Government Ends Doral's Misery; Failure to Cost FDIC $749M

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Regulators have shut Doral Bank, ending a tumultuous decade for the Puerto Rican bank.

The $5.9 billion-asset Doral was the fourth bank to fail this year and the biggest bank to be closed since the $11 billion-asset Westernbank in Puerto Rico was shuttered in April 2010. The failure is estimated to cost the Federal Deposit Insurance Corp. nearly $749 million.

The bank's collapse sparked some confusion Friday. Initially, the FDIC appeared to announce the failure before it was finalized, and sent a subsequent message to recall the press release. The seizure was then made official in an announcement a short time later. "An e-mail was sent in error," a FDIC spokeswoman said.

According to the FDIC, Doral's $4 billion in deposits will be sold to Banco Popular's subsidiary in Puerto Rico, but the acquirer in turn put deals in place with three other institutions to manage a portion of the failed bank's operations.

Banco Popular, which agreed to pay a 1.59% deposit premium, will manage eight of Doral's 26 locations, the FDIC said. FirstBank Puerto Rico in Santurce will acquire 10 branches. Banco Popular's New York-based subsidiary, Banco Popular North America, will operate three of the locations. The remaining five branches, located in the Panhandle area of Florida, will be sold to Centennial Bank in Conway, Ark., a unit of Home Bancshares. Doral's branches will reopen under normal hours starting on Saturday.

Under the deal, Banco Popular agreed to acquire $3.25 billion of Doral's assets. The FDIC said it has entered into two separate agreements to sell $1.3 billion of the assets to other parties. Those deals are expected to close in 30 days.

Doral was the first Puerto Rican bank to fail since three banks — Eurobank, R-G Premier Bank of Puerto Rico and Westernbank — were closed in April 2010.

Doral's problems went back to the mid-2000s when it restated several years of earnings to adjust how it calculated the fair value of floating-rate interest-only strips. The restatement cut into several years of profit, prompting the company to claim that it had overpaid its taxes.

Making matters worse, the bank lost nearly $950 million over the last seven years, according to FDIC call reports. Its total risk-based capital plummeted to 4% at Dec. 31 from 12.4% two years earlier.

Doral and Puerto Rico's Treasury Department reached an accord in 2012 to reclassify $230 million of the overpaid taxes as a prepaid tax asset, which raised the company's capital levels. But the FDIC determined last year that the company could no longer count the funds toward Tier 1 capital.

Puerto Rico also voided the 2012 agreement, forcing Doral to file a lawsuit in hopes to asserting its claim to the funds. Puerto Rico's Court of First Instance ruled in October that the territory's government had to repay the funds over five years, but the government appealed the decision. An appeals court rejected Doral's claims to the refund earlier this week.

The FDIC, meanwhile, continued to tighten the noose around Doral, requiring it to boost capital levels and rejecting any capital restoration plan that included the anticipated tax refund. As a result, Doral had been selling loans and other assets to reduce risk and raise capital.

The FDIC hit Doral with a prompt corrective action directive earlier this month. Around the same time, the company also moved out of its corporate office in a high-end part of Miami, though it was unclear if the move was part of a self-initiated cost-cutting exercise or the result of FDIC pressure.

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