Capital One Financial Corporation (COF) Earnings Call Transcript & Summary

Good morning. Welcome to the 2020 Annual Stockholder Meeting of Capital One Financial Corporation. At this time, I would like to turn the call over to Mr. Richard Fairbank, Chairman, CEO and President of Capital One. Mr. Fairbank, you may begin.

Good morning, ladies and gentlemen. I am Rich Fairbank, Chairman of the Board, Chief Executive Officer and President of Capital One Financial Corporation, and it's my pleasure to welcome you to our annual stockholder meeting. Before we begin, as a result of the COVID-19 pandemic, and given our concerns with the health, safety and well-being of our stockholders, directors, officers and associates, we decided to hold our annual meeting in a virtual-only format this year. We are grateful that you are joining us virtually this morning. We look forward to welcoming you back to our headquarters next year. On the call with me today are Scott Blackley, our Chief Financial Officer; and John Finneran, our Corporate Secretary. We are also pleased to have with us this morning on the call, members of our Board of Directors: Aparna Chennapragada; Ann Fritz Hackett; Tom Killalea; Eli Leenaars; Pierre Leroy; François Locoh-Donou; Peter Raskind; Eileen Serra; Mayo Shattuck; Brad Warner; and Catherine West. Also on the call are [ Paul House ] and Matthew Streadbeck of Ernst & Young, our independent registered public accounting firm. And finally, we have on the call, James J. Raitt, of American Election Services, LLC, our Inspector of Election for today's meeting to receive proxies, to count the votes and to report the results of voting. Mr. Finneran will record the minutes of this meeting, and will now present the notice of the meeting and report on other administrative matters. Mr. Finneran?

Thank you, Mr. Chairman. As a reminder, please note that in today's meeting, we may make forward-looking statements which are based on management's current expectations and are subject to uncertainty and change in circumstances. Numerous factors could cause our actual results and condition to differ materially from those described in any forward-looking statements, including those described in the Risk Factors section in our annual and quarterly reports, accessible in Capital One's Investor Relations website and filed with the SEC. Broadridge Financial Solutions, Inc., Capital One's proxy distributor, has delivered an affidavit stating that the notices of Internet availability of the proxy statement and other proxy materials were first sent on or about March 19, 2020, to all stockholders of record as of March 3, 2020, which was the record date established by the Board of Directors to determine the stockholders entitled to receive notice of, and to vote at this meeting. In addition, we have made available for inspector -- for inspection an electronic list of all such stockholders certified by our transfer agent, Computershare Trust Company. The Affidavit will be kept with the records of the meeting. Also, the inspector of elections has previously taken an oath of office, which will be filed with the records of this meeting. Mr. Chairman, as of March 3, 2020, the record date for this meeting, there were 450 million -- 457,421,339 shares of common stock outstanding that are each entitled to 1 vote per share. The inspector of elections reports that the holders of at least 412,681,244 shares are present. This is approximately 90.21% of all shares eligible to vote and constitutes a quorum for the transaction of business. Mr. Chairman?

A quorum being present, I therefore declare the meeting open and ready for business. There are 5 matters to come before us today as listed in the notice of the meeting. I again call on Mr. Finneran to review some procedures and address the matters brought before this meeting. Mr. Finneran?

Thank you, Mr. Chairman. The agenda and rules of conduct for the meeting are available at the Annual Meeting web page at the bottom right side of the screen. If there are any questions or comments specifically concerning the matters to be voted on in this meeting, please submit them via the web page by typing them in the box at the very bottom side of the screen at any time during the meeting. We ask that you please include your name with the question, and limit yourself to no more than 2 questions and 1 topic per question. If your question does not relate to a specific proposal being brought before the meeting, we will hold it until the general Q&A at the end of the meeting. If we receive similar questions, we'll combine them into a single one. If we receive more questions than we're able to respond to during the time allotted for this meeting, we'll welcome you to reach out to our Investor Relations team, who will be standing by after this meeting to speak with you. Contact information for our Investor Relations team can be found on our website. As noted in our rules of conduct, recording of this meeting is not permitted. Most of you have already sent in your proxy or voted by Internet, telephone or mail. Your shares will be voted in accordance with your instructions and no further action is needed on your part. However, any shareholder who has not yet voted or who wishes to change his or her vote may do so by clicking on Vote Here on the annual meeting web portal until the polls are closed. As a reminder, only stockholders of record and valid proxy holders may vote at this meeting. It is now 10:11 a.m. Eastern Time, and the polls are open on all matters. We now present that -- we will now present the items to be voted on at the meeting. After this, the polls will be closed and no more votes will be accepted. The first matter brought before the meeting is the election of directors. The nominees for election of directors are as follows: Mr. Richard Fairbank; Ms. Aparna Chennapragada; Ms. Ann Fritz Hackett; Mr. Peter Thomas Killalea; Mr. Cornelis Eli Leenaars; Mr. Pierre Leroy; Mr. François Locoh-Donou; Mr. Peter Raskind; Ms. Eileen Serra; Mr. Mayo Shattuck; Mr. Bradford Warner; and Ms. Catherine West. Each nominee has been nominated by the current Board of Directors to serve as a member of the Board for a 1-year term, expiring at the annual stockholder meeting in 2021. No other nominations have been received in accordance with the Capital One's bylaws and the rules of the SEC. The second matter brought before this meeting is to ratify the selection of Ernst & Young LLP by the Audit Committee of the Board of Directors as the independent registered accounting firm of Capital One for 2020. The third matter brought before this meeting is to approve, on a nonbinding advisory basis, Capital One's 2019 named executive officer compensation. The fourth matter brought before this meeting is to approve amendments to Capital One's restated certificate of incorporation to allow stockholders to act by written consent. The fifth matter brought before this meeting is a stockholder proposal regarding an independent board Chairman if properly presented. The proposal was submitted by Mr. John Chevedden, a stockholder of the company. We've been notified that Mr. Chevedden will present this proposal. Mr. Chevedden, we ask that you please limit your comments about your proposal to about 2 minutes. You don't need to read the text of your proposal as it's set forth in the proxy statement provided to all stockholders. Operator, would you please open the line so that Mr. Chevedden may present his proposal?

