DORAL FINANCIAL CORP, 424B4, 1998-02-13

DORAL FINANCIAL CORP
424B4, 1998-02-13
MORTGAGE BANKERS & LOAN CORRESPONDENTS

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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-43725
Registration No. 333-46219

PROSPECTUS

1,580,000 SHARES

[DORAL FINANCIAL CORPORATION LOGO]
COMMON STOCK
------------------------

All of the 1,580,000 shares of common stock, $1.00 par value per share (the
"Common Stock"), offered hereby are being sold by Doral Financial Corporation
("Doral" or the "Company").

The Common Stock is quoted on the Nasdaq Stock Market's National Market
System (the "Nasdaq National Market") under the symbol "DORL." On February 12,
1998, the last reported sale price for the Common Stock on the Nasdaq National
Market, was $24.00 per share. See "PRICE RANGE OF COMMON STOCK AND DIVIDEND
POLICY."
------------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 8, FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
------------------------

THESE SECURITIES ARE NOT DEPOSITS, ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY
BANKING OR NONBANKING AFFILIATE OF THE COMPANY AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THE COMMISSIONER OF FINANCIAL INSTITUTIONS OF
PUERTO RICO OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION, THE
OFFICE OF THE COMMISSIONER OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
==================================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $24.00 $1.44 $22.56
- ------------------------------------------------------------------------------------------------------------------
Total(3)............................... $37,920,000 $2,275,200 $35,644,800
==================================================================================================================
</TABLE>

(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including under the Securities Act of 1933, as amended. See
"UNDERWRITING."
(2) Before deducting expenses of the offering payable by the Company estimated
to be $400,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 237,000 additional shares of Common Stock on the same terms
and conditions as the Common Stock offered hereby, solely to cover
over-allotments, if any. If the over-allotment option is exercised in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $43,608,000, $2,616,480 and $40,991,520,
respectively. See "UNDERWRITING."

The shares of Common Stock are offered hereby by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to certain other conditions. The Underwriters reserve
the right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that delivery of the shares will be made at the
offices of Brean Murray & Co., Inc., New York, New York on or about February 19,
1998.
------------------------

BREAN MURRAY & CO., INC.
------------------------

THE DATE OF THIS PROSPECTUS IS FEBRUARY 13, 1998.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR ENGAGE
IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF
THE COMMON STOCK OF THE COMPANY, INCLUDING STABILIZING, SYNDICATE SHORT COVERING
AND PENALTY BID TRANSACTIONS. SUCH TRANSACTIONS MAY BE EFFECTED THROUGH THE
NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
---------------------

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents of the Company heretofore filed by it with the
Securities and Exchange Commission (the "Commission" ) are incorporated by
reference herein: Annual Report on Form 10-K for the year ended December 31,
1996; Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30
and September 30, 1997 and Current Reports on Form 8-K dated September 22, 1997,
October 1, 1997 and January 21, 1998.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
subsequent to the date of this Prospectus and prior to the termination of the
offering made hereby shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of the filing of such
documents. Any statement contained herein, or in a document incorporated or
deemed to be incorporated by reference herein, shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein, or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request of any such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents unless such exhibits
are specifically incorporated by reference into such documents). Requests for
such copies should be directed to Doral Financial Corporation, Attention:
Secretary, 570 Lexington Avenue, New York, New York 10022, telephone: (212)
508-0340.
---------------------

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports and other information with the
Commission. Information as of particular dates concerning its directors and
officers and any material interest of such persons in transactions with the
Company is disclosed in proxy statements distributed to stockholders filed with
the Commission. The Company has filed with the Commission a registration
statement on Form S-3 (herein, together with all amendments, schedules and
exhibits thereto, referred to as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
shares of Common Stock offered hereby. This Prospectus, which constitutes a part
of the Registration Statement, does not contain all the information set forth in
such Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. Statements contained herein
concerning the provisions of documents are necessarily summaries of such
documents, and each statement is qualified in its entirety by reference to the
copy of the applicable document filed with the Commission. For further
information, reference is hereby made to the Registration Statement and all such
reports, proxy statements and other information filed by the Company, which can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the public reference facilities in the Commission's regional offices located at
Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661,
and Suite 1300, 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material can also be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such material may also be accessed electronically through the
Commission's site on the World Wide Web at http://www.sec.gov. The Common Stock
is quoted on the Nasdaq National Market. Reports and other information
concerning the Company may also be inspected at the National Association of
Securities Dealers, Inc., 1735 K Street, Washington, D.C. 20006.

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PROSPECTUS SUMMARY

The following summary, is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the consolidated
financial statements (including the notes thereto) included elsewhere in this
Prospectus or incorporated by reference herein. Unless otherwise indicated, the
information in this Prospectus assumes that the over-allotment option described
in "UNDERWRITING" is not exercised and gives effect to a two-for-one stock split
of the Company's Common Stock in the form of a stock dividend distributed on
August 28, 1997. References herein to the "Company" or "Doral" shall be deemed
to refer to the Company and its consolidated subsidiaries, unless the context
requires otherwise.

THE COMPANY

The Company, together with its wholly-owned subsidiaries, is primarily
engaged in a wide range of mortgage banking activities, including 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 and financing 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, to a
lesser extent, the origination of construction loans and mortgage loans secured
by commercial real estate (the "Mortgage Banking Business"). The Company is the
leading mortgage banking institution in Puerto Rico in volume of origination of
first mortgage loans on single-family residences. The Company's Mortgage Banking
Business is principally conducted through two operating units: Doral Mortgage
Corporation ("Doral Mortgage"), a wholly-owned subsidiary of the Company, and HF
Mortgage Bankers Division (the "HF Division"), a division of the Company. The
Company is also engaged in the banking business through Doral Bank (formerly
known as Doral Federal Savings Bank), a Puerto Rico commercial bank acquired by
the Company in September 1993, and in the securities business through Doral
Securities, Inc. ("Doral Securities"), a broker-dealer subsidiary established by
the Company in September 1996. As a result of the conversion of the charter of
Doral Bank from that of a federal savings association to that of a Puerto Rico
chartered commercial bank on October 1, 1997, the Company is a bank holding
company subject to the provisions of the Bank Holding Company Act of 1956 (the
"BHC Act") and, accordingly, subject to supervision and regulation by the Board
of Governors of the Federal Reserve System (the "Federal Reserve").

The Company is an approved seller/servicer for the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association
("FNMA"), an approved issuer for the Government National Mortgage Association
("GNMA") and an approved servicer under the GNMA, FNMA and FHLMC mortgage-backed
securities programs. Doral is also qualified to originate mortgage loans insured
by the Federal Housing Administration ("FHA") and guaranteed by the Veterans
Administration ("VA").

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securities, consisting primarily of residential mortgage loans, mortgage-backed
securities and United States government and agency obligations the interest on
which is tax exempt to the Company for Puerto Rico income tax purposes. The
Company's strategy is to become a more diversified financial services company by
offering a broad range of mortgage products as well as expanding into new areas
of business such as banking and securities brokerage. The Company also intends
to pursue opportunities to expand geographically within the mainland United
States, particularly within the New York City metropolitan area and other areas
with large Hispanic populations, through acquisitions, the establishment of new
operations or a combination of both.

Substantially all of Doral's business is currently conducted in Puerto
Rico. The Mortgage Banking Business is conducted in Puerto Rico through 20
branches, 16 of which are operated by Doral Mortgage, three by the HF Division
and one by Centro Hipotecario, Inc., a wholly-owned mortgage banking subsidiary.
Doral Mortgage also operates two branches in Miami and Orlando. Doral Securities
operates through a single branch in the San Juan metropolitan area and employed
24 persons as of September 30, 1997.

Doral Bank, operates through five branches in the San Juan metropolitan
area, which serve primarily as deposit-taking operations. To date, most loans
held in Doral Bank's loan portfolio have been originated pursuant to the Master
Loan Production Agreement (the "Master Loan Production Agreement") with the
Company. See "BUSINESS -- Other Lending and Investment Activities -- Lending
Activities of Doral Bank and Real Estate Owned." Doral Bank has experienced
rapid growth since its acquisition by the Company, increasing its assets from
$13 million as of September 10, 1993 to $352 million as of September 30, 1997.
To date, this growth has been funded primarily through increases in certificate
of deposit accounts, as well as borrowings from institutional investors,
advances from the Federal Home Loan Bank of New York and long term brokered
deposits. As of September 30, 1997, Doral Bank had total deposits and net worth
of $254 million and $27 million, respectively. Custodial accounts associated
with the Company's servicing portfolio, commercial demand deposit accounts of
the Company and certificate of deposit accounts constituted approximately 15%,
1% and 65%, respectively, of Doral Bank's total deposit accounts as of September
30, 1997. The Company intends to continue to increase the assets of Doral Bank
as well as to expand its branch network and deposit base.

On September 22, 1997, the Company amended its Restated Certificate of
Incorporation to change its name from First Financial Caribbean Corporation to
Doral Financial Corporation.

Doral's principal executive office is located at 1159 Franklin D. Roosevelt
Avenue, San Juan, Puerto Rico 00920, and its telephone number is (787) 749-7100.

THE OFFERING

Common Stock to be Offered
by the Company............ 1,580,000 shares.

Common Stock to be
Outstanding After the
Offering(1)(2)........... 19,977,460 shares.

Use of Proceeds............ The net proceeds from the sale of the shares of
Common Stock offered hereby will be used for
general corporate purposes, which may include: (i)
making capital contributions to Doral Bank and the
Company's other subsidiaries; (ii) investing in
mortgage servicing rights through the internal
origination of mortgage loans, the acquisition of
mortgage loans with the related servicing rights
and the purchase of contracts to service mortgage
loans; (iii) funding possible acquisitions of
mortgage banking and other financial institutions;
and (iv) increasing working capital. See "USE OF
PROCEEDS."

Nasdaq National Market
Symbol.................... "DORL."
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(1) Based on 18,397,460 shares outstanding as of February 12, 1998.
(2) Does not include up to 966,857 shares of Common Stock issuable upon
conversion of outstanding convertible securities of the Company. See
"DESCRIPTION OF CAPITAL STOCK -- 8% Preferred Stock."

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA(1)

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(1) See notes to "SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA."

RISK FACTORS

See "RISK FACTORS" for a discussion of certain factors that should be
considered carefully by prospective purchasers of the Common Stock.

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RECENT DEVELOPMENTS

UNAUDITED RESULTS FOR THE QUARTER AND YEAR ENDED DECEMBER 31, 1997

On January 21, 1998, the Company released its unaudited earnings for the
quarter and year ended December 31, 1997. The Company's unaudited income before
a non-cash extraordinary charge for the year ended December 31, 1997 was $32.5
million, or $1.70 per diluted share, compared to $27.0 million or $1.42 per
diluted share for 1996.

The Company reported unaudited income before a non-cash extraordinary
charge for the quarter ended December 31, 1997 of $8.9 million or $0.46 per
diluted share compared to $6.2 million, or $0.33 per diluted share for the
quarter ended December 31, 1996.

The Company recorded a non-cash extraordinary charge to earnings of $12.3
million in connection with the exchange of convertible debt for convertible
preferred stock. See "-- Increase in Capital and Non-cash Charge to Earnings for
Fourth Quarter Related to Exchange of Convertible Debentures for Convertible
Preferred Shares." After the non-cash extraordinary charge, the Company's
unaudited net income for the year ended December 31, 1997 was $20.2 million or
$1.06 per diluted share. The Company reported an unaudited net loss after the
non-cash extraordinary charge for the quarter ended December 31, 1997 of $3.4
million, or $0.18 per diluted share.

The Company's total loan production (originations and purchases) for the
quarter and year ended December 31, 1997 were $321 million and $1.04 billion
respectively, compared to $208 million and $817 million, respectively, for the
comparable periods of 1996. The Company's servicing portfolio totaled
approximately $4.7 billion as of December 31, 1997.

INCREASE IN CAPITAL AND NON-CASH CHARGE TO EARNINGS FOR FOURTH QUARTER RELATED
TO EXCHANGE OF CONVERTIBLE DEBENTURES FOR CONVERTIBLE PREFERRED SHARES.

On October 22, 1997, the Company completed the exchange of the $8,460,000
outstanding principal amount of the Company's 8.25% Convertible Subordinated
Debentures due January 1, 2006 (the "Convertible Debentures") held by a private
investor for 8,460 shares of its 8% Convertible Cumulative Preferred Stock
(Liquidation Preference $1,000 per share) (the "8% Preferred Stock"). See
"DESCRIPTION OF CAPITAL STOCK -- 8% Preferred Stock."

Notwithstanding the fact that the conversion rights of the 8% Preferred
Stock and the Convertible Debentures are identical, Accounting Principals Board
Opinion No. 26 ("APB 26") requires that the Company record a non-cash charge to
earnings of approximately $12.3 million for the fourth quarter of 1997, which
amount is equal to the difference between the fair market value of the shares of
8% Preferred Stock issued pursuant to the exchange and the net carrying amount
of the Convertible Debentures on the Company's financial statements. As a result
of the appreciation in the price of the Company's Common Stock since the
issuance of the Debentures in 1995, the fair market value of the shares of 8%
Preferred Stock, which is directly related to the value of the Company's Common
Stock, exceeded the net carrying amount of the Convertible Debentures by
approximately $12.3 million. This non-cash charge will be recorded during the
fourth quarter as an extraordinary item on the Company's financial statements
and will not affect the Company's net income from operations.

The Company's retained earnings will be reduced by the amount of the charge
as a result of the application of APB 26, approximately $12.3 million, and the
Company's paid-in-capital account will be simultaneously increased by
approximately $20.8 million, which represents the sum of the charge and the
elimination of the indebtedness represented by the Convertible Debentures,
resulting in a net increase to the Company's stockholders' equity of
approximately $8.5 million.

RECENT AMENDMENTS TO COMPANY'S RESTATED CERTIFICATE OF INCORPORATION

At a special meeting of stockholders of the Company held on September 22,
1997, the Company's shareholders approved amendments to the Company's Restated
Certificate of Incorporation to change the

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name of the Company to Doral Financial Corporation from First Financial
Caribbean Corporation and to increase the number of authorized shares of Common
Stock from 20,000,000 shares to 50,000,000 shares.

BULK PURCHASES OF MORTGAGE SERVICING RIGHTS

During the second and third quarters of 1997, the Company engaged in
several bulk purchases of mortgage servicing rights, aggregating approximately
$1.0 billion.

During the second quarter of 1997, the Company entered into a series of
purchase transactions with a local financial institution whereby it acquired
servicing rights with respect to approximately $270 million principal amount of
mortgage loans, of which $200 million represented servicing rights to FHA and VA
loans backing GNMA mortgage-backed securities. As of September 30, 1997, $170
million of such servicing rights had been transferred to the Company and were
included in the Company's servicing portfolio as of such date.

During the third quarter, the Company entered into a transaction with
another local financial institution whereby it acquired the rights to service
approximately $800 million principal amount of mortgage loans, of which
approximately $350 million consisted of servicing rights with respect to FHA and
VA loans backing GNMA mortgage-backed securities. As of September 30, 1997, none
of the above servicing rights had been transferred to the Company, and,
therefore, were not included in the Company's servicing portfolio as of such
date.

MODIFICATION OF TAX LAWS AFFECTING FHA AND VA LOANS AND GNMA SECURITIES

The Company has historically benefited from Puerto Rico tax laws that
exempt from Puerto Rico income taxes the interest received on FHA loans and VA
loans secured by real property in Puerto Rico and on GNMA mortgage-backed
securities backed by FHA and VA loans. This favorable tax treatment has
permitted the Company to sell Puerto Rico tax exempt GNMA mortgage-backed
securities to local investors at higher prices than those at which comparable
instruments trade in the mainland United States and to reduce its effective tax
rate through the receipt of tax exempt interest income.

On July 22, 1997, an amendment was adopted to the Puerto Rico Internal
Revenue Code that modified the tax exempt treatment of FHA and VA loans secured
by real property in Puerto Rico and GNMA mortgage-backed securities backed by
such loans. Under the terms of the amendment, effective August 1, 1997, only FHA
and VA loans used to finance the original acquisition of newly constructed
housing and mortgage-backed securities backed by such loans qualify for
tax-exempt treatment. The amendment, however, provides a preferential tax rate
of 17% for individuals to be withheld at source with respect to interest
received on FHA and VA loans not qualifying for tax exemption. In addition, the
amendment grandfathered the tax exempt status of FHA and VA loans originated on
or prior to July 31, 1997 and mortgage-backed securities backed by such loans.
Since the effective date of the amendment, approximately 40% of the Company's
total FHA and VA loan originations have consisted of mortgage loans to finance
the acquisitions of newly constructed housing that qualified for tax exemption
under the amendment. Management believes that the change in tax treatment of FHA
and VA loans described above will not have a material adverse effect on the
Company's financial condition or results of operation. See "BUSINESS -- Mortgage
Banking Business -- Puerto Rico Secondary Mortgage Market and Favorable Tax
Treatment."

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RISK FACTORS

Prospective investors should consider carefully the following factors, as
well as the other information contained in this Prospectus or incorporated by
reference herein, before making an investment in the Common Stock. This
Prospectus contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company's actual results could
differ materially from the results anticipated in these forward-looking
statements as a result of the risk factors and uncertainties set forth below and
other factors described elsewhere in this Prospectus.

INTEREST RATE FLUCTUATIONS; CYCLICAL NATURE OF MORTGAGE BANKING INDUSTRY

Changes in interest rates can have a variety of effects on the Company's
business. In particular, changes in interest rates affect the volume of mortgage
loan originations and purchases, the interest rate spread on the Company's
portfolio of loans and securities, the gain on sale of loans and the value of
the Company's mortgage servicing rights, other servicing related assets and
securities holdings.

Lower interest rates tend to increase demand for mortgage loans for home
purchases, as well as the demand for refinancing of existing mortgages. Higher
interest rates make it more difficult for potential borrowers to purchase
residential properties and to qualify for mortgage loans and reduce demand for
refinance loans. As a result, higher interest rates may adversely affect the
volume of loan originations and income related to mortgage production. A
substantial portion of the Company's total mortgage loan originations has
consistently been comprised of refinance loans. For the nine months ended
September 30, 1997 and the years ended December 31, 1996, 1995 and 1994,
refinancing activity represented approximately 51%, 47%, 41% and 59%,
respectively, of the Company's total dollar volume of mortgage loans originated.
Although the Company has increased home purchase originations, a significant
future increase in mortgage interest rates in Puerto Rico would adversely affect
the Company's business if it results in a significant decrease in refinancing of
first mortgage loans.

Changes in prevailing long-term interest rates between the time the Company
commits to or establishes an interest rate on a mortgage loan and the time
commitments to purchase the mortgage loan are obtained or the loan is sold
affect Doral's gain or loss on the sale of such mortgage loan. The Company uses
forward commitments and other hedging techniques in an attempt to reduce its
exposure to changes in interest rates pending the sale of such mortgage loans.
However, there can be no assurance that these hedging techniques will be
successful in insulating the Company from such risks. To the extent such hedging
techniques are not successful, the Company's profitability may be adversely
affected. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Interest Rate Fluctuations."

Declines in interest rates can adversely affect the Company's revenues by
increasing prepayment rates and causing an increase of the amortization of the
Company's servicing assets recorded on the Company's financial statements
(previously classified as Mortgage Servicing Rights) and interest-only strip
receivables ("IOs") (previously classified as excess servicing fees receivable)
or causing an impairment to be recognized with respect to such assets. Moreover,
increased prepayment rates can reduce the Company's servicing income by
decreasing the size of the Company's servicing portfolio. Conversely, a rising
interest rate environment tends to positively affect the market value of the
Company's servicing assets, IOs and residual interests by reducing prepayments
and extending the average life of the Company's servicing assets, residual
interests and IOs. To date, the Company has not used synthetic instruments to
protect the value of its servicing assets, residual interests or IOs from future
interest rate fluctuations. The primary means used by the Company to reduce the
sensitivity of the Company's servicing income to possible reduction of its
servicing portfolio has been the development of a strong retail origination
network that has allowed the Company to increase or maintain the size of its
servicing portfolio even during periods of high prepayment. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- General; Results of Operations for Nine Months Ended September 30,
1997 and 1996."

Another important element of the Company's revenues and earnings, net
interest income (interest earned less interest expense), is directly related to
the difference (the "spread") between the interest rates earned by the Company
on the mortgage loans, mortgage-backed securities and other interest earning
assets held by

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the Company and the interest rates paid by the Company on its borrowings to
finance the origination, purchase and holding of loans, mortgage-backed
securities and other interest earning assets prior to sale. A greater proportion
of the Company's net income has been composed of net interest income than is
typical of mortgage banking institutions in the United States. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- General; Results of Operations for the Three Years Ended December
31, 1996, 1995 and 1994 -- Net Interest Income." The Company generally finances
its mortgage loans and mortgage-backed securities with short-term borrowings.
Generally, short-term interest rates are lower than long-term interest rates and
the Company benefits from the difference in the spread during the time mortgage
loans and mortgage-backed securities are held pending sale. Increases in
short-term rates relative to long-term rates could reduce the spread and thereby
adversely affect the Company's net income.

Doral Bank, the Company's banking subsidiary, is also affected by changes
in interest rates. Because most of Doral Bank's loans held for investment have
fixed rates and because interest on deposits will rise more quickly in a rapidly
rising interest rate environment than the composition of Doral Bank's loan
portfolio, the net interest income of Doral Bank could be adversely affected in
such an environment. See "BUSINESS -- Other Lending and Investment Activities."

IMPAIRMENT OF VALUE OF INTEREST-ONLY STRIP RECEIVABLES AND SERVICING ASSET

The Company derives a portion of its income by recognizing gains on sales
of loans based on the fair value of the IOs or residual and subordinate
certificates received by the Company in connection with sales of loans or
securitizations and the fair value of the retained servicing asset related to
such loans. As of September 30, 1997, the Company's unaudited balance sheet
reflected the fair value of IOs, residual and subordinate certificates and
servicing assets of approximately $78.8 million. The fair values of IOs and
residual and subordinate certificates are reflected in the Company's financial
statements as part of "securities held for trading." The fair value of the
Company's mortgage servicing rights (other than servicing rights originated by
the Company prior to April 1, 1995 which are not reflected in the Company's
consolidated financial statements) are reflected in the Company's consolidated
financial statements as "servicing asset." The fair value of such IOs, residual
and subordinate interests and servicing assets are based, in part, on market
interest rates and projected loan prepayment and credit loss rates. If actual
experience differs from the assumptions used in the determination of the fair
values of such assets, future cash flows and earnings could be adversely
affected and the Company could be required to write down the value of its IOs,
residual and subordinate certificates and servicing assets. While the Company
has been able on at least one occasion to sell IOs for their reported value,
there is not an active market for the sale of IOs or residual and subordinate
certificates and no assurance can be given that they could be sold at their
reported value.

ECONOMIC CONDITIONS IN PUERTO RICO AND REPEAL OF SECTION 936 TAX BENEFITS

During 1996 and the first nine months of 1997, approximately 99% of the
mortgage loans originated and acquired by the Company's mortgage banking
activities were secured by real estate located in Puerto Rico. In addition, as
of September 30, 1997, approximately 99% of loans receivable held for investment
by Doral Bank were secured by real estate located in Puerto Rico. Accordingly,
the Company's financial condition and results of operations are dependent to a
significant extent upon economic conditions prevailing from time to time in
Puerto Rico. Any significant adverse economic developments in the Puerto Rico
economy could result in a decrease in the volume of mortgage loans originated by
Doral or an increase in defaults or delinquencies on mortgage loans that are
serviced or held by Doral pending sale in the secondary mortgage market, thereby
reducing the resale value of such mortgage loans. Any such downturn in the
Puerto Rico economy could also result in an increase in the level of
nonperforming assets held by Doral Bank.

Section 936 of the U.S. Internal Revenue Code ("Section 936") has
historically provided incentives for U.S. corporations to invest in Puerto Rico
by granting a credit to qualifying corporations ("936 Corporations") against a
portion of the U.S. income tax payable from the active conduct of a trade or
business in Puerto Rico and 100% of certain qualifying investment income derived
in Puerto Rico. Section 936, together with complementary Puerto Rico laws, has
provided incentives for 936 Corporations and financial intermediaries receiving
funds from 936 Corporations to invest in mortgage loans and mortgage-backed
securities originated in Puerto Rico. Section 936 helped to create a pool of
lower-cost funds in Puerto Rico that the Company historically used to fund
mortgage loans and mortgage-backed securities. On August 20, 1996, the Small
Business Job Protection Act of 1996 (the "Small Business Job Protection Act")
was signed

9
<PAGE> 10

into law. The Small Business Job Protection Act provides for the elimination of
the special U.S. federal income tax benefits available under Section 936 to U.S.
corporations operating and investing in Puerto Rico. The Act repealed Section
936, subject to a ten-year grandfather rule for 936 Corporations that were
engaged in the active conduct of a trade or business on October 13, 1995 and
that qualified for and elected the benefits of Section 936 for the corporation's
taxable year which includes such date. During the grandfather period, the amount
of income that will benefit from the credit available under Section 936 derived
from the active conduct of a trade or business will be subject to varying caps.
The credit available for investment income was not made subject to the
grandfather rule and was eliminated effective for taxable years beginning after
December 31, 1995 but in no event prior to July 1, 1996.

While the long-term impact of the repeal of Section 936 cannot be
determined at this time, the repeal of Section 936 could have an adverse effect
on the general economic condition of Puerto Rico, the Company's predominant
service area, by reducing incentives for investment in Puerto Rico. Any such
adverse effect on the general economy of Puerto Rico could lead to an increase
in mortgage delinquencies and a reduction in the level of residential
construction and demand for mortgage loans. The elimination of the credit for
investment income has resulted in a decrease in the amount of funds invested in
the Puerto Rico financial market by 936 Corporations ("936 Funds"). Management
believes that the principal impact of the loss of 936 Funds has been a moderate
increase in the Company's funding costs. The adverse effect of any such increase
has been ameliorated by a general decline in interest rates since the repeal of
Section 936. Prior to the elimination of the credit for investment income, the
Company had implemented a strategy to diversify its sources of funding and
reduce its reliance on 936 Funds. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital
Resources" and "BUSINESS -- Funding." Although management does not believe that
the repeal of Section 936 is likely to have a material adverse effect on the
profitability or financial condition of the Company, it is not possible, at this
time, to measure the long-term effect, if any, on the Company of the repeal of
Section 936.

FEDERAL PROGRAMS

The business and profitability of Doral depend, to a large degree, on its
ability to sell mortgage loans to investors in the secondary mortgage market at
prices that are higher than the prices at which Doral originates or purchases
such loans. The growth of the secondary mortgage market is attributable in large
part to programs maintained by the FNMA, FHLMC and GNMA. In addition, part of
the Company's business is affected significantly by the continuation of various
programs administered by the FHA for the United States Department of Housing and
Urban Development ("HUD"), which insures mortgage loans, and the VA, which
partially guarantees mortgage loans. Any discontinuation of, or significant
reduction in, the various programs administered by FNMA, FHLMC, GNMA, FHA or VA
could have a material adverse effect on the Company's operations. See
"BUSINESS -- Mortgage Banking Business -- Sale of Loans; Issuance of
Mortgage-Backed Securities."

POSSIBLE CHANGES IN PREVAILING REGULATORY STRUCTURE

The Company is subject to the rules and regulations of, and supervision by,
several Federal and Puerto Rico entities, including FNMA, FHLMC, GNMA, FHA, VA,
HUD, and the Office of the Commissioner of Financial Institutions of Puerto Rico
(the "Office of the Commissioner"), with respect to, among other things,
licensing requirements, establishment of maximum interest rates, required
disclosure to customers and the origination, processing, underwriting, selling
and securitization of mortgage loans. Although the Company believes that it is
in compliance in all material respects with applicable Federal and Puerto Rico
laws, rules and regulations, there can be no assurance that more restrictive
laws or rules will not be adopted in the future, which could make compliance
more difficult or expensive, restrict the Company's ability to originate or sell
mortgage loans or sell mortgage-backed securities, further limit or restrict the
amount of interest and other fees earned from the origination of loans, or
otherwise adversely affect the business or prospects of the Company. See
"BUSINESS -- Regulation -- Banking Operations."

HOLDING COMPANY STRUCTURE

The Company is a bank holding company subject to the supervision and
regulation of the Federal Reserve as a result of its ownership of Doral Bank.
Under the Federal Reserve policy, a bank holding company such as the Company is
expected to act as a source of financial strength to each of its subsidiary
banks and to commit resources to support each subsidiary bank. This support may
be required at times when, absent such policy, the bank holding company might
not otherwise provide such support. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to

10
<PAGE> 11

maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment. In addition, any capital loans by
a bank holding company to any of its subsidiary banks must be subordinated in
right of payment to deposits and to certain other indebtedness of such
subsidiary bank. Doral Bank is currently the only depository institution
subsidiary of the Company. To date, the Company has not entered into any
agreement with a federal regulatory agency to maintain the capital of Doral Bank
nor has it made any capital loans to Doral Bank. See
"BUSINESS -- Regulation -- Banking Operations -- Federal Regulation."

Because the Company is a holding company, its right to participate in the
assets of any subsidiary upon the latter's liquidation or reorganization will be
subject to the prior claims of the subsidiary's creditors (including depositors
in the case of Doral Bank) except to the extent that the Company may itself be a
creditor with recognized claims against the subsidiary.

The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. As of September 30, 1997, Doral Bank was a well capitalized
institution for purposes of FDICIA. Undercapitalized depository institutions are
subject to restrictions on borrowing from the Federal Reserve System. In
addition, undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. A depository
institution's holding company must guarantee the capital plan, up to an amount
equal to the lesser of 5% of the depository institution's assets at the time it
becomes undercapitalized or the amount of the capital deficiency when the
institution fails to comply with the plan. The federal banking agencies may not
accept a capital plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. If a depository institution fails to submit an
acceptable plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator.

DELINQUENCY, FORECLOSURE AND OTHER CREDIT RISKS

The Company is generally at risk for any mortgage loan defaults from the
time that the Company funds the mortgage loans it originates or acquires to the
time it sells them or packages them into mortgage-backed securities. Once the
Company sells the mortgage loans it originates or acquires or packages them into
mortgage-backed securities, the risk of loss from mortgage loan defaults and
foreclosures generally passes to the purchaser or insurer of the mortgage loans,
except for loans sold on a recourse basis. The degree of risk associated with
servicing mortgage loans following their sale or packaging into mortgage-backed
securities depends on the extent to which the servicing arrangement is on a
non-recourse or recourse basis. In recourse servicing, the servicer agrees to
share the credit risk with the owner of the mortgage loans, such as FNMA or
FHLMC or with a private investor, insurer or guarantor. Losses on recourse
servicing occur primarily when foreclosure sale proceeds of the property
underlying a defaulted mortgage are less than the outstanding principal balance
and accrued interest of such mortgage loan and the cost of holding and disposing
of such underlying property. As of September 30, 1997, the Company was servicing
mortgage loans with an aggregate principal amount of $434 million on a recourse
or partial recourse basis. At September 30, 1997 and December 31, 1996 and 1995,
the Company's recourse obligation with respect to mortgage loans being serviced
on a recourse or partial recourse basis was approximately $179 million, $74
million and $85 million, respectively. Sales of loans with recourse has
increased during 1997 as a result of a greater emphasis on the sale of
non-conforming loans to Puerto Rico financial institutions, which often are
effected on a recourse or partial recourse basis, instead of through
securitizations. See "BUSINESS -- Mortgage Banking Business -- Sale of Loans;
Issuance of Mortgage-Backed Securities." During the years ended December 31,
1996 and 1995 and the nine months ended September 30, 1997, losses incurred due
to recourse servicing were not material. However, there can be no assurance that
in future the Company will not incur losses due to recourse servicing.

From time to time, the Company sells mortgage-backed securities and
mortgage loans subject to put arrangements, under which the Company grants to
the purchaser a put option that grants the purchaser the right to sell, and
obligates the Company to buy, the mortgage-backed securities or loans at a
future date at a negotiated price. If an investor elects to exercise its put
option, the Company would suffer a loss to the extent that the market value of
the securities or loans is less than the put price on the date the put option is
exercised.

11
<PAGE> 12

As of September 30, 1997, the Company had outstanding $182 million in
mortgage-backed securities and loans sold subject to put arrangements, which
expire in varying amounts from 1998 through 2002, all of which were accounted
for as sales on the Company's financial statements.

As of September 30, 1997, the Company had established a reserve of $1.3
million for possible losses related to recourse and put obligations. While
management believes such reserve is adequate, no assurance can be given that the
reserve will be sufficient to absorb any losses that the Company may experience
from such contingent obligations.

In the ordinary course of business, the Company makes certain
representations and warranties to the purchasers and insurers of mortgage loans
and to the purchasers of servicing rights. If a mortgage loan defaults and there
has been a breach of these representations or warranties, the Company may become
liable for the unpaid principal and interest on the defaulted mortgage loan. In
such case, which would primarily arise as the result of fraudulent
representation made by the Company in the loan origination or acquisition
process, the Company may be required to repurchase the mortgage loan and bear
any subsequent loss on the mortgage loans. During the first nine months of 1997
and the years ended December 31, 1996 and 1995, the impact of loans repurchased
by the Company as the result of any such fraudulent representations was not
material. However, there can be no assurance that in the future the Company will
not incur losses relating to fraudulent misrepresentations.

The Company is also affected by mortgage loan delinquencies and defaults on
mortgage loans that it services. Under certain types of servicing contracts,
even when mortgage loan payments are delinquent, the servicer must forward all
or part of the scheduled payments to the owner of the mortgage loans. Also, to
protect their liens on mortgage properties, owners of mortgage loans usually
require the servicer to advance mortgage and hazard insurance and tax payments
on schedule even though sufficient escrow funds may not be available. The
servicer will ultimately be reimbursed by the mortgage owner or from liquidation
proceeds for payments advanced that the servicer is unable to recover from the
mortgagor. However, in the interim, the servicer must absorb the cost of funds
advanced during the time the advance is outstanding. Furthermore, the servicer
must bear the increased cost of attempting to collect on delinquent and
defaulted mortgage loans. Although these increased costs are somewhat offset
through the receipt of late fees and the reimbursement of certain direct
expenses out of foreclosure proceeds, management believes that increased
delinquencies and defaults generally increase the costs of the servicing
function. In addition, if a default is not cured, the mortgage loan will be
prepaid as a result of foreclosure proceedings. As a consequence, the Company is
required to forego servicing income from the time such loans become delinquent.
In general, economic slowdowns or recessions expose the Company to increased
delinquency and default risks. See "BUSINESS -- Mortgage Banking
Business -- Loan Servicing."

Doral Bank holds loans for investment in its portfolio that involve a
degree of credit risk. During the nine months ended September 30, 1997, Doral
Bank increased its allowance for loan losses as a result of the growth in this
portfolio and increases in the amount of commercial mortgage loans and
construction loans held by Doral Bank for which Doral Bank generally provides
higher allowances. While management believes that the current allowance for loan
losses is adequate, Doral Bank intends to increase its allowance in the future
as required. However, in the event of higher than expected defaults on those
loans, the Company's results of operations would be adversely affected. See
"BUSINESS -- Other Lending and Investment Activities -- Nonperforming Assets and
Allowance for Loan Losses."

As of September 30, 1997, Doral held real estate owned as of result of
foreclosure ("REO") of approximately $2.9 million, not including approximately
$1.8 million owed to the Company from a partnership to which the Company
previously sold REO. See "BUSINESS -- Mortgage Banking Business -- Foreclosure
Experience and Real Estate Owned." There is no liquid secondary market for the
Company's REO, and no assurance can be given that the Company will be able to
sell said REO for its reported value.

12
<PAGE> 13

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,580,000 shares of
Common Stock offered hereby, after deducting the Underwriting discounts and
commissions and estimated offering expenses payable by the Company are estimated
to be approximately $35,244,800 ($40,591,520, if the Underwriters' over-
allotment option is exercised in full), at the public offering price of $24.00
per share. The Company intends to use such net proceeds for general corporate
purposes, which may include: (i) making capital contributions to Doral Bank and
the Company's other subsidiaries; (ii) investing in mortgage servicing rights
through the internal origination of mortgage loans, the purchase of mortgage
loans with the related servicing rights and the purchase of contracts to service
mortgage loans; (iii) funding possible acquisitions of mortgage banking and
other financial institutions; and (iv) increasing working capital. From time to
time, the Company engages in negotiations regarding possible acquisitions and
will consider acquisition opportunities as they arise. However, the Company has
no current agreements or understandings regarding any possible acquisitions.

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Common Stock is traded on the over-the-counter market and is quoted on
the Nasdaq National Market under the symbol "DORL." Prior to September 23, 1997,
the Company's Common Stock was traded under the symbol "FRCC." The table below
sets forth on a per share basis, for the calendar quarters indicated, the high
and low sales prices as reported by the Nasdaq National Market, and the cash
dividends declared on the Common Stock during such periods. The information in
the table has been adjusted to reflect a two-for-one stock split effective
August 28, 1997.

<TABLE>
<CAPTION>
PRICE RANGE CASH DIVIDENDS
---------------------- DECLARED
HIGH LOW PER SHARE
-------- -------- --------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
First Quarter...................................... $11 3/8 $ 8 7/8 $0.075
Second Quarter..................................... 11 3/4 9 3/8 0.085
Third Quarter...................................... 12 9/16 9 3/8 0.085
Fourth Quarter..................................... 14 3/8 10 3/8 0.085
Year Ended December 31, 1997
First Quarter...................................... $15 5/8 $13 $0.085
Second Quarter..................................... 16 5/16 12 1/8 0.10
Third Quarter...................................... 27 14 7/8 0.10
Fourth Quarter..................................... 25 3/4 19 3/4 0.10
Current Year Ending December 31, 1998
First Quarter (through February 12, 1998).......... 25 1/2 20 1/2 --
</TABLE>

On February 12, 1998, the last reported sale price for the Common Stock as
reported on the Nasdaq National Market was $24.00 per share.

The approximate number of shareholders of record of the Common Stock as of
February 11, 1998 was 788, which does not include beneficial owners whose shares
of Common Stock are held of record in the names of brokers and nominees.

The terms of the Company's 8% Convertible Cumulative Preferred Stock
(Liquidation Preference $1,000 per share) (the "8% Preferred Stock") do not
permit the payment of cash dividends on Common Stock if dividends on the 8%
Preferred Stock are in arrears. The holders of shares of 8% Preferred Stock are
entitled to receive cumulative cash dividends, when, as and if declared by the
Board of Directors, out of assets of the Company legally available therefor, at
the annual rate of 8% of their liquidation preference, or $6.66 2/3 per share
per month. See "DESCRIPTION OF CAPITAL STOCK -- 8% Preferred Stock -- Dividend
Rights and Limitations."

See "CERTAIN PUERTO RICO INCOME TAX CONSIDERATIONS" for a discussion of
Puerto Rico withholding taxes applicable to dividends on the Common Stock
payable to non-residents of Puerto Rico

13
<PAGE> 14

and "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" for a discussion of the ability
of United States Shareholders (as defined therein) to claim a foreign tax credit
for such taxes.

The ability of the Company to pay dividends in the future is limited by
various restrictive covenants contained in the debt agreements of the Company,
the earnings, cash position and capital needs of the Company, general business
conditions and other factors deemed relevant by the Company's Board of
Directors. The Company is prohibited under the Indenture for the Company's 7.84%
Senior Notes due 2006 (the "Senior Note Indenture") from paying dividends on any
capital stock (other than dividends payable in capital stock or in stock
rights), if an event of default exists under any such agreement at such time, or
if the amount of dividends payable by the Company together with the aggregate
amount of dividends paid and other capital distributions made since October 1,
1996, (the "Measure Date") exceed the sum of: (i) 50% of the Company's
Consolidated Net Income (as defined in the Senior Note Indenture), accrued from
the Measure Date to the end of the quarter ending not less than 45 days prior to
the dividend payment date; (ii) $15 million; and (iii) the net proceeds of any
sale of capital stock subsequent to the Measure Date. In addition, under the
terms of a First Amended and Restated Credit Agreement, dated as of September
25, 1996, as amended between the Company and Bankers Trust Company as lender and
agent for several other lending institutions (the "Syndicated Credit Agreement")
and other debt agreements of the Company, the Company may be prohibited from
paying dividends if it fails to maintain specified minimum levels of net worth,
net earnings to debt service and dividends ratios, and certain other financial
ratios.

The ability of the Company to pay dividends may also be restricted by
various regulatory requirements and policies of bank regulatory agencies having
jurisdiction over the Company and its subsidiaries. See
"BUSINESS -- Regulation -- Banking Operations -- Federal Regulation -- Dividend
Restrictions."

