Shares of Doral Financial (DRL) shot up Monday after the San Juan, P.R., company said in its annual report that the reclassification of a previously reported tax overpayment will result in a significant boost to its capital levels.
The $8 billion-asset company disclosed in its 10-K that the Commonwealth has agreed to reclassify a $230 million overpayment from an amortizing deferred tax asset to a prepaid tax asset. The agreement results in a $100 million reversal of its deferred tax asset and, according to a research note from Sandler O'Neill & Partners LP, will add roughly $200 million to its capital base and boost its Tier 1 capital ratio from 12.2% of assets at Dec. 31 to 15% for the quarter that ended March 31.
Deferred Tax Assets are usually reversed when a company proves that it can make money on a consistent basis, but in Doral's case the primary accounting implication is the asset will no longer be dependent on the the company's future earnings stream. Doral's shares were up more than 11% midday Monday, to $1.71. Doral earned $11.7 million in the quarter that ended Dec. 31, compared to a loss of $30.2 million in the prior quarter.