10-QPeriod: Q3 FY2002

CAPITAL ONE FINANCIAL CORP Quarterly Report for Q3 Ended Sep 30, 2002

Filed November 14, 2002For Securities:COFCOF-PLCOF-PICOF-PKCOF-PNCOF-PJ

Summary

Capital One Financial Corporation (COF) reported strong financial performance for the nine months ending September 30, 2002, with net income increasing by 42% to $660.0 million compared to the prior year. This growth was driven by a significant increase in asset and account volumes across its consumer lending and auto finance segments, along with robust non-interest income streams, particularly from servicing and securitizations. Despite a challenging economic environment and increased competition, the company demonstrated effective cost management, with marketing expenses decreasing year-over-year for the quarter and operating costs per account showing improvement. However, investors should note a one-time impact on net income for the third quarter of 2002 due to a change in the accounting treatment of loan recoveries, which negatively affected earnings by $31.4 million or $0.14 per diluted share. Additionally, the company incurred $110 million in one-time charges during the quarter related to lease terminations, facility capacity, and stock compensation. The company's balance sheet reflects substantial growth in both consumer loans and borrowings, indicating aggressive expansion. Capital adequacy ratios remain strong and well above regulatory requirements, positioning Capital One to navigate potential future regulatory changes.

Key Highlights

  • 1Net income for the nine months ended September 30, 2002, increased by 42% to $660.0 million from $464.3 million in the prior year.
  • 2Total assets grew significantly to $36.9 billion from $28.2 billion at year-end 2001, driven by increases in consumer loans and securities.
  • 3Total liabilities also increased substantially to $32.6 billion from $24.9 billion, with deposits and other borrowings showing notable growth.
  • 4Net interest income saw a substantial increase of 61% for both the three and nine-month periods, driven by higher asset volumes and a widening net interest margin.
  • 5Non-interest income rose by 32% for the quarter, bolstered by strong performance in servicing and securitizations, and service charges/customer fees.
  • 6The company reported a one-time negative impact of $31.4 million on net income in Q3 2002 due to a change in accounting for loan recoveries, affecting diluted EPS by $0.14.
  • 7Capital adequacy ratios remain robust, significantly exceeding 'well-capitalized' regulatory thresholds for both Capital One Bank and Capital One, F.S.B.

Frequently Asked Questions

The primary driver of Capital One's increased net income in the first nine months of 2002 was the significant growth in asset and account volumes across its consumer lending and auto finance segments, coupled with strong non-interest income generation. The company also benefited from an increase in net interest income and improved operating efficiency.

The change in accounting for loan recoveries, which reclassified a portion of recoveries related to finance charges and fees to revenue, resulted in a one-time negative impact on net income for the third quarter of 2002. This change reduced net income by $31.4 million, or approximately $0.14 per diluted share.

Capital One anticipates that delinquencies and charge-offs will increase during the fourth quarter of 2002 and into the first half of 2003. This is attributed to the continued seasoning of accounts, particularly in the subprime portfolio, slower loan growth rates, and general economic and seasonal factors. Managed net charge-offs are projected to reach low-6% levels in Q4 2002 and rise to the high-6% range in early 2003 before declining.

Capital One maintains strong capital adequacy ratios that significantly exceed regulatory requirements, categorizing both Capital One Bank and Capital One, F.S.B. as 'well-capitalized.' The company has proactively adjusted its application of the Subprime Guidelines to meet new requirements and expects to continue meeting or exceeding 'well-capitalized' thresholds even with the upcoming implementation of the Accrued Interest Receivable (AIR) Advisory.