Capital One Financial Corporation (COF) Q1 2012 Earnings Report, Transcript and Summary

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.

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?

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 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. Q1 revenue was impacted by the close of the ING Direct acquisition in mid-February and by 1/2 quarter of ING Direct operations. The impact was largest in noninterest income, where we recognized the bargain purchase gain of $594 million at close. The gain was driven largely by the substantial decline in long-term interest rates, which began shortly after we announced the acquisition of ING Direct last June. As you know, we put on a swap position early last August designed to protect the positive impact of those lower rates on the fair value of ING Direct's assets. The mark-to-market loss on that partial hedge from inception to close was $355 million, of which $78 million was realized in the first quarter. The noninterest expense attributed to ING Direct includes both normal operating expenses for about 1/2 quarter, along with ING Direct transaction and merger-related expenses recorded in the quarter. Now if we turn to Slide 5, you'll see the significant impact of ING Direct on Capital One's balance sheet. As you can see, the acquisition of ING Direct on February 17 added about $20 billion in cash. Together with Capital One's standalone cash position, in part generated by the sale of Capital One investment securities over the last couple of quarters, this cash represents a significant portion of the funding being accumulated for the U.S. Credit Card assets we are about to acquire from HSBC. The other assets, which came with the acquisition of ING Direct at fair value, include about $40 billion in mortgage Home Loans and some $30 billion in investment securities. ING Direct's $85 billion of liabilities are almost entirely consumer deposits. For segment reporting purposes effective on the close date, ING Direct's loans and deposits are included in our Consumer Banking segment. Cash and securities acquired from ING Direct are reported in the other category. The table on Slide 5 provides balance sheet data as of close date and quarter end. Now let's take a moment to discuss the impacts to average balances and yields for the quarter on Slide 6. Average loan balances increased in the quarter by almost $21 billion, driven largely by the acquisition of ING Direct mid-quarter. In our legacy businesses, average balances grew by about $2 billion, as the modest decline we experience in our Domestic Card business due to expected seasonal paydowns was more than offset by growth in our Commercial Lending and Auto Finance businesses. As expected, the on-boarding of ING Direct's lower margin business and our temporarily high cash balances close to 102-basis point decline in net interest margin this quarter to 6.20%. The intended deployment of cash to fund HSBC's U.S. Card assets in the second quarter will allow us to recapture a significant percentage of the NIM reduction from Q1. And over the following few quarters, we expect NIM to be back at preacquisition levels. Moving to Slide 7, strong retained earnings growth in capital actions related to the financing of our 2 acquisitions led to a 220-basis point increase in our Tier 1 common equity ratio in the quarter. Capital actions in the quarter included settlement of the $2 billion equity forward we executed last July; $2.6 billion of equity issued to ING Group; and the $1.25 billion equity raise in March, shortly after our planned capital action was approved by the Fed as part of its CCAR process. As of March 31, our Basel I Tier 1 common equity ratio was 11.9%. We continue to be comfortable with our strong capital levels and our capacity to generate healthy amounts of capital going forward. We expect the addition of ING Direct and HSBC's U.S. Card portfolio to quickly enhance our earnings trajectory and capital generation. Now before turning the call over to Rich, I'd like to highlight on Slide 8 the significant impacts that we expect to closing of HSBC's Card business will have on our company's financial results in the second quarter, including a substantial negative effect on both earnings and capital in the quarter. Since purchase accounting and other material financial statement impacts can only be calculated after closing, we expect to be able to provide you with detailed information at the end of Q2. For now, I can offer a quick overview of the types of impacts you should expect. The largest earnings impact from acquiring HSBC's U.S. Card business in Q2 will most likely be a significant build in our allowance for loan losses associated with HSBC's current loans. Delinquent loans, which have lost revolving privileges, will be accounted for under SOP 03-3 and a lifetime credit mark will be taken against those loans. The fair value of the current loans, which we expect to represent the majority of the acquired HSBC card portfolio, will be subject to a FAS 91 mark, which in turn will come into revenue over time. Starting in the second quarter and extending over several years, we expect card expenses and earnings will be affected by the amortization of PCCR. The amount of which will be determined as part of the purchase accounting to be completed after close. Earnings in the second quarter and beyond will also be affected by transaction and merger-related expenses and the amortization of other assets and intangibles. We'll do our best at the end of the second quarter to lay out for you not just the upfront impacts of the HSBC close as we've done for ING Direct, but also the ongoing effect which those impacts will have on subsequent quarters' earnings. Of course, the addition of HSBC's U.S. Card assets will add to Capital One's risk-weighted assets and together with the negative impacts of purchase accounting on Q2 income will cause our Tier 1 common ratio to decline in the second quarter. The considerable uncertainty surrounding purchase accounting makes it difficult to project exactly where our Tier 1 common ratio will be at the end of the second quarter, but our current best estimate continues to be that the ratio will be in the mid-9% range. To the extent that there are any large unanticipated impacts from purchase accounting, their capital impacts are likely to resolve quickly in the second quarter or in the quarters immediately following close. More importantly, we remain fully confident that the HSBC transaction will contribute significantly to the strong capital generation we expect to realize as a company going forward. With that, I'll hand the call over to Rich. Rich?

