acquired in
a Transfer.In November 2003, the Accounting Standards
Executive Committee issued the Statement of Position
(SOP) No. 03-3, Accounting for Certain Loans of Debt
Securities Acquired in a Transfer. This statement
addresses accounting for differences between contractual
cash flows and cash flows expected to be collected from an
investors initial investment in loans or debt securities
(loans) acquired in a transfer if those differences are
attributable, at least in part, to credit quality. This
SOP does not apply to loans originated by the entity. This
SOP prohibits carrying over or creation of valuation
allowances in the initial accounting of all loans acquired
in a transfer that are within the scope of this SOP. The
prohibition of the valuation allowance carryover applies to
the purchase of an individual loan, a group of loans, and
loans acquired in a purchase business combination. This
SOP is effective for loans acquired in fiscal years
beginning after December 15, 2004. Management believes
that the adoption of this statement will not have a
material effect on Doral Financials Consolidated Financial
Statements.  Loan Commitments Accounted for as Derivative
Instruments. In March 2004, the U.S. Securities and Exchange
Commission released the Staff Accounting Bulletin (SAB)
No. 105, Loan Commitments Accounted for as Derivative
Instruments. This bulletin informs registrants of the
staffs view that the fair value of the recorded loan
commitments should not consider the expected future cash flows
related to the associated servicing of the future loan. The provisions
of SAB 105 must be applied to loan commitments accounted for as
derivatives that are entered into after March 31, 2004. The staff
will not object to the application of existing accounting practices
to loan commitments accounted for as derivatives that are entered
into on or before March 31, 2004, with appropriate disclosures.
On April 1, 2004, the Company adopted the provisions of SAB 105.
Doral Financial records the value of its mortgage loan commitments at
fair market value for mortgages it intends to sell. Doral Financial
does not currently include, and prior to SAB 105, did not
include the value of mortgage servicing or any other internally
developed intangible assets in the valuation of its mortgage loan
commitments. Therefore, the adoption of SAB 105 did not have an
impact on Doral Financials financial condition or results of
operations. 23
    Table of Contents  ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Doral Financial Corporation is a financial holding company
that, together with its wholly-owned subsidiaries, is engaged in
mortgage banking, commercial 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 32nd year of operations.
Doral Financial once again achieved record earnings for the
first quarter of 2004 with net income and net income per diluted
share increasing by 48% and 43%, respectively, compared to the
first quarter of 2003. The results for the quarter ended March
31, 2004 reflect the continued strength of the Puerto Rico
mortgage market, which did not experience the slowdown
experienced by the U.S. mortgage market since the second half of
2003. Doral Financial continues to be Puerto Ricos largest
residential mortgage lender. The volume of loans originated and
purchased by Doral Financial during the quarters ended March 31,
2004 and 2003 was approximately $1.8 billion and $1.5 billion,
respectively. Doral Financials loan servicing portfolio
increased to approximately $13.1 billion as of March 31, 2004,
from $11.8 billion as of March 31, 2003. 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 March 31, 2004, Doral Financial
held securities for trading with a fair market value of $992.7
million, approximately $255.5 million of which consisted of
Puerto Rico GNMA securities, the interest on which is tax-exempt
to the Company. These securities are generally held by Doral
Financial for longer periods prior to sale in order to maximize
the tax-exempt interest received thereon. Trading securities are
reflected in 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 March 31, 2004,
Doral Financial held approximately $2.1 billion in securities
that were classified as held to maturity and reported at
amortized cost. As of March 31, 2004, Doral Financial also held
$2.6 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 increasingly significant contributions to
Doral Financials consolidated earnings. For the quarters ended March 31, 2004 and 2003, Doral
Financials banking subsidiaries contributed $60.4 million ($64.2
million after intersegment eliminations) and $33.6 million ($34.8
million after intersegment eliminations), or 58% and 48%,
respectively, to the Companys consolidated net income. Refer to
note f of the accompanying Consolidated Financial Statements
for additional information regarding the composition of
intersegment eliminations. 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, provides investment banking services,
operates a repurchase lending operation, primarily with
affiliates, involving short-term extensions of credit secured by
highly liquid and marketable securities, and provides investment
management services to a locally based investment company. For
the quarters ended March 31, 2004 and 2003, Doral Securities had
net income of approximately $1.4 million and $839,000, respectively. Refer to
note f of the accompanying Consolidated Financial Statements
for additional information regarding the composition of
intersegment eliminations. Doral Financial conducts its insurance agency activities in
Puerto Rico through Doral Agency. For the quarters ended March
31, 2004 and 2003, Doral Agencys net income was approximately
$2.6 million and $1.3 million, respectively. 24
    Table of Contents  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 is organized as an operating
division within the parent company. As of March 31, 2004, Doral
Financial had assets of $2.9 billion at the parent company level
(excluding investment in consolidated subsidiaries). While Doral Financial continues to diversify its sources of
revenues, net gains from mortgage loan sales and fees at both its
mortgage banking and banking units continue to be its principal
source of revenues. For the quarter ended March 31, 2004, the
Companys net gain on mortgage loan sales and fees was $136.9
million compared to $77.3 million for the first quarter of 2003,
an increase of approximately 77%. Net gain on mortgage loan
sales and fees constituted approximately 57% of Doral Financials
total revenues and was driven by strong demand for mortgages from
federal government-sponsored secondary mortgage entities and
local financial institutions looking to increase their investment
in residential mortgage loans. The increase in mortgage loan
sales and fees also reflects the positive impact of the retained
IOs in connection with the sale of non-conforming loan pools to
local financial institutions. During the first quarter of 2004,
the Company retained $113.6 million of IOs in connection with
loan sales compared to $51.9 million for the first quarter of
2003. Net interest income is Doral Financials second most
significant source of revenues. Net interest income is the
excess of interest earned by the Company on its interest-earning
assets over the interest incurred on its interest-bearing
liabilities. Net interest income increased by 43% during the
first quarter of 2004 compared to the same period for 2003. The
increase was driven by an increase in the amount of the Companys
average interest-earning assets, which increased by 22% compared
to the first quarter of 2003. Doral Financial also earns revenues from the sale of
securities in which it invests. For the first quarter of 2004,
the net gain on sale of securities classified as available for
sale increased from $7.1 million for the first quarter of 2003 to
$16.2 million. Doral Financials trading activities, which
include realized and unrealized gains or losses on its securities
held for trading and options, futures contracts and other
derivatives used for interest rate management purposes, decreased
to a loss of $48.6 million for the first quarter of 2004 compared
to a gain of $4.9 million for the first quarter of 2003. Doral
Financials interest rate management was directed principally to
protect the Company from large sudden increases in interest
rates. The loss on trading activities was offset by gains on
sale of investment securities, higher gains on mortgage loan
sales and fees, and other sources of revenues. The hedging loss
was also offset by a $40.8 million reduction in accumulated
comprehensive loss included in stockholders equity. Net servicing income for the first quarter of 2004 was
approximately $1.7 million compared to a loss of $4.1 million for
the first quarter of 2003. The increase in net servicing income
for the quarter ended March 31, 2004 was due to reduced
impairment charges. The Company recorded net impairment charges
of $1.4 million during the quarter ended March 31, 2004, compared
to $4.9 million for the same period a year ago. Doral Financials strong capital base will also allow it to
continue to increase its interest-earning assets during 2004 and
continue to grow its net interest income. Doral Financial has
taken steps to lock in a portion of its borrowing costs at
current low levels to help ensure a profitable interest rate
spread. In fact, as of March 31, 2004, Doral Financials
internal rate models reflect that an increase in rates of up to
200 basis points would have a positive impact on its net interest
income. Doral Financial also has adequate sources of liquidity to
fund its operations. Doral Financials historical results of
operations and investment grade ratings allow it to access
capital markets and diversify its sources of borrowings. Doral
Financials banking subsidiaries also have the ability to raise
funds quickly and efficiently through retail deposits, brokered
deposits and advances from the Federal Home Loan Bank of New
York. Doral Financials strong capital position and liquidity
also gave it the flexibility to invest substantial amounts in
derivative instruments in order to protect the Companys revenues
and assets from sudden large, unanticipated increases in interest
rates. 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 25
    Table of Contents  March 31,
2004. 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, 2003. RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 2004 AND
2003 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 interest rates and the strength of the Puerto Rico
housing market. Changes in interest rates also significantly
influence Doral Financials results of operations by affecting
the difference between the rates it earns on its interest-earning
assets and the rates it pays on its interest-bearing liabilities,
as well as impacting the gains and losses it obtains from its
mortgage loan sales and trading activities. The components of Doral Financials revenues are: (1) net
interest income; (2) net gain on mortgage loan sales and fees;
(3) servicing income; (4) trading activities; (5) gain on sale of
investment securities; and (6) commissions, fees and other
income. NET INCOME Doral Financials net income for the quarter ended March 31,
2004 was $103.6 million, an increase of $33.6 million, or 48%,
from $70.0 million for the comparable 2003 period. Consolidated
results include the operations of Doral Bank PR and Doral Bank
NY, Doral Financials commercial banking units, which contributed
$60.4 million ($64.2 million after intersegment eliminations) to
Doral Financials consolidated net income for the quarter ended
March 31, 2004, compared to $33.6 million ($34.8 million after
intersegment eliminations) for the respective 2003 period.
Refer to note f of the accompanying Consolidated Financial
Statements for additional information regarding the composition
of intersegment eliminations. The contribution of the banking
sector includes the investment activities of Doral International,
Doral Bank PRs wholly-owned international banking subsidiary. Interest income
and capital gains derived from U.S securities are generally
tax-exempt to Doral International under Puerto Rico law. Doral
Securities, Doral Financials institutional securities unit,
contributed $1.4 million to consolidated net income for the
quarter ended March 31, 2004, compared to approximately $839,000
for the respective 2003 period (refer to note f of the
accompanying Consolidated Financial Statements for additional
information regarding the composition of intersegment
eliminations). Doral Agency, Doral Financials insurance agency,
contributed $2.6 million to consolidated net income for the
quarter ended March 31, 2004 compared to $1.3 million for the
respective 2003 period. Diluted earnings per common share for
the first quarter of 2004 were $0.86, an increase of 43% over the
$0.60 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 first quarter of 2004 and 2003
was $59.1 million and $41.3 million, respectively, an increase of
43%. The increase in net interest income for the first quarter
of 2004, compared to the respective 2003 period, was due to an
increase in Doral Financials average balance of net
interest-earning assets, particularly in its investment
securities and IOs, as well as an increase in the Companys net
interest spread and margin for the period. Average
interest-earning assets grew by 22% from the first quarter of
2003 to the first quarter of 2004. Doral Financials net
interest spread and margin for the first quarter of 2004 were
2.01% and 2.43%, compared to 1.79% and 2.10% for the first
quarter of 2003. The increase in net interest rate spread and margin during
the first quarter of 2004 was due primarily to the widening of
the yield curve or the tendency of short-term rates paid by Doral
Financial on its borrowings to decline more in relative terms
than the rates earned by Doral Financial on its loans and
securities. The average rate paid by Doral Financial on its
interest-bearing liabilities decreased by 60 basis points during
the first quarter of 2004 while the average yield earned on its
interest-earning assets decreased by only 38 basis points during
the first quarter of 2004 compared to the same period of 2003. 26
    Table of Contents  The Companys
commercial banking subsidiaries contributed
$33.3 million ($38.1 million after intersegment eliminations) to
the consolidated net interest income for the first quarter of
2004, compared to $26.9 million ($28.8 million after intersegment
eliminations) for the first quarter of 2003. Refer to note f of
the accompanying Consolidated Financial Statements for additional
information regarding the composition of intersegment
eliminations. The following table presents, for the periods indicated,
Doral Financials average balance sheet, the total dollar amount
of interest income from its average interest-earning assets and
the related yields, as well as the interest expense on its
average interest-bearing liabilities expressed in both dollars
and rates, and the net interest margin and spread. The table
does not reflect any effect of income taxes. Average balances
are based on the average daily balances. 27
    Table of Contents  TABLE A
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS) QUARTER ENDED MARCH 31,2004
    
