Doral Financial posts $233 million 2Q net loss

That compared with a net loss of $3.5 million for the first quarter ended March 31, 2010 and net income of $8.2 million for the second quarter ended June 30, 2009.

For the six months ended June 30, the company reported a net loss of $236.8 million compared with a net loss of $38.1 million for the same period in 2009.

“Doral has taken prudent actions that allocate capital in a manner that improves our asset quality to build a stronger company,” said Doral Financial President & CEO Glen Wakeman. “We experienced significant growth in our core business, as evidenced by a $300.9 million, or 16%, increase in retail deposits this quarter.”

Doral Financial missed out in late April when the Federal Deposit Insurance Corp. (FDIC) failed three local banks—R-G Premier Bank, Westernbank and Eurobank—and auctioned them off to island rivals. Doral’s acquisition bids for R-G Premier Bank and Westernbank fell short and the company did not make a play for Eurobank.

Banco Popular de Puerto Rico grabbed Westernbank, while Scotiabank de Puerto Rico acquired R-G Premier Bank and Eurobank was picked up by Oriental Bank & Trust.

However, Doral Bank posted double-digit growth in deposits and stronger capitalization levels in the wake of the FDIC-assisted consolidation of the island’s banking industry.

In April, Doral raised $171.0 million of new capital to take part in the FDIC-assisted transactions. The capital raise enhanced Doral’s capital ratios, which had, previous to the raise, already exceeded the regulatory well capitalized benchmarks.

With the new capital, Doral undertook actions aimed to improve the asset quality of the company. These actions, which significantly affected the quarter results, included:

In April 2010, Doral sold $378 million of non-agency collateralized mortgage obligations (CMO) at a loss of $137 million. $130 million of the loss had previously been reflected as a reduction of common equity in other comprehensive income (loss), resulting in an incremental charge to common equity from the CMO sale of $7 million.

In June 2010, Doral reclassified construction loans with unpaid principal balances of $133 million from loans held for investment to loans held for sale, resulting in a charge to income of $13 million. Doral entered into an agreement to sell the construction loans and similar real estate owned property to a third party on July 29, 2010 in exchange for cash and a loan receivable from the purchaser. There was no gain or loss incurred as a result of the July 2010 sale agreement as the loans were marked to lower of cost or market when transferred to held for sale in June 2010.

The company reduced its estimate of proceeds to be received from the real estate acquired through foreclosure by $17 million to facilitate future sales of other real estate owned (OREO). This change in OREO estimated proceeds caused an $8 million increase in the residential mortgage provision for loan and lease losses.

Doral decreased the recorded amounts of its claim for losses against Lehman Brothers, Inc. by $10.8 million to 25% of the total claim. The cumulative effect of the actions taken was to dispose of certain assets, or position certain assets for future disposition, at a cumulative charge to income of $186 million.

Financial highlights

The company reported net loss attributable to common shareholders and basic loss per share of $235.7 million and $3.50, respectively, for the second quarter of 2010 compared to net income attributable to common shareholders and basic income per share of $21.2 million and $0.34, respectively, for the first quarter of 2010, and net income attributable to common shareholders and basic income per share of $14.5 million and $0.27, respectively for the second quarter of 2009.

The company reported net loss attributable to common shareholders and basic loss per share of $214.5 million and $3.30, respectively for the six months ended June 30, 2010 compared to losses of $40.1 million and $0.74, respectively for the six months ended June 30, 2009.

Net interest income for the second quarter of 2010 was $40.1 million, a decrease of $3.7 million compared to the first quarter of 2010, and a decrease of $2.0 million compared to the second quarter of 2009. Net interest margin was 1.84% for the quarter ended June 30, 2010, down 3 basis points when compared to the first quarter of 2010 and an increase of 6 basis points compared to the second quarter of 2009. Asset yields are being adversely affected by the higher level of non-performing loans and yield concessions on loan restructurings.

