10-QPeriod: Q2 FY2003

CAPITAL ONE FINANCIAL CORP Quarterly Report for Q2 Ended Jun 30, 2003

Filed August 11, 2003For Securities:COFCOF-PLCOF-PICOF-PKCOF-PNCOF-PJ

Summary

Capital One Financial Corporation (COF) reported strong performance for the second quarter and first half of 2003. Net income for the quarter increased by 35% year-over-year to $286.8 million, translating to $1.23 per diluted share, up from $0.92 per share in the prior year. This growth was driven by an expanding managed loan portfolio, gains from auto loan sales, a decrease in the provision for loan losses, and reduced marketing expenses. For the first six months of 2003, net income rose 49% to $595.9 million, or $2.58 per diluted share, compared to $401.1 million, or $1.75 per share, in the same period of 2002. Key drivers for the half-year performance included increased managed earning assets, lower loan loss provisions, gains from auto loan sales, and decreased marketing expenses. The company continues to emphasize its Information-Based Strategy (IBS) to manage risk and optimize returns across its consumer lending, auto finance, and international segments.

Key Highlights

  • 1Net income for the three months ended June 30, 2003, increased 35% to $286.8 million, or $1.23 per diluted share, compared to $213.1 million, or $0.92 per diluted share, in the prior year.
  • 2Net income for the six months ended June 30, 2003, increased 49% to $595.9 million, or $2.58 per diluted share, compared to $401.1 million, or $1.75 per diluted share, in the prior year.
  • 3Managed loans outstanding increased 17% year-over-year for the quarter to $59.9 billion, indicating continued portfolio growth.
  • 4Provision for loan losses decreased significantly by $154.7 million in the quarter, reflecting improved credit quality and slower loan growth.
  • 5Marketing expenses were reduced by $49.9 million in the quarter as the company moderated loan growth and faced increased competition.
  • 6The company sold $1.3 billion of auto loans during the quarter, generating a gain of $35.1 million, contributing to non-interest income.
  • 7Capital ratios for Capital One Bank and Capital One, F.S.B. remained strong, well above the 'well-capitalized' regulatory requirements.

Frequently Asked Questions

The increase in net income was primarily driven by growth in the company's managed loan portfolio, gains realized from the sale of auto loans, a substantial decrease in the provision for loan losses, and a reduction in marketing expenses compared to the same period in the prior year.

Capital One is actively managing its loan portfolio through its Information-Based Strategy (IBS), focusing on higher credit quality assets. While delinquencies and net charge-off rates saw some increase, attributed to the seasoning of subprime accounts added in the prior year and slower loan growth, the company believes its allowance for loan losses is adequate. They are moderating growth in subprime lending and increasing focus on prime and superprime segments.

Capital One anticipates earnings per share of at least $4.55 for 2003, representing approximately 16% growth over 2002. This outlook is based on moderating loan growth to 15-20%, an expected increase in marketing spending in the second half of the year, and a belief that economic conditions will not significantly deteriorate. The company expects loan growth to accelerate in the second half of the year due to seasonality and increased marketing investment.

The company faces intense competition across its product lines, particularly in the prime and superprime credit card markets. To counter this, Capital One is leveraging its IBS to tailor products, focusing on differentiated offerings like low fixed-rate cards. They are also strategically adjusting marketing spend to target areas with higher response rates and opportunities, while continuing to build brand awareness.