    2003AVERAGE
    
    
    
    
    
    AVERAGE
    
    AVERAGE
    
    
    
    
    
    AVERAGEBALANCE
    
    INTEREST
    
    YIELD/RATE
    
    BALANCE
    
    INTEREST
    
    YIELD/RATEASSETS:Interest-earning assets:Total
loans(1)(2)
    
    $
    3,373,523
    
    
    $
    60,136
    
    
    
    7.15
    %
    
    $
    3,278,767
    
    
    $
    55,040
    
    
    
    6.81
    %Mortgage-backed securities
    
    
    1,407,854
    
    
    
    17,470
    
    
    
    4.98
    %
    
    
    1,215,931
    
    
    
    17,525
    
    
    
    5.85
    %Interest-only strips
    
    
    612,434
    
    
    
    12,384
    
    
    
    8.11
    %
    
    
    380,438
    
    
    
    10,856
    
    
    
    11.57
    %Investment securities
    
    
    2,940,922
    
    
    
    32,592
    
    
    
    4.45
    %
    
    
    1,633,342
    
    
    
    22,060
    
    
    
    5.48
    %Money market investments
    
    
    1,411,467
    
    
    
    3,517
    
    
    
    1.00
    %
    
    
    1,468,878
    
    
    
    4,129
    
    
    
    1.14
    %Total interest-earning assets/interest income
    
    
    9,746,200
    
    
    $
    126,099
    
    
    
    5.19
    %
    
    
    7,977,356
    
    
    $
    109,610
    
    
    
    5.57
    %Total non-interest-earning assets
    
    
    808,203
    
    
    
    
    
    
    
    
    
    
    
    665,310Total assets
    
    $
    10,554,403
    
    
    
    
    
    
    
    
    
    
    $
    8,642,666LIABILITIES AND STOCKHOLDERS EQUITY:Interest-bearing liabilities:Deposits
    
    $
    3,109,118
    
    
    $
    18,982
    
    
    
    2.45
    %
    
    $
    2,356,384
    
    
    $
    18,066
    
    
    
    3.11
    %Repurchase agreements
    
    
    3,303,767
    
    
    
    22,672
    
    
    
    2.75
    %
    
    
    2,869,475
    
    
    
    23,937
    
    
    
    3.38
    %Advances from FHLB
    
    
    1,202,148
    
    
    
    11,786
    
    
    
    3.93
    %
    
    
    1,269,167
    
    
    
    12,374
    
    
    
    3.95
    %Loans payable
    
    
    230,797
    
    
    
    1,405
    
    
    
    2.44
    %
    
    
    218,891
    
    
    
    1,451
    
    
    
    2.69
    %Notes payable
    
    
    601,579
    
    
    
    12,201
    
    
    
    8.13
    %
    
    
    620,348
    
    
    
    12,505
    
    
    
    8.18
    %Total interest-bearing liabilities/interest expense
    
    
    8,447,409
    
    
    $
    67,046
    
    
    
    3.18
    %
    
    
    7,334,265
    
    
    $
    68,333
    
    
    
    3.78
    %Total non-interest-bearing liabilities
    
    
    462,439
    
    
    
    
    
    
    
    
    
    
    
    242,526Total liabilities
    
    
    8,909,848
    
    
    
    
    
    
    
    
    
    
    
    7,576,791Stockholders equity
    
    
    1,644,555
    
    
    
    
    
    
    
    
    
    
    
    1,065,875Total liabilities and stockholders equity
    
    $
    10,554,403
    
    
    
    
    

    
    
    
    
    
    $
    8,642,666Net interest-earning assets
    
    $
    1,298,791
    
    
    
    
    
    
    
    
    
    
    $
    643,091Net interest income on a non-taxable equivalent basis
    
    
    
    
    
    $
    59,053
    
    
    
    
    
    
    
    
    
    
    $
    41,277Interest
rate spread(3)
    
    
    
    
    
    
    
    
    
    
    2.01
    %
    
    
    
    
    
    
    
    
    
    
    1.79
    %Interest
rate margin(4)
    
    
    
    
    
    
    
    
    
    
    2.43
    %
    
    
    
    
    
    
    
    
    
    
    2.10
    %Net interest-earning assets ratio
    
    
    
    
    
    
    
    
    
    
    115.38
    %
    
    
    
    
    
    
    
    
    
    
    108.77
    %
  (1)
    
    Average loan balances include the average balance of non-accruing loans, on which interest income is recognized when collected.  (2)
    
    For the first quarter of 2004 interest income on loans includes a yield adjustment of $4.7 million related to deferred fees on a construction loan repaid prior to maturity.  (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. 28
    Table of Contents  The following table describes 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 B
NET INTEREST INCOME VARIANCE ANALYSIS
(IN THOUSANDS) QUARTER ENDEDMARCH 31,2004 COMPARED TO 2003INCREASE (DECREASE) DUE TO:VOLUME
    
    RATE
    
    TOTALINTEREST INCOME VARIANCETotal loans
    
    $
    1,613
    
    
    $
    3,483
    
    
    $
    5,096Mortgage-backed securities
    
    
    2,807
    
    
    
    (2,862
    )
    
    
    (55
    )Interest-only strips
    
    
    6,710
    
    
    
    (5,182
    )
    
    
    1,528Investment securities
    
    
    17,914
    
    
    
    (7,382
    )
    
    
    10,532Money market investments
    
    
    (164
    )
    
    
    (448
    )
    
    
    (612
    )TOTAL INTEREST INCOME VARIANCE
    
    
    28,880
    
    
    
    (12,391
    )
    
    
    16,489INTEREST EXPENSE VARIANCEDeposits
    
    
    5,853
    
    
    
    (4,937
    )
    
    
    916Repurchase agreements
    
    
    3,670
    
    
    
    (4,935
    )
    
    
    (1,265
    )Advances from FHLB
    
    
    (662
    )
    
    
    74
    
    
    
    (588
    )Loans payable
    
    
    80
    
    
    
    (126
    )
    
    
    (46
    )Notes payable
    
    
    (384
    )
    
    
    80
    
    
    
    (304
    )TOTAL INTEREST EXPENSE
VARIANCE
    
    
    8,557
    
    
    
    (9,844
    )
    
    
    (1,287
    )NET INTEREST INCOME VARIANCE
    
    $
    20,323
    
    
    $
    (2,547
    )
    
