Capital One Financial Corp (COF) 2002 Q4 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 completion. Running through 5:00 p.m. eastern time on January 23rd. Access this re-broadcasting by dialing 800-879-7617, for U.S. callers; (402) 220-5341, for international callers. Our hosts today are Thomas Johnson, Chairman and Chief Executive Officer and Jeffrey Leeds, Executive Vice-President and Chief Financial Officer. Discussing the company's fourth quarter earnings release. A question and answer session will follow. Instructions to the k will be provided at that time. At this time for the opening remarks, I would like to turn the call over to Mr. Johnson. Please go ahead sir.

Thank you very much. Good morning everyone and thanks for joining us on today's call to discuss our fourth quarter and annual results. I'd like to refer you to the cautionary language at the end of the press release regarding forward-looking statements. Any forward-looking statements that we mistakenly make today, because we don't really do that, should be considered in the context of cautionary language included in our press release.

As is our custom, I'll make a few opening comments, and then I'll turn the call over to the operator for questions. I'd like to make three key points that I think are evident in our results. First, we achieved significant growth in both retail banking and mortgage banking results. Second, credit quality measures continued to demonstrate the strength of our loan portfolio and third, the combination of strong growth and exceptional asset quality has taken GreenPoint's already high profitability to a new level. Allowing us to support our growth while returning a meaningful amount of capital to shareholders.

Let me talk just a minute about each of these points. Over all, GreenPoint maintained earnings growth momentum throughout 2002, reporting record earnings for the fourth quarter and for the full year. Net income per diluted share for continuing operations in the fourth quarter was $1.46, 14% above last year's fourth quarter. For the year, we earned $5.53, a 23% increase over 2001. Return on average equity and return on average assets at 27.3% and 2.4% respectively last year, were at record levels. Both of these measures ranked GreenPoint at or very near the top of the rankings of all large banks and thrifts throughout the nation.

In the retail bank, core deposits grew at a record rate. I'm happy to acknowledge that some of this growth is attributable to the friendly environment for insured deposits relative to other investment alternatives. However, I'm also convinced that our growth results from groundwork carefully laid over the past several years. The base on which we have built our deposit growth is the sales culture we instituted five years ago, supported by a state of the art customer relationship management system.

In 2002, we benefited from several product and marketing initiatives that had their early beginnings the previous year. We introduced a free checking program in late 2001, and promoted it aggressively throughout 2002. Building on that program, we introduced the first premium interest checking product to the New York market in the spring, and heavily promoted that account as well. I'm sure many of you saw and heard our advertising, and I hope many of you opened accounts. In addition, we announced a de novo branch program based on the population and income growth that New York experienced in the 1990s, coupled with the consolidation of bank branches resulting from the many bank and thrift mergers and acquisitions during that period. We opened seven branches in 2002, and plan to open roughly 11 more this year.

This has taken place during a period of intensifying competition but the early results of our new branches are extremely encouraging. Of the $300m of growth in core deposits that we experienced in the fourth quarter, for example, approximately $70m came from our new branches, virtually all, 98%, of those deposits were core deposits. Further, we piloted a small business banking program in the fall of 2001, and then rolled it out to all of our branches. Again, the initial results have been very encouraging and we'll give you more specific numbers as we go through 2003. The result of all this activity was 34% growth in core deposits in 2002 over 2001, and fee income expanded by 26%. With our de novo branching and small business branching programs, we're building the foundation to continue that growth into the future.

Mortgage banking in 2002 again benefited from a very friendly interest rate environment. However, we also took significant steps to increase our share of the mortgage market. We continued our geographic expansion in 2002, opening new wholesale offices in Columbus, Ohio and Dallas. E-point, our web-based loan portal for mortgage brokers was piloted in late 2001 and gained rapid acceptance as it was rolled out to all our brokers in 2002. Today, more than 50% of our wholesale applications come through E point. Combined with other investments in technology, we are providing our brokers with efficient and valuable tools to test loan scenarios, submit applications, receive fast answers and monitor their pipeline of approved applications. It's equally valuable to us, in processing applications, and reaching underwriting decisions more quickly and efficiently. More than 60% of our Alt-A applications can now be approved automatically by the decision engine built into E-point. The result of these efforts was a substantial increase in mortgage production in 2002 over 2001, with volume reaching a record level of nearly $10b in the fourth quarter. I will not attempt to forecast mortgage volume for 2003, but I will say that I believe we are poised to capture a bigger share of whatever size market there is.