Hello, this is John Chevedden. Can you hear me okay?

Yes, sir, we can.

Thank you. Proposal 5, independent Board Chairman. Shareholders request our Board of Directors to adopt the policy and amend our governing documents as necessary to require that the Chairman of the Board be an independent member of the Board whenever possible. This proposal topic won 52% supported polling on Monday. This proposal topic also won 50-plus percent support at 5 major companies in 1 year, including 73% support at Netflix. These 5 majority votes would have been still higher if more shareholders had access to independent proxy voting advice. In 5 years, our stock has declined from $80 to $70 in a mostly robust stock market. Meanwhile, Richard Fairbank, our combined Chairman and CEO, has been building up tenure, and now has 26 years-long tenure. Our lead director, Ann Hackett, has 16 years long tenure. Long tenure in a director is the opposite of independence and independence can be the most important attribute for a director, especially a Chairman or a lead director. Ms. Hackett received the second highest negative votes of any Capital One director in 2019. On another corporate governance matter, shareholders gave outstanding 56% support in 2019 to a shareholder proposal to enable shareholders to act by written consent. Capital One's ongoing dialogue with shareholders, that was hyped in the 2019 proxy next to the written consent proposal, was apparently flawed. Such ongoing dialogue was apparently clueless and did not foresee the 56% support for the shareholder proposal for written consent. And management spent serious money leading up to the 2018 Annual Meeting to get a redundant shareholder vote on an already existing 25% stock ownership threshold to call a special meeting. In this frivolous effort, management spent serious money with a $1.6 billion law firm that employs 1,200 attorneys. The roles of Chairman and CEO are fundamentally different and should be held by 2 directors: a CEO and a Chairman who is completely independent of the CEO and our company. Please vote yes, independent Board Chairman, proposal 5.

Mr. Chevedden, thank you very much. We appreciate your ownership in Capital One and appreciate your engagement with the company. Mr. Chairman, that's back to you.

Thank you, Mr. Finneran. We will now turn to responding to the questions submitted through the online portal on matters specifically related to the matters to be voted on at this meeting. Mr. Finneran?

Thank you, Mr. Chairman. So we have a couple of questions relating to the proposals. So the first question is, has our Lead Director, Ann Hackett, assumed any new lead director responsibilities in the past year? The answer to that question is no, she is not. I think as we disclosed on Page 20 of the proxy, Ms. Hackett serves on only 1 other public company board, and she is not the Lead Director of that Board. So she dedicates significant time and attention to the affairs and with a very important role of serving as Independent Lead Director for Capital One. And we have one other question that relates to realized pay, and a question regarding whether or not we calculate and disclose Mr. Fairbank's realized pay for the 5-year period preceding this meeting. And the answer to that is, we, like many other public companies disclose a considerable amount of information about executive pay, including CEO pay in the proxy. I think there some 30 or 40 pages of pay disclosure that's contained in the proxy. Realized pay is not one of those things, but there are about 3 years' worth of pay that Mr. Fairbank and other named executive officers has received both in the summary compensation table, but also on a performance year basis in the proxy as it relates to the Say on Pay vote. Mr. Fairbank, I think it's back to you. Those were the only questions that we had relating to the matters that were up for a vote.

Okay. So it is 10:19 a.m., and the polls are now closed.

