Capital One Financial's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Capital One Financial (COF)

Q1 2012 Earnings Call

April 19, 2012 5:00 pm ET

Executives

Jeff Norris -

Gary L. Perlin - Chief Financial Officer

Richard D. Fairbank - Founder, Executive Chairman, Chief Executive Officer and President

Analysts

David S. Hochstim - The Buckingham Research Group Incorporated

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

John W. Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division

Brian Foran - Nomura Securities Co. Ltd., Research Division

Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division

Donald Fandetti - Citigroup Inc, Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Daniel Furtado - Jefferies & Company, Inc., Research Division

Betsy Graseck - Morgan Stanley, Research Division

Presentation

Operator

Good evening, everyone, and welcome to the Capital One First Quarter 2012 Earnings Conference Call. [Operator Instructions] 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

Thanks very much, Lynette. Welcome, everyone, to Capital One's First Quarter 2012 Earnings Conference Call. As usual, we are webcasting live over the Internet. To access the call on the Internet, please log on to Capital One's website at capitalone.com and follow the links from there. In addition to the press release and financials, we've included a presentation summarizing our first quarter 2012 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. Rich and Gary will walk you through this 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 the 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 the forward-looking statements. And for more information on these 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 website and filed with the SEC.

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

Gary L. Perlin

Thanks, Jeff, and good afternoon to everyone listening to the call. I'll start by providing a few highlights from the quarter on Slide 3.

Capital One earned $1.4 billion or $2.72 per share in the first quarter of 2012. Without the impact of a bargain purchase gain related to the ING Direct acquisition, first quarter net income would have been $809 million or $1.56 per share. Earnings from continuing operations, excluding the bargain purchase gain, would have been $911 million dollars or $1.76 per share. Aside from the ING Direct bargain purchase gain, the increase in linked quarter earnings was primarily driven by higher revenue and lower noninterest and provision expenses in our legacy businesses. Higher legacy revenue was driven in part by increased average loan balances and favorable net interest margin.

First quarter revenue also includes a $160 million benefit related to our sale of Visa stock and subsequent reserve adjustments and the absence of about $150 million of unique contra-revenue items recorded in the fourth quarter. These benefits were partially offset by a $75 million accrual for upcoming refunds we expect to provide customers in our Domestic Card business, which you'll hear more about from Rich in a moment.

Overall, noninterest expenses inclusive of ING Direct-related expenses decreased $114 million quarter-over-quarter. The decrease was due to about $100 million in seasonally lower marketing spend and a modest decrease in legacy operating expenses. All told, run rate legacy operating expenses fell to just over $2.0 billion, and there were no significant onetime expenses in Q1 as there were in the fourth quarter.

We recorded mortgage Rep and Warranty expense of $169 million in the quarter. Of which, $153 million was booked in discontinued operations. The majority of this expense relates to a settlement one of our subsidiaries made with a government-sponsored enterprise to resolve present and future Rep and Warranty repurchased claims. Although we had already reserved in prior quarters for most of this outcome, we increased our reserve by $95 million to account for the final settlement amount. This settlement amount has now been paid to the GSE, so you'll see the impact of that payment in the second quarter reserve calculation. This settlement resolves the bulk of our GSE Rep and Warranty exposure.

Strong credit performance led to a $288 million decrease in provision expense in the quarter, driven by both a lower level of charge-offs and a larger allowance release. I'll address the specific impacts of ING Direct on our first quarter earnings, which are listed on Slide 3, by looking at the table on Slide 4.

Looking at Slide 4, we expect to provide a similar view for the impact of HSBC's U.S. Card business in the second quarter. As the operations of the 2 businesses quickly become integrated, we will no longer be able to split ING Direct or HSBC out from the rest of our financials beyond the quarter in which each acquisition is closed.

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