• Fourth-quarter EPS of $1.41 misses consensus estimate of $1.59.
  • EPS declines from $2.01 in Q3, CFO blames "seasonal patterns."
  • Total net revenue declines slightly from Q3 to $5.6 billion.
  • Net interest margin narrows by 45 basis points from Q3, to 6.52% in Q4.
  • Guides for 2013 revenue to be consistent with Q4 2012.
  • Expects "to return to a meaningful dividend in 2013."

Corrected to show that Capital One's fourth-quarter EPS was $1.41 (not $1.31). Updated with comment from Brad Lamensdorf, a portfolio manager for the AdvisorShares Ranger Equity Bear ETF.



) --

Capital One

(COF) - Get Report

on Thursday after the market close reported fourth-quarter net income available to common stockholders of $825 million, or $1.41 a share, missing the consensus estimate of $1.59, among analyst polled by Thomson Reuters.

In comparison, the company earned $1.173 billion, or $2.05 a share, in the third quarter, and $381 million, or 89 cents a share, in the fourth quarter of 2011, when Capital One incurred unusually high expenses at it prepared for its first-quarter acquisition of ING Direct (USA).

Capital One CFO Gary Perlin said that "seasonal expense and margin trends led to a reduction in fourth quarter earnings compared to the previous quarter," and that "with a few exceptions largely related to these seasonal patterns, fourth quarter 2012 results give us a good picture of what to expect in terms of pre-provision earnings in 2013, assuming little change in the external environment."

Investors were not amused, sending the company's shares down 8% in aftermarket trading, to $56.89.

Pre-provision earnings exclude the quarterly provision for credit losses . The fourth-quarter provision was $1.151 billion, increasing from $1.014 billion the previous quarter, and $861 million a year earlier. The company said that the provision increased form the third quarter because fewer nonperforming loans acquired through acquisitions were absorbed by credit marks previously taken.

Capital One's annualized ratio of net charge-offs to average loans increased to 2.26% in the fourth quarter from 1.75% in the third quarter, "largely because of the diminishing impact of the credit mark," while the net charge-off rate for credit card loans increased to 4.35% from 3.04%, "also driven by seasonality and the diminishing impact of the credit mark."

Capital One's fourth-quarter revenue was $5.624 billion, declining from $5.782 billion in the third quarter, "almost entirely driven by higher levels of estimated uncollectible finance charges and fees in the company's Domestic Card business."

Capital One provided revenue guidance, saying "the company expects average quarterly revenue levels in 2013 to be consistent with the fourth quarter of 2012, as a modest decline in earning assets will be offset by a steady to slightly higher net interest margin."

Fourth-quarter net interest income was $4.528 billion, declining from $4.646 million in the third quarter, but increasing from $3.182 billion in the fourth quarter of 2011, reflecting the ING Direct acquisition, as well as the company's purchase of



domestic credit card portfolio during the second quarter of last year.

The net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- was 6.52%, declining sharply from 6.97% in the third quarter. Capital One said "the higher levels of estimated uncollectible finance charges and fees coupled with a substantial increase in the proportion of lower-yielding cash and investment securities in anticipation of the call of high coupon trust securities resulted in a decrease in net interest margin of 45 basis points to 6.52 percent." A sequential decline in the company's cost of funds of seven basis points to 0.99% partially mitigated the margin squeeze.

Operating expenses during the fourth quarter totaled $2.862 billion, increasing from $2.729 billion the previous quarter, "driven by higher year-end expense patterns and somewhat higher integration expenses." Marketing expenses also increased, to $393 million in the fourth quarter, from $316 million in the third quarter.

As part of its 2013 guidance, Capital One said "Overall, the company expects non-interest expense

including the operating expense and marketing expense to be, on average, just over $3.1 billion per quarter, reflecting a modest decline in quarterly expenses relative to seasonally elevated operating and marketing costs in the fourth quarter of 2012."

Capital One CEO Richard Fairbank said the company was "well positioned to deliver sustained shareholder value through sure-footed execution, substantial capital generation, and disciplined capital allocation for the benefit of our shareholders," adding that "as a first step, we expect to return to a meaningful dividend in 2013, following the completion of the current

Federal Reserve stress test process."

Brad Lamensdorf, a portfolio manager for the

AdvisorShares Ranger Equity Bear ETF

(HDGE) - Get Report

says that his fund had already sold Capital One short, as the company "has very weak earnings quality which is what we try to focus on."

"They have gotten a lot of high margin fees in the past, but individuals have been cutting their card balances quite a bit. Meanwhile, at a time of historically low interest rates, customers are moving to other places that have lower rates, which is hurting Capital One's margins," he said.

Lamensdorf added that "Capital One doesn't break out its fee income in great detail, but we have a firm feeling that they have been enjoying very high penalty fees, which are starting to come down."

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Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.