So thank you, Mr. Chairman. So the inspector of elections had previously submitted to us the preliminary voting results, which I will now announce. The following are the preliminary voting results received from the Inspector of Elections. The final results will be publicly disclosed on a Form 8-K, which will be filed shortly after the meeting within the next couple of days with the SEC. On the first matter, all nominees have been elected to serve as directors for a 1-year term, expiring at Capital One's annual stockholder meeting to be held in 2021. The minimum percentage of shares of common stock voted in favor of any of these directors was approximately 83.28% of votes cast. The ratification of the selection of Ernst & Young LLP as the independent registered public accounting firm for Capital One for 2020 was approved. Approximately 96.94% of votes cast are for this item. Capital One's 2019 named executive officer compensation was approved on a nonbinding advisory basis. Approximately 68.62% of votes cast were for this item. For the fourth item, the amendments to Capital One's restated certificate of incorporation to allow stockholders to act by written consent were approved, and approximately 82.5% of the votes of the common stock outstanding voted for this item. And finally, the stockholder proposal regarding an independent board Chairman was not approved, approximately 33% of the votes cast were for this item. Capital One thanks its stockholders for their participation and support. As a reminder, the final voting results of these matters will be disclosed on Form 8-K to be filed shortly after the meeting. Mr. Chairman?

Thank you very much, Mr. Finneran. This concludes the business of the meeting, and the 2020 Annual Stockholder Meeting of Capital One Financial Corporation is adjourned. Mr. Finneran, have we received any other general questions?

Yes. Yes, we do. We have a couple -- a handful of general questions as well. So the first one is, will the company be profitable in the second quarter of 2020? Maybe Mr. Blackley, that question probably is best directed to you?

Thank you, Mr. Finneran. As has been our long-standing practice, Capital One does not provide guidance on quarterly earnings. So I'm not going to be able to comment on potential Q2 financial performance at this time.

Okay, fine. Mr. Blackley, I think there's another question that's probably directed to you. We've got a couple of questions regarding share repurchases, one noting that the company recently suspended its share repurchase program, and really just, again, what conditions would the company look to be met in order for the stock buybacks to be resumed?

Thank you, Mr. Finneran. As Capital One has reported, we did suspend our share buyback program in mid-March based on the uncertainties that we were facing with regard to the pandemic rhythm economic downturn. Going into the downturn, Capital One has a strong capital position. However, the timing of when we may resume our share buyback will depend on future facts and circumstances, and so I won't speculate about the precise timing at this time.

Okay. Great. So we've got kind of another question. Rich, this is -- probably is more for you, although, Scott, you may want to weigh in on this as well. So in the first quarter, your -- Capital One reported a large loss. Many of our competitors reported smaller losses or even a profit for the quarter. We've traded at a valuation discount to peers and at a discount to tangible book value. What gives you confidence that the business model can deliver value to shareholders going forward?

Hello, this is Rich. I appreciate very much the spirit of that question. So first of all, just to comment about the reporting of the loss in this period of time in the first quarter. We have a business model that is a credit card-heavy model relative to most banks. The proportion of our business that is, A, in credit cards; and B, in consumer lending, is on the high end of banks. And you sometimes can see the effect of this and how it trades. We and other consumer lenders have pretty volatile trading patterns as people are making bets for or against the consumer. One of the characteristics of our business model from an accounting point of view, is that we take a provision for losses that anticipates future credit losses, and we bring them forward into a current time period. So either when we grow quickly, bringing on a lot of new loans, or in a period like this, when our outlook for credit changes, which it did as the pandemic descended upon us, those changes in the future credit outlook, we bring forward entirely into the current period. So it can create a pretty big impact. And you saw that in the first quarter. And that tends to be what you see across all the consumer-lending stocks, and it's just one of the things that creates for investors like you, sometimes a more volatile and bumpy ride compared to certain other stocks or even certain other financial stocks. But speaking as a founder of Capital One, 30 years ago, in entering banking, not being in the business back then, and subsequently, we have very carefully chosen what businesses to be in. So while most banks do just about everything in banking, and that's because they've been around for over 100 years, we -- our players in some banking activities, and we're not in a number of others, and it's not by accident. These are very carefully chosen based on the characteristics of certain businesses. And what we're looking for when we select businesses, like the first business we selected, which was entering the credit card business, is a business that has the opportunity for exceptional returns on a risk-adjusted basis as an industry opportunity. And then within that, a strategy that we could have that could allow us to perform particularly well. The other thing very important in that consideration is a business that is resilient in downturns, and a strategy that we would have that could make us very resilient in downturns. And so over the 25 years, we've been a public company, we've cobbled together a number of businesses and become national players in all of them, and in fact, one of the largest players in the nation in each of these businesses. But all along in the sunniest of days, or in particular, when things are going so well, our focus is to make sure that the choices we're making enable us to be resilient when the bad times come. And that's been our strategy from the beginning. If you go back and look at the global financial crisis in 2007 through 2009, while everybody had a bit of a rough ride, Capital One was really quite strong in that period of time, and our strength enabled us, frankly, to outgrow the competition in the subsequent time period. So that was certainly a test of resilience. And we had a lot of strength there. We also learned a lot in the hindsight of going back and dissecting everything that happened, and we've tried to incorporate that into our business model now. Now every downturn is different. This downturn has unique characteristics about that, and so I'm not going to make any predictions. But I feel very good about the business model that we have, the choices of businesses that we have selected and the resilient moves that we have made going into this downturn. Thank you for a great question.