Now, let me make some comments on credit quality. the credit quality of our mortgage portfolio remains very strong, and shows no evidence of deteriorating. Our owned portfolio consists almost exclusively of one to four family mortgages with very high FICO scores and very low loan to value ratios. The result of course is very low charge-offs comparable to a portfolio of agency loans. Let me take you quickly through some of the numbers. The average FICO score in our entire loan portfolio is 711. As you know a number like that is solidly in the A quality category. The average FICO score of the loans we put into the portfolio during the fourth quarter was 720. The higher FICO for the more recent periods is in part the result of the high quality loans available in the re-fi boom. But even as the re-fi boom ebbs, we will maintain our high credit standards. The average original loan to value ratio of loans in our portfolio is 64%. The average current LTV based on the original appraisal and adjusted only for amortization is 59% for the whole portfolio. Once again, the loans put into the portfolio during the fourth quarter were consistent, with an average LTV of 65%. Even for the loans we sold to the secondary market where we do not retain any credit risk, our average FICO score was above 700. The average FICO for all production in 2002 including what we sold was 715. The result was a very low charge-off rate of two basis points, in 2002. This was on a portfolio that has a significantly higher yield than a traditional portfolio of agency loans. It is very difficult to conceive of a reasonable scenario in which we would experience significant loan losses. Finally, GreenPoint has always been among the most highly profitable thrifts, and our profitability reached new levels in 2002.

Of our $498m of earnings from continuing operations, we paid out $88m in dividends. The remaining $410m supported the bs expansion that came with fast growing business activity, and the investments required to maintain the growth. Still, in 2002, we repurchased $5.5m or 5.5% of our outstanding shares.

In summary, while we are enjoying our success in 2002, my management team and I are not underestimating the challenges that we face in 2003. We begin the year, which should see substantially lower industry-wide mortgage volumes, with a strong pipeline, and enhanced positions in our new and more established market areas. Economic and interest rate conditions will determine the eventual level of nationwide loan originations but we are confident we can continue to add to our market share. Competition for customers and deposits in the New York market will continue to intensify. We met the competition with outstanding success in 2002 and we believe our momentum will carry through this year. Finally, we will adhere to our longstanding commitment to manage our capital aggressively in the interests of our shareholders. That really concludes my formal remarks, and I'd like now to turn the session back over to Edwin who will take your questions.

Edwin, are you there?

Thank you. At this time I'd like to begin the question and answer session of today's presentation. If you would like to ask a question, hit star then 1 on your touch-toned phone. You will be announced prior to asking your question. Withdraw that question star then 2. Once again, if anyone would like to ask a question please use star then 1 now. We will hold a moment for questions to queue up.

Our first question comes from Bruce Harting.

Hi, Tom.

Hi, Bruce.

Specific line items for you guys. I'm just curious about the salary and benefit line, and then the banking service fees, you know, the great deposit growth you had that looked like it came off a little bit. If you talk about the timing of realizing deposit fees. And then also, with the tremendous loan volume you're doing, you are able to, you held the growing earnings without really growing the loan on bs base. And I'm just curious, for some outlook comments for 2003 about asset growth on bs. Thanks.

Bruce, I'm going to ask Jeff to address those questions.

Bruce, in terms of the expenses, they were up about $20m quarter-over-quarter. I'd estimate about half of that increase was one-time, on the salary and benefits line, what you're seeing there is increases due to adjustments in performance compensation that take place typically at the end of the year. That was --

When we have a good year.

When we have a good year. That was worth about $3m. Remember also that expenses in the third quarter were benefited by one-time items worth about $3m so that's $6m. And finally, in the other admin lines we had about $2m to $3m worth of consulting expenses that, on projects that have already been completed. So I would certainly not suggest that anybody interpolate or extrapolate the growth that you see in the fourth quarter as an ongoing run rate. With respect to -- what was the next one, Bruce?

Deposit fees.

Deposit fees. Yeah, the deposit fees were off a little on the link quarter basis. They do tend to decline a bit seasonally in the fourth quarter and furthermore, we have run into resistance due to low interest rates in terms of our investor resource program. That's the program in which we sell mutual funds and annuities and in particular in the fourth quarter, annuity sales were somewhat weak, given the very low guaranteed interest rates on those products. Banking fees held up extremely well, however.

And finally, with respect to the loan portfolio, there was modest but not overwhelming growth. Remember, also, that we're confronting substantial volume of prepayments in 2002, and I'd hesitate at this point to provide you a forecast in terms of loan growth in the investment portfolio. I would suggest, however, if, as we expect, there is some decline in overall mortgage originations, you should see probably on an average basis a little bit less in the loan warehouse for 2003. So we wouldn't look for substantial growth in the bs in 2003, relative to 2002.

