10-KPeriod: FY2008

CAPITAL ONE FINANCIAL CORP Annual Report, Year Ended Dec 31, 2008

Filed February 26, 2009For Securities:COFCOF-PLCOF-PICOF-PKCOF-PNCOF-PJ

Summary

Capital One Financial Corporation's (COF) 2008 10-K filing reveals a challenging year marked by the significant impact of the U.S. economic recession. The company experienced a net loss of $46.0 million, a stark contrast to the $1.57 billion net income in 2007, primarily driven by a substantial increase in the provision for loan and lease losses, which more than doubled to $5.1 billion. This reflects a significant deterioration in credit quality, with managed charge-off rates and delinquency rates rising considerably. Despite the financial headwinds, Capital One remains a major financial institution with $108.6 billion in deposits and $146.9 billion in managed loans outstanding as of year-end 2008. The company actively managed its liquidity, increasing cash reserves and investing in high-quality securities. Management also took steps to fortify its balance sheet, including exiting riskier lending areas and reducing costs. Notably, the company participated in the U.S. Treasury's Capital Purchase Program, receiving $3.55 billion in exchange for preferred stock and warrants, a move management stated was to support financial stability and provide an alternative capital source. The acquisition of Chevy Chase Bank F.S.B. was announced and pending regulatory approval, expected to close in early 2009.

Financial Statements
Beta
Revenue$13.89B
Operating Income$85.00M
Interest Expense$3.96B
Net Income-$46.00M
EPS (Basic)$-0.21
EPS (Diluted)$-0.21
Shares Outstanding (Basic)376.00M
Shares Outstanding (Diluted)378.00M

Key Highlights

  • 1Capital One reported a net loss of $46.0 million for 2008, a significant decline from a net income of $1.57 billion in 2007, heavily impacted by the economic recession.
  • 2The provision for loan and lease losses surged by 93% to $5.1 billion in 2008, reflecting deteriorating credit quality and increased delinquencies and charge-offs.
  • 3The company participated in the U.S. Treasury's Capital Purchase Program, receiving $3.55 billion in exchange for preferred stock and warrants, bolstering its capital position.
  • 4Capital One announced its intention to acquire Chevy Chase Bank F.S.B. for approximately $520 million, a transaction that received regulatory approval and was expected to close in the first quarter of 2009.
  • 5Managed loans held for investment decreased by $4.4 billion in 2008, reflecting a strategic pullback from certain lending activities and weaker loan demand.
  • 6Despite the challenging environment, the company emphasized its strong liquidity position, with $7.5 billion in cash and cash equivalents at year-end 2008 and $31.0 billion in securities available for sale.
  • 7Goodwill impairment of $810.9 million was recognized, primarily within the Auto Finance sub-segment, due to scaling back operations.

Frequently Asked Questions

The primary driver for Capital One's reduced profitability in 2008 was the severe U.S. economic recession, which led to a sharp increase in the provision for loan and lease losses. This provision more than doubled to $5.1 billion, reflecting a significant deterioration in credit quality, with higher delinquencies and charge-off rates across the company's loan portfolios.

Capital One focused on strengthening its balance sheet by increasing its liquidity reserves, which included growing cash and cash equivalents to $7.5 billion and increasing securities available for sale to $31.0 billion. Additionally, the company participated in the U.S. Treasury's Capital Purchase Program, raising $3.55 billion in preferred stock and warrants, which management stated was to support financial stability and provide an alternative source of capital.

The economic recession led to a significant deterioration in the credit quality of Capital One's loan portfolio. This manifested as increased managed charge-off rates (up to 4.35% in 2008) and delinquency rates (up to 4.49% in 2008). Consequently, managed loans held for investment decreased by $4.4 billion as the company tightened underwriting standards, exited riskier lending areas, and experienced weaker loan demand.

The announced acquisition of Chevy Chase Bank F.S.B. was a strategic move to expand Capital One's retail depository institution base, particularly in the Washington D.C. region. While pending regulatory approval at the time of filing, the company anticipated the transaction, valued at approximately $520 million, to be accretive to earnings in 2009 and 2010, while also expecting significant cost savings.