Doral Financial Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 5.13 | About: Doral Financial (DRL)

Doral Financial (NYSE:DRL)

Q3 2013 Earnings Call

November 05, 2013 2:00 pm 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

David E. Hooston - Chief Financial Officer and Executive Vice President

Christopher C. Poulton - Executive Vice President of US Operations

Analysts

Allan Young

Brian Gonick

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Doral Financial Corporation Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Glen Wakeman. Please go ahead.

Glen R. Wakeman

Thank you, and welcome, everyone, to our third quarter investor call. My name is Glen Wakeman. I'm President and Chief Executive Officer of Doral. Before we get started, I would like to ask our General Counsel, Enrique Ubarri, to comment on some important disclosure matters.

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 and 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, estimates or words of similar meaning or future or conditional words such as will, would, should, could or may. We intend these 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. This afternoon, I will be discussing our third quarter results. There is an investor deck that was made available. You can follow along with our commentary.

We continue to make progress on our transformation. Our headline loss of $7.5 million asks some important progress. In this quarter, we improved our earnings by $2 million quarter-over-quarter. Our NIM was up. Our costs were down, and our capital ratios remain compliant with our regulatory orders. We achieved almost $8 million in pretax, pre-credit provision income.

Now we foresee continued economic recession in Puerto Rico, and in order to prepare for that continuation, at the beginning of the year, we established a good bank/bad bank strategy. By separating the assets and operations in Puerto Rico from our mortgage bank, we have been better able to analyze and address our borrowers' needs on a loan-by-loan basis. We are seeing the most immediate benefit of those actions in our commercial portfolio where our nonperforming assets fell by another $20 million this quarter.

Our residential mortgage customers were impacted by higher utility prices and continuing wage pressures that took effect during the quarter, and the NPAs in that book were up.

Our U.S. operations continued to execute extremely well. Assets now approach $2.5 billion, and we continue to maintain a track record of minimal delinquency. Also, importantly, we continue to grow our U.S. deposit base. We have now reached $1.5 billion in retail deposits and expect to continue to see solid growth in the fourth quarter. The U.S. operations are essentially funding independent.

In Puerto Rico, our mortgage franchise is also contributing to our good bank. We continue to see softness in the mortgage market, and our production during the quarter reflected this environment. However, please remember that we sell almost all of our mortgage origination volume, and our gains on those sales continue to exceed a robust 300 basis points. Once again, our capital exceeds our regulatory requirements. So in summary, we are making progress building a good bank that can offset the costs of a bad bank.

Please go to page 4, and you can see the profile of our company. Doral Financial Corporation is an $8.6 billion bank holding company with operations in the United States and Puerto Rico. We've transformed Doral from a trading business into a more traditional community bank wherein commercial assets complement a mortgage franchise. But we operate in 2 geographies, and we believe that originating and selling affordable fixed-rate mortgages is a sustainable business enterprise in Puerto Rico and is, in fact, a key strength of Doral.

But given the continuing economic challenges on the island, we've chosen to build our commercial book in the U.S. Regarding capital, our Tier 1 leverage ratio remains above our regulatory requirements. We continue to hold excess capital in the holding company that can be pushed down if need be. We can also delever our balance sheet by selling lower-margin assets like securities. Some $150 million or so repo [ph] matures in the first quarter of next year, and this gives us some runway to execute our strategy of building a good bank that offsets the cost of a bad bank.

Our book value per share is over $66. We trade at a substantial discount to book value. The discount's understandable. We have a large pool of legacy assets that needs special attention. There also is significant drag on earnings. We will continue to reduce this drag in order to increase our market cap, and that is our focus. These assets cloud and overwhelm an underlying good bank.

We've depicted the split between good bank and bad bank, which we call Recovery on page 5 of the Investor deck. Now separating the operations has enabled us to develop unique strategies and plans for each unit. Our mortgage bank continues to build on its historical strengths. It is a profitable enterprise that can be further simplified and improved. For example, we do expect some branch reduction as we consolidate our operations.