Thank you. Our next question comes from Gary Gordon.

Hi, thanks. Two questions on the loan sale, I guess the loan origination sales. One, the profit margin on the specialty products, I guess has been gradually running over the course of the year. Maybe an update on, why that happened this quarter, to the extent of giving thoughts about '03. And then two, I guess specialty originations year-over-year, flat, this is not much of a re-fi product, but if you could address it to the re-fi sensitivity of product.

Let me start on that, Gary. We do believe that the lower profit margins are going to on the specialty products are going to prove to be temporary. And we look forward to spreads returning to more normal levels. We still believe the originations of Alt-A and No-Doc loans represents a very profitable business. I'm going to let Jeff go a little bit further into that. There are some nuances that there it is important to understand.

Yes. I think Gary in part what you're seeing in the specialty margins, as you know, we tend to sell most of our origination servicing released and as I'm sure you're aware the values placed on servicing as re-fi’s have continued to be relatively high has come down a bit and part of the decline you see there is a function of that condition in the marketplace. Likewise, implicit in a whole-loan sale is the value of the IO that arises when those loans are securitized, and once again, as a consequence of very high prepayment rates we were getting paid less for that particularly in the fourth quarter than we have in the past. But as Tom said, I don't think -- we don't think that this is necessarily an ongoing trend. Did that get everything, Gary?

Let's see, I did ask about the volume of originations 2002 over 2001 in specialty were roughly flat.

Yes.

Presumably, is that a re-fi sensitivity issue?

Well, I think that's a little bit of it. That's a little bit of it. We have also both late in 2001, and earlier this year, we have also placed some limitations in terms of credit on the loans that we're willing to make, even though we're not retaining that credit on our own bs. Late last year and then again early this year, we particularly in the California market, limited maximum loan sizes, we reduced in some areas of California maximum LTVs and that did manifest itself as lower volumes of specialty origination, particularly earlier this year. You might notice that in each of the last two quarters, we've experienced pretty sharp increases in specialty mortgage origination, and in fact by the fourth quarter, we did supersede the fourth quarter of 2001. Having said all that I think your observation is accurate, that as and when the re-fi boom does moderate, we should see continued shifts toward the more specialty products from the more generic.

Okay, thanks.

Thank you. Our next question comes from Jim Acor(ph.).

Good morning, guys. I was wondering if you might be able to give us a little bit of comment on Tom, I think you mentioned that the loans that you were adding to your portfolio in the fourth quarter averaged a 720 FICO score. I was wondering if you or Jeff could give us a little bit of flavor for the prepayment speeds on the on-bs portfolio and ultimately I think what I'm trying to drive at is, also what the yields were on the new product that's being put on. It looked like the on-bs margin got hit pretty hard on a sequential basis because of eroding asset yields and I'm trying to figure out where that trend takes us in '03.

Yes, Jim. With respect to the portfolio on a quarter-to-quarter basis, the prepayments were roughly similar. We experienced about $1.2b prepay, plus scheduled AM in the fourth quarter versus $1.1b in the third, so we had a CPR in the portfolio of about 42 versus 37 in the prior three months. The real spike in that came between the second and third quarters. Much of what we added were fixed-rate mortgages, a mixture of Alt-A and also jumbo loans, eight jumbo loans. And what you're seeing I think in the yield, in addition to the replacement of one whack with another, is also the fact that as these loans prepay, you have to write down any premiums. In general, however, the compression in the margin, the net interest margin was exactly the same in the fourth as in the third, and where that goes from here, obviously, will depend on re-fi activity in the future.

But the yields on the new product?

Well, they're lower, of course. You know, I would guess roughly in the fourth quarter, the yields going in were probably close to 100 basis points lower than the yields going out.

Okay, thank you.

Thank you. Our next question comes from Scott Valentin.

Good morning. A question for you on the deposit rates with the -- that the premium checking you have, is there any room to cut that rate and bring down the cost of funds?

Well, over time, that rate's going to relate to the level of rates in the open market, and to competitive -- the competitive situation. But as you may recall, Scott, we started that rate on that premium account at 3%. And we're now offering 2.2%. So yes, it can come down over time, but it will always remain a premium rate, because it is a premier product that we're featuring in order to build customer relationships. We make money at -- we make a lot of money versus other sources of same-duration funds, even at the 2.2%.

Okay. And it's a question for Jeff. Jeff, is there any way to quantify the margin impact on when you mentioned before with regard to the servicing evaluation on the margins on gain of sale of loans, the margin came down 46 basis points, link quarter, that below the trend that you always expected the margin to remain below 250 to 300, that kind of range.