    $
    17,776
 INTEREST INCOME Total interest income increased from $109.6 million during
the first quarter of 2003, to $126.1 million during the first
quarter of 2004, an increase of 15%. The increase in interest
income is primarily related to the increase in Doral Financials
total average balance of interest-earning assets, which
increased from $8.0 billion at March 31, 2003 to $9.7 billion at
March 31, 2004. Interest income on loans increased by approximately $5.1
million or 9% during the first quarter of 2004, compared to the
respective 2003 period. The increase during 2004 reflect an
increase in the level of loans held by Doral Financial compared
to 2003, due to the increased volume of loan originations and
purchases. Also, during the first quarter of 2004, the Company
recognized a yield adjustment of $4.7 million related to
deferred fees on a construction loan with an outstanding balance
of $57.4 million that was repaid prior to maturity. Interest income on mortgage-backed securities for the first
quarter of 2004 decreased by approximately $55,000 compared to
the respective 2003 period. The decrease in interest income on
mortgage-backed securities for the first quarter of 2004 reflects increased amortization of
premiums on mortgage-backed securities, particularly U.S. GNMAs,
due to higher prepayments compared to the same period of 2003,
offset in part, by an increase in the average balance of
mortgage-backed securities, which increased from $1.2 billion
for the first quarter of 2003 to $1.4 billion for the comparable
2004 period. The increase in the average balance of
mortgage-backed securities reflects the Companys strategy to 29
    Table of Contents  continue to maximize tax-exempt interest income by holding a
significant amount of tax-exempt Puerto Rico GNMA securities
and, in the case of its international banking entities, 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 increased by approximately $1.5
million to $12.4 million during the first quarter of 2004, from
$10.9 million for the respective 2003 period. The increase
during the first quarter of 2004 when compared to the respective
2003 period resulted from an increase in the average balance of
IOs, which increased from $380.4 million during the first
quarter of 2003 to $612.4 million during the first quarter of
2004. The increase in IOs resulted from a higher volume of sale
and securitization activities. The total cash flow received on
the Companys portfolio of IOs, particularly its floating rate
IOs, increased to $35.4 million for the first quarter of 2004,
compared to $25.5 million for the first quarter of 2003. 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, lower interest rates adversely impact the
value of the IOs by causing accelerated prepayments that shorten
the life of the asset. See Amortization and Impairment of
Servicing Assets and Valuation of IOs. Interest income on investment securities increased by $10.5
million from the first quarter of 2003 to the first quarter of
2004. The increase in interest income on investment securities
during the first quarter of 2004 reflects Doral Financials
strategy to increase its tax-exempt interest income by investing
in U.S. Treasury and agency securities, the interest on which is
tax-exempt to the Company under Puerto Rico law and is not
subject to U.S. income taxation because of Doral Financials
status as a foreign corporation for U.S. income tax purposes.
The average balance of investment securities increased from $1.6
billion for the first quarter of 2003 to $2.9 billion for the
first quarter of 2004. The Companys higher balances in
investment securities was partially offset by a reduction in the
average yield of 103 basis points for the first quarter of 2004
compared to the corresponding 2003 period. This reduction
reflects that higher-yielding securities were sold, called or
matured during the period and replaced with lower-yielding
securities. Interest income on money market investments decreased by
approximately $612,000 from the first quarter of 2003 to the
first quarter of 2004. 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 first
quarter of 2004 periods reflects lower short-term interest rates
in spite of a significant amount of money market instruments
held by Doral Financial in anticipation of rising interest
rates. The average yield on money market investments declined
by 14 basis points from 1.14% for the first quarter of 2003 to
1.00% for the first quarter of 2004. INTEREST EXPENSE Total interest expense decreased to $67.0 million during
the first quarter of 2004, from $68.3 million for the respective
2003 period, a decrease of 2%. The decrease in interest expense
for the 2004 period was due to a decrease in the average cost of
borrowings due to the low interest rate environment that was
partly offset by an increased volume of borrowings to finance
Doral Financials loan production and investment activities. The
average balance of interest-bearing liabilities increased to
$8.4 billion at an average cost of 3.18% for the quarter ended
March 31, 2004, compared to $7.3 billion at an average cost of
3.78% for the quarter ended March 31, 2003. Interest expense on deposits amounted to $19.0 million
during the first quarter of 2004, an increase of 5% as compared
to the respective 2003 period. The increase in interest
expense on deposits reflects a larger deposit base held at Doral
Financials banking subsidiaries that was partly offset by a
decrease in the average cost of borrowings. The average balance of deposits increased to $3.1
billion for the quarter ended March 31, 2004, from $2.4 billion
for the quarter ended March 31, 2003. The increase in deposits
reflects the expansion of Doral Financials bank branch network,
which increased to 43 branches as of March 31, 2004, compared to
37 branches as of March 31, 2003. The average interest cost on
deposits was 2.45% for the quarter ended March 31, 2004,
compared to 3.11% for the respective 2003 period. Interest expense related to securities sold under
agreements to repurchase decreased by $1.3 million or 5% during
the first quarter of 2004 compared to the same period of 2003.
The decrease in interest expense on securities sold under
agreements to repurchase during the first quarter of 2004
reflects lower borrowing costs, as compared to the respective
2003 period, that more than offset increased borrowings to
finance mortgage-backed securities and other investment
securities. The average balance of borrowings under repurchase
agreements for the first quarter of 2004 was $3.3 billion at an
average cost of 2.75%, compared to $2.9 billion at an average
cost of 3.38% for the first quarter of 2003. Interest expense on advances from the FHLB decreased by
approximately $588,000 for the first quarter of 2004 as compared
to the respective 2003 period. The decrease in interest expense
on advances from the FHLB during the first quarter of 2004
reflects a slight decrease in the average balance of advances
from the FHLB. The average balance of advances from FHLB
decreased to $1.2 billion at an average cost of 3.93% for the
quarter ended March 31, 2004, 30
    Table of Contents  compared to $1.3 billion at an
average cost of 3.95% for the quarter ended March 31, 2003. The
decrease in advances from the FHLB was replaced by increased
deposits. Interest expense related to loans payable amounted to $1.4
million for the first quarter of 2004, compared to $1.5 million
for the comparative 2003 period. The decrease in interest
expense on loans payable was principally due to a decrease in
the average cost of borrowings from 2.69% for the first quarter
of 2003 to 2.44% for the comparable period of 2004. The
decrease in the average cost of borrowings was partly offset by
an increase in the average balance of loans payable outstanding
from $218.9 million to $230.8 million for the quarters ended
March 31, 2003 and 2004, respectively. Interest expense on notes payable was $12.2 million for the
first quarter of 2004, compared to $12.5 million for the same
period a year ago, a decrease of 2%. The decrease in interest
expense on notes payable is due to a decrease of $18.8 million
in the average balance of notes payable from March 31, 2003 to
March 31, 2004 principally related with principal payments made
to reduce the balance of a 7.50% note payable to a local bank
collateralized by mortgage loans. 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 historical
loss experience, current delinquency rates, known and inherent
risk in the loan portfolio, an assessment of individual problem
loans, the estimated value of 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
March 31, 2004, more than 97% of Doral Financials loan
portfolio was secured, and the amounts due on the loans have
historically been substantially recovered through the sale of
the property after foreclosure or negotiated settlements with
borrowers. Doral Financial recognized provisions to its allowance for
loan losses of $1.6 million for the quarter ended March 31,
2004, as compared to $4.8 million for the respective 2003
period. During the early part of 2003, the Company increased
the general provision for certain construction loans to reach a
level management deemed appropriate in the allowance for loan
losses based on the composition of the construction loan
portfolio and existing economic conditions. Also, during the
first quarter of 2003, the Company increased the allowance for
loan losses to provide a reserve for a construction loan with an
outstanding balance of $13.3 million that was not yet a
non-performing loan. This loan was classified as a
non-performing loan during the first quarter of 2004 (refer to
Non-Performing Assets and Allowance for Loan Losses  Table
I). The Company was able to maintain an adequate allowance for loan losses, which equals 0.83% of
total loans as of March 31, 2004 compared to 0.70% as of March
31, 2003. NON-INTEREST INCOME Net Gain on Mortgage Loan Sales and Fees.Net gain from
mortgage loan sales and fees increased by 77% during the first
quarter of 2004 to $136.9 million, compared to $77.3 million for
the same period of 2003. The increase for the first quarter of
2004 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
increased margins, especially with the retention of IOs in
connection with bulk sales of mortgage loan pools to
institutional investors. See Amortization and Impairment of
Servicing Assets and Valuation of IOs. Total loan sales and securitizations were $1.4 billion for
the first quarter of 2004, compared to $884.6 million for the
first quarter of 2003. During the first quarter of 2004, loan
sales and securitizations that resulted in the recording of IOs
amounted to $744.4 million
compared to $288.9 million for the first quarter of 2003. Doral
Financial retained IOs as part of its sales activities of $113.6
million for the first quarter of 2004, compared to $51.9 million
for the respective 2003 period. During the first quarter of
2004, Doral Financial also recorded $15.3 million in connection
with the recognition of mortgage servicing rights as part of its
loan sale and securitization activities, compared to $7.2
million for the respective 2003 period. Net 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 March
31, 2004, the weighted average gross servicing fee rate for the
entire portfolio was 0.31%. The size of Doral Financials loan
servicing portfolio has increased substantially since its
inception as a result of increases in loan production and bulk
purchases of servicing rights. Late fees and other
servicing-related fees such as prepayment fees are also included
as a component of servicing income. Late fees and other
servicing-related fees were $2.7 million for the first quarter
of 2004, compared to $2.2 million for the comparative 2003
period. 31
    Table of Contents  For the quarter ended March 31, 2004, net servicing income
was approximately $1.7 million compared to a loss of $4.1
million for the corresponding period of 2003. The increase in
net servicing income for the first quarter of 2003 was the
result of decreased amortization and impairment of mortgage
servicing assets. Doral Financial recognized a net impairment
charge of $1.4 million for the first quarter of 2004, compared
to $4.9 million for the respective 2003 period. The decrease in
the net impairment charge was the result of a stable low level
of mortgage interest rates compared to the sharp decrease in
interest rates experienced during the first quarter of 2003 and a
reduction in the impairment allowance for certain mortgage
servicing rights stratas which experienced lower than
anticipated prepayments. See Note l to the unaudited
consolidated financial statements contained herein for
additional information. Gross servicing fees amounted to $9.5
million for the first quarter of 2004, compared to $8.5 million
for the first quarter of 2003. The Companys mortgage servicing
portfolio, including its own portfolio of $2.5 billion at March
31, 2004 and $2.2 billion at March 31, 2003, was approximately
$13.1 billion at March 31, 2004, compared to $11.8 billion as of
March 31, 2003. 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 March
31, 2004 and 2003, Doral Financial recognized servicing assets
of $15.3 million and $7.2 million, respectively, in connection
with the sale of loans to third parties. Set forth below is a
summary of the components of the net servicing income (loss): TABLE C
NET SERVICING INCOME (LOSS) QUARTER ENDEDMARCH 31,(In thousands)
    
    2004
    
    2003Servicing fees (net of guarantee fees)
    
    $
    6,743
    
    
    $
    6,362Late charges
    
    
    1,832
    
    
    
    1,688Prepayment penalties
    
    
    1,345
    
    
    
    1,060Interest loss
    
    
    (602
    )
    