As noted, our U.S. operations fuel our growth. Our bad bank, we call Doral Recovery, and this unit manages our discontinued, restructured and nonperforming assets on the island. It is a special servicer separate from our mortgage banking operations.

Our recovery assets are essentially collateralized by real estate in Puerto Rico. Special servicing doesn't necessarily mean that all of the loans are bad. As a reminder, more than 60% of our loans are performing in this book.

Our focus is on establishing and maintaining payments, improving our collateral position and optimizing our cost to collect. Today, we have over 200 dedicated resources deployed at the asset level. The solutions they provide include restructures, forbearance, short sales, foreclosures or deed in lieu. Strategies are customized to the needs of each borrower and concentrate on maximizing the recovery of our principal.

We have some foresight about the prospects for the island's economy. That is why, in 2008, we began to rebuild our U.S. mainland business and reposition our portfolio. Our profile is changing, as we continue to reduce our exposure to the island, and migrate our assets to the U.S. As of today, over 40% of our loans and almost half of our retail deposits are now based in the U.S.

Now Dave Hooston, our CFO, will drill down on our third quarter results.

David E. Hooston

Thank you, Glen. The net loss of $7.5 million for the quarter, the $2.5 million -- $2.9 million improvement from the second quarter was the result of higher net interest income, non-interest income, as well as lower non-interest expenses, which were offset by slightly higher credit costs. Net interest income for the quarter of $57.6 million compared favorably to the previous quarter's $56.7 million, which was pre-adjusted for some adjustments to over capitalized interest. Accordingly, our NIM improved to 303 basis points for the quarter from 300 basis points in the prior quarter, pre-adjusted for those reversals.

Noninterest income also improved, increasing $1.9 million from the prior quarter to $18.7 million from $16.8 million in the second quarter. While the previous quarter saw a significant negative impact from the decline in fair value assets associated with end of June increases in interest rates associated with anticipated Fed tapering, those assets have recovered modestly in value as rates and expectations of higher rates have moderated. However, we did see a decrease in mortgage loans originated for sale on the quarter with production declining nearly 30% to $136 million in the third quarter from $193 million in the second quarter.

Noninterest expense declined $5.4 million to $68.4 million. This decline was driven by lower consulting expenses and a $3.4 million benefit recorded from reimbursed -- recorded related to reimbursements due from the Commonwealth for the low-income loan origination programs.

For the quarter, our provision for credit losses totaled $16.4 million, mostly driven by asset valuation adjustments. The prior quarter's $5.5 million was net of a $4.6 million credit to correct an over accrual of interest income on modified loans.

For Doral Growth, on Slide 7, our pretax income for the quarter of $12 million improved $2 million from the prior quarter. The improvement was principally driven by lower non-interest expense, which was offset by higher credit provisions. Net interest margin was a healthy 325 basis points and is consistent with the second quarter. Non-interest income of $18.7 million was slightly higher than the second quarter. Again, the second quarter reflected approximately $5 million of losses on fair value assets, which values improved during the third quarter. Non-interest expense of $65.7 million reflects the $3.4 million benefit of the Puerto Rico housing credit I discussed earlier.

The credit provision for Doral Growth was $3.2 million as compared to $0.5 million in the prior quarter. Doral Growth provisions were mainly related to Puerto Rico residential loans. Lastly, on this page, we would like to note the Doral Growth loan portfolios Glen had mentioned earlier is comprised 54% of high credit quality commercial loans in the United States; and Doral Growth, our good bank, in total, represents 74% of our total loan portfolio.