Thanks, Gary. I'll begin tonight on Slide 9. In the first quarter, our Domestic Card business delivered strong profits, improving credit and solid year-over-year growth in loans and purchase volumes. Loans declined seasonally in the quarter. Compared to the first quarter of last year, loans grew about 5%, purchase volumes increased about 15% and our Domestic Card business continue to grow and gain market share in new accounts booked. Revenues and revenue margin declined in the first quarter, driven by a onetime reserve addition related to cross-selling. The reserve is for expected customer refunds associated with instances in which phone salespeople didn't adhere to our scripts and sales policies when cross-selling products to our Credit Card customers. The $75 million accrual drove about 50 basis points of the margin reduction in the quarter. Noninterest expense for the quarter declined, as both marketing and operating expenses were lower than in the fourth quarter. Lower marketing in the first quarter reflects normal quarterly variability and the timing of direct mail and brand marketing. Credit performance improved in the quarter. First quarter delinquency improvements outpaced industry trends, but it's important to recognize that our first quarter improvement is consistent with the fact that our seasonality is more pronounced than the industry's, the mirror image of last quarter's worsening delinquency trends. Looking through this seasonality, we observed modest underlying delinquency improvements, which drove an allowance release in the quarter. All told, the Domestic Card business delivered $515 million in net income in the quarter. We're on track to complete the HSBC U.S. Card business acquisition in the second quarter, and we expect merger-related impacts to have a significant effect on Domestic Card results in the remaining quarters of 2012. We expect second quarter results to reflect the significant build in allowance and finance charge and fee reserve as we build -- excuse me, as we bring the HSBC Domestic Card loans onto our balance sheet. We also expect to take a credit mark to cover expected losses on delinquent loans that no longer carry revolving privileges. We anticipate the credit mark will absorb most of the HSBC credit losses for the next couple of quarters, artificially lowering the overall charge-off rate at the Domestic Card segment during that time. We expect that the Domestic Card charge-off rate will increase in the fourth quarter of 2012. In addition to these expected short-term impacts, we expect the addition of HSBC loans will affect quarterly trends across the business. We expect that the continuing runoff of parts of the HSBC portfolio will offset the underlying growth trajectory of the combined Domestic Card business, resulting in modest overall loan growth rates for the segment. We expect the domestic -- that combined Domestic Card quarterly revenue margin will decline in the quarters following the completion of the HSBC acquisition, with the majority of the decline resulting from planned actions to bring HSBC's customer practices in line with our own. We expect the phased implementation of these actions to reduce our quarterly Domestic Card revenue margin by about 30 to 35 basis points by the first half of 2013. These actions were planned and included in the expected deal economics when we announced the acquisition. Additional factors expected to pressure Domestic Card revenue margin include runoff of higher yielding loan balances and purchase accounting impacts. We expect PCCR amortization will increase Domestic Card noninterest expenses for several years. And after the short-term moves I described a moment ago play out, we expect the charge-off rate on the combined Card business to reach a level that's around 75 basis points higher than the standalone charge-off rate for Capital One's Domestic Card business. Despite the noise associated with these short-term and medium-term impacts, we expect that the synergies and ongoing operations of the HSBC U.S. Card business will drive a significant and sustainable increase in Domestic Card earnings. Turning to Slide 10, first quarter results in our Consumer Banking business reflect the addition of ING Direct, as well as continued strong Auto Finance performance. The significant increases in loan and deposit volumes, revenue and noninterest expense were all driven by the addition of ING Direct in the quarter. We added about $40 billion in ING Direct Home Loans in the quarter and Auto loans grew by about $1.8 billion. Growth in Auto loans resulted from continued traction in geographic expansion and our strategy to deepen relationships with the most valued auto dealers. Auto loan originations grew 19% from the prior quarter. We're pleased that we achieved these growth while maintaining tight underwriting standards, and much of the growth in the first quarter was in prime loans. While the pace of originations growth is likely to moderate, we expect that loans will continue to grow throughout 2012. Loan yields decreased with the partial quarter effect of adding the ING Direct loan portfolio, and they're expected to decrease again in the second quarter with the full quarter effect of adding ING loans. We expect relatively stable Consumer Banking loan yields after the second quarter. We expect yield increases from the expected mortgage runoff to be offset by yield decreases from a higher mix of prime loans in our Auto Lending business. We expect that sizable runoff of the ING mortgage portfolio and the continuing runoff of our legacy mortgage portfolio will more than offset the growth in Auto loans, driving a declining trend in Consumer Banking loan balances for several years. We added just under $85 billion in deposits when we completed the ING Direct acquisition. Weighted average deposit interest expense decreased 11 basis points in the quarter, the result of disciplined pricing across our combined deposit franchise and the current rate environment. Provision expense declined, with lower charge-offs in both the Home Loans portfolio and the Auto lending business, partially offset by an allowance build driven by the increase in Auto Loan balances. The Consumer Banking business posted net income of $224 million in the quarter, driven by strong Auto profitability and a partial quarter of ING Direct run rate profitability, partially offset by amortization of purchase accounting impact. With continuing growth and profitability in Auto lending, strong positions in great Local Banking markets and the powerful ING Direct deposit franchise with national banking reach. The Consumer Banking business is poised to deliver solid, long-term results. As you can see on Slide 11, our Commercial Banking business continues to deliver strong and steady performance. Loan volumes increased about 2% in the quarter. Year-over-year, loans increased by about 15%. Growth in loan commitments was even stronger. For several quarters, we've targeted and achieved the strongest growth in areas in which we built specialized expertise and capabilities, including rent control, multifamily real estate in Metro New York City