Two weeks ago, Puerto Rican lender Doral Financial (DRL) announced that it would raise equity capital for two purposes. One was for stability, as they need more capital to cushion against loan losses, which have grown along with the increase in non-performing assets:
The other reason was more upbeat, as they wanted to raise equity to be able to bid on deposits of failed banks:
From the 19th:
SAN JUAN, PR -- (MARKET WIRE) -- 04/19/10 -- Doral Financial Corporation (NYSE: DRL) ("Doral" or the "Company"), the holding company of Doral Bank, today announced that it has entered into definitive agreements to raise up to $600 million of new equity capital for the Company through a private placement, primarily with institutional investors.
Of the $600 million of total equity commitments, $180 million is permanent capital to support the Company's capital position and growth, including to support a possible Federal Deposit Insurance Corporation (the "FDIC") assisted transaction. The remaining $420 million is contingent upon completing such an FDIC-assisted acquisition and will be held in escrow and will be returned to investors if the acquisition is not completed.Today, the company announced that they had not been selected by the FDIC to participate in taking over failed institutions, and will hand that extra money back to investors.
From today's release:
"The long-awaited banking consolidation is a step towards a healthier banking industry and we have emerged from the process a much stronger institution, having received an injection of $180 million in permanent capital. Our commitment, to offer a choice to our existing and new clients by providing an excellent service while improving the quality of life in our communities, is stronger than ever," said Glen Wakeman, CEO and President of Doral Financial Corporation.
As previously announced, the Company will retain the $180 million of capital raised last week and will return to investors the additional funds raised contingent on an acquisition as a result of not being selected to acquire any of the Puerto Rico banks closed by the FDIC today.
So, why are shares off so much? In addition to the dilution from a new capital raise (investors were brushing off that negative because the offsetting positives from getting FDIC-vetted deposits would have been like taking free money), the company announced that they're biting the bullet and "reducing the balance sheet." They're selling loans that are worth much less than they paid, and once these sales are completed they'll continue by selling some of their construction loans. Fortunately their construction loan portfolio is a much smaller piece than their residential A painful process, but there remains a TON of bad loans out there....
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