14
<PAGE> 15

CAPITALIZATION

The following table sets forth the actual consolidated capitalization of
the Company at September 30, 1997 and as adjusted to give effect to the issuance
and sale of the 1,350,000 shares of Common Stock offered hereby and the exchange
on October 22, 1997, of shares of the Company's 8% Preferred Stock for the
Convertible Debentures referred to in footnote (1) below. In addition to the
indebtedness of the Company reflected below, at September 30, 1997, the Company
had other indebtedness consisting of deposits ($251 million) and FHLB-NY
borrowings ($15 million) incurred in the ordinary course of business. See
"BUSINESS -- Funding." This table should be read in conjunction with the
Company's Consolidated Financial Statements and related notes included elsewhere
in this Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term borrowings
Loans payable............................................. $218,670 $218,670
Short-term portion of notes payable....................... 19,981 19,981
Short-term portion of securities sold under agreements to
repurchase............................................. 613,186 613,186
-------- --------
Total short-term borrowings....................... $851,837 $851,837
======== ========
Long-term borrowings
Long-term portion of notes payable........................ $ 55,160 $ 55,160
Long-term portion of securities sold under agreements to
repurchase............................................. 75,200 75,200
8.25% Convertible Subordinated Debentures(1).............. 8,460 --
Senior Notes.............................................. 75,000 75,000
-------- --------
Total long-term borrowings........................ $213,820 $205,360
======== ========
Stockholders' equity
8% Convertible Cumulative Preferred Stock (liquidation
preference $1,000 per share), 20,000 shares authorized;
8,460 shares issued and outstanding as adjusted(1)..... $ -- $ 8
Common Stock, $1.00 par value, 50,000,000 shares
authorized; 18,425,460 shares issued (20,005,460 as
adjusted), and 18,397,460 outstanding (19,977,460 as
adjusted)(2)........................................... 18,425 20,005
Paid-in capital........................................... 30,924 85,341
Retained earnings(3)...................................... 121,327 109,027
Treasury Stock at par value, 28,000 shares................ (28) (28)
Unrealized gain (loss) on securities available for sale... 55 55
Unearned compensation under employment contracts.......... (24) (24)
-------- --------
Total stockholders' equity........................ $170,679 $214,384
======== ========
</TABLE>

- ---------------

(1) Represents $8.46 million of Convertible Debentures which were convertible
into shares of Common Stock at a conversion price of $8.75 per share,
subject to certain adjustments in certain events. On October 22, 1997, the
Convertible Debentures were exchanged for shares of the Company's 8%
Preferred Stock, having an aggregate liquidation preference equal to the
outstanding principal amount of the Convertible Debentures. The shares of
the 8% Preferred Stock have the same conversion rights as the Convertible
Debentures. See "RECENT DEVELOPMENTS -- Increase in Capital and Non-Cash
Charge to Earnings for Fourth Quarter Related to Exchange of Convertible
Debentures for Convertible Preferred Shares" and "DESCRIPTION OF CAPITAL
STOCK -- 8% Preferred Stock; Purchase Rights of Popular, Inc."
(2) Does not include up to 966,857 shares of Common Stock issuable upon
conversion of the Convertible Debentures outstanding as of September 30,
1997, or upon the conversion of the shares of 8% Preferred Stock for which
they were exchanged as described in Note (1) above.
(3) The amount set forth under the As Adjusted column reflects the extraordinary
non-cash charge described in "RECENT DEVELOPMENTS -- Increase in Capital and
Non-Cash Charge to Earnings for Fourth Quarter Related to Exchange of
Convertible Debenture for Convertible Preferred Shares."

15
<PAGE> 16

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following table sets forth certain selected consolidated financial and
operating data for the Company on a historical basis as of and for the
nine-month periods ended September 30, 1997 and 1996, and for each of the five
years in the period ended December 31, 1996. This information should be read in
conjunction with the Consolidated Financial Statements and related notes thereto
included elsewhere herein. The consolidated financial information for the
nine-month periods ended September 30, 1997 and 1996 is derived from unaudited
consolidated financial statements, which, in the opinion of management, include
all adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of the results for such periods. Results for the nine-month
period ended September 30, 1997 are not necessarily indicative of results for
the full year.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues...................... $ 94,313 $ 80,167 $ 107,833 $ 91,837 $ 72,043 $ 70,228 $ 49,804
Interest expense.............. 43,214 32,759 46,443 43,380 23,252 9,710 9,270
Loan origination, servicing
administrative and general
expenses.................... 24,278 23,807 30,111 26,396 30,046 29,597 24,118
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes.... 26,821 23,601 31,279 22,061 18,745 30,921 16,416
Income taxes.................. 3,190 2,790 4,238 2,500 2,530 9,601 3,371
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before cumulative
effect of change in
accounting principle........ 23,631 20,811 27,041 19,560 16,215 21,320 13,045
Cumulative effect of change in
accounting principle........ -- -- -- -- 1,215 -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income.................... $ 23,631 $ 20,811 $ 27,041 $ 19,560 $ 17,430 $ 21,320 $ 13,045
=========== =========== =========== =========== =========== =========== ===========
Cash dividends paid........... $ 5,229 $ 4,459 $ 6,008 $ 4,374 $ 3,943 $ 3,142 $ 2,182
BALANCE SHEET DATA:(1)
Mortgage loans held for
sale........................ $ 326,252 $ 279,139 $ 261,608 $ 245,484 $ 263,773 $ 262,515 $ 128,814
Securities held for trading,
net......................... 611,297 415,331 436,125 418,348 327,960 129,180 124,967
Securities held to maturity... 191,024 112,658 109,055 77,945 66,804 6,530 --
Security available for sale... 71,548 12,036 12,007 14,579 -- -- --
Loans receivable, net......... 165,702 107,824 128,766 51,355 34,809 9,561 --
Mortgage notes receivable,
net......................... -- -- -- -- -- -- 7,282
Total assets.................. 1,546,105 1,050,593 1,106,996 917,922 768,019 486,431 320,972
Loans payable and securities
sold under agreements to
repurchase.................. 907,056 610,827 584,856 598,436 569,436 335,994 227,179
Notes payable................. 150,141 91,231 152,126 51,682 17,055 -- --
Deposit accounts.............. 250,945 147,265 158,902 95,740 66,471 26,451 --
Stockholders' equity.......... 170,679 145,738 150,531 129,017 90,496 76,945 58,467
PER SHARE DATA:(2)
Net income:
Primary..................... $ 1.29 $ 1.15 $ 1.49 $ 1.33 $ 1.23 $ 1.58 $ 1.18
Fully diluted(3)............ 1.24 1.10 1.42 1.27 1.15 1.41 1.03
Cash dividends:
Common Stock................ $ 0.285 $ 0.245 $ 0.33 $ 0.29 $ 0.26 $ 0.20 $ 0.15
Series A Preferred
Stock(3).................. -- .3825 .3825 1.05 1.05 1.05 1.05
Weighted average shares
outstanding:(2)
Primary..................... 18,320,742 18,103,110 18,133,122 14,615,890 13,885,468 13,229,708 10,643,200
Fully diluted............... 19,364,316 19,361,294 19,362,536 15,520,270 15,153,928 15,033,928 12,694,784
OPERATING DATA:
Mortgage loans
originated(4)............... $ 689,000 $ 548,000 $ 754,000 $ 559,000 $ 760,000 $ 1,432,000 $ 694,000
Mortgage loans purchased(5)... 27,000 61,000 63,000 77,000 64,000 1,000 29,000
Loan servicing portfolio...... 3,626,000 2,944,000 3,068,000 2,668,000 2,644,000 2,375,000 1,737,000
</TABLE>

- ---------------

(1) Certain reclassifications of prior years' data have been made to conform to
1997 classifications.
(2) Adjusted to reflect a two-for-one stock split effective December 10, 1993
and a two-for-one stock split effective August 28, 1997.
(3) Includes the dilutive effect of the Series A Preferred Stock that was issued
in July 1991 and redeemed in May 1996 and of the Company's Convertible
Debentures, which were exchanged for shares of the Company's 8% Preferred
Stock on October 22, 1997.
(4) Excludes loans purchased from third parties.
(5) Composed exclusively of FHA and VA loans.

16
<PAGE> 17

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Doral is the leading originator of mortgage loans in Puerto Rico, in terms
of the volume of originations of first mortgages on single-family residences.
The volume of loans originated and purchased by Doral was approximately $817
million, $636 million, $824 million, $1.4 billion, and $723 million for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively.

The increase in originations in 1993 was primarily due to declines in
mortgage interest rates, which declined to their lowest levels in decades,
thereby stimulating demand for both refinancing loans and loans to finance the
acquisition of new and existing residential units. The decrease in originations
in 1994 compared to 1993, is attributable to rising interest rates causing a
lower level of demand for mortgage loans, decreased refinancing activity and
increased competition. The decrease in originations in 1995, compared to 1994,
was the result of continued reduced demand for mortgage loans, especially
refinancing loans. The increase in 1996 was due to an increase in refinancing
activity as well as increased originations relating to loans to finance the
acquisition of new residential units. Refinancing loans comprised 47% of loan
originations in 1996 compared to 41% and 59% in 1995 and 1994, respectively.
Mortgage loans to finance the acquisition of new residential units increased 63%
during 1996 increasing from $84 million for 1995 to $136 million for 1996. Such
loans comprised 17% of total originations for 1996 compared to 13% for 1995 and
8% for 1994.

During 1992 and 1993, the Company's strategy was to increase its servicing
portfolio through internal originations. As a result of the high volume of loans
originated in those years, the Company was not active in the wholesale loan
purchase market during 1992 and 1993. The Company reentered the Puerto Rico
wholesale mortgage loan purchase market during the second quarter of 1994 in
order to diversify its sources of loan production and compensate for the
decrease in volume caused by higher interest rates and increased competition.
The amount of loans purchased from third parties was approximately $63 million,
$77 million, $64 million, $1 million, and $29 million for the years ended
December 31, 1996, 1995, 1994, 1993 and 1992, respectively. The Company believes
that the purchase of mortgage loans is a low cost method of increasing mortgage
loan production that complements retail loan originations. Purchases of loans
from third parties are generally limited to FHA and VA loans.

The Company entered the banking business in September 1993 through the
acquisition of Doral Bank, which currently operates through five branches in the
San Juan metropolitan area. During the year ended December 31, 1994, Doral Bank
contributed $205,000 to the consolidated net income of the Company as a result
of the incurrence of expenses associated with creating the infrastructure
necessary to support bank growth. For the years ended December 31, 1995 and
1996, Doral Bank's net income increased to $1.5 million and $2.3 million,
respectively, reflecting a substantial increase in interest earning assets.
Doral Bank increased its assets from $86.4 million as of December 31, 1994 to
$160.4 million and $280.7 million as of December 31, 1995 and 1996,
respectively. This growth was funded largely through increases in certificate of
deposit accounts, non-interest bearing deposits from affiliated companies,
advances from the Federal Home Loan Bank of New York ("FHLB-NY") and the private
placement of five year notes secured by FHLB-NY letters of credit with 936
Corporations.

Doral's results of operations are primarily influenced by: (i) the
direction of interest rates; (ii) the demand for mortgage credit, which is
affected by such external factors as economic conditions, particularly those in
Puerto Rico; and (iii) the relationship between mortgage interest rates and the
cost of funds.

17
<PAGE> 18

The principal components of Doral's revenues are: (i) mortgage loan sales
and fees; (ii) net interest income; (iii) servicing income; (iv) gain on sale of
servicing rights; and (v) other income.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ -----------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loan sales and fees............. $18,223 $20,471 $26,610 $13,529 $10,573
Interest income.......................... 64,099 49,030 66,987 61,907 46,508
Interest expense......................... 43,214 32,759 46,443 43,380 23,252
Net interest income...................... 20,885 16,271 20,544 18,527 23,256
Servicing income......................... 10,863 8,342 11,659 10,577 11,448
Gain on sale of servicing rights......... -- 1,813 1,813 5,205 3,003
Other income............................. 1,128 511 764 620 511
</TABLE>

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

Net Income. The Company's net income for the nine months ended September
30, 1997 increased to $23.6 million, compared to $20.8 million for the
corresponding period of 1996. For the nine month period ended September 30,
1997, Doral Bank contributed approximately $3.1 million in net income compared
to $1.5 million for the nine months ended September 30, 1996.

Revenues from Mortgage Loan Sales and Fees. Revenues from mortgage loan
sales and fees for the first nine months of 1997 decreased to $18.2 million from
$20.5 million for the comparable period of 1996. This decrease was due primarily
to lower gains on sales of mortgage-backed securities and loans during the first
and second quarter of 1997. The total volume of loans originated and purchased
was approximately $716 million for the nine month period ended September 30,
1997 compared to approximately $609 million for the nine month period ended
September 30, 1996, reflecting higher mortgage activities in both refinancings
and home purchase loans. Refinancing loans comprised 51% of production during
the first nine months of 1997 versus 48% for the comparable period of 1996.
Revenues for the nine month period of 1996 include a gain on the sale of
mortgage servicing rights of approximately $1.8 million. There were no sales of
servicing rights during the first nine months of 1997.

Net Interest Income. Net interest income was $20.9 million for the nine
months ended September 30, 1997, an increase of approximately $4.6 million over
the comparable period of 1996. The weighted-average interest rate spread was 243
basis points during the nine months ended September 30, 1997 compared to 254
basis points for the comparable period of 1996. Doral Bank contributed
approximately $7.3 million and $4.9 million to the consolidated net interest
income of the Company for the nine month periods ended September 30, 1997 and
1996, respectively.

Servicing Income. For the nine month period ended September 30, 1997 loan
servicing income was $10.9 million compared to $8.3 million for the same period
in 1996 reflecting the increase in the size of the Company's servicing
portfolio. Effective January 1, 1997, certain amounts previously classified as
servicing income are required to be classified as interest income pursuant to
SFAS No. 125.

Amortization of IOs and Servicing Asset. The Company creates IOs
(previously classified as excess servicing fees receivable) as a result of the
sale of loans in bulk or securitization transactions. See "-- Changes in
Accounting Standards -- SFAS No. 125." IOs are created on the sale of loans by
computing the present value of the excess of the weighted-average coupon on the
loans sold over the sum of: (i) the pass-through interest paid to the investor
and (ii) a base servicing fee, and adjusting such amount for expected losses and
prepayment assumptions. Such IOs are reflected in the Company's Consolidated
Balance Sheet as part of securities held for trading. Sales of mortgage loans
during the first nine months of 1997 resulted in the recording of approximately
$12.7 million in IOs compared to $10.8 million for the first nine months of 1996
reflecting an increase in bulk sales of non-conforming loans during the period.
During the nine month period ended September 30, 1997, the Company sold $6.1
million of IOs for their carrying amount. Amortization of

18
<PAGE> 19

IOs for each of the nine month periods ended September 30, 1997 and 1996 was
approximately $2.8 million and $1.0 million, respectively. Effective January 1,
1997, the amortization of IOs is recorded as a reduction of interest income. For
prior periods, amortization of IOs was recorded as a reduction of servicing
income. For the nine months ended September 30, 1997, the Company capitalized
servicing assets of $11.6 million compared to $8.2 million for the comparable
period of 1996. For the nine month periods ended September 30, 1997 and 1996,
amortization of servicing assets was $1.9 million and $722,000, respectively.
Amortization of servicing assets is recorded as a component of "Other Expenses"
in the Company's Consolidated Financial Statements and is recorded in the
accompanying Consolidated Statement of Income and Retained Earnings under "Other
Expenses."

RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

Net Income. The Company's net income for the year ended December 31, 1996
increased to $27.0 million compared to $19.6 million for 1995. Consolidated
results include the operations of Doral Bank, which contributed approximately
$2.3 million to the Company's consolidated net earnings in 1996, compared to
$1.5 million for 1995 and $205,000 in 1994. Consolidated results for 1995
reflect the adoption by the Company as of April 1, 1995 of Statement of
Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights." Additional net income of approximately $1.5 million was
realized for the year ended December 31, 1995 as a result of the adoption of
SFAS No. 122. Since SFAS No. 122 does not permit retroactive application, the
results for 1995 are not directly comparable to prior years. See Note 2 to the
Company's Consolidated Financial Statements for the year ended December 31, 1996
included elsewhere herein. Results for 1994 include a one time benefit of $1.2
million from the cumulative effect of the adoption of SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" as of January 1, 1994.

Revenues from Mortgage Loan Sales and Fees. As part of its mortgage
banking business, Doral sells substantially all of the loans that it originates,
except for certain mortgage loans originated by Doral Bank, which are generally
held until maturity. When Doral sells mortgage loans and mortgage-backed
securities, it realizes a gain or loss which is equal to the difference between
Doral's carrying cost and the selling price of the loans sold, net of commitment
fees paid. Net gain or loss on sale of loans is affected by interest rate
fluctuations on fixed-rate loans and securities, as well as by the tax status of
interest on mortgage loans under Puerto Rico income tax statutes. See "RISK
FACTORS -- Interest Rate Fluctuations; Cyclical Nature of Mortgage Banking
Industry" and "RECENT DEVELOPMENTS -- Modification of Tax Laws Affecting FHA and
VA Loan and GNMA Securities." Substantially, all the mortgage loans originated
by Doral are fixed interest rate loans.

Revenues from mortgage loan sales and fees increased by 97% during 1996,
compared to an increase of 28% in 1995 and to a decrease of 70% in 1994. The
increase for 1996 was the result of increased volume of loan originations and
higher excess servicing fees receivable ("ESRs") related to sale of
non-conforming and low balance loans as discussed below. The increase for 1995
was primarily due to the adoption SFAS No. 122 during the second quarter of
1995, which had the effect of increasing the gain on the sale of mortgage loans
by requiring that the carrying costs of mortgage loans be reduced by a portion
of the fair value of the related mortgage servicing rights ("MSRs"). The amount
allocated to MSRs was included as a component of mortgage loan sales and fees in
the Company's Consolidated Statement of Income. The decrease in 1994 was due to
interest rate increases resulting in a lower level of loan originations, lower
gains on the sale of mortgage loans and pressures on pricing as a result of
increased competition. During the years ended December 31, 1996 and 1995, the
Company capitalized $10.8 million and $8.2 million, respectively, in MSRs which
were included in the Company's revenues as part of "Mortgage Loan Sales and
Fees." The Company amortizes MSRs over their expected life. See "-- Amortization
of Excess Servicing Fees Receivable and Mortgage Servicing Rights." Effective
January 1, 1997, SFAS No. 125 requires that ESRs and MSRs be classified as IOs
and servicing assets respectively. See "-- Changes in Accounting
Standards -- SFAS No. 125."

Sales of mortgage loans made during 1996 resulted in the recording of
approximately $15.9 million of ESRs compared to $2.6 million and $5.8 million in
1995 and 1994, respectively. Doral capitalized as an asset any ESRs on loans
sold with servicing rights retained whenever the stated servicing fee rate was
materially higher than the servicing fee normally permitted by FNMA or FHLMC.
The ESR represents the discounted present value of the excess (the "excess
spread") of the weighted-average interest rate on the pool of loans

19
<PAGE> 20

sold over (x) the pass-through interest rate paid to the investor and (y) a
normal servicing fee, as adjusted for expected losses and prepayment assumption.
The ESR is recognized at the time of sale of the related loan as an adjustment
to the resulting gain or loss on sale of the loan and is recorded in the
accompanying Consolidated Statement of Income under "Mortgage loan sales and
fees." Most of the Company's ESRs resulted from the sale in bulk to financial
institutions of nonconforming and low balance mortgage loans which the Company
is generally able to originate at higher interest rates and thereby retain a
larger excess spread on such loans. ESRs are amortized over their expected life
and such amortization is recorded as a reduction of servicing income. See
"Amortization of Excess Servicing Fees Receivable and Mortgage Servicing
Rights." For a discussion of a change in the accounting treatment of ESRs
effective January 1, 1997, see "-- Changes in Accounting Standards -- SFAS No.
125."

For the year ended December 31, 1995, the increase in mortgage loan sales
and fees was net of losses on options on futures contracts used for hedging
purposes of $5.4 million, while in 1996 and 1994 such hedging activities
produced gains in the amount of $3.1 million and $2.2 million, respectively,
thereby increasing mortgage loan sales and fees by the same amount. See
"-- Interest Rate Fluctuations."

Net Interest Income. Net interest income is the difference between the
interest income earned on interest earning assets and the interest paid by Doral
on its interest bearing liabilities. The conditions that affect net interest
income from period to period include the relationship between prevailing
mortgage rates and the prime rate, the London Interbank Bid Rate for deposits of
U.S. dollars ("LIBID"), the cost of 936 Funds, interest on retail and long term
brokered deposits, interest rates on fixed-rate loans and the Company's average
holding period before mortgage loans are sold.

In each year since Doral's inception, interest income earned by Doral on
its interest earning assets has exceeded interest expense on Doral's short-term
borrowings and other financing arrangements. Net interest income increased by
11% from 1995 to 1996 after having decreased by approximately 20% from 1994 to
1995, and increased by approximately 65% from 1993 to 1994. The increase in net
interest income during 1996 reflects an increase in average interest earning
assets, particularly at Doral Bank. Average interest earning assets at Doral
Bank increased from $106.1 million as of December 31, 1995 to $199.6 million as
of December 31, 1996. The decline in net interest income during 1995 compared to
1994 was the result of decreased interest spreads, primarily from mortgage
banking operations, as mortgage interest rates declined more rapidly than
short-term interest rates payable on warehousing and repurchase agreement lines
of credit and the other funding vehicles used to finance such assets. The
Company's weighted average interest rate spread was approximately 218 basis
points during 1996 as compared with approximately 250 basis points and 385 basis
points during 1995 and 1994, respectively. The decrease in interest spread
during 1996 and 1995 compared to 1994 also reflects additional interest costs
incurred in connection with borrowings not directly related to interest earning
assets, including a servicing secured bank term loan, unsecured senior notes,
and ten-year convertible subordinated debentures. See "-- Liquidity and Capital
Resources" and "BUSINESS -- Funding." The decrease in the interest rate spread
from 1993 to 1994 was due to higher short-term borrowing costs. The Company has
been able to continue to maintain a positive interest spread due to, among other
things, the origination of higher yielding mortgages and the funding of mortgage
loans held by Doral Bank through lower costing deposits and the availability of
short-term financing, including 936 Funds, at lower costs. For a discussion of
recent amendments to Section 936, see "RISK FACTORS -- Economic Conditions in
Puerto Rico and Repeal of Section 936 Tax Benefits." As of December 31, 1996,
approximately $64.2 million ($28.3 million of such deposits are not reflected in
the Consolidated Financial Statements of the Company because of inter-company
eliminations) or 34% of total deposits held at Doral Bank consisted of
non-interest bearing accounts, comprised primarily of servicing accounts and
corporate demand accounts maintained by the Company and its affiliates.

Doral Bank contributed approximately $6.9 million or 34% of the
consolidated net interest income of the Company for the year ended December 31,
1996 compared to $4.3 million or 23% for the year ended December 31, 1995. This
increase reflects an increase in average interest earning assets from $106.1
million for the year ended December 31, 1995 to $199.6 million for the year
ended December 31, 1996 that was partially offset by a decrease in the average
interest rate spread from 336 basis points for 1996 compared to 407 basis points
for 1995.

20
<PAGE> 21

Net interest income has generally represented a greater proportion of the
Company's total net income than that of typical mortgage banking institutions.
This results primarily from the fact that the Company has held mortgage-backed
securities, mainly GNMA certificates, for longer periods of time prior to sale
than is customary for mortgage bankers in the United States, in order to
maximize the interest income produced by these securities. During the year ended
December 31, 1996, the Company held mortgage loans and mortgage-backed
securities for an average period of 259 days prior to sale as compared to 352
days for the year ended December 31, 1995. This decrease in the amount of days
mortgage loans and mortgage-backed securities were held prior to sale was due
principally to increased sales of loans and mortgage backed-securities.

Servicing Income. Servicing income represents revenues earned by Doral for
servicing mortgage loans. Doral's loan servicing fees depend on the type of
mortgage loan being serviced and range from 0.25% to 0.50% of the declining
outstanding principal amount of such loan. The size of Doral's loan servicing
portfolio and the amount of its servicing fees have increased substantially
since Doral's inception, as a result of increases in loan originations and bulk
purchases of mortgage servicing rights. Servicing fees increased 10% from 1995
to 1996 and 33% from 1993 to 1994. Loan servicing fees, however, decreased 8%
from 1994 to 1995. The decrease in loan servicing income during 1995 was due
primarily to sales made during 1995 and the last quarter of 1994 of mortgage
servicing rights aggregating approximately $512 million. Increases in the amount
of loan servicing fees for 1996 and 1994 were primarily due to increases in the
principal amount of loans serviced as compared to prior years. The mortgage
servicing portfolio was approximately $3.1 billion at December 31, 1996,
compared to $2.7 billion as of December 31, 1995. At December 31, 1996, less
than 2% of the Company's servicing portfolio was related to mortgages originated
outside Puerto Rico (all of which were originated in Florida).

The amount of prepayments on mortgage loans serviced by the Company was
$201 million, $160 million, and $281 million for the years ended December 31,
1996, 1995 and 1994, respectively. This represented approximately 7%, 6%, and
11% of the aggregate principal amount of mortgage loans serviced during such
periods and the average size of the loans prepaid was $35,360, $37,800, and
$41,800, respectively. The primary means used by the Company to reduce the
sensitivity of its servicing income to increases in prepayment rates is the
maintenance of a strong retail origination network that has allowed it to
increase or maintain the size of its servicing portfolio even during periods of
high prepayments.

Amortization of Excess Servicing Fees Receivable and Mortgage Servicing
Rights. Prior to January 1, 1997, ESRs were amortized over the expected life of
the asset and such amortization was recorded as a reduction of servicing income.
The amortization of ESRs is based on the amount and timing of estimated future
cash flows. Amortization of such ESRs for each of the years ended December 31,
1996, 1995, and 1994 was approximately $1,628,000, $988,000, and $570,000,
respectively. MSRs are amortized in proportion to, and over the period of,
estimated servicing income. Amortization of MSRs is included as a component of
"Other Expenses" in the Company's Consolidated Financial Statements. During
1996, total amortization of MSRs amounted to $998,789 versus $562,054 for 1995.
Effective January 1, 1997, ESRs were reclassified as IOs and MSRs as servicing
asset. For a discussion of certain accounting changes regarding the treatment of
ESRs, see "-- Changes in Accounting Standards -- SFAS No. 125."

Increases in prepayment rates over anticipated levels can adversely affect
the value of the Company's IOs (previously classified as ESRs) and servicing
assets. See "RISK FACTORS -- Impairment of Value of Interest-Only Strip
Receivables and Servicing Asset."

Gain on Sale of Servicing Rights. During the years ended December 31,
1996, 1995 and 1994, the Company sold servicing rights of $102 million, $310
million, and $202 million, respectively, realizing pretax gains of approximately
$1.8 million, $5.2 million, and $3.0 million, respectively. While the Company's
strategy is to continue to increase the size of its servicing portfolio by
retaining the servicing rights to the mortgage loans it originates, the Company
may continue to sell servicing rights in the future when market conditions are
favorable.

Other Income and Expenses. Other income increased 23% in 1996 as compared
to 1995, and 21% from 1994 to 1995. The increases during 1996 and 1995 were due
primarily to increased fees earned by Doral Bank.

21
<PAGE> 22

Total expenses in 1996 increased by $6.8 million compared to the same
period for 1995, as a result of higher interest expense associated with the
financing of the Company's mortgage loans and mortgage-backed securities
portfolios. Employee costs and advertising expense increased 39% and 41%,
respectively, over 1995 levels reflecting additional costs associated with
expanding the Company's customer base and loan origination capacity.

For 1995 compared to 1994 aggregate expenses increased by approximately 31%
as a result of higher interest expense associated with the financing of the
Company's mortgage loan and mortgage-backed securities portfolio. Telephone and
advertising expenses decreased 19% and 41%, respectively, compared to 1994
levels as a result of cost reduction measures implemented by management
commencing during 1994. Employee costs in 1994 reflected approximately $1.75
million of voluntary reductions in salary taken by the Chief Executive Officer.

Puerto Rico Income Taxes. The Puerto Rico maximum statutory corporate
income tax rate is 39%. For 1996, the effective income tax rate of Doral was
13.5% compared to 11.3% for 1995 and 16.3% for 1994. The decrease in effective
tax rates for 1996 and 1995 compared to 1994 was mainly due to the increase in
holdings of tax exempt GNMA mortgage-backed securities. The decrease for 1995
also reflects deductions for the value of shares previously granted under
employment agreements.

The lower effective tax rates (as compared to the maximum statutory rate)
experienced by Doral, reflect the fact that the portion of the net interest
income derived from certain FHA and VA mortgage loans secured by property
located in Puerto Rico and on GNMA securities backed by such mortgage loans is
exempt from income tax under Puerto Rico law. See "RECENT
DEVELOPMENTS -- Modification of Tax Laws Affecting FHA and VA Loans and GNMA
Securities." Net income tax savings to Doral attributable to this exemption
amounted to approximately $8.5 million, $4.6 million and $5.4 million for the
years ended December 31, 1996, 1995 and 1994, respectively. See Note 21 to the
Company's Consolidated Financial Statements for the year ended December 31, 1996
for a reconciliation of the provision for income taxes to the amount computed by
applying the applicable Puerto Rico statutory tax rates to income before taxes.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash requirements arise from loan originations and purchases,
repayments of debt upon maturity, payments of operating and interest expenses,
servicing advances and loan repurchases. The Company's primary sources of
liquidity are sales in the secondary mortgage market of the loans it originates
and purchases, short-term borrowings under warehouse, gestation and repurchase
agreement lines of credit secured by pledges of its loans and mortgage-backed
securities (in most cases until such loans are sold and the lenders repaid) and
revenues from operations. Commencing in 1993, the Company made a strategic
decision to diversify its sources of funding and to obtain funding from sources
outside of Puerto Rico. In the past, the Company has also relied on publicly
offered and privately-placed debt financings and public offerings of preferred
and common stock. Doral Bank also relies on deposits, including long-term
brokered deposits, borrowings from the Federal Home Loan Bank of New York (the
"FHLB-NY") as well as term notes backed by letters of credit of the FHLB-NY.

The interim Consolidated Statement of Cash Flows reflects the working
capital needs of the Company. Operating activities provided approximately $40.4
million of net cash during the nine month period ended September 30, 1997,
reflecting, in part, increased borrowings under agreements to repurchase used to
finance the Company's portfolio of mortgage-backed securities. The Company held
mortgage loans (excluding mortgage-backed securities held to maturity and loans
receivable held for investment) prior to sale for an average period of
approximately 322 days for the nine month period ended September 30, 1997 and
259 days during the year ended December 31, 1996. This increase was mainly due
to increases in the time GNMA mortgage-backed securities were held prior to
sale, as the Company decided to hold such securities for longer periods pending
the outcome of the legislative changes in Puerto Rico affecting the tax exempt
status of such securities. See "RECENT DEVELOPMENTS -- Modification of Tax Laws
Affecting FHA and VA Loans and GNMA Securities."

22
<PAGE> 23

Investing activities used net cash of approximately $123.8 million during
the nine month period ended September 30, 1997 due primarily to origination of
loans receivable and purchases of securities held to maturity of approximately
$117.1 million and $104.3 million, respectively, that were partially offset by
principal amortization of such securities and loans of approximately $102.6
million.

During the first nine months of 1997, financing activities provided
approximately $84.8 million of net cash primarily due to additional deposits
amounting to approximately $92.0 million received by Doral Bank. During 1997,
Doral Bank opened three additional branches in the San Juan metropolitan area.
Doral Bank now operates a total of five branches, all of which are located in
the San Juan metropolitan area.

Doral borrows money under warehouse lines of credit to fund its mortgage
loan commitments and repays the borrowings as the mortgages are sold. The
warehouse lines of credit then become available for additional borrowings.
Included among Doral's warehouse line of credit facilities are gestation or
presale facilities that permit the Company to obtain more favorable rates once
mortgage loans are in the process of being securitized but prior to actual
issuance of the mortgage-backed securities as well as to finance such
mortgage-backed securities upon their issuance. At September 30, 1997 and
December 31, 1996, Doral had available warehouse lines of credit, including
gestation lines of credit, of $770 million and $595 million, respectively.
Doral's warehouse and gestation lines of credit are generally subject to
termination at the discretion of the lender.

Doral also obtains short-term financing through repurchase agreement lines
of credit with financial institutions and investment banking firms, including
Doral Securities. Under these agreements, Doral sells GNMA, FNMA or
FHLMC-guaranteed mortgage-backed securities or collateralized mortgage
obligations, or other securities and simultaneously agrees to repurchase them at
a future date at a fixed price. Doral uses the proceeds of such sales to repay
borrowings under its warehouse lines of credit. The effective cost of funds
under repurchase agreements is typically lower than the cost of funds borrowed
under Doral's warehouse lines of credit. As of September 30, 1997, the Company
had available repurchase lines of credit (excluding the gestation lines of
credit referred to above) of approximately $1.2 billion. Borrowings under
certain repurchase lines are subject to availability of funds by the lender and
of acceptable collateral by the Company. Doral's continued use of repurchase
agreements will depend on the cost of repurchase agreements relative to the cost
of borrowing under its warehouse lines of credit with banks and other financial
institutions.

Certain of the debt obligations of the Company contain various provisions
that may affect the ability of the Company to pay dividends and remain in
compliance with those obligations. These provisions include requirements
concerning net worth, financial ratios, limitations on capital distributions and
other financial covenants. These provisions have not had, and are not expected
to have, an adverse impact on the ability of the Company to pay dividends in the
future.

The monthly weighted-average interest rate of Doral's borrowings for
warehouse lines of credit and for repurchase agreement lines of credit was 6.77%
and 5.78%, respectively, for the nine-month period ended September 30, 1997
compared to 6.71% for warehousing lines of credit and 5.45% for repurchase
agreements for the year ended December 31, 1996.

Doral Bank obtains funding for its lending activities through the receipt
of deposits, including long term brokered certificates of deposit, FHLB-NY
advances and from other borrowings, such as term notes backed by FHLB-NY letters
of credit and repurchase agreements with brokerage houses. As of September 30,
1997, Doral Bank held approximately $254 million in deposits (including $2.9
million in corporate accounts of the Company that are eliminated in the
preparation of the Company's Consolidated Financial Statements) at a
weighted-average interest rate of 4.3%, approximately 23% of which consisted of
non-interest bearing deposits. Approximately $42.7 million of total deposits
consisted of brokered certificates of deposit obtained through broker-dealers
with maturities ranging from three to five years. Doral Bank, as a member of
FHLB-NY, has access to collateralized borrowings from the FHLB-NY up to a
maximum of 30% of its total assets. Advances and reimbursement obligations with
respect to letters of credit must be secured by qualifying assets with a market
value equal to 120% of the advances. At September 30, 1997, Doral Bank had $15
million in outstanding advances from the FHLB-NY at a weighted average interest
rate cost of 6.24%. In addition, as of September 30, 1997, Doral Bank had $53.1
million outstanding in term notes secured by FHLB-NY letters of credit at an
average interest rate cost of 6.60%. Approximately $5 million principal amount
of such term notes

23
<PAGE> 24

bear interest at a fluctuating rate based on LIBID. The interest rate on such
floating rate notes has effectively been fixed pursuant to an interest rate swap
agreement with a major brokerage house. The interest rates on all term notes are
subject to an upward adjustment to a rate equal to 100% of LIBID for a term
equal to the remaining term of the note as a result of the recent changes to
Section 936 of the Internal Revenue Code. Because Doral Bank has the contractual
right to prepay the notes if the investor seeks an upward adjustment, in all but
one of the three cases in which an investor requested an upward adjustment,
Doral Bank has been successful in negotiating a rate adjustment below 100% of
LIBID.

As of September 30, 1997, Doral Bank exceeded all regulatory capital
requirements that were applicable to it as a federal savings association (i.e.
tangible and core capital of at least 1.5% and 3.0%, respectively, of adjusted
assets and total risk based capital of at least 8% of risk weighted assets). As
of September 30, 1997, Doral Bank had tangible capital and core capital of $26.5
million or approximately 7.54% of adjusted assets and total risk-based capital
of $27.7 million or 16.8% of risk weighted assets. See "BUSINESS --
Regulation -- Banking Operations -- Federal Regulation -- Capital Adequacy" for
the regulatory capital requirements applicable to the Company and Doral Bank
following the conversion of Doral Bank to a commercial bank.

Servicing agreements relating to the mortgage-backed securities programs of
FNMA, FHLMC and GNMA and certain other investors and mortgage loans sold to
certain other purchasers, require Doral to advance funds to make scheduled
payments of principal, interest, taxes and insurance, if such payments have not
been received from the borrowers. Doral generally recovers funds advanced
pursuant to these arrangements within 30 days. During the nine-month period
ended September 30, 1997, the monthly average amount of funds advanced by the
Company under such servicing agreements was approximately $3.5 million.

During the nine month period ended September 30, 1997, the Company
collected an average of approximately $1.2 million per month in net servicing
fees, including late charges. At September 30, 1997 and December 31, 1996, the
servicing portfolio amounted to approximately $3.6 billion and $3.1 billion,
respectively. The Company may, from time to time, determine to sell portions of
its servicing portfolio and to purchase servicing rights in bulk from third
parties. See "RECENT DEVELOPMENTS -- Bulk Purchases of Mortgage Servicing
Rights."

The Company engages in the sale or exchange of mortgage loans on a recourse
basis, particularly in the case of non-conforming loans. Recourse sales
generally involve the sale of non-conforming loans to local financial
institutions. Sales with recourse have increased during 1997, due to a shift
from sale of non-conforming loans through securitizations, which are done on a
non-recourse basis (except for the retention of residual and subordinate
interests), to direct sales to local financial institutions which are often done
on a recourse or partial recourse basis. The Company has shifted to selling
non-conforming loans directly to financial institutions because it is generally
able to achieve higher gains through the recognition of IOs. See "-- Results of
Operations for the Nine Months Ended September 30, 1997 and 1996." As of
September 30, 1997, the Company was servicing mortgage loans with an aggregate
principal amount of $434 million on a recourse or partial recourse basis. As of
September 30, 1997, recourse obligations related to the Company's mortgage
servicing portfolio totalled $179 million (which includes the Company's recourse
obligations with respect to the sale of approximately $283 million of mortgage
loans sold on a 10% recourse basis). The Company estimates the fair value of the
retained recourse obligation at the time mortgage loans are sold.

From time to time, the Company may sell mortgage-backed securities and
mortgage loans subject to put arrangements. Pursuant to these arrangements, the
Company grants the purchaser of the mortgage-backed securities or mortgage loans
a put option that grants the buyer the right to sell, and obligates the Company
to buy, the securities or loans at a future date at a negotiated price. Sales of
securities or loans with puts are accounted for as sales or borrowings pursuant
to SFAS No. 125 based on a financial components approach focusing on whether
control of the asset has been surrendered. As of September 30, 1997, the Company
had outstanding $182 million in mortgage-backed securities and mortgage loans
sold subject to put arrangements, which expire in varying amounts from 1998
through 2002, all of which were accounted for as sales pursuant to SFAS No. 125
because the Company understands that control of the asset has been surrendered
to the purchaser.

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<PAGE> 25

The Company has established a reserve of $1.3 million for possible losses
from recourse servicing and put obligations.

Doral expects that it will continue to have adequate liquidity and
financing arrangements to finance its operations. The Company 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 the Company will be successful in consummating any such transactions.

ASSETS AND LIABILITIES

At September 30, 1997, total assets were $1.546 billion compared to $1.107
billion at December 31, 1996. This increase was due primarily to increases in
interest earning assets related to the Company's mortgage loan production and
securitization activities and purchases of securities. The Company increased its
inventory of GNMA securities in anticipation of proposed changes in the tax
exempt status of GNMA securities under Puerto Rico law. See "RECENT
DEVELOPMENTS -- Modification of Tax Laws Affecting FHA and VA Loans and GNMA
Securities." Total liabilities were $1.375 billion at September 30, 1997
compared to $956 million at December 31, 1996. The increase in total liabilities
was primarily related to increased deposit accounts held at Doral Bank and
increases in securities sold under agreements to repurchase and advances under
warehousing lines of credit incurred in connection with the Company's mortgage
banking activities.

As of September 30, 1997, Doral Bank had $352.0 million in assets compared
to $280.7 million at December 31, 1996. This increase was due primarily to a net
increase of $39 million, $22 million and $23 million in loans receivable, loans
held for sale and securities held to maturity, respectively. At September 30,
1997, Doral Bank's deposit accounts totaled $253.9 million compared to $187.2
million at December 31, 1996. These amounts include $2.9 million and $28.3
million, respectively, in corporate accounts of the Company which are eliminated
in the preparation of the Company's Consolidated Financial Statements. Deposit
accounts include $38 million as of September 30, 1997 in non-interest bearing
demand deposits representing escrow funds and other servicing accounts from
Doral's servicing operations.

INTEREST RATE FLUCTUATIONS

Changes in interest rates can have a variety of effects on the Company's
business. In particular, changes in interest rates affect the volume of mortgage
loan originations and acquisitions, the interest rate spread on the Company's
portfolio of loans and securities, the amount of gain on sale of loans and the
value of the Company's servicing assets, IOs and securities holdings.

The Company does not generally hedge conventional loans in the pipeline or
in the process of origination because the Company does not generally permit
customers to lock-in an interest rate prior to closing. Instead, the interest
rates on loans are generally fixed at closing based on a certain spread over a
prevailing rate that adjusts weekly based on the FHLMC auction for residential
mortgage loans. For FNMA and FHLMC conforming loans and FNMA and FHLMC
mortgage-backed securities, the Company seeks to sell or obtain commitments for
the sale of such loans or mortgage-backed securities following the funding of
such loans. These loans are normally sold to institutional investors or to FNMA
and FHLMC. To the extent the Company does engage in offerings of mortgage
products which lock-in the interest rate until the closing date, it attempts to
obtain forward commitments at the time it fixes the rates for the loans.
Non-conforming conventional loans are normally sold in bulk to local financial
institutions or packaged into collateralized mortgage obligations. The sale of
non-conforming conventional loans normally takes longer than the sale of
conforming mortgage loans. Accordingly, the Company attempts to manage this
interest rate risk through the purchase of listed options on U.S. Treasury
Securities, as well as through the purchase of option contracts in the
over-the-counter market on other interest rate sensitive instruments.

In the case of Puerto Rico tax exempt GNMA securities, the Company normally
holds such securities for longer periods prior to sale to maximize its net
interest income and to take advantage of the fact that the interest on certain
of such securities is exempt from income taxation under Puerto Rico law. Prices
for tax exempt GNMA securities in Puerto Rico tend to be more stable than prices
for similar securities in the mainland U.S. because the tax exempt status of
interest paid on these securities under Puerto Rico law makes

25
<PAGE> 26

them more attractive to retail investors. This relative stability of prices for
Puerto Rico tax exempt GNMA securities allows the Company to carry out a less
aggressive hedging strategy to attempt to protect the value of these assets than
what might otherwise be required. The Company seeks to protect itself from
interest rate risk associated with its inventory of GNMA securities by
purchasing listed options on treasury bond futures contracts and other interest
rate sensitive instruments, as well as purchasing options on U.S. GNMA
securities in the over-the-counter market. As of September 30, 1997, the Company
had in place $75.2 million of long-term repurchase agreements secured by
collateralized mortgage obligations backed by GNMA certificates with a principal
amount of approximately $86.0 million. The Company does not obtain forward
commitments or otherwise hedge such securities because they are financed
pursuant to long-term repurchase agreements. The Company has the right to
substitute similar securities under the repurchase agreements. For GNMA
securities that do not qualify for Puerto Rico tax exemption, the Company will
implement a less aggressive hedging strategy because it intends to sell such
securities in the United States market as soon as practicable following
completion of the securitization process. For a discussion of recent amendments
to Puerto Rico law that limited the type of FHA and VA loans that qualify for
tax exemption, see "RECENT DEVELOPMENTS -- Modification of Tax Laws Affecting
FHA and VA Loans and GNMA Securities."

