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Capital One Financial Corp. Q1 2010 Earnings Call Transcript

Capital One Financial Corp. Q1 2010 Earnings Call Transcript

Capital One Financial Corp. (COF)

Q1 2010 Earnings Call

April 22, 2010 5:00 PM ET


Jeff Norris – Managing Vice President, Investor Relations

Richard Fairbank – Chairman and CEO

Gary Perlin – CFO and Principal Accounting Officer


Bruce Harting - Barclays Capital

Sanjay Sakhrani – KBW

Matthew Kelley - Morgan Stanley

Joe Mack - Meredith Whitney Advisory Group

Chris Brendler - Stifel Nicolaus

Yanni Koulouriotis - Buckingham Research

Stephen Wharton - JP Morgan

Henry Coffey - Sterne Agee

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Mike Taiano - Sandler O’Neill

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Welcome to the Capital One First Quarter 2010 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer period. (Operator Instructions).

Thank you. I would now like to turn the call over to Mr. Jeff Norris, Managing Vice President of Investor Relations. Sir, you may begin.

Jeff Norris

Thank you very much, Jay. Welcome everybody to Capital One’s first quarter 2010 earnings conference call. As usual we’re webcasting live over the internet. To access the call on the internet, please log on to Capital One’s website at, and follow the links from there.

In addition to the press release and financials, we’ve included a presentation summarizing our first quarter 2010 results. With me today are Mr. Richard Fairbank, Capital One’s Chairman and Chief Executive Officer; and Mr. Gary Perlin, Capital One’s Chief Financial Officer and Principal Accounting Officer. Rich and Gary will walk you through the presentation.

To access a copy of the presentation and the press release, please go to Capital One’s website, click on Investors and then click on Quarterly Earnings Release.

Please note that this presentation may contain forward-looking statements. Information regarding Capital One’s financial performance and any forward-looking statements contained in today’s discussion and materials speak only as of the particular date or dates indicated in the materials.

Capital One does not undertake any obligation to update or revise any of this information whether as a result of new information, future events, or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements.

For more information on those factors, please see the section titled Forward Looking Information in the earnings release presentation and the Risk Factor section in our annual and quarterly reports, which are accessible at the Capital One’s website and filed with the SEC.

Now, I’ll turn the call over to Mr. Perlin. Gary?

Gary Perlin

Thanks, Jeff, and good afternoon to everyone listening in on the call this afternoon. Let me go straight to the income statement on slide three of the presentation. Capital One earned $636 million, or $1.40 per share in the first quarter, up $0.57 per share or 70% from the prior quarter, as modestly improved pre-provision earnings were bolstered by lower expenses.

Total revenue declined $79 million, or 1.8%, as an improvement in margin, partially offset a 2.9% decline in average loans. The margin benefited from a 17 basis point improvement in cost of funds. Loan yields were also up slightly in the quarter despite somewhat lower fees, as both were positively affected by higher collectability.

Despite the slight decline in revenue, pre-provision earnings were up modestly, as a $100 million reduction in our non-interest expenses more than offset the lower revenue. The largest contributor to the better quarter-over-quarter performance was the $369 million decrease in provision expense.

Total charge-offs in the quarter fell $170 million, as a lower charge-offs in our commercial, auto finance and retail banking businesses, more than offset a slight decrease in domestic card charge-offs.

We released $566 million of allowance through provision expense in the first quarter, after posting an allowance build a $4.3 billion to retained earnings on January 1st in line with new accounting standards. More on the impact of FAS 167 and the drivers of the allowance in a moment.

Several other items impacted income in the quarter. First, we sold mortgage I/O bonds that were acquired through the purchase of Chevy Chase Bank, resulting in the deconsolidation of $1.5 billion of loans and a net P&L gain of $127 million.

We also recognized a net gain on securities of $65 million as we rebalanced a portion of our agency mortgage bank securities portfolio.

Lastly we realized a $50 million benefit to tax expense in the quarter, resulting from settlements during the quarter. These gains were partially offset by a $224 million cost associated with our rep and warranty exposure, about half of which is related to the run-off GreenPoint mortgage portfolio and therefore is in discontinued operations.

Let’s turn to the balance sheet on slide four. Total lending assets declined by $11 billion in the quarter. Our domestic card portfolio was down $4 billion in the quarter, driven by $1.5 billion in charge-offs, $1 billion of run-off in our installment loan portfolio, as well as expected seasonal pay downs and revolving credit.

The installment loan portfolio will continue to pressure card growth metrics, as we expect approximately $2 billion more to run-off over the remainder of 2010.

The commercial banking portfolio remained largely flat versus fourth quarter levels, but we expect to see modest growth in this portfolio over the remainder of 2010, as good lending opportunities are beginning to emerge in our markets.

On the consumer bank side, the nearly $2 billion decline in first quarter assets, is primarily driven by two trends I mentioned on last quarter’s call. First, in our auto finance business, our decision to pull back on origination volume in early 2008 is continuing to reduce the level of outstandings, although we’re now beginning to approach the point at which new originations will equal the run-off of prior originations.

Auto assets were down $700 million in the first quarter and we continue to expect ending loans will be down approximately $2 billion at year-end 2010 versus the end of 2009.

The second factor pressuring consumer bank outstandings is that our mortgage portfolio largely remains in run-off mode with a $900 million declined in assets in the first quarter. The decline in other assets in the quarter is related to FAS 167 as we reclassified securitization receivables to cash, more on FAS 167 in a minute.

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