Doral Financial Corporation
DRL Past Growth & Valuation

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By CaptainDix
December 20, 2005

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Although the (final?) re-statement for the past five years is still in the works, if we have faith in Doral management's recent announcements, it is interesting and useful to look at the overall accrual in value to common shareholders in DRL since 12/31/99, the date of the last clean financials.

Let's start with the assumption that the after-tax reduction in equity due to the restatements is $750M as of 12/31/04, hence total equity available to common shareholders stood at $650M as of that date. Further, let's make an admittedly rough assumption that 2005 diluted EPS is $1.35 per common share. (Perhaps a bit optimistic, but perhaps not if current management is more adept with their hedging strategies than former management.) This would be equal to $146M in '05 earnings. $67M was paid out in dividends, so the remaining $79M adds to equity as retained earnings. (I use diluted EPS so dividends to preferred shareholders aren't included.)

This gets us to an estimate of $729M in equity attributable to common shareholders at 12/31/05, or common share book value of $6.75 per share.

As of 12/31/99, book value per common share (after adjustment for two 3:2 splits since then) was $3.31, per the '99 10-K. This equates to an average growth rate in BV of 12.6% per annum.

In addition, as we know, there were some reasonably hefty dividend payments (at least based on today's share price) made. From the M* site (again after adjustment for splits), I calculate annual dividend payments per share at $0.383, $0.477, $0.575, $0.60, $0.60, $0.62 for 2000 through 2005. The average dividend payment is 10.6% of BV (note: not %age of share price).

So, despite the gloom and doom surrounding this company and its stock, it appears that we have a bank that has still been able to grow its "owner earnings" at an average rate of 23.2% over the past six years, after all of the financial re-statements.

While I realize that there are some assumptions here (particularly for '05), they won't change the average growth rate in value much. (I am also ignoring the effect of any intangible asset changes - I think these are minimal to nil, in any case.)

Now, I realize also that this growth rate is very likely not to be maintained in the future. Certainly in the short term, the flat yield curve will "compress" DRL's earnings, but history shows that yield curve flattening and inversion does not last for very long (if one has a reasonably long-term horizon). But the calculations indicate that the ROE over time for DRL has still been very good, and with a more conservative "thrift" business model, a valuation of the stock at 2xBV should be reasonable. If Doral also has added franchise value and can attract more than one bidder for its acquisition, a further increase in share value might be expected.

Finally, I know that The Admiral has opined that this is a case where significant costs down the road due to shareholder lawsuits should be expected. While I do not necessarily disagree (he out-ranks me), there are three questions on this point I would ask:

(1) What comparable examples for successful shareholder lawsuits are there in recent history?

(2) What were the losses due to jury awards and legal expenses that ultimately came out of the shareholder's hides, compared to the company's equity base?

(3) Perhaps most importantly, how much time elapsed before such losses were incurred? A multi-hundred million dollar hit to equity in 2006 is one thing, but my (admittedly meager) knowledge in this area suggests to me that any such suits will take many, many years to get settled - so apply the proper discount factor over x years to estimate the hit to current value. The wheels of justice grind very slowly.

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