Declines in interest rates can adversely affect the Company's revenues by
increasing prepayment rates and causing an increase of the amortization of the
Company's servicing asset (previously classified as Mortgage Servicing Rights)
and IO's (previously classified as excess servicing fees receivable) or causing
an impairment to be recognized with respect to such assets. Moreover, increased
prepayment rates can reduce the Company's servicing income by decreasing the
size of the Company's servicing portfolio. To date, the Company has not used
synthetic instruments to protect the value of its servicing assets and IOs from
future interest rate fluctuations. The primary means used by the Company to
reduce the sensitivity of the Company's servicing income and value of its
servicing asset due to possible reductions of its servicing portfolio during
periods of high prepayments has been the development of a strong retail
origination network that has allowed the Company to increase or maintain the
size of its servicing portfolio even during periods of high prepayments, such as
those experienced during 1993.

The net interest income of the Company is also subject to interest rate
risk because its interest-earning assets and interest-bearing liabilities
reprice at different times and varying amounts. Most of the Company's interest
earning assets, including its mortgage-backed securities held for trading, are
fixed rate interest-earning assets that are not subject to repricing (except for
replacement of assets through repayments, sales and new originations) while the
short-term borrowings used to finance these positions normally reprice on a
periodic basis (e.g., daily, monthly or quarterly). To protect against major
fluctuations in short-term interest rates, the Company purchases listed put and
call options and sells call options on financial instruments, including
Eurodollar contracts. Doral Bank also enters into interest rate swap agreements.
This policy attempts to ensure a relatively stable short-term cost of funds.
With respect to its loans receivable and securities held to maturity, Doral Bank
attempts to obtain long-term deposits and other long-term debt financing,
including long-term brokered certificates of deposit, advances from the FHLB-NY
and term notes backed by FHLB-NY letters of credit.

In the future, the Company may utilize alternative hedging techniques
including futures, options or other hedge vehicles 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,
the Company's profitability may be adversely affected.

INFLATION

Doral is affected by inflation in the areas of loan production and
servicing fees. General and administrative expenses increase with inflation.
However, the increase in real estate values in Puerto Rico in recent years has
been a positive factor for the Company'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. Interest rates normally increase during periods
of high inflation and decrease during periods of low inflation. See "-- Interest
Rate Fluctuations" for a discussion of the effects of changes of interest rates
on the Company's operations.

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<PAGE> 27

CHANGES IN ACCOUNTING STANDARDS

SFAS No. 114. In January 1995, the Company adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." This Statement requires that
impaired loans that are within the scope of the Statement be measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependant. Loans that are measured at fair value or at the lower of cost or fair
value, are excluded.

SFAS No. 121. In January 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed." SFAS No. 121 establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill related to
those assets, to be held and used. Under SFAS No. 121, long-lived assets and
certain identifiable intangibles to be held and used must be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review of
recoverability, an estimate of the future cash flows expected to result from the
use of the asset and its eventual disposition must be made. If the sum of the
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss is recognized.

SFAS No. 123. In January 1996, the Company also adopted SFAS No. 123,
"Accounting for Stock-based Compensation." This Statement defines a fair value
based method of accounting for employee stock options and encourages all
entities to adopt that method of accounting for all of their stock-based
employee compensation plans. No transactions of the nature covered by SFAS No.
123 have been made.

SFAS No. 125. In June 1996, the Financial Accounting Standards Board
("FASB") issued SFAS 125. SFAS 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on the application of a financial-components approach that
focuses on control. That approach requires the recognition of financial assets
and servicing assets controlled by the reporting entity, the derecognition of
financial assets when control is surrendered, and the derecognition of
liabilities when they are extinguished. Specific criteria are established for
determining when control has been surrendered in the transfer of financial
assets.

This Statement requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It also requires that servicing assets
and other retained interests in the transferred assets be measured by allocating
the previous carrying amount between the assets sold, if any, and retained
interest, if any, based on their relative fair values at the date of the
transfer. Servicing assets and liabilities must be subsequently measured by (a)
amortization in proportion to and over the period of estimated net servicing
income and loss and (b) assessment for asset impairment or increased obligation
based on their fair values.

SFAS 125 modifies the accounting for IOs or retained interests in
securitizations, such as excess servicing fees receivable, that can be
contractually prepaid or otherwise settled in such a way that the holder would
not recover substantially all of its recorded investment. In this case, it
requires that they be classified as available for sale or as trading securities.
IO's and retained interests are to be recorded at market value in accordance
with SFAS No. 115. Changes in market value of IOs are included in operations, if
classified as trading securities, or in shareholders' equity as unrealized gains
or losses, net of taxes, if classified as available for sale.

Under the provisions of SFAS 125, management has determined that excess
servicing fees receivable retained by the Company as a result of securitization
transactions or bulk sales of whole loans will be held as trading securities as
IOs. In addition, all residual interests and mortgage backed securities
previously retained by the Company as part of its securitization transactions
will also be held as trading securities.

The provisions of this Statement, except as indicated below, are effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and must be applied
prospectively. Earlier or retroactive application is not permitted. In December
1996, the FASB issued a statement that defers for one year the effective date
applicable to the provisions of SFAS 125 that deal with secured borrowings and
collateral. Additionally, the deferment provision would apply to transfers of
financial assets for repurchase agreements, dollar rolls and securities lending.

27
<PAGE> 28

Refer to Note (e) to the Company's Interim Consolidated Financial
Statements for the period ended September 30, 1997 for certain reclassifications
made by the Company as a result of the adoption of SFAS 125.

The adoption of the above standards has not had a material effect on the
Company's result of operations or financial position.

SFAS No. 128. In February 1997, the FASB issued SFAS No. 128, "Earnings
Per Share." This Statement simplifies the standards for computing earnings per
share ("EPS") previously found on APB Opinion No. 15, "Earnings Per Share," and
makes it comparable to international EPS standards. It replaces the presentation
of the primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS computation on the face of the income
statement for all entities with complex capital structures and requires
reconciliation of the numerator and denominator of the diluted EPS computation.

This Statement is effective for financial statements issued after periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. This Statement requires restatement of prior-period EPS data
presented. The capital structure of the Company is such that the adoption of
this new standard will not affect current or prior period presentations of basic
or diluted EPS. Accordingly, the Company's basic EPS would amount to $1.29,
$1.15, $1.49, $1.33 and $1.23, for the nine months ended September 30, 1997 and
1996 and for the years ended December 31, 1996, 1995 and 1994, respectively,
while diluted EPS would amount to $1.24, $1.10, $1.42, $1.27 and $1.15 for such
periods, which is equivalent to the primary EPS and fully diluted EPS currently
presented.

SFAS No. 130. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of general
purpose financial statements. This Statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial position. In Doral's case, unrealized
gains and losses on certain investments in debt securities will be the only
other comprehensive income item to be included in comprehensive income.

This Statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required. This Statement affects only financial
statement presentation and, therefore, management understands that its adoption
will not have a material effect, if any, on the Company's financial position or
results of operations.

SFAS No. 131. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." This Statement establishes the standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim reports issued to shareholders.

This Statement requires that a public business enterprise report financial
and descriptive information about its reportable segments. Operating segments
are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. It also
requires reporting descriptive information about the way that the operating
segments were determined, the products and the services provided by the
operating segments, differences between the measurements used in reporting
segment information and those used in the enterprises general purpose financial
statements, and the changes in the measurement of segment amount from period to
period. Doral's management has not yet made a determination on the business
lines of the Company that fulfill the segment definition described above.

This Statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required. This statement affects only financial
statement presentation and disclosure and therefore management understands it
will not have a material effect, if any, on the Company's financial position or
results of operations.

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<PAGE> 29

YEAR 2000 ISSUES

The Company has established a corporate-wide task group to oversee the
identification, correction, reprogramming and testing of the Company's systems
and software applications for year 2000 compliance as well as to identify other
possible risks associated with the year 2000 problem. The year 2000 problem
refers to the fact that many software applications and operational programs
written in the past were not designed to recognize calendar dates beginning in
the year 2000. The failure of such applications or systems to properly recognize
the dates beginning in the year 2000 could result in miscalculations or system
failures. The Company will work closely with HRU, Inc., the company that
provides data processing services for the Company's mortgage servicing
operation, as well as with third party vendors of computer hardware and software
applications to ensure that the systems used by HRU, Inc. and the computer
hardware and software provided by such other vendors will be year 2000 compliant
by the end of 1998.

The Company intends to devote the resources, which may include external
resources, such as consultants, it deems necessary to address this issue and has
established the goal of having substantially all its systems and software
applications year 2000 compliant by the end of 1998. While the Company has not
yet completed the process of quantifying the expenses related to achieving year
2000 compliance, management, based on preliminary information, does not
anticipate that such expenses will have a material impact on the Company's
results of operations or financial condition during the next two years.

29
<PAGE> 30

BUSINESS

GENERAL

The Company, together with its wholly-owned subsidiaries, is primarily
engaged in a wide range of mortgage banking activities, including 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 and financing of mortgage loans, mortgage-backed
securities and other investment securities for sale or investment, the purchase
and sale of servicing rights associated with mortgage loans and, to a lesser
extent, the origination of construction loans and mortgage loans secured by
commercial real estate (the "Mortgage Banking Business"). The Company is the
leading mortgage banking institution in Puerto Rico in volume of origination of
first mortgage loans on single-family residences. The Company's Mortgage Banking
Business is principally conducted through two operating units: Doral Mortgage, a
wholly-owned subsidiary of the Company, and the HF Division, a division of the
Company. The Company is also engaged in the banking business through Doral Bank
(formerly known as Doral Federal Savings Bank), a Puerto Rico commercial bank
which was acquired by the Company in September 1993 and in the securities
business through Doral Securities, a broker-dealer subsidiary established by the
Company in September 1996. As a result of the conversion of the charter of Doral
Bank from that of a federal savings association to that of a Puerto Rico
chartered commercial bank on October 1, 1997, the Company is a bank holding
company subject to the provisions of the BHC Act, and, accordingly, subject to
supervision and regulation by the Federal Reserve. See "-- Regulation -- Banking
Operations -- Federal Regulation."

The Company is an approved seller/servicer for FHLMC and FNMA, an approved
issuer for GNMA and an approved servicer under the GNMA, FNMA and FHLMC
mortgage-backed securities programs. The Company is also qualified to originate
mortgage loans insured by FHA and guaranteed by VA. See "-- Mortgage Banking
Business -- Sale of Loans; Issuance of Mortgage-Backed Securities."

The Company's strategy is to increase its volume of loan originations and
its servicing portfolio, as well as to maximize net interest income. The Company
seeks to increase its volume of loan originations by emphasizing quality
customer service and maintaining the most extensive system of branch offices of
any mortgage banking institution in Puerto Rico. The Company strives to increase
the size of its servicing portfolio by relying primarily on internal loan
originations and supplementing such originations with purchases of loans and
mortgage servicing rights from third parties. The Company has traditionally
emphasized origination of 15-year and 30-year conventional and FHA-insured or
VA-guaranteed mortgage loans on single-family residences. The Company relies on
net interest income for a more significant portion of its earnings than do most
mortgage banking companies. The Company seeks to maximize net interest income by
holding mortgage-backed securities, primarily Puerto Rico tax exempt GNMA
securities backed by Puerto Rico mortgages, for longer periods prior to sale
than most mortgage banking companies. This strategy has the effect of reducing
the Company's overall effective tax rate because the interest on certain GNMA
securities backed by Puerto Rico mortgages is tax exempt under Puerto Rico law.
A recent amendment to Puerto Rico tax laws has modified the tax exempt treatment
of GNMA securities. See "RECENT DEVELOPMENTS -- Modification of Tax Laws
Affecting FHA and VA Loans and GNMA Securities." The Company also seeks to
increase net interest income by funding and holding for investment, loans and
investment securities, consisting primarily of residential mortgage loans,
mortgage-backed securities and United States government and agency obligations
the interest on which is tax exempt to the Company for Puerto Rico income tax
purposes. See "-- Other Lending and Investment Activities." The Company's
strategy is to become a more diversified financial services company by offering
a broad range of mortgage products as well as expanding into new areas of
business such as banking and securities brokerage. The Company also intends to
pursue opportunities to expand geographically within the mainland United States,
particularly within the New York City metropolitan area and other areas with
large Hispanic populations, through acquisitions, the establishment of new
operations or a combination of both.

Substantially all of the Company's business is currently conducted in
Puerto Rico. The Mortgage Banking Business is currently conducted in Puerto Rico
through 20 branches, 16 of which are operated by Doral Mortgage, three by the HF
Division and one by Centro Hipotecario. Doral Mortgage also operates
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<PAGE> 31

branch offices in Orlando and Miami, Florida. Doral Securities operates through
a single branch in the San Juan metropolitan area and employed 24 persons as of
September 30, 1997.

Doral Bank, currently operates through five branches in the San Juan
metropolitan area, which serve primarily as deposit-taking operations. To date,
most loans have been originated pursuant to a Master Loan Production Agreement
with the Company. See "-- Other Lending and Investment Activities -- Lending
Activities of Doral Bank and Real Estate Owned." Doral Bank has experienced
rapid growth since its acquisition by the Company, increasing its assets from
$13 million as of September 10, 1993 to $352 million in assets as of September
30, 1997. To date, this growth has been funded primarily through increases in
certificate of deposit accounts and non-interest bearing deposits consisting
primarily of corporate and custodial accounts as well as borrowings from
institutional investors, advances from the FHLB-NY and long term brokered
deposits. As of September 30, 1997, Doral Bank had total deposits and net worth
of $254 million and $27 million, respectively. Custodial accounts associated
with the Company's servicing portfolio, commercial demand deposit accounts of
the Company and certificate of deposit accounts constituted approximately 15%,
1% and 65%, respectively, of Doral Bank's total deposit accounts as of September
30, 1997. The Company intends to continue to increase the assets of Doral Bank
as well as to expand its branch network and deposit base.

During the third quarter of 1996, the Company's new broker-dealer
subsidiary, Doral Securities became operational. While Doral Securities engages
in a general securities business, it has a particular emphasis on the sale of
Puerto Rico tax-exempt GNMA securities and other Puerto Rican securities.

The following table sets forth the components of Doral's revenues and the
percentage contribution of each component for the periods indicated.

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------------- --------------------------------------------------
1997 1996 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Mortgage loan sales and
fees.................. $18,223 19% $20,471 26% $26,610 25% $13,529 15% $10,573 15%
Interest income......... 64,099 68 49,030 61 66,987 62 61,907 67 46,508 65
Servicing income........ 10,863 12 8,342 10 11,659 11 10,577 12 11,448 16
Gain on sale of
servicing rights...... -- -- 1,813 2 1,813 2 5,205 6 3,003 4
Other income............ 1,128 1 511 * 764 * 620 * 511 *
</TABLE>

- ---------------

* Less than one percent.

MORTGAGE BANKING BUSINESS

Loan Origination and Purchase of Mortgages. The Company has the most
extensive system of branch offices for originating mortgage loans of any
mortgage banking institution in Puerto Rico. Doral Mortgage operates 16 branches
throughout Puerto Rico and two branch offices in the State of Florida. The HF
Division operates three branches in the San Juan metropolitan area. Centro
Hipotecario, Inc. operates an additional branch in the San Juan metropolitan
area.

While the Company makes available a wide variety of mortgage loan products
designed to respond to consumer needs and competitive conditions, it currently
emphasizes 15-year and 30-year conventional first mortgages and 15-year and
30-year FHA loans and VA loans secured by single-family residences.
Substantially all the loans are fixed rate mortgages. Conventional mortgage
loans generally (i) do not exceed 80% of the appraised value of the mortgaged
property or (ii) are insured by private mortgage insurers.

According to applicable VA guidelines, the maximum amount of a VA loan
originated in Puerto Rico is currently $203,000. Pursuant to applicable FHA
guidelines, the maximum amount of a single-family FHA loan ranges from $81,548
to $152,000, depending on the municipality where the mortgaged property is
located.

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<PAGE> 32

The average loan size for FHA/VA mortgage loans and conventional mortgage loans
was approximately $73,100 and $59,700, respectively as of September 30, 1997.

A portion of the conventional loans by the Company are conforming loans
which qualify for inclusion in guarantee programs sponsored by FNMA or FHLMC.
The Company also originates conventional loans that do not qualify for the
guarantee programs of FNMA or FHLMC, because they do not conform to one or more
of the requirements of such agencies ("non-conforming loans"). The underwriting
standards used by the Company for non-conforming loans is generally similar to
that of conforming loans. The principal deviations from such standards are
relaxed requirements for income verification and credit history. The Company
requires lower-loan-to-value ratios in non-conforming loans, generally 65% or
less. To date, the Company has not been actively involved in the origination of
so-called "sub-prime" mortgage loans to individuals who are deemed to be
relatively high credit risks. For the nine months ended September 30, 1997 and
the years ended December 31, 1996, 1995 and 1994, non-conforming conventional
loans represented approximately 34%, 31%, 45% and 28%, respectively, of the
Company's total volume of mortgage loans originated.

The Company also originates construction loans for owner-occupied
single-family residences and other real estate development projects and mortgage
loans on commercial properties. The Company has recently been more active in the
origination of mortgage loans secured by income-producing commercial properties.
While many of these loans are funded through Doral Bank for investment, the
Company's mortgage banking units also originate such loans for resale to
investors. For the nine months ended September 30, 1997, the Company originated
approximately $25 million of mortgage loans secured by income-producing
commercial properties, $16 million of which were funded by Doral Bank. The
Company has entered into a preferred broker agreement with GMAC Commercial
Mortgage Corporation ("GMAC") whereby the Company will act as the exclusive
broker of commercial loans for GMAC in Puerto Rico. The loans to be brokered to
GMAC would generally involve larger denomination loans that the Company does not
originate directly. For the nine months ended September 30, 1997, the Company
originated $26 million in construction loans, of which $9 million were
originated through Doral Bank. See "-- Other Lending and Investment
Activities -- Lending Activities of Doral Bank and Real Estate Owned."
Construction loans and mortgage loans on commercial properties together
constituted approximately 7% and 3% of the total dollar volume of loans
originated and purchased by the Company for the nine months ended September 30,
1997 and for the year ended December 31, 1996, respectively.

The Company also originates second mortgages. For the nine months ended
September 30, 1997 and the year ended December 31, 1996, second mortgages
constituted approximately 2% and 4%, respectively, of the total loans originated
by the Company. The maximum loan-to-value ratio on second mortgages permitted by
the Company is 80% (including the amount of any first mortgage).

In addition to second mortgages, the Company offers home equity or personal
loans secured by real estate mortgages up to $40,000. These loans are generally
made for debt consolidation, home improvements, refinancing or other personal
credit needs. These loans are generally secured by first or second mortgages on
single-family residences, are payable within five to ten years and provide for
higher interest rates than typical conventional mortgages. During the nine
months ended September 30, 1997 and for the year ended December 31, 1996, the
Company originated approximately $29 million and $74 million of such loans,
respectively.

Loan origination activities performed by the Company include soliciting,
completing and processing mortgage loan applications and preparing and
organizing the necessary loan documentation. Loan applications are examined for
compliance with underwriting criteria and, if all requirements are met, the
Company issues a commitment to the prospective borrower specifying the amount of
the loan and the loan origination fees, discount points and closing costs to be
paid by the borrower or seller and the date on which the commitment expires.

The Company's strategy is to increase its servicing portfolio primarily
through internal originations through its branch network. The Company, however,
also purchases FHA loans and VA loans from other mortgage bankers for resale to
institutional investors in the form of GNMA securities. The amount of loans
purchased from third parties was approximately $27 million for the nine months
ended September 30, 1997
32
<PAGE> 33

and $63 million, $77 million and $64 million and for the years ended December
31, 1996, 1995, 1994. All loans purchased consisted of FHA and VA loans.

In addition to loan originations through its retail branch network and
purchases from third parties, the Company originates mortgage loans referred to
it by approved mortgage brokers. The mortgage broker receives a fee payable at
closing by the borrower for its services. Approximately $47 million, $34 million
and $10 million of mortgage loans were originated through mortgage brokers for
the nine months ended September 30, 1997 and for the years ended December 31,
1996, and 1995, respectively. Purchases of loans from other mortgage bankers in
the wholesale loan market as well as origination of mortgage loans through loan
brokers provides the Company with a source of low cost production that
complements the Company's internal originations and allows the Company to
efficiently increase the size of its servicing portfolio.

The following table sets forth the number and dollar amount of the
Company's mortgage loan originations for the periods indicated:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE INITIAL LOAN BALANCE)
<S> <C> <C> <C> <C> <C> <C> <C>
FHA/VA LOANS:(1)
Number of loans............. 3,582 3,057 4,362 4,016 7,037 8,364 3,224
Volume of loans............. $261,925 $214,348 $306,753 $267,909 $433,748 $ 532,654 $207,239
Percent of total volume..... 38% 39% 41% 48% 57% 37% 30%
CONVENTIONAL AND OTHER
LOANS:(2)
Number of loans............. 7,144 7,305 9,575 5,059 6,285 12,658 7,637
Volume of loans............. $426,743 $333,724 $446,957 $291,537 $326,698 $ 899,794 $486,484
Percent of total volume..... 62% 61% 59% 52% 43% 63% 70%
TOTAL LOANS:
Number of loans(3).......... 10,726 10,362 13,937 9,075 13,322 21,022 10,861
Volume of loans(4).......... $688,668 $548,072 $753,710 $559,446 $760,446 $1,432,448 $693,723
AVERAGE INITIAL LOAN
BALANCE:
FHA/VA Loans................ $ 73,100 $ 70,100 $ 70,300 $ 66,700 $ 61,600 $ 63,700 $ 64,300
Conventional and other
loans(2).................. 59,700 45,700 46,700 57,600 52,000 71,100 63,700
REFINANCING(5).............. 51% 48% 47% 41% 59% 80% 67%
</TABLE>

- ---------------

(1) Excludes loans purchased from third parties.
(2) Includes second mortgage loans and non-conforming loans (conventional loans
that do not qualify for inclusion in the guarantee programs sponsored by
FNMA or FHLMC).
(3) Includes 1,397, 1,502, 2,044, 834, 898 and 61, of loans funded by Doral Bank
pursuant to the Master Loan Production Agreement for the nine months ended
September 30, 1997 and 1996 and the years ended December 31, 1996, 1995,
1994 and 1993, respectively. See "-- Other Lending and Investment Activities
-- Lending Activities of Doral Bank and Real Estate Owned."
(4) Includes $117.1 million, $66.3 million, $98.7 million, $52.3 million, $26.3
million and $4.9 million, principal amount of loans funded by Doral Bank
pursuant to the Master Loan Production Agreement for the nine months ended
September 30, 1997 and 1996 and the years ended December 31, 1996, 1995,
1994 and 1993, respectively. See "-- Other Lending and Investment
Activities -- Lending Activities of Doral Bank and Real Estate Owned."
(5) As a percentage of the total dollar volume of loans originated.

A substantial portion of the Company's total mortgage loan originations has
consistently been comprised of refinance loans. Demand for refinance loans has
traditionally been high in Puerto Rico because this product is often used as a
vehicle for debt consolidation. For the nine months ended September 30, 1997 and
the years ended December 31, 1996, 1995 and 1994, refinancing activity
represented approximately 51%, 47%, 41% and 59%, respectively, of the Company's
total dollar volume of mortgage loans originated. The decrease in refinance
activity during 1994 compared to 1993 was due to the rise in interest rates
experienced during the

33
<PAGE> 34

second half of 1994. The continued decrease in refinance loans during 1995
reflected the continued weakness in demand for this product following the
unusually high refinance activity experienced during 1993. A significant future
increase in mortgage interest rates in Puerto Rico could adversely affect the
Company's business if it results in a significant decrease in refinancing of
first mortgage loans.

In recent years, the Company, primarily through the HF Division, has
increased relations with realtors and developers in order to increase home
purchase loan originations, particularly in newly constructed residential
developments. Mortgage loans to finance the acquisition of new residential units
for the first nine months of 1997 and for the years ended December 31, 1996 and
1995, were $90 million, $136 million and $84 million, respectively. The Company
believes that by increasing its home purchase originations it may offset, in
part, the adverse effects that increasing interest rates or lower demand for
refinance loans could have on overall mortgage loan production. In addition,
strength in the new housing sector will allow the Company to originate FHA and
VA loans that qualify for tax exemption under the recent amendments to Puerto
Rico tax laws limiting tax exemption to FHA and VA loans used to finance the
acquisition of newly constructed residential housing. See "RECENT
DEVELOPMENTS -- Modification of Tax Laws Affecting FHA and VA Loans and GNMA
Securities."

All loan originations, regardless of whether originated through the retail
network, obtained through mortgage brokers or purchased from third parties, must
be underwritten in accordance with the Company's underwriting criteria,
including loan-to-value ratios, borrower income qualifications, debt ratios and
credit history, investor requirements, and insurance and property appraisal
requirements. The Company's underwriting standards also comply with the relevant
guidelines set forth by HUD, VA, FNMA, FHLMC, federal banking regulatory
authorities, private mortgage investment conduits and private mortgage insurers,
as applicable. The Company's underwriting personnel, while operating out of loan
offices, make underwriting decisions independent of the Company's mortgage loan
origination personnel. Under the Company's quality control plan, the Company
reverifies a portion of the mortgage loans funded each month, to provide
reasonable assurance that the Company's underwriting standards have been
satisfied. The selection of mortgage loans for reverification is done on a
sampling basis to provide quality control coverage for all mortgage loan
programs and appraisers. In addition, the Company reconfirms employment status,
the source of down payment and other key items.

Typically, when a mortgage loan is originated through the Company's retail
branches, the borrower is required to pay an origination fee to the Company.
These fees range up to 6% of the principal amount of the mortgage loan, and are
payable at the closing of such loan. The Company may also charge discount points
depending upon market conditions and regulatory considerations as well as the
Company's objectives concerning mortgage loan origination volume and pricing.
The Company incurs certain costs in originating mortgage loans, including
overhead, out-of-pocket costs and, in some cases, where the mortgage loans are
subject to a purchase commitment from private investors, related commitment
fees. The volume and type of mortgage loans and of commitments made by investors
vary with competitive and economic conditions, resulting in fluctuations in
revenues from mortgage loan originations. Generally accepted accounting
principles ("GAAP") require that general operating expenses incurred in
originating mortgage loans be charged to current expense. Direct origination
costs and origination income must be deferred and amortized using the interest
method, in the case of loans held for investment, or deferred until the related
loans are sold, in the case of loans held for sale.

Loan Servicing. The Company's principal source of servicing rights is
mortgage loan originations. When the Company sells the mortgage loans it has
originated or purchased, it generally retains the rights to service such loans
and receives the related servicing fees. Loan servicing includes collecting
principal and interest and remitting the same to the holders of the mortgage
loans or mortgage-backed securities to which such mortgage loan relates, holding
escrow funds for the payment of real estate taxes and insurance premiums,
contacting delinquent borrowers, supervising foreclosures in the event of
unremedied defaults and generally administering the loans. The Company receives
annual loan servicing fees ranging from 0.25% to 0.50% of the declining
principal amount of the loans serviced plus any late charges. For the nine
months ended September 30, 1997 and the year ended December 31, 1996, the
weighted-average servicing fee for the Company's servicing portfolio was
approximately 0.43% and 0.39%, respectively.
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<PAGE> 35

Servicing rights represent a contractual right and not a beneficial
ownership interest in the underlying mortgage loans. Failure to service the
loans in accordance with contract requirements may lead to a termination of the
servicing rights and the loss of future servicing fees. In general, the
Company's servicing agreements are terminable by the investor for cause. With
respect to all mortgage loans funded by Doral Bank after October 1, 1995, Doral
Bank may terminate the Company's servicing rights without cause upon notice to
the Company. There has been no termination of servicing rights by any mortgage
loan owners because of the failure by the Company to service in accordance with
its contractual obligations.

At September 30, 1997 and December 31, 1996 and 1995, approximately $213.7
million, $256.6 million, and $267.5 million, respectively, or 6%, 8% and 10%,
respectively, of the Company's total servicing portfolio consisted of mortgage
loans securitized by the Company and sold to grantor trusts or real estate
mortgage conduits ("REMICs"). The insurance company insuring the senior
certificates issued by such grantor trusts and other conduits may terminate the
Company's servicing rights if, among other things: (i) the Company becomes
ineligible or loses its rights as an approved servicer for GNMA, FNMA or FHLMC;
(ii) the number of loans included in the trusts which are delinquent 90 days or
more (including properties acquired upon foreclosure) exceeds 8% of the
aggregate outstanding principal balance of the mortgage loans included in the
trusts; and (iii) realized losses with respect to mortgage loans included in the
trusts exceed certain thresholds on an annual basis (1% of the outstanding
balance of mortgage loans) and on a cumulative basis over various periods of
time (ranging from 0.45% to 4.00% of the original principal balance of loans in
the trusts).

The Company's mortgage loan servicing portfolio is subject to reduction by
reason of normal amortization, prepayments and foreclosure of outstanding
mortgage loans. Additionally, the Company may sell mortgage loan servicing
rights from time to time to other institutions if market conditions are
favorable.

35
<PAGE> 36

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

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
COMPOSITION OF SERVICING
PORTFOLIO AT PERIOD END:
FHA and VA mortgage loans..... $1,611,268 $1,236,128 $1,305,792 $1,117,296 $1,062,108 $ 955,624 $ 851,853
Conventional and other
mortgage loans(1)........... 2,015,058 1,708,215 1,762,690 1,550,964 1,581,418 1,420,031 885,571
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total servicing
portfolio........... $3,626,326 $2,944,343 $3,068,482 $2,668,260 $2,643,526 $2,375,655 $1,737,424
========== ========== ========== ========== ========== ========== ==========
BEGINNING SERVICING
PORTFOLIO................... $3,068,482 $2,668,260 $2,668,260 $2,643,526 $2,375,655 $1,737,424 $1,413,006
ADD:
Loans funded and
purchased(2)................ 716,427 609,078 816,566 636,030 823,834 1,433,448 722,723
Bulk servicing acquired....... 170,700 -- -- 42,300 -- -- --
LESS:
Servicing sales transferred... -- 102,000 102,000 310,000 202,000 198,700 53,400
Run-off(3).................... 329,283 230,995 314,344 343,596 353,963 596,517 344,905
---------- ---------- ---------- ---------- ---------- ---------- ----------
Ending servicing
portfolio........... $3,626,326 $2,944,343 $3,068,482 $2,668,260 $2,643,526 $2,375,655 $1,737,424
========== ========== ========== ========== ========== ========== ==========
SELECTED DATA REGARDING
MORTGAGE LOANS SERVICED:
Number of loans............... 72,101 59,831 62,199 54,993 52,515 48,272 39,562
Weighted average interest
rate........................ 8.45% 8.30% 8.53% 8.43% 8.21% 8.15% 9.09%
Weighted average maturity
(months).................... 180 212 221 181 192 226 204
Weighted average servicing fee
rate........................ .4292 .4031 .3933 .3831 .3945 .4195 .4040
DELINQUENT MORTGAGE LOANS AND
PENDING FORECLOSURES AT
PERIOD END:(4)
60-89 days past due........... 1.77% 1.78% 1.77% 1.78% 1.53% 1.49% 1.39%
90 days or more past due...... 2.06 2.12 2.18 2.22 1.48 1.62 1.55
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total delinquencies... 3.83% 3.90% 3.95% 4.00% 3.01% 3.11% 2.94%
========== ========== ========== ========== ========== ========== ==========
Foreclosures pending.......... 1.22% 1.06% 1.12% 1.04% 1.19% 1.21% 1.44%
========== ========== ========== ========== ========== ========== ==========
</TABLE>

- ---------------

(1) Includes $206.3 million, $123.8 million, $152.3 million, $73.7 million, $26
million and $4.7 million of loans serviced for Doral Bank for the nine
months ended September 30, 1997 and 1996 and for years ended December 31,
1996, 1995, 1994 and 1993, respectively, which represented 5.7%, 4.20%,
4.96%, 2.76%, 0.98% and 0.20% of the total servicing portfolio as of such
date.
(2) Loans funded and purchased represent that portion of loans originated or
purchased with respect to which the servicing rights were retained by the
Company.
(3) Run-off refers to regular amortization of loans, prepayments and
foreclosures.
(4) Expressed as a percentage of the total number of loans serviced.

Substantially all of the mortgage loans in the Company's servicing
portfolio are secured by single (one-to-four) family residences. Substantially
all of the Company's mortgage servicing portfolio is composed of mortgages
secured by real estate in Puerto Rico. At September 30, 1997 and December 31,
1996, less than 2% as of each date of the Company's mortgage servicing portfolio
related to mortgages secured by real property outside Puerto Rico (all of which
were secured by real property located in the State of Florida).

The amount of principal prepayments on mortgage loans serviced by the
Company was $194 million, $158 million, $201 million, $160 million and $281
million for the nine month periods ended September 30, 1997 and 1996, and for
years ended December 31, 1996, 1995 and 1994, respectively. Such prepayments
represented approximately 8%, 8%, 7%, 6% and 11% of the aggregate principal
amount of mortgage loans serviced during such periods and the average size of
the loans prepaid were $37,420, $34,420, $35,360, $37,800 and $41,800,
respectively. Principal prepayments remained stable during 1996 compared to
1995. Principal

36
<PAGE> 37

prepayments declined during 1995 and 1994 as a result of decreased refinancing
activity following the refinance boom of 1993. The primary means used by the
Company to reduce the sensitivity of its servicing fee income to changes in
interest and prepayment rates is the maintenance of a strong internal
origination capability that has allowed the Company to continue to increase the
size of its servicing portfolio even in times of high prepayments resulting from
declines in interest rates.

Servicing agreements relating to the mortgage-backed securities programs of
FNMA, FHLMC and GNMA, and certain other investors, require the Company to
advance funds to make scheduled payments of principal, interest, taxes and
insurance, if such payments have not been received from the borrowers. During
the first nine months of 1997 and the year ended December 31, 1996, the monthly
average amount of funds advanced by the Company under such servicing agreements
was approximately $3.5 million and $6.3 million, respectively. Funds advanced by
the Company pursuant to these arrangements are generally recovered by the
Company within 30 days.

The degree of risk associated with a mortgage loan servicing portfolio is
largely dependent on the extent to which the servicing portfolio is non-recourse
or recourse. In non-recourse servicing, the principal credit risk to the
servicer is the cost of temporary advances of funds. In recourse servicing, the
servicer agrees to share credit risk with the owner of the mortgage loans such
as FNMA or FHLMC or with a private investor, insurer or guarantor. Losses on
recourse servicing occur primarily when foreclosure sale proceeds of the
property underlying a defaulted mortgage are less than the then outstanding
principal balance and accrued interest of such mortgage loan and the cost of
holding and disposing of such underlying property. During 1997, the Company has
increased its sale of loans on a recourse basis. For additional information
regarding recourse obligations, see "-- Sale of Loans; Issuance of
Mortgage-Backed Securities."

In the ordinary course of business, the Company makes certain
representations and warranties to purchasers and insurers of mortgage loans and
to the purchasers of servicing rights. In connection with any purchases by the
Company of servicing rights, the Company is also exposed to liability as a
successor to third party originators' representations and warranties. If a loan
defaults and there has been a breach of representations and warranties, the
Company may become liable for the unpaid principal and interest on defaulted
loans. In such a case, the Company may be required to repurchase the mortgage
loan and bear any subsequent loss on the mortgage loan. During the first nine
months of 1997 and the years ended December 31, 1996, 1995, and 1994, the impact
of loans repurchased as a result of borrower misrepresentations was not
material.

The Company's servicing rights provide it with a significant continuing
source of income. There is a market in Puerto Rico for servicing rights, which
are generally valued in relation to the present value of the expected income
stream generated by the servicing rights. Among the factors which influence the
value of a servicing portfolio are servicing fee rates, loan balances, loan
types, loan interest rates, expected average life of underlying loans (which may
be reduced through foreclosure or prepayment), the value of escrow balances,
delinquency and foreclosure experience, servicing costs, servicing termination
rights of permanent investors, and any recourse provisions. During the years
ended December 31, 1996, 1995 and 1994, the Company sold servicing rights on
$102 million, $310 million and $202 million, respectively, of mortgage loans. No
sales of servicing were made during the first nine months of 1997. While the
Company's general strategy is to increase the size of its servicing portfolio by
retaining the servicing rights related to the mortgage loans it originates and
purchases, the Company may from time to time sell additional portions of its
servicing portfolio when market conditions are favorable.

The Company also purchases mortgage servicing rights in bulk from third
parties. See "RECENT DEVELOPMENTS -- Bulk Purchases of Mortgage Servicing
Rights."

The market value of, and earnings from, the Company's mortgage loan
servicing portfolio may be adversely affected if mortgage interest rates decline
and mortgage loan prepayments increase. In a period of declining interest rates
and accelerated prepayments, servicing income generated from the Company's
mortgage loan servicing portfolio may also decline through increased
amortization and the recognition of impairment of servicing rights. Conversely,
as mortgage interest rates increase, the market value of the Company's mortgage
loan servicing portfolio may be positively affected. Increases in the rate of
delinquencies
37
<PAGE> 38

and foreclosures on mortgage loans tend to increase the costs associated with
administering mortgage loans. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Interest Rate Fluctuations."

HRU, Inc., an entity in which the Company owns a 33% equity interest,
provides mailing and electronic data processing services for the Company's
mortgage servicing operations and earns fees from the Company based on the
volume of mortgage loans serviced. Such fees are determined at fair market value
and amounted to approximately $725,000, $900,000, $860,000, and $726,000 for the
nine months ended September 30, 1997 and the years ended December 31, 1996,
1995, and 1994, respectively.

Foreclosure Experience and Real Estate Owned. While delinquency rates in
Puerto Rico are generally higher than in the mainland United States, these rates
are not necessarily indicative of future foreclosure rates or losses on
foreclosures. Moreover, for the mortgage loans in the Company's servicing
portfolio serviced on a non-recourse basis, foreclosure losses in connection
with the Company's Mortgage Banking Business are generally the responsibility of
the investors or insurer and not of the Company. REO related to the Company's
Mortgage Banking Business arises primarily through foreclosure on mortgage loans
repurchased from investors either because of breach of representations or
warranties or pursuant to recourse arrangements. As of September 30, 1997, and
December 31, 1996, 1995 and 1994, Doral held REO with a book value of
approximately $2.9 million, $2.2 million, $2.1 million and $2.1 million,
respectively. Sales of REO resulted in net losses to Doral of approximately
$176,000, $305,000, $145,000, and $473,000 for the nine months ended September
30, 1997 and for the years ended December 31, 1996, 1995 and 1994, respectively.
There is no liquid secondary market for the sale of the Company's REO.

In addition to the REO held by the Company, a real estate partnership, in
which the Company owns a 15% interest and in which members of management are
investors, held REO with a book value of approximately $1.8 million as of
September 30, 1997. The REO was part of $4.7 million of REO that was sold by the
Company to the partnership in December 1990. Of the $4.7 million purchase price,
$600,000 was paid in cash and $4.1 million was paid in notes of the partnership.
As of September 30, 1997, the unpaid balance of the notes held by the Company
was $1.8 million.

With respect to mortgage loans securitized through GNMA programs, the
Company is fully insured as to principal by the FHA against foreclosure loss,
while the VA guarantee is subject to a limitation which is generally equal to
25% to 50% of the principal amount of the loan, up to a maximum ranging from
$22,500 to $50,750, depending upon the amount of the loan. As a result of these
programs, foreclosure on these loans had generated no loss of principal as of
September 30, 1997. The Company, however, incurs about $2,200 per loan
foreclosed in interest and legal charges during the time between payment by the
Company and FHA or VA reimbursement. For the nine months ended September 30,
1997 and the years ended December 31, 1996, 1995 and 1994 total expenses related
to FHA or VA loans foreclosed amounted to $45,000, $60,000, $75,000 and
$464,000, respectively. Although FNMA and FHLMC are obligated to reimburse the
Company for principal and interest payments advanced by the Company as a
servicer (except for recourse servicing), the funding of delinquent payments or
the exercise of foreclosure rights involve costs to the Company which may not be
recovered. Such nonrecovered expenses have been immaterial to date.

Any significant adverse economic developments in Puerto Rico, the Company's
primary service area, could result in an increase in defaults or delinquencies
on mortgage loans that are serviced by the Company or held by the Company
pending sale in the secondary mortgage market, thereby reducing the resale value
of such mortgage loans and increasing the costs of administering loans. See
"RISK FACTORS -- Economic Conditions in Puerto Rico and Repeal of Section 936
Tax Benefits."

Sale of Loans; Issuance of Mortgage-Backed Securities. The Company
customarily sells most of the loans that it originates, except for those
originated by Doral Bank, which are generally held until maturity, utilizing
different sales channels as described below. The Company issues GNMA-guaranteed
mortgage-backed securities, which involve the packaging of FHA loans or VA loans
into pools of $1 million or more ($2.5 million to $5 million for serial notes)
for sale primarily to broker-dealers in Puerto Rico. During the first nine
months of 1997 and the years ended December 31, 1996 and 1995, the Company
issued approximately $277 million, $373 million and $366 million, respectively,
in GNMA-guaranteed mortgage-backed securities.
38
<PAGE> 39

Certain GNMA-guaranteed mortgage-backed securities sold by the Company are
in the form of GNMA serial notes. GNMA serial notes are sold in pools of $2.5
million to $5 million. Such pools are composed solely of FHA loans or VA loans
originated in Puerto Rico. GNMA securities issued under the serial note program
are structured into packages consisting of notes of different yields and
estimated maturities, which range from 1 to 30 years and have a weighted average
maturity of approximately 12 years, taking into account historical experience
with prepayments of the underlying mortgages. The rates on the serial notes or
GNMA pools must be 1/2 of 1% less than the rates on the mortgages comprising the
pool. Upon completion of the necessary processing, the GNMA-guaranteed
mortgage-backed securities are offered to the public through broker-dealers.
During the first nine months of 1997 and the years ended December 31, 1996 and
1995, the Company issued GNMA serial notes totaling approximately $234 million,
$317 million and $284 million, respectively.

