Doral Financial Corporation
A Few Points...

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By reinhs
August 16, 2006

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Hi Guys,
Just a few points and impressions from reading over the 10k tonight. My eyes are just shot from staring at my screen...

First off, the killer. Interest Expense and Non-Interest Expense. Doral actually made a good deal of money in 2005. Interest income was about $948M, up from $723M in 2004. The kicker though was that due to the circumstances they were not able to borrow like normal, they were not able to sell like normal, and the debt rating caused the cost of borrowed money to be higher. The result is interest expense went from $385M in 2004 to a whopping $667M in 2005. Net numbers were $338M for 2004 but only $280M for 2005. Ouch.

Next is non-interest numbers. Non-interest income for 2005 was $62.5M, up from $16M in 2004(lots of variables make these numbers) but expenses were $214M in 2004 and $289M in 2005. Something like $29M of that was due to restatement fees in 2005, and another $25M is money they set aside for dealing with SEC issues. They don't know if it will be enough, but it's non-recurring once this is all said and done. They are working with the SEC on options to close the case quickly, but don't know if they will be successful.

We can factor out the SEC money and the restatement fees, but until Doral is current in filings, the SEC ends the investigation, and maybe the debt rating starts trickling back up I just don't see how we will be able to make good long-term guesses as to what margins Doral will be able to make. Earnings potential will be very hard to predict for probably a solid year from now I'd guess.

On another note though, Doral is doing massive things inside to clean up and get tight. It sounds like they are looking at everything. They are considering consolidating branches where there is not good profitability or duplication. They are updating systems that are not efficient and outsourcing a lot of back office stuff. The results have been an employee reduction from about 2,500 in 2005 to somewhere over 1,800 right now.
In Q4 2005 they terminated their institutional sales and investment banking services (page 14) and they are "considering the future viability " of Doral Securities. They noted expenses have been growing at a compounded 15% and they are going to fix that.

While cutting back non-profitable pieces they are looking to expand and diversify. They are considering opening strategic new branches while closing non-performers. They are looking into increasing things like the insurance side of the business... They are also trying to diversify their selling channels and be less based on trading due to the risks involved.

On page 28 they make an interesting point that basically says they are fairly safe from a hostile takeover. Doesn't mean they won't sell of course, just that they someone can't come in and grab them while they are down, at least not easily.

Loan originations are down for various reasons. One of which is until debt ratings are straight, they are up to date on filings and the SEC issues are past them, they have basically been forced to sell portfolios to US based companies with more stringent requirements on the loans. This makes them be pickier on what they originate, which lowers origination numbers. Also, for whatever reason, profits aren't nearly as high when selling to US companies compared to selling local. This makes margins tighter and profits lower until they can borrow and sell to the normal channels again. They really need to get this SEC thing closed. Sounds like 10Q's will be back on track by the October filing.

Finally they claim that though they have done massive work to clean things up inside, there are still material weaknesses that have been identified that it may take them the rest of 2006 to fix. It's pretty obvious from reading though that they are going after it.

Anyway, there is a lot more but I'm starting to get threatened for keeping my wife up by typing. Sorry this is all mumbled but I wasn't sure if I'd have time to post in the morning. Love to hear anyone else's views or observations.

Talk to you soon,
(Who has bought Doral from $31 to $40, to $49, to $41, $20, $11... $4.37)

I did sell off everything above I think $12 or so for the tax break...

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