and selected C&I industry segments such as energy and commercial finance. Commercial deposits grew 5% in the quarter and 15% year-over-year, with improvements in deposit interest expense. Revenues were relatively flat in the quarter, but up about 15% from the first quarter of 2011. Noninterest expense increased in the quarter, as we continued to hire bankers and invest in our infrastructure to attract and serve primary banking relationships. Strong commercial credit performance continued in the quarter. The charge-off rate for the Commercial Banking segment was 19 basis points, down 43 basis points in the quarter and 61 basis points from the first quarter of 2011. The charge-off rate in our Commercial Lending businesses, which exclude the runoff Small-Ticket CRE portfolio, was actually 0, with charge-off rates improving across all of our commercial businesses except Small-Ticket CRE. The nonperforming asset rate for the Commercial Banking segment was 1.23%, up 6 basis points from the fourth quarter but down significantly from the first quarter of 2011. The modest increase in the quarter was driven by a small handful of CRE loans. We expect continuing strength in commercial credit, with some quarterly choppiness in commercial charge-offs and nonperformers. Net income for the quarter improved significantly to $210 million, as the Commercial Banking business continues to deliver a meaningful and increasingly important contribution to Capital One's overall results. Turning to Slide 12, we expect that significant runoff portfolios will mute the optics of reported loan growth for Capital One, despite strong underlying growth in our key businesses. As I've just discussed, we're delivering strong growth in several key businesses across Capital One. Our Auto Finance business continues to gain traction with our strategy to build deep relationships with our most valued auto dealers and our expansion of this relationship approach to new geographies. In our Commercial Banking business, our focused approach to commercial real estate and our deep industry specialization in C&I continue to generate strong growth in loans and loan commitments. Capital markets funding for commercial businesses has declined and many foreign banks and nonbanks have pulled back from Commercial Lending. And in our Domestic Card business, we're gaining share on the level playing field created by the CARD Act and the great recession. Our new products like Venture, Cash and Spark are winning in the marketplace. And we're adding customer relationships, loans and platforms for future growth with new private label partnerships like Kohl's and Sony. We expect the completion of the HSBC U.S. Card business acquisition will catapult us to a leading scale position in the private label partnership space. These growth trends have long been partially offset by the impacts of runoff portfolios like Installment Loans in the Domestic Card business; the Home Loans back book that we inherited through our North Fork and Chevy Chase Bank acquisitions in Consumer Banking; and the Small-Ticket Commercial Real Estate portfolio in Commercial Banking. With the acquisition of ING Direct, we're adding a significant runoff portfolio of ING mortgages, and we expect portions of the HSBC Card portfolio to continue the runoff as well. Over the 12 months, beginning with the third quarter of 2012, we expect around $8.5 billion of mortgage runoff in our Consumer Banking business at about $1.8 billion of runoff in portions of our Domestic Card business. All told, we expect that the runoff portfolios will decline by about $10.5 billion from the third quarter of this year through the third quarter of 2013 and will decline by a further $8 billion through the third quarter of 2014. Because of this significant runoff, we expect modest overall loan growth for the total company despite strong underlying loan growth in our Auto Finance, Commercial Banking and Domestic Card business. I'll close tonight on Slide 13. Capital One continued to deliver strong results in the first quarter of 2012. The most newsworthy event of the quarter, of course, was the completion of the ING Direct acquisition. We are thrilled to welcome the customers and associates of ING Direct to Capital One. We now look forward to completing the acquisition of the HSBC Card business in the second quarter. We continue to believe that both transactions are financially and strategically compelling, and we are as excited about them today as when we announced the deals. We still have a lot of work to do to integrate them, but as we've gotten closer to both ING Direct and the HSBC U.S. Card business, we've been able to affirm that the drivers of financial and strategic value remain very compelling and in line with our expectations. The run rates of the businesses are performing as we expected. And at ING Direct, customers continue to build deposit balances and there have been no meaningful changes in attrition or customer loyalty measures. We haven't changed our view of expected synergies, and we've been impressed with the talent and cultural fit of both institutions. By 2013, we expect that deal synergies and the strong underlying earnings power of the combined Capital One, ING Direct and HSBC businesses will deliver attractive financial results and EPS accretion. We'll continue to provide purchase accounting and merger-related impacts to help bring these underlying trends into view in the second half of 2012. With the ING Direct integration well underway and the HSBC U.S. Card acquisition on track to close in the second quarter, we're focusing on delivering the financial and strategic upside of these combined companies. Because the acquisitions are such a key source of shareholder value, we're committing all the necessary management time and talent to executing surefooted and effective integration. We're also building a great customer franchise. Capital One is already one of the handful of banks that's building a very large and loyal customer base. ING Direct brings 7 million loyal early digital adapters with attractive demographics and HSBC has 27 million active U.S. Credit Card accounts, so the acquisitions will strengthen and expand our combined customer base. Over time, these customer relationships are a tremendous source of value as we can expand and deepen customer relationships with new products and services. We've made great strides in delivering a franchise enhancing customer experience, and we expect to preserve and leverage this simple, compelling ING customer experience as we continue to build a great customer franchise across all our businesses. The combination of Capital One, ING Direct and the HSBC U.S. Card business puts us in an even stronger position to create sustained shareholder value through growth potential, strong returns and strong capital generation. We are focused on delivering that value, including distributing capital to shareholders through a meaningful dividend and share buybacks, consistent with our long-standing commitment to maintaining a strong and resilient capital base. With that, Gary and I will be happy to answer your questions. Jeff?

