Capital One Financial Corporation (COF)

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Capital One Financial (COF)

Q3 2012 Earnings Call

October 18, 2012 5:00 pm ET


Jeff Norris

Gary L. Perlin - Chief Financial Officer

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


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

Betsy Graseck - Morgan Stanley, Research Division

Richard B. Shane - JP Morgan Chase & Co, Research Division

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

Moshe Orenbuch - Crédit Suisse AG, Research Division

Jason Arnold - RBC Capital Markets, LLC, Research Division

David S. Hochstim - The Buckingham Research Group Incorporated

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Donald Fandetti - Citigroup Inc, Research Division

Scott Valentin - FBR Capital Markets & Co., Research Division

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



Good day, and welcome to the Capital One Third Quarter 2012 Earnings Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] Thank you. At this time, now, I would like to turn the call over to Mr. Jeff Norris, Senior Vice President of Global Finance. Sir, you may begin.

Jeff Norris

Thanks very much, Linette. Welcome, everybody, to Capital One's Third Quarter 2012 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 have included a presentation that summarizes our third 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, 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 forward-looking statements.

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, accessible at the Capital One website and filed with the SEC.

And now, I'll turn the call over to Mr. Perlin. Gary?

Gary L. Perlin

Thanks, Jeff, and good afternoon to everyone on the call. Third quarter earnings were $1.18 billion or $2.01 per common share. The third quarter was the first one which reflects a full 3 months of both ING Direct and the HSBC U.S. Card business, along with Capital One's underlying business performance. While the absolute level of merger-related accounting impacts was considerably less this quarter as compared with the first 2 quarters of 2012, linked quarter comparisons are obviously affected significantly. Looking ahead, there will be some ongoing impact on revenue and operating expense from merger-related accounting, although quarter-to-quarter movements should be far less exaggerated. In contrast, the impact of merger-related accounting on credit metrics has now largely run its course.

After I briefly review a few key items from the third quarter, Rich will speak both to our underlying business performance and what our results this quarter suggest about future trends. I'll discuss our summary income statement on Slide 4.

The significant increase in earnings this quarter versus the previous quarter can largely be explained by 3 factors; continued strong performance in our businesses, a full quarter of HSBC operations and a large reduction in acquisition-related credit accounting impacts compared to the previous quarter. Linked quarter pre-provision earnings increased about $800 million, driven largely by moving from a partial quarter to a full-quarter impact of acquired HSBC credit card operations. There was also a substantial reduction in charges related to legal and regulatory matters and in other unique items, which affected second quarter results.

Compared to the second quarter, the additional months worth of revenue and expense related to the HSBC Card business increased pre-provision earnings this quarter by approximately $175 million, which is net of about $100 million of acquisition-related accounting effects. After building the finance charge and fee reserve by $173 million in Q2 to cover expected non-principal losses on the acquired revolving loan portfolio of HSBC, there was only a $17 million negative effect on revenue in Q3. Revenue continued to be negatively affected in the quarter by $133 million in premium amortization related to both acquisitions. We expect that this impact will decline about 15% per quarter.

Operating expense declined modestly in the quarter due to a steep reduction in charges related to legal and regulatory matters and other unique items. While we had an extra month of HSBC-related operational expenses and PCCR amortization compared to the second quarter, this was partially offset by a reduction in merger-related expenses. Amortization of purchase accounting adjustments for intangibles and other assets was about $170 million in the quarter and is expected to decline at about 5% per quarter going forward. The majority of this amortization represents PCCR and CDI, but the total also includes amortization of software and other assets. You can find details on acquisition-related accounting and other items in the financial tables, those that are appended to our earnings press release, and you'll also continue to see detailed breakouts in our quarterly financial reports.

Finally, lower provision expense was driven by a significantly lower allowance build related to acquired HSBC credit card loans, offset to a small degree by higher linked quarter charge-offs due to lower absorption of losses by the SOP 03-3 purchase accounting mark. To be specific in this quarter, the mark on impaired loans we acquired from HSBC absorbed approximately $176 million and now stands at $149 million.

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