Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Doral Financial (NYSE:DRL)

Q1 2013 Earnings Call

May 09, 2013 10:00 am ET

Executives

Glen R. Wakeman - Chief Executive Officer, President, Director, Chief Executive Officer of Doral Bank, President of Doral Bank and Director of Doral Bank

Enrique R. Ubarri-Baragano - Chief Compliance of Doral Financial Corp, Executive Vice President of Doral Financial Corp and General Legal Counsel of Doral Financial Corp

Christopher C. Poulton - Executive Vice President of US Operations

Analysts

Gregory Greenberg

Brian Gonick

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Doral Financial Corporation First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host, President and CEO, Doral Financial Corporation, Glen Wakeman. Please go ahead, sir.

Glen R. Wakeman

Thank you, and thank you to everyone for joining us on the investor call this morning. Today, we will be reviewing the first quarter results, and during this morning's call, I will be referring to presentation materials which were released along with our 10-Q filing and earnings announcement. But before we begin, I would like to invite our General Counsel, Enrique Ubarri, to make some comments about compliance matters. Enrique?

Enrique R. Ubarri-Baragano

Thank you, Glen. This presentation today may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These include comments with respect to our objectives and strategies and the results of our operations on our business. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as expects, anticipates, intends, plans, believes, seeks and estimates or words of similar meaning or future or conditional verbs such as will, would, should, could or may. We intend this forward-looking statements to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act. Glen?

Glen R. Wakeman

Thank you, Enrique. The first quarter results indicate significant progress in both revenue growth and expense control. However, these improvements are being absorbed by credit costs associated with our -- those problem assets in Puerto Rico. During the first quarter, we isolated these volatile assets by establishing a special servicing operation, Doral Recovery. We want to remind our investors that although problem assets are our biggest challenge, they have largely hidden the performance of our core business, Doral Growth.

Slide 4 of the investor presentation illustrates the company's performance on a consolidated basis. Our asset substitution program continues to be effective and improved NIM during the quarter by 36 basis points to a robust 331. You may recall that our NIM was below 2% just over 2 years ago. During Q1, we succeeded in lowering our operating expenses and growing our pretax pre provision earnings. These improvements helped us to better absorb almost $90 million of credit provisions, concentrated largely in our newly established special servicer, Doral Recovery.

Now, Doral operates 2 divisions: A high-margin bank, for our purposes we've labeled Doral Growth; and a special servicing group in Puerto Rico labeled Doral Recovery. Doral Growth is a $6.4 billion operation consisting of our Puerto Rico-based mortgage bank and our U.S.-based commercial bank. In the first quarter, these units delivered over a 1% pretax return on assets. Doral Recovery, which was established at the beginning of this year, is a $2 billion special servicer. The protracted recession on the island impacted many of our borrowers and created the need for a dedicated unit. This is not simply a portfolio of nonperforming loans. On the contrary, a majority of these loans assigned to this group are performing. This portfolio consists of 4 types of assets. Restructured mortgages, also known as TDRs; defaulted mortgages defined as more than 180 days past due; all of our Puerto Rico commercial loans, which you might recall we've discontinued several years ago; and finally, our real estate-owned or OREO. Now, recovery of this portfolio requires individual loan-level attention. Virtually all of these assets are secured by real estate. Our goal is to maximize our cash recovery either through a repayment by the existing borrower or the use of other tools or means. We separated these assets to provide better monitoring and better execution but separation has another benefit. It also provides for more visibility into our core business, Doral Growth. Doral Growth generated a 1.2% pretax return on average assets in the first quarter. In Puerto Rico, we continue to be a leader in affordable fixed-rate mortgages, and this origination and servicing business continues to be a strong fee generator. You will note that our growing U.S. business is now fully 1/2 of our loan portfolio and is a significant driver in our NIM expansion. You'll also notice that it has de minimis problem assets or what we call nonperforming assets, roughly about 16 basis points on its entire book; and in addition, from a funding point of view, our retail deposits in the U.S. continue to grow and I'm pleased to report they have now crossed the $1 billion mark.