    
    (644
    )Other servicing fees
    
    
    172
    
    
    
    72Amortization and impairment of servicing
assets
    
    
    (7,801
    )
    
    
    (12,647
    )Total net servicing income (loss)
    
    $
    1,689
    
    
    $
    (4,109
    )
 Trading Activities.Trading activities include gains and
losses, whether realized or unrealized, in the market value of
Doral Financials trading securities, including IOs, as well as
on options, futures contracts and other derivative instruments
used for interest rate risk management purposes. Trading
activities for the quarter ended March 31, 2004 resulted in a
loss of $48.6 million compared to a gain of $4.9 million for the
first quarter of 2003. Loss on trading activities was related
primarily to realized losses with respect to derivative
instruments and unrealized losses on the value of its trading
securities, offset in part by realized gains on the sale of
trading securities. Set forth below is a summary of the
components of gains and losses from trading activities: TABLE D
COMPONENTS OF TRADING ACTIVITIES QUARTER ENDEDMARCH 31,(In thousands)
    
    2004
    
    2003Net realized gains on sales of trading securities
    
    $
    23,380
    
    
    $
    20,011Net unrealized losses on trading securities
    
    
    (13,128
    )
    
    
    (452
    )Net realized and unrealized losses on derivative instruments
    
    
    (58,866
    )
    
    
    (14,658
    )Total
    
    $
    (48,614
    )
    
    $
    4,901
 The value of Doral Financials trading securities and
derivatives is 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 32
    Table of Contents  securities by
entering into transactions involving the purchase of derivatives
such as options and futures contracts. During 2004 and 2003,
Doral Financials risk management strategy has been principally
directed to protect the value of its securities and net interest
income from a rising interest rate scenario. During 2004 and
the early part of 2003, Doral Financial has experienced losses
on its derivatives because interest rates have remained stable
at historic low levels. These losses have been generally offset
by increases in realized gains on trading securities, gains on
sale of investment securities, gains on sale of mortgage loans
and increased net interest income. Net Gain on Sale of Investment Securities.Net gain on
sale of investment securities represents the impact on income of
transactions involving the sale of securities classified as
available for sale. For the first quarter of 2004, sale of
investment securities resulted in a gain of $16.2 million
compared to $7.1 million for the corresponding 2003 period, an
increase mostly related to increased volume of sales and
favorable pricing due to the continued low interest rate
environment. Proceeds from sales of securities available for
sale amounted to $3.8 billion for the first quarter of 2004,
compared to $1.1 billion for the first quarter of 2003. Commissions, Fees and Other Income.Commissions, fees and
other income increased 40% during the first quarter of 2004 from
$6.2 million for the quarter ended March 31, 2003 to $8.7
million for the quarter ended March 31, 2004. The increase
during the first quarter of 2004 was due primarily to increased
commissions and fees earned by Doral Financials retail banking,
institutional securities and insurance agency operations. Set
forth below is a summary of Doral Financials principal sources
of commissions, fees and other income. TABLE E
COMMISSIONS, FEES AND OTHER INCOME
(IN THOUSANDS) QUARTER ENDEDMARCH 31,2004
    
    2003Retail banking fees
    
    $
    3,107
    
    
    $
    2,610Securities brokerage and asset
management fees and commissions
    
    
    734
    
    
    
    222Insurance agency commissions
    
    
    2,899
    
    
    
    1,787Other income
    
    
    1,941
    
    
    
    1,596Total
    
    $
    8,681
    
    
    $
    6,215
 Doral Financials fees and commissions have increased
steadily as Doral Financials banking subsidiaries continue to
increase their retail branch network and as Doral Financial
continues to diversify its sources of revenues by generating
additional securities fees and commissions from insurance agency
activities. Doral Financial intends to further increase its fee
income by continuing to aggressively cross-sell new banking and
insurance products to its large retail consumer base.
Currently, Doral Financial is capturing a substantial portion of
the insurance policies obtained by borrowers who obtain
residential mortgage loans through Doral Financials
mortgage-banking entities. NON-INTEREST EXPENSES Total non-interest expenses increased by 3% during the
first quarter ended March 31, 2004, compared to the respective
2003 period. This increase reflects increases in professional
fees, depreciation and amortization, occupancy and other
expenses resulting from the continued expansion of Doral
Financials mortgage banking and banking operations and expenses
related to increased loan originations and servicing. For the
quarter ended March 31, 2004, other expenses, increased by 34%,
compared to the first quarter of 2003 due mainly to increases in
mortgage loan origination-related expenses, employee-related
expenses, custodial fees and other expenses. Professional fees
for the first quarter of 2004 were $2.4 million, compared to
$2.0 million for the same period a year ago. The increase for
the first quarter of 2004 was primarily due to legal, accounting
and consulting fees associated with the continued expansion of
Doral Financials business and compliance with the requirements
of the Sarbanes-Oxley Act of 2002. Depreciation and
amortization expense was $4.3 million in the first quarter of
2004, compared to $3.6 million for the comparative 2003 period.
The increase in depreciation was principally related to
increases in leasehold improvements and the purchase of office
furniture and equipment as well as software and hardware related
to the Companys growth and computer systems upgrade. For the
first quarter of 2004, compensation expense includes $2.4
million, associated with the expensing of the fair value of
stock options, compared to $1.1 million for the first quarter of
2003. The increase in the stock based compensation expenses was
related to 1,560,000 stock options granted to certain executive
officers during the first quarter of 2004. 33
    Table of Contents  INCOME TAXES Income taxes include Puerto Rico income taxes as well as
applicable federal and state taxes. As Puerto Rico corporations,
Doral Financial and all its Puerto Rico subsidiaries are
generally required to pay federal income tax only with respect
to their income derived from the active conduct of a trade or
business in the United States (excluding Puerto Rico) and
certain investment income derived from U.S. assets. Any such tax
is creditable, with certain limitations, against Puerto Rico
income taxes. The maximum statutory corporate income tax rate in
Puerto Rico is 39%. For the first quarter of 2004 and 2003, the
effective income tax rate of Doral Financial was 18% and 16%,
respectively. The increase in the effective tax rate for 2004
reflected increased pre-tax income from the Companys non-tax
advantaged operations including loan sales, 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 and U.S. mortgage loans, the interest income and gain
on sale, if any, 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 $18.7 million and $15.4 million for the quarters
ended March 31, 2004 and 2003, respectively. Except for the operations of Doral Bank NY and Doral Money,
substantially all of the Companys operations are conducted
through subsidiaries in Puerto Rico. Doral Bank-NY and Doral
Money are U.S. corporations and are subject to U.S. income-tax
on their income derived from all sources. For the first quarter
ended March 31, 2004 and 2003, the provision for income taxes
for the Companys U.S. subsidiaries amounted to approximately
$170,000 and $2.1 million, respectively. Recently, the Legislature of Puerto Rico approved a law
designed to encourage international banking entities to operate
as separate legal entities rather than operating divisions.
This law imposes income taxes at normal statutory rates on each
international banking entity that operates as a unit or division
of a bank, to the extent the international banking entities net
income exceeds 40% of the banks net taxable income in the
taxable year commenced on July 1, 2003, 30% of the banks net
taxable income in the taxable year commencing in July 1, 2004
and 20% of the banks net taxable income in the taxable year
commencing on July 1, 2005 and thereafter. It does not impose
income taxation on an international banking entity that operates
as a subsidiary of a bank. Prior to March 31, 2004, Doral Financial operated two
international banking entities: (1) Doral Overseas, a division
at the parent company level and (2)Doral International, a
wholly-owned subsidiary of Doral Bank PR. As of March 31, 2004,
substantially all of the operations previously conducted at Doral
Overseas are being conducted by Doral International. As a
result, Doral Financial will continue enjoying 100% tax-exempted
income from its international banking operations. Doral
Financial cannot give any assurance, however, that the law will
not be modified in the future to reduce the tax benefits
currently available to international banking subsidiaries such
as Doral International. 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 loan 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 LIBOR. MSRs are classified as
servicing assets and IOs are classified as trading securities in
Doral Financials Consolidated Statements of Financial
Condition. 34
    Table of Contents  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 quarters of 2004 and 2003, the market prices
used to recognize 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. The unamortized
balance of Doral Financials servicing asset reflected in Doral Financials Consolidated Financial
Statements as of March 31, 2004 and December 31, 2003 was $176.4
million and $167.5 million, respectively. For additional
information regarding the unamortized balance of Doral
Financials servicing assets and amortization for the quarters
ended March 31, 2004 and 2003, please refer to Note l 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 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 4.95 to 5.50 during the
first quarter of 2004, compared to a range of 4.75 to 5.50
during the first quarter of 2003. As of March 31, 2004 and
December 31, 2003, the carrying value of IOs reflected in Doral
Financials Consolidated Financial Statements was $678.1 million
(related to $5.2 billion of mortgage loan pools sold to
investors) and $578.1 million (related to $4.8 billion of
mortgage loan pools sold to investors), respectively. The
initial recorded value of IOs is amortized over the expected
life of the asset. The amortization is based on the amount and
timing of estimated future cash flows to be received with
respect to IOs. For additional information regarding the
carrying value of Doral Financials IOs and amortization for the
quarters ended March 31, 2004 and 2003, please refer to Note l
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 the carrying value. If the MSRs are impaired, the
impairment is recognized in current period earnings. 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. Other than temporary impairment is recognized
as a direct write-down of the servicing assets. As of March 31,
2004, the impairment allowance for MSRs was $7.9 million. In
the case of MSRs, Doral Financial stratifies the mortgage loans
underlying a mortgage loan pool or mortgage-backed security on
the basis of their predominant risk characteristics, which Doral
Financial has determined to be type of loan
(government-guaranteed, conventional, conforming and
non-conforming) and interest rates. Doral Financial measures
MSRs 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 its 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. 35
    Table of Contents  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. Purchases of mortgage loans from third
parties were $624.0 million and $442.0 million for the quarters
ended March 31, 2004 and 2003,respectively. The following table
sets forth the number and dollar amount of Doral Financials loan
production for the periods indicated: TABLE F
LOAN PRODUCTION
(Dollars in Thousands,
Except for Average Initial Loan Balance) QUARTER ENDEDMARCH 31,`2004
    
