Doral Survival Struggle Ends as Puerto Rico Regulators Shut Bank

 Doral Financial Corp., the Puerto Rico bank engulfed by legal scrutiny and FBI probes, was seized by regulators after tumbling 94 percent in the past year.

Puerto Rico’s financial regulator shuttered the bank on Friday, according to a statement from the the Federal Deposit Insurance Corp., which was appointed receiver. Popular Inc. agreed to acquire the banking operations of the seized firm, including deposits, and operate eight of Doral’s 26 former branches. Agreements were reached with three banks to acquire the other 18 locations.

“Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship in order to retain their deposit insurance coverage,” the FDIC said.

Doral, the commonwealth’s second-largest bank, struggled to survive after the FDIC notified the lender last year that it couldn’t use a $229 million tax refund as part of its Tier 1 capital. Regulators said earlier this month that Doral continues to be “critically under-capitalized.” The bank hasn’t posted an annual profit since 2005.

“The fact that they’ve already found an acquirer, that’s fast,” said James Barth, former chief economist at the Office of Thrift Supervision and now a finance professor at Auburn University.“It suggests that the FDIC has contemplated taking action for a while.”

Court Battle

An appeals court this week determined that San Juan-based Doral isn’t owed the tax refund by Puerto Rico’s Treasury, overturning a previous verdict favoring the bank. The court battle stems from the company’s overstatement of earnings from 1998 to 2005.

In December, the Federal Bureau of Investigation said it seized computers and documents in a raid of Doral’s offices to search for evidence related to “several ongoing investigations.”

Doral is the fourth U.S. bank to fail this year, and the biggest to be closed since Westernbank Puerto Rico was shuttered in April 2010. Popular, Puerto Rico’s biggest bank, acquired about $9.4 billion of Westernbank’s $11.9 billion in assets in that transaction.

At the end of last year, Doral Bank had about $5.9 billion of assets and $4.1 billion in deposits, according to the FDIC. Popular will purchase $3.25 billion of the assets and agreed to pay the FDIC a premium of 1.59 percent for the right to assume the deposits.

The FDIC reached two separate agreements to sell $1.3 billion of Doral Bank’s assets to other parties and “will retain the remaining assets for later disposition,” the regulator said. The closure will cost the Deposit Insurance Fund an estimated $748.9 million, the FDIC said.

‘Not Foolish’

“These banks are not foolish when they work with FDIC on something like this,” Barth said. Popular “is going to make sure they do all their calculations and that the deal makes their bank more profitable.”

Popular shares surged 5.4 percent to $34.51, the most in more than 10 months.

Doral, which traded as high as $129.60 in April 2010, plunged 75 percent last year. The stock tumbled 46 percent Friday to 72 cents a share in New York before being halted. The regulator inadvertently distributed the statement to news organizations before U.S. markets closed.

“The e-mail was sent prematurely,” said Barbara Hagenbaugh, an FDIC spokeswoman.

Spokesmen for Doral and Popular had no immediate comment.

Last month, Doral disclosed that Acting Chief Financial Officer Nancy Reinhard had stepped down, three months after assuming the role from David Hooston, who the company said was placed on administrative leave for personal reasons.

Doral employees in the Isla Verde branch took photos of one another and their desks after closing Friday. Earlier in the week, customers lined up inside the branch to withdraw their money.

With assistance from Alexander Lopez in San Juan.

To contact the reporters on this story: Elizabeth Dexheimer in New York at edexheimer@bloomberg.net; Dakin Campbell in New York at dcampbell27@bloomberg.net

To contact the editors responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net Dan Reichl



Doral Financial Corp. Branch

A Doral Financial Corp. branch stands in San Juan, Puerto Rico, on Friday, Feb. 28, 2015. Photographer: Alexander Lopez/Bloomberg
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Doral Survival Struggle Ends as Puerto Rico Regulators Shut Bank

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