Conforming conventional loans, other than those funded by Doral Bank under
the Master Loan Production Agreement, originated or purchased by the Company are
either sold directly to FNMA, FHLMC or private investors for cash or are grouped
into pools of $1 million or more in aggregate principal balance and exchanged
for FNMA or FHLMC-issued mortgage-backed securities, which the Company sells to
broker-dealers. In connection with any such exchanges, the Company pays
guarantee fees to FNMA and FHLMC. The issuance of mortgage-backed securities
provides the Company with flexibility in selling the mortgage loans that it
originates or purchases and also provides income by increasing the value and
marketability of such loans.

Mortgage loans that do not conform to GNMA, FNMA or FHLMC requirements
(non-conforming loans) are sold to financial institutions or other private
investors or are securitized into "private label" mortgage-backed securities
through grantor trusts or REMICs that either are organized by the Company or
third parties and sold through broker-dealers. The Company is generally able to
originate non-conforming loans at higher interest rates which permits the
Company to earn higher revenues on the sale of such loans through the
recognition of IOs. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION -- General; Results of Operations for the
Nine Months Ended September 30, 1997 and 1996."

The securitization of non-conforming loans involves the creation of a
grantor trust or REMIC which issues mortgage-backed securities to investors.
These mortgage-backed securities normally consist of several classes of senior,
subordinate and residual certificates. The residual certificates evidence a
right to receive payments on the mortgage loans after payment of all required
amounts on the senior and subordinate certificates are made. To date, credit
enhancement, in the form of an insurance policy and subordination, has generally
been used to improve the credit rating of the senior certificates and thereby
increase their marketability. During the years ended December 31, 1996 and 1995,
the Company securitized approximately $37 million and $75 million, respectively,
aggregate principal amount of non-conforming mortgage loans. The Company has not
engaged in securitizations during the first nine months of 1997 because it has
been able to obtain greater revenues through the creation of IOs by bulk sales
of whole loans to local financial institutions. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- General; Results of
Operations for the Nine Months Ended September 30, 1997 and 1996." Subject to
market conditions, the Company may enter into a similar securitization
transactions in the future.

Financial Security Assurance, Inc. ("FSA") has insured approximately $35
million and $70 million of senior certificates issued in connection with such
securitization transactions during the years ended December 31, 1996 and 1995,
respectively. As part of its arrangement with FSA, the Company has agreed to
retain and pledge to FSA the residual certificates issued by the respective
trusts. The Company also generally retains the subordinate certificates issued
in such transactions. As of September 30, 1997, and December 31, 1996 and 1995,
the Company held approximately $13.9 million, $14.6 million and $13.1 million,
respectively, in subordinate certificates and $4.4 million, $7.7 million and
$8.8 million, respectively, in residual certificates issued in securitization
transactions involving the Company. Currently a liquid secondary market for
subordinate or residual certificates does not exist in Puerto Rico. The value of
residual certificates represents the present value of expected future
distributions on such certificates over the life of the trusts and is subject to
substantial fluctuations as a result of changes in prevailing interest rates.
39
<PAGE> 40

The decision whether to sell non-conforming loans in bulk to local
financial institutions or to securitize such loans through mortgage conduits
depends on market conditions and the relative pricing and other terms of such
alternative sales channels. Similarly, the relative emphasis on the origination
of FHLMC and FNMA conforming loans versus FHA and VA loans and non-conforming
loans depends on market conditions, the relative pricing and return on
origination of the different types of mortgage loans and the maximum loans
amounts for the various types of loans.

In addition to the sale of the "private label" mortgage-backed securities
referred to above, the Company has, from time to time, sold mortgage-backed
securities in bulk to local broker-dealers or financial institutions. These
mortgage-backed securities are often converted into collateralized mortgage
obligations by the purchasers and sold in the local Puerto Rico market.

While the Company generally sells conforming loans on a non-recourse basis,
the Company also engages in the sale or exchange of mortgage loans on a recourse
basis. Recourse sales generally involve the sale of non-conforming loans to
local financial institutions. Prior to 1997, recourse obligations had decreased,
in part, due to the securitization of non-conforming loans into private label
mortgage-backed securities that were sold on a non-recourse basis. As the
Company has shifted from selling non-conforming loans through securitizations to
bulk sales of whole loans to local financial institutions, which are often done
on a recourse or partial recourse basis, recourse obligations have increased. As
of September 30, 1997, the Company was servicing mortgage loans with an
aggregate principal amount of $434 million on a recourse or partial recourse
basis. As of September 30, 1997, and December 31, 1996 and 1995, the Company's
recourse obligations relating to its mortgage servicing portfolio were
approximately $179 million, $74 million and $85 million, respectively. Of these
recourse obligations, approximately $10 million, $14 million and $16 million
principal amount, respectively, consisted of loans sold to FNMA and FHLMC or
exchanged into securities of such agencies, and approximately $169 million $60
million and $69 million principal amount, respectively, consisted of non-
conforming loans sold to other private investors. The Company estimates the fair
value of the retained recourse obligation at the time mortgage loans are sold.
The Company has generally been successful in obtaining at least the carrying
value of such repurchased loans upon the resale thereof or upon foreclosure. The
Company protects itself from possible losses by requiring a lower loan-to-value
ratio for non-conforming loans, generally 65% or lower. As of September 30,
1997, the Company maintained a reserve for recourse obligations and put
obligations referred to below of approximately $1.3 million. See "RISK
FACTORS -- Delinquency, Foreclosure and Other Credit Risks."

From time to time, the Company may sell mortgage-backed securities and
mortgage loans subject to put arrangements. Pursuant to these arrangements, the
Company grants the purchaser of the mortgage-backed securities or loans a put
option that grants the buyer the right to sell, and obligates the Company to
buy, the securities or loans at a future date at a negotiated price. Pursuant to
SFAS No. 125, sales of securities or loans with puts are accounted for as sales
or borrowings based on a financial components approach that focuses on whether
control of the asset has been surrendered. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Changes in
Accounting Standards -- SFAS No. 125." As of September 30, 1997, the Company had
outstanding $182 million in mortgage-backed securities and mortgage loans sold
subject to put arrangements, which expire in varying amounts from 1998 through
2002, all of which were accounted for as sales because the Company believes that
control of the asset has been surrendered. See "RISK FACTORS -- Delinquency,
Foreclosure and Other Credit Risks."

Market Interest Rates and Net Interest Income. A greater proportion of the
Company's net income has generally been composed of net interest income than is
typical of mortgage banking institutions in the mainland United States. This is
primarily due to the fact that the Company has traditionally held FHA-VA
mortgage loans secured by real property in Puerto Rico and GNMA mortgage-backed
securities for longer periods prior to sale than mortgage banking institutions
generally do, in order to maximize the tax exempt interest income earned on such
instruments. See "-- Puerto Rico Secondary Mortgage Market and Favorable Tax
Treatment" herein. For the nine months ended September 30, 1997 and the years
ended December 31, 1996 and 1995, the Company held mortgage loans (excluding
mortgage-backed securities held to maturity and loans receivable) prior to sale
for an average period of 322 days, 259 days and 352 days, respectively. The
40
<PAGE> 41

decrease in the number of days mortgage loans and mortgage-backed securities
were held during 1996 was primarily due to increased sales of mortgage loans and
mortgage-backed securities during the period. The increase for the first nine
months of 1997 was due to increased holdings of mortgage-backed securities held
for trading.

The operation of the GNMA serial note program in Puerto Rico also tends to
increase the period during which mortgage loans are held prior to sale. The fact
that the GNMA serial note pools consist of a minimum of $2.5 million principal
amount of mortgage loans as compared to $1 million for other GNMA programs,
obligates the Company to hold mortgage loans and mortgage-backed securities for
longer periods prior to sale in order to assemble such pools.

Changes in prevailing market interest rates between the time Doral funds a
mortgage loan and the time the mortgage loan or mortgage-backed security is sold
to permanent investors could reduce Doral's net interest income on mortgage
loans held prior to sale and gains from the sale of loans, thereby reducing
Doral's net income. Doral attempts to manage these risks by securing commitments
for future delivery or engaging in managed hedging transactions such as those
described under "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Interest Rate Fluctuations."

Interest Rate Management. The Company's Mortgage Banking Business is
subject to the risk that future changes in interest rates may adversely affect
the value of the Company's portfolio of mortgage loans and mortgage-backed
securities. Interest rate fluctuations may also adversely affect the Company's
net interest income. The Company attempts to minimize these risks through the
use of forward commitments and other hedging techniques. For a more detailed
discussion of such risks and the techniques used by the Company to attempt to
mitigate such risks see "MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Interest Rate Fluctuations."

Puerto Rico Secondary Mortgage Market and Favorable Tax Treatment. In
general, the Puerto Rico market for mortgage-backed securities is an extension
of the United States market with respect to pricing, rating of the investment
instruments, and other matters. However, the Company has benefitted historically
from certain incentives provided by United States and Puerto Rico tax laws.
Section 936, which provided certain of these incentives, was repealed on August
20, 1996, subject to a ten-year grandfather period discussed below.

Under the various Puerto Rico Industrial Incentives Acts (the "Industrial
Incentives Acts"), certain investment income earned by qualified manufacturing
entities or service enterprises ("Exempt Companies") is exempt from Puerto Rico
income tax. The Industrial Incentive Acts also encourage investment in Puerto
Rico by allowing Exempt Companies to reduce the otherwise applicable 10% tax
(the "Tollgate Tax") on distributions to shareholders by investing their exempt
industrial development income ("IDI") in Puerto Rico for fixed periods of time,
generally from five years to ten years. Investment income that qualifies for
this exemption includes interest on certain mortgage loans and interest on 936
Funds placed with eligible institutions in Puerto Rico (primarily savings and
loan associations, commercial banks and registered broker-dealers), provided
such funds are invested by the eligible institutions in certain "eligible
activities" as defined in regulations promulgated by the Office of the
Commissioner, including certain mortgage loans and mortgage-backed securities
and warehousing loans to finance the origination of mortgage loans.

On December 2, 1997, a new tax incentives statute (the "1998 Tax Incentives
Act") was signed into law. The 1998 Tax Incentives Act will apply to new
companies establishing operations in Puerto Rico as well as to companies
currently conducting operations in Puerto Rico that choose to renegotiate their
existing tax exempt grants. In the case of existing companies that renegotiate
their grants, only that portion of their income that exceeds an average base
income as computed under the 1998 Tax Incentives Act, will be subject to the
provisions of the Act. Under the 1998 Tax Incentives Act, the Tollgate Tax will
be replaced with an income tax rate ranging from 2% to 7%. However, passive
income derived from the investment of IDI in Puerto Rico financial institutions
and other designated investments will continue to be tax exempt. The 1998 Tax
Incentives Act, by eliminating the Tollgate Tax, could have the effect of
reducing incentives for the

41
<PAGE> 42

investment of funds by Exempt Companies on a long-term basis in Puerto Rico but
should not affect existing Puerto Rico incentives for investing on a short-term
basis.

Most Exempt Companies are United States corporations ("936 Corporations")
that meet certain requirements and have elected the benefits of Section 936.
Section 936 has historically permitted 936 Corporations to credit against their
United States corporate income tax a portion of such tax attributable to (i)
income derived from the active conduct of a trade or business within Puerto Rico
or from the sale or exchange of substantially all assets used in the active
conduct of such trade or business ("Active Business Income") and (ii) qualified
possession source investment income ("QPSII"). QPSII includes interest derived
from mortgage loans secured by real property located in Puerto Rico and
mortgage-backed securities consisting of such mortgage loans as well as interest
on deposits with financial institutions which in turn use such funds to finance
the origination of certain qualifying eligible activities that include mortgage
loans and other qualifying assets. In the past, the credit provided by QPSII has
favorably affected the Company's net interest income by helping create a pool of
lower-cost funds that the Company could access through financial intermediaries
such as banks and broker-dealers and use to fund mortgage loans and
mortgage-backed securities pending sale. The credit provided for QPSII also
tended to increase the demand for Puerto Rico mortgage loans and mortgage-backed
securities by providing incentives for 936 Corporations and financial
intermediaries to invest in certain mortgage loans and mortgage backed
securities originated in Puerto Rico.

The Omnibus Budget Reconciliation Act of 1993 amended various provisions of
Section 936. The amendments (the "OBRA Amendments"), were generally effective
for taxable years beginning after December 31, 1993, and permitted a taxpayer to
compute the tax credit available under Section 936 (the "936 Credit") as under
prior law but limited the amount of credit allowed with respect to Active
Business Income under one of two alternatives to be selected at the option of
the taxpayer. Under the first alternative, the limit was equal to a fixed
percentage of the amount of tax credit allowable under prior law (the "Fixed
Percentage Method"). This fixed percentage commenced at 60% for taxable years
beginning in 1994 and is reduced by 5% per year until 1998. For taxable years
beginning in 1998, such percentage would be 40%. Under the second alternative
(the "Economic Activity Method"), which is based on the amount of economic
activity conducted by the taxpayer in Puerto Rico, the credit could not exceed
the sum of the following three components: (i) 60% of the qualified possession
wages and the allocable fringe benefits paid by the taxpayer; (ii) applicable
percentages of certain depreciation deductions claimed for regular tax purposes
by the taxpayer with respect to qualified tangible property; and (iii) a portion
of the possession income taxes paid by the taxpayer except where the taxpayer
uses the profit-split method for determining its income. The OBRA Amendments did
not limit the 100% credit available under Section 936 for QPSII.

On August 20, 1996, the Small Business Job Protection Act, which provides
for the repeal of Section 936, was signed into law. 936 Corporations that were
engaged in the active conduct of trade or business on October 13, 1995 and that
qualified for and elected the benefits of Section 936 for the corporation's
taxable year which includes such date will have the benefit of a ten-year
grandfather rule. Under the grandfather rule, the amount of Active Business
Income eligible for the 936 Credit is subject to certain caps similar to those
introduced by the OBRA Amendments that will vary depending upon whether the 936
Corporation computed its 936 Credit under the Economic Activity Method (which
was moved to a new Section 30A of the Code) or under the Fixed Percentage
Method. The credit available for QPSII was not entitled to the benefit of the
grandfather rule and was eliminated with respect to amounts received or accrued
for taxable years commencing after December 31, 1995 but no earlier than July 1,
1996.

QPSII, the Company had implemented a strategy to diversify its sources of
funding and reduce its reliance on 936 Funds. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources" and "-- Funding."

Any change in Puerto Rico's political status could also result in the
elimination or modification of these tax benefits described above. See "THE
COMMONWEALTH OF PUERTO RICO -- Relationship of Puerto Rico with the United
States" for a description of legislation introduced into the United States
Congress regarding the holding of a referendum on the political status of Puerto
Rico.

OTHER LENDING AND INVESTMENT ACTIVITIES

Lending Activities of Doral Bank and Real Estate Owned. The Company,
through Doral Bank, originates for investment mortgage loans secured by
residential real estate, including personal loans up to $40,000 secured by first
or second mortgages. To a lesser extent, Doral Bank also originates or purchases
development and construction loans, commercial real estate loans, general
commercial loans and unsecured consumer loans. Prior to the conversion of its
charter to that of a Puerto Rico commercial bank on October 1, 1997, Doral Bank
operated as a federal savings association under the name "Doral Federal Savings
Bank."

At September 30, 1997 and December 31, 1996 and 1995, loans held for
investment which were originated as part of the Company's other lending
activities through Doral Bank, totaled $165.7 million, $128.8 million and $51.4
million, respectively. Of such loans, 83%, 81% and 72%, respectively, were
secured by mortgages on single-family residences. Substantially all of Doral
Bank's loans are secured by real property located in Puerto Rico. At September
30, 1997 and December 31, 1996 and 1995, 99%, 98% and 99%, respectively, of the
mortgage loans held for investment by Doral Bank were secured by property
located in Puerto Rico. At September 30, 1997, the largest loan held for
investment by Doral Bank was $3.4 million and the maximum aggregate amount of
loans that Doral Bank could make to a single borrower under federal banking
regulations as of such date was $4.2 million. See "-- Regulation -- Banking
Operations -- Puerto Rico Regulation" for a discussion of the lending limits
applicable to Doral Bank as a Puerto Rico commercial bank. The Company
anticipates continued growth in Doral Bank's portfolio of loans held for
investment.

In addition to its portfolio of loans held for investment, Doral Bank
maintains a portfolio of mortgage loans held for sale consisting principally of
first mortgage loans secured by residential properties. As of September 30, 1997
and December 31, 1996 and 1995, Doral Bank held mortgage loans available for
sale of $56.9 million, $35.0 million and $31.7 million, respectively. Such
mortgage loans are recorded in the financial statements of the Company at the
lower of cost or market value.

In connection with its acquisition by the Company in 1993, Doral Bank
entered into a Master Loan Production Agreement with the Company whereby the
Company agreed to help Doral Bank meet its stated production goals by, among
other things, (i) advertising, promoting and marketing to the general public;
(ii) interviewing prospective borrowers and conducting the initial processing of
loan applications, consistent with Doral Bank's underwriting guidelines; and
(iii) providing personnel and facilities with respect to the execution of loan
agreements. In the future, Doral Bank may determine to engage in direct mortgage
loan originations through its branch network.

For mortgage loans originated prior to October 1, 1995, Doral Bank had in
effect a Master Purchase, Servicing and Collection Agreement (the "Master
Purchase Agreement") with the Company providing for the sale by Doral Bank to
the Company of the servicing rights to all first and second mortgage loans
secured by residential properties, all loans secured by commercial real estate,
all commercial business loans, consumer and any other loans secured by mortgages
and forming a part of Doral Bank's loan portfolio (the "Doral Bank Loans"). The
Master Purchase Agreement further provides that the Company, exclusively, will
service the Doral Bank Loans according to a fee schedule contained in the Master
Purchase Agreement. The fee schedule provides that the purchase price of the
servicing rights with respect to the Doral Bank Loans is a percentage of the
outstanding principal amount of such Doral Bank Loans.

For Doral Bank Loans originated after October 1, 1995, the Master Purchase
Agreement was substituted with a Master Servicing and Collection Agreement (the
"Master Servicing Agreement") whereby Doral Bank

43
<PAGE> 44

will contractually agree to service all Doral Bank Loans originated after the
date of the Master Servicing Agreement. Under the Master Servicing Agreement,
the Company will not, however, purchase the intangible right to service such
Doral Bank Loans. The Company is entitled to receive a servicing fee ranging
from 25 to 50 basis points of the outstanding principal amount of the Doral Bank
Loans being serviced. Doral Bank retains the right to terminate the Company's
servicing rights, without cause, upon notice to the Company.

The following table sets forth certain information regarding the Company's
loans held for investment as part of its other lending activities through Doral
Bank as of the dates indicated:

<TABLE>
<CAPTION>
SEPTEMBER 30, PERCENT DECEMBER 31, PERCENT DECEMBER 31, PERCENT
1997 OF TOTAL 1996 OF TOTAL 1995 OF TOTAL
------------- -------- ------------ -------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Construction loans.................... $ 11,383 7% $ 2,793 2% $ 2,637 5%
Residential mortgage loans............ 109,101 65 91,595 70 29,481 57
Commercial real estate................ 28,555 17 18,462 14 9,205 18
Consumer -- secured by mortgage....... 8,622 5 12,207 9 7,362 14
Consumer -- other..................... 2,667 2 356 (1) 324 (1)
Commercial (non-real estate).......... 3,158 2 2,047 2 702 1
Loans on saving deposits.............. 2,727 2 1,771 1 1,940 4
Land secured.......................... 1,534 (1) 814 (1) 330 (1)
-------- --- -------- --- ------- ---
Gross loans(2)(3)................... 167,747 100% 130,046 100% 51,980 100%
-------- -------- -------
Less:
Unearned interest and deferred loan
fees.............................. (886) (561) (383)
Allowance for loan losses........... (1,159) (719) (242)
-------- -------- -------
(2,045) (1,280) (625)
-------- -------- -------
Loans receivable, net(4)............ $165,702 $128,766 $51,355
======== ======== =======
</TABLE>

- ---------------

(1) Less than one percent.
(2) Sum of the columns may not add up to the totals due to rounding.
(3) Excludes residential mortgage loans held for sale by Doral Bank of $56.9
million, $35.0 million and $31.7 million as of September 30, 1997 and
December 31, 1996 and 1995, respectively.
(4) Net of deferred loan fees resulting from the sale of servicing rights to
affiliates which are eliminated in the preparation of the Company's
Consolidated Financial Statements.

Doral Bank originates adjustable and fixed interest rate loans. However,
given traditional consumer preferences in Puerto Rico for fixed rate mortgage
loans, Doral Bank's principal product, the Company does not anticipate
significant growth in adjustable rate mortgages except in the case of
construction loans and mortgage loans secured by commercial properties. At
September 30, 1997 and December 31, 1996 and 1995 approximately 9%, 3% and 7%,
respectively, of Doral Bank's loans held for investment were adjustable rate
loans. The adjustable rate loans have interest rate adjustment limitations and
are generally tied to the prime rate. Future market factors may affect the
correlation of the interest rate adjustment with the rate Doral Bank pays on the
short-term deposits that have primarily funded these loans.

44
<PAGE> 45

The following information indicates as of September 30, 1997, with respect
to the Company's loans held for investment through Doral Bank, the time periods
during which fixed rate loans mature and adjustable rate loans reprice:

<TABLE>
<CAPTION>
FIXED RATE LOANS ADJUSTABLE RATE LOANS
- ------------------------------------------------------ ---------------------------------
BOOK BOOK
VALUE TERM OF DATE OF VALUE
TERM TO MATURITY (IN THOUSANDS) RATE ADJUSTMENT (IN THOUSANDS)
- ---------------- -------------- ----------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1 month -- 1 year..................... $ 3,347 1 month -- 1 year $ 14,406
1 year -- 3 years..................... 3,999 Non-performing 220
3 years -- 5 years.................... 5,762
5 years -- 10 years................... 34,544
--------
10 years -- 20 years.................. 66,977 $ 14,626
========
Over 20 years......................... 36,415
Non-performing........................ 2,077
--------
$153,121
========
</TABLE>

Nonperforming Assets and Allowance for Loan Losses. Nonperforming assets
("NPAs") consist of loans on a non-accrual basis and other real estate owned.
Doral Bank's policy is to place all loans 90 days or more 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 90 or
more days delinquent and collectibility is reasonably assured. Mortgage loans
held for sale as part of the Company's Mortgage Banking Business are normally
only placed on a non-accrual basis upon commencement of foreclosure proceedings
(which normally occurs within six to eight months following default). For the
first nine months of 1997 and for the years ended December 31, 1996, 1995 and
1994, the Company would have recognized $195,000, $114,000, $211,000 and
$287,000, respectively, in additional interest income had all delinquent loans
owned by the Company been accounted for on an accrual basis.

The following table sets forth information with respect to the Company's
non-accrual loans, REO and other nonperforming assets as of September 30, 1997
and December 31, 1996, 1995 and 1994.

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
SEPTEMBER 30, 1997 1996 1995 1994
------------------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MORTGAGE BANKING BUSINESS:(1)
Non-accrual loans(2)................................ $ -- $ -- $1,250 $4,260
Other real estate owned............................. 2,948 2,246 2,085 2,029
Other nonperforming assets(3)....................... 1,782 1,833 893 448
OTHER LENDING ACTIVITIES THROUGH DORAL BANK:(4)
Non-accrual loans................................... 2,297 1,728 949 459
Other real estate owned............................. -- -- -- 87
Total NPAs as a percentage of loans receivable, net
and other real estate owned...................... 1.4% 1.3% 1.8% 1.6%
Ratio of allowance for loan receivables to
nonperforming loans.............................. 50.46% 41.62% 25.50% 93.25%
</TABLE>

- ---------------

(1) Includes mortgage loans held for sale and real estate owned related to the
Company's Mortgage Banking Business.
(2) Of the amounts shown, $1.25 million and $2.9 million represented loans that
were required to be repurchased by a non-affiliated Puerto Rico government
institution at par on a non-recourse basis as of December 31, 1995 and 1994,
respectively.
(3) This amount refers to a mortgage loan to a real estate partnership to which
the Company previously sold REO. This loan is included in "Mortgage-backed
securities and investments held to maturity" in the Company's financial
statements. See "-- Mortgage Banking Business -- Foreclosure Experience and
Real Estate Owned."
(4) Includes mortgage loans and REO of Doral Bank.

45
<PAGE> 46

The Mortgage Banking Business' other real estate owned arises primarily
through foreclosure on mortgage loans repurchased from investors, either because
of breach of representations or warranties or pursuant to recourse arrangements.
The Company believes that the value of the REO reflected on its financial
statements represents a reasonable estimate of the properties' fair value, net
of cost of sales. During the past five years, the impact of loans repurchased as
the result of breach of representations or warranties or pursuant to recourse
arrangements has not been material.

The provision for loan losses relating to loans held by Doral Bank was
$1,159,000 at September 30, 1997, compared to $719,000 as of December 31, 1996.
The increase in the allowance was primarily the result of the increase in the
size of the loan portfolio and an increase in the amount of construction loans
and commercial mortgage loans for which Doral Bank provides a higher allowance.

The percentage of the allowance for loan losses to nonperforming loans held
for investment will not remain constant due to the nature of Doral Bank's
portfolio of mortgage loans, which are primarily collateralized by real estate.
The collateral for each nonperforming mortgage loan is analyzed by Doral Bank to
determine potential loss exposure, and in conjunction with other factors, this
loss exposure contributes to the overall assessment of the adequacy of the
allowance for loan losses. On an on-going basis, management monitors the loan
portfolio and evaluates the adequacy of the allowance for loan losses. In
determining the adequacy of the allowance for loan losses, management considers
such factors as historical loan loss experience, known problem loans,
evaluations made by bank regulatory authorities, assessment of economic
conditions and other appropriate data to identify the risks in the loan
portfolio. Loans deemed by management to be uncollectible are charged to the
allowance for loan losses. Recoveries on loans previously charged off are
credited to the allowance. Provisions for loan losses are charged to expense and
credited to the allowance in amounts deemed appropriate by management based upon
its evaluation of the known and inherent risks in the loan portfolio. While
management believes that the current allowance for loan losses is sufficient,
future additions to the allowance may be necessary.

The following table summarizes certain information regarding the Company's
allowance for loan losses related to loans held for investment by Doral Bank and
losses on other real estate owned for both Doral Bank and the Company's Mortgage
Banking Business for the periods indicated.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------- ------------------------
1997 1996 1996 1995 1994
------ ----- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REAL ESTATE HELD FOR SALE:
Balance at beginning of period........................ $ 356 $ 356 $ 356 $ 356 $ 525
Provision for losses.................................. 45 -- -- -- --
Losses charged to the allowance(1).................... -- -- -- -- (169)
Other................................................. -- -- -- --
------ ----- ----- ----- -----
Balance at end of period.............................. $ 401 $ 356 $ 356 $ 356 $ 356
====== ===== ===== ===== =====
ALLOWANCE FOR LOAN RECEIVABLES:(2)
Balance at beginning of period........................ $ 719 $ 242 $ 242 $ 428 $ 234
Provision for loan losses............................. 465 465 655 110 168
Recoveries............................................ 43 28 49 7 26
Losses charged to the allowance....................... (68) (46) (227) (303) --
------ ----- ----- ----- -----
Balance at end of period.............................. $1,159 $ 689 $ 719 $ 242 $ 428
====== ===== ===== ===== =====
</TABLE>

- ---------------
(1) Does not include losses of $176,000, $146,000, $305,000, $145,000 and
$473,000 for the nine month periods ended September 30, 1997 and 1996, and
for the years ended December 31, 1996, 1995 and 1994, respectively, from the
sale of REO that were charged directly against operations.
(2) Relates to loans held for investment by Doral Bank.

46
<PAGE> 47

Other Investment Activities. As a result of the Company's mortgage
securitization activities, the Company maintains a substantial portfolio of
mortgage-backed securities held for trading. At September 30, 1997, the Company
held securities for trading with a fair market value of $611.3 million,
approximately $548.1 million which consisted of Puerto Rice tax exempt GNMA
securities and other tax-exempt securities. These tax-exempt securities are
generally held by the Company for longer periods prior to sale in order to
maximize the tax-exempt interest received thereon. Pursuant to SFAS No. 115,
securities held for trading are reflected on the Company's financial statements
at their fair market value with resulting gains or loans included as part of
mortgage loan sales and fees.

The following table sets forth information regarding the composition of the
Company's securities held for trading as of the periods indicated:

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1997 1996 1995
------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-Backed Securities:
GNMA...................................................... $407,951 $219,325 $242,327
CMO Certificates.......................................... 157,487 158,110 157,535
FHLMC..................................................... 5,313 6,370 7,092
FNMA...................................................... 2,496 929 987
US Treasury Bonds........................................... -- 10,218 --
US Treasury Notes........................................... -- 9,450 --
US Treasury Bills........................................... -- 5,095 --
IOs......................................................... 28,106 24,678 10,407
Other....................................................... 9,944 1,950 --
-------- -------- --------
Total............................................. $611,297 $436,125 $418,348
======== ======== ========
</TABLE>

As of September 30, 1997, the Company also held approximately $191 million
of securities and other investments which are classified as held to maturity
because the Company had the intent and ability to hold these securities until
maturity. Of this amount, approximately $71.9 million were held by Doral Bank.
The holding of these securities until maturity is consistent with the Company's
strategy to maximize tax exempt interest income. The Company does not believe
that the holding of these securities will have an adverse effect on the
liquidity of the Company because it believes that it will be able to obtain
continuous financing for these securities under its existing credit facilities
or pursuant to deposits, in the case of securities owned by Doral Bank.

47
<PAGE> 48

The following table provides certain information regarding the composition
of the Company's mortgage-backed securities and other investments held to
maturity as of the dates, indicated below.

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
SEPTEMBER 30, 1997 1996 1995
--------------------- --------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE-BACKED
SECURITIES:
CMO certificates of
other issuers........ $ 51,900 $ 52,322 $ 58,828(1) $ 59,803 $59,248(1) $59,521
GNMA.................... 36,177 37,239 37,879 38,483 10,745 10,918
DEBT SECURITIES:
Federal Home Loan Bank
Notes................ 49,541 49,328 3,493 3,487 4,999 4,995
U.S. Treasury Notes..... 16,431 16,475 6,956 6,976 1,997 2,002
U.S. Treasury Bills..... 69 69 66 69 63 63
U.S. Treasury Bonds..... 10,213 10,213
Farm Credit Notes....... 24,911 24,911
OTHER INVESTMENTS:
Mortgage notes
receivables.......... 1,782 1,782 1,833 1,833 893 893
-------- -------- -------- -------- ------- -------
$191,024 $192,339 $109,055 $110,651 $77,945 $78,392
======== ======== ======== ======== ======= =======
</TABLE>

- ---------------

(1) Includes approximately $4.6 million and $4.8 million of interest-only
securities as of December 31, 1996 and 1995, respectively.

The following table provides information as of September 30, 1997 relating
to the contractual or expected maturities (in the case of mortgage-backed
securities) of the Company's mortgage-backed securities and investments held to
maturity.

<TABLE>
<CAPTION>
MORTGAGE-BACKED
SECURITIES DEBT SECURITIES OTHER
--------------- --------------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Within one year.................................. $ 300 $ 7,049 $1,782
After 1 year through five years.................. 2,375 42,046 --
After 5 years through 10 years................... 8,625 1,493 --
After 10 years................................... 76,777 50,577 --
------- -------- ------
$88,077 $101,165 $1,782
======= ======== ======
</TABLE>

The following table provides information on the aggregate gross unrealized
holding gains and losses for the Company's mortgage-backed securities and
investments held to maturity as of the dates indicated:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
SEPTEMBER 30, 1997 1996 1995
----------------------- ----------------------- -----------------------
MORTGAGE- MORTGAGE- MORTGAGE-
BACKED DEBT BACKED DEBT BACKED DEBT
SECURITIES SECURITIES SECURITIES SECURITIES SECURITIES SECURITIES
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gross unrealized holding gains.......... $1,514 $ 61 $1,613 $23 $481 $ 4
====== ==== ====== === ==== ===
Gross unrealized holding losses......... 30 230 34 6 34 4
====== ==== ====== === ==== ===
</TABLE>

As part of its strategy to maximize net interest income, the Company also
invests in investment securities that are classified as available for sale. As
of September 30, 1997, the Company held approximately $71.5 million, of
securities classified as available for sale of which $4.2 million were held by
Doral Bank.

48
<PAGE> 49

The following table provides certain information regarding the composition
of the Company's mortgage-backed securities and other investments classified as
available for sale as of the dates indicated below.

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
SEPTEMBER 30, 1997 1996 1995
------------------- ------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES:
FNMA................................. $ 2,069 $ 2,034 $ 2,241 $ 2,134 $ 7,164 $ 7,132
FHLMC................................ 2,208 2,160 2,365 2,277 4,414 4,381
GNMA................................. 12,180 12,354 7,534 7,596 2,992 3,066
DEBT SECURITIES:
Federal Home Loan Bank Notes......... 55,000 55,000
------- ------- ------- ------- ------- -------
$71,457 $71,548 $12,140 $12,007 $14,570 $14,579
======= ======= ======= ======= ======= =======
</TABLE>

The following table provides certain information regarding aggregate gross
unrealized holding gains and losses for the Company's mortgage-backed securities
and other investments classified as available for sale as of the dates indicated
below:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
SEPTEMBER 30, 1997 1996 1995
------------------ ---------- ----------
MORTGAGE- MORTGAGE- MORTGAGE-
BACKED BACKED BACKED
SECURITIES SECURITIES SECURITIES
------------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gross unrealized holding gains............................ $174 $ 62 $95
====== ==== ===
Gross unrealized holding losses........................... 83 195 86
====== ==== ===
</TABLE>

BROKER-DEALER ACTIVITIES

The Company is involved in the securities business through Doral
Securities, a broker-dealer registered with the Securities and Exchange
Commission (the "Commission") and a member of the National Association of
Securities Dealers, Inc. (the "NASD"). While Doral Securities is engaged in a
general securities business, it has a particular focus on the sale of Puerto
Rico tax-exempt GNMA securities and other Puerto Rican securities.

Doral Securities' business is generally organized into two units:
institutional and retail. The institutional unit employs approximately four
registered representatives and handles the institutional trading activities of
the firm. The retail unit, which employs approximately nine registered
representatives, is responsible for handling the needs of individual retail
clients. Doral Securities is an introducing broker-dealer for retail
transactions with all transactions cleared through the Pershing Division of
Donaldson, Lufkin and Jenrette Securities Corporation. Total fees and
commissions from the institutional and retail units of Doral Securities for the
nine months ended September 30, 1997 were approximately $338,000.

Doral Securities also earns interest revenues by acting as an intermediary
between borrowers, including the Company, and lenders of funds utilizing
repurchase and reverse repurchase agreements. As of September 30, 1997, Doral
Securities had $326.6 million in outstanding reverse repurchase agreements, of
which approximately $294.4 million consisted of funds loaned to the Company and
which are eliminated in the preparation of the Company's consolidated financial
statements. Doral Securities earned net interest income of $589,000 for the nine
months ended September 30, 1997.

Under Regulation K, promulgated by the Federal Reserve, Doral Securities
may only conduct securities activities "outside the United States." For purposes
of Regulation K, Puerto Rico is considered to be outside the United States. In
addition, under Regulation K, Doral Securities may not engage in underwriting or

49
<PAGE> 50

dealing in equity securities without the prior approval of the Federal Reserve.
Doral Securities is currently considering applying for such approval.

Since commencing operations in September 1996, Doral Securities' primary
sources of funding have been capital contributions from the Company, repurchase
agreements with financial institutions and other institutional investors
involving marketable securities and cash flows from operations.

FUNDING

Borrowing Arrangements Relating to Mortgage Banking Operations. Except as
noted below with respect to GNMA securities, historically, a period of two to
four months has normally elapsed between the origination of a mortgage loan by
the Company and its sale to permanent investors. The Company often holds Puerto
Rico tax exempt GNMA securities for longer periods to take advantage of tax
exempt interest income on such securities while conforming loans that qualify
for the mortgage-backed securities programs of FNMA and FHLC are normally sold
within 60 days of origination.

Prior to issuance of GNMA or other mortgage-backed certificates, the
Company's mortgage loans are funded almost entirely by borrowings under
warehousing lines of credit or other financing agreements, such as pre-sale,
gestation facilities and repurchase agreements, with financial institutions. The
Company's principal short-term facilities include the Syndicated Credit
Agreement, warehousing lines of credit with three local commercial banks and
pre-sale, gestation or repurchase facilities with three affiliates of major U.S.
brokerage houses. Pre-sale or gestation facilities generally permit the Company
to obtain more favorable financing rates once mortgage loans have been assigned
to a pool but prior to securitization. These facilities also generally allow for
the financing of mortgage-backed securities upon issuance. Typically, the
Company finances between 90% and 95% of the principal amount of its mortgage
loans and secures advances under its lines of credit by pledging such loans and
the servicing agreements relating thereto to such banks or financial
institutions, a practice commonly referred to as "warehousing." The Company pays
interest on its lines of credit at floating rates which vary with market
conditions. The interest rates on these lines of credit have been lower than the
interest rates which the Company earns on the mortgage loans pledged to secure
such financing. Amounts borrowed under lines of credit are payable upon demand
and, except in the case of gestation facilities, are usually repaid after the
Company packages such mortgage loans into GNMA, FNMA or FHLMC certificates and
receives the proceeds from the sale of such certificates or the financing of
such securities under repurchase agreements. The Company's warehousing lines of
credit are generally terminable at the discretion of the lender.

The Company also obtains short-term financing through repurchase agreements
with financial institutions and investment banking firms. Under these
agreements, the Company sells GNMA, FNMA or FHLMC-guaranteed mortgage-backed
securities and, to a lesser extent, private label mortgage-backed securities,
and simultaneously agrees to repurchase them at a future date at a fixed price.
Doral uses the proceeds of such sales to repay borrowings under its bank
warehousing lines of credit. The effective cost of funds under repurchase
agreements is typically lower than the costs of funds borrowed under Doral's
warehousing lines of credit. Doral's continued use of repurchase agreements will
depend upon the cost of repurchase agreements relative to the cost of borrowing
under lines of credit from banks.

Commencing in 1993, the Company made a strategic decision to diversify its
sources of funding and to obtain funding from sources outside of Puerto Rico. As
of September 30, 1997, the Company's credit facilities included three presale or
gestation facilities with affiliates of major U.S. brokerage houses and the
Syndicated Credit Agreement. Obtaining credit from financial institutions
located outside Puerto Rico generally permits the Company to obtain larger lines
of credit and reduces its dependence on funding available in the local market.

As part of the implementation of its strategy to diversify its sources of
funding, the Company entered into the Syndicated Credit Agreement. The
Syndicated Credit Agreement provides for credit facilities totaling up to $110
million which currently expire on June 27, 1998. The facilities include: (i) a
$100 million secured one-year revolving warehousing credit facility to finance
residential mortgage loans and mortgage-backed securities; and (ii) $10 million
secured one-year revolving credit facilities to provide financing for
receivables
50
<PAGE> 51

and other working capital needs. The amounts available under the Syndicated
Credit Agreement are subject to a borrowing base which consists of mortgage
loans and mortgage-backed securities for the first facility and receivables
relating to servicing advances and real estate owned for the second facility.

The Company has also entered into a Credit Agreement dated as of November
5, 1997, with Bankers Trust Company that provides a revolving credit facility of
$25 million for the financing of mortgage servicing rights and working capital.
This credit facility, which expires on October 31, 1998, is secured by the
Company's servicing portfolio. As of December 31, 1997, the Company had borrowed
$15 million under this credit facility.

On October 10, 1996, the Company issued $75 million of its 7.84% Senior
Notes due 2006 (the "Senior Notes"). The Senior Notes were issued pursuant to an
Indenture entered into between the Company and Bankers Trust Company, as
trustee. The Senior Notes were sold in a public underwritten offering through BT
Securities Corporation. The net proceeds from the sale of the Senior Notes were
used to repay $17.7 million owed by the Company under a five-year senior
servicing secured loan facility and for general corporate purposes, including
capital contributions to Doral Bank, Doral Securities and other subsidiaries.

In the past, the Company has also issued convertible securities in private
placement transactions as a method of obtaining funding for its operations. See
"DESCRIPTION OF CAPITAL STOCK -- 8% Preferred Stock."

Funding Arrangements Relating to Banking Operations. Deposits and
borrowings, consisting of FHLB-NY advances and term notes, are the primary
sources of Doral Bank's funds for use in its lending, investment and other
business activities. In addition, Doral Bank obtains funds in the form of loan
repayments and income from operations as well as capital contributions from the
Company. The Company made capital contributions of $5 million and $8.5 million
to Doral Bank during the years ended December 31, 1996 and 1995, respectively.
No additional capital contributions were made during the first nine months of
1997. Loan repayments are a relatively stable source of funds while net increase
in deposits are significantly influenced by general interest rates and money
market conditions.