Thanks, Rich. We will now start the Q&A session. [Operator Instructions] Lynette, please start the Q&A session.

[Operator Instructions] We will take your first question from Dave Hochstim from Buckingham Research Group.

Wondering, could you just clarify what you said about the Domestic Card revenue margin declining and then expecting higher charge-offs as well? It seems [Audio Gap]. And then just on the $75 million reserve, could you just explain what happened in terms of product sales?

Okay. So David, with respect to the revenue margin, what we are saying is, of course, we have a strong revenue margin at Capital One. We're buying a company that also has a kind of comparable, strong revenue margin. What we're saying is that when we -- as we plan from the time of the announcement of the deals, when we bring on HSBC, that, as you can imagine, thinking of all the work that we've done over the years with respect to our own policies and customer practices, bringing HSBC in line with those will hit a run rate of revenue margin reduction on our portfolio of about 30 basis points to 35 basis points. There is a phasing of those effects, but over the course of the first half of 2013, we will hit that run rate. And that's a sustainable effect from the transition of HSBC into Capital One.

And their charge-offs are higher, so their margins are lower? And when charge-offs are higher...

Yes. Yes. So as you remember, with the various data that's come out as part of this deal and I think if you look on at HSBC, HSBC has just essentially always had a charge-off rate that is a fair amount higher than Capital One's. And so when it comes into Capital One, just the math of the weighted average of those will take over. Our point is that you won't see that for a couple of quarters after HSBC comes on because of the mark that will pretty much take out those charge-offs for a couple of quarters. But what we're saying is after that mark runs its course, there will be a sustainable delta of around 75 basis points effective combined higher charge-offs that comes from just the math of pulling these 2 institutions together. I'm sorry, did I answer -- there's a bunch of 75s. Okay. And the -- I'm so sorry, so the 75 -- you want to ask about the accrual related to the cross-sell, David? Yes. So we have policies and scripts in place to ensure that our sales practices meet our standards. And unfortunately, this didn't happen in some cases with respect to the sale of some cross-sell products at Capital One. So what we're doing is, we are reaching out to all the customers who have purchased these products over the past couple of years and are offering a refund to those customers. And this is a one-time $75 million hit that we're taking for that effect. But it's very important that we make sure that all of our customers have bought the products in the context that we exactly intended when we were selling.

We'll move next to Sanjay Sakhrani with KBW. Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division: I had a couple of questions on just numbers. First, I want to make sure I had all the onetime items in terms of the impacts to continuing ops on legacy Capital One. Are they -- the $150 million Visa gain, the $75 million hit to current reserve build, $19 million hit to Rep and Warranty and $25 million and higher expenses related to the HSBC integration?

All of those items came through continuing ops, Sanjay, that's correct. The only thing I'll mention because the way we have shown them, because of the bargain purchase gain, the hedge lost that was recorded in the quarters of $77 million, which previously was showing up in continuing ops but wasn't called out as an ING expense, although we told you what it was for, it's showing up in the column that says ING impact. So I just want to make sure you know that, that onetime impact is there, but it's showing up in the INGD column. Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. Perfect. And then just as far as the impact on ING on a go-forward basis, when looking at Slide 3, are the 2 ongoing impacts kind of the loan premium amortization as well as the CDI amortization? I know that's for half the quarter, but just on an ongoing basis, is that what we have to kind of back out of what the core earnings power of ING is? And could you just talk about how that core earnings power of ING compares today relative to the number you guys provided when you closed the deal of $630 million?