I don't at this point have anything more specific than that I'm afraid. It varies, you know, month to month with individual trades. But I don't have those data.

Okay. Thanks.

Thank you. Our next question comes from Sal Di Martino.

Good morning, guys, nice quarter. I have a couple of questions on the retail banking side. First, can you tell me where you stand on the opening of new branches? I think you had targeted 16, and you had opened two or so in the third quarter. That's number one.

And number two, with the early successes that you outlined in the press release, has the break-even point changed, and would you consider adding even more branches?

We opened seven branches, Sal, by the end of the year. And I think we're up to 11 now. We've changed the program from an original intention of 16 to 18, opportunistically, and we're not quite far enough into it to make any decisions about a follow-on program. But I would say that the current trend, as I mentioned in our opening remarks, the current trend is such that we're doing enough better …. than that our assumptions when we started the program that I would expect, I guess, that the break-even points would be achieved earlier than we had thought. And this will be a critical year, because we will have enough experience, you know, by the time we get half-way and three-quarters of the way through the year to make more definitive judgments about whether we ought to go further. I'm optimistic.

Okay, great. What sort of would be the biggest obstacle to opening new branches? Would it be the economy, would it be the stock market, would it be the stock market or would it be real estate?

Well, it's really the supply of locations that our -- that are in areas that meet the characteristics that we look for. As we've mentioned, our branch expansion is predicated on trying to find concentrations of population groups that are similar to the population groups that GreenPoint has always been so successful with, and then looking at the competitive situation in those neighborhoods. We found 18. We think there are more. Obviously, we picked the best ones first, but we'll keep studying, and if we do even better than we had thought we would do, as we have so far, it may be that larger numbers of opportunities will present themselves to us. We're very devoted to doing as much as is economically desirable, and it really relates to how well we do at attracting deposits and business in the neighborhoods that we go into and what we learn from that.

Okay, thanks.

Thank you. Our next question comes from Gary Gordon.

Hi, follow question. Just noticing your tax rate this year was 37%, or '02 was. '01 was 39%. Which one of them was the more unusual, by going forward?

That's a pretty tight range, Gary.

Well, I have highly sophisticated earnings model.

Oh, I know you do.

We've actually experienced some nice declines in that rate over the last several years, the latest of which was last year. But I'd suggest that the rate for 2002 is probably representative roughly of where we will be. We tend to establish the rate during the first quarter of any given year the. And try, subject to changing circumstances, to hold it there. So you'll get a look at our annual rate as we estimate it now with the first quarter earnings release. But more like 2002 than 2001, Gary.

Okay, thanks a lot.

Thank you. Our next question comes from Jim Acor.

Thank you, two quick follow-ups if I could. Tom, you mentioned you have expectation you will generate market share gains in terms of origination volume in '03 and beyond. If you set any targets where you would like to see that market share go on a national basis?

Yes, we would like our national market share to get to somewhere between 2.5% and 3% over a long period of time. That would be sort of a four, five-year target.

Okay.

And that as you know, we're at 3% in California, and that's why we've sort of picked that level. We don't know of any reason why we shouldn't be able to accomplish the same kind of penetration of other markets. It may be that there are places that are not quite as densely populated, so that's why I say a range of 2.5% to 3%.

Okay, fair enough. And then Jeff, if I could just ask you one question on the mortgage servicing revenues. Looked like we had a positive number in the fourth quarter. Were there any impairment charges, and if not, should we expect that sort of $5.5m to $6m to be a representative number for a quarterlies for '03?

There was no impairment, Jim, and yes, that's a reasonable run rate to assume. Depending on conditions, we either may have additional impairment, or recapture. But that's a pretty pure number.

Okay, great, thanks very much for the time. Appreciate it.

Thank you. Our next question comes from Vivek Juneja.

Canned can't hear you Vivek.

Sorry. The question I have is for talking to Jeff. Jeff, what's your outlook for the securities portfolio, it shrank this quarter, and can you weave that in with your outlook for share buyback, since you clearly did accelerate it this quarter, but your capital ratios grew even further.

Well, yeah. There is no tight specific relationship between the two, Vivek. The securities portfolio going forward, I think, will ultimately depend obviously on the yields that can be -- that can be garnered in that market, relative to the yields on loans that might go into the portfolio. I think both the investment portfolio and the securities portfolio will react over the course of the year to changes in the warehouse, which at any point in time is very difficult to forecast going forward. I think the best guidance in terms of the bs under current conditions is not very much growth. And if you believe that there will be less mortgage origination, you might see increases, either to the loan portfolio or the securities portfolio, as the warehouse recede. And as Tom said, we have been comfortable even with capital ratios somewhat below where they ended the year, and we still look at our stock as an extremely attractive investment. Probably better than huge leverage on the bs. So I guess I would limit my guidance to that.