Deposits have been the principal source of funds for Doral Bank's lending
activities. At September 30, 1997, Doral Bank held $254 million in deposits at a
weighted average interest rate cost of 4.3%. Doral Bank offers passbook savings
accounts, checking accounts, NOW accounts and fixed interest rate certificate
accounts with varying maturities. An important portion of Doral Bank's deposits
consist of non-interest bearing wholesale deposit accounts such as corporate and
custodial accounts. At September 30, 1997, $58.7 million or approximately 23% of
Doral Bank's total deposits consisted of non-interest bearing accounts.
Approximately 16% of Doral Bank's total deposits related to corporate and
custodial accounts of the Company and its affiliates. This amount includes
approximately $2.9 million in corporate accounts of the Company and its
affiliates which are eliminated in the preparation of the Company's Consolidated
Financial Statements. Corporate accounts of the Company as well as escrow and
custodial accounts related to the Company's Mortgage Banking Business represent
a stable low cost funding source for Doral Bank. For additional information
regarding the characteristics of Doral Bank's deposit accounts as of December
31, 1996, refer to Note 19 of the Company's Consolidated Financial Statements
included elsewhere herein.

Doral Bank may also obtain funding through collateralized borrowings
directly from the FHLB-NY and through borrowings secured by FHLB-NY letters of
credit, up to a maximum of 30% of total assets. Such advances or letter of
credit reimbursement obligations must be secured by qualifying assets with a
market value of at least 120% of the outstanding obligation. At September 30,
1997, Doral Bank had $15 million in outstanding advances from the FHLB-NY at a
weighted average interest rate cost of 6.24%. For additional information
regarding funding for Doral Bank through the issuance of term notes secured by
FHLB-NY letters of credit, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital
Resources."

From time to time, Doral Bank may also obtain funding through the use of
repurchase agreements with brokerage firms and other financial institutions. As
of September 30, 1997, Doral Bank did not have any outstanding borrowings under
repurchase agreements.

51
<PAGE> 52

PUERTO RICO INCOME TAXES

The Company is subject to Puerto Rico income taxes. On October 31, 1994,
the Government of Puerto Rico enacted a new comprehensive internal revenue act
known as the Puerto Rico Internal Revenue Code of 1994 (the "PR Code"). Most
changes affecting corporations are effective for taxable years commencing after
June 30, 1995. While the PR Code incorporates many of the provisions of the
prior tax law, it also provides for various amendments and changes from prior
law.

Among the most important changes introduced by the PR Code were (i) a
reduction in the maximum marginal statutory corporate tax rate from 42% to 39%;
(ii) the elimination of the deduction for bad debt expense arising from the use
of the reserve method for bad debt reserve and the related prorated recapture of
the outstanding balance of the reserve existing as of June 30, 1995 over a four
year period; and (iii) optional use of a new method of accelerated depreciation
for capital assets purchased during taxable years beginning after June 30, 1995.

The Company is also subject to an alternative minimum tax of 22% on its
alternative minimum tax net income. In computing the Company's alternative
minimum tax net income its interest expense deduction will be reduced in the
same proportion that its exempt obligations (including FHA and VA loans and GNMA
securities) bear to its total assets. Therefore, to the extent that the Company
holds FHA loans or VA loans and other exempt obligations, it may be subject to
the payment of the 22% alternative minimum tax.

Under PR Code, corporations are not permitted to file consolidated returns
with their subsidiaries and affiliates. Effective for taxable year commencing
after June 30, 1995, the Company is entitled to a 100% dividend received
deduction on dividends received from Doral Bank, Doral Mortgage or any other
Puerto Rico corporation subject to tax under PR Code. Effective July 1, 1995,
the PR Code also provided for the elimination of the existing 29% withholding
tax applicable on interest paid to nonresident corporations and individuals as
well as a reduction of the withholding tax applicable to dividends payable to
non-resident corporations and individuals from 25% to 10%.

UNITED STATES INCOME TAXES

The Company and its subsidiaries are corporations organized under the laws
of Puerto Rico. Accordingly, the Company and its subsidiaries are subject
generally to United States income tax only on their income, if any, from sources
within the United States. Prior to 1992, the Company did not earn any income
that was subject to United States income tax. Doral Mortgage operates two
branches in the State of Florida. Accordingly, Doral Mortgage is subject to both
Florida income and franchise taxes and federal income tax on income effectively
connected with the conduct of the trade or business of these branches. In
addition, the United States may impose a branch profits tax of 30% in the event
that profits from the Florida branches are repatriated to Puerto Rico. Both the
federal tax as well as the branch profit tax may be claimed as a tax credit in
Puerto Rico, subject to certain limitations.

Prior to October 1, 1997, Doral Bank, as a federal savings association, was
also subject to U.S. income taxes. It was entitled to a foreign tax credit for a
portion of income taxes paid to the Puerto Rico Treasury Department. Doral Bank
had elected to qualify for the benefits provided under Section 936 which allows
an income tax credit for a portion of the U.S. income taxes attributable to the
earnings derived from sources within Puerto Rico. See "-- Mortgage Banking
Business -- Puerto Rico Secondary Mortgage Market and Favorable Tax Treatment"
for a description of Section 936. Following the conversion of Doral Bank to a
Puerto Rico commercial bank on October 1, 1997, it is subject to taxation in
substantially the same manner as the Company and the other subsidiaries of the
Company.

EMPLOYEES

At September 30, 1997, the Company employed 963 persons, of whom 277 were
involved in loan production activities and 138 were involved in loan servicing
activities. None of the Company's employees is represented by a labor union and
the Company considers its employee relations to be good.

52
<PAGE> 53

REGULATION -- MORTGAGE BANKING BUSINESS

The Company's Mortgage Banking Business is subject to the rules and
regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to originating,
processing, selling and servicing mortgage loans and the issuance and sale of
mortgage-backed securities. Those rules and regulations, among other things,
prohibit discrimination and establish underwriting guidelines which include
provisions for inspections and appraisals, require credit reports on prospective
borrowers and fix maximum loan amounts, and with respect to VA loans, fix
maximum interest rates. Moreover, lenders such as the Company are required
annually to submit to FHA, VA, FNMA, FHLMC, GNMA and HUD audited financial
statements, and each regulatory entity has its own financial requirements. The
Company's affairs are also subject to supervision and examination by FHA, VA,
FNMA, FHLMC, GNMA and HUD at all times to assure compliance with the applicable
regulations, policies and procedures. Mortgage origination activities are
subject to, among others, the Equal Credit Opportunity Act, Federal
Truth-in-Lending Act and the Real Estate Settlement Procedures Act and the
regulations promulgated thereunder which, among other things, prohibit
discrimination and require the disclosure of certain basic information to
mortgagors concerning credit terms and settlement costs. The Company is also
subject to regulation by the Office of the Commissioner, with respect to, among
other things, licensing requirements and establishment of maximum origination
fees on certain types of mortgage loan products. Although the Company believes
that it is in compliance in all material respects with applicable Federal and
Puerto Rico laws, rules and regulations, there can be no assurance that more
restrictive laws or rules will not be adopted in the future, which could make
compliance more difficult or expensive, restrict the Company's ability to
originate or sell mortgage loans or sell mortgage-backed securities, further
limit or restrict the amount of interest and other fees earned from the
origination of loans, or otherwise adversely affect the business or prospects of
the Company.

The Company is licensed by the Office of the Commissioner as a mortgage
banking institution in Puerto Rico. Such authorization to act as a mortgage
banking institution must be renewed as of January 1 of each year. In the past,
the Company has not had any difficulty in renewing its authorization to act as a
mortgage banking institution and management is unaware of any existing
practices, conditions or violations which would result in the Company being
unable to receive such authorization in the future. The Company's operations in
the State of Florida are subject to regulation by the Florida Department of
Banking and Finance.

Section 5 of the Puerto Rico Mortgage Banking Institutions Law (the
"Mortgage Banking Law") requires the prior approval of the Office of the
Commissioner for the acquisition of control of any mortgage banking institution
licensed under the Mortgage Banking Law. For purposes of the Mortgage Banking
Law, the term "control" means the power to direct or influence decisively,
directly or indirectly, the management or policies of a mortgage banking
institution. The Mortgage Banking Law provides that a transaction that results
in the holding of less than 10% of the outstanding voting securities of a
mortgage banking institution shall not be considered a change of control.
Pursuant to Section 5 of the Mortgage Banking Law, upon receipt of notice of a
proposed transaction that may result in change of control, the Office of the
Commissioner is obligated to make such inquiries as he deems necessary to review
the transaction. Under the Mortgage Banking Law, the determination of the Office
of the Commissioner whether or not to authorize a proposed change of control is
final and non-appealable.

REGULATION -- BANKING OPERATIONS

FEDERAL REGULATION

General

The Company is a bank holding company subject to supervision and regulation
by the Federal Reserve under the BHC Act. As a bank holding company, the
Company's activities and those of its banking and nonbanking subsidiaries are
limited to the business of banking and activities closely related or incidental
to banking, and the Company may not directly or indirectly acquire the ownership
or control of more than 5% of any class of voting shares or substantially all of
the assets of any company in the United States, including a bank, without the
prior approval of the Federal Reserve. In addition, bank holding companies are
generally prohibited under the BHC Act from engaging in nonbanking activities,
subject to certain exceptions.

53
<PAGE> 54

Doral Bank is considered a foreign bank for purposes of the International
Banking Act of 1978, as amended (the "IBA"). Under the IBA, Doral Bank is not
permitted to operate a branch or agency that is located outside of its "home
state" except to the extent that a national bank with the same home state is
permitted to do so as described under "-- Interstate Banking Legislation" below.
Puerto Rico is not considered a state for purposes of the geographic limitations
contained in the IBA. Doral Bank does not currently operate in the mainland
United States and, therefore, has not designated any state as its home state for
purposes of the IBA. In addition, some states have laws prohibiting or
restricting foreign banks from acquiring banks located in such states and treat
Puerto Rico's banks and bank holding companies as foreign banks for such
purposes.

Doral Bank is subject to supervision and examination by applicable federal
and state banking agencies, including the FDIC and the Office of the
Commissioner. Doral Bank is subject to requirements and restrictions under
federal and state law, including requirements to maintain reserves against
deposits, restrictions on the types and amounts of loans that may be granted and
the interest that may be charged thereon, and limitations on the types of other
investments that may be made and the types of services that may be offered.
Various consumer laws and regulations also affect the operations of Doral Bank.
In addition to the impact of regulation, commercial banks are affected
significantly by the actions of the Federal Reserve as it attempts to control
the money supply and credit availability in order to influence the economy.

Holding Company Structure

Doral Bank is subject to restrictions under federal law that govern certain
transactions between the Company or other nonbanking subsidiaries of the
Company, whether in the form of loans, other extensions of credit, investments
or asset purchases. Such transactions by Doral Bank to the Company, or to any
one nonbanking subsidiary of the Company, are limited in amount to 10% of Doral
Bank's capital stock and surplus and, with respect to all of its nonbanking
subsidiaries, to an aggregate of 20% of the transferring institution's capital
stock and surplus. Furthermore, such loans and extensions of credit by Doral
Bank are required to be secured in specified amounts and must be on terms that
are consistent with safe and sound banking practices. All other transactions
between the Company and its nonbanking subsidiaries and Doral Bank, while not
subject to quantitative or collateral requirements, are subject to the
requirement that they be on terms and conditions no less favorable to Doral Bank
than would be available to unaffiliated third parties.

Under Federal Reserve policy, a bank holding company, such as the Company,
is expected to act as a source of financial strength to each of its subsidiary
banks and to commit resources to support each such subsidiary bank. This support
may be required at times when, absent such policy, the bank holding company
might not otherwise provide such support. In addition, any capital loans by a
bank holding company to any of its subsidiary banks are subordinate in right of
payment to deposits and to certain other indebtedness of such subsidiary bank.
In the event of a bank holding company's bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of a
subsidiary depository institution will be assumed by the bankruptcy trustee and
entitled to a priority of payment. Doral Bank is currently the only subsidiary
depository institution of the Company. The Company has not made any capital loan
to Doral Bank nor has it entered into any agreement with any Federal bank
regulating agency to maintain the capital of Doral Bank.

Because the Company is a holding company, its right to participate in the
assets of any subsidiary upon the latter's liquidation or reorganization will be
subject to the prior claims of the subsidiary's creditors (including depositors
in the case of depository institution subsidiaries) except to the extent that
the Company may itself be a creditor with recognized claims against the
subsidiary.

Under the Federal Deposit Insurance Act (the "FDIA"), a depository
institution (which term includes both banks and savings associations), the
deposits of which are insured by the FDIC, can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in danger of default." "Default"
is defined generally as the appointment of a conservator or a receiver and "in
danger of default" is defined generally as

54
<PAGE> 55

the existence of certain conditions indicating that a default is likely to occur
in the absence of regulatory assistance. In some circumstances (depending upon
the amount of the loss or anticipated loss suffered by the FDIC),
cross-guarantee liability may result in the ultimate failure or insolvency of
one or more insured depository institutions in a holding company structure. Any
obligation or liability owned by a subsidiary depository institution to its
parent company is subordinated to the subsidiary bank's cross-guarantee
liability with respect to commonly controlled insured depository institutions.
Doral Bank is currently the only controlled FDIC-insured depository institution
of the Company.

Capital Adequacy

Under the Federal Reserve's risk-based capital guidelines for bank holding
companies and state member banks, the minimum guidelines for the ratio of
qualifying total capital ("Total Capital") to risk-weighted assets (including
certain off-balance sheet items, such as standby letters of credit) is 8%. At
least half of the Total Capital is to be comprised of common equity, retained
earnings, minority interests in unconsolidated subsidiaries, noncumulative
perpetual preferred stock and a limited amount of cumulative perpetual preferred
stock, in the case of a bank holding, less goodwill and certain other intangible
assets discussed below ("Tier 1 Capital"). The remainder may consist of a
limited amount of subordinated debt, other preferred stock, certain other
instruments and a limited amount of loan and lease loss reserves ("Tier 2
Capital").

The Federal Reserve has adopted regulations that require most intangibles,
including core deposit intangibles, to be deducted from Tier l Capital. The
regulations, however, permit the inclusion of a limited amount of intangibles
related to purchased mortgage servicing rights and purchased credit card
relationships and include a "grandfather" provision permitting the continued
inclusion of certain existing intangibles.

In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies and member banks. These guidelines provide
for a minimum ratio of Tier 1 Capital to total assets, less goodwill and certain
other intangible assets discussed below (the "Leverage Ratio") of 3% for bank
holding companies and member banks that meet certain specified criteria,
including that they have the highest regulatory rating. All other bank holding
companies and member banks will be required to maintain a Leverage Ratio of 3%
plus an additional cushion of at least 100 to 200 basis points. The guidelines
also provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels, without significant reliance on intangible
assets. Furthermore, the guidelines indicate that the Federal Reserve will
continue to consider a "tangible Tier 1 Leverage Ratio" and other indicia of
capital strength in evaluating proposals for expansion or new activities. The
tangible Tier 1 leverage ratio is the ratio of a banking organization's Tier 1
Capital, less all intangibles, to average total assets, less all intangibles.

The FDIC has established regulatory capital requirements for state
non-member insured banks, such as Doral Bank, that are substantially similar to
those adopted by the Federal Reserve for state member banks.

Set forth below are the Company's and Doral Bank's capital ratios at
September 30, 1997 based on existing Federal Reserve and FDIC guidelines.

<TABLE>
<CAPTION>
THE COMPANY DORAL BANK
----------- ----------
<S> <C> <C>
Tier 1 Capital.............................................. 21.2% 16.1%
Total Capital............................................... 21.3 16.8
Leverage Ratio.............................................. 10.5 7.5
</TABLE>

Failure to meet capital guidelines could subject a bank holding company or
an insured bank to a variety of enforcement remedies, including, with respect to
an insured bank, the termination of deposit insurance by the FDIC, and to
certain restrictions on its business. See "FDICIA" below.

Bank regulators have in the past indicated their desire to raise capital
requirements applicable to banking organizations beyond current levels. However,
management is unable to predict whether and when higher capital requirements
would be imposed and, if so, at what levels or on what schedule.

55
<PAGE> 56

FDICIA

Under FDICIA, federal banking regulators must take prompt corrective action
in respect of depository institutions that do not meet minimum capital
requirements. FDICIA and regulations thereunder establish five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." A depository institution
is deemed well capitalized if it maintains a Leverage Ratio of at least 5%, a
risk-based Tier 1 capital ratio of at least 6% and a risk-based Total Capital
ratio of at least 10% and is not subject to any written agreement or directive
to meet a specific capital level. A depository institution is deemed adequately
capitalized if it is not well capitalized but maintains a Leverage Ratio of at
least 4% (or at least 3% if given the highest regulatory rating and not
experiencing or anticipating significant growth), a risk based Tier l capital
ratio of at least 4% and a risk-based Total Capital ratio of at least 8%. A
depository institution is deemed undercapitalized if it fails to meet the
standards for adequately capitalized institutions (unless it is deemed
significantly or critically undercapitalized). An institution is deemed
significantly undercapitalized if it has a Leverage Ratio of less than 3%, a
risk-based Tier 1 capital ratio of less than 3% or a risk-based Total Capital
ratio of less than 6%. An institution is deemed critically undercapitalized if
it has tangible equity equal to 2% or less of total assets. A depository
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives a less than
satisfactory examination rating in any one of four categories.

At September 30, 1997, Doral Bank was well capitalized. An institution's
capital category, as determined by applying the prompt corrective action
provisions of law, may not constitute an accurate representation of the overall
financial condition or prospects of the Company or Doral Bank, and should be
considered in conjunction with other available information regarding the Bank's
financial condition and results of operations.

FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institution's
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institution's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. The federal banking agencies may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an acceptable
plan, it is treated as if it is significantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets and
cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator.

The capital-based prompt corrective action provisions of FDICIA and their
implementing regulations apply to FDIC-insured depository institutions such as
Doral Bank, but they are not directly applicable to holding companies, such as
the Company, which control such institutions. However, federal banking agencies
have indicated that, in regulating holding companies, they may take appropriate
action at the holding company level based on their assessment of the
effectiveness of supervisory actions imposed upon subsidiary insured depository
institutions pursuant to such provisions and regulations.

Interstate Banking Legislation

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
permits bank holding companies, with Federal Reserve approval, to acquire banks
located in states other than the holding company's home state without regard to
whether the transaction is prohibited under state law. In addition, commencing
June 1, 1997, national and state banks with different home states are permitted
to merge across state lines, with approval of the appropriate federal banking
agency, unless the home state of a participating bank passes legislation prior
to May 31, 1997 expressly prohibiting interstate mergers. States were allowed to
"opt in" to

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permit interstate branching by merger prior to June 1, 1997, and to permit de
novo interstate branching. Once a bank has established branches in a state
through an interstate merger transaction, the bank may establish and acquire
additional branches at any location in the state where any bank involved in the
interstate merger transaction could have established or acquired branches under
applicable federal or state law. A bank that has established a branch in a state
through de novo branching may establish and acquire additional branches in such
state in the same manner and to the same extent as a bank having a branch in
such state as a result of an interstate merger. If a state opts out of
interstate branching within the specified time period, no bank in any other
state may establish a branch in the state which has opted out, whether through
an acquisition or de novo. For purposes of the FDIA, Doral Bank is considered a
state bank and is subject to the same restrictions on interstate branching as
other state banks. However, for purposes of the IBA, Doral Bank is considered a
foreign bank. Under IBA, foreign banks may branch interstate by merger or de
novo to the same extent as domestic banks in the foreign bank's home state.
Doral Bank does not currently operate in the mainland United States and
therefore has not selected a home state.

Various other legislation, including proposals to overhaul the bank
regulatory system, expand bank and bank holding company powers and limit the
investments that a depository institution may make with insured funds, is from
time to time introduced in Congress. The Company cannot determine the ultimate
effect that such potential legislation, if enacted, or implementing regulations,
would have upon their financial condition or results of operations.

Dividend Restrictions

The payment of dividends by Doral Bank to the Company may be affected by
regulatory requirements and policies, such as the maintenance of adequate
capital. If, in the opinion of the applicable regulatory authority, a depository
institution under its jurisdiction is engaged in, or is about to engage in, an
unsafe or unsound practice (that, depending on the financial condition of the
depository institution, could include the payment of dividends), such authority
may require, after notice and hearing, that such depository institution cease
and desist from such practice. The Federal Reserve has issued a policy statement
that provides that insured banks and bank holding companies should generally pay
dividends only out of current operating earnings. In addition, all insured
depository institutions are subject to the capital-based limitations required by
FDICIA. See "-- FDICIA."

See "-- Regulation -- Banking Operations -- Puerto Rico Regulation" for a
description of certain restrictions on Doral Bank's ability to pay dividends
under Puerto Rico law.

FDIC Insurance Assessments

The deposits of Doral Bank are insured by the Savings Association Insurance
Fund ("SAIF") administered by the FDIC and, accordingly, Doral Bank is subject
to FDIC deposit insurance assessments.

Pursuant to FDICIA, the FDIC has adopted a risk-based assessment system,
under which the assessment rate for an insured depository institution varies
according to the level of risk incurred in its activities. An institution's risk
category is based partly upon whether the institution is well capitalized,
adequately capitalized or less than adequately capitalized. Each insured
depository institution is also assigned to one of the following "supervisory
subgroups": "A", "B" or "C". Group "A" institutions are financially sound
institutions with only a few minor weaknesses; group "B" institutions are
institutions that demonstrate weaknesses that, if not corrected, could result in
significant deterioration; and group "C" institutions are institutions for which
there is a substantial probability that the FDIC will suffer a loss in
connection with the institution unless effective action is taken to correct the
areas of weakness.

On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was
enacted and signed into law. DIFA repealed the statutory minimum premium, and
currently premiums related to deposits assessed by both the BIF and the Savings
Association Insurance Fund ("SAIF") are to be assessed at a rate of between 0
cents and 27 cents per $100.00 of deposits. DIFA also provides for a special
one-time assessment imposed on deposits insured by the SAIF to recapitalize the
SAIF to bring the SAIF up to statutory required levels. Doral Bank accrued for
the one-time assessment in the third quarter of 1996.
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DIFA also separated, effective January 1, 1997, the Financing Corporation
("FICO") assessment to service the interest on its bond obligations from the BIF
and SAIF assessments. The amount assessed on individual institutions by the FICO
will be in addition to the amount, if any, paid for deposit insurance according
to the FDIC's risk-related assessment rate schedules. FICO assessment rates for
the first semiannual period of 1997 were set at 1.30 basis points annually for
BIF-assessable deposits and 6.48 basis points annually for SAIF-assessable
deposits. These rates may be adjusted quarterly to reflect changes in assessment
bases for the BIF and the SAIF. By law, the FICO rate on BIF-assessable deposits
must be one-fifth the rate on SAIF-assessable deposits until the insurance funds
are merged or until January 1, 2000, whichever occurs first. As of September 30,
1997, Doral Bank had a SAIF deposit assessment base of approximately $214
million.

Brokered Deposits

FDIC regulations adopted under FDICIA govern the receipt of brokered
deposits. Under these regulations, a bank cannot accept, roll over or renew
brokered deposits (which term is defined also to include any deposit with an
interest rate more than 75 basis points above prevailing rates) unless (i) it is
well capitalized or (ii) it is adequately capitalized and receives a waiver from
the FDIC. A bank that is adequately capitalized may not pay an interest rate on
any deposits in excess of 75 basis points over certain prevailing market rates
specified by regulation. There are no such restrictions on a bank that is well
capitalized. The Company does not believe the brokered deposits regulation has
had or will have a material effect on the funding or liquidity of Doral Bank
which is currently a well capitalized institution.

PUERTO RICO REGULATION

General

As a commercial bank organized under the laws of the Commonwealth, Doral
Bank is subject to supervision, examination and regulation by the Office of the
Commissioner of Financial Institutions of the Commonwealth (the "Office of the
Commissioner"), pursuant to the Puerto Rico Banking Act of 1933, as amended (the
"Banking Law").

Section 27 of the Banking Law requires that at least 10% of the yearly net
income of the Bank be credited annually to a reserve fund. This apportionment
shall be done every year until the reserve fund shall be equal to 10% of total
paid-in capital (preferred and common). As of October 1, 1997, the date of the
conversion of Doral Bank into a commercial Bank, Doral Bank had an adequate
reserve fund established.

Section 27 of the Banking Law also provides that when the expenditures of a
bank are greater than the receipts, the excess of the former over the latter
shall be charged against the undistributed profits of the bank, and the balance,
if any, shall be charged against the reserve fund, as a reduction thereof. If
there is no reserve fund sufficient to cover such balance in whole or in part,
the outstanding amount shall be charged against the capital account and no
dividend shall be declared until said capital has been restored to its original
amount and the reserve fund to 20% of the original capital of the institution.

Section 16 of the Banking Law requires every bank to maintain a legal
reserve which shall not be less than 20% of its demand liabilities, other than
government deposits (federal, state and municipal) secured by actual collateral.
The Office of the Commissioner can by regulation increase the reserve
requirement to 30% of demand deposits.

Section 17 of the Banking Law permits Doral Bank to make loans to any one
person, firm, partnership or corporation, up to an aggregate amount of 15% of
the paid-in capital and reserve fund of the Bank and of such other components as
the Office of Commissioner may permit from time to time. As of September 30,
1997, the legal lending limit for Doral Bank under this provision based solely
on its paid-in capital and reserve fund was approximately $3.1 million. If such
loans are secured by collateral worth at least 25% more than the amount of the
loan, the aggregate maximum amount may reach one third of the paid-in capital of
the bank, plus its reserve fund and of such other components as the Office of
Commissioner may permit from time to time. There are no restrictions under
Section 17 on the amount of loans that are wholly secured by bonds,

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securities and other evidences of indebtedness of the Government of the United
States or the Commonwealth, or by current debt bonds, not in default, of
municipalities or instrumentalities of the Commonwealth.

Section 14 of the Banking Law authorizes Doral Bank to conduct certain
financial and related activities directly or through subsidiaries, including
finance leasing of personal property, making and servicing mortgage loans and
operating a small-loan company. Doral Bank currently does not have any
subsidiaries.

The Finance Board, which is a part of the Office of the Commissioner, but
also includes as its members the Secretary of the Treasury, the Secretary of
Commerce, the Secretary of Consumer Affairs, the President of the Planning
Board, and the President of the Government Development Bank for Puerto Rico, has
the authority to regulate the maximum interest rates and finance charges that
may be charged on loans to individuals and unincorporated businesses in the
Commonwealth. The current regulations of the Finance Board provide that the
applicable interest rate on loans to individuals and unincorporated businesses
is to be determined by free competition. The Finance Board also has authority to
regulate the maximum finance charges on retail installment sales contracts,
which are currently set at 21%, and for credit card purchases, which are
currently set at 26%. There is no maximum rate set for installment sales
contracts involving motor vehicles, commercial, agricultural and industrial
equipment, commercial electric appliances and insurance premiums.

CERTAIN REGULATORY RESTRICTIONS ON INVESTMENTS IN COMPANY COMMON STOCK

Because of the Company's status as a bank holding company, owners of the
Common Stock are subject to certain restrictions and disclosure obligations
under various federal laws, including the BHC Act. Regulations pursuant to the
BHC Act generally require prior Federal Reserve approval for an acquisition of
control of an insured institution (as defined) or holding company thereof by any
person (or persons acting in concert). Control is deemed to exist if, among
other things, a person (or persons acting in concert) acquires more than 25% of
any class of voting stock of an insured institution or holding company thereof.
Control is presumed to exist subject to rebuttal, if a person (or persons acting
in concert) acquires more than 10% of any class of voting stock and either (i)
the Company has registered securities under Section 12 of the Securities
Exchange Act of 1934, or (ii) no person will own, control or hold the power to
vote a greater percentage of that class of voting securities immediately after
the transaction. The concept of acting in concert is very broad and also is
subject to certain rebuttable presumptions, including among others, that
relatives, business partners, management officials, affiliates and others are
presumed to be acting in concert with each other and their businesses.

Section 12 of the Puerto Rico Banking Act requires the prior approval of
the Office of the Commissioner with respect to a transfer of capital stock of a
bank that results in a change or control of the bank. Under Section 12, a change
of control is presumed to occur if a person or group of persons acting in
concert, directly or indirectly, acquire more than 5% of the outstanding voting
capital stock of the bank. The Office of the Commissioner has interpreted the
restrictions of Section 12 as applying to acquisitions of voting securities of
entities controlling a bank, such as a bank holding company. Under the Puerto
Rico Banking Act, the determination of the Office of the Commissioner whether to
approve a change of control filing is final and non-appealable.

The provisions of the Mortgage Banking Law also only require regulatory
approval for the acquisition of more than 10% of the Company's outstanding
voting securities. See "-- Regulation -- Mortgage Banking Business."

The above regulatory restrictions relating to investment in the Company may
have the effect of discouraging takeover attempts against the Company and may
limit the ability of persons, other than Company directors duly authorized by
the Company's board of directors, to solicit or exercise proxies, or otherwise
exercise voting rights, in connection with matters submitted to a vote of the
Company's stockholders.

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REGULATION -- BROKER-DEALER OPERATIONS

Doral Securities is registered as a broker-dealer with the Commission and
the Office of the Commissioner. Doral Securities is also a member of the NASD.
As a registered broker-dealer, it is subject to regulation by the Commission,
the NASD and the Office of the Commissioner in matters relating to the conduct
of its securities business, including record keeping and reporting requirements,
supervision and licensing of employees and obligations to customers. In
particular, Doral Securities is subject to the Commission's net capital rules,
which specify minimum net capital requirements for registered broker-dealers and
are designed to ensure that broker-dealers maintain adequate regulatory capital
in relation to their liabilities and the size of their customer business. As a
subsidiary of a bank holding company, Doral Securities is also subject to
regulation by the Federal Reserve.

MARKET AREA AND COMPETITION

Prior to March 1992, Puerto Rico was the Company's exclusive service area.
Although Doral Mortgage has since opened branch offices in Orlando and Miami,
Florida, Puerto Rico remains the Company's predominant service area accounting
for 99% of the Company's loan originations for the nine months ended September
30, 1997 and for each of the years ended December 31, 1996 and 1995. Within
Puerto Rico, the Company's primary market area is the metropolitan San Juan
area, which accounted for approximately 50%, 55% and 45% of the Company loan
originations for the nine months ended September 30, 1997 and for the years
ended December 31, 1996 and 1995, respectively. The competition in Puerto Rico
for the origination of mortgages is substantial. Competition comes not only from
other mortgage bankers but also from major commercial banks. There are
approximately 37 mortgage banks, one savings institution and 16 commercial banks
operating in Puerto Rico, including affiliates of banks headquartered in the
United States, Canada and Spain. The Company competes principally by offering
loans with competitive features, by emphasizing the quality of its service and
pricing its range of products at competitive rates.

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THE COMMONWEALTH OF PUERTO RICO

GENERAL

Puerto Rico, the fourth largest of the Caribbean islands, is located
approximately 1,600 miles southeast of New York, New York and 1,000 miles
southeast of Miami, Florida. It is approximately 100 miles long and 35 miles
wide. The population of Puerto Rico for 1990, as determined by the United States
Census Bureau, was approximately 3.5 million compared to 3.2 million in 1980.
According to estimates of the Puerto Rico Planning Board, the population of
Puerto Rico increased to 3.7 million in fiscal 1996. The Puerto Rico Planning
Board estimates that the San Juan metropolitan area has a population in excess
of 1.0 million.

RELATIONSHIP OF PUERTO RICO WITH THE UNITED STATES.

The Constitution of Puerto Rico was drafted by a popularly elected
constitutional convention, overwhelmingly approved in a special referendum and
approved "as a compact" by the United States Congress and the President,
becoming effective upon proclamation of the Governor of Puerto Rico on July 25,
1952. Puerto Rico's relationship to the United States under the compact is
referred to herein as "Commonwealth status." The United States and Puerto Rico
share a common defense, market and currency. Puerto Rico exercises virtually the
same control over its internal affairs as a state government does. The people of
Puerto Rico are citizens of the United States, but do not vote in national
elections and are represented in Congress by a Resident Commissioner who has a
voice in the House of Representatives but only limited voting rights. Most
federal taxes, except those such as social security taxes which are imposed by
mutual consent, are not levied in Puerto Rico. No federal income tax is
collected from Puerto Rico residents on ordinary income earned from sources
within Puerto Rico, except for Federal employees who are subject to taxes on
their salaries. Corporations organized under the laws of Puerto Rico are treated
as foreign corporations for federal income tax purposes. For many years there
have been two major views in Puerto Rico with respect to the island's
relationship to the United States, one essentially favoring the existing
Commonwealth status and the other favoring statehood.

On November 14, 1993, a plebiscite was held in Puerto Rico to allow
eligible voters an opportunity to express their preference between statehood,
Commonwealth (with certain changes) and independence for Puerto Rico. The
Commonwealth status obtained the most votes, receiving 48.4% of the votes cast,
and statehood and independence received 46.2% and 4.4% of the votes casts,
respectively.

On February 26, 1997 legislation was introduced in the U.S. House of
Representatives (the "Political Status Act") proposing a mechanism to settle
permanently the political relationship between Puerto Rico and the United
States, either through full self-government (e.g., statehood or independence,
including, as an alternative, free association via a bilateral treaty) or
continued Commonwealth status. Under the proposed legislation, failure to settle
on full self-government after completion of the referenda process provided
therein would result in retention of the current Commonwealth status. On March
19, 1997, similar legislation was introduced in the U.S. Senate. The House
Resources Committee held hearings and voted in favor of the Political Status
Act. The Political Status Act must now be voted by the House Rules Committee
before reaching the House floor. It is not possible at this time to predict when
the Political Status Act will be voted on by the full House of Representatives,
what course the legislation will follow in the Senate, and whether it will be
subsequently enacted into law.

A change in the political status of Puerto Rico could result in
modifications to or elimination of the Puerto Rico laws providing favorable tax
treatment for investment in Puerto Rico mortgages. See "BUSINESS -- Mortgage
Banking Business -- Puerto Rico Secondary Mortgage Market and Favorable Tax
Treatment." It is not possible to predict to what extent any adverse effects of
such a change in political status would be offset by possible beneficial
economic changes resulting from a change in political status.

THE ECONOMY

Puerto Rico has established policies and programs directed at developing
the manufacturing and service sectors (with emphasis on the tourism industry)
and expanding and modernization of the island's infrastruc-
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ture. The investment of funds by mainland United States, foreign and local
entities in new factories has been stimulated by selective tax exemption,
development loans, and other financial and tax incentives. Infrastructure
expansion and modernization have been to a large extent financed by bonds and
notes issued by the Commonwealth, its public corporations and municipalities.
Economic progress has been aided by significant increases in the levels of
education and occupational skills of the island's population. The percentage of
the college-age population enrolled in institutions of higher learning has
increased from 16.8% in 1970 to 37.8% in 1996.

The economy of Puerto Rico is closely integrated with that of the mainland
United States. During the fiscal year ended June 30, 1996, approximately 88% of
Puerto Rico's exports went to the United States mainland, which was also the
source of approximately 62% of Puerto Rico's imports. For the fiscal year ended
June 30, 1996, Puerto Rico experienced a positive adjusted merchandise trade
balance of $3.2 billion.

The economy of Puerto Rico is dominated by the manufacturing and service
sectors. The manufacturing sector has experienced a basic change over the years
as a result of increased emphasis on higher wage, high technology industries,
such as pharmaceuticals and electronics. The service sector also plays a major
role in the economy. It ranks second only to manufacturing in contribution to
the gross domestic product and leads all sectors in providing employment. In
recent years, the service sector has experienced significant growth in response
to the expansion of the manufacturing sector.

Gross product increased from $23.7 billion for fiscal 1992 to $30.2 billion
($26.7 billion in 1992 prices) for fiscal 1996, an increase of 27.7% (12.9% in
1992 prices). Since fiscal 1985, personal income, both aggregate and per capita,
has increased consistently each fiscal year. In fiscal 1996, aggregate personal
income was $29.4 billion ($27.8 billion in 1992 prices) and personal income per
capita was $7,882 ($7,459 in 1992 prices). Average employment increased from
999,000 in fiscal 1993 to 1,128,300 in fiscal 1997. Average unemployment
decreased from 16.8% in fiscal 1993 to 13.1% in fiscal 1997.

Future growth in the Puerto Rico economy will depend on several factors
including the condition of the United States economy, the relative stability in
the price of oil imports, the exchange value of the U.S. dollars and the level
of interest rates and changes to federal tax incentive legislation referred to
below.

The Small Business Job Protection Act, which was signed into law on August
20, 1996, provides for the repeal of Section 936. The elimination of the
benefits of Section 936, without the substitution of another fiscal incentive to
attract investment to Puerto Rico, could have an adverse effect on the future
growth of the Puerto Rico economy. At this point, the Company cannot predict the
long-term impact of the repeal of Section 936 on the economy of Puerto Rico. See
"RISK FACTORS -- Economic Conditions in Puerto Rico and Repeal of Section 936
Tax Benefits."

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DESCRIPTION OF CAPITAL STOCK

AUTHORIZED CAPITAL

The Company is authorized to issue 50,000,000 shares of Common Stock, $1.00
par value, and 2,000,000 shares of Serial Preferred Stock, $1.00 par value (the
"Serial Preferred Stock"). The following summary of certain rights and
privileges of the Common Stock and Serial Preferred Stock of the Company does
not purport to be complete. Statements in this summary are qualified in their
entirety by reference to the Company's Restated Certificate of Incorporation and
the amendments thereto and to the General Corporation Law of Puerto Rico.

COMMON STOCK

As of February 12, 1998, there were 18,397,460 shares of Common Stock
issued and outstanding. In addition, as of that date, a total of 966,857 of the
Company's authorized but unissued shares of Common Stock had been reserved for
possible issuance upon the conversion of all outstanding Convertible Debentures
and 1,000,000 and 144,388 shares had been reserved for issuance in connection
with the Company's 1997 Employee Stock Option Plan and 1988 Restricted Stock
Plan, respectively. On October 22, 1997, the Convertible Debentures were
exchanged for 8,460 shares of 8% Preferred Stock. In addition, as of September
30, 1997, 400,000 shares of Common Stock had been reserved for issuance to honor
certain contractual rights to purchase Common Stock. See "-- Purchase Rights of
Popular, Inc." below. The Common Stock is traded in the over-the-counter market
on the Nasdaq National Market. The holders of the Common Stock are entitled to
one vote for each share held of record on all matters submitted to a vote of
stockholders. Each share of Common Stock has the same relative rights as, and is
identical in all respects with, each other share of Common Stock. There are no
cumulative voting rights for the election of directors.

Subject to the rights of the holders of the outstanding shares of 8%
Preferred Stock and any other outstanding shares of Serial Preferred Stock that
may be issued in the future, in the event of the liquidation, dissolution or
distribution of assets of the Company, the holders of Common Stock are entitled
to share ratably in the assets of the Company legally available for distribution
to stockholders. The Common Stock has no redemption, conversion or sinking fund
privileges.

Subject to the dividend preference of the 8% Preferred Stock and any
dividend preferences which may be established with respect to any other series
of preferred stock, the holders of Common Stock are entitled to receive, pro
rata, dividends when and as declared by the Board of Directors out of funds
legally available therefor.

Holders of Common Stock do not have preemptive rights to subscribe for or
purchase additional securities of the Company.

ChaseMellon Shareholder Services LLC, New York, New York, is the transfer
agent and registrar for the Common Stock.

SERIAL PREFERRED STOCK

The Company's Restated Certificate of Incorporation authorizes the Board of
Directors to fix the designation, voting powers, preferences, limitations and
relative rights of any series of the Company's Serial Preferred Stock at the
time of issuance. The holders of Common Stock may be adversely affected since
preferred stock issued in the future may be designated with special rights or
preferences by the Board of Directors over the holders of the Common Stock as to
dividends, liquidation rights, voting rights (e.g., separate class right to
approve a merger or sale of substantially all the assets of the Company) and
other matters. The issuance of Serial Preferred Stock under certain
circumstances may have the effect of delaying, deferring or preventing a change
in control of the Company. The 8% Preferred Stock is the only series of Serial
Preferred Stock currently designated by the Company. The Company is authorized
to issue 20,000 shares of 8% Preferred Stock under the designation creating such
series of preferred stock.

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8% PREFERRED STOCK

The Company entered into a Debenture Purchase Agreement dated September 25,
1995, as amended and restated as of December 15, 1995 (the "Debenture Purchase
Agreement") with Popular, Inc. ("Popular"), a bank holding company headquartered
in San Juan, Puerto Rico, providing for the issuance and sale to Popular of
$10.0 million of Convertible Debentures in a private transaction. Approximately
$6.6 million of Convertible Debentures were issued on September 25, 1995 and the
remaining $3.4 million were issued on December 22, 1995. The Convertible
Debentures were convertible into shares of Common Stock at a conversion price of
$8.75 per share (as adjusted for a two-for-one stock split effective August 28,
1997), subject to adjustment in certain circumstances.

The Company entered into an Exchange Agreement dated July 9, 1997, with
Popular, whereby the Company agreed to exchange 8,460 newly issued shares of the
8% Preferred Stock for the $8.46 million principal amount of the Convertible
Debentures held by Popular at the time. Popular had previously converted $1.54
million of Convertible Debentures and sold the shares of Common Stock issued
upon conversion of such Convertible Debentures in the open market. On October
22, 1997, the exchange contemplated under the Exchange Agreement took place and
the shares of 8% Preferred Stock were issued. The 8% Preferred Stock qualifies
as Tier 1 Capital for purposes of compliance with the regulatory capital
requirements applicable to bank holding companies. See
"BUSINESS -- Regulation -- Banking Operations -- Federal Regulation -- Capital
Adequacy."

As of December 31, 1997, there were 8,460 shares of the Company's 8%
Preferred Stock issued and outstanding. The shares of 8% Preferred Stock will
not be traded in the over-the-counter market or any national securities
exchange.

Dividend Rights and Limitations. The holders of the shares of 8% Preferred
Stock, in preference to holders of the Common Stock, are entitled to receive
cumulative cash dividends when, as and if declared by the Board of Directors,
out of the assets of the Company legally available therefore at the annual rate
of 8% of the liquidation value thereof payable monthly or $6.66 2/3 per share
per month.

