Capital One Financial Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. Amounts are U.S. dollars. The company operates Credit Card, Consumer Banking and Commercial Banking businesses. Comparisons with Q1 2012 are affected by the 2012 ING Direct and U.S. card acquisitions.
Financial performance and condition
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Total net revenue | $5.551 billion | $4.935 billion, up 12% |
| Net interest income | $4.570 billion | $3.414 billion, up 34% |
| Net interest margin | 6.71% | 6.20% |
| Non-interest income | $981 million | $1.521 billion, down 36% |
| Provision for credit losses | $885 million | $573 million |
| Non-interest expense | $3.028 billion | $2.504 billion |
| Income from continuing operations, net of tax | $1.144 billion | $1.505 billion |
| Net income / diluted EPS | $1.066 billion / $1.79 | $1.403 billion / $2.72 |
| Net charge-off rate | 2.20% | 2.04% |
- Q1 2012 included a $594 million ING Direct bargain-purchase gain; excluding it, management said Q1 2013 net income rose 32% from the comparable period. Q1 2013 also included $78 million of after-tax loss from discontinued operations.
- Net interest margin increased 51 basis points, primarily due to lower funding costs. The company redeemed $3.65 billion of trust preferred securities on January 2, 2013.
- Total assets were $300.2 billion, loans held for investment $191.3 billion, deposits $212.4 billion and stockholders’ equity $41.3 billion at quarter-end. Loans declined 7% from year-end, partly because about $7 billion of Best Buy loans moved to held for sale. Total borrowing debt was $37.5 billion, including $11.0 billion of securitized debt.
- Cash and cash equivalents were $6.7 billion. Reported liquidity reserves were $59.2 billion, comprising cash and unencumbered available-for-sale securities.
- Cash-flow statement: operating activities provided $2.8 billion; investing activities provided $5.1 billion; financing activities used $12.2 billion. Cash and cash equivalents declined $4.3 billion during the quarter. Bank cash-flow totals are affected by balance-sheet and funding movements.
- Capital ratios under Basel I improved: Tier 1 common was 11.79%, Tier 1 risk-based 12.18%, and total risk-based 14.43%. Tangible common equity ratio was 8.61%.
Material changes and segment results
- Revenue growth primarily reflected larger average earning assets following the ING Direct and U.S. card acquisitions. Higher credit-loss provisions and operating costs partially offset that growth; intangible amortization was $177 million versus $62 million a year earlier.
- Credit Card net income was $686 million, up 21%; Consumer Banking was $383 million, up 71%; Commercial Banking was $203 million, down 3%. “Other” recorded a $128 million loss, versus $505 million income in Q1 2012, principally reflecting the prior-year ING Direct bargain gain.
- Net charge-offs increased to $1.079 billion from $780 million, primarily due to acquired card balances. The reported 30+ day delinquency rate improved to 2.74% from 3.09% at year-end; management notes seasonal effects and that acquired-loan accounting can affect reported credit measures.
- The allowance for loan and lease losses fell to $4.606 billion from $5.156 billion. The decline included a $289 million reduction associated with transferring Best Buy loans to held for sale and a $261 million allowance release.
Outlook, significant items and risks
- Management expected 2013 total net revenue of approximately $22.5 billion and non-interest expense of approximately $12.5 billion, including about $11 billion of operating expense and $1.5 billion of marketing expense. These estimates exclude potential non-recurring items.
- Management expected average interest-earning assets and full-year average loan balances to decline in 2013. It forecast approximately $19 billion of ending loan run-off and sales, including about $10 billion of acquired mortgage run-off, $2 billion of other acquired card run-off and the planned $7 billion Best Buy portfolio sale. Weak consumer demand and competition were cited as headwinds; Auto, Commercial Banking and parts of Domestic Card were expected to provide growth.
- The Best Buy portfolio sale to Citibank and early termination of the partnership were expected to close in Q3 2013, subject to customary conditions. The portfolio had $6.3 billion of loans at March 31.
- The Federal Reserve did not object to the company’s 2013 CCAR capital-distribution plan. On May 2, the board approved increasing the quarterly common dividend from $0.05 to $0.30 per share.
- Mortgage representation-and-warranty reserves were $994 million at March 31, up from $899 million at year-end. Management estimated an additional $2.7 billion of reasonably possible losses beyond the reserve; actual losses could exceed both the reserve and estimate. Other litigation losses considered reasonably possible were estimated at about $150 million, excluding specified mortgage cases included in the $2.7 billion estimate.
- In April 2013, the company agreed to an SEC administrative order finding violations of Exchange Act reporting and recordkeeping provisions and to pay a $3.5 million penalty. The order did not require a restatement.
- Management cited low interest rates, weak consumer demand, acquisition integration, credit performance, competition, regulation, litigation, funding-market access and operational or technology disruption among forward-looking risks. The filing states disclosure controls were effective at a reasonable level of assurance.
Important facts for investors to verify
- Whether the Best Buy sale closed on schedule and the effect on loan balances, earnings and partnership economics.
- Underlying credit trends, particularly acquired card portfolios, auto lending and acquired mortgage loans; review reported metrics both including and excluding acquired loans.
- Assumptions and developments behind the $994 million mortgage reserve and $2.7 billion reasonably possible exposure, including material litigation outcomes.
- Delivery of 2013 revenue and expense guidance amid loan run-off, weak demand, competition and low rates.
- Liquidity and funding composition, including the use and rollover of short-term FHLB advances, as well as capital levels after the dividend increase.