Doral Recovery reported a pretax loss for the quarter of $20.5 million, a slight improvement over the $22.2 million loss reported for the second quarter. While net interest income improved $8.6 million -- I'm sorry $6.2 million from $10.6 million, the third quarter, the improvement reflects the improvement related to the interest reversals on modified loans in the second quarter. Not sure I said that very well, but you can ask me a question on it later. Non-interest income and non-interest expense for the quarter were also relatively unchanged. The provision for credit losses of $13.2 million, the majority of the $16.4 million for the quarter increased by $8.3 million from the prior quarter principally due to lower provisions related to the adjustment for the second quarter, again related to modified loans. This is becoming a repeat offense, isn't it? The net interest in provision for the quarter on a post-adjusted basis reflects the valuation adjustment on collateral dependent loans I discussed earlier.

Glen talked about our improvement in nonperforming loans. The commercial portfolio continues to show strong improvement with a $17.2 million increase -- or decrease in commercial credits, offset by a $21 million increase in residential for a $4 million increase overall in NPLs. This was offset by a positive impact on OREO. OREO in total went down by $6.3 million for the quarter showing a quarter-over-quarter decrease in nonperforming assets of $2.2 million.

Also, we'd like to point out our nonperforming loan adjusted coverage ratio. This is important in that the portfolio of loans on the books of -- related to Puerto Rico, both on the Growth portfolio and on the Recovery portfolio, are legacy assets. It's essentially not been added to -- in over 4 years. And with respect to those credits, not only do we provide for provisions on the balance sheet for loan losses that have not yet been recognized, but they also represent the net of charge-offs previously taken.

With the benefit of charge-offs previously taken, plus the ALLL at September 30, we have a coverage ratio on our nonperforming loans of nearly 35%. I think that helps to explain our ongoing adherence to monitoring our credit quality. Glen?

Glen R. Wakeman

Thanks, Dave. So in summary, we continue to make progress in transforming our company. Earnings improved. Doral Growth delivered a $5 million profit increase from Q2. The U.S. continues to deliver high-quality growth, and Doral Recovery is helping to stabilize nonperforming assets.

There is more opportunity ahead as we reprice $500 million of liabilities over the next 6 months. We expect that to translate into lifts in our NIM. Now despite this progress, we remain quite concerned about the island's prospects and the risks it poses to our island-based operations.

We expect the current environment will be met with more stakeholder scrutiny across the board. We have our asset quality and earnings power challenges to be sure, and we remain steadfast in addressing these issues. We will keep you updated on our progress as we seek to build a good bank that more than offsets the cost of a bad one.

Thank you for your attention, and we will now be pleased to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We have a question from the line of Allan Young with Raging Capital Management.

Allan Young

Could you just -- we focused on the coverage ratio of 35% of NPLs? Could you just give me some color as to why you feel that's an adequate amount?

Glen R. Wakeman

Sure, Dave will take that question.

David E. Hooston

Sure, that's a good question. And one never knows whether one has enough reserves. Of course, those are always estimates, and we are in a challenging economy here in Puerto Rico. The point of the coverage ratio, however, is to show on the face of an ALLL relative to the allowance, you'd look at that ratio, and it's approximately 1.8%. But if you add the previously charged-off amounts to that ALLL, which have already been charged down on the unpaid principal balance to reflect the recorded investment that you see on the balance sheet, that shows a nearly 35% coverage ratio. So it's an enhancement viewed for the amount of reserves and valuation scrutiny that we've given to the assets that are on the books.

Glen R. Wakeman

So the way we approach our provisions is they're policy and model driven, and we have, as you can see in our Q, disclosed by asset class how we develop those methodologies. And as you know, we are a, principally, a collateral-based lender here in Puerto Rico, and we have very specific policies on asset valuations, appraisals and so forth. We revalue appraisals at noted points in time, mostly on or about 12 months for resi, on or about 18 months for commercial. And we've revalued north of $1 billion of assets just this year alone. So for all of the indications that we have, both from model point of view, policy point of view and evaluations point of view, we think we've incorporated everything into these numbers.