Now, switching to Doral Recovery on Page 7. For the quarter, Doral Recovery was a $27 million drag on earnings. While a majority of our loans are performing and many NPLs continue to make some payments, all of these assets require loan-level dedicated resources and tools to consistently recover more payments from more borrowers. These assets drive earnings volatility. The effects are best seen in our credit provisions. Our Asset Quality, Page 8, illustrates our credit provisions are made up of 2 components: One, payment performance; and two, changes in valuation. The chart on Page 8 illustrates the effects of both. Changes in valuation generally lead to charge-offs. This creates substantial marks versus unpaid balance, and in the bottom of the chart you can see, when combined with our existing allowance, this provides us with a 33% coverage against our NPLs.

Now, going forward, we will continue our asset substitution initiative which results in driving top-line growth. We'll also continue our focus on expense reduction in order to offset the credit costs we experienced in Doral Recovery. Separation of Doral Growth and Doral Recovery enables the special attention required to maximize cash recovery, but it also highlights the financial performance of our growth business which we hope will improve the overall valuation of our company's shares. Now, as you know, these shares are listed on the NYSE, and in order to comply with the listing requirements, we will be seeking approval for a reverse stock split. This matter will be voted on at our upcoming shareholder meeting as outlined in our proxy.

This concludes the end of our formal remarks. Thank you for your attention. We will now open the session for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Steve Davidwitz [ph] with Simons [ph].

Unknown Analyst

My question is for Glen, and at this point, I know it's the number one question of everyone I interact with, and probably on your minds as well. But if you could share with us your vision, your hope, your expectation that, on a consolidated basis, we have the good and the bad, the Growth and the Recovery, when you hope that we will see normal net income without, let's say, the help of DTA reversal?

Glen R. Wakeman

Well, I think that's a fair question and I think, as we look forward, the equation is can the earnings power where we've built and continue to build in Doral Growth offset the costs of the credits that we are, for lack of a better word, liquidating on the island. We came a lot closer to that this quarter. We think that the top line is sustainable. We think that the numbers that we put up in terms of NIM as well as fees are going to carry forward throughout the rest of this year. Our focus on cost control will also generate similar trends certainly stable to improving. The question on our minds is always the same, which is will we get some relief and stability from the economy on the island? Because, as you know, most of our assets are collateralized by real estate. We've seen the contraction of the economy reduce. However, it continues to be challenged, and I think that our target is to be able to cover our recovery expenses sometime during the course of this year; and I think that that'll depend on our ability to sustain top line and cost control trends, but most importantly, it will depend on how effective we are at cash recoveries and liquidating the assets that we have in Doral Recovery in a cost-effective way.

Operator

[Operator Instructions] The next question is from Greg Greenberg with Wells Fargo Advisors.

Gregory Greenberg

Yes, two questions. To make sure I read the color report correct, the holding company did put $25 million in new capital onto the bank. Is that right, for this quarter?

Glen R. Wakeman

Yes, right. That's correct, yes.

Gregory Greenberg

And then the second question had to do with nonexecutive Chairman. The press release, 8-K, said it's been 6 years since the major capitalization. So, why now? Are you just worried about Jamie Dimon? You were figuring -- you wanted to be beat him to the punch and separate it?

Glen R. Wakeman

Well, yes. Believe it or not, that's not a bad characterization. Currently, certainly, industry trends are moving in this direction. We believe, our Board, believe we should embrace those trends. So, instead of continuing with a Lead Independent Director, we've chosen to name a nonexecutive Chairman who I have been partners with for some years now and has vast experience, certainly, with our company and other financial institutions, and we think this is the best thing to do to serve our shareholders and other stakeholders.

Gregory Greenberg

Okay, and the back to the capital question. Either last quarter or the quarter before you had mentioned that it was very reasonable to be able to put at least I think $100 million from the hold co. down to the bank, so you're just down $25 million. How would you characterize that number now?

Glen R. Wakeman

I think it's pretty close to the same hundred and we would be in a position to move capital down as we needed to.

Operator

[Operator Instructions] The next question is from Brian Gonick with Senvest.

Brian Gonick

Your noninterest income in Doral Recovery was negative. Why is that?

Christopher C. Poulton

Brian, it's Chris Poulton, and I think as you know I have responsibility for Doral Recovery. There were a couple of things that run through that line that have to do with reversals of items and loans that aren't NIM-related, and so from time to time you'll have a couple of things like that. It, generally, isn't a particularly material number though.

Brian Gonick

Okay, so would you say it was unusual that it was negative?

Christopher C. Poulton

Generally, we would expect that number to be pretty close to zero. There isn't a lot of feed iteration in that space either.

