FDIC, Court deliver twin blows to ailing Doral Bank

Written by  //  February 26, 2015  //  Banking, Financial District  //  No comments

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Doral has been under the FDIC's scrutiny, and now has been deemed "critically undercapitalized" by the regulator. (Credit: © Mauricio Pascual)

Doral has been under the FDIC’s scrutiny, and now has been deemed “critically undercapitalized” by the regulator. (Credit: © Mauricio Pascual)

Doral Bank was on the receiving end of major blows by the Federal Deposit Insurance Corp. and the Appellate Court Wednesday, just before it’s time as a member of Puerto Rico’s financial community could come to an end.

In a letter to the Securities and Exchange Commission, the bank made public the results of the Joint Report of Examination from the FDIC and the Puerto Rico Office of the Commissioner of Financial Institutions and other documents confirming regulators deemed the financial institution to be “critically undercapitalized” as of Sept. 30, 2014.

Because of this, Doral Bank, a subsidiary of Doral Financial Corp., has been strictly forbidden to conduct a number of basic transactions, such as paying interest and making any investments.

The document lists some of the prohibitions as “entering into any material transaction other than in the usual course of business, including any investment, expansion, acquisition, sale of assets, or other similar action with respect to which the depository institution is required to provide notice to the appropriate federal banking agency; extending credit for any highly leveraged transaction; amending the institution’s charter or by-laws, except to the extent necessary to carry out any other requirement of any law, regulation, or order.”

Doral may not also “pay excessive compensation or bonuses; pay interest on new or renewed liabilities at a rate that would increase the institution’s weighted average cost of funds to a level significantly exceeding the prevailing rates of interest on insured deposits in the institution’s normal market areas; and make any principal or interest payment on subordinated debt beginning 60 days after becoming critically undercapitalized.”

The regulatory requirements come just days before Doral bank is reportedly to be shuttered and its assets sold to one or several local banks — possibly Banco Popular de Puerto Rico and Oriental Bank — through an FDIC-assisted transaction.

In January, this media outlet reported that the FDIC had advised Doral Bank to “accept an offer to combine with another insured depositary institution,” or improve its capital levels to once again be considered as “adequately capitalized.”

Appellate Court cuts Doral’s lifeline
On Wednesday afternoon, Doral Bank seemingly lost it’s last hope for liquidity due to an Appellate Court ruling validating that the Puerto Rico government is not obliged to pay a $229 million tax credit the financial institution claims it is owed.

The Appellate Court determined that in 2012, Doral Bank falsely misrepresented itself to the Treasury Department stating that it had over-paid taxes, which entitled them to a tax credit of $229 million. The court also said that the bank did not have enough proof to support its claim.

In addition, the court concluded that the government was not reckless during the legal proceedings and denied Doral’s petition that the Commonwealth pay for its legal fees.

“Even though in Puerto Rico we appreciate the banking sector, their presence, and their part in our economic development, their role should be within the legal guidelines. (…) We feel satisfied because we suitably defended the people’s best interests from this financial institution’s completely illegal claim,” said Puerto Rico Justice Secretary César Miranda in a statement issued late in the day.

Meanwhile, Treasury Secretary Juan Zaragoza added “this has been a difficult battle, but we always acted convinced that our legal and moral obligation with Puerto Rico and it’s people was to defend the public funds. No taxpayer is above the law (…).”

The legal proceedings started in May 2014 when former Treasury Secretary Melba Acosta voided the agreement made in March 2012.

The bank stated in the past that $229 million was enough to keep its afloat.

Doral will appeal
In a separate statement, Matthew D. McGill of Gibson, Dunn & Crutcher — Doral Financial Corp.’s legal counsel — confirmed the decision of an immediate appeal to the Puerto Rico Supreme Court.

“The decision of the [Appellate Court] seriously degrades the rule of law by empowering the government to disregard contracts on little more than a whim. And with the [Gov. Alejandro] García-Padilla administration now actively searching for ways to evade its legal obligations, the issues raised by Doral’s case are even more important today than when the administration first capriciously nullified Doral’s agreement,” he said.

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