Sure, Sanjay. With respect to your -- the question about what is an ongoing source of expense or impact to revenue, you are correct. The loan premium amortization will continue for several years. It's being recognized on an accelerated schedule. So at this stage, we're running at $40 million, $45 million a full quarter, and that will start to come down, the CDI, obviously, will continue for a substantial period of time. There will be no more transaction-related expenses for ING Direct having to do with the deal, itself, but certainly, there will be integration and other merger-related expenses that will be hitting for a period of time, and we'll call those out for you. So certainly, the bargain purchase gain and the mark-to-market loss, or mark-to-market position on the hedge which is related to that will not recur. So you've got that correct. Certainly, in terms of the view of ING Direct's ongoing impact, what we've really tried to do for you this quarter, Sanjay, is not to suggest what you should think about in terms of ING's ongoing impact. What we really tried to do was to give you a clean view of our first quarter performance net of ING Direct so that you could compare it to our fourth quarter performance, which was obviously before the acquisition. What we've tried to do in terms of an impact of ING Direct in this quarter is to reflect it as it would have operated as a standalone company. In other words, we took into account their Securities portfolio before we combined it with our own. We simply looked at the yields on their assets and their deposits. So it's a good representation of what ING Direct would have done as a standalone company, which isn't materially different from that which we had assumed at the time of the deal. You've just reminded us of that sort of $630 million number. But I wouldn't say it's necessarily a good representation of the value of ING Direct going forward because Capital One will value the deposits of ING Direct more highly than they would have been. And so that, obviously, will be reflected in the Consumer Banking segment. The Securities portfolio and the cash position of ING Direct is showing up in our other category. We're just going to optimize our balance sheet as a whole. So I think the information we've given you should allow you to understand what short-term impact ING Direct has had. I think in order to understand the long-term impact, you really have to kind of go back to our assumptions around the deals, and as Rich said, we feel that -- we feel as good about them today as we did when we announced them.

John Stilmar with SunTrust has your next question.

Rich, just a quick highlight for us on the legacy Capital One business. Top line yield continues to actually move up and defying what other banks are showing at least on the top line yield in terms of the U.S. Card business. What is the real driver there? Is it net card customer profitability in your legacy Capital One business getting better or is it just the migration of Installment Loans becoming a less important part of the business? And if that's the case, can you help us kind of understand what that dynamic might be on the legacy business going forward?

Well, the -- we have just had a lot of strength on the revenue side, and I've embarrassed myself on -- you should be cautious asking me this question because if you remember when I kept predicting this revenue margin to come down and it stubbornly kind of refused to do that. So it demonstrates, though, the power of several things that are going on. I mean, some of the revenue margin strength has been related to credit that has continued to come in a little bit better than expected, and, of course, that's not a sustainable point, and we would expect not to get too much more of those credit effects. But the marketing we're doing over the last few years has been really light in terms of teaser-oriented balance transfer of products. I mean, we're just not really active participants in that particular segment. We have -- our highest yielding parts of our portfolio have had significantly less attrition than we expected also which has contributed. And funding costs are down also, which helps the current revenue margin. So we feel very good about this and, of course, now we bring on HSBC, who I think the earnings power of that enterprise really comes from revenue margin strength. And what excites us is the fact that there we see a lot of opportunities in the way we can manage accounts and hit the ground running with that business. That, I think, will show continued strength in revenue margin. I do want to say, though, that, of course, note, we are pointing downward with respect to revenue margin and we really mean it here relative to this known impact of taking a little bit of the air out with respect to some of HSBC's practices. So that's a very real effect. I think also we should expect the competitive environment, which is gradually heating up. I think that, that impact will clearly, I think, kind of take things down a little bit. And I do want to also say that as we continue to get traction in partnerships, which I'm really bullish about the continued opportunity we have there, that will be great in terms of value creation, but that's a thing that pulls down margin as well.

Chris Brendler from Stifel, Nicolaus has your next question. Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division: Just a couple of quick clarifications, if I could. Rich, the discussion around HSBC and the practices and the changing around those practices and the 75 basis points, I believe -- or sorry, 30 basis points of revenue margin pressure doesn't -- I think you would also benefit, as the HSBC loans come on, the revenue margin should go up first and then start to come down as you maintain just to those practices. Is that the case?

