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Doral Financial Sells Mortgage Loan Portfolio

Stocks in this article: DRL BPOP

NEW YORK (The Deal) -- As part of a larger effort to shore up its balance sheet, troubled bank operator Doral Financial (DRL) has sold a $242.1 million portfolio of mortgage loans and servicing rights to FirstBank Puerto Rico in exchange for the lender canceling a $234.1 million loan.

The San Juan, Puerto Rico-based company, which runs Doral Bank, is evaluating all strategic alternatives to boost its capital position in the wake of a dispute with Puerto Rico's government over $229.88 million in potential tax refunds, which accounted for 43% of the bank's Tier 1 Capital.

The Federal Deposit Insurance Corp. sent a letter to Doral Bank on May 1, asserting that the bank may no longer count some or all of the expected tax refunds from the Treasury as Tier 1 capital, and gave the bank 120 days to submit a new capitalization plan.

After the mortgage loan sale was announced in the late afternoon on June 2, the stock, which is listed on the New York Stock Exchange under the symbol DRL, plunged 17.13% on Tuesday, June 3, closing at $2.95 with a market cap of $19.61 million. The stock closed at $3.56 on Monday.

However, some investors still see Doral Financial as a long-term turnaround case.

Steve Lococo, the president and senior portfolio manager of Omaha-based asset management firm Footprints Asset Management and Research, believes Doral Financial was making progress toward an operating turnaround before Puerto Rico's Treasury Department claimed that it didn't owe Doral Financial nearly $230 million and the FDIC sent a warning letter.

"The letter from FDIC threw a monkey wrench into [its operational efforts], and it's unfortunate," Lococo said by phone on Tuesday. However, Lococo said he doesn't believe the bank's regulators are on the cusp of a takeover.

"The FDIC is not in business to seize banks...They want to see Doral go forward," Lococo said.

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