Brian Gonick

Yes, and where does the gain on sale income show up? The mortgages you originate?

Glen R. Wakeman

Yes, that's in Doral Growth and that'll be on the noninterest income line, Brian.

Brian Gonick

And the noninterest expense in Doral recovery, of about $20 million, how much of that is REO expense?

Glen R. Wakeman

$2 million dollars.

Christopher C. Poulton

It's Chris again. This quarter I think it was about $2 million. You, generally, will see about 20% or so, 20%, 25% of the cost in Doral Recovery though related to credit cost whether it's foreclosure expense, OREO-related or various other holding costs.

Brian Gonick

Okay. So, is this $20 million a number kind of a normal number you think or is it going to be fluctuating up and down?

Christopher C. Poulton

I think you'll see some volatility in that number. Again, I think one of the things we've said is you do have some volatility in the numbers in Doral Recovery based on sort of the activity in Doral Recovery. In general, we are adding more resources to work these loans and so I would expect to see a slight increase in overall expenses there. Some of those resources though are being transferred out of our Doral Growth business, so I don't know that you'll see necessarily an uptick in overall expenses.

Brian Gonick

Okay, transferred from Growth, and so would you say -- if it's a volatility number, was the volatility high this quarter or low this quarter? Like is this $20 million -- where is that in the range of where you think it might be on a quarterly basis?

Christopher C. Poulton

I think it was pretty normal. I think it was pretty normal.

Brian Gonick

Okay, and as far as expenses related to compliance and what the regulators are requiring, how much of that in this quarter -- how much were you down, sequentially, from the prior quarter and where do you think we're going in that expense?

Christopher C. Poulton

We're down about 1/2 from the prior quarter, Brian, and we think we're seeing a declining trend. There's some base costs that we're going to continue with. For example, higher FDIC insurance expense and the cost of the organization, so forth, we've put in place. But in terms of the amount of expenditure against external advisers and the like, that we needed to employ to comply with the orders and so forth, we expect that to diminish.

Brian Gonick

So, can you quantify what the total was this quarter and what base level we might get to?

Christopher C. Poulton

Yes, if we don't have that handy, Brian, can we come back to you with that?

Brian Gonick

Yes, sure, that's fine.

Christopher C. Poulton

Okay, that's fine. I prefer to do that.

Operator

[Operator Instructions] We do have another question, It's coming from the line of Miriam Halez [ph], she's a private investor.

Unknown Shareholder

I would like to tell you that, as an investor, I'm quite disappointed to see the value of this going down compared to last year. Last year around this time, it was probably twice as much and the economy was not that great last year. This year, it's a little bit better and everything is improving. The banks are reporting good revenues and good money available to their investors and I feel -- I know that the management has changed and there are a lot of ways that you're trying to make things better but I feel that something needs to be done better and more efficiently. We should have been around at least $2, for this stock, this time of the year. So, why is it that even though you're trying to make things better than you're getting more provisions to write-off materials that are not so good and that are deemed to be poor, you're still lagging and we have to go through a reverse split which is usually not the greatest thing to happen, and people lose confidence when that happens. So, please let me know.

Glen R. Wakeman

Well, thank you for your comments and we share your disappointment, and our economy or a fair amount of our assets are struggling, unfortunately is not performing better, unlike the U.S. The U.S. economy has certainly helped us and has helped us generate substantial revenue improvement as well as overall profitability improvement. I think that we're going to continue to see challenges on the island for the foreseeable future and we'll continue to take the most prudent steps we can to manage those challenges. Unfortunately, in order to comply we will be requesting the reverse split. It should be noted that management has invested significantly in Doral, we believe in the prospects today, certainly going forward, and we hope to see -- as our performance improves, we hope to see that that reflected in our share price and reward investors like yourself for your patience.

Unknown Shareholder

Thank you.

Operator

[Operator Instructions] There are no questions in queue.

Glen R. Wakeman

Thank you very much for everyone's time and attention. We'll, look forward to an update, either at our annual meeting which is coming up in June or our next investor call. Thank you.

Operator

Ladies and gentlemen, this conference will be available for replay today, after 12:00 p.m. through June 9 at midnight. You may access the AT&T teleconference replay system at any time by dialing 1 (800) 475-6701 and entering the access code 293013. International participants, please dial (320) 365-3844. That does conclude our conference today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Doral Financial Management Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts