Capital One Financial Corp (COF) 2002 Q3 法說會逐字稿

Good day, and welcome to the GreenPoint Financial Corporation conference call. This call is being recorded. As a reminder, there will be a rebroadcast of today's conference available one hour after its completion running through 5:00 p.m. Eastern Time on October 21st. You may access this rebroadcast by dialing 888-562-4922 for US callers or 402-530-7679 for international callers. Our speaker today is Jeffery R. Leeds, Executive Vice President and Chief Financial Officer who will be discussing the company's third quarter earnings results. A question and answer session will follow the formal remarks. Instructions for Q&A will be provided at that time. At this time for opening remarks, I would like to turn the call over to Mr. Leeds. Please go ahead, Sir.

Thank you operator and good morning everyone. Thanks for joining us on today's call to discuss GreenPoint's third quarter results. I would like to refer you to the cautionary language at the end of the press release regarding forward-looking statements. GreenPoint claims the Safe Harbor protection contained in the law for forward-looking statements. Any forward-looking statements made today should be considered in the context of the cautionary language included in our press release. GreenPoint had an outstanding quarter and we're very pleased to report record earnings of $1.41 per share in our continuing operation. These earnings were 15 percent above the second quarter of 2001 and 4 percent ahead of the prior period. Results in our manufactured housing business matched our operating plan and accordingly, we reported no net income from discontinued operations. The turn on average equity and return on average assets at 27.3 percent and 2.38 percent respectively, remain very high. Both these measures rank GreenPoint at or very near the top of the rankings of large banks and thrifts. The quarter had several highlights. A friendly rate environment for mortgage origination and continued successful expansion of our mortgage business led to a 38 percent gain in production compared with the second quarter and a substantial increase in the end of quarter pipeline. Performance in our consumer bank maintained the strong momentum established in the first half of this year. Credit quality in our mortgage portfolio remained very strong and showed no deterioration. Non-performing loans in the portfolio declined and charge offs continued extremely low. Let me take you through some of the details of this morning's release. GreenPoint Mortgage originated a record $9.7 billion of loans in the third quarter, up 38 percent from the previous three months and 43 percent from a year ago. As important, application volume was up 36 percent quarter-over-quarter in response to a favorable market environment and strong execution in the business. Accordingly, our pipeline grew from 7 billion at the end of June to almost 9.5 billion on September 30th. Moreover, loan held for sales stood at a record 6.3 billion all of which signals strength going forward. Our overall sales margin was stable at 140 basis points in the [later] three months. The margins on specialty products at 286 basis points were off only slightly from the 295 in the preceding six months. We believe these specialty margins remain tops in the industry. Margins on agency and jumbo sale also stabilized at 59 basis points. During the quarter, GreenPoint mortgage developed an important new source of liquidity for its home equity lines of credit. It sold 553 million of these loans to a new investor as whole loans. Importantly, these whole loan sales transfer all credit and prepayment risks to the investor. Our consumer bank maintained its momentum during the recent quarter. Core deposits grew 5 percent and are up 27 percent since the beginning of the year. Core deposit growth did slow to a more sustainable pace in the third quarter, as we lowered the rate on incredible checking and reduced promotional advertising of that account. However, we opened more traditional checking accounts last quarter than in the prior three months. Overall, we achieved net deposit growth during the quarter, which has continued in October despite intensified competition. Our Denoval branch expansion is on track. The first new branch in the program opened last month in Middle Village Queens and so far 10 leases have been signed, three in Queens, two each in Manhattan and Staten Island and one each in the Bronx, Nassau and Suffolk County. Our entry into small business banking is on schedule and exceeding our expectation. All of our branches are offering our business-banking products and so far we have opened about 2,800 business accounts with balances of $45 million. Turning to balance sheet management and asset quality, net interest income was unchanged relative to the second quarter, an increase of 1.1 billion in average earning asset was offset by a 21 basis points narrower net interest margin. The increase in average earning asset was driven by 1.2 billion increase in loans held for sale, reflecting higher levels of mortgage banking activity. Unprecedented refinance activity reduced yields on all categories of earnings asset, which were partly offset by declining funding block. The higher proportion of relatively lower yielding loans held for sale and the asset mix also contributed to the narrower net interest margin. The declining net interest margin reflects our conscious strategy of maintaining an asset sensitive balance sheet. The same lower interest rate environment that drives high refinance activity also leads to greater volumes of new mortgage origination and higher mortgage banking revenue. As the run rate rise, improving net interest margins resulting from asset sensitivity will mitigate the effects of lower banking revenues. We believe over time, the complementary relationship between our balance sheet position and the mortgage origination business provides smoother revenue and income growth. With respect to asset quality, we remain extremely pleased with the performance of our residential mortgage portfolio. This quarter, we've expanded our presentation of non-performing loan data by separating NPL held for sale and held for investment. Non-performing loans held for investment have declined over the past several quarters. A total of $154 million at September 30th, down from 155 million last quarter and 172 million at December 31st 2001. Only losses from non-performing loans held for investment are charged against the allowance for loan losses. Charge-offs in the third quarter were $500,000 and represented a mere 2 basis points annualized of average loan. Non-performing loans held for sale are predominantly loans we've repurchased from investors. They are taken back on average about a year after their initial sale and the increasing dollar amounts have risen roughly in proportion with our overall sales volumes. When the loans are repurchased, they are brought back at the lower of cost or fair market value. Some loans will cure, i.e., return to performing status in which case they will be sold again. Others will be sold at discounts reflecting their non-current status and some will be foreclosed. Any losses recognized, either when the loans are repurchased or when they're ultimately disposed off, are not charged against the loan loss allowance rather GreenPoint maintains a separate valuation reserve against which losses -- losses from repurchases are taken. The reserves stood at $25 million at September 30th up from $21 million at June 30th. In view of the recent developments in the manufactured housing industry, I would like to take a few moments to comment on recent developments in our discontinued business. In announcing our decision to exit manufactured housing lending on January 3rd, we told you of our intent to, one, eliminate any [on] balance sheet exposure to the industry and, two, create liabilities that conservatively reflect the potential for losses in our securitized portfolio thereby, effectively eliminating future exposure to loss. As we reported in August, the final $110 million of manufactured housing loans were sold from our balance sheet removing all remaining MH exposure. Through the first nine months following the discontinuation of our lending operations, both repossession activity and loss severity have been significantly better than we assumed. However, recent developments in the MH industry suggest that additional pressures may arise in the resale market for manufactured housing units. Accordingly, despite the better than expected portfolio performance, we are retaining our conservative loss assumptions. Moreover, we have pursued an aggressive liquidation strategy that has resulted in a 71 percent reduction in our inventory of repossessed units. The combination of lower repossession inventory and better default in severity performance increases our confidence that our life of loan loss assumptions will withstand any incremental market pressures. This morning during the release, noted a preliminary agreement to restructure the credit enhancement and servicing arrangements with one of our surety provider. The restructuring gives rise to accounting costs and benefits to GreenPoint. All have been fully reflected in the third quarter result along with the better than expected performance of the securitized portfolio. In total, they had no impact on earnings from discontinued operations. And more importantly, the remaining exposure to losses at $293 million is exactly where it was at the end of 2001 and at the end of the second quarter. In summary, we are very pleased with our third quarter results. The persistence of low interest rates makes it virtually certain, GreenPoint mortgage will achieve record loan origination and record earnings for the year. In an increasingly competitive local marketplace, our consumer bankers have captured record growth in core deposits and new accounts while lowering overall funding costs. Also consistent with low interest rates, our net interest margin has contracted, but it remains among the highest in the thrift industry. As and when interest rates stabilize and begin to rise, we're well positioned to see the margins improve. Our business mix continues to produce extraordinary profitability. As market conditions have changed over the year, return on average equity has remained steadily in excess of 27 percent. Given the outstanding credit quality of our residential mortgage portfolio and our confidence that manufactured housing risks are behind us, we can maintain capital levels commensurate with the risk we take while buying back significant amounts of stock. All of us at GreenPoint look forward to building further on the performance we have already achieved this year and with that I'd like to turn the session over to the operator who will take your questions. Operator.

Thank you. At this time, we're ready to begin the question and answer session of the call. If you would like to ask a question, please press "*" "1" you will be announced prior to asking your question. To withdraw your question you may press "*" "2." Once again to ask a question, please press "*" "1." Our first question comes from Bruce Harting of Lehman Brothers.

Yes. Hey, how's it going? On -- you know, just a question on, you know, the deposits and, you know, all the branch openings and banks moving into the city and your own, you know, new deposit branch roll outs. Can you address that issue, and you did have a little bit of deposit growth in the quarter but, you know, not really spending much on the marketing line, advertising. Just wondering, you know, kind of, you know, holistically, what's the strategy with regard to that going forward? How aggressive do you want to be in the New York City market and also just relative cost of funds between incremental deposit gathering and Federal Home Loan Banks? I see, how they, you know, been increasing the, you know, bank advances, and my guess is that's a very attractive source of funds right now? What's that costing you? Thanks.

Bruce, with respect to our approach to the New York market, we have consistently competed effectively with all of our competitors in the marketplace and we think we continue to do that. We inaugurated the incredible interest checking promotion in the first quarter of this year, and we feel it's been extremely successful and has put a substantial volume of deposits on the books. During the quarter, we stepped back a bit in terms of the rate we're paying on those deposits and also on the promotional advertising. And while the new account activity has [slowen] down, it has by no means stopped. We continue to open new accounts and retain the ones we have even as our competitors are presently offering rates somewhat higher than the ones we are. I think, as important or more importantly, as I mentioned earlier, we continue to open traditional checking accounts at a very strong pace. We opened 28,000 accounts in the third quarter versus 27,000 in the second, and of course, that is a much more efficient funding and, probably, in the long run more stable funding as well. I think our approach to promotion and for that matter to pricing will be one in which it will vary potentially from quarter to quarter where we promote heavily in a quarter and then step back. Likewise, I think we will be at but not necessarily at the top of the market when it comes to pricing, as has always been the case. With respect to the increase in home loan bank advances that you mentioned, home loan bank is a very efficient source of funding and in fact, I think I have commented in these meetings previously that the funding there has throughout most of this year been more attractive than retail CDs. However, the growth that you see in the third quarter, I think, relates principally to the very large long warehouse that we carried at the end of the quarter and that of course will tend to go up and down as mortgage banking activity goes up and down, and we think, that the Home Loan Bank and Federal funds and so forth are more efficient financing source for that more temporary asset buildup.

Gary Gordon of UBS, you may ask your question.

Okay. Thanks. Two questions, first, considering the huge supply of loan origination, I was a little surprised to see the loan sale profit margins go down at all, may be you could review you know, what the explanation for that is? And then two, you have to be the only thrift in United States whose servicing assets actually went up this quarter, maybe you talk a little about impairments activity if at all, and are you growing servicing is there any particular reason or is it an anomaly?

What was the last part of that Gary?

Are you growing servicing, is there some -- is this signaling that there is some growth of the servicing business or is it just an anomaly?

Let me take the second question first. In terms of servicing, we did have net growth in the servicing asset. Our impairment in the quarter was very minor. On a pre-tax basis, it was about $3.5 million and given the market for servicing, we have perhaps not sold as much of it as we have in the past. I would emphasize, however, that there has been no change in our strategic approach to the servicing business. It is definitively an adjunct to our origination business. We do it, when it makes sense; we continue to sell a majority of our loans servicing lease, and I don't think any of that will change. With regard to the margins on the gains, I guess, my characterization would be slightly different than yours. I think within the realm of, you know, 5 or 10 basis points in one direction and another, I wouldn't characterize those margins as having been down, they just were not up. There was a considerable volatility in the market and that has caused spreads to gyrate a little bit. I think, I view the quarter as essentially being the same as last quarter where there was also considerable volume delivered into the market.

Okay. Thanks.

Kevin Timmons of CL King Associates. You may ask your question.

Thanks. Could you give us a little bit of color on the geography behind the NoDoc originations? And also, how asset quality is varying? Geographically speaking, are there any areas of weakness or strength?

I think the majority of our traditional NoDoc products continues to come from New York, although, the product is in fact offered throughout the network. And as has is always been the case, it tends to center in urban areas particularly where there are a lot of comps and a lot of individuals that have need for that particular variant of the product. We don't break it out separately anymore, and in fact it represents a significant but not overly large proportion of our overall specialty mortgage origination. With respect to the loan performance in our portfolio, portfolio today represents about 40 percent in New York, about 24 percent in California, but most of those are relatively unseasoned loans, and the balance is spread throughout the country. And I'm not aware we have not seen any particularly trouble spots, geographically speaking.

Bill Roy of Merrill Lynch you may ask your question.

Hi, guys. Nice quarter.

Well, thank you, Bill.

It appeared that you only sold about 65 percent of your origination volume which profit the held for sale about $2 billion sequentially. Does this indicate potentially stronger fourth quarter loan sales? And from an accounting perspective, you booked the gains at the point of rate block or at the point of the actual sale into the secondary market?

We booked the gains when the trade settled, and that is typically a month following when the trade is consummated. So, there is no income reported until we get the money. I think what your seeing there, Bill, with respect to the somewhat slower pace of loan sales relative to originations is the reflection of record volumes throughout the industry and at GreenPoint. Our first priority is serving our customers, which means efficiently processing applications, underwriting properly, and funding the loans in timely fashion. Post closing processes including the assembly of final documents, the quality control checks, and preparing the files for delivery to investment -- to investors are distinctly the second order of business and given the volume crush and the need to devote maximum resources to closing loans, the post closing activities have been stretched out, and that's what led to the slower pace of sales and the higher warehouse. But the loans are closed, their heads effectively, and they will be sold and, yes, I think it is safe to conclude that the revenues from net loan warehouse will show up in subsequent quarters.

And as a follow up question, is my calculation correct on the held portfolio runoff rate of 57 percent, which is higher than the typical conforming market is experiencing?

No. I got that number this time, Bill, and prepayments plus scheduled amortization in our loan portfolio was about $1 billion on an average balance of close to 10 billion, about 9.8, I guess, for the quarter as a whole. My number suggests that the CPR in the overall investment portfolio was about 37 percent during the quarter. That is up from 29 percent the preceding quarter, but I don't get 50. No.

Okay. And you've seen a lot of arms trade out in the [sixth] -- in the 15, 30 years. In fact, that's the composition of that runoff?

No, as a matter of fact, arms have really been an increasing percentage of our production. We did originate overall, about 71 percent in fixed rate and 29 percent in arms; 21 percent was hybrid arms, and I am not really aware of that pattern. In fact -- and I am not the mortgage expert, I am just the CFO. But my sense has been that the increased popularity of the hybrid arms, the [31s and the 51s] ones have potentially sucked fixed rate borrowers down the curve to take advantage of the low rates in the immediate part of the curve. So, the phenomenon you described which may occur in the future doesn't seem to be the case at the present time.

Thank you.

Vivek Juneja from JP Morgan. You may ask your question.

Hi Jeff.

Good morning Vivek.

Question for you. The home equity loan, do you not feel, declined? Is that because of the change in the format, which you sold it or is there another reason for it?

I think that's principally -- the home loan vehicle obviously transfers more of the risk than the securitization format, and the 1.1 percent being on sale that we recorded this quarter was predominantly a reflection of those transactions, and I think that is substitutively different than a non-cash securitized gain on sale. So, that is in fact the value of the loans with all of the risks being transferred.

Another question Jeff. Your got tax rate keeps ticking down. Any outlook for it that you could give us?

Yes, I will say that it doesn't keep ticking down. I think it dropped between the second and the third quarter, as a result of a review of the projected tax returns for this year. And you should assume that the third quarter tax rate will prevail in the fourth. I can't make -- can't give you any firm assurances about the tax rate at this point for 2003.

Okay. I mean my comment was in response to the fact that you also had a go down from Q1 to Q2 and it was down...

Well that, I think, is more rounding than anything else probably.

Thanks.

Once again to ask a question please press "*" "1." [Tom Haynes], Citadel, you may ask your question.

Hi Jeff, how are you?

I'm fine Tom.

Can you just comment on your, you know, your view on the aggressiveness of how you should give -- of how you want to repurchase shares, you know, kind of, given where the stock is, given the ROE levels, and kind of given your ability to roll the balance sheet at this point?

Well, I don't think I'm prepared to go much beyond what I said in my prepared remarks. We are generating a good deal of capital. The balance sheet in the third quarter, in fact, I would say, was certainly on the high side of our expectations and reflected the build up in the warehouse. I think that the balance sheet levels you see at the end of the third quarter are likely to persist through the fourth quarter and maybe even further on depending on how much mortgage origination is to be done next year. Our board approved 5 percent share repurchase program last month that represents about 5 million shares. And I would say that, you know, we reported 1.5 million shares repurchased in each of the last two quarters and that's probably is good guidance as there is.

Great, thank you.

Scott Valentin of Friedman, Billings you may ask your question.

Good morning, Jeff.

Hi, Scott.

Question for you on -- regarding the MH, you increased potential exposure, can you give us a business decision of that? I mean it's, I guess in the past it's being viewed as a good thing when you guys have reduced your exposure MH and it seems you have potential to increase that, if you can go through it again?

No, I think it's very important to understand that this restructuring does not increase our exposure. The exposure beyond the liabilities we've already created is exactly the same as it was before and that whether we had agreed to this restructuring or not that 293 million, which is the difference between the draws for which we have created liabilities and the ultimate amount of draws would have remained the same one way or other. So this restructuring in no way increases the risk to GreenPoint from the manufactured housing industry. What it did do in exchange for some additional letters of credit is that it protected our ability to service loans on which we have credit exposure, and we think, and the first nine months suggest, that our servicing has been extremely effective. So please don't interpret that as in anyway altering the ultimate risk to the company because it does not. It merely exchanged somewhat greater amount of LCs and again we have taken liabilities already in the third quarter. We have created liabilities that will offset projected draws on those LCs in return for which we have permanently eliminated service or termination triggers in the deals with that surety provider which means that we will continue to have control over the servicing on the assets for which we have credit risks.

Okay. Thanks a lot.

At this time sir, there are no further questions.

Well, thank you operator, and thanks everybody for joining us this very busy morning. We appreciate it.

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