The Company may not declare, set apart or pay any dividend on or make any
distribution of assets (other than dividends paid or other distributions made in
stock of the Company ranking junior to the 8% Preferred Stock as to the payment
of dividends and the distribution of assets upon liquidation, dissolution or
winding up of the Company) on, or redeem, purchase, set apart or otherwise
acquire (except upon conversion or exchange for stock of the Company ranking
junior to the 8% Preferred Stock as to the payment of dividends and the
distribution of assets upon liquidation, dissolution or winding up of the
Company), shares of Common Stock or of any other stock of the Company ranking
junior to the 8% Preferred Stock as to the payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up of the
Company, unless all accrued and unpaid dividends on the 8% Preferred Stock have
been or contemporaneously are declared and paid and the full monthly dividend on
the 8% Preferred Stock for the current month has been or is contemporaneously
declared and paid or declared and set apart for payment and unless the Company
has not defaulted in the payment of the redemption price of any shares of 8%
Preferred Stock called for redemption.

Whenever all accrued dividends on the 8% Preferred Stock and any other
stock of the Company ranking on a parity to the 8% Preferred Stock as to the
payment of dividends are not paid in full, all dividends declared upon the 8%
Preferred Stock and any such other parity stock of the Company must be declared
pro rata so that the amount of dividends declared per share on the 8% Preferred
Stock and such other parity stock of the Company will bear the same ratio that
the liquidation preference per share of 8% Preferred Stock and such other stock
of the Company bear to each other.

Liquidation Rights. Upon the liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, the holders of the 8% Preferred Stock
are entitled to receive out of the assets of the Company an amount in cash equal
to $1,000 per share plus accrued and unpaid dividends thereon to the date of
such distribution, before any payment may be made to the holders of Common Stock
or any other securities of the Company ranking junior to the 8% Preferred Stock
as to the distribution of assets upon liquidation. No such distribution or
payment on account of liquidation, dissolution or winding up of the Company may
be made to

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<PAGE> 65

the holders of the shares of any class or series of stock of the Company ranking
on a parity with the 8% Preferred Stock as to the distribution of assets upon
liquidation, unless the holders of the 8% Preferred Stock receive like
distributive amounts ratably in accordance with the full distributive amounts
which they and the holders of such parity stock are respectively entitled to
receive upon such preferential distribution.

Neither the consolidation or merger of the Company with any other
corporation, nor the sale, lease or conveyance of all or any part of the
property or business of the Company, will be deemed to be a liquidation,
dissolution or winding up of the Company. After the payment to the holders of
the 8% Preferred Stock of the full preferential amounts provided for above, the
holders of the 8% Preferred Stock as such will have no right or claim to any of
the remaining assets of the Company.

Conversion Rights. The holders of shares of 8% Preferred Stock have the
right, at their option, to convert such shares into shares of Common Stock of
the Company at any time before the close of business on December 1, 2005 at a
conversion price of $8.75 per share, subject to adjustment from time to time
upon the occurrence of certain events. The number of shares of Common Stock
issuable upon conversion of a share of 8% Preferred Stock shall be determined by
dividing the aggregate liquidation preference of the shares of 8% Preferred
Stock being converted by the conversion price in effect on the conversion date.
The 8,460 shares of 8% Preferred Stock held by Popular are convertible into the
same aggregate number of shares of Common Stock (966,857 shares) as were the
Convertible Debentures outstanding immediately prior to the exchange made
pursuant to the terms of the Exchange Agreement.

Redemption. The 8% Preferred Stock is subject to redemption in whole or in
part, at the option of the Company with the consent of the Federal Reserve on or
after January 1, 2001 and on or prior to December 31, 2002 at a price of $1,020
per share and thereafter at redemption prices declining to a price of $1,000 per
share on or after January 1, 2005. There is no mandatory redemption or sinking
fund obligation with respect to the 8% Preferred Stock.

Voting Rights. The holders of shares of 8% Preferred Stock are not
entitled to any voting rights except as required by law or as described below.

The affirmative vote or consent of the holders of at least a majority of
the outstanding shares of the 8% Preferred Stock, voting as a class, is required
for the approval of any variation or abrogation of the rights, preferences and
privileges of the 8% Preferred Stock by way of any amendment of any provision of
the Company's Certificate of Incorporation or otherwise which would alter or
materially affect the special rights, powers or preferences of the 8% Preferred
Stock or to authorize or issue any class of stock ranking prior to the 8%
Preferred Stock as to dividends or upon liquidation.

Registration Rights. Under the terms of the Exchange Agreement, the
holders of shares of 8% Preferred Stock are entitled to include such shares (or
the shares of Common Stock into which their shares of 8% Preferred Stock are
convertible) in certain registration statements filed by the Company with
respect to its equity securities. In addition, one or more holders of shares of
8% Preferred Stock having an aggregate liquidation preference of not less than
$5.0 million ($2.5 million in the case of Popular) may require the Company to
file a registration statement covering such shares under certain circumstances.

PURCHASE RIGHTS OF POPULAR, INC.

The Exchange Agreement incorporates a provision previously contained in the
Debenture Purchase Agreement which grants Popular a non-transferable right to
acquire up to a maximum of 400,000 additional shares of Common Stock, at a price
of $8.75 per share (subject to adjustment upon the occurrence of certain
events). Popular may exercise its purchase rights if, as a result of the
issuance of newly issued shares of Common Stock or of options or securities
convertible into Common Stock by the Company, the shares of Common Stock issued
or issuable upon conversion of the 8% Preferred Stock held by Popular (plus any
shares previously acquired by Popular upon conversion of the Convertible
Debentures or the 8% Preferred Stock) represent in the aggregate less than 4.99%
of the Company's fully diluted outstanding shares of Common Stock. Popular's
right to acquire additional shares of the Company's Common Stock expires on June
30, 1999

65
<PAGE> 66

and is subject to termination upon the occurrence of certain corporate events
involving the acquisition of the Company.

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

The following discussion summarizes certain federal income tax aspects
relevant to a decision to purchase Common Stock. This discussion is based upon
the Code, the applicable Treasury Regulations (the "Regulations") and judicial
and administrative interpretations of the Code and Regulations, all as in effect
on the date of this Prospectus. Each investor should be aware that the Code, the
Regulations and any interpretations thereof are subject to change and that any
change could be applied retroactively.

This discussion does not purport to deal with all aspects of federal income
taxation that may be relevant to particular investors in light of their personal
investment circumstances or to certain types of investors subject to special
treatment under the Code (for example, banks, foreign persons, life insurance
companies or tax exempt organizations). EACH INVESTOR IS STRONGLY URGED TO
CONSULT ITS OWN TAX ADVISOR AS TO ANY FEDERAL, STATE, LOCAL OR OTHER TAX
CONSIDERATIONS AFFECTING THE PURCHASE, HOLDING AND DISPOSITION OF THE COMMON
STOCK.

The Company believes that dividends paid by it in the past with respect to
the Common Stock qualified as income from sources within Puerto Rico and that
such future dividends will continue to so qualify. The following discussion is
based on the assumption that such dividends will continue to so qualify. In
addition, for purposes of determining the source of gain on the sale or exchange
of the Common Stock, United States citizens and residents who are bona fide
residents of Puerto Rico during the entire taxable year are assumed to be
classified as nonresidents.

SALE OR EXCHANGE OF THE COMMON STOCK

United States Shareholders. Gain or loss will be recognized by a
shareholder who is a United States citizen or resident (in each case other than
a bona fide resident of Puerto Rico during the entire taxable year) or
corporation (a "United States Shareholder") upon the sale or exchange of the
Common Stock in an amount equal to the difference between the amount realized
upon the sale or exchange and the tax basis of the Common Stock sold or
exchanged. Such gain or loss will be capital gain or loss if the Common Stock is
a capital asset in the hands of the shareholder.

Puerto Rico Shareholders. In general, gain from the sale or exchange of
the Common Stock by an individual who is a bona fide resident of Puerto Rico
during the entire taxable year will not be includible in such shareholder's
gross income and will be exempt from federal income taxation. No deduction or
credit will be allowed for any amount that is allocable to or chargeable against
amounts excluded from gross income by reason of the preceding sentence. A
corporation organized under the laws of Puerto Rico will also not be subject to
federal income tax on gain recognized from the sale or exchange of the Common
Stock unless the corporation is engaged in a trade or business in the United
States and the sale or exchange of the Common Stock is effectively connected
with that trade or business.

DISTRIBUTIONS ON COMMON STOCK

United States Shareholders. Distributions made by the Company with respect
to the Common Stock to a United States Shareholder will be treated as dividends
for federal income tax purposes to the extent such distributions are treated as
made out of the Company's current or accumulated earnings and profits, and will
be includible in gross income and characterized as ordinary income to the
shareholders. To the extent that such distributions exceed the Company's current
or accumulated earnings and profits, such excess will be treated as a return of
capital and will be applied against and reduce the adjusted basis of the Common
Stock in the hands of each holder. The amount of any such distribution which
exceeds the adjusted basis of the Common Stock in the hands of the holder will
be treated as gain from the sale or exchange of such stock, generally reportable
as capital gain (provided the Common Stock is held as a capital asset).
Corporate United

66
<PAGE> 67

States shareholders will not be allowed any dividends received deduction with
respect to dividends paid with respect to the Common Stock.

Subject to the limitations contained in the Code, any Puerto Rico income
tax paid or deemed paid on a dividend distribution on the Common Stock will be
creditable against the United States federal income tax liability of a
shareholder who is a United States person.

Puerto Rico Shareholders. In general, distributions of dividends made by
the Company with respect to the Common Stock to an individual who is a bona fide
resident of Puerto Rico during the entire taxable year or to a corporation
organized under the laws of Puerto Rico will not be includible in such
shareholder's gross income and will be exempt from federal income taxation. A
corporation organized under the laws of Puerto Rico that is engaged in a trade
or business within the United States, however, will be taxed on the dividends if
they are effectively connected with that trade or business.

PASSIVE FOREIGN INVESTMENT COMPANY STATUS

The Code provides special rules regarding certain distributions received by
United States persons (which term includes United States citizens who are
residents of Puerto Rico but not Puerto Rico corporations) with respect to, and
sales and other dispositions (including pledges) of, stock of a Passive Foreign
Investment Company ("PFIC"). Unless a special election is made to include income
of a PFIC currently, the shareholders of a PFIC will be required to pay a
special tax plus an interest charge on gain recognized from the disposition of
stock in the PFIC or upon the receipt of an excess distribution from the PFIC. A
foreign corporation, such as the Company, will be treated as a PFIC if 75% or
more of its gross income is passive income or if the average percentage of its
assets (by value) for such taxable year that produce, or are held for the
production of, passive income is at least 50%. Special rules apply in the case
of income derived from the active conduct of a banking business, certain items
of income received from affiliates, as well as with respect to the treatment of
corporations 25% or more of the value of the stock of which is owned by such
non-United States corporation. Once a foreign corporation is a PFIC for a
taxable year, it will be treated as a PFIC for all subsequent taxable years
unless certain exemptions apply. The IRS has issued proposed regulations under
the PFIC provisions pursuant to which individuals who have been full-year bona
fide residents of Puerto Rico for all taxable years during which they have held
the stock of a PFIC are not subject to the deferred tax treatment.

The Company believes that it has not been a PFIC for any of its prior
taxable years and expects to conduct its affairs in such a manner so that it
will not meet the criteria to be considered a PFIC in the foreseeable future.

CERTAIN PUERTO RICO INCOME TAX CONSIDERATIONS

The following discussion summarizes certain Puerto Rico income tax aspects
relevant to a decision to purchase the Common Stock. This discussion is based
upon the Puerto Rico Internal Revenue Code of 1994, as amended (the "PR Code"),
the applicable regulations under the PR Code and judicial and administrative
interpretations of the PR Code, all as in effect on the date of this Prospectus.
Each investor should be aware that the PR Code, the regulations promulgated
thereunder and any interpretations thereof are subject to change and that any
change could be applied retroactively.

This discussion does not purport to deal with all aspects of Puerto Rico
income taxation that may be relevant to particular investors in light of their
personal investment circumstances or to certain types of investors subject to
special treatment under the PR Code (for example, non-resident aliens, life
insurance companies, special partnerships, subchapter N corporations and certain
United States and Puerto Rico qualified pension plans). EACH INVESTOR IS
STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR AS TO ANY PUERTO RICO INCOME AND
OTHER TAX CONSIDERATIONS AFFECTING THE PURCHASE, HOLDING AND DISPOSITION OF THE
COMMON STOCK.

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<PAGE> 68

SALE OR EXCHANGE OF COMMON STOCK

Gain or loss will be realized on the sale or exchange of the Common Stock
equal to the difference between the amount realized upon the sale or exchange
and the tax basis of such shares. Such gain or loss will be capital gain or loss
if the Common Stock is held as a capital asset and will be long-term capital
gain or loss if the holding period for the Common Stock exceeds six months.

Puerto Rico Residents and Corporations. Any gain on the sale or exchange
of the Common Stock by a Puerto Rico resident individual, whether United States
citizens or aliens, or a Puerto Rico corporation will generally be required to
be recognized as gross income and subject to income tax. If the shareholder is
an individual and the gain is a long-term capital gain, it will be taxable at a
maximum rate of 20%. If the shareholder is a Puerto Rico corporation and the
gain is a long-term capital gain, it will qualify for an alternative tax of 25%.

Non-resident individual U.S. citizens. A United States citizen
non-resident of Puerto Rico will not be subject to Puerto Rico income tax (and a
20% withholding tax on the gross sales price or proceeds) on the sale or
exchange of the Common Stock if the gain is from sources outside Puerto Rico.
The gain from the sale or exchange of Common Stock will be considered from
sources outside Puerto Rico if all rights, title and beneficial ownership on the
shares of Common Stock is transferred outside Puerto Rico.

Foreign Corporations. A foreign corporation engaged in a trade or business
in Puerto Rico (a "Resident Foreign Corporation") will be subject to a maximum
tax rate of 25% on long term capital gains from the sale or exchange of the
Common Stock to the extent that such gain is (i) from sources within Puerto Rico
or (ii) from sources outside Puerto Rico and effectively connected to the
conduct of a Puerto Rico trade or business ("ECI-PR"). For Puerto Rico income
tax purposes, the gain from the sale of the Common Stock is considered derived
from the place where all rights, title and beneficial ownership on the stock
pass from the seller to the purchaser.

On the sale or exchange of the Common Stock, a foreign corporation not
engaged in trade or business in Puerto Rico will be subject to a 29% tax on the
excess of capital gains derived from sources within Puerto Rico over capital
losses of the same nature. An amount equal to 25% of the gross sales price will
be withheld from the proceeds of any sale which constitutes income from sources
within Puerto Rico, which amount will be credited against the tax liability.

Foreign Partnerships. Under the PR Code, partnerships are generally taxed
as corporations. Accordingly, the discussion with respect to foreign
corporations is equally applicable to most foreign partnerships.

DISTRIBUTIONS ON COMMON STOCK

Distributions of property made by the Company with respect to the Common
Stock will be treated as dividends for Puerto Rico income tax purposes and will
be taxable in the manner described below to the extent the Company has either
current or accumulated earnings and profits. To the extent that the amount of
the distributions paid on the Common Stock exceeds the Company's current and
accumulated earnings and profits for Puerto Rico income tax purposes, such
distributions will be treated as a return of capital (rather than as a dividend)
and will be applied against and reduce the adjusted basis of the Common Stock in
the hands of such holder. The amount of any such distribution which exceeds the
adjusted basis of Common Stock in the hands of the holder will be treated as a
gain from the sale or exchange of such shares of stock, taxable in the manner
described below.

The following discussion regarding the Puerto Rico income taxation of
dividends paid on the Common Stock assumes that such dividends are from Puerto
Rico sources. Generally, dividends paid by a corporation organized under the
laws of Puerto Rico are considered to be from Puerto Rico sources unless the
Puerto Rico corporation derives less than 20% of its gross income from Puerto
Rico sources during the three taxable years preceding the year of declaration of
the dividends (or part of such period as the corporation has been in existence).
Since its incorporation in 1972, the Company has derived more than 20% of its
gross income from Puerto Rico sources.

68
<PAGE> 69

Puerto Rico Residents and Corporations. Individual residents of Puerto
Rico, whether United States citizens or aliens, and corporations organized under
the laws of Puerto Rico will be subject to Puerto Rico income tax on dividends
received on the Common Stock.

The PR Code imposes a maximum income tax of 10% to be withheld at source on
the total amount of dividends paid by the Company on the Common Stock to
individuals residents of Puerto Rico. An individual may make an election for
such withholding not to apply, but will be required to include as ordinary
income the dividend received which will be subject to normal tax rates. The
maximum Puerto Rico income tax rate for individuals is 33%.

No withholding tax is imposed on distributions of dividends to corporations
organized under the laws of Puerto Rico. Such dividends will be taxed at the
normal corporate tax rates, but such corporations will be entitled to claim a
dividend received deduction in computing its Puerto Rico income tax liability
equal to 85% of the dividend received from the Company (the "Dividend
Deduction"), provided the Dividend Deduction may not exceed 85% of the corporate
taxpayer's net taxable income in Puerto Rico. Based on the applicable maximum
Puerto Rico regular corporate income tax rate of 39%, the maximum effective tax
rate on dividends would be 5.85% after the Dividend Deduction.

Non-Resident Individual U.S. Citizens. The PR Code imposes a 10%
withholding tax on the total amount of any dividend paid by the Company on the
Common Stock to an individual United States citizen who is a non-resident of
Puerto Rico.

A United States citizen who is a non-resident of Puerto Rico may elect, in
the same manner that a Puerto Rico resident elects, to include the dividends
received as ordinary income at the regular graduated rates. Notwithstanding the
making of such election, a 10% withholding would still be made on the total
amount of any dividend distribution unless the individual files with the
Company, prior to the first dividend distribution for the taxable year, a
Withholding Exemption Certificate to the effect that said individual's gross
income from sources within Puerto Rico during the taxable year does not exceed
$1,300, if single, or $3,000, if married.

For a discussion of the creditability of any Puerto Rico income tax paid or
deemed paid on a dividend distribution on the Common Stock against the federal
income tax liability of a United States Shareholder, see "CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS."

Foreign Corporations. For purposes of the PR Code, a corporation organized
outside of Puerto Rico is considered a "foreign corporation." Taxation of
dividends paid by the Company to such a foreign corporation will depend on
whether the foreign corporation is a Resident Foreign Corporation or not.

A foreign corporation ETB-PR (a "Resident Foreign Corporation") must file a
Puerto Rico income tax return and is taxed at the normal corporate tax rates on
the net income derived from Puerto Rico sources and on certain items of income
from sources outside Puerto Rico which are ECI-PR. Net income from Puerto Rico
sources includes the gross income from Puerto Rico sources, including any
dividends paid by the Company, less applicable deductions. A Resident Foreign
Corporation will be entitled to claim the Dividend Deduction.

A foreign corporation not engaged in a trade or business in Puerto Rico
will be subject to a 10% withholding tax imposed on the gross dividends received
from the Company.

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<PAGE> 70

UNDERWRITING

Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "Underwriters"), for which Brean Murray & Co.,
Inc. is acting as representative (the "Representative"), and each of the
Underwriters severally has agreed to purchase from the Company the aggregate
number of shares of Common Stock set forth opposite its name below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Brean Murray & Co., Inc..................................... 592,000
Bear, Stearns & Co. Inc..................................... 38,000
BT Alex. Brown Incorporated................................. 38,000
CIBC Oppenheimer Corp....................................... 38,000
Cowen & Company............................................. 38,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 38,000
A.G. Edwards & Sons, Inc.................................... 38,000
Lazard Freres & Co. LLC..................................... 38,000
Lehman Brothers Inc......................................... 38,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 38,000
PaineWebber Incorporated.................................... 38,000
Prudential Securities Incorporated.......................... 38,000
Salomon Smith Barney........................................ 38,000
SBC Warburg Dillon Read Inc................................. 38,000
Schroder & Co. Inc.......................................... 38,000
UBS Securities LLC.......................................... 38,000
Allen & Co.................................................. 22,000
Anderson & Strudwick Incorporated........................... 22,000
Cruttenden Roth Incorporated................................ 22,000
EVEREN Securities, Inc...................................... 22,000
Fahnestock & Co. Inc........................................ 22,000
Janney Montgomery Scott Inc................................. 22,000
Morgan Keegan & Company, Inc................................ 22,000
Needham & Company, Inc...................................... 22,000
Raymond James & Associates, Inc............................. 22,000
The Robinson-Humphrey Company, LLC.......................... 22,000
C.E. Unterberg, Towbin...................................... 22,000
Gilford Securities Incorporated............................. 11,000
Gruntal & Co., L.L.C........................................ 11,000
Edward D. Jones & Co., L.P.................................. 11,000
Laidlaw Global Securities, Inc.............................. 11,000
Loewenbaum & Company Incorporated........................... 11,000
Nordberg Capital Inc........................................ 11,000
The Ohio Company............................................ 11,000
Parker/Hunter Incorporated.................................. 11,000
Pennsylvania Merchant Group Ltd............................. 11,000
Ragen MacKenzie Incorporated................................ 11,000
Samuel A. Ramirez & Co...................................... 11,000
Scott & Stringfellow, Inc................................... 11,000
The Seidler Companies Incorporated.......................... 11,000
Stifel, Nicolaus & Company Incorporated..................... 11,000
Van Kasper & Company........................................ 11,000
HC Wainwright & Co., Inc.................................... 11,000
---------
Total............................................. 1,580,000
=========
</TABLE>

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<PAGE> 71

Under the terms and conditions of the Underwriting Agreement, the Company
is obligated to sell, and the Underwriters are obligated to purchase, all of the
shares of Common Stock set forth in the table above, if any of the shares of
Common Stock are purchased.

The Underwriters propose to offer the shares of Common Stock to the public
initially at the public offering price set forth on the cover page of this
Prospectus, and to certain selected dealers at such public offering price less a
concession not to exceed $0.84 per share. The Underwriters or such selected
dealers may reallow a commission to certain other dealers not to exceed $0.10
per share. After the offering to the public, the public offering price, the
concession to selected dealers and the reallowance to other dealers may be
changed by the Underwriters.

The Company has granted the Underwriters an option exercisable for 30 days
from the date of this Prospectus, to purchase up to 237,000 additional shares of
Common Stock to cover over-allotments, if any, at the initial public offering
price, less the underwriting discounts and commissions, as set forth on the
cover page of this Prospectus. If the Underwriters exercise this option, then
each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment as indicated in the table above. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the shares of Common Stock offered hereby.

The Representative has in the past performed investment banking services
for the Company. A. Brean Murray, the Chairman and Chief Executive Officer of
the Representative, is a director of the Company.

In connection with this offering, certain Underwriters may engage in
passive market making transactions in the Common Stock on the Nasdaq Stock
Market immediately prior to the commencement of sales in this offering, in
accordance with Rule 103 of Regulation M. Passive market making consists of
displaying bids on the Nasdaq Stock Market limited by the bid prices and effect
in response to order flow. Net purchases by a passive market maker on each day
are limited to a specified percentage of the passive market maker's average
daily trading volume in the Common Stock during a specified period and must be
discontinued when such limit is reached. Passive market making may stabilize the
market price of the Common Stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.

In connection with this offering, the Underwriters may engage in
stabilizing, syndicate short-covering transactions penalty bids or other
transactions during the offering that may stabilize, maintain or otherwise
affect the market price of the Common Stock at a level above that which might
otherwise prevail in the open market. Stabilizing transactions are bids for and
purchases of Common Stock on behalf of the Underwriters to provide them with
enough Common Stock to deliver those purchasing Common Stock in the offering. A
penalty bid is an arrangement that permits the Underwriters to reclaim a selling
concession when the Common Stock originally sold by the syndicate member are
purchased in a syndicate covering transaction. Such stabilizing, syndicate short
covering transactions, penalty bids and other transactions, if commenced, may be
discontinued at any time.

In connection with this offering, the Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Pietrantoni Mendez & Alvarez, San Juan, Puerto Rico.
Certain legal matters will be passed upon for the Underwriters by Stroock &
Stroock & Lavan LLP, New York, New York.

EXPERTS

The financial statements as of December 31, 1996 and 1995 and for each of
the three years in the period ended December 31, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.

71
<PAGE> 72

DORAL FINANCIAL CORPORATION AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED ANNUAL AUDITED FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-2
Financial Statements
Consolidated Balance Sheet as of December 31, 1996 and
1995................................................... F-3
Consolidated Statement of Income for the years ended
December 31, 1996, 1995 and 1994....................... F-4
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995 and 1994....................... F-5
Consolidated Statements of Changes in Stockholder's Equity
for the years ended December 31, 1996, 1995 and 1994... F-6
Notes to Consolidated Financial Statements................ F-7
INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheet as of September 30, 1997 and
December 31, 1996......................................... F-37
Consolidated Statement of Income and Retained Earnings for
the quarter and the nine months ended September 30, 1997
and 1996.................................................. F-38
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1997 and 1996......................... F-39
Notes to Consolidated Financial Statements.................. F-40
</TABLE>

All financial schedules have been omitted because they are not applicable
or because the required information is shown in the financial statements or
notes thereto.

F-1
<PAGE> 73

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of
Doral Financial Corporation

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Doral Financial Corporation (formerly, First Financial Caribbean Corporation)
and its subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

As discussed in Note 2 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65," effective April 1,
1995.

PRICE WATERHOUSE

San Juan, Puerto Rico
January 31, 1997, except for the stock split
described in Note 31, which is as of August 28, 1997

CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 10 expires Dec. 1, 1998
Stamp 1457754 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report

F-2
<PAGE> 74

DORAL FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
-------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 81,213,266 $ 59,871,646
Mortgage loans held for sale, net........................... 261,607,809 244,132,116
Securities held for trading................................. 411,447,299 407,941,495
Securities held to maturity................................. 109,054,782 77,945,425
Securities available for sale............................... 12,006,540 14,578,997
Loans receivable, net....................................... 128,765,669 51,355,258
Accounts receivable and mortgage servicing advances, net.... 15,882,059 9,591,627
Accrued interest receivable................................. 10,090,549 8,155,028
Mortgage servicing rights, net.............................. 20,968,937 11,164,065
Excess servicing fees receivable, net....................... 24,678,425 10,407,297
Property, leasehold improvements and equipment, net......... 9,359,550 6,504,725
Cost in excess of fair value of net assets acquired, net.... 6,561,918 6,526,131
Real estate held for sale, net.............................. 2,246,449 2,084,541
Prepaid and other assets.................................... 8,071,477 5,859,593
-------------- ------------
Total assets...................................... $1,101,954,729 $916,117,944
============== ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Loans payable............................................... $ 196,396,627 $234,367,019
Securities sold under agreements to repurchase.............. 387,651,266 363,615,500
Deposit accounts............................................ 158,901,811 95,740,441
Notes payable............................................... 147,892,823 51,682,156
Advances from Federal Home Loan Bank of N.Y................. 15,000,000 10,407,111
Convertible Subordinated Debentures......................... 10,000,000 10,000,000
Accounts payable and other liabilities...................... 26,992,355 16,024,065
Income tax payable.......................................... 216,873 388,041
Deferred tax liability...................................... 8,372,005 4,877,068
-------------- ------------
Total liabilities................................. 951,423,760 787,101,401
-------------- ------------
Commitments and contingencies (Note 25).....................
-------------- ------------
Stockholders' equity:
Serial Preferred Stock, $1 par value, 2,000,000 shares
authorized; no shares outstanding (1995 - 108,397
shares of 10.5% Cumulative Convertible Preferred Stock,
Series A, outstanding)................................. -- 108,397
Common stock, $1 par value, 20,000,000 shares authorized;
18,250,184 shares issued (1995 - 17,768,340);
18,222,184 shares outstanding (1995 - 17,740,340)...... 18,250,184 17,768,340
Paid-in capital........................................... 29,561,431 29,459,630
Retained earnings......................................... 102,925,252 81,892,300
-------------- ------------
150,736,867 129,228,667
Unrealized (loss) gain on securities available for sale, net
of deferred tax........................................... (81,358) 8,856
Treasury stock at par value, 28,000 shares.................. (28,000) (28,000)
Unearned compensation under employment contracts............ (96,540) (192,980)
-------------- ------------
Total stockholders' equity........................ 150,530,969 129,016,543
-------------- ------------
Total liabilities and stockholders' equity........ $1,101,954,729 $916,117,944
============== ============
</TABLE>

The accompanying notes are an integral part of these statements.

F-3
<PAGE> 75

DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Interest income.................................... $ 66,986,946 $61,907,114 $46,507,972
Mortgage loan sales and fees....................... 26,610,264 13,528,534 10,572,734
Servicing income................................... 11,658,588 10,576,826 11,447,772
Gain on sale of mortgage servicing rights.......... 1,813,108 5,204,933 3,003,459
Other income....................................... 764,082 619,923 510,705
------------ ----------- -----------
107,832,988 91,837,330 72,042,642
------------ ----------- -----------
Expenses:
Interest........................................... 46,443,095 43,380,148 23,251,898
Employee cost...................................... 8,981,538 6,471,059 6,000,632
Taxes, other than payroll and income taxes......... 1,086,556 1,150,416 847,856
Maintenance........................................ 694,000 654,354 712,627
Advertising........................................ 3,500,444 2,474,638 4,205,312
Professional services.............................. 2,670,920 2,867,316 3,658,557
Telephone.......................................... 1,813,094 1,682,412 2,076,049
Rent............................................... 2,083,538 2,096,979 2,004,023
Other.............................................. 9,281,164 8,999,491 10,540,576
------------ ----------- -----------
76,554,349 69,776,813 53,297,530
------------ ----------- -----------
Income before income taxes and cumulative effect of
change in accounting principle..................... 31,278,639 22,060,517 18,745,112
------------ ----------- -----------
Income taxes:
Current............................................ 961,124 1,400,044 2,092,696
Deferred........................................... 3,277,000 1,100,169 436,899
------------ ----------- -----------
4,238,124 2,500,213 2,529,595
------------ ----------- -----------
Income before cumulative effect of change in
accounting principle............................... 27,040,515 19,560,304 16,215,517
Cumulative effect of change in accounting
principle -- adoption of SFAS 115, net of deferred
income taxes of $880,000........................... -- -- 1,215,000
------------ ----------- -----------
Net income................................. $ 27,040,515 $19,560,304 $17,430,517
============ =========== ===========
Earnings per share:
Primary:
Income before cumulative effect of change in
accounting principle.......................... $ 1.49 $ 1.33 $ 1.15
Cumulative effect of change in accounting
principle..................................... -- -- .08
------------ ----------- -----------
Net income................................. $ 1.49 $ 1.33 $ 1.23
============ =========== ===========
Fully diluted:
Income before cumulative effect of change in
accounting principle............................ $ 1.42 $ 1.27 $ 1.07
Cumulative effect of change in accounting
principle....................................... -- -- .08
------------ ----------- -----------
Net income................................. $ 1.42 $ 1.27 $ 1.15
============ =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE> 76

DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 27,040,515 $ 19,560,304 $ 17,430,517
------------- ------------- -------------
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Depreciation and amortization........................... 1,796,043 1,764,500 1,533,750
Amortization of excess servicing fees receivable........ 1,628,427 988,082 566,668
Amortization of cost in excess of fair value of net
assets acquired....................................... 374,530 376,158 358,097
Amortization of mortgage servicing rights............... 998,789 562,054 730,059
Deferred tax provision.................................. 3,277,000 1,100,169 436,899
Gain on sale of mortgage servicing rights............... (1,813,108) (5,204,933) (3,003,459)
Cumulative effect of change in accounting principle..... -- -- (1,215,000)
Allowances for losses................................... 797,000 352,000 299,523
Origination and purchases of mortgage loans held for
sale.................................................. (719,886,000) (583,659,000) (797,582,000)
Principal repayments and sales of mortgage loans held
for sale.............................................. 368,572,642 283,829,870 216,918,548
Purchases of mortgage-backed securities held for
trading............................................... (156,935,000) (72,124,000) (265,025,000)
Principal repayments and sales of mortgage-backed
securities held for trading........................... 488,619,000 357,461,000 653,479,000
Increase in mortgage servicing rights................... (10,803,661) (8,207,139) (581,130)
Additions to excess servicing fees receivable........... (15,899,555) (2,638,790) (5,859,312)
(Increase) decrease in accounts receivable and mortgage
servicing advances.................................... (7,087,432) (2,857,582) 8,112,720
Increase in accrued interest receivable................. (1,935,521) (280,477) (3,853,140)
(Decrease) increase in loans payable.................... (26,203,023) (94,428,485) 72,911,782
(Decrease) increase in payable related to short sales... (12,106,847) 22,089,547 --
Increase in interest payable............................ 2,388,123 382,912 788,079
Increase in securities sold under agreements to
repurchase............................................ 23,923,266 59,885,483 160,530,375
Increase (decrease) in accounts payable and other
liabilities........................................... 7,228,028 (2,151,491) (21,838,018)
Decrease in income tax payable.......................... (171,168) (2,183,732) (1,177,206)
Amortization of unearned compensation under employment
contracts............................................. 96,440 64,294 64,294
------------- ------------- -------------
Total adjustments................................... (53,142,027) (44,879,560) 16,595,529
------------- ------------- -------------
Net cash (used) provided by operating activities.... (26,101,512) (25,319,256) 34,026,046
------------- ------------- -------------
Cash flows used for investing activities:
Purchases of securities held to maturity.................. (54,480,000) (10,789,000) (61,789,000)
Principal repayments of securities held to maturity....... 23,370,643 3,207,857 799,896
Origination of loans receivable........................... (98,680,000) (52,341,000) (26,252,000)
Principal repayments of loans receivable.................. 21,269,589 4,060,159 836,792
Purchases of securities available for sale................ (4,639,000) -- --
Principal repayments and maturities of securities
available for sale...................................... 7,121,243 -- --
Purchase of property, leasehold improvements and
equipment............................................... (4,650,868) (802,245) (3,229,537)
Payments of contingent purchase price of subsidiary....... (410,317) (292,887) (430,929)
Proceeds from sale of real estate held for sale........... 1,182,627 1,616,911 3,163,069
Acquisition of real estate held for sale.................. (1,344,535) (1,585,541) (2,350,675)
Proceeds from sale of mortgage servicing rights........... 1,813,108 5,228,985 3,306,286
Increase in prepaid and other assets...................... (1,541,969) (1,799,225) (591,019)
------------- ------------- -------------
Net cash used by investing activities............... (110,989,479) (53,495,986) (86,537,117)
------------- ------------- -------------
Cash flows provided by financing activities:
Increase in deposits...................................... 63,161,370 29,269,330 40,020,265
Proceeds from convertible subordinated debentures......... -- 10,000,000 --
Proceeds from issuance of common stock, net............... 475,248 23,261,330 --
Proceeds (repayment) of advances from Federal Home Loan
Bank.................................................... 4,592,889 9,987,866 (2,012,134)
Increase in notes payable................................. 96,210,667 34,626,676 17,055,480
Dividends declared and paid............................... (6,007,563) (4,374,439) (3,943,260)
------------- ------------- -------------
Net cash provided by financing activities........... 158,432,611 102,770,763 51,120,351
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents....................................... 21,341,620 23,955,521 (1,390,720)
Cash and cash equivalents at beginning of year.............. 59,871,646 35,916,125 37,306,845
------------- ------------- -------------
Cash and cash equivalents at the end of year................ $ 81,213,266 $ 59,871,646 $ 35,916,125
============= ============= =============
Supplemental Schedule of Noncash Investing and Financing
Activities:
Noncash financing activities -- conversion of preferred
stock................................................... $ 1,083,970 $ 959,320 $ 2,100,840
============= ============= =============
Supplemental Cash Flow Information:
Cash used to pay interest................................. $ 44,055,000 $ 43,000,000 $ 22,460,000
============= ============= =============
Cash used to pay income taxes............................. $ 1,132,000 $ 3,360,000 $ 3,260,000
============= ============= =============
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE> 77

DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED UNEARNED
(LOSS) COMPENSATION UNDER
PREFERRED COMMON PAID-IN RETAINED GAIN ON SECURITIES TREASURY EMPLOYMENT
STOCK STOCK CAPITAL EARNINGS AVAILABLE FOR SALE STOCK CONTRACTS
--------- ----------- ----------- ------------ ------------------ --------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................. $ 414,413 $13,524,276 $10,136,348 $ 53,219,178 $ $(28,000) $(321,568)
Shares converted....... (210,084) 840,336 (630,252)
Cash dividends:
Convertible preferred
stock, $1.05 per
share.............. (325,045)
Common stock -- $.26
per share.......... (3,618,215)
Net income............. 17,430,517
Amortization of
unearned
compensation......... 64,294
--------- ----------- ----------- ------------ --------- -------- ---------
Balance at December 31,
1994................. 204,329 14,364,612 9,506,096 66,706,435 (28,000) (257,274)
Shares issued on
December 11, 1995.... 3,020,000 20,241,330
Shares converted....... (95,932) 383,728 (287,796)
Cash dividends:
Convertible preferred
stock, $1.05 per
share.............. (187,639)
Common stock -- $.29
per share.......... (4,186,800)
Net income............. 19,560,304
Amortization of
unearned
compensation......... 64,294
Net change in fair
value of securities
available for sale,
net of deferred
taxes................ 8,856
--------- ----------- ----------- ------------ --------- -------- ---------
Balance at December 31,
1995................. 108,397 17,768,340 29,459,630 81,892,300 8,856 (28,000) (192,980)
Shares issued on
January 31, 1996..... 50,000 430,000
Shares converted....... (107,961) 431,844 (323,883)
Shares redeemed........ (436) (4,316)
Cash dividends:
Convertible preferred
stock, $.3825 per
share.............. (13,998)
Common stock -- $.33
per share.......... (5,993,565)
Net income............. 27,040,515
Amortization of
unearned
compensation......... 96,440
Net change in fair
value of securities
available for sale,
net of deferred
taxes................ (90,214)
--------- ----------- ----------- ------------ --------- -------- ---------
Balance at December 31,
1996................. -- $18,250,184 $29,561,431 $102,925,252 $ (81,358) $(28,000) $ (96,540)
========= =========== =========== ============ ========= ======== =========

TOTAL
------------
<S> <C>
Balance at December 31,
1993................. $ 76,944,647
Shares converted.......
Cash dividends:
Convertible preferred
stock, $1.05 per
share.............. (325,045)
Common stock -- $.26
per share.......... (3,618,215)
Net income............. 17,430,517
Amortization of
unearned
compensation......... 64,294
------------
Balance at December 31,
1994................. 90,496,198
Shares issued on
December 11, 1995.... 23,261,330
Shares converted.......
Cash dividends:
Convertible preferred
stock, $1.05 per
share.............. (187,639)
Common stock -- $.29
per share.......... (4,186,800)
Net income............. 19,560,304
Amortization of
unearned
compensation......... 64,294
Net change in fair
value of securities
available for sale,
net of deferred
taxes................ 8,856
------------
Balance at December 31,
1995................. 129,016,543
Shares issued on
January 31, 1996..... 480,000
Shares converted.......
Shares redeemed........ (4,752)
Cash dividends:
Convertible preferred
stock, $.3825 per
share.............. (13,998)
Common stock -- $.33
per share.......... (5,993,565)
Net income............. 27,040,515
Amortization of
unearned
compensation......... 96,440
Net change in fair
value of securities
available for sale,
net of deferred
taxes................ (90,214)
------------
Balance at December 31,
1996................. $150,530,969
============
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE> 78

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- REPORTING ENTITY

The consolidated financial statements include the accounts of Doral
Financial Corporation (formerly, First Financial Caribbean Corporation) and its
wholly-owned subsidiaries ("DFC" or the "Company"), Doral Mortgage Corporation
("Doral"), RSC Corp. ("RSC"), Centro Hipotecario de Puerto Rico, Inc., Doral
Federal Savings Bank ("Doral Federal") and AAA Financial Services Corporation
("AAA Financial"). All significant intercompany accounts and transactions have
been eliminated in consolidation.

AAA Financial, a securities broker dealer, commenced operations in
September 1996. Its operations for the year ended December 31, 1996 were not
significant.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company is primarily engaged in the origination, purchase and sale of
FHA, VA and conventional first and second mortgage loans and in providing and/or
arranging for interim financing for the construction of residences and other
types of real estate developments in Puerto Rico and selected markets in
Florida. The Company, in combination with its subsidiaries, services FHA
insured, VA guaranteed and conventional mortgage loans pooled for issuance of
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") backed
securities and collateralized mortgage obligations certificates issued by
grantor trusts established by the Company ("CMO Certificates"). It also services
loans for private investors. The Company also originates loans for investment
and provides banking services through a federal savings bank that operates two
branches located in Puerto Rico. It also provides brokerage services through AAA
Financial.

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

The following summarizes the more significant accounting policies followed
in the preparation of the accompanying consolidated financial statements.

SECURITIES HELD FOR TRADING

Securities held for trading are recorded at fair value. Changes in fair
value are recorded currently in income.

SECURITIES HELD TO MATURITY

Securities held to maturity are recorded at amortized cost.

SECURITIES AVAILABLE-FOR-SALE

Securities available-for-sale are recorded at fair value, with unrealized
gains and losses excluded from earnings and reported, net of taxes, in a
separate component of stockholders' equity.

MORTGAGE LOANS HELD FOR SALE

Mortgage loans held for sale are recorded at the lower of cost or market
computed on an aggregate portfolio basis.

F-7
<PAGE> 79

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

LOANS RECEIVABLE

Loans receivable are held by Doral Federal principally for investment
purposes. These consist of residential first and second mortgages, commercial
and consumer loans.

Loans receivable are presented at the unpaid balance, less unearned
interest, net deferred loan fees and allowance for loan losses. Unearned
interest on commercial and consumer loans is amortized using a method which
results in a uniform level rate of return on the principal amounts outstanding.

ALLOWANCES FOR LOSSES

Allowances for losses provide for estimated losses on loans receivable,
accounts receivable and real estate held for sale. The allowance is established
based upon a review of the loan portfolio, loss experience, economic conditions
and other pertinent factors.

The Company estimates the fair value of the retained recourse obligation of
loans sold with recourse at the time of sale. Ordinarily the amounts involved
are minimal insofar as the recourse obligations are met by substituting loans.
The Company has generally been able to rehabilitate and resell the reacquired
loans for at least their carrying amount. Accordingly, a reserve for possible
losses arising from recourse obligations has not historically been deemed
necessary.