    2003FHA/VA mortgage loansNumber of loans
    
    
    1,184
    
    
    
    852Volume of loans
    
    $
    105,604
    
    
    $
    78,185Percent of total volume
    
    
    6
    %
    
    
    5
    %Average initial loan balance
    
    $
    89,193
    
    
    $
    91,766Conventional conforming mortgage loansNumber of loans
    
    
    5,199
    
    
    
    3,886Volume of loans
    
    $
    824,704
    
    
    $
    578,280Percent of total volume
    
    
    45
    %
    
    
    40
    %Average initial loan balance
    
    $
    158,627
    
    
    $
    148,811Conventional non  conforming mortgage loans(1)(2)Number of loans
    
    
    6,932
    
    
    
    5,768Volume of loans
    
    $
    606,853
    
    
    $
    562,359Percent of total volume
    
    
    33
    %
    
    
    38
    %Average initial loan balance
    
    $
    87,544
    
    
    $
    97,496Other(3)Number of loans
    
    
    862
    
    
    
    565Volume of loans
    
    $
    304,260
    
    
    $
    241,732Percent of total volume
    
    
    16
    %
    
    
    17
    %Total loansNumber of loans
    
    
    14,177
    
    
    
    11,071Volume of loans
    
    $
    1,841,421
    
    
    $
    1,460,556
   (1)
    
    Includes $39.3 million and $13.6 million in
second mortgages for the quarters ended March 31, 2004
and 2003, respectively.(2)
    
    Includes $10.1 million and $24.0 million in
home equity or personal loans secured by real estate
mortgages of up to $40,000 for the quarters ended March
31, 2004 and 2003, 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. 36
    Table of Contents  A substantial portion of Doral Financials total residential
mortgage loan originations has consistently been composed of
refinance loans. For the quarters ended March 31, 2004 and 2003,
refinance loans represented approximately 61% and 64%,
respectively, of the total dollar volume of internally originated
mortgage loans. 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 in Puerto Rico is less
sensitive to interest rate changes than in the mainland United
States because a significant amount of refinance loans in the
Puerto Rico mortgage market 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 rates on consumer debt. 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 G
LOAN ORIGINATION SOURCES QUARTER ENDED MARCH 31,2004
    
    2003Puerto Rico
    
    US
    
    Total
    
    Puerto Rico
    
    US
    
    TotalRetail
    
    
    51
    %
    
    
    
    
    
    
    51
    %
    
    
    54
    %
    
    
    
    
    
    
    54
    %Wholesale(1)
    
    
    8
    %
    
    
    26
    %
    
    
    34
    %
    
    
    5
    %
    
    
    25
    %
    
    
    30
    %New Housing Developments
    
    
    9
    %
    
    
    1
    %
    
    
    10
    %
    
    
    11
    %
    
    
    
    
    
    
    11
    %Multi-family
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    %
    
    
    2
    %Other(2)
    
    
    4
    %
    
    
    1
    %
    
    
    5
    %
    
    
    2
    %
    
    
    1
    %
    
    
    3
    %
   (1)
    
    Refers to purchases of mortgage loans from other
financial institutions and mortgage lenders. U.S. wholesale
purchase normally do not include the related servicing
right.(2)
    
    Refers to commercial, consumer and land loans
originated through the 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 first quarters of 2004 and 2003, Doral Financial
purchased servicing rights to approximately $79.4 million and
$316.8 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. 37
    Table of Contents  The following table sets forth certain information regarding
the total mortgage loan-servicing portfolio of Doral Financial
for the periods indicated:  TABLE HMORTGAGE LOAN SERVICING(Dollars in Thousands, Except for Average Size of Loans Prepaid) AS OF MARCH 31,2004
    
    2003COMPOSITION OF SERVICING PORTFOLIO AT PERIOD END:GNMA
    
    $
    2,665,266
    
    
    $
    3,015,013FHLMC/FNMA
    
    
    3,599,908
    
    
    
    3,041,977Doral Financial grantor trusts
    
    
    34,156
    
    
    
    46,721Other conventional mortgage loans(1)(2)
    
    
    6,796,729
    
    
    
    5,654,971Total servicing portfolio
    
    $
    13,096,059
    
    
    $
    11,758,682SELECTED DATA REGARDING MORTGAGE LOANS SERVICED:Number of loans
    
    
    153,440
    
    
    
    144,901Weighted- average interest rate
    
    
    6.94
    %
    
    
    7.32
    %Weighted- average remaining maturity (months)
    
    
    258
    
    
    
    255Weighted- average gross servicing fee rate
    
    
    .3126
    %
    
    
    .3238
    %Average servicing portfolio
    
    $
    12,959,343
    
    
    $
    11,522,190Principal prepayments
    
    $
    561,688
    
    
    $
    509,497Prepayments to average portfolio (annualized)
    
    
    17
    %
    
    
    18
    %Average size of loans prepaid
    
    $
    85,885
    
    
    $
    87,347Servicing assets, net reflected on Consolidated Statement
of Financial Condition
    
    $
    176,401
    
    
    $
    160,270DELINQUENT MORTGAGE LOANS AND PENDING
FORECLOSURES AT PERIOD END:60-89 days past due
    
    
    1.08
    %
    
    
    1.17
    %90 days or more past due
    
    
    1.85
    %
    
    
    1.92
    %Total delinquencies excluding foreclosures
    
    
    2.93
    %
    
    
    3.09
    %Foreclosures pending
    
    
    1.70
    %
    
    
    1.76
    %SERVICING PORTFOLIO ACTIVITY:Beginning servicing portfolio
    
    $
    12,690,244
    
    
    $
    11,241,523Add:Loans funded and purchased(3)
    
    
    1,032,837
    
    
    
    825,351Bulk servicing acquired
    
    
    79,391
    
    
    
    316,839Less:Servicing sales transferred
    
    
    982
    
    
    
    2,450Run-off(4)
    
    
    705,431
    
    
    
    622,581Ending servicing portfolio
    
    $
    13,096,059
    
    
    $
    11,758,682
  (1)
    
    Includes $2.5 billion and $2.2 billion of
loans owned by Doral Financial at March 31, 2004 and
2003, respectively, which represented 19% of the total
servicing portfolio as of such dates and for which no
servicing rights has been recognized.  (2)
    
    Includes portfolios of $255.8 million
and $198.6 million at March 31, 2004 and 2003,
respectively, of insured FHA/VA delinquent loans sold
to third parties.  (3)
    
    Excludes approximately $808.6 million and
$635.2 million of conventional, commercial, consumer,
construction and other loans not included in Doral
Financials mortgage servicing-portfolio as of March
31, 2004 and 2003, respectively.  (4)
    
    Run-off refers to regular amortization of
loans, prepayments and foreclosures. Substantially all of the mortgage loans in Doral Financials
servicing portfolio are secured by single (one-to-four) family
residences secured by real estate located in Puerto Rico. At
March 31, 2004 and 2003, approximately 2% and 3%, respectively,
of Doral Financials mortgage-servicing portfolio was related to
mortgages secured by real property located on the U.S. mainland. 38
    Table of Contents  The amount of principal prepayments on mortgage loans serviced by Doral
Financial was $561.7 million and $509.5 million for the quarters ended March
31, 2004 and 2003, respectively. This represents approximately 17% and 18%,
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 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 in
addition to the mortgage collateral. 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. See Off-Balance
Sheet Activities for more information regarding recourse obligation. 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. 39
    Table of Contents  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 March 31, 2004 and 2003, Doral Financial would have recognized
$8.2 million and $6.5 million, respectively, in additional interest income had
all delinquent loans been accounted for on an accrual basis. Doral Financial
evaluates loans for impairment. Impaired loans as of March 31, 2004 and
December 31, 2003 amounted to approximately $22.6 million and $23.7 million,
respectively. At March 31, 2004 and December 31, 2003 an impairment allowance
of $2.8 million and $2.4 million, respectively, was allocated to such impaired
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. 40
    Table of Contents  TABLE I
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS) AS OF
    
    AS OFMARCH 31, 2004
    
    DECEMBER 31, 2003Mortgage banking business:Non-accrual loans:Construction loans
    
    $
    2,856
    
    
    $
    2,901Residential mortgage loans
    
    
    21,043
    
    
    
    20,818Loans
held-for-sale past due 90 days and still
accruing(1)(2)
    
    
    64,954
    
    
    
    62,270OREO
    
    
    16,872
    
    
    
    18,176Total NPAs of mortgage banking business
    
    
    105,725
    
    
    
    104,165Other lending activities through banking subsidiaries:Non-accrual loans:Construction loans
    
    
    16,459
    
    
    
    1,503Residential mortgage loans
    
    
    12,149
    
    
    
    11,664Commercial real estate
    
    
    9,680
    
    
    
    5,166Consumer loans
    
    
    1,456
    
    
    
    1,681Commercial non-real estate loans
    
    
    606
    
    
    
    586Total non-accrual loans
    
    
    40,350
    
    
    
    20,600OREO
    
    
    1,692
    
    
    
    1,077Total NPAs of banking subsidiaries
    
    
    42,042
    
    
    
    21,677Total NPAs of Doral Financial (consolidated)
    
    $
    147,767
    
    
    $
    125,842Total NPAs of banking subsidiaries as a percentage
of their loans portfolio, net, and OREO
    
    
    1.49
    %
    
    
    0.76
    %Total NPAs of Doral Financial as a percentage of
consolidated total assets
    
    
    1.23
    %
    
    
    1.21
    %Total non-performing loans to total loans
    
    
    3.79
    %
    
    
    3.13
    %Ratio of allowance for loan losses to total
non-performing loans at end of period (consolidated)
    
