What's in Capital One's CEO's Wallet? An $800 Million Fortune

It’s after midnight and Richard Fairbank steps off the ice in a sweat. As teammates trudge toward the locker room, he unlaces his skates and explains how he never planned to take up hockey, let alone join an amateur league.

“When my kids learned to play, I did too,” just to keep up with them, says Fairbank, 64, a father of eight. Two decades later, he co-owns the suburban Virginia rink and the professional team that practices there, the Washington Capitals. Along the way, he managed to build the seventh-biggest commercial bank in the U.S., almost from scratch.

He did it by pursuing interests on a similarly unpredictable path -- turning a small consulting firm into a credit-card juggernaut, and then adding an unusual mix of businesses to create Capital One Financial Corp. Since going public in 1994, the stock has trounced the industry average, helping him amass a fortune of more than $800 million, according to data compiled by Bloomberg.

He’s a rarity in U.S. finance -- an idea man who built a behemoth, then held on to the reins as both chief executive officer and chairman. Capital One’s quirky ads are ubiquitous in the U.S., with Visigoths, Jennifer Garner and Samuel L. Jackson asking viewers, “What’s in your wallet?” Now, the question is: What will Fairbank do next?

The Federal Reserve is preparing to increase benchmark interest rates for the first time since 2006. Credit-card lenders are bracing for rising defaults as consumers take on more debt. The booming auto-loan industry is under scrutiny from regulators. Energy financing, one of Capital One’s niche units, is contending with an oil slump.

Top Performer

Since Capital One’s initial public offering, the stock has climbed 1,576 percent, compared with a 200 percent gain for the KBW Bank Index. In the six years through 2014, the firm was the index’s top performer. But the company’s focus on consumers, including those with untested or blemished credit, means that when the industry stumbles, as it did in 2001 and 2008, the lender’s stock typically fares worse.

Capital One also stands out for return on equity, a measure of profitability. Among the biggest U.S. commercial banks, it has the third-highest average ROE over the past five years, following U.S. Bancorp and Wells Fargo & Co.

Analysts and investors have been looking for signs of Fairbank’s next move. Will he shift lending practices? Will he focus on expanding the firm’s already leading Internet bank? Or maybe introduce some new push altogether?

“He likes to be zigging when the world is zagging,” said Gary Perlin, who retired last year as chief financial officer. “He likes to be a contrarian because that’s where he sees the greatest opportunities. And he’s willing to change his mind.”

Padded Jersey

Rinkside after his game, wearing a padded blue-and-white jersey and holding his stick, Fairbank talks hockey but demurs when invited to discuss strategy. People close to him said he worries about divulging ideas to competitors, because breaking with the pack is how he found success.

Tatiana Stead, a spokeswoman for McLean, Virginia-based Capital One, later turned down interview requests.

“Rich has never been interested in developing a public profile,” she said. “He has always been singularly focused on the company and his vision for Capital One.”

Fairbank, who set out to work with children, became interested in management while running a community center in California in the 1970s. He earned an MBA at Stanford University and landed at a Washington-area consulting firm where he and a colleague, Nigel Morris, tinkered with new ways of parsing data to assess credit-card risk.

Teaser Offers

They traveled the country in the mid-1980s pitching ideas to more than 20 card-issuing banks and got rejected. Then a small lender in Virginia called Signet Bank hired them. They pioneered concepts like tailored interest rates, rather than the same rate for everyone, and teaser offers that entice new borrowers to transfer balances from other cards. By 1994, the business was surging and Signet spun off Capital One in an IPO, making Fairbank CEO and Morris president.

“They had a completely different way of doing business, a testing and learning approach that was completely innovative,” said Tom Brown, CEO of hedge fund Second Curve Capital, an adviser and investor in Capital One when it went public. “Rich is so nontraditionally thoughtful. He’s able to see into the future of where he needs to be and work backward, even when no one else agrees.”

Buying Spree

Along with Fairbank’s successes have come some missteps, including attempts to enter the mobile-phone business and to create a marketing company for florists before firms such as 1-800-Flowers seized that role.

After more than a decade of eschewing deposits, Fairbank reversed course in the early 2000s and started buying banks, jarring some colleagues and investors. Around that time Morris left. Fairbank’s shopping spree -- from Hibernia Corp. in 2005 to North Fork Bancorp in 2006 to the 2012 purchase of ING Direct, the biggest U.S. online lender -- brought more volatile earnings and the challenge of integrating new businesses.

“I wasn’t a fan of the bank strategy -- it never generated the earnings that were originally projected and too much of the rewards went to other companies’ shareholders,” said Moshe Orenbuch, a Credit Suisse Group AG analyst. “He paid a lot for the banks he bought.”

Analysts’ Puzzle

Still, Orenbuch and other critics concede the deposit stockpile had an upside: It helped Capital One weather the 2008 financial crisis when other funding sources froze.

It also left analysts with a puzzle. Capital One’s mix of businesses isn’t like the more traditional banks and stand-alone payments firms they’re used to tracking. The company has missed or beat their earnings estimates by an average of 52 percent over the past decade, more than eight of its closest competitors, data compiled by Bloomberg show.

They also can’t agree on the future: Earnings per share will fall as much as 1.2 percent or rise as much as 18 percent next year compared with last year, according to analyst estimates in a Bloomberg survey.

“Capital One is a jackalope, not a jack rabbit but not exactly an antelope,” said Brian Foran, an analyst at Autonomous Research LLP, who has covered the lender for the past decade. “Their earnings should be more stable as they become more bank-like, but investors are still scratching their heads because every three months, it’s still a crapshoot.”

Auto Loans

Now, consumer borrowing is shifting. Online upstarts such as LendingClub Corp. are offering new sources of low-interest loans funded directly by investors. Subprime auto and credit-card lending rose last year to the highest level since the financial crisis.

Industry executives, led by Fairbank, began signaling in October that more loans will sour as they chase a new generation of customers. Capital One’s provisions for credit losses climbed to $935 million in the first quarter, a 27 percent increase from the same period last year. Write-off rates probably will rise later this year from historic lows, Fairbank said in January.

Capital One also is the fourth-largest U.S. auto lender, according to Experian Plc. That industry’s boom over the past few years is leading to tensions: Subprime borrowers are increasingly failing to make payments just as more of the debts are packaged and sold to bond investors.

Regulators and prosecutors including the U.S. Department of Justice have taken notice and started probing practices at lenders including Capital One. The bank has said it’s cooperating with inquiries and that subprime lending has remained flat, while borrowers with top scores are driving growth in the business.

‘More Unpredictable’

Such shifts are contributing to analysts’ divergence.

“There’s a lot of uncertainty,” said William Ryan at Portales Partners. “There’s more credit volatility in their business mix, which makes them more unpredictable.”

Fairbank has a lot at stake. Most of his wealth comes from Capital One stock. Since 1997, he hasn’t received an annual salary -- rare for any CEO, according to Rose Marie Orens, a senior partner at Compensation Advisory Partners.

His holdings have helped keep talk of succession at bay. Analysts don’t bother to raise it on conference calls. One of the most recent times Fairbank was asked about it, at an investor conference two years ago, he brushed off the question, saying he loves the game and wants to stay.

At the Virginia rink, a 20-minute drive from Capital One’s headquarters, Fairbank said the same about his approach to hockey. “We just want to play,” he said. His team just won, 6-to-2.

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