EXCESS SERVICING FEES RECEIVABLE

The Company sells substantially all of the mortgage loans it produces
(other than those originated by Doral Federal) and retains the related servicing
rights. These servicing rights entitle the Company to a future stream of cash
flows based on the outstanding principal balance of the mortgage loans and the
contractual servicing fee. Gains and losses on sales of such loans are adjusted
to reflect as income or loss servicing fees that vary from normal servicing fee
rates set by federally sponsored secondary market makers. Accordingly, the
Company has recorded, as excess servicing fees receivable, amounts equal to the
present value of servicing fees to be received in future years in excess of
normal rates based upon the estimated lives of the loans and using long-term
interest rates that reflect the risks of the assets. The receivable is realized
through receipt of the excess service fees over time. The Company periodically
evaluates the net realizable value of its excess servicing fees receivable based
on the present value of the estimated remaining future excess servicing fees
revenue, using the same discount rate used to calculate the original excess
servicing fees receivable asset. Any impairment in the value of the excess
servicing fees receivable due to actual and anticipated prepayment experience,
is recognized currently as a reduction of excess servicing fees receivable.
Excess servicing fees receivable is amortized over their estimated life using a
method approximating the level-yield method. The amortization is recorded as a
reduction of servicing income.

MORTGAGE SERVICING RIGHTS

In April 1995, the Company adopted Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights, an amendment of
FASB No. 65," ("SFAS 122"). This Statement changed the accounting for servicing
rights related to loans originated by an entity. Previously, the Company
followed the guidance provided by SFAS 65 which, among other things, prohibited
the recognition of servicing rights related to loans originated by an entity.
SFAS 122 requires that under certain conditions a portion of the cost of
originating a mortgage loan be allocated to the mortgage servicing right. The
allocation is based on the aggregate independent fair values of the loan and the
related servicing right. To determine the fair value of the servicing rights,
the Company uses the market prices of comparable servicing sale contracts.

SFAS 122 also requires that all mortgage servicing rights be evaluated for
impairment. In determining impairment, mortgage servicing rights are
disaggregated into pools based on their predominant risk characteristic. The
Company has determined that risk characteristic to be interest rates. Impairment
is recognized
F-8
<PAGE> 80

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

whenever the prepayment pattern of a particular mortgage pool indicates that the
fair value of the related mortgage servicing rights is less than its carrying
amount. Impairment is recognized by charging such excess to income. The Company
determined that no reserve for impairment is required.

The adoption of this standard had the effect of increasing net income and
mortgage loan sales and fees by approximately $1,500,000 and $2,600,000,
respectively, for the year ended December 31, 1995, and increasing capitalized
servicing rights at December 31, 1995 by approximately $4,150,000. If the
Company had not adopted SFAS 122, earnings per share would have been
approximately $2.44 and $2.33, on a primary and fully diluted basis,
respectively, for the year ended December 31, 1995. SFAS 122 prohibits
retroactive application, therefore, mortgage servicing rights related to loans
originated prior to April 1, 1995 continue to be unrecognized in the Company's
financial statements.

Purchased mortgage servicing rights are initially recorded at the lower of
cost or present value of estimated future net servicing income stream. The
amount capitalized is amortized in proportion to, and over the period of,
estimated net servicing income. Amortization is adjusted prospectively to
reflect changes in prepayment experience. Any unamortized balance related to
rights sold is charged to income at time of sale.

COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED

The cost in excess of fair value of net assets acquired is amortized on the
straight-line basis over their estimated useful lives (30-year period for
acquisitions made before Doral Federal and a 10-year period for the acquisition
of Doral Federal).

REAL ESTATE HELD FOR SALE

The Company acquires real estate through foreclosures. These properties are
held for sale and are stated at the lower of fair value, minus estimated costs
to sell, or cost.

PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT

Property, leasehold improvements and equipment are carried at cost.
Depreciation and amortization are provided on the straight-line method over the
estimated useful lives of the assets or the terms of the leases, if shorter, for
leasehold improvements. These range from five to ten years.

SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL

Resale agreements are treated as short-term investments. These are carried
at the amounts at which the transaction will be settled. The securities
underlying the agreements are not recorded in the asset accounts of the Company.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

From time to time the Company enters into sales of securities under
agreements to repurchase the same or similar securities. Amounts received under
these agreements represent short-term borrowings and the securities underlying
the agreements remain in the asset accounts.

INCOME AND EXPENSE RECOGNITION

Loan origination fees and related direct loan origination costs are
deferred and amortized to income as an adjustment of the yield throughout the
life of the related mortgage loan. Such fees and costs related to mortgage loans
held for sale are deferred and recognized in income as a component of gain on
sale of mortgage loans when the related loans are sold or securitized.

F-9
<PAGE> 81

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SALE OF SECURITIES WITH PUT ARRANGEMENTS

From time to time the Company may sell mortgage-backed securities with put
arrangements. Pursuant to these arrangements the Company grants the buyer a put
option that allows the buyer to sell the securities back to the Company at a
negotiated price. The accounting treatment for these transactions (as a
borrowing or a sale) is based on an assessment of the probability that the put
option will be exercised. If on the transaction date, management determines that
it is probable that the put option will be exercised, the transaction is
accounted for as a borrowing. If it is not judged probable that the put option
will be exercised, the transaction is accounted for as a sale.

The premium collected on such put and any gain on the securities sold are
deferred until the negotiated net option period expires. When a transaction is
initially recorded as a sale but exercise of the put option later becomes
probable, the Company accrues any losses expected upon the exercise of the put
option and periodically adjusts the estimated loss accrual.

AMORTIZATION OF DEBT ISSUANCE COSTS

Costs related to the issuance of debt are amortized under a method which
approximates the interest method and shown as part of the related debt.

INTEREST RATE RISK MANAGEMENT

The Company has various mechanisms to reduce its exposure to interest rate
fluctuations, as these affect the value of its portfolio and the prices of newly
generated loans, loans to be originated and sales with put options.

The Company may enter into financial derivatives such as futures contracts,
options and interest rate swaps.

The cost of unexpired options, net of premiums collected on written
options, is capitalized as part of the carrying cost of the mortgage loans and
charged to income when these expire. Unrealized net gains or losses on unexpired
options positions are considered as part of the lower cost or market evaluation
made for mortgage loans.

LOAN SERVICING

The Company pools FHA insured and VA guaranteed mortgages for issuance of
GNMA mortgage-backed securities. Conventional loans are pooled and issued as
FNMA or FHLMC mortgage-backed securities and CMO certificates as well as sold in
bulk to investors with servicing retained. Under the servicing agreement, the
Company is required to advance funds to make scheduled payments to investors, if
payments due have not been received from the mortgagors. At December 31, 1996,
accounts receivable include advances to investors of approximately $8,195,000
(1995 -- $5,340,000).

The Company is also required to foreclose on loans in the event of default
by the mortgagor. Mortgage loan servicing fees, which are based on a percentage
of the principal balances of the mortgages serviced, are credited to income as
mortgage payments are collected.

SALES OF MORTGAGE SERVICING RIGHTS

The Company recognizes gain or loss on the sale of mortgage servicing
rights after the sales contract is executed, all regulatory related approvals
are obtained and the title and all risks and rewards of ownership have been
irrevocably transferred to the buyer.

F-10
<PAGE> 82

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

The Company follows an asset and liability approach that requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of other assets and liabilities. A valuation allowance is recognized for
any deferred tax asset which, based on management's evaluation, is more likely
than not (a likelihood of more than 50%) that some portion or all of the
deferred tax asset will not be realized.

STATEMENT OF CASH FLOWS

Cash and cash equivalents include cash in banks, overnight deposits and
certificates of deposit (1996 -- $49,400,000 and 1995 -- $25,099,000) and other
highly liquid securities with an original maturity of three months or less.

At December 31, 1996, other highly liquid securities include $21,373,791 of
securities purchased under agreements to resell maturing between January 8 and
February 20, 1997.

At December 31, 1996, collateral for securities purchased under agreements
to resell are summarized as follows:

<TABLE>
<CAPTION>
ESTIMATED
CARRYING VALUE MARKET VALUE
-------------- ------------
<S> <C> <C>
Mortgage-backed securities.................................. $12,317,534 $12,699,334
US Treasury Notes........................................... 10,000,000 10,018,750
----------- -----------
$22,317,534 $22,718,084
=========== ===========
</TABLE>

These securities were held by the dealers that arranged the transactions.

EARNINGS PER SHARE

Primary net income per share is determined by dividing net income, after
deducting preferred stock dividends, by the weighted average number of common
stock outstanding during the period considering the dilutive effect of
restricted stock awards.

Fully diluted net income per share has been computed based on the
assumption that all of the shares of convertible preferred stock and convertible
subordinated debentures are converted into common stock, and after giving
retroactive effect to the elimination of interest expense, net of income taxes,
applicable to the convertible subordinated debentures.

The number of shares of common stock used for computing the primary and
fully diluted earnings per share was as follows:

<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Primary............................................... 18,133,122 14,615,890 13,885,468
Fully diluted......................................... 19,362,536 15,520,270 15,153,928
</TABLE>

FAIR VALUE OF FINANCIAL INSTRUMENTS

The reported fair values of financial instruments are based on a variety of
factors. For a substantial portion of financial instruments, fair values
represent quoted market prices for identical or comparable instruments. In a few
other cases, fair values have been estimated based on assumptions concerning the
amount and timing of estimated future cash flows and assumed discount rates
reflecting varying degrees of risk. Accordingly, the fair values may not
represent actual values of the financial instruments that could have been
realized as of year end or that may be realized in the future.

F-11
<PAGE> 83

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CHANGES IN ACCOUNTING PRINCIPLES

In January 1995, the Company adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan." This Statement requires that impaired loans that are
within the scope of the statement be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. Loans that are
measured at fair value or at the lower of cost or fair value, are excluded.

In January 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed." SFAS
No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets,
to be held and used. Under SFAS No. 121, long-lived assets and certain
identifiable intangibles to be held and used must be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review for recoverability, an
estimate of the future cash flows expected to result from the use of the asset
and its eventual disposition must be made. If the sum of the future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized.

In January 1996, the Company also adopted SFAS No. 123, "Accounting for
Stock-based Compensation." This Statement defines a fair value based method of
accounting for employee stock options and encourages all entities to adopt that
method of accounting for all of their stock-based employee compensation plans.
As allowed by SFAS No. 123, the Company elected to continue to measure
compensation cost for its stock compensation plans using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25. No transactions of
the nature covered by SFAS No. 123 have been made.

The adoption of these Statements had no effect on the Company's results of
operations or financial position.

ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF
LIABILITIES

In June 1996, the Financial Accounting Standards Board ("FASB") issued a
new Statement of Financial Accounting Standards "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No.
125"). This Statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
the application of a financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished.

This Statement requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It also requires that servicing assets
and other retained interests in the transferred assets be measured by allocating
the previous carrying amount between the assets sold, if any, and retained
interest, if any, based on their relative fair values at the date of the
transfer. Servicing assets and liabilities must be subsequently measured by (a)
amortization in proportion to and over the period of estimated net servicing
income or loss and (b) assessment for asset impairment or increased obligation
based on their fair values.

The provisions of this Statement, except as indicated below, are effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and must be applied
prospectively. Earlier or retroactive application is not permitted. In December
1996, the FASB issued a statement that defers for one year the effective date
applicable to the provisions of SFAS No. 125 that deal with secured borrowings
and collateral. Additionally, the deferment provision would apply to transfers
of financial assets only for repurchase agreements, dollar rolls and securities
lending.

F-12
<PAGE> 84

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Management believes that the adoption of these standards will not have a
material adverse effect on the Company's financial statements.

OTHER

Certain amounts reflected in the 1995 and 1994 consolidated financial
statements have been reclassified to conform to the presentation for 1996.

NOTE 3 -- COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED

Doral and RSC were acquired in December 1986. These transactions were
accounted for by the purchase method resulting in $1,620,000 of cost in excess
of the fair value of net assets acquired. The terms of the purchase agreement
required additional pay-outs to the former stockholder over a ten-year period
that ended in 1996. The additional pay-outs are contingent payments under the
purchase agreements, and are accounted for as additional cost over the fair
value of assets acquired. The amount of such pay-outs was determined based on a
percentage ranging from 1/16% to 1/4% of the aggregate principal amount of
mortgage loans closed.

The changes in cost in excess of fair value of net assets acquired are
shown below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of period................... $6,526,131 $6,609,402 $6,536,570
Contingent payments under Doral purchase
agreement...................................... 410,317 292,887 430,929
Amortization expense............................. (374,530) (376,158) (358,097)
---------- ---------- ----------
Balance at the end of period..................... $6,561,918 $6,526,131 $6,609,402
========== ========== ==========
</TABLE>

Total accumulated amortization relating to cost in excess of fair value of
net assets acquired amounted to $3,726,190, $3,351,660 and $2,975,502 at
December 31, 1996, 1995 and 1994, respectively.

NOTE 4 -- REGULATORY REQUIREMENTS

HOLDING COMPANY REQUIREMENTS

As a result of the acquisition of Doral Federal, the Company became a
savings and loan holding company ("SLHC") subject to the restrictions and
requirements of the Home Owners' Loan Act of 1933, as amended (the "HOLA"). As
SLHC, the Company was registered with the Director of the Office of Thrift
Supervision (the "OTS") and is subject to various requirements of the HOLA,
including examination, supervision and reporting requirements. Federal law and
OTS regulations place certain limits on the types of activities in which an SLHC
and its subsidiaries may engage. However, in general, these restrictions do not
apply to a holding company that controls only one savings and loan association,
provided such association meets the "qualified thrift lender" test which
generally requires the association to have 65% of its portfolio assets in
"qualified thrift investments." For Puerto Rico based savings institutions,
these investments include, among other things, home mortgages, mortgage-backed
securities, and personal loans.

THRIFT REGULATORY CAPITAL REQUIREMENTS

Doral Federal is also subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on Doral Federal's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Doral
Federal must meet specific capital guidelines that involve quantitative measures
of Doral Federal's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory account-

F-13
<PAGE> 85

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ing practices. Doral Federal's capital amounts and classification are also
subject to qualitative judgements by the regulators about components, risk
weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require Doral Federal to maintain minimum amounts and ratios (set forth in the
table below) of tangible capital to adjusted assets, core capital to adjusted
assets, and total risk-based capital to risk weighted assets, all as defined in
the regulation. Management believes, as of December 31, 1996, that Doral Federal
meets all capital adequacy requirements to which it is subject.

As of December 31, 1996, the most recent notification from the OTS
categorized Doral Federal as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized Doral Federal
must maintain minimum total risk-based, core and Tier I risk-based capital
ratios as set forth in the table. There are no conditions or events since the
notification that management believes have changed the institution's category.

Doral Federal's actual capital amounts and ratios are also presented in the
table. Totals of $343,339 and $394,626 were deducted from tangible, core and
total risk-based capital for certain non-allowable assets in 1996 and 1995,
respectively.

<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------- ---------------------- ------------------------
AMOUNT RATIO(%) AMOUNT RATIO(%) AMOUNT RATIO(%)
----------- -------- ----------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Tangible capital (to adjusted
assets)......................... $23,376,244 8.3% $ 4,206,239 >= 1.5% $ -- --%
Tier I risk-based capital (to risk
weighted assets)................ 23,376,244 19.3 -- -- 7,282,044 >= 6.0
Core capital (to adjusted
assets)......................... 23,376,244 8.3 8,412,479 >= 3.0 14,020,798 >= 5.0
Total risk-based capital (to risk
weighted assets)................ 24,095,420 19.8 9,709,392 >= 8.0 12,136,740 >= 10.0
As of December 31, 1995:
Tangible capital (to adjusted
assets)......................... 16,010,824 10.0 2,400,180 >= 1.5 -- --
Tier I risk-based capital (to risk
weighted assets)................ 16,010,824 25.4 -- -- 3,778,961 >= 6.0
Core capital (to adjusted
assets)......................... 16,010,824 10.0 4,800,360 >= 3.0 8,000,600 >= 5.0
Total risk-based capital (to risk
weighted assets)................ 16,249,331 25.8 5,038,615 >= 8.0 6,298,269 >= 10.0
</TABLE>

HOUSING AND URBAN DEVELOPMENT REQUIREMENTS

The Company is a U.S. Department of Housing and Urban Development approved,
non-supervised mortgagee and is required to maintain an excess of current assets
over current liabilities and minimum net worth, as defined by the various
regulatory agencies. The Company is also required to maintain fidelity bonds and
errors and omission's insurance coverages based on the balance of its servicing
portfolio.

SAIF ASSESSMENT

During the third quarter of 1996, the Company recorded a nonrecurring
expense of $588,000 related to the payment of a special assessment to the
Federal Deposit Insurance Corporation due to the enactment of legislation to
recapitalize the Savings Association Insurance Fund.

F-14
<PAGE> 86

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REGISTERED BROKER-DEALER REQUIREMENTS

AAA Financial is registered as a broker-dealer with the Securities and
Exchange Commission ("SEC") and the Puerto Rico Office of the Commissioner of
Financial Institutions (the "CFI"). AAA Financial is also a member of the
National Association of Securities Dealers (the "NASD"). As a registered
broker-dealer, it is subject to regulation by the SEC, the NASD and the CFI in
matters relating to the conduct of its securities business, including record
keeping and reporting requirements, supervision and licensing of employees and
obligations to customers. In particular, AAA Financial is subject to the SEC's
net capital rules, which specify minimum net capital requirements for registered
broker-dealers and are designed to ensure that broker-dealers maintain adequate
regulatory capital in relation to their liabilities and the size of their
customer business.

The Company is in compliance with these regulatory requirements.

NOTE 5 -- MORTGAGE LOANS HELD FOR SALE

Mortgage loans held for sale consist of:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Mortgage Loans:
Conventional loans...................................... $193,644,969 $160,723,158
FHA/VA loans............................................ 62,548,030 79,338,335
Construction and commercial loans....................... 5,414,810 4,070,623
------------ ------------
$261,607,809 $244,132,116
============ ============
</TABLE>

At December 31, 1996, the aggregate amortized cost and approximate market
value of these loans are as follows:

<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED APPROXIMATE
AMORTIZED COST HOLDING GAINS HOLDING LOSSES MARKET VALUE
- -------------- ---------------- ---------------- ------------
<C> <C> <C> <C>
$261,607,809 $11,207,655 $(7,625,151) $265,190,313
============ =========== =========== ============
</TABLE>

Proceeds from sales of mortgage loans held for sale and mortgage-backed
securities held for trading during 1996 was approximately $765,195,000
(1995 -- $725,236,000, 1994 -- $774,313,000). Gross gains of $33,580,000
(1995 -- $42,472,000, 1994 -- $56,010,000) and gross losses of $19,014,000
(1995 -- $27,362,000, 1994 -- $41,452,000) were realized on those sales.

F-15
<PAGE> 87

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6 -- SECURITIES HELD FOR TRADING

Securities held for trading consist of:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Mortgage-backed securities:
GNMA...................................................... $219,324,613 $242,327,525
CMO certificates.......................................... 158,109,657 157,535,436
FHLMC..................................................... 6,369,721 7,091,819
FNMA...................................................... 929,498 986,715
US Treasury Bonds........................................... 10,218,750 --
US Treasury Notes........................................... 9,450,000 --
US Treasury Bills........................................... 5,095,060 --
Other....................................................... 1,950,000 --
------------ ------------
$411,447,299 $407,941,495
============ ============
</TABLE>

CMO certificates include the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Certificates of other issuers............................... $135,815,885 $135,572,829
Subordinated certificates, CMO's established by the
Company................................................... 14,597,551 13,136,055
Residual certificates, CMO's established by the Company..... 7,696,221 8,826,552
------------ ------------
$158,109,657 $157,535,436
============ ============
</TABLE>

At December 31, 1996, CMO certificates include approximately $14,894,000 of
interest only certificates.

Net unrealized holding gains on trading securities included in earnings for
the year ended December 31, 1996 amounted to approximately $2,796,000
(1995 -- $4,864,000, 1994 -- net unrealized holding losses of $1,485,000).

NOTE 7 -- SECURITIES HELD TO MATURITY

Securities held to maturity consist of:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1996 1995
--------------------------- -------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Mortgage backed securities:
CMO certificates of other
issuers...................... $ 58,828,043 $ 59,803,233 $59,248,183 $59,520,647
GNMA............................ 37,879,031 38,483,168 10,744,705 10,918,536
Debt securities:
Federal Home Loan Bank Notes.... 3,492,882 3,487,300 4,999,354 4,995,300
U.S. Treasury Notes............. 6,956,248 6,976,250 1,997,436 2,001,880
U.S. Treasury Bills............. 65,871 69,000 63,075 63,360
Other investments:
Mortgage notes receivables...... 1,832,707 1,832,707 892,672 892,672
------------ ------------ ----------- -----------
$109,054,782 $110,651,658 $77,945,425 $78,392,395
============ ============ =========== ===========
</TABLE>

F-16
<PAGE> 88

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Management has the intent to hold these securities and believes it has the
ability to hold them to maturity by obtaining continuing financing under its
existing credit facilities. In addition, part of the above securities are held
by Doral Federal which has the ability to finance these securities with
deposits, advances from Federal Home Loan Bank of N.Y. and other long-term
funding sources.

At December 31, 1996, CMO certificates include approximately $4,550,000 of
interest only certificates.

At December 31, 1996, securities held to maturity include approximately
$16,220,000 pledged to secure public funds deposited in Doral Federal.

Contractual maturities of securities held to maturity at December 31, 1996
are as follows:

<TABLE>
<CAPTION>
MBS DEBT SECURITIES OTHER
----------- --------------- ----------
<S> <C> <C> <C>
Within one year................................. $ -- $ 65,871 $1,832,707
After 1 year through five years................. 12,487,500 8,956,248 --
After 5 years through 10 years.................. 12,483,350 1,492,882 --
After 10 years.................................. 71,736,224 -- --
----------- ----------- ----------
$96,707,074 $10,515,001 $1,832,707
=========== =========== ==========
</TABLE>

Expected maturities on mortgage-backed securities and loans will differ
from contractual maturities because borrowers have the right to prepay
obligations with or without prepayment penalties.

Aggregate gross unrealized holding gains and losses are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
MBS DEBT SECURITIES
--------------------- ----------------
1996 1995 1996 1995
---------- -------- ------- ------
<S> <C> <C> <C> <C>
Gross unrealized holding gains................. $1,613,352 $480,645 $23,131 $4,730
========== ======== ======= ======
Gross unrealized holding losses................ $ 34,025 $ 34,350 $ 5,582 $4,055
========== ======== ======= ======
</TABLE>

NOTE 8 -- SECURITIES AVAILABLE FOR SALE

Securities available for sale consist of the following certificates:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1996 1995
------------------------- -------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
FNMA................................ $ 2,241,007 $ 2,133,870 $ 7,164,471 $ 7,132,358
FHLMC............................... 2,364,808 2,277,139 4,413,676 4,381,228
GNMA................................ 7,534,100 7,595,531 2,991,994 3,065,411
----------- ----------- ----------- -----------
$12,139,915 $12,006,540 $14,570,141 $14,578,997
=========== =========== =========== ===========
</TABLE>

Aggregate gross unrealized holding gains and losses are as follows:

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Gross unrealized holding gains.............................. $ 61,430 $ 95,406
======== ========
Gross unrealized holding losses............................. $194,805 $ 86,550
======== ========
</TABLE>

The contractual maturity of the securities available for sale at December
31, 1996 is over ten years.

Proceeds from sales of securities available for sale during 1996 were
approximately $6,548,000. Gross gains of $33,478 were realized on those sales.
There were no sales during 1995 and 1994.
F-17
<PAGE> 89

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9 -- LOANS RECEIVABLE

Loans receivable consist of:

<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Residential mortgage loans................................. $ 91,595,388 $29,480,931
Commercial real estate..................................... 18,461,975 9,204,612
Consumer -- secured by mortgage............................ 12,207,143 7,361,606
Construction loans......................................... 2,793,026 2,637,523
Loans on savings deposits.................................. 1,771,242 1,939,912
Commercial................................................. 2,047,174 701,650
Consumer -- other.......................................... 356,237 323,744
Land secured............................................... 813,975 330,345
------------ -----------
Gross loans........................................... 130,046,160 51,980,323
Less:
Unearned interest and deferred loan fees................. (561,315) (382,894)
Reserve for loan losses.................................. (719,176) (242,171)
------------ -----------
(1,280,491) (625,065)
------------ -----------
Total loans...................................... $128,765,669 $51,355,258
============ ===========
</TABLE>

As of December 31, 1996, the Company had loans amounting to approximately
$1,728,000 (1995 -- $949,000) on which the accrual of interest income had been
discontinued. If these loans had been accruing interest, the additional interest
income realized would have been approximately $114,000 (1995 -- $86,000).

Doral Federal originates adjustable and fixed interest rate loans. The
adjustable rate loans have interest rate adjustment limitations and are
generally tied to various market indexes. Future market factors may affect the
correlation of the interest rate adjustment with the rate Doral Federal pays on
the short-term deposits that have primarily funded these loans.

At December 31, 1996, the composition of loans receivable was as follows:

FIXED RATE

<TABLE>
<CAPTION>
TERM TO MATURITY BOOK VALUE
- ---------------- ------------
<S> <C>
1 month - 1 year........................................... $ 3,348,611
1 year - 3 years........................................... 2,010,815
3 years - 5 years.......................................... 6,030,170
5 years - 10 years......................................... 32,501,114
10 years - 20 years........................................ 44,896,737
More than 20 years......................................... 35,722,130
Non-performing............................................. 1,540,177
------------
$126,049,754
============
</TABLE>

ADJUSTABLE RATE

<TABLE>
<CAPTION>
TERM TO DATE OF RATE ADJUSTMENT BOOK VALUE
- ------------------------------- ------------
<S> <C>
1 month - 1 year........................................... $ 3,808,206
Non-performing............................................. 188,200
------------
$ 3,996,406
============
</TABLE>

F-18
<PAGE> 90

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- ALLOWANCES FOR LOSSES

The changes in the allowances for losses were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Accounts receivable and mortgage servicing advances:
Balance at beginning of period....................... $1,805,701 $1,563,701 $1,446,563
Provision for losses................................. 142,000 242,000 132,000
Losses charged to the allowance...................... (514,927) -- (14,862)
---------- ---------- ----------
Balance at the end of period...................... $1,432,774 $1,805,701 $1,563,701
========== ========== ==========
Real estate held for sale:
Balance at beginning of period....................... $ 356,035 $ 356,035 $ 525,000
Provision for losses................................. -- -- --
Losses charged to the allowance...................... -- -- (168,965)
---------- ---------- ----------
Balance at the end of period...................... $ 356,035 $ 356,035 $ 356,035
========== ========== ==========
Reserve for bank loan losses:
Balance at beginning of period....................... $ 242,171 $ 428,046 $ 234,200
Provision for loan losses............................ 655,000 110,000 167,523
Recoveries........................................... 48,540 6,810 26,323
Losses charged to the allowance...................... (226,535) (302,685) --
---------- ---------- ----------
Balance at the end of period...................... $ 719,176 $ 242,171 $ 428,046
========== ========== ==========
</TABLE>

NOTE 11 -- EXCESS SERVICING FEES RECEIVABLE

The changes in excess servicing fees receivable are shown below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Balance at beginning of period................... $10,407,297 $ 8,756,589 $3,463,945
Additions........................................ 15,899,555 2,638,790 5,859,312
Amortization
Scheduled...................................... (1,628,427) (988,082) (566,668)
Unscheduled.................................... -- -- --
----------- ----------- ----------
Balance at the end of period..................... $24,678,425 $10,407,297 $8,756,589
=========== =========== ==========
</TABLE>

There was no impairment of excess servicing fees receivable during any of
the above periods.

F-19
<PAGE> 91

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12 -- PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT

Property, leasehold improvements and equipment consist of:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Office furniture and equipment.............................. $ 6,763,942 $ 6,076,902
Leasehold improvements...................................... 5,383,776 4,634,187
Automobiles................................................. 334,880 262,428
Office building............................................. 361,794 335,982
Real estate under rental agreements......................... 73,660 73,660
----------- -----------
12,918,052 11,383,159
Less -- Accumulated depreciation and amortization........... (6,515,397) (4,956,434)
----------- -----------
6,402,655 6,426,725
Land........................................................ 2,956,895 78,000
----------- -----------
$ 9,359,550 $ 6,504,725
=========== ===========
</TABLE>

NOTE 13 -- MORTGAGE SERVICING RIGHTS

The changes in mortgage servicing rights are shown below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Balance at beginning of period........................... $11,164,065 $ 3,543,032 $3,994,788
Capitalization of rights................................. 10,803,661 7,901,308 581,130
Rights sold.............................................. -- (24,052) (302,827)
Rights purchased......................................... -- 305,831 --
Impairments.............................................. -- -- --
Amortization:
Scheduled.............................................. (998,789) (562,054) (730,059)
Unscheduled............................................ -- -- --
----------- ----------- ----------
Balance at the end of period............................. $20,968,937 $11,164,065 $3,543,032
=========== =========== ==========
</TABLE>

The Company's servicing portfolio amounted to approximately $3,100,000,000
and $2,668,000,000 at December 31, 1996 and 1995, respectively, including
$74,390,000 and $85,170,000 respectively, of loans sold with recourse which are
not government guaranteed or insured.

During the years ended December 31, 1996, 1995 and 1994, the Company sold
rights to service loans amounting to approximately $102,000,000, $310,000,000
and $202,000,000, respectively. Mostly all sales were from pre-SFAS No. 122.
During the years ended December 31, 1996 and 1994, the Company did not purchase
rights to service loans (1995 -- $40,000,000). The carrying amount of those
mortgage servicing rights recorded post-SFAS No. 122 approximates its fair
value.

F-20
<PAGE> 92

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14 -- ACCOUNTS PAYABLE AND OTHER LIABILITIES

Accounts payable and other liabilities consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Amounts retained on mortgage loans, generally paid within 5
days...................................................... $ 3,427,154 $ 2,164,834
Customer mortgages and closing expenses payable............. 2,360,763 1,756,931
Deferred compensation plan.................................. 2,605,658 1,982,142
Incentive compensation payable.............................. 5,900,768 2,162,867
Accrued expenses and other payables......................... 12,698,012 7,957,291
----------- -----------
$26,992,355 $16,024,065
=========== ===========
</TABLE>

NOTE 15 -- LOANS PAYABLE

At December 31, 1996 and 1995, the Company had several mortgage warehousing
lines of credit and gestation or presale facilities totaling $595,000,000 and
$525,000,000, respectively. Advances under these facilities are secured by loans
held for inclusion in GNMA, FNMA and FHLMC pools or for sale to financial
investors.

Loans payable consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Loans payable resulting from use of warehousing lines of
credit and gestation or presale facilities, due in
1997. At various variable rates averaging -- 6.69% and
6.77% at December 31, 1996 and 1995, respectively, and
other financing arrangements.......................... $186,413,927 $171,277,562
Securities sold short at 7.5% due on January 1997
(1995 -- due December 31, 1996)....................... 9,982,700 22,089,547
Amount payable in connection with securities returned
under put arrangement on January 1996, at 7.50%....... -- 41,000,000
------------ ------------
$196,396,627 $234,367,109
============ ============
</TABLE>

Maximum borrowings outstanding at any month-end during 1996 and 1995 were
$223,000,000 and $280,000,000, respectively. The approximate average outstanding
borrowings during the periods were $203,000,000 and $223,000,000, respectively.
The weighted average interest rate of such borrowings, computed on a monthly
basis, was 6.71% in 1996 and 7.15% in 1995.

In 1995, DFC entered into a Syndicated Credit Agreement (the "Syndicated
Credit Agreement") with five banks providing for three credit facilities
totaling up to $125 million. The credit facilities were structured by Bankers
Trust Company, as administrative and syndicate agent. The three facilities
include: (i) a $100 million secured one-year revolving warehousing credit
facility to finance residential mortgage loans and mortgage-backed securities;
(ii) a $7 million secured one-year revolving credit facility to provide
financing for receivables and working capital needs; and (iii) a $18 million
five-year senior secured term loan, secured with a portion of the Company's
servicing portfolio, to finance the acquisition of additional servicing rights
and general working capital purposes. On September 25, 1996, the Syndicated
Credit Agreement was amended and restated to extend the maturity date until June
27, 1997, and add an additional $3 million to the working capital line. In
addition, the third facility was repaid and eliminated from the amended
Syndicated Credit Agreement. The amounts available under the Syndicate Credit
Agreement are subject to a borrowing base which consists of mortgage loans and
mortgage-backed securities for the first facility and receivables relating

F-21
<PAGE> 93

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to servicing advances and real estate owned for the second facility. Loans
payable include advances from the warehousing credit facility. Advances from the
other facility is included in notes payable.

The existing warehousing credit facilities, the Syndicated Credit Agreement
and other financing arrangements require the Company to maintain certain capital
ratios and to comply with other requirements. At December 31, 1996, the Company
was in compliance with these requirements.

NOTE 16 -- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

The Company sells mortgage-backed securities and mortgage loans under
agreements to repurchase. At December 31, 1996 and 1995, the Company had several
repurchase agreement lines of credit, totaling $692,000,000 and $617,000,000,
respectively. At December 31, 1996 and 1995, the Company had a liability of
$387,651,266 and $363,615,500, respectively, relating to such agreements at
interest rates ranging from 5.32% to 6.50% in 1996 and 5.09% to 6.95% in 1995.

F-22
<PAGE> 94

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

These agreements mature at various dates as follows:

<TABLE>
<CAPTION>
APPROXIMATE MARKET
REPURCHASE AND BOOK VALUE OF
TYPE OF SECURITY LIABILITY UNDERLYING SECURITIES
- ---------------- ------------ ----------------------
<S> <C> <C>
December 31, 1996:
GNMA(1)............................................ $116,459,015 $122,827,388
FHLMC(1)........................................... 6,030,638 6,176,947
FNMA(1)............................................ 763,266 929,498
CMO Certificates(1)................................ 70,467,504 76,752,780
FHLB Discount Note(1).............................. 159,905 160,000
------------ ------------
193,880,328 206,846,613
------------ ------------
GNMA(2)............................................ 97,513,474 106,275,154
FHLMC(2)........................................... 170,608 192,775
CMO Certificates(2)................................ 36,165,588 48,891,806
------------ ------------
133,849,670 155,359,735
------------ ------------
GNMA (3)........................................... 4,437,827 4,510,502
------------ ------------
CMO Certificates (4)............................... 55,483,441 64,514,858
------------ ------------
$387,651,266 $431,231,708
============ ============
December 31, 1995:
GNMA(1)............................................ $143,475,000 $152,157,723
FHLMC(1)........................................... 6,917,000 7,091,819
FNMA(1)............................................ 1,001,000 986,515
CMO Certificates(1)................................ 126,630,000 148,223,489
------------ ------------
278,023,000 308,459,546
------------ ------------
GNMA(2)............................................ 39,998,000 42,541,205
CMO Certificates(2)................................ 25,554,000 29,707,699
------------ ------------
65,552,000 72,248,904
------------ ------------
GNMA(3)............................................ 5,014,000 5,708,786
------------ ------------
CMO Certificates(4)................................ 15,026,500 17,767,400
------------ ------------
$363,615,500 $404,184,636
============ ============
</TABLE>

- ---------------

(1) Term up to 30 days
(2) Term over 30 days to 120 days
(3) Term over 120 days to 1 year
(4) Term between 3 to 5 years

Maximum borrowings outstanding at any month-end during 1996 and 1995 under
the repurchase agreements were $413,000,000 and $389,000,000, respectively. The
approximate average borrowings outstanding during the periods were $387,000,000
and $368,000,000, respectively. The weighted average interest rate of such
borrowings, computed on a monthly basis was 5.45% in 1996 and 5.90% in 1995.

F-23
<PAGE> 95

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1996, securities sold under agreements to repurchase are
classified by dealer as follows:

<TABLE>
<CAPTION>
APPROXIMATE MARKET
VALUE OF UNDERLYING
BALANCE OF BORROWING SECURITIES
-------------------- ----------------------
<S> <C> <C>
BP Capital Markets, Inc.......................... $114,150,827 $133,702,984
Paine Webber, Inc. of Puerto Rico................ 23,018,000 26,392,352
Merrill Lynch Government Securities of Puerto
Rico, SA....................................... 184,596,457 199,848,841
Bear Stearns Securities Corp..................... 14,362,000 15,285,675
CS First Boston Corporation...................... 4,025,000 4,330,308
Privately placed with institutions and other
investors...................................... 27,305,982 29,264,775
Conservation Trust of Puerto Rico................ 20,193,000 22,406,773
------------ ------------
Total.................................. $387,651,266 $431,231,708
============ ============
</TABLE>

NOTE 17 -- NOTES PAYABLE

Notes payable consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ -----------
<S> <C> <C>
Demand note payable at 9% interest, collateralized by CMO
certificates............................................. $ 1,000,000 $ 1,000,000
Unsecured medium term notes, payable at interest rates
ranging from 7.00% to 13.63%, final payment dates ranging
from January to June 1997................................ 660,000 1,590,000
Unsecured notes, payable at interest rates ranging from
6.50% to 9.25%, final payment dates ranging from January
1997 to May 2001......................................... 4,675,000 5,915,480
Note payable to bank, collateralized by CMO certificates,
at 8.50% interest rate and due on October 10, 1997....... 9,275,447 9,776,676
Term-notes payable to corporate investors, collateralized
by stand-by letters of credit issued by the Federal Home
Loan Bank of New York:
at 5.55% maturing on October 13, 2000.................... 8,100,000 8,100,000
at a variable rate (4.67% at December 31, 1996) maturing
on November 17, 2000.................................. 5,000,000 5,000,000
at 5.23% maturing on November 27, 2000................... 5,000,000 5,000,000
at 6.05% maturing on May 23, 2001........................ 5,000,000 --
at 5.98% maturing on June 19, 2001....................... 10,000,000 --
at 6.30% maturing on September 18, 2001.................. 10,000,000 --
at 6.28% maturing on September 24, 2001.................. 10,000,000 --
Note payable to bank, at 7.15% interest rate, due June 27,
1997..................................................... 3,000,000 --
Note payable to bank, collateralized by CMO certificates,
at 8.00% interest rate and due on February 15, 1997...... 3,280,882 --
7.84% Senior Notes due on October 10, 2006................. 70,766,494 --
</TABLE>

F-24
<PAGE> 96

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ -----------
<S> <C> <C>
Mortgage note secured by land at 7.63% interest rate and
due on June 11, 1997..................................... 2,135,000 --
Loan payable to Bank, collateralized by mortgage servicing
rights held by the Company............................... -- 15,300,000
------------ -----------
$147,892,823 $51,682,156
============ ===========
</TABLE>

At December 31, 1996, the scheduled aggregate annual maturities of notes
payable were approximately as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1997.............................................. $ 21,741,329
1998.............................................. 735,000
1999.............................................. 1,500,000
2000.............................................. 18,100,000
2001.............................................. 35,050,000
2002 and thereafter............................... 75,000,000
------------
152,126,139
Less: Debt issuance costs including interest rate
hedging costs................................... (4,233,506)
------------
$147,892,823
============
</TABLE>

NOTE 18 -- CONVERTIBLE SUBORDINATED DEBENTURES

Consists of 8.25% Convertible Subordinated Debentures due January 1, 2006
(the "Subordinated Convertible Debentures") sold to BanPonce Corporation
("BanPonce") under a Debenture Purchase Agreement (the "Debenture Agreement").
The Subordinated Convertible Debentures are convertible into shares of common
stock of the Company at a conversion price of $8.75 per share (after giving
effect to the stock split), subject to adjustments in certain events. The
Subordinated Convertible Debentures are subordinated to all existing and future
senior debt of the Company (as defined in the Debenture Agreement). Under the
Debenture Agreement, BanPonce has the right to acquire up to 200,000 additional
shares of the Company's common stock at a price of $8.75 per share (subject to
adjustment in certain events) to the extent that its investment in the Company
is reduced below 5% on a fully-diluted basis. Such right to acquire the
additional shares expires on June 30, 1999 and is subject to termination upon
the occurrence of certain corporate events involving the acquisition of the
Company.

NOTE 19 -- DEPOSIT ACCOUNT

At December 31, 1996, deposits and their weighted average interest rates
are summarized as follows:

<TABLE>
<CAPTION>
1996 1995
------------------- ------------------
AMOUNT % AMOUNT %
------------ ---- ----------- ----
<S> <C> <C> <C> <C>
Certificates of deposit......................... $ 99,614,530 5.87 $52,326,703 6.12
Regular savings................................. 17,054,578 4.36 10,271,981 3.68
NOW accounts.................................... 6,330,229 3.46 2,046,765 3.35
Non interest-bearing deposits................... 35,902,474 -- 31,094,992 --
------------ -----------
$158,901,811 $95,740,441
============ ===========
</TABLE>

At December 31, 1996, certificates of deposit over $100,000 amounted to
$44,025,000.

F-25
<PAGE> 97

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of certificates of deposit by maturity as of December 31, 1996
follows:

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Within one year............................................. $64,534,289 $40,465,351
One to three years.......................................... 12,253,299 5,252,095
Over three years............................................ 22,826,942 6,609,257
----------- -----------
$99,614,530 $52,326,703
=========== ===========
</TABLE>

A summary of certificates of deposit by interest rate at December 31, 1996
follows:

<TABLE>
<CAPTION>
RATE AMOUNT
- ---- -----------
<S> <C>
2.99% or less............................................... $ 40,000
From 3.00% to 3.99%......................................... 5,000
From 4.00% to 4.99%......................................... None
From 5.00% to 5.99%......................................... 54,292,300
From 6.00% to 6.99%......................................... 36,714,218
From 7.00% to 7.99%......................................... 8,473,012
From 8.00% to 8.99%......................................... 90,000
-----------
Total............................................. $99,614,530
===========
</TABLE>

At December 31, 1996, Doral Federal had brokered certificates of deposit
amounting to $16,300,000 maturing as follows:

<TABLE>
<S> <C>
One to three years.......................................... $ 5,460,971
Over three years............................................ 10,839,029
-----------
Total............................................. $16,300,000
===========
</TABLE>

At December 31, 1996, Doral Federal had deposits from officers, directors,
employees and stockholders of the Company amounting to approximately $700,000
(1995 -- $1,100,000).

