Capital One Financial Corporation

Good day, ladies and gentlemen, and welcome to the Capital One second quarter 2021 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. If you'd like to ask a question during this time, simply press the star key, then the number one on your telephone keypad. If you would like to withdraw your question, press the star key, then the number two. Thank you. I would now like to send the conference over to Mr. Jeff Norris. Senior Vice President of Finance. Sir, you may begin.

Thanks very much, Holly, and welcome everyone to Capital One's second quarter 2021 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 second quarter 2021 results. With me today are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer, and Mr. Andrew Young, Capital One's Chief Financial Officer. Rich and Andrew will walk you through this presentation. To access a copy of the presentation and 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 in 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 factors 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. Young. Andrew.

Thanks, Jeff, and good afternoon, everyone. I'll start on slide three of tonight's presentation. In the second quarter, Capital One earned $3.5 billion, or $7.62 per diluted common share. Included in the results for the quarter was a $55 million legal reserve bill. Net of this adjusting item earnings per share in the quarter was $7.71. On a gap basis, pre-provision earnings increased slightly in the sequential quarter to $3.4 billion. We recorded a provision benefit of $1.2 billion in the quarter, as $541 million of charge-off was offset by a $1.7 billion allowance release. Revenue grew 4% in the linked quarter, largely driven by the impact of strong domestic card purchase volume on non-interest income and the absence of the mark on our snowflake investment a quarter ago. Period end loans held for investment grew $6.5 billion, or 3%, inclusive of the effect of moving $4.1 billion of loans to held for sale during the quarter. The loans moved to held for sale consisted of $2.6 billion of an international card partnership portfolio and $1.5 billion in commercial loans. Turning to slide four, I will cover the changes in our allowance in the quarter. We released $1.7 billion of allowance, primarily driven by observed strong credit performance and an improved economic outlook. Turning to slide five, we provide the allowance coverage ratios by segment. You can see allowance coverage declined in the quarter across all segments, largely reflecting the dynamics I just described. However, coverage ratios remain well above pre-pandemic levels due to continued economic uncertainty as our allowance is built to absorb a wide range of outcomes. Our domestic card coverage is now 8.9%, down from 10.5% last quarter. Our branded card coverage is 10.1%. Recall that the difference between branded and domestic coverage is largely driven by the loss sharing agreements in some of our partnership portfolios. Coverage in our consumer business declined about 60 basis points to 3.0%. In addition to continued strong credit performance and improved economic outlook, historically high auto values aided the reduction in coverage. Coverage in our commercial banking business declined about 25 basis points to 1.7%, with the single largest driver being the improvement in our energy portfolio. Turning to page six, I'll now discuss liquidity. You can see our preliminary average liquidity coverage ratio during the quarter was 141%. The LCR continues to be well above the 100% regulatory requirement. Our liquidity reserves from cash, securities, and federal home loan bank capacity ended the quarter at approximately $137 billion. The $14 billion decline in total liquidity was driven by lower-ending cash balances. Our cash position declined in the quarter as it was redeployed to net loan growth, wholesale funding maturities, a modest increase in our securities portfolio, and share repurchases. Moving to page seven, I'll now discuss net interest margin. You can see that our second quarter net interest margin was 5.89%, 10 basis points lower than the prior quarter. The linked quarter decline in NIM was largely driven by lower yield in our card portfolio. where the typical seasonal decrease in revolve rate was exacerbated by higher transactor volume and associated higher payments. These impacts were partially offset by the favorable impact from one more day in the quarter. Lastly, turning to slide eight, I will cover our capital position. Our common equity tier one capital ratio was 14.5% at the end of the second quarter, down 10 basis points from the first quarter. loan growth and capital actions were largely offset by earnings growth. During the quarter, the Federal Reserve released the results of their stress test. Our stress capital buffer requirement, which will be effective on October 1st of this year, is 2.5%, resulting in a total capital requirement by the Fed of 7.0%. While we saw a decline in this year's SCB, It's important to note that the Fed's stress testing results can move around meaningfully from year to year and are only one of many factors that we use in our capital planning process. Based on our internal modeling, we continue to estimate that our CET1 capital need is around 11%. Turning to share repurchases, we repurchased $1.7 billion of common stock in the second quarter, the full amount allowed under the Fed's capital preservation measures. We have approximately $5.3 billion remaining of our current board authorization of seven and a half billion. Now let me move on to dividends. In the third quarter of 2020, we reduced our dividend to 10 cents due to the Fed's capital preservation measures. We chose to continue this reduced level of dividend in the fourth quarter of 2020 out of an abundance of caution. The difference between our historical 40 cent dividend and the reduced level for those two quarters was $0.60 per common share. Therefore, we expect to make up for the reduced level of dividends from the second half of 2020 by paying a $0.60 special dividend in the third quarter of 2021. In addition to the special dividend, we expect to increase our quarterly common stock dividend from $0.40 per share to $0.60 per share in the third quarter. Both the $0.60 special dividend and the increase of our quarterly common stock dividend to $0.60 will be subject to board approval. With that, I will turn the call over to Rich. Rich?