I think less so than you might think. I mean relative to attrition and other things, I think that we're not really seeing an updraft before the downdraft. I think that we think things are mostly going to be coming in around where we are, and then from there, you have the phased downdraft effect of our implementation of the things we've been planning to do for a long time. Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division: Okay. If I could ask a second question, or a clarification. The bargain purchase gain, I believe, is not taxable, if I'm calculating correctly. And then I'll just ask, my real question would be on interchange. You've had quite a bit of success in the U.S. Card business and growing to purchase volume, another good quarter this quarter, 27% growth, 25% growth, whatever the number is, but interchange revenue seems to be relatively flat. Is that a reflection of the rewards products you're pushing out today or is there other true-ups in the rewards redemption rate that's causing the depressed growth in that interchange, if you could just help me to think about that?

Gary, why don't you do bargain purchase, I'll do interchange.

You're right, Chris. The bargain purchase is not -- it carries no tax burn.

Chris, yes, purchase volume at Capital One has been growing pretty dramatically. I mean, obviously, we've also brought in partnerships and that's added to this effect. But even without the partnerships, we have tended to be leading the league tables of industry growth in the last couple of years with respect to purchase volume growth. Let me talk about interchange here for a minute. First of all, just a comment about the Q1 interchange numbers. The Q1 interchange numbers were relatively weak due to seasonality. That's in fact -- it's pretty consistent for Capital One. So quarter-over-quarter, our purchase volume was down 9% and our interchange was down 7%. But pulling way up on the observation that you talk about that while purchase volume is very strong, the interchange is not growing at as strong a rate. It's important to note that the net interchange disclosures in the press release tables are for the total company, and they include payments to some of our partners and some impacts from other lines of business. So it's difficult to derive truly what's going on with respect to net interchange income from these disclosures. If you were to look at just our Domestic Card business, which would take out the impact of other business lines and the effect of the partnership payments, net interchange has had solid growth throughout 2011 and in the first quarter of 2012. Now that said, our Domestic Card net interchange is not increasing at the same rate as our purchase volume as we continue to shift our portfolio toward rewards customers and move away from some of the balance intensive revolver segment, which has limited rewards cost but lower margin and greater resiliency challenges. So look, we feel great about the rewards customers we're attracting and we think that interchange, although it's growing less quickly than purchase volume, I think is going to be a continuingly strong contributor to the revenue growth of the company.

We'll move next to Brian Foran with Nomura.

My first question on the deal accretions. I guess at the time of the mergers, you had said mid-single-digit accretion to 2013 from ING. And at the time of HSBC, you had said high-teens GAAP and operating EPS accretion to 2013. And consensus was around $6 at the time for both. So with all the kind of things you're talking about, the practice changes at HSBC, et cetera, is the mid-single digit and high-single digits off consensus at that time still a good benchmark to work off of in terms of the top-down accretion, or have any of the things you've now outlined changed your contemplation of how accretive these deals might be?

Brian, it's Gary. I'm happy to take that. And certainly, what you might call a baseline free acquisition trajectory, obviously, will have changed if for no other reason than the interest rate environment. But as far as the deals themselves go, with ING Direct, of course, we've had a beneficial improvement to the upfront capital impact of that transaction, which will cause a bit of amortization of that capital over the next year or so, which obviously will affect reported earnings, but by a relatively small amount which I identified. So that might have a small impact in terms of reported results over the next couple of years. With HSBC, obviously, we haven't closed the transaction. There will be -- I wouldn't be surprised if there were more significant purchase accounting impacts upfront, and therefore, on income over the next year or so. But looking aside from the accounting, the fundamentals of what we see in the HSBC business look good and very much in line with what we saw before we announced the deal and what we put into those numbers, including some of the moves that Rich described. So I think if you put the 2 deals together as we can see them right now, I think we're still in the same ballpark for accretion. But we'll certainly give you a running commentary as it plays out, so you understand what the moving parts and pieces are.

And then my follow-up is Slide 7. Can you explain how this disallowed DTA works? I guess, first, why it's increased the past 2 quarters? Second, when you gave the mid-9s capital guidance for the deal close, would that mid-9s include something in the same ballpark of this $900 million disallowed DTA? And then third, I realized that disallowed DTA recapture can depend on actual earnings, your forecast as you turn the calendar year every January 1. But is there any reason to expect that this $900 million wouldn't be recaptured over some near- to medium-term amount of time?

It's certainly one of my favorite topics, Brian. DTA, as you suggested, has gone up. Although we have not closed on the HSBC transaction, we do contemplate the close of the transaction. It is going to have an upfront negative impact on earnings and that, among other things, can contribute to an increase in the DTA in this quarter. Obviously, as time plays out, the likelihood of recapture is quite high. With respect to the previously stated expectation of the mid-9% range for Tier 1 common at the end of next quarter, as I said, it's more likely to be affected by purchase accounting than it is by our forecast of DTA. But we certainly feel, as of today, that we're in that right ballpark, could be helped. That could go the other way in a very, very short run because of purchase accounting, but if so, that is likely to resolve within a quarter or so.