Provision for loan and lease losses for the second quarter of 2010 was $44.6 million, an increase of $30.7 million over the first quarter 2010 provision, and an increase of $34.5 million over the provision recorded for the second quarter of 2009. As previously noted, the provision included a charge of $12.6 million to reduce certain construction loans to lower of cost or market when transferred to loans held for sale and an $8.0 million charge to the provision due to increased severities on OREO resulting from management’s strategic decision to accelerate OREO dispositions.

Non-interest loss of $120.2 million for the second quarter of 2010 increased $156.8 million and $139.3 million compared to non-interest income for the first quarter of 2010 and the second quarter of 2009, respectively. Non-interest loss for the second quarter of 2010 was driven by a loss on sale of securities of $137.2 million as the company sold $378.0 million of non-agency CMOs.

Non-interest expense of $104.1 million for the second quarter of 2010, increased $36.7 million and $48.6 million from expenses for the quarters ended March 31, 2010 and June 30, 2009, respectively. Higher expenses in the second quarter of 2010 were due to recognition of an additional reserve on the Lehman Brothers, Inc. (LBI) claim receivable of $10.8 million, payment of $3.3 million pursuant to the company’s Retention Program, higher advertising expenses as a result of campaigns to increase the company’s deposit and mortgage loan market share after the bank consolidations on the island, higher professional services expenses incurred in the company’s capital raise, preferred stock exchange, participation in bids for FDIC assisted transactions, sale of non-performing assets and the defense of the Company’s former officers. In addition, there were increases in provisions and other expenses for other real estate owned properties primarily related to adjustments to market value in line with current economic trends and management's strategic decision to accelerate OREO dispositions.

Second quarter 2010 reflected an income tax expense of $4.5 million compared with a $2.5 million income tax expense in the first quarter of 2010 and an income tax benefit of $12.7 million for the second quarter of 2009. Tax expense for the quarter is related to taxes on U.S. source income. The second quarter of 2009 tax benefits was related to a release of unrecognized tax benefits due to the expiration of the statute of limitations net of the recognition of an accrual for unrecognized tax benefits.

Doral Financial’s loan production for the second quarter of 2010 was $380.2 million, up from $289.1 million for the first quarter of 2010, and $291.9 million for the second quarter of 2009. The increase in loan production during the second quarter of 2010 was due to approximately $139.2 million of loan production from the company’s U.S. mainland based middle market syndicated lending unit which is engaged in purchasing senior credit facilities in the syndicated loan market.

Total assets as of June 30, 2010 amounted to $9.4 billion compared to $9.7 billion as of March 31, 2010 and $10.2 billion as of Dec. 31, 2009.

Total deposits of $4.9 billion increased $297.5 million, or 6.4%, over deposits of $4.6 billion as of December 31, 2009. The year-to-date deposit increase resulted from a $199.3 million, or 10.0%, increase in retail deposits and a $98.2 million or 3.7% increase in brokered deposits. For the quarter, retail deposits increased $300.9 million, or 16%, and brokered deposits increased $53.5 million, or 2%.

Non-performing loans as of June 30, 2010 were $944.2 million, an increase of $40.4 million from March 31, 2010 and an increase of $96.0 million from December 31, 2009. During the quarter, Doral repurchased $60 million of non-performing loans guaranteed by the Federal Housing Administration (FHA).

These loans, while non-performing, retain their FHA insurance and present little credit loss potential to Doral. The ratio of the allowance for loan and lease losses to total loans receivable as of June 30, 2010 was 2.44%, down 24 basis points from 2.68% as of March 31, 2010 and down 33 basis points from 2.77% as of June 30, 2009. Doral reported net charge-offs of $57.2 million in the quarter, and net charge-offs of $64.4 million since December 2009, or 104 basis points and 117 basis points of June 30, 2010 loans receivable, respectively.

The company’s capital ratios continue to exceed the published well-capitalized standards established by the federal banking agencies with an estimated Tier 1 Leverage Ratio of 8.52%, estimated Tier 1 risk-based capital ratio of 13.99% and estimated total risk-based capital ratio of 15.26%. The estimated Leverage, Tier 1 and total risk-based capital ratios exceeded the well-capitalized standards by $328.9 million, $454.5 million and $299.0 million, respectively.