Doral Financial ( DRL) investors can't seem to catch a break. The latest troubling news to come from the scandal-tarred Puerto Rican bank concerns the surprise resignation of Chairman John Ward late last week. Ward quit following a disagreement with Doral's other top executives over a potential sale of the bank. Ward, in an email sent to some employees on Friday, says he is becoming "increasingly concerned about the process of governing this company." Ward is concerned Doral's investment bankers "will not aggressively pursue a strategic buyer.'' In November, Doral announced that it had hired Bear Stearns ( BSC) and JPMorgan Chase ( JPM) to discuss how to refinance $625 million in outstanding corporate debt. The investment banks also were brought on to examine alternatives to restructuring the bank's balance sheet. Doral, for its part, is trying to spin Ward's departure in the best possible light. In a statement, the bank says Ward and the bank's management held "different views'' about the best way to "maximize shareholder value." Shares of Doral, which plummeted as much as 9% in early trading, most recently were down 14 cents, or 5%, to 2.73. Doral's stock has been riveted by a series of bad events since early 2005, stemming from its improper use of interest-rate-only strips -- a type of a derivative -- to hedge its mortgage portfolio against interest rate fluctuations. Later, Doral found problems related to the sale of some of its mortgages to other Puerto Rican banks including R&G Financial ( RGF) and First BanCorp ( FBP), both of which also have been haunted by accounting scandals.
The problems at the bank have led to a host of executive shake-ups, a major earnings restatement and a regulatory investigation. In 2005, the bank fired its CFO Ricardo Melendez, and longtime CEO Salomon Levis resigned under pressure. In October 2006, Lidio Soriano, who took over as Doral's CFO, also resigned. Glen Wakeman, Doral's CEO of five months, will remain in his current post despite the Ward resignation. In the wake of the Ward news, Doral is naming Dennis Buchert, an independent director, to become nonexecutive chairman of its board. Recently, the bank paid a $26 million penalty to the Securities and Exchange Commission to settle an investigation into the accounting irregularities. Doral says it is currently negotiating a settlement with federal prosecutors. On Friday, Doral reported a net loss of $28.7 million for the third quarter, or 34 cents a share. The bank says it is currently up-to-date on its earnings reports through the third quarter of 2006. Analysts have turned up their noses to this stock since the bank revealed that it had accounting troubles. Of the remaining five analysts that cover the stock, four have equivalents to "sell" ratings on Doral. Challenges will remain in the fourth quarter, says Omotayo Okusanya, an analyst at UBS. A "weak EPS profile jeopardizes refinancing of $625 million of debt," writes Okusanya in a note Wednesday. "Should Doral fail to refinance upcoming debt, we believe equity would be worth zero in a liquidation." Okusanya is one of the analysts with a sell rating on the stock. "Longer term profitability issues may still exist unless management develops a more aggressive turnaround plan," he adds. "We believe a below book valuation is warranted given near and longer term concerns."