Up next is Craig Maurer from CLSA. Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division: Following up on the earlier question regarding your growth in purchase sales. I want to ask you a question about competition. Bank of America shed roughly $90 billion in card assets since mid-'08. It seems that there are few real winners in this segment. When do you expect the industry itself to start growing again, or are we still going to see just shifts in assets going on for quite a long time? I was just curious.

Craig, I think the industry is just sort of getting back to where -- if you look at the revolving credit numbers, so they are really just -- they've been now just a few months of where the thing is, essentially flat. So my feel for the industry is that its big days of shrinking are over, but it's going to sort of gradually come back to a modest level of growth. I think the real story is, it's kind of to your earlier point, the opportunity or some of the share change dynamics that go on with different players. And we are finding -- I mean, and I think the striking thing is different players are just taking out different positions. And we are finding in all of the segments that we are investing in -- and that's very similar to where we -- the ones we were focusing on before the great recession, by the way -- we are finding that we are steadily gaining share in those segments. We're also finding that the -- as we project the net present value of our originations, if you kind of add it all up, we do sort of a metric of the NPV of everything we're originating in a year, how does that compare with NPV in prior years. The sort of overall value creation from these things is consistent with some of the strong years in the middle of the decade. So we feel very good about this. But I think the story for Card, for Capital One, is going to be not so much a story about growth, although I think it will be a story of share gain, but most importantly it's going to be a share -- a story of earnings power and consistency. And as such, I think that it's going to be an important driver of shareholder value going forward. I want to also say that in terms of competitive levels and pricing, I think the industry is at a kind of a stable point. It's not really going up, it's not really going down. But I think there's a rationality to it at least, even though the competition is fierce. There's a rationality to it that adds to my confidence that this can be a powerful driver of value for Capital One. Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division: Just a follow-up, do you think that rationale -- rationality applies to reward spending as well, as we've seen those increase dramatically as everybody seems to be targeting the same group?

Look, I think you have to catch everyone's attention that everywhere you turn, there's another big investment going on by somebody. Particularly MX, Chase and ourselves are going very hard right at that heavy spender part of the marketplace. Look, it is fiercely competitive, and it's -- these are by far the most expensive accounts to book of anything that we originate. The nice thing is with these -- these are wonderful annuities that have low attrition and fabulous return dynamics, and it's really all about therefore the cost to acquire. But what that also means, Craig, is it something where you don't -- one can see -- we can watch it at the time of origination and really understand the investment that we're making right there on the spot. And while it's very competitive, we like the success that we're getting and we're going to continue doing what we're doing, and I think real value is getting created there.

That will come from Don Fandetti from Citigroup.

Yes, Gary, I was wondering if you could, as you look forward to Basel II, if you could talk a little bit about the impact of high-risk weightings on sort of lower credit quality card receivables and what impact that might have on you and if you can quantify it in terms of the RWA inflation?

Sure, Don, and let me answer the second part of that question first. No, we don't have specific estimates for you at this point in time. Remember that we are only going to become a Basel II bank at the end of this year as a result of our acquisition of ING Direct. That makes that a certainty. Therefore, we'll have a 2-year preparation process prior to going parallel in 2015, and obviously, not actually entering Basel II fully until at least 2016. So it's way early to really try and identify what those numbers might be. Obviously, as we asses our own capital trajectory, we need to make some internal views about what the impact is going to be. Certainly, it should, all else being equal, cause our risk-weighted assets to rise. But as we assess our capital trajectory knowing that Basel II, and of course Basel III are in our future, we also take into account the fact that our own robust internal economic capital models at least are on the same -- running along the same principles as Basel II. Obviously, there are a lot of individual parts and pieces that may affect that. And also, running stress tests as we now do also gives us a sense of what we might expect out of the various kinds of assets that we have. So this is going to be an ongoing journey for us. We'll certainly give you insight when we are able to generate it. It will take quite a bit of time. Let me set your expectations there. But even including the expected increase in risk-weighted assets from Basel II, we take that at least general knowledge of what's ahead when we say that we're going to be on the strong capital generation trajectory even between here and there.

Got you. That's helpful. And then lastly, if you could -- has there been any more movement in terms of a potential nomination of an ING member to your board, and if you could just talk a little bit about the lockup of those shares, what your thoughts are?

Yes. So the -- as you know, under ING's ownership stake, they have the right to nominate one member to join our Board of Directors, and we are working through the appointment process now with ING Direct.

As far as the lockup itself, Don, goes just to remind you what you probably already know, which is that lockup is in effect until 90 days after closing, which is going to be on or around May 17.

Moving on to Moshe Orenbuch with Crédit Suisse. Moshe Orenbuch - Crédit Suisse AG, Research Division: The first is, I'm just trying to make sure I understand correctly your guidance for the 35 basis point lower revenue margin and 75 basis point higher credit loss. I mean, given that it probably at that point will be about 1/3 of the receivables, right? So if you're talking about the ING -- I mean, the HSBC portfolio being in the neighborhood of 100 basis point to 120 basis point lower yielding than your portfolio and losses kind of 200-and-some-odd basis points higher, is that correct?