    
    21.98
    %
    
    
    26.47
    %
  (1)
    
    Includes loans held-for-sale past due 90-180 days and loans held for sale
past due over 180 days with a current loan-to-value ratio over 90%.(2)
    
    Does not include approximately $10.5 million and $10.4 million of 90 days
past due FHA/VA loans as of March 31, 2004 and December 31, 2003,
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. 41
    Table of Contents  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 J
ALLOWANCE FOR LOAN LOSSES AND OREO
(DOLLARS IN THOUSANDS) QUARTER ENDEDMARCH 31,2004
    
    2003OREO:Balance at beginning of period
    
    $
    3,375
    
    
    $
    2,772Provision for losses
    
    
    300
    
    
    
    270Net gains (losses), charge-offs and others
    
    
    429
    
    
    
    (616
    )Balance at end of period
    
    $
    4,104
    
    
    $
    2,426Allowance for Loan Losses:Balance at beginning of period
    
    $
    28,211
    
    
    $
    18,243Provision for loan losses
    
    
    1,561
    
    
    
    4,778Charge  offs:Mortgage loans held-for-sale
    
    
    (2
    )
    
    
    (20
    )Construction loans
    
    
    
    
    
    
    Residential mortgage loans
    
    
    (20
    )
    
    
    Commercial real estate loans
    
    
    
    
    
    
    Consumer loans
    
    
    (619
    )
    
    
    (699
    )Commercial non-real estate loans
    
    
    (27
    )
    
    
    (52
    )Other
    
    
    
    
    
    
    Total charge-offs
    
    
    (668
    )
    
    
    (771
    )Recoveries:Mortgage loans held-for-sale
    
    
    4
    
    
    
    Construction loans
    
    
    
    
    
    
    Residential mortgage loans
    
    
    
    
    
    
    Commercial real estate loans
    
    
    
    
    
    
    Consumer loans
    
    
    69
    
    
    
    45Commercial non-real estate loans
    
    
    39
    
    
    
    4Other
    
    
    
    
    
    
    Total recoveries
    
    
    112
    
    
    
    49Net charge-offs
    
    
    (556
    )
    
    
    (722
    )Other adjustments
    
    
    (812
    )
    
    
    Balance at end of period(1)
    
    $
    28,404
    
    
    $
    22,299Allowance for loan losses as a percentage of
total loans outstanding at the end of period
    
    
    0.83
    %
    
    
    0.70
    %Net charge-offs to average loans outstanding
    
    
    0.02
    %
    
    
    0.02
    %
  (1)
    
    Includes the allowance of mortgage loans held-for-sale of $11.7
million for 2004 and $7.3 million for 2003, and the allowance for loans
receivable held for investment of $16.7 million for 2004 and
$15.0 million for 2003. 42
    Table of Contents  The allowance for loan losses relating to loans held by Doral Financial
was $28.4 million at March 31, 2004, compared to $22.3 million as of March 31,
2003. The increase in the allowance was primarily a result of a larger loan
portfolio as well as an increase in and seasoning of the construction loan
portfolio that carries 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 quarter ended March 31, 2004, the monthly average amount of funds advanced
by Doral Financial under such servicing agreements was approximately $29.8
million, compared to $21.2 million for the same period during 2003. 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 insurance and guarantee programs, the amounts
advanced tend to be greater than normal arrangements because of the delinquent
status of the loans. As of March 31, 2004, the outstanding principal balance of
such FHA/VA loans was $255.8 million and the aggregate monthly amounts of funds
advanced by Doral Financial was $24.5 million. During the first quarter 2003,
the Company sold approximately $54.2 million of residential FHA insured or VA
guaranteed delinquent loans. There was no delinquent loans sales in the first
quarter of 2004. 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, loan sales in the secondary mortgage market, 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. 43
    Table of Contents  The following table shows Doral Financials sources of borrowings and the
related average interest rate as of March 31, 2004 and December 31, 2003: TABLE K
SOURCES OF BORROWINGS
(DOLLARS IN THOUSANDS) AS OF MARCH 31, 2004
    
    AS OF DECEMBER 31, 2003AMOUNT
    
    AVERAGE
    
    AMOUNT
    
    AVERAGEOUTSTANDING
    
    RATE
    
    OUTSTANDING
    
    RATEDeposits
    
    $
    3,203,810
    
    
    
    2.29
    %
    
    $
    2,971,272
    
    
    
    2.38
    %Repurchase Agreements
    
    
    3,475,129
    
    
    
    2.67
    %
    
    
    3,602,942
    
    
    
    2.46
    %Advances from the FHLB
    
    
    1,294,500
    
    
    
    3.80
    %
    
    
    1,206,500
    
    
    
    3.89
    %Loans Payable
    
    
    283,925
    
    
    
    2.16
    %
    
    
    178,334
    
    
    
    2.12
    %Notes Payable
    
    
    599,760
    
    
    
    7.76
    %
    
    
    602,581
    
    
    
    7.76
    %
 Doral Financial had warehousing, gestation and repurchase agreements lines
of credit (including advances from the FHLB-NY) totaling $10.7 billion as of
March 31, 2004, of which $5.0 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 March 31, 2004, 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 market value of securities
previously pledged as collateral decline, Doral Financial will be required to
deposit additional cash or securities to meet its margin requirements, thereby
adversely affecting its liquidity. A considerable amount of Doral Financials liquidity is derived from the
sale of mortgage loans in the secondary mortgage market. The U.S. (including
Puerto Rico) secondary mortgage market is the most liquid in the world in large
part because of the sale or guarantee programs maintained by FHA, VA, HUD, FNMA
and FHLMC. To the extent these programs were curtailed or the standard for
insuring or selling loans under such programs were materially increased or for
any reason Doral Financial failed to qualify for such programs, Doral
Financials ability to sell mortgage loans and consequently its liquidity would
be materially adversely affected. Doral Financial maintains a considerable investment in MSRs and IOs
generated as part of its mortgage sale activities. While the servicing assets
and IOs are recorded at the time of sale of the related mortgage loans, the
cash related to such retained interest is received over the life of the asset
and, therefore, does not generally provide immediate liquidity that is
available to Doral Financial to fund its operations or to pay dividends. Doral Financials banking subsidiaries obtain funding for their lending
activities through the receipt of deposits, FHLB-NY advances and from other
borrowings, such as term notes backed by FHLB-NY letters of credit. As of March
31, 2004, Doral Financials banking subsidiaries held approximately $3.2
billion in deposits at a weighted-average interest rate of 2.29%. 44
    Table of Contents  The following table presents the average balance and the annualized
average rate paid on each deposit type for the periods indicated: TABLE L
AVERAGE DEPOSIT BALANCE
(DOLLARS IN THOUSANDS) QUARTER ENDED
    
    YEAR ENDEDMARCH 31, 2004
    
    DECEMBER 31, 2003AVERAGE
    
    AVERAGE
    
    
    
    
    
    AVERAGEBALANCE
    
    RATE
    
    AVERAGE BALANCE
    
    RATECertificates of deposit
    
    $
    1,842,505
    
    
    
    3.02
    %
    
    $
    1,535,835
    
    
    
    3.12
    %Regular passbook savings
    
    
    364,851
    
    
    
    2.28
    %
    
    
    268,990
    
    
    
    2.51
    %NOW accounts
    
    
    569,520
    
    
    
    2.13
    %
    
    
    497,277
    
    
    
    2.19
    %Non-interest bearing
    
    
    332,242
    
    
    
    
    
    
    
    349,531
    
    
    
    Total deposits
    
    $
    3,109,118
    
    
    
    2.45
    %
    
    $
    2,651,633
    
    
    
    2.83
    %
 The following table sets forth the maturities of certificates of deposit
having principal amounts of $100,000 or more at March 31, 2004.  TABLE MCERTIFICATES OF DEPOSIT MATURITIES(IN THOUSANDS) AMOUNTCertificates of deposit maturitiesThree months or less
    
    $
    205,686Over three through six months
    
    
    79,422Over six through twelve months
    
    
    930,087Over twelve months
    
    
    308,122Total
    
    $
    1,523,317
 As of March 31, 2004 and December 31, 2003, Doral Financials
banking subsidiaries had approximately $1.1 billion and $985.3 million,
respectively, in brokered deposits obtained through broker-dealers. Brokered
deposits are used by Doral Financials banking subsidiaries as a source of
long-term funds. Brokered deposits, however, are generally considered a less
stable source of funding than core deposits obtained through retail bank
branches. Brokered-deposit investors 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 March 31, 2004, 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 March 31, 2004, based on
existing Federal Reserve, FDIC and OTS guidelines. 45
    Table of Contents  TABLE N
REGULATORY CAPITAL RATIOS DORAL
    
    DORAL
    
    DORALFINANCIAL
    
    BANK PR
    
    BANK NYTotal Capital (Total capital to risk- weighted assets)
    
    
    23.0
    %
    
    
    19.5
    %
    
    
    19.8
    %Tier 1 Capital Ratio (Tier 1 capital to risk- weighted assets)
    
    
    22.6
    %
    
    
    18.8
    %
    
    
    19.6
    %Leverage
Ratio(1)
    