The Company as a servicer of loans is required to maintain certain balances
on behalf of the borrowers, called escrow funds. At December 31, 1996, escrow
funds amounted to approximately $38,519,000 (1995 -- $35,377,000), of which
$30,316,000 were deposited with Doral Federal (1995 -- $27,430,000). The
remaining escrow funds, $8,203,000 (1995 -- $7,947,000) were deposited with
other banks and therefore excluded from the Company's assets and liabilities.

NOTE 20 -- ADVANCES FROM THE FEDERAL HOME LOAN BANK

At December 31, 1996, advances from the Federal Home Loan Bank of New York
("FHLB") consist of the following:

<TABLE>
<S> <C>
6.307% due on July 21, 2000................................. $ 5,000,000
6.445% due on July 17, 2002................................. 5,000,000
5.959% due on January 29, 2003.............................. 5,000,000
-----------
Total............................................. $15,000,000
===========
</TABLE>

At December 31, 1996, the Company had qualified collateral, in the form of
first mortgage notes and mortgage-backed securities with a carrying value of
$82,705,750 which were pledged to secure the above advances from the FHLB and
stand-by letters of credit issued by the FHLB as collateral for the term-notes
in the amount of $53,100,000 shown under notes payable.

F-26
<PAGE> 98

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 21 -- INCOME TAXES

Under the provisions of Law No. 38 of May 20, 1983, the Company is exempt
from the payment of Puerto Rico income taxes on the interest earned on mortgage
loans on residential properties located in Puerto Rico which were executed after
June 30, 1983, and are insured or guaranteed pursuant to the provisions of the
National Housing Act of June 27, 1934, as amended, and pursuant to the
Provisions of the Servicemen's Readjustment Act of 1944, as amended.
Accordingly, the Company holds exempt loans and mortgage-backed securities for
periods of time prior to sale in order to maximize the tax exempt interest
produced by these securities and loans. Therefore, net interest income has
generally represented a greater proportion of the Company's total net income
than that of a typical non-Puerto Rican mortgage banking institution.

Doral Federal, as a federally chartered financial institution operating in
Puerto Rico, is subject to U.S. Federal income taxes. Doral Federal has filed an
election under Section 936 of the U.S. Internal Revenue Code, whereby a
possession tax credit is allowed for part of the federal income taxes
attributable to income from operations in Puerto Rico. The 1996 Omnibus Budget
Reconciliation Act repealed the Section 936 for U.S. business operations in
Puerto Rico, effective for the taxable years beginning on January 1, 1996. A 10-
year grandfather period was provided for existing credit claimants such as Doral
Federal. The Company has experienced no significant adverse effect because of
the repeal.

The mortgage banking operations of the Company conducted through Puerto
Rico corporations are not subject to United States income tax for business
carried out in Puerto Rico. Substantially all of the Company's mortgage banking
operations are conducted in Puerto Rico, therefore, the amount of U.S. income
taxes with respect to such operations is not significant.

Consolidated tax returns are not permitted under the Puerto Rico Internal
Revenue Code, therefore, income tax returns are filed individually by each
Company.

The provision for income taxes differs from amounts computed by applying
the applicable Puerto Rico statutory tax rate to income before taxes. A
reconciliation of the difference follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Income before income taxes...................... $31,278,639 $22,060,517 $20,840,112
=========== =========== ===========
</TABLE>

<TABLE>
<CAPTION>
% OF PRETAX % OF PRETAX % OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rates.... $ 12,198,669 39.0 $ 9,265,417 42.0 $ 8,752,847 42.0
Tax effect of exempt
interest
income -- net........... (8,502,187) (27.2) (4,590,485) (20.8) (5,435,541) (26.1)
Tax effect of capital
gains................... (510,588) (2.5)
Tax effect of amortization
of goodwill, other non-
deductible expenses and
other................... 541,642 1.7 (281,246) (1.3) 602,877 2.9
Tax effect of shares
issued under employment
contracts............... -- -- (1,893,473) (8.6) -- --
------------ ----- ------------ ----- ------------ -----
Provision for income
taxes................... $ 4,238,124 13.5 $ 2,500,213 11.3 $ 3,409,595 16.3
============ ===== ============ ===== ============ =====
</TABLE>

F-27
<PAGE> 99

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1996, the components of the net deferred tax liability are:

<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Deferred tax liabilities resulting from:
Untaxed income........................................... $(12,990,675) $(6,460,876)
Deferred costs........................................... (1,643,124) (1,986,637)
------------ -----------
(14,633,799) (8,447,513)
------------ -----------
Deferred tax assets:
Unrealized losses........................................ 1,570,277 1,108,105
Deferred income.......................................... 3,655,434 1,539,361
Net operating loss....................................... 773,148 922,979
Reserve for doubtful accounts and others................. 262,935 --
------------ -----------
6,261,794 3,570,445
------------ -----------
Net deferred tax liability................................. $ (8,372,005) $(4,877,068)
============ ===========
</TABLE>

Deferred income tax expense for the year ended December 31, 1994 amounted
to $1,316,899 of which $436,899 is presented as current and $880,000 is shown as
part of the cumulative effect of change in accounting principle.

At December 31, 1996, a subsidiary had net operating losses available to
offset future taxable Puerto Rico source income amounting to approximately
$1,982,000 expiring in 2001.

NOTE 22 -- RELATED PARTY TRANSACTIONS

Mortgage loans held for sale include approximately $230,000 of loans to
various officers of the Company at prevailing interest rates (1995 -- $460,000).

The Company paid a computer service bureau, in which it holds a 33%
interest, $900,000, $860,000 and $726,000 for services rendered during the years
ended December 31, 1996, 1995 and 1994, respectively. At December 31, 1996 and
1995, the Company's equity in this service bureau was not significant.

The Company has a 15% interest in a real estate partnership amounting to
approximately $135,000 and which is carried at cost because of its lack of
materiality. At December 31, 1996 and 1995, securities held to maturity include
approximately $1,800,000 and $890,000, respectively, due from the Partnership.

NOTE 23 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments may include commitments to extend credit and sell
mortgage-backed securities and loans, and options on futures contracts. Those
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 contract or notional amounts of those 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 is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments as it does for on-balance
sheet instruments. At December 31, 1996, commitments to extend credit to
individuals for residential mortgages amounted to approximately $5,000,000 and
commitments to sell mortgage-backed securities and loans amounted to
approximately $32,000,000. Management believes that the Company has the ability
to meet these commitments and that no loss will result from the

F-28
<PAGE> 100

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

Since many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements.

The Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterpart. A geographic concentration exists within the Company's mortgage
loans portfolio since most of the Company's business activity is with customers
located in Puerto Rico.

The Company controls the credit risk of its future contracts through credit
approvals, limits and monitoring procedures. Options on future contracts confer
the right from sellers to buyers to take a future position at a stated price.
Risks arise from the possible inability of counterparts to meet the terms of
their contracts and from movements in securities values and interest rates.
Collateral for securities purchased under agreements to resell is kept by the
seller under custody agreements. Collateral for securities sold under agreements
to repurchase is kept by the purchaser.

NOTE 24 -- PENSION AND COMPENSATION PLANS

The Company has a noncontributory target benefit pension plan ("the Plan").
The Plan generally covers all full time Company employees that have completed
one year of service and have attained age 21.

Under the Plan, the Company contributes annually the funding amount which
is projected to be necessary to fund the target benefit. The target benefit is
based on years of service and employees' compensation, as defined in the Plan.
The Company has the right to terminate the Plan at any time. Upon termination,
all amounts credited to the participants' accounts will become 100% vested.

Contributions to the Plan during the years ended December 31, 1996, 1995
and 1994 amounted to approximately $722,000, $640,000 and $700,000,
respectively. Plan assets consist principally of mortgage loans and
mortgage-backed securities.

The Company has unfunded deferred incentive compensation arrangements (the
"Deferred Compensation") with certain employees. The Deferred Compensation is
determined as a percentage of net income arising from the mortgage banking
activities, as defined, and is payable to participants after a five-year vesting
period. The expense for the years ended December 31, 1996 and 1995 amounted to
approximately $232,000 and $62,000, respectively. For the year ended December
31, 1994 there was no deferred compensation expense.

The Company also has incentive compensation arrangements with certain
employees payable currently. The incentive payments are based on the amount of
consolidated net income in excess of an established return on stockholders'
equity, as defined in the agreements. The expense under these arrangements for
the years ended December 31, 1996, 1995 and 1994 amounted to approximately
$6,446,000, $2,415,000 and $2,721,000, respectively.

F-29
<PAGE> 101

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 25 -- COMMITMENTS AND CONTINGENCIES

The Company has several noncancellable operating leases for office
facilities expiring through 2005. Total minimum rental commitments for leases in
effect at December 31, 1996 are as follows:

<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- ----------
<S> <C>
1997........................................................ $1,538,000
1998........................................................ 938,000
1999........................................................ 400,000
2000........................................................ 247,000
2001........................................................ 229,000
2002 and thereafter......................................... 5,590,000
</TABLE>

Total rental expense for the years ended December 31, 1996, 1995 and 1994
amounted to approximately $2,100,000, $2,100,000 and $2,000,000, respectively.

The Company is subject to legal proceedings and claims which have arisen in
the ordinary course of its business and have not been finally adjudicated. These
actions, when finally concluded and determined, will not, in the opinion of
management, have a material adverse effect upon the financial position or
results of operations of the Company.

From time to time the Company may sell mortgage-backed securities with put
options. At December 31, 1996, the amounts outstanding under these arrangements
were as follows:

<TABLE>
<CAPTION>
AMOUNT
DATES ON WHICH PUT EXPIRES OUTSTANDING
- -------------------------- ------------
<S> <C>
Within six months........................................... $ 55,932,000
One to two years............................................ 34,405,000
Three years and thereafter.................................. 14,663,000
------------
$105,000,000
============
</TABLE>

If the put option is exercised, the Company would have to buy back these
securities at an agreed price, adjusted for future prepayments. As part of its
hedging program, the Company includes the risks associated with its put
arrangements.

The Insurance and Indemnity Agreements (the "Agreements") covering certain
financial guaranty insurance policies covering the payment of senior
certificates issued by CMO grantors trusts established by the Company, provide,
among other things, that the Company cannot sell, transfer or pledge the
residual certificates issued by the trusts (amounting to approximately
$4,833,000) without the insurance company approval because the residual
certificates are pledged as collateral to the insurance company.

DFC currently benefits from Puerto Rico tax laws. Of particular importance
is the current income tax exemption, available under Puerto Rico law for
interest on FHA loans and VA loans secured by residential property located in
Puerto Rico and mortgage-backed securities backed by such mortgage loans. As a
result of this exemption, DFC has been able to sell tax-exempt Puerto Rico GNMA
mortgage-backed securities to local investors at higher prices than those at
which comparable instruments would be sold in the mainland United States. This
exemption has also permitted the Company to reduce its effective tax rate, since
a significant portion of its net interest income is tax exempt. The government
of Puerto Rico announced that it plans to eliminate the exemption on new FHA and
VA loans closed after July 1, 1997, except for loans made to finance the
purchase of homes in low and moderate income housing projects sponsored by local
housing authorities. This proposal must be approved by the Puerto Rico
legislature before becoming effective. Such interest income would be taxed at a
preferential rate of 17%. FHA and VA loans closed before July 1, 1997, as well
as securities backed by such mortgage loans would continue to be tax exempt.

F-30
<PAGE> 102

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

While the impact of such proposal cannot be fully measured until management
has the opportunity to review the implementing legislation as finally approved,
management believes that the adoption of the proposal in its current form would
not have a material adverse effect in the Company's results of operations.

NOTE 26 -- CAPITAL STOCK AND PAID-IN CAPITAL

The authorized number of shares of Common Stock was increased during 1996
from 10,000,000 to 20,000,000 shares. During 1997, the authorized number of
shares of Common Stock was increased to 50,000,000.

The Company has a Restricted Stock Plan (the "Restricted Stock Plan") and a
Stock Option Plan. The Restricted Stock Plan provides for the granting of up to
500,000 shares of common stock to selected officers at no cost. During 1994 and
prior years 355,612 shares were awarded and issued under the Restricted Stock
Plan. No additional shares have been awarded subsequent to 1994. The terms of
the Restricted Stock Plan permit the imposition of restrictions ranging from one
to five years on the sale or disposition of the shares issued. The Stock Option
Plan provides for the granting to selected officers and key employees of option
to purchase up to 600,000 shares of common stock at prices equal to the fair
market value on date of grant. No options have been awarded.

All of the outstanding shares of the Company's 10.5% Cumulative Convertible
Preferred Stock Series A, were redeemed in May 1996.

Present regulations limit the amount of dividends that Doral Federal may
pay. Payment of such dividends is prohibited if, among other things, the effect
of such payment would cause the capital of Doral Federal to fall below the
regulatory capital requirements.

NOTE 27 -- SUPPLEMENTAL INCOME STATEMENT INFORMATION

Employee costs and other expenses are shown in the Consolidated Statement
of Income and Retained Earnings net of direct loan origination costs. Pursuant
to SFAS No. 91 direct loan origination costs are capitalized as part of the
carrying cost of mortgage loans and are offset against mortgage loan sales and
fees when the loans are sold. Without the application of SFAS No. 91, employee
costs and other expenses would have been as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Employee costs.................................. $31,487,527 $24,395,306 $28,537,321
=========== =========== ===========
Other expenses.................................. $13,104,839 $12,042,064 $12,802,432
=========== =========== ===========
</TABLE>

F-31
<PAGE> 103

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Set forth below is a breakdown of direct loan origination costs that were
capitalized as part of the carrying cost of mortgage loans inventory or offset
against mortgage loan sales and fees.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Offset against mortgage loan sales and fees..... $22,006,118 $16,398,038 $21,008,323
Capitalized as part of loan inventory........... 4,213,138 5,093,940 5,093,940
----------- ----------- -----------
$26,219,256 $21,491,978 $26,102,263
=========== =========== ===========
</TABLE>

NOTE 28 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1996 and 1995. FASB Statement
No. 107, "Disclosures about Fair Value of Financial Instruments," defines the
fair value of financial instruments as the amount at which the instruments could
be exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. Significant differences can arise between the fair
value and carrying amount of financial instruments that are recognized at
historical cost amounts.

<TABLE>
<CAPTION>
1996 1995
----------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents........................ $ 81,213 $ 81,213 $ 59,872 $ 59,872
Mortgage loans held for sale..................... 261,608 265,190 244,132 244,148
Securities held for trading...................... 411,447 411,447 407,941 407,941
Securities held to maturity...................... 109,055 110,652 77,945 78,392
Securities available for sale.................... 12,007 12,007 14,579 14,579
Loans receivable................................. 128,766 128,766 51,355 51,355
Accounts receivable and mortgage servicing
advances...................................... 15,882 15,882 9,592 9,592
Accrued interest receivable...................... 10,091 10,091 8,155 8,155
Excess servicing fees receivable................. 24,678 24,678 10,407 10,407
Mortgage servicing rights........................ 20,969 20,969 11,164 11,164
---------- ---------- -------- --------
$1,075,716 $1,080,895 $895,142 $895,605
========== ========== ======== ========
Financial liabilities:
Loans payable.................................... $ 196,397 $ 196,397 $234,367 $234,367
Securities sold under agreements to repurchase... 387,651 387,651 363,616 363,616
Deposit accounts................................. 158,902 158,902 95,740 95,740
Notes payable.................................... 147,893 147,893 51,682 51,682
Advances from FHLB............................... 15,000 15,000 10,407 10,407
Payables and accrued liabilities................. 26,992 26,992 16,024 16,024
Convertible Subordinated Debentures.............. 10,000 10,000 10,000 10,000
Income tax payable............................... 8,589 8,589 5,265 5,265
---------- ---------- -------- --------
$ 951,424 $ 951,424 $787,101 $787,101
========== ========== ======== ========
</TABLE>

The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments:

Cash and cash equivalents: valued at the carrying amounts in the
consolidated balance sheet. The carrying amounts are reasonable estimates
of fair value due to the short period to maturity. This approach

F-32
<PAGE> 104

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

applies to cash and cash equivalents, accounts receivable and mortgage
servicing advances, accrued interest receivables and the majority of
short-term financial liabilities.

Mortgage loans held for sale, securities held for trading, securities
held to maturity and securities available-for-sale: valued at quoted
market prices if available. For securities without quoted prices, fair
values represent quoted market prices for comparable instruments. In a few
other cases, fair values have been estimated based on assumptions
concerning the amount and timing of estimated future cash flows and assumed
discount rates reflecting varying degrees of risk.

Loans receivable: valued on the basis of estimated future principal
and interest cash flows, discounted at various rates. Loan prepayments are
assumed to occur at rates experienced in previous periods when interest
rates were at levels similar to current levels, adjusted for any
differences in interest rate outlook. Future cash flows for homogeneous
categories of loans, such as residential mortgage loans, are estimated on a
portfolio basis and discounted at current rates offered for similar loan
terms to new borrowers with similar credit profiles. Quoted market prices
for securities backed by similar loans, adjusted for different loan
characteristics, are also used in estimating fair value.

Excess servicing fees receivable and mortgage servicing
rights: valued based on the present value of the estimated remaining
future servicing fee revenue.

Deposit accounts: for demand deposits and deposits with no defined
maturities, fair value is taken to be the amount payable on demand at the
reporting date. The fair values of fixed-maturity deposits, including
certificates of deposit, are estimated using rates currently offered for
deposits of similar remaining maturities. The value of long-term
relationships with depositors is not taken into account in estimating the
fair values disclosed.

Loans payable and securities sold under agreements to repurchase: The
carrying amounts are reasonable estimates of fair values due to short
period to maturity.

Notes payable, advances from FHLB and convertible subordinated
debentures: The carrying amounts are reasonable estimates of fair values
due to recent issuance date and current interest rates.

Derivatives: fair value is estimated as the amounts that the Company
would receive or pay to terminate the contracts at the reporting date,
taking into account the current unrealized gains or losses of open
contracts. Market or dealer quotes are available for many derivatives;
otherwise, pricing or valuation models are applied to current market
information to estimate fair value.

NOTE 29 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Financial data showing results of the 1996 and 1995 quarters is presented
below. These results are unaudited. In the opinion of management all adjustments
necessary for a fair presentation have been included:

<TABLE>
<CAPTION>
QUARTERS
-------------------------------------
1ST 2ND 3RD 4TH
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Revenue......................................... $26,035 $25,984 $28,148 $27,665
Net income...................................... 6,354 7,034 7,424 6,230
Net income per share:
Primary...................................... .36 .39 .40 .34
Fully diluted................................ .34 .37 .39 .32
</TABLE>

F-33
<PAGE> 105

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
QUARTERS
-------------------------------------
1ST 2ND 3RD 4TH
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995
Revenue......................................... $20,710 $23,277 $23,365 $24,487
Net income...................................... 3,430 6,137 4,928 5,065
Net income per share:
Primary...................................... .24 .42 .34 .33
Fully diluted................................ .23 .41 .32 .31
</TABLE>

NOTE 30 -- RISK MANAGEMENT ACTIVITIES

The Company's principal objective in holding derivatives and certain other
financial instruments is the management of interest rate risk arising out of its
portfolio holdings and related borrowings. Risk management activities are aimed
at optimizing realization on sales of mortgage loans and/or mortgage-backed
securities and net interest income, given levels of interest rate risk
consistent with the Company's business strategies.

Asset/liability risk management activities are conducted in the context of
Company's sensitivity to interest rate changes. This sensitivity arises due to
changes in the value of mortgage loans held for sale and mortgage-backed
securities held for trading from the time such assets are originated to the time
these are sold. In addition, interest-bearing liabilities reprice more
frequently than interest-earning assets and, therefore, the Company is affected
by the interrelationships between long-term and short-term interest rates.

To achieve its risk management objective, the Company uses a combination of
derivative financial instruments, particularly, futures and options, as well as
other types of contracts such as forward sales commitments.

As part of the interest rate risk management at December 31, 1996, the
Company, as a purchaser, had unexpired options where it had the right to sell
bonds and GNMA contracts for a notional amount of $465,000,000. It also had
rights to buy bonds and GNMA contracts for a notional amount of $290,000,000. As
a writer of options, the Company had unexpired options where it had the
obligations to sell bonds and GNMA contracts for a notional amount of
$353,000,000, and obligations to buy bonds and GNMA contracts for a notional
amount of $210,000,000. In addition, at December 31, 1996 the Company had
approximately $32,000,000 of forward commitments to sell mortgage-backed
securities and loans.

Generally, the options purchased or written have expired without being
exercised. During the years ended December 31, 1996, 1995 and 1994 net gains
(net losses) from these transactions, designated as hedges, amounted to
approximately $3,100,000, ($5,400,000) and $2,172,000, respectively. These
amounts are presented as part of mortgage loan sales and fees. At December 31,
1996, mortgage loans held for sale includes capitalized costs of unexpired
options of approximately $3,185,000. At December 31, 1996, unrealized net losses
on open positions related to unexpired options, including capitalized costs,
amounted to approximately $5,900,000.

The credit risk of futures contracts is limited, due to daily cash
settlement of the net change in value of open contracts with the exchange in
which the instrument is traded. Forwards have a greater degree of credit risk,
depending on the types of counterparts involved, as daily cash settlements are
not required. Options are contracts that grant the purchaser, for a premium
payment, the right to either purchase from or sell to the writer of the option a
financial instrument at a specified price within a specified period of time or
on a specified date.

The risk that counterparts to both derivative and cash instruments might
default on their obligations is monitored on an ongoing basis. To manage the
level of credit risk the Company deals with counterparts of good credit
standing, enters into master netting agreements whenever possible and, when
appropriate, obtains

F-34
<PAGE> 106

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

\collateral. Master netting agreements incorporate rights of set off that
provide for the net settlement of subject contracts with the same counterpart in
the event of default.

All derivative financial instruments are subject to market risk, the risk
that future changes in market conditions may make an instrument less valuable or
more onerous. For example, fluctuations in market prices and interest rates
change the market value of the instruments. If the instruments are recognized at
market value, these changes directly affect reported income. Exposure to market
risk is managed in accordance with risk limits set by senior management by
buying or selling instruments or entering into offsetting positions.

The Company enters into rate swap agreements in managing its interest rate
exposure. Interest rate swap agreements generally involve the exchange of fixed
and floating rate interest payment obligations without the exchange of the
underlying principal.

At December 31, 1996, the Company had outstanding an interest rate swap
agreement with an investment banker to change the Company's interest rate
exposure. The agreement is for a notional principal amount of $5,000,000
covering the Company's interest rate exposure of a $5,000,000 floating rate
term-note. This agreement ends at the time the related obligation matures. The
interest rate to be received is 87% of the three-months LIBOR rate minus .125%
(4.676% at December 31, 1996) and the interest rate to be paid is 4.92%.
Nonperformance by the counterpart will expose the Company to an interest rate
risk.

The Company entered into a transaction to hedge the funding cost of the
7.84% Senior Notes due on October 10, 2006 (the "Senior Notes"). The loss
incurred in such transaction has been deferred and is being amortized throughout
the life of the Senior Notes as an adjustment to the Notes' yield. Unamortized
balance at December 31, 1996 was approximately $2,500,000, and is shown as part
of the Senior Notes.

NOTE 31 -- SUBSEQUENT EVENTS

STOCK SPLIT

On July 10, 1997, the Board of Directors of the Company declared a
two-for-one stock split of the Company's common stock held by registered
shareholders as of August 18, 1997. The stock split was effected on August 28,
1997. All amounts in the financial statements have been restated to reflect the
split.

CONVERTIBLE SUBORDINATED DEBENTURES -- (UNAUDITED)

Pursuant to the Debenture Agreement (see Note 18) on April 29, 1997,
$1,540,000 of the Convertible Subordinated Debentures were converted into 88,000
shares of the Company's common stock at a conversion price of $17.50. On July 9,
1997, the Company entered into an agreement to exchange the remaining
Convertible Subordinated Debentures for 8,460 of newly issued 8% Convertible
Cumulative Preferred Stock (liquidation preference $1,000 per share)("8%
Preferred Stock"). The 8% Preferred Stock is convertible into common stock at a
conversion price of $8.75 (after giving effect to the stock split). The 8%
Preferred Stock will have a preference in liquidation over the common stock. In
addition, the terms of the agreement prohibit the Company from paying dividends
on the common stock if the dividend of the 8% Preferred Stock is in arrears. The
holder of the 8% Preferred Stock will be entitled to receive cumulative cash
dividends when declared by the Board of Directors at an annual rate of 8% of the
liquidation preference.

F-35
<PAGE> 107

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The 8% Preferred Stock is not redeemable prior to January 1, 2001. On or
after that date, the 8% Preferred Stock will be redeemable at the option of the
Company at the following per share redemption prices:

<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---- ----------------
<S> <C>
2001........................................................ $1,020
2002........................................................ 1,015
2003........................................................ 1,010
2004........................................................ 1,005
2005 and thereafter......................................... 1,000
</TABLE>

On October 22, 1997, the holder of the Convertible Subordinated Debentures
converted the debentures into 8,460 shares of 8% Preferred Stock with an
aggregate liquidation preference of $8,460,000.

In connection with the conversion of the 8.25% Convertible Subordinated
Debentures into 8% Preferred Stock, the Company recorded an extraordinary
non-cash loss on extinguishment of debt of $12.3 million. This extraordinary
loss was determined based upon the fair market value of the 8% Preferred Stock
and the carrying value of the 8.25% Convertible Subordinated Debentures at the
time of conversion.

F-36
<PAGE> 108

DORAL FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(UNAUDITED) (AUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT FOR
SHARE INFORMATION)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 82,586 $ 81,213
Mortgage loans held for sale, net........................... 326,252 261,608
Securities held for trading, net............................ 611,297 436,125
Securities held to maturity................................. 191,024 109,055
Securities available for sale............................... 71,548 12,007
Loans receivable, net....................................... 165,702 128,766
Accounts receivable and mortgage servicing advances, net.... 20,224 15,882
Accrued interest receivable................................. 12,393 10,091
Servicing asset............................................. 30,624 20,969
Property, leasehold improvements and equipment, net......... 10,861 9,359
Cost in excess of fair value of net assets acquired......... 6,299 6,562
Real estate held for sale, net.............................. 2,948 2,246
Prepaid expenses and other assets........................... 14,347 13,113
---------- ----------
$1,546,105 $1,106,996
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans payable............................................... $ 218,670 $ 196,643
Securities sold under agreements to repurchase.............. 688,386 388,213
Deposit accounts............................................ 250,945 158,902
Notes payable............................................... 150,141 152,126
Advances from Federal Home Loan Bank of N.Y................. 15,000 15,000
Convertible Subordinated Debentures......................... 8,460 10,000
Accounts payable and other liabilities...................... 32,935 26,992
Income tax payable.......................................... 1,656 217
Deferred tax liability...................................... 9,233 8,372
---------- ----------
Total liabilities................................. 1,375,426 956,465
---------- ----------
Commitments and contingencies...............................
---------- ----------
Stockholders' equity:
Serial Preferred Stock, $1 par value, 2,000,000 shares
authorized; no shares outstanding...................... -- --
Common Stock, $1 par value, 50,000,000 shares authorized;
18,425,460 shares issued (including 9,212,730 shares
issued on August 28, 1997 as stock split)
(1996 -- 18,249,460); 18,397,460 shares outstanding
(1996 -- 18,221,460)................................... 18,425 18,249
Paid-in capital........................................... 30,924 29,563
Retained earnings......................................... 121,327 102,925
Unrealized gain (loss) on securities available for sale,
net of deferred tax.................................... 55 (81)
Treasury stock at par value, 28,000 shares (1996 -- 28,000
shares)................................................ (28) (28)
Unearned compensation under employment contracts.......... (24) (97)
---------- ----------
Total stockholders' equity........................ 170,679 150,531
---------- ----------
Total liabilities and stockholders' equity........ $1,546,105 $1,106,996
========== ==========
</TABLE>

The accompanying notes are an integral part of this statement.

F-37
<PAGE> 109

DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS

<TABLE>
<CAPTION>
NINE-MONTH
QUARTER ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ----------- ------------ -----------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Mortgage loans sales and fees...................... 7,166 7,049 18,223 20,471
Servicing income................................... 3,816 2,645 10,863 8,342
Interest income.................................... 23,026 16,430 64,099 49,030
Gain on sale of servicing rights................... -- 1,813 -- 1,813
Rental and other income............................ 398 211 1,128 511
-------- ------- -------- -------
34,406 28,148 94,313 80,167
-------- ------- -------- -------
Expenses:
Interest........................................... 15,100 10,941 43,214 32,759
Employee cost, net (See Note g).................... 3,174 1,735 6,308 6,268
Taxes, other than payroll and income taxes......... 375 303 1,019 785
Maintenance........................................ 253 199 701 488
Advertising........................................ 791 938 2,520 2,561
Professional services.............................. 831 634 2,395 2,021
Telephone.......................................... 544 444 1,531 1,364
Rent............................................... 647 505 1,844 1,552
Other, net (See Note g)............................ 3,111 3,523 7,960 8,768
-------- ------- -------- -------
24,826 19,222 67,492 56,566
-------- ------- -------- -------
Income before income taxes........................... 9,580 8,926 26,821 23,601
Income taxes:
Current............................................ 1,038 (5) 2,397 663
Deferred........................................... (50) 1,507 793 2,127
-------- ------- -------- -------
988 1,502 3,190 2,790
-------- ------- -------- -------
Net income................................. 8,592 7,424 23,631 20,811
Retained earnings at beginning of period............. 114,575 92,368 102,925 81,892
Less cash dividends paid:
Convertible preferred stock..................... -- -- -- 14
Common stock.................................... 1,840 1,548 5,229 4,445
-------- ------- -------- -------
Retained earnings at the end of period............... $121,327 $98,244 $121,327 $98,244
======== ======= ======== =======
Earnings per share:
Primary:
Net income................................. $ 0.47 $ 0.41 $ 1.29 $ 1.15
======== ======= ======== =======
Fully Diluted:
Net income................................. $ 0.45 $ 0.39 $ 1.24 $ 1.10
======== ======= ======== =======
</TABLE>

The accompanying notes are an integral part of this statement.

F-38
<PAGE> 110

DORAL FINANCIAL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
NINE-MONTH
PERIOD ENDED
SEPTEMBER 30,
---------------------
1997 1996
--------- ---------
(UNAUDITED)
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 23,631 $ 20,811
--------- ---------
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of interest-only strip receivable.......... 2,791 996
Amortization of cost in excess of fair value of net
assets acquired........................................ 280 282
Amortization of servicing assets........................ 1,932 722
Depreciation and amortization........................... 1,656 1,308
Gain on sale of servicing rights........................ -- (1,813)
Allowances for losses................................... 609 609
Origination and purchases of mortgage loans held for
sale................................................... (599,372) (542,745)
Principal repayment and sales of loans held for sale.... 271,455 325,795
Purchases of securities held for trading................ (214,679) (67,840)
Principal repayments and sales of securities held for
trading................................................ 306,634 263,977
Increase in interest-only strip receivable.............. (6,644) (10,821)
Increase in accounts receivable and mortgage servicing
advances............................................... (4,952) (3,698)
Increase in servicing asset............................. (11,587) (8,239)
Purchase of securities available for sale............... (75,003) (4,639)
Principal repayments and sales of securities available
for sale............................................... 15,462 7,012
Increase in interest receivable......................... (2,302) (1,504)
Increase (decrease) in loans payable.................... 22,027 (11,352)
Increase in interest payable............................ 2,282 397
Increase in securities sold under agreements to
repurchase............................................. 300,173 23,745
Increase in payables and accrued liabilities............ 3,661 5,750
Increase (decrease) in income tax payable............... 1,439 (383)
Deferred tax provision.................................. 793 2,127
Amortization of unearned compensation under employment
contracts.............................................. 72 64
--------- ---------
Total adjustments................................... 16,727 (20,250)
--------- ---------
Net cash provided by operating activities........... 40,358 561
--------- ---------
Cash flows from investing activities:
Purchases of securities held to maturity.................. (104,274) (41,480)
Principal repayments of investments held to maturity...... 22,510 6,767
Origination of loans receivable........................... (117,055) (66,333)
Principal repayments of loans receivable.................. 80,119 9,864
Purchase of property, leasehold improvements and
equipment............................................... (3,158) (1,291)
Additions to cost in excess of fair value of net assets
required................................................ (18) (309)
Increase in real estate held for sale..................... (702) (354)
Increase in other assets.................................. (1,235) (3,463)
Proceeds from sale of servicing rights.................... -- 1,813
--------- ---------
Net cash used by investing activities............... (123,813) (94,786)
--------- ---------
Cash flows from financing activities:
Increase in common stock.................................. -- 475
(Decrease) increase in notes payable...................... (1,986) 39,548
Increase in deposits...................................... 92,046 51,525
Dividends declared and paid............................... (5,229) (4,459)
Decrease in advances from FHLB............................ -- 4,593
Net cash provided by financing activities........... 84,828 91,682
--------- ---------
Net (increase) decrease in cash and cash
equivalents......................................... 1,373 (2,543)
Cash and cash equivalents at beginning of period............ 81,213 59,872
--------- ---------
Cash and cash equivalents at the end of period.............. $ 82,586 $ 57,329
========= =========
Supplemental schedule of noncash investing and financing
activities:
Noncash financing activities -- conversion of preferred
stock................................................... $ -- $ 1,080
========= =========
Noncash investing activities -- conversion of subordinated
debentures.............................................. $ 1,540 $ --
========= =========
Supplemental cash flow information:
Cash used to pay interest................................. $ 41,547 $ 32,362
========= =========
Cash used to pay income taxes............................. $ 958 $ 1,046
========= =========
</TABLE>

The accompanying notes are an integral part of this statement.
F-39
<PAGE> 111

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(a) The Consolidated Financial Statements (unaudited) include the accounts of
Doral Financial Corporation, formerly First Financial Caribbean Corporation
and its wholly-owned subsidiaries, Doral Mortgage Corporation ("Doral
Mortgage"), Centro Hipotecario, Inc., Doral Securities, Inc., formerly AAA
Financial Services Corporation, ("Doral Securities") and Doral Bank,
formerly Doral Federal Savings Bank ("Doral Bank"). Doral Bank converted
its charter from that of a federal savings association to that of a Puerto
Rico commercial bank effective October 1, 1997. See item 5 -- Other
Information -- Status as a bank holding Company. References herein to the
"Company" or "DFC" 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
on Form 10-K for the year ended December 31, 1996, 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 results for the interim periods have been reflected.

(b) The results of operations for the quarter and nine-month period ended
September 30, 1997 are not necessarily indicative of the results to be
expected for the full year.

(c) Cash dividends per share paid for the quarter and nine-month period ended
September 30, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
NINE-MONTH PERIOD
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- -----------------
1997 1996 1997 1996
------ ------ ------- -------
<S> <C> <C> <C> <C>
Series A Preferred Stock........................ $ -- $ -- $ -- $0.3825
Common Stock.................................... $ 0.10 $.0850 $0.2850 $0.2450
</TABLE>

All outstanding shares of Series A Preferred Stock were redeemed on May 10,
1996.

(d) At September 30, 1997, escrow funds include approximately $38.0 million
deposited with Doral Bank. These funds are included in the Company's
financial statements. Escrow funds also include approximately $9.3 million
deposited with other banks excluded from the Company's assets and
liabilities.

(e) Certain reclassifications of prior years' data have been made to conform to
1997 classifications. In connection with the adoption by the Company,
effective January 1, 1997, of SFAS No. 125 "Accounting for Transfers of
Servicing Assets and Extinguishment of Liabilities" ("SFAS 125"), the
Company reclassified the asset previously shown on the Company's
Consolidated Balance Sheet as "Mortgage Servicing Rights" to "Servicing
Asset". In addition, the asset previously shown as "Excess Servicing Fees
Receivable" was reclassified as "Interest-Only Strips" and is now included
in the Company's Consolidated Balance Sheet as a component of "Securities
held for trading, net".

(f) The number of average shares of common stock used for computing the primary
and fully diluted net income per share was as follows:

<TABLE>
<CAPTION>
QUARTER ENDED NINE-MONTH PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary......................... 18,397,460 18,222,184 18,320,742 18,103,110
Fully diluted................... 19,364,316 19,366,788 19,364,316 19,361,294
</TABLE>

F-40
<PAGE> 112

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

(g) Employee costs and other expenses are shown in the Consolidated Statement
of Income and Retained Earnings net of direct loan origination costs that,
pursuant to SFAS No. 91, are capitalized as part of the carrying cost of
mortgage loans and are offset against mortgage loan sales and fees when the
loans are sold. Set forth below is a reconciliation of the application of
SFAS No. 91 to employee costs and other expenses:

<TABLE>
<CAPTION>
NINE-MONTH PERIOD
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- -----------------
1997 1996 1997 1996
------ ------ ------- -------
<S> <C> <C> <C> <C>
Employee costs, gross........................... $9,581 $7,272 $26,840 $22,341
Deferred costs pursuant to SFAS 91.............. 6,407 5 ,537 20,532 16,073
------ ------ ------- -------
Employee cost, net.............................. $3,174 $1,735 $ 6,308 $ 6,268
====== ====== ======= =======
Other expenses, gross........................... $4,070 $4,376 $11,136 $11,773
Deferred costs pursuant to SFAS 91.............. 959 853 3,176 3,005
------ ------ ------- -------
Other, net...................................... $3,111 $3,523 $ 7,960 $ 8,768
====== ====== ======= =======
</TABLE>

Set forth below is a breakdown of direct loan origination costs that were
capitalized as part of the carrying cost of mortgage loans inventory or offset
against mortgage loan sales and fees.

<TABLE>
<CAPTION>
NINE-MONTH PERIOD
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- -----------------
1997 1996 1997 1996
------ ------ ------- -------
<S> <C> <C> <C> <C>
Offset against mortgage loan sales and fees..... 7,759 6,418 20,661 14,664
Capitalized as part of loan inventory........... (150) -- 3,763 4,213
------ ------ ------- -------
$7,609 6,418 $24,424 $18,877
====== ====== ======= =======
</TABLE>

(h) In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
125. SFAS 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
the application of a financial-components approach that focuses on control.
That approach requires the recognition of financial assets and servicing
assets controlled by the reporting entity, the derecognition of financial
assets when control is surrendered, and the derecognition of liabilities
when they are extinguished. Specific criteria are established for
determining when control has been surrendered in the transfer of financial
assets.

This Statement requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be
initially measured at fair value, if practicable. It also requires that
servicing assets and other retained interests in the transferred assets be
measured by allocating the previous carrying amount between the assets
sold, if any, and retained interest, if any, based on their relative fair
values at the date of the transfer. Servicing assets and liabilities must
be subsequently measured by (a) amortization in proportion to and over the
period of estimated net servicing income and loss and (b) assessment for
asset impairment or increased obligation based on their fair values.

SFAS 125 modifies the accounting for interest-only strips or retained
interests in securitizations, such as excess servicing fees receivable,
that can be contractually prepaid or otherwise settled in such a way that
the holder would not recover substantially all of its recorded investment.
In this case, it requires that they be classified as available for sale or
as trading securities. Interest-only strips ("IOs") and retained interests
are to be recorded at market value in accordance with SFAS No. 115. Changes
in market value of IOs are included in operations, if classified as trading
securities, or in shareholders' equity as unrealized gains or losses, net
of taxes, if classified as available for sale.

F-41
<PAGE> 113

DORAL FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

Under the provisions of SFAS 125, management has determined that excess
servicing fees receivable retained by the Company as a result of
securitization transactions or bulk sales will be held as trading
securities as IOs. In addition, all residual interests and mortgage backed
securities previously retained by the Company as part of its securitization
transactions will also be held as trading securities.

The provisions of this Statement, except as indicated below, are effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and must be applied
prospectively. Earlier or retroactive application is not permitted. In
December 1996, the FASB issued a statement that defers for one year the
effective date applicable to the provisions of SFAS 125 that deal with
secured borrowings and collateral. Additionally, the deferment provision
would apply to transfers of financial assets for repurchase agreements,
dollar rolls and securities lending.

Refer to Note e for certain reclassifications made by the Company as a
result of the adoption of SFAS 125.

(i) On July 10, 1997, the Board of Directors declared a two-for-one stock split
of the Company's Common Stock $1.00 par value (the "Common Stock"). The
stock split was effected on August 28, 1997 in the form of a stock dividend
of one additional share of Common Stock for each share of Common Stock held
of record on August 18, 1997. Prior to the declaration of the stock split,
the Company had 9,682,158 fully diluted shares outstanding. Following the
distribution of the additional shares, the Company had 19,364,316 fully
diluted shares outstanding. The stock split did not dilute shareholders'
voting rights or their proportionate interest in the Company. All amounts
in the financial statements have been restated to reflect the stock split.

F-42
<PAGE> 114

======================================================

NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OR THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

---------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by
Reference........................... 2
Available Information................. 2
Prospectus Summary.................... 3
Recent Developments................... 6
Risk Factors.......................... 8
Use of Proceeds....................... 13
Price Range of Common Stock and
Dividend Policy..................... 13
Capitalization........................ 15
Selected Consolidated Financial and
Operating Data...................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 30
The Commonwealth of Puerto Rico....... 61
Description of Capital Stock.......... 63
Certain Federal Income Tax
Considerations...................... 66
Certain Puerto Rico Income Tax
Considerations...................... 67
Underwriting.......................... 70
Legal Matters......................... 71
Experts............................... 71
Index to Financial Statements......... F-1
</TABLE>

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1,580,000 SHARES

[DORAL FINANCIAL CORPORATION LOGO]
COMMON STOCK
------------------------------

PROSPECTUS
------------------------------
BREAN MURRAY & CO., INC.
FEBRUARY 13, 1998

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