Thank you, Rich. There's a couple of questions that I can answer. One was, do we know how many people are attending in this meeting as of last count? I had 46 people shareholders registered, guests participating in the meeting. And the second question is whether our Lead Director Ann Hackett is on the call? As Mr. Fairbank indicated earlier, yes she is along with all of our other directors as well. And then one that, I don't know whether this came in after we had the other set of questions or whether I had missed it, but let me answer it now, which is, what are the arguments for the CEO, Chairman roles being held by the same person? So I would generally refer shareholders to our proxy on Pages 115 to 117, where we lay out all the reasons why the Board believes that it's best to have the Board have the flexibility to determine who its leaders might be. But there's also -- I mean, I think there are really 2 core arguments: one is that the other governance practices that the company has in place, including a very strong and active independent lead director, a vast majority of directors being independent with 11 of our 12 directors being independent, all of the major committees being composed solely of independent directors, provides a lot of independence in the oversight of management and its business. And then just generally, that I think the Board very strongly believes that retaining the flexibility on the facts and circumstances, and the individual who may be available for leadership for the company at any point in time, both present and distant future, that it's best to have the flexibility to pick the right leader for the circumstances. And that may or may not be the CEO or an independent director, but having the Board have the flexibility to make that choice at the time is an important thing to retain. And then Rich, we've got one last question that I think is probably worth responding to, and that relates to risk management. And the question is really, what gives us confidence that risk management practices are sound and will allow us to create a valuable company going forward? And this relates both to the current environment of addressing some of the risks associated with COVID-19.

Thanks. I very much appreciate that business. The founding notion that we had in creating Capital One was that risk management is the business. It's not just a nice thing to have or an important thing to have as part of the business. Risk management is the business that we are in. And the founding idea of Capital One was very focused on credit risk management, and a belief that I had and our team had back then, that the very judgmental and sort of intuitively-driven method of credit-decisioning making was something that was subject to be revolutionized by data and information -- by data, technology and scientific testing. And so what we built in the founding of this company was what we call our information-based strategy, with a massive investment in top talent from top tools across the country, and an investment in thousands and thousands of tests of product ideas, credit policies and to actually empirically see how people perform in good times and bad with respect to credit. And now we have almost 3 decades of experience in that business model. And now that has allowed us to build one of the nation's biggest credit card companies and to weather the downturn very successfully. But risk management is not just about credit. It's also about compliance risks, operational risks, reputational risks, legal risks. There are lots of different elements to this bank. And we have built a team of world-class talent and a whole governance structure and risk management set of processes to be able to evaluate, manage risks, report on them and very importantly, respond when we see issues arising. Over our journey, from time to time, we have hit some bumps, and we've encountered unanticipated risks. But -- and what we try to do in every case is harness the energy of that moment to propel ourselves forward. And we have done that in every occasion. So here we are, as a public company, we just celebrated our 25th anniversary. And from the founding day, where the notion was risk management is the business, here we are 2.5 decades later, and that is exactly the same way that we manage the business and what all of our top executives, and really everybody at Capital One lives every day. And I think that puts us in a good position to weather a storm like this one that, despite all the best of planning, no one really anticipated this pandemic, but I find that the risk management capabilities that we have are already have helped us respond to this crisis. And I feel very good about our chances to manage it very successfully and emerge with strength on the other side.

Rich, thank you very much. That's -- I think you've addressed the last question that came in as well, which is kind of what happens on the other side. I think you just ended -- set that up well. I think that's all the questions that we have. So again, thank you very much. If you have any additional questions, again, please feel free to contact our Investor Relations team. The information can be found at [email protected], and they'll be standing by after this call to speak with you if you have any further questions. Again, thank you for your attendance and your continued investment in Capital One. We hope that next year, we will see you all in person at our headquarters in McLean, Virginia. And we hope that you and your loved ones stay safe in the interim. That concludes the meeting, and you may disconnect at this time. Thank you very much.