    
    15.4
    %
    
    
    7.1
    %
    
    
    9.2
    %
    (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 March 31, 2004, 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. The federal banking and thrift regulatory agencies adopted a rule that
imposes a 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, Doral Financial classifies most of the IOs
retained in connection with the sale of its non-conforming loans as
credit-enhancing interest-only strips under the 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 capital rule for IOs. 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 for risk-based
capital requirements. 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 March 31, 2004, Doral Financials outstanding
balance of loans sold with full or partial recourse was $2.5 billion. Substantially all of Doral Financials recourse obligations and IOs are
recorded at the holding company level and, accordingly, the rule only impacts
the regulatory requirements applicable to Doral Financial as a financial
holding company and has no impact on the banking subsidiaries. While the impact
of this rule is to reduce Doral Financials regulatory capital ratios at the
holding company level, Doral Financial anticipates that it will continue to
comply with all applicable capital requirements. 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 March 31, 2004, Doral Financials total assets were $12.0 billion
compared to $10.4 billion at December 31, 2003. The increase in assets was due
primarily to an increase in cash and money market investments of $1.1 billion,
resulting from a higher volume of liquid assets accumulated by the Company in
anticipation of rising interest rates, and an increase of $315.8 million in
accounts receivable from investment sales. Total liabilities were $10.3
billion at March 31, 2004, compared to $8.8 billion at December 31, 2003. The
increase in liabilities was largely the result of an increase in deposit
accounts and loans payable used to fund Doral Financials increase in assets.
Also,accounts payable from investment purchases increased by $1.2 billion to
for the first quarter of 2004 from December 31, 2003. At March 31, 2004,
deposit accounts totaled $3.2 billion, compared to $3.0 billion at December 31,
2003. As of March 31, 2004, Doral Financials banking subsidiaries had $8.5
billion in assets, compared to $7.2 billion at December 31, 2003. 46
    Table of Contents  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) are often sold to investors on a
partial or full recourse basis pursuant to which Doral Financial retains part
or all of the credit risk associated with such loan after sale. Recourse is
generally limited to a period of time (generally 24 months) or a percentage up
to a 15% of the principal amount of the loans sold. Doral Financials
contingent obligation with respect to such recourse provisions is not reflected
on Doral Financials consolidated financial statements. As of March 31, 2004,
the outstanding principal balance of loans sold subject to full recourse or
partial recourse was $2.5 billion. As of such date the maximum principal
amount in loans that Doral Financial would have been required to repurchase if
all loans subject to recourse defaulted was $2.0 billion. As of March 31,
2004, Doral Financial maintained a reserve of $3.8 million for potential losses
from such recourse agreements, which is included in Accrued expenses and other
liabilities in Doral Financials consolidated financial statements. During
the first quarter of 2004, Doral Financial repurchased approximately $27.0
million of loans subject to recourse. Historically, losses on recourse
obligations have not been significant. As of March 31, 2004, approximately
$123.5 million or 5% 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 in these instruments.
The Company uses the same credit policies in making these commitments as it
does for on-balance sheet instruments. At March 31, 2004, commitments to
extend credit and commercial and financial standby letters of credit amounted
to approximately $443.1 million and $3.0 million, respectively, and commitments
to sell/purchase mortgage-backed securities and loans amounted to approximately
$1.6 billion. Management believes that the Company has the ability to meet
these commitments and that no loss will result from the same. Commitments to
extend credit are agreements to lend to a customer as long as the conditions
established in the contract are met. Commitments generally have fixed
expiration dates or other termination clauses. A letter of credit is an arrangement that represents an obligation on the
part of the Company to a designated third party, contingent upon the failure of
the Companys customer to perform under the terms of the underlying contract
with a third party. The amount in letters of credit represents the maximum
amount of credit risk in the event of non-performance by these customers.
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. Letters of
credit are used by the customer as a credit enhancement and typically expire
without having been drawn upon. 47
    Table of Contents  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 March 31, 2004. TABLE O
CONTRACTUAL OBLIGATIONS (IN THOUSANDS)
    
    PAYMENT DUE BY PERIODLESS THAN
    
    
    
    
    
    
    
    
    
    AFTER 5CONTRACTUAL OBLIGATIONS
    
    TOTAL
    
    1 YEAR
    
    1-3 YEARS
    
    3-5 YEARS
    
    YEARSDeposits
    
    $
    3,203,810
    
    
    $
    2,212,937
    
    
    $
    576,254
    
    
    $
    414,230
    
    
    $
    389Repurchase
and warehousing lines of credit(1)
    
    
    3,759,054
    
    
    
    3,053,629
    
    
    
    260,625
    
    
    
    444,800
    
    
    
    Advances from FHLB(1)
    
    
    1,294,500
    
    
    
    642,500
    
    
    
    535,000
    
    
    
    117,000
    
    
    
    Notes Payable
    
    
    599,760
    
    
    
    212,742
    
    
    
    91,470
    
    
    
    12,751
    
    
    
    282,797Other liabilities and obligations
    
    
    1,443,477
    
    
    
    1,360,968
    
    
    
    27,000
    
    
    
    27,000
    
    
    
    28,509Non-cancellable Operating Leases
    
    
    58,245
    
    
    
    5,861
    
    
    
    10,764
    
    
    
    9,760
    
    
    
    31,860Total Contractual Cash Obligations
    
    $
    10,358,846
    
    
    $
    7,488,637
    
    
    $
    1,501,113
    
    
    $
    1,025,541
    
    
    $
    343,555
  (1)
    
    Includes $1.7 billion of repurchase agreements with an
average rate of 4.36% 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 the FHLB-NY are
included in the less than one year category in the above table but
have actual contractual maturities ranging from April 2004 to
February 2014. They are included on the first call date basis
because increases in interest rates over the average rate of the
Companys callable borrowings may induce the lenders to exercise
their call right. 48
    Table of Contents  TABLE P
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
    
    $
    443,141
    
    
    $
    257,876
    
    
    $
    184,453
    
    
    $
    23
    
    
    $
    789Commitments to
sell/purchase
mortgage-backed
securities and loans
    
    
    1,556,698
    
    
    
    1,556,698
    
    
    
    
    
    
    
    
    
    
    
    Commercial and financial
standby letters
of credit
    
    
    3,017
    
    
    
    3,017
    
    
    
    
    
    
    
    
    
    
    
    Standby repurchase
(recourse)
obligations
    
    
    2,014,637
    
    
    
    323,631
    
    
    
    1,155,576
    
    
    
    
    
    
    
    535,430Total
    
    $
    4,017,493
    
    
    $
    2,141,222
    
    
    $
    1,340,029
    
    
    $
    23
    
    
    $
    536,219
  (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, 2003 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 and certain off-balance sheet
instruments and incorporates market-based assumptions regarding the effect of
changing interest rates on the prepayment rates and optionality of certain assets and
liabilities. 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 each
scenario. Accordingly, the estimates resulting from the use of the model
should not be viewed as an earnings forecast. Actual results will differ from
simulated results due to timing, magnitude, and frequency of interest rate
changes as well as changes in market conditions and management strategies. The Risk Management Committee, which comprises members of senior
management and reports to Doral Financials Board of Directors, monitors
interest rate risk within Board-approved policy limits. Doral Financials
current interest rate risk policy limits are primarily 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 interest rates. The
current policy limits this exposure to a 30% reduction in net interest income
for a 12-month horizon under a 200-basis point increase or decrease in interest
rates. 49
    Table of Contents  The following table shows Doral Financials net interest income
sensitivity profile as of March 31, 2004, and December 31, 2003:  TABLE QINTEREST RATE SENSITIVITYAS OF MARCH 31, 2004 CHANGE IN INTEREST RATES(BASIS POINTS)
    

    PERCENTAGE CHANGE  IN 12-MONTH  NET INTEREST INCOME+200
    
    
    13.4
    %+100
    
    
    6.2
    %-100
    
    
    (10.3
    %)-200
    
    
    (13.6
    %)
 INTEREST RATE SENSITIVITYAS OF DECEMBER 31, 2003PERCENTAGE CHANGE IN 12-MONTHCHANGE IN INTEREST RATES (BASIS POINTS)
    
    NET INTEREST INCOME+200
    
    
    8.5
    %+100
    
    
    5.3
    %-100
    
    
    (7.2
    %)-200
    
    
    (10.6
    %)
 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 6.2% and 13.4% over one year. The model assumes that the
portfolio of loans held for sale and trading 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 reduce net
interest income by 13.6% over one year. 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 a full 100 or 200 basis point decrease in
rates for short-term assets and liabilities, principally due to the current low
level of short-term interest 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 shock in rates, in order to reflect what
has been the historical trend of changes in market 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,
collars, forwards and options. Exchange-traded derivatives include futures and
options. 50
    Table of Contents  The Company has purchased various interest rate collars, intended to
protect the Company against significant increases in interest rates. The
following table summarizes the Companys interest rate collars outstanding at
March 31, 2004. TABLE R
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
    
    
    $
    224$400,000
    
    March 2007
    
    Excess 3-month LIBOR
and 5.5% provided
that 3-month LIBOR is
less than 8.5%
    
    $
    5,760
    
    
    $
    576$600,000
    
    September 2007
    
    Excess 3-month LIBOR
and 5.5% provided
that 3-month LIBOR
is less than 8.5%
    
    $
    5,570
    
    
    $
    1,461$100,000
    
    February 2008
    
    Excess 3-month LIBOR
and 5.5% provided
that 3-month LIBOR
is less than 8.0%
    
    $
    955
    
    
    $
    449$100,000
    
    April 2008
    
    Excess 3-month LIBOR
and 5.0% provided
that 3-month LIBOR
is less than 8.0%
    
    $
    1,000
    
    
    $
    481$200,000
    
    April 2008
    
    Excess 3-month LIBOR
and 8.0% provided
that 3-month LIBOR
is less than 10.0%
    
    $
    353
    
    
    $
    134$300,000
    
    July 2008
    
    Excess 3-month LIBOR
and 5.0% provided
that 3-month LIBOR
is less than 8.0%
    
    $
    2,715
    
    
    $
    1,751
 From time to time, Doral Bank PR enters into interest rate swap agreements
to manage its interest rate exposure. Interest rate swap agreements generally
involve the exchange of fixed and floating rate interest payment obligations
without the exchange of the underlying principal. Non-performance by the
counterparty exposes Doral Bank PR to interest rate risk. At March 31, 2004,
Doral Bank PR had two interest rate swaps agreements outstanding (each with a
notional amount of $100.0 million) that are intended to protect Doral Bank PR
from the repricing of its short-term liabilities during a rising interest rate
environment. These agreements end on September 11, 2007 and September 12,
2007, respectively. The interest rate to be received on these swaps agreements
is 100% of the three-month LIBOR rate. The rate being received by Doral Bank PR
on each of these swap agreements was 1.11%, as of March 31, 2004. The fixed
interest rate payable by Doral Bank PR under these agreements was 3.6875% and
3.655%, respectively, as of March 31, 2004. At March 31, 2004, the agreements
had an aggregate negative fair value of $7.1 million which is recorded as a
liability in Doral Financials Consolidated Financial Statements. Although Doral Financial uses derivatives to manage market risk, for
financial reporting purposes, its general policy is to account for such
instruments on a marked-to-market basis with gains or losses charged to current
operations as they occur. This treatment may 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 futures 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. The
notional amounts of assets and liabilities related to these derivatives totaled
$4.7 billion and $1.3 billion, respectively, as of March 31, 2004. Notional
amounts indicate the volume of derivatives activity, but do not represent Doral
Financials exposure to market or credit risk. 51
    Table of Contents  The table below summarizes the fair values of Doral Financials
derivatives, as well as the source of the fair values. TABLE S
FAIR VALUE RECONCILIATION
(IN THOUSANDS) QUARTER ENDEDMARCH 31, 2004Fair value of contracts outstanding at the beginning of the period
    