Allan Young

No, I understand that, and I think your disclosures are very helpful. I guess, what I'm getting at is the implication is that if you make a loan and for some reason, it goes bad, you ultimately take possession of the collateral and you will sell it, and there will be a 35% severity ratio, if you will, that will be the hit. Ultimately, that would require you to liquidate the asset in the market, and that would be, say, residential. You're selling homes. Is there -- are there transactions in the marketplace, that are sufficient to give you confidence in that number? How do you arrive at that?

Christopher C. Poulton

This is Chris Poulton. I have responsibility for Doral Recovery. I can perhaps answer some of that. I think the way to take a look at this is one is perhaps unlike what you would expect to see in the U.S. market, sometimes. The most logical outcome of a nonperforming loans is not necessarily to take it through the protracted foreclosure process, take that back and sell it. What we generally find is that the most likely outcome of one of these loans is to restructure the loan with the borrower at generally a slightly lower monthly payment but a monthly payment that the borrower can afford. In all cases, in almost all cases, when that's true, we're receiving much more than 1/3 than [ph] 65% of the unpaid principal balance we're generally receiving much better than that. I think severities with regard to when you do take an asset back, do generally depend on the type of loan, et cetera. We see anywhere generally from about a 20% reduction up to about 40% or so. But again, you see that in the coverage ratios as well where our commercial average ratio is up to about 40%. In terms of -- one of the ways that we show this though and by showing UPB, et cetera, is one of the questions we do receive sometimes is if you take a look at bulk sales in the market and try to compare those prices, what would you calculate? By giving you the UPB, as well as the recorded value and the allowance it allows you to compare end-market transactions to do your own math on that.

Allan Young

Bulk sales have been in the, what, 40% to 50% on the dollar, something like that?

Christopher C. Poulton

I think that's about right.

Allan Young

Right, okay. And can you just comment on the investment security portfolio? Any exposure to Puerto Rico, whether it's in municipal securities or perhaps some structured finance securities with residential exposure, just any exposure to the island at all at this point? Can you quantify that?

Glen R. Wakeman

Sure. It's about $5 million, and it should be expiring within the next 6 months or so.

Allan Young

That's it, in the portfolio?

Glen R. Wakeman

That's it. Yes, we took some choices about 3 years ago to start to minimize our exposure. And so as of today, we sit with a little bit, on or about $5 million.

Allan Young

Okay. And lastly, I know it's a tough question to answer, but given all the news about the macro situation in Puerto Rico, how do you expect it to affect the particular borrowers that you target as you go forward? What are some of the indicators you look to? And how are they trending? And what impacts ultimately do you expect?

Glen R. Wakeman

Well, we think that there are different impacts by asset class, and we believe that the island is not headed for a shock. It's headed for a protracted decline. And I think that's what we've been saying for some years. As a consequence of that, we decided to eliminate construction lending early '07, commercial lending '08 and tightened all our underwriting for resi '09, and frankly, over the last couple of years, we do nothing but affordable fixed-rate resi, which is most of our book. And most of what we originate, north of 95% of what we originate, we actually sell into GSE pools. So the way we think about the island is we expect it to be smaller for the medium term. We don't expect a shock. And the asset classes that we've selected to be active in are really affordable fixed-rate residential mortgages. Our borrowers average on or about $100,000. Our borrowers' monthly payments are on or about $600. And we think that is a sustainable asset class to be in. And that's essentially what we're doing. We think that the worries around the market are largely going to be met with policies that are ultimately recessive, recessive from the point of view of reduced spending or more to our worry, recessive from the point of view of reducing disposable income. That disposable income reduction will affect our borrowers, certainly not to the magnitude of borrowers with large exposures, but certainly, in our asset class, we would expect to see higher utility prices and so forth crimping some of their ability to make their monthly payments. One of the things that gives us some hope, I would say, and one of the other reasons why they did pick this asset class is that for all intents and purposes, there is not a rental market for homes in Puerto Rico for affordable borrowers, certainly, perhaps for vacation homes but not for our customer base. And as a consequence, our borrowers do try to find ways of making a monthly payment that will enable them to keep them in their homes. We prefer that our borrowers stay in their homes even at a reduced payment because it helps us with upkeep, property taxes and overall collateral values and the like. So it's kind of a long answer, but the way we think about it is we see a recession. We don't see shock. We have minimized the exposure to what we believe are riskier asset classes that we'd like to be in and focus on the asset class that we think is sustainable. Instead of doing commercial lending here in Puerto Rico, we've chosen to develop and build commercial lending operations on the mainland, which now tops some $2.5 billion and generates a substantial earnings stream for us. As an offset to what we expect to see as a smaller economy, a smaller marketplace and overall, a smaller population. So there's an equation here. Can we get the U.S. profit plus the mortgage bank profits to offset the costs of the orderly remediation of these assets that we don't want to be in?

Operator

Our next question comes from the line of Brian Gonick with Senvest.

Brian Gonick

Can you quantify what the interest expense savings will be on the $500 million of liabilities that rolls off, the 2.6% cost?

Glen R. Wakeman

Yes, on or about next year, Brian, we would expect somewhere between $12 million and $20 million.

Brian Gonick

That's -- is that like a net saving, meaning are there assets you're going to also kind of roll off as well? So, is this gross number, or a net number?

Glen R. Wakeman

That's a gross number. So we would expect -- throughout the -- that's an annualized number, I think, and basically, the way we think about that is we're going to have timing matters and so forth. So perhaps full-year is somewhere around $5 million pickup. But in terms of the total benefit, we would expect to pick up a pretty substantial repricing benefit on these assets -- on these liabilities rather.

Brian Gonick

So the run rate savings are $12 million to $20 million?

Glen R. Wakeman

Yes, basically.

Brian Gonick

Okay. And would you also, by having these liabilities either roll off or just reprice and replace with other liabilities, will you let assets run off as well? That is will we lose some interest income?

Glen R. Wakeman

We would expect to lose some assets that will have liabilities that expire like our securities portfolio. We expect to be a little bit slimmer. And we would expect, yes, that we would see some assets that have, notably U.S. assets, that have attractive yields that are no longer attractive to replace and will put pressure on our NIM. We would expect some of those to run off as well. Basically, what we see is we see liquidation of assets on the island through repayments, charge-offs, refinancings, and we see some assets that were attractive at one point with higher yields having lower yields like, for example, our taxi medallion portfolio, over the medium term may be less attractive to us, and therefore, we may run those off.

Brian Gonick

So what do you think the interest income would be that you would lose associated with the assets that will run off or liquidate or what have you?

Glen R. Wakeman

Well, my 5 number would be net of all that.

Brian Gonick

Okay, that's a net number then.

Glen R. Wakeman

Yes, basically.

Operator

And our next question comes from the line of Todd Hagerman with Sterne Agee.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Just a few questions. First, Glen and Dave, on the exposure to Puerto Rico, if you will, you mentioned the securities portfolio. I'm just wondering on the other piece in terms of credit, either direct or indirect, what that exposure might be as well.

Glen R. Wakeman

0.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Okay. And then, Glen, you mentioned in terms of the improvement on the commercial side, the $20 million dollars, I'm just curious given the corporate tax rate reset in July, the outlook that you have for the economy, what are you seeing in terms of, with the immediate hit that the corporates are taking right now and your view of the economy. What's kind of the initial read on -- notably, like small business at this point in time?

Glen R. Wakeman

Our small -- we have very small book of small business customers, about 2,500 in total, I think something sub $200 million. Most of -- virtually all of our small business customers are in our recovery book and you can look at the split and see that about 60 are performing and 40 are not. We would expect that performance to continue because they're collateralized businesses. So these are businesses that are essentially owner-practitioner office space, that kind of thing.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Okay, that's helpful. And then on the -- you mentioned -- in terms of the mortgage and the originate and sell model, very healthy margins as you'd mentioned. Your U.S. peers, if you will, have been getting hit pretty hard on that -- in that regard, notably in terms of like the guarantee fees going up and so forth. Can you kind of give us a better sense of kind of what's behind that, kind of healthy margin and sustainability going forward?

Glen R. Wakeman

Yes, there are -- the fundamentals of the island are a little bit different in terms of mortgage dynamics than U.S. There are couple of fundamentals that are true. One is closing costs are still important components of the sales process on the island, whereas most of those are waived in the U.S. Second is the residential mortgages on the island are virtually all fixed rate, either 15 or mostly 30 year, and they're mostly Fannie, Freddie, FHA type of product. The third component is that the longevity of the mortgages are pretty significant, and the longevity of the mortgages on the island are running somewhere around 7 years or north of 7 years, and you see a shorter cycle on the U.S. Our book is dominated by FHA/VA type of mortgage, which by definition, by nature, are higher margin and more attractive to investor pools. So that's essentially where we're getting the gain from.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Okay, so that being said, which all is -- very much make sense. So you're pretty comfortable that these margins should remain relatively steady, at least in the near term, anyway.

Glen R. Wakeman

Yes, we think so.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Okay. And then finally, I just wanted to ask you a question on capital. You mentioned some of the optionality that you have in the balance sheet. Again, given the backdrop of your view of the economy, and the different options, how should we think about kind of the balance sheet, at least near term in terms of, do we -- is there further deleveraging? Is it kind of status quo? I'm just trying to get a sense of how I should think about earning asset levels in the balance sheet at least over the next 6, 12 months given the economy.

Glen R. Wakeman

Yes, I would tell you 3 things. Two of which are practical. The third remains to be seen. The 2 that are practical is, low-margin assets like securities and the like, we'd to likely simply run off the book, and you could see the maturities and the sizes and so forth in the Q. The second is that we are reducing our credit exposure to Puerto Rico. So we are seeing a smaller resi market. We originate for sale anyway, so we're not putting things on book, and we are going to continue to see paydowns, and you could see liquidation curves of -- liquidations of our total loans in Puerto Rico in the Q for both resi and for our commercial book that's a stated strategy to reduce our exposure to the island overall. The third component is that it remains to be seen. We do carry excess capital in the holding company that we would utilize if we needed to. We would delever if, in fact, we needed to delever, and a lot of that depends on what we see happening in terms of the credit quality and the continued challenges that we have in credit quality on the island. So I would say, step one would be we take a look at assets that we wanted to expire. Step two is the liquidating assets in ordinary course on the island; and then step three, would be some other choices. What I can assure you is the company won't get bigger from an asset point of view. We really don't envision that. We see the company getting smaller, more -- much more likely outcome than the company getting bigger.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Right, I know, that makes sense. Yes, I mean, part of the question was -- was related to you guys have been very much more focused in terms of workout as opposed to bulk sales, and I was just trying to get the sense if that was kind of the status quo and if that would affect the balance sheet natural delevering in any particular way, either near term or long term.

Glen R. Wakeman

Yes, I think the way we think about it is -- it's a fair question. I think we think about it being capital effective. Like we reduced $50 million of commercial NPLs in the second quarter for 0 capital hit, right? We just worked it out ordinary course. We -- that's the way we think about it. To the degree there would be sales that made sense, we'd look at those. But right now we seem to be more -- much more capital efficient, if you will, by working the loans one at a time. And until and unless something in our market changes, that would be our approach.

Operator

And we have a question from Mary Halead [ph], private investor.

Unknown Attendee

I wanted to make a comment. I wanted to thank you for helping women entrepreneurs, and I'm really happy, at least, even though you're dealing with a lot of problems, you're helping the segment of the population that is most of the time ignored. And I'm surprised that by the all the help that you're giving to the community, no one really mentioned that. Every now and then you go to Yahoo Finance and you find an article about you doing that, and I'm really surprised, and I have to give you credit for that. This is great.

Glen R. Wakeman

Thank you very much.

