01—Abstract
Summary
Summary of the 10-K filed March 1, 2011. Cited figures are marked; the original filing is the authoritative source.
Capital One Financial Corp. (COF) closed 2010 with net income of $2.7 billiona ($6.01 per diluted share), up sharply from $884 million in 2009, driven mainly by a $4.2 billion (52%) decline in the provision for loan and lease losses to $3.9 billion.
Credit quality improved across the portfolio: the net charge-off rate fell to 5.18% from 5.87% (managed basis), and the 30+ day performing delinquency rate dropped to 3.52% from 4.62%. Management indicated that net charge-offs from the recession likely peaked in Q1 2010. Total reported revenue fell 4% to $16.2 billionb, reflecting lower CARD Act-driven penalty fees and a decline in home-loan and card balances.
The balance sheet was reshaped by the January 1, 2010 adoption of new consolidation accounting standards, which brought $41.9 billionc of securitized assets back on balance sheet along with a $4.3 billion loan loss allowance and a $2.9 billion after-tax reduction to equity. Reported loans fell to $125.9 billion from $136.8 billion managed loans a year earlier, deposits rose to $122.2 billion, and deposits became the primary funding source as wholesale borrowings declined. Capital ratios declined mechanically under the consolidation, with the Tier 1 risk-based ratio at 11.63% and the Tier 1 common equity ratio at 8.78%, both still above well-capitalized thresholds.
Key risks for investors include the pending Dodd-Frank rules (including a proposed 12-cent debit interchange cap), elevated mortgage representation and warranty exposure (reserve of $816 milliond, with a reasonably possible additional loss of up to $1.1 billion), ongoing litigation such as the Interchange and Late Fees suits, and the expected rise in FDIC assessments starting April 2011. Management guided to modest loan growth in 2011, rising non-interest expense driven by marketing, and continued margin strength, while noting that the dividend was $0.05 per quarter.
02—Key points
Key Highlights
- Net income rose to $2.7 billion ($6.01 diluted EPS) in 2010 from $884 million ($0.74) in 2009, primarily due to a $4.2 billion decrease in loan loss provisions.
- Net charge-off rate improved to 5.18% (managed) from 5.87%, and the 30+ day delinquency rate fell to 3.52% from 4.62%; management believes charge-offs peaked in Q1 2010.
- Adoption of new consolidation accounting standards on January 1, 2010 added $41.9 billion of assets and a $4.3 billion allowance, reducing equity by $2.9 billion and lowering capital ratios.
- Total reported revenue fell 4% to $16.2 billion, as CARD Act restrictions cut penalty fees and non-interest income declined 30% to $3.7 billion.
- Deposits grew 5.5% to $122.2 billion and now serve as the largest funding source, while total borrowings fell to $41.8 billion.
- Capital remained strong with a Tier 1 risk-based capital ratio of 11.63% and Tier 1 common equity ratio of 8.78%, both comfortably above regulatory minimums and well-capitalized levels.
- Material regulatory and legal exposure includes Dodd-Frank interchange and deposit insurance changes, mortgage repurchase reserves of $816 million, and multiple class actions.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed March 1, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $16.17B$12.98B | +24.6% |
| Operating Income | $3.05B$987.00M | +209.0% |
| Interest Expense | $2.90B$2.97B | −2.4% |
| Net Income | $2.74B$884.00M | +210.3% |
| EPS (Basic) | $6.07$0.75 | +709.3% |
| EPS (Diluted) | $6.01$0.74 | +712.2% |
| Shares Outstanding (Basic) | 452.00M428.00M | +5.6% |
| Shares Outstanding (Diluted) | 456.00M431.00M | +5.8% |
05—Questions
Frequently Asked Questions
How much did Capital One's profitability improve in 2010, and what drove it?
Net income rose to $2.7 billion, or $6.01 per diluted share, from $884 million ($0.74) in 2009. The improvement was driven mainly by a $4.2 billion (52%) decline in the provision for loan and lease losses to $3.9 billion, reflecting better credit trends and a $2.8 billion net allowance release. Partly offsetting this were lower revenue and higher losses from discontinued mortgage operations.
Are credit quality trends improving, and is the worst behind the company?
Yes, by the company's measures. The managed net charge-off rate fell to 5.18% from 5.87%, and the 30+ day performing delinquency rate dropped to 3.52% from 4.62%. Management believes net charge-offs peaked in Q1 2010 and expects continued downward trends in consumer lending, though it anticipates more fluctuation in Commercial Banking charge-offs over the next several quarters.
How did the new consolidation accounting rules affect the reported financials?
Effective January 1, 2010, the company consolidated most of its credit card securitization trusts, adding $41.9 billion of assets and $44.3 billion of related debt, along with a $4.3 billion loan loss allowance. This reduced stockholders' equity by $2.9 billion and lowered regulatory capital ratios, and it makes reported loans ($125.9 billion) not directly comparable with prior-year managed loans ($136.8 billion). Reported interest income and expense increased significantly as a result.
What are the main risks to future earnings highlighted in the filing?
Key risks include the Dodd-Frank Act's potential 12-cent cap on debit interchange fees, which could reduce debit revenue; higher FDIC deposit insurance assessments beginning April 2011; stricter capital and liquidity requirements under Basel III; and elevated mortgage representation and warranty exposure, with reserves of $816 million and up to $1.1 billion of reasonably possible additional losses. The company also faces numerous class actions and regulatory matters, including interchange and overdraft litigation.
What is management's outlook for 2011?
Management expects a slow economic recovery and continued elevated unemployment. It anticipates average loan balances roughly flat with 2010 but period-end growth, with credit card balances expected to rise after the first quarter of 2011. Non-interest expense is expected to increase due to higher marketing spending, and margins should remain strong, though they may drift modestly lower. Management also expects regulatory capital ratios to rise after a temporary decline in early 2011 as the consolidation phase-in completes.
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