    $
    5,573Contracts realized or otherwise settled during the period
    
    
    (53,296
    )Fair value of new contracts entered into during the period
    
    
    49,427Other changes in fair values
    
    
    (4,817
    )Fair value of contracts outstanding at the end of the period
    
    $
    (3,113
    )
 TABLE T
SOURCE OF FAIR VALUE (IN THOUSANDS)
    
    PAYMENT DUE BY PERIODMATURITY
    
    
    
    
    
    
    
    
    
    MATURITYAS OF MARCH 31, 2004
    
    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
    
    $
    (1,452
    )
    
    $
    386
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,066
    )Prices provided by other external sources
    
    
    
    
    
    
    (6,323
    )
    
    
    4,276
    
    
    
    
    
    
    
    (2,047
    )$
    (1,452
    )
    
    $
    (5,937
    )
    
    $
    4,276
    
    
    $
    
    
    
    $
    (3,113
    )
 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 thereby
reducing credit exposure. 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, 2003 for a discussion of the effects
of changes of interest rates on Doral Financials operations. 52
    Table of Contents  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 Doral Financials management, including its Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the design and
operation of Doral Financials disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of
March 31, 2004. Based upon this evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the design and operation of these
disclosure controls and procedures were effective. 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 in 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, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES  (a),(b)
    
    Effective April 28, 2004, Doral Financials Restated Certificate of
Incorporation was amended to increase the number of authorized shares of
common stock from 200,000,000 to 500,000,000 shares and the number of
authorized shares of serial preferred stock from 10,000,000 to
40,000,000 shares. For additional information regarding this matter, refer to the
Doral Financials definitive Proxy Statement, dated March 15, 2004, filed
with the Securities and Exchange Commission. (c),(d) and (e) Not applicable. 
 ITEM 3 - DEFAULTS UPON SENIOR SECURITIES  Not applicable. 
 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Stockholders Meeting of the Company was held on April 21, 2004.
A quorum was obtained with 100,999,856 votes represented in person or by
proxy, which represented approximately 93.6% of all votes eligible to be cast
at the meeting. The eight existing directors of the Company, Salomón Levis,
Zoila Levis, Richard F. Bonini, Edgar M. Cullman, Jr., Efraim Kier, John L.
Ernst, John B. Hughes and Harold D. Vicente were reelected for additional
one-year terms and Peter A. Hoffman was elected as a new director. A proposal
to amend the Companys Restated Certificate of Incorporation to increase the
number of authorized shares of Common Stock from 200,000,000 to 500,000,000
shares was approved as well as a proposal to increase the number of authorized
shares of serial preferred stock from 10,000,000 to 40,000,000 shares. The
adoption of the Companys Omnibus Incentive Plan as well as the appointment of
PricewaterhouseCoopers LLP as the Companys independent accountants for 2004
were also approved. The results of the voting for each of the proposals is set
forth below: 53
    Table of Contents  Election of Directors NOMINEES FOR ONE-YEAR TERM
    
    VOTES FOR
    
    VOTES WITHHELDSalomón Levis
    
    
    98,523,200
    
    
    
    2,476,656Zoila Levis
    
    
    98,697,802
    
    
    
    2,302,054Richard F. Bonini
    
    
    98,659,092
    
    
    
    2,340,764Edgar M. Cullman, Jr.
    
    
    95,987,152
    
    
    
    5,012,704John L. Ernst
    
    
    98,389,407
    
    
    
    2,610,449Peter A. Hoffman
    
    
    99,795,972
    
    
    
    1,203,884John B. Hughes
    
    
    98,530,703
    
    
    
    2,469,153Efraim Kier
    
    
    99,318,315
    
    
    
    1,681,541Harold D. Vicente
    
    
    99,344,716
    
    
    
    1,655,140
 Proposal to Increase Number of Authorized Shares of Common Stock to 500,000,000
shares. For:
    
    
    87,810,582Against:
    
    
    13,119,253Abstain:
    
    
    70,021Broker Non-Votes:
    
    
    0
 Proposal to Increase the Number of Authorized Shares of Serial Preferred Stock
to 40,000,000 shares. For:
    
    
    57,473,424Against:
    
    
    27,425,010Abstain:
    
    
    90,524Broker Non-Votes:
    
    
    16,010,898
 Proposal to Adopt Doral Financial Omnibus Incentive Plan. For:
    
    
    81,924,015Against:
    
    
    2,878,472Abstain:
    
    
    186,471Broker Non-Votes:
    
    
    16,010,898
 Ratification of the Appointment of PricewaterhouseCoopers LLP as the Companys
Independent Accountants for 2004. For:
    
    
    99,747,894Against:
    
    
    1,192,485Abstain:
    
    
    59,477Broker Non-Votes:
    
    
    0
 
 ITEM 5 - OTHER INFORMATION Declaration of Cash
Dividend. On April 21, 2004, the Board of Directors
of Doral Financial voted to declare a cash dividend of $0.15 per common share
payable on June 4, 2004, to shareholders of record on May 13, 2004. The
dividend represents a 25% increase over the Companys prior quarterly dividend. 
 54
    Table of Contents  ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit   3(a) -
Certificate of Amendment to Restated Certificate of Incorporation.Exhibit   3(b)
- By-laws of Doral Financial Corporation, as amended as of
April 21, 2004.Exhibit 10(a) -
Doral Financial Corporation Omnibus Incentive Plan.Exhibit 12(a) - Computation of Ratio of Earnings to Fixed Charges.Exhibit 12(b) - Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.Exhibit 31(1) - CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 31(2) - CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 32(1) - CEO Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.Exhibit 32(2) - CFO Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.
 The Company has not filed as exhibits certain instruments defining the
rights of holders of debt of the Company not exceeding 10% of the total assets
of the Company and its consolidated subsidiaries. The Company will furnish
copies of any such instruments to the Securities and Exchange Commission upon
request. (b) Reports on Form 8-K i.
    
    Current Report on Form 8-K, dated January 5, 2004, (a)
reporting under Items 7 and 9 the issuance of a press release
announcing that it expects to release its earnings for the quarter
and year ended December 31,2003, on or about January 14, 2004 and
(b) filing as an exhibit under Item 7 a copy of the related press
release dated January 5, 2004.ii
    
    Current Report on Form 8-K, dated January 14, 2004,
reporting under Items 7 and 12 (a) the issuance of a press release
announcing the unaudited earnings results for the quarter and year
ended December 31, 2003 and (b) filing as an exhibit under Item 7
a copy of the related press release dated January 14, 2004.iii
    
    Current Report on Form 8-K, dated February 3, 2004, (a)
reporting under Items 7 and 9 the issuance of a press release
stating that the Registration Statement on Form S-3 relating to
the resale of its 4.75% Perpetual Cumulative Convertible Preferred
Stock, and the underlying common stock issuable upon conversion of
the preferred stock, by the selling security holders named therein
had been declared effective by the Securities and Exchange
Commission and (b) filing as an exhibit under Item 7 a copy of the
related press release dated February 3, 2004.iv
    
    Current Report on Form 8-K, dated April 5, 2004, (a)
reporting under Items 7 and 9 the issuance of a press release
stating that contrary to some analysts predictions with respect to
US-based mortgage lenders, the Company did not believe that the
recent increase in economic activity and the perception that
interest rates would increase, would have an adverse impact on the
Companys operations and announcing that the Company plans to
release its first quarter 2004 earnings on April 14, 2004
immediately following the close of regular trading in the New York
Stock Exchange and (b) filing as exhibits under Item 7 a copy of
the related press release dated April 5, 2004.v
    
    Current Report on Form 8-K, dated April 14, 2004,
reporting under Items 7 and 12 (a) the issuance of a press release
announcing the unaudited earnings results for the quarter ended
March 31, 2004 and (b) filing as an exhibit under Items 7 a copy
of the related press release dated April 14, 2004.vi
    
    Current Report on Form 8-K, dated April 21, 2004, reporting under Items 5 and 7
(a) the issuance of a press release announcing an increase in the quarterly dividend on the Companys
common stock, and (b) filing as an exhibit under Item 7 a copy of
the related press release dated April 21, 2004.
 55
    Table of Contents  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: May 7, 2004
    
    /s/ Salomón Levis
Salomón Levis
Chairman of the Board
and Chief Executive OfficerDate: May 7, 2004
    
    /s/ Ricardo Meléndez
Ricardo Meléndez
Executive Vice President and
Chief Financial Officer
    Table of Contents  INDEX TO EXHIBITS ExhibitNumber
    
    
    
    Description3(a)
    
    -
    
    Certificate of Amendment to
Restated Certificate of Incorporation.3(b)
    
    -
    
    By-laws of Doral Financial
Corporation, as amended as of April 21, 2004.10(a)
    
    -
    
    Doral Financial Corporation Omnibus
Incentive Plan.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.