Thanks.

Thank you. We have a follow-up question from Scott Valentin.

Two questions, actually. One, I saw a decline in the liability on the recourse exposure. Could you explain what that led to that?

Yes, Scott. That tends to decline each and every quarter. The liability is drawn down as the letters of credit themselves are drawn down. So what you will see when we tabulate all of the results for the fourth quarter in the queue, is a decline in outstanding letters of credit, and a roughly commensurate decline in the liability. As the draws are made, the liability is reduced rather than earnings being reduced. And I think we all agree that's the better way for things to happen. The uncovered exposure on all of our LCs was the same at the end of the fourth quarter than it was at the end of the third.

Okay. And then comments, have you seen any change in Conseco(ph.), I guess ongoing resolution of a bankruptcy there but have you noticed any change in the way they are treating the re-po inventory?

We have not, and we would comment that they seem to be acting as very logical economic men. And behaving themselves extremely well, and making certain that there are no sudden moves on their part that would be disruptive to orderly liquidation of inventory for the entire industry.

Okay. And one last question. With regard to competition in the Alt-A segment of the mortgage market, are you seeing increased competition yet or is it still that a lot of the big players are focused on conforming? Can you comment going forward, if you assume volumes decline in 2003 what do you see in the Alt-A market?

There is increasing competition but we continue to get what we think we ought to get. I think we've already commented on the relationship timing-wise between re-po’s and the availability of specialty product. And as the re-po -- I'm sorry, re-fi boom subsides as I think it inevitably will in 2003, there should be more attention on the part of the broker community to the specialty products, and we expect to get our very handsome share of that.

Okay, thank you very much.

You're welcome.

Thank you. Our next question comes from Bruce Harting.

In the release you say, you make several references to the success of the branch rollout, de novo branch program, both on originations and deposits. Can you give granularity with regard to the -- remind us of the average cost of those branches and where we stand in the build-out. And then just semantics, I thought it was interesting that you're making very clear now that $34b of your originations were A-quality loans. And then, that pretty much is the entire origination volume for the year, is that correct? I just want to make sure, you know, your total production was $33.1b.

That has been the case, Bruce, as you know, we have never originated anything other than A-quality loans. Regarding the branches, I gave you the statistics about where we are. We've opened, I think we're probably now up to 11 or something, given some openings early in January, out of a program which is now 18. I gave you the numbers on how those branches that we have opened are doing. They're all operating ahead of projection, and in the fourth quarter as I mentioned, $70m out of our net $300m increase in core deposits came from the new branches, $70m, and 98% of the $70m was core deposits. So that's success beyond, I think, our dreams. So it's going extremely well.

Yeah, bear in mind, Bruce, you know, a number of those seven branches were really opened in the final few weeks of December. So the $70m, I would not divide that by seven and say there's an average of $10m per branch. It is nothing like that. The earlier ones obviously represent most of that total. And we've not -- and I don't think we intend, really, to get into the exercise of telling you what the branches are costing and individually what, where they stand in terms of profitability. We've never done that to the existing branches. But Tom's correct that in general, the success of the branches has been beyond what we had indicated when we said we thought that those branches could break even within 15 months of opening.

You know, without getting into the specifics of what they cost, let me just say they don't cost very much. We're very careful about what size, piece of real estate we need. We're very, very careful and opportunistic about where we rent, and the average number of square feet is pretty low. I think 3,000, 4,000 square feet. You don't have to stick very much stuff into something that has three to 4,000 square feet. And so that's the investment. There's some working capital investment, as you build up staff to run these branches. But it's just not a whole lot of -- it's a lot more work than money.

Any new -- you've bumped up the original program by a couple of branches. Should we expect in the course of '03 to see any new rollouts in new geographies?

I'm hoping. We will see how the original program has done. We have no plans for the moment for radically different geographies. But what would happen most likely, I think, if things go as well as I think they might is for us to penetrate the existing geographies, including the two new ones, the Bronx and Staten Island perhaps more than we have projected in the current program.

Okay. Thanks.

You're welcome.

Sir, at this time, we show no further questions.

All right. If there are no further questions, let me just thank all of you for listening to us, and for your good questions. I think you know that we run this company for the shareholders, and we will continue to do so, and work just as hard as we can for your benefit and since we're big shareholders, it will also presumably benefit us. Thanks very much, and we'll talk to all of you as the year goes on.