Just in terms of the math, Moshe, it's Gary. Certainly, your estimate on the charge-off is about right. I'll normally trust your math on the revenue side as well. So just math-wise, I think you've got it. Moshe Orenbuch - Crédit Suisse AG, Research Division: Okay, great. And just as a follow-up, the sale, the pro forma has mentioned that you are planning to sell $17 billion of securities from ING. When does or did that happen, and did that include the subinvestment grade, the RMBS securities?

As far as that goes, Moshe, Gary again, on the -- on what came over from ING Direct, by and large, we have not sold anything, any material amount of the ING Securities portfolio. We did sell several billion, between $5 billion and $10 billion worth of securities out of Capital One's portfolio, you'll remember, starting back in Q3 of 2011. And so we haven't really needed to sell any more securities in order to achieve the necessary liquidity for HSBC. As you can see on the slides, we're already about $32 billion in cash at the end of Q1. And with respect to our future expectations, with respect to balance sheet repositioning, we're integrating the investment -- we have integrated the investment portfolios as of day one between ING Direct and Capital One. We've integrated our overall balance sheet management. And from here on out, we will be optimizing to get kind of the best risk return position consistent with our historically prudent credit and market-risk guidelines. With respect to the very specific question, the subinvestment grade, private mortgage-backed securities that were in the ING Direct portfolio as identified when we announced the deal, obviously, those are paid down somewhat. But by and large, those did come along with the acquisition itself. We have not made any moves with respect to that, but as with all of the assets that came over from ING Direct, those were marked to the fair value when they came over.

Ryan Nash from Goldman Sachs.

Hey, Rich, just in terms of the loan growth, I guess down, call it 5.5%, then you recognized there is a lot of seasonality in there. But is there something different in the portfolio that really drove the outsized decrease this quarter? I guess we saw it for everybody in the industry, and is it whether it's just the greater focus on spend you're seeing more volatility imbalances? And also, how much is left in the installment book to run off?

Ryan, the -- we had one accelerator -- we had one amplifier of seasonality that we'll have to get used to going forward, which is the Kohl's portfolio and, of course, now we'll have to watch other partnership portfolios. But definitely, bringing Kohl's on added actually materially more outstanding seasonality between Q4 and Q1. I'd have to go study the seasonality of the other -- of the HSBC partnerships, but we'll find out about that. Gary, do you have the Installment Loan number?

Not off the top of my head. It was several hundred million, but we can certainly get back with a more specific number.

Okay, I'll follow up with Jeff. And just one other clarification. Just in terms of the loan runoff expectation, I didn't get it exactly. Was it that it's going to be $10 billion for -- up through 2Q '13 and then $8 billion after that, was that the amount?

Yes. So it was kind of awkward the way I was describing it because we were trying to be precise on things that started. So when -- basically for the year following when we fully have these, both of these deals on board, which would be there for Q3 through Q2 of the following year. I think what was confusing is I said that Q3 when it's through Q3. But anyway, so for the year, starting Q3 of 2012, the expected runoff would be $10.5 billion and then for the year following that, midyear to midyear again, the year following that, it would be the $8 billion number that I had.

Ryan, Gary again. Let me just give you some realtime updates there. So my intuition was about right. We had about $360 million of runoff in Installment Loans in the fourth quarter. We got about $1.5 billion left of that.

Daniel Furtado from Jefferies. Daniel Furtado - Jefferies & Company, Inc., Research Division: You referenced in the first quarter here the absence of $150 million in unique contra-revenue items that were recorded in 4Q. Can you please speak to those, and will these unique items reappear in the near term?

Dan, the items that were in the fourth quarter that did not recur in the first quarter, the largest of them was a reserve for the U.K. PPI business. We told you that was about $80 million in the fourth quarter. That was a contra-revenue. We also had close to $40 million worth of Rep and Warranty expense in the fourth quarter that hit continuing operations. A lot of it, of course, goes into the disc ops. But your question, of course, is specifically around that. And then there was a very small movement in the ING hedge in the fourth quarter and a few other nits and nats that kind of ended up to about $150 million. By and large, the only one of those that repeated this quarter was a small amount of Rep and Warranty in disc ops, but not large enough to talk about. With respect to the potential for those to show up again in the future, again, the U.K. PPI reserve has grown a couple of times over the last year. That's based on an assumption about consumer behavior over there. We think we obviously have fully reserved for the experience we've seen, and we expect it's conceivable there could be a change but we have no reason to believe that right now.

[Operator Instructions] And your final question will come from Betsy Graseck from Morgan Stanley.

It's easy, asked and answered. I'm good.

Well, in that case, I'd like to thank everybody for joining us on the conference call today, and thank you for your continuing interest in Capital One. The Investor Relations staff will be here this evening to answer any questions you may have. Have a good evening.

And that does conclude today's teleconference. We thank you all for your participation.