Unknown Attendee

You're welcome. But also, I wanted to get an idea of what else Doral should do to make things better for the investor? I hear that you have a lot of people working for you. I mean, like the number of people who work for Doral is large. And if you look at all the banks, almost -- JPMorgan, Bank of America, I mean those are just giants. They are all trying to get leaner, and as soon as their mortgage departments are not performing, they say, all right, we are going to just let go of 3,000 people, or 2,000 people because we have to perform and have a good business. So why is it that Doral is not taking that direction? As much as I hate people to lose their jobs and not having anything to offer to their families, I look at the big picture of what your bank is going to do and what the investors are going to basically get out of investing in your company.

Glen R. Wakeman

We understand your question. And let me make that -- and let me addresses it 2 ways. First by thanking you for acknowledging our work in the community. Let me explain the business rationale for that. We see community programs as strategic and specifically as an alternative to investing ad dollars. We try to find programs that form an intersection between our employees, our customers and our shareholders. And in fact, on the island of Puerto Rico, more than 2/3 of the credit decisions or banking decisions for households are made by women, and so we decided to create a mentoring program and invest in helping entrepreneurs build their businesses with a means of really giving back to our community but doing it -- doing so on a wise basis, which would encourage our borrowers and depositors to remain loyal, our customers across the board to remain loyal and also, as a lower-cost means of building our brand. The return for these programs is almost 10:1, so every $1 we put in to committee programs, we get an equivalent of $10 of media coverage and the like. And so this has helped us. Having said that, we're pretty cost conscious about how we do it. And in fact, we have reduced our workforce this year by over 10% on the island. We've done it quietly through normal attrition. We simply aren't replacing roles. It's a much more cost effective way to do it because this is a very high-cost exit labor market. We have closed several branches. We intend to close more, and we intend to take those employees that choose to go on their way and take those employees that would prefer to stay and replace other employees that might have left in key areas of the company where we need some strengthening. The 2 areas of the company, we're in Puerto Rico we think we continue to need to strengthen is our originations for our mortgage and our delinquency management for our portfolio. So to the degree that we can downsize our company in a cost-effective way while at the same time, finding solutions for our employees that can strengthen our originations function and our default management function, we tend to do both. So I think -- if you think about our reactions to the recession, it's been very thoughtful both from a strategic point of view and a brand-building point of view but also from the point of view of reducing our workforce.

Unknown Attendee

That's great. I'm glad that you're taking those steps. And I hope things go well for you because I feel you have a great business to start off with, but because of the financial situations or whatnot, things have not gone the way they should go or they should have gone. And the business in the U.S. is doing well. The more is taken from that area, maybe to the U.S., probably is going to be the way to go. And I am not into banking, but I do have a business, and I work a lot with people that are in business, and I know there are times that you have to bite the bullet and say this is the way we are going to do it and this is how we are going to do it. I know in the process, people are going to get hurt, but this is life. This is how it goes. And I hate to be like that, but that's how it goes. And I wish you the best, and I hope by the next year or so, at least, all the people who have invested in your company can realize some of the losses that they've gone through. I hope they all get back to the point where -- and make some money off of the investment that they made because your bank used to be a huge bank and used to have really good potential and offered a lot of incentives for people to invest in it, and since the financial crisis, seems like things have not -- they've gotten better. Don't get me wrong. But they need to get to see more. And as an investor, I'm really -- I am really, really curious to see what you guys are going to do.

Operator

There are no questions in the queue at this time. Please continue.

Glen R. Wakeman

So we appreciate everybody's attention. We'll continue to focus on the issues that we've put forward, and we hope to continue to do the work of creating value, and we'll be looking forward to an update at the end of the year. Thank you very much for your time and attention.

Operator

Thank you, ladies and gentlemen. This conference will be available for replay after 4 p.m. Eastern today through December 5, 2013, 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 306281. International participants can dial (320) 365-3844 with access code 306281. That does conclude our conference for today. We thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.

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