Doral's Situation Worsens with 'Critically Undercapitalized' Tag

Doral Financial's future took another blow after the Puerto Rican company disclosed that its bank is now viewed by regulators as being "critically undercapitalized."

Doral disclosed in a regulatory filing Wednesday that its $5.9 billion-asset bank had received the downgrade from "significantly undercapitalized" less than two weeks after submitting its annual report to the Federal Reserve Bank of New York. The downgrade was included in a Tuesday notification from the Federal Deposit Insurance Corp.

The company was recently hit with a prompt corrective action, often considered one of the last public warnings before a bank goes into receivership. Doral acknowledged that failure was a possibility in a recent regulatory filing, and industry experts have also warned that the company is quickly running out of options.

Doral's problems go back nearly a decade, 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 Doral to claim it overpaid taxes. Doral's bank has lost nearly $950 million in the last seven years, according to FDIC call reports.

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

Doral won a legal victory in October when Puerto Rico's Court of First Instance ruled that the territory's government had to repay the funds over five years. But the government appealed that decision and Doral is still unable to count the money toward capital levels.