10-QPeriod: Q3 FY2005

CAPITAL ONE FINANCIAL CORP Quarterly Report for Q3 Ended Sep 30, 2005

Filed November 2, 2005For Securities:COFCOF-PLCOF-PICOF-PKCOF-PNCOF-PJ

Summary

Capital One Financial Corporation (COF) reported solid financial results for the nine months ended September 30, 2005. Net income grew to $1.53 billion, a 13% increase year-over-year, with diluted earnings per share rising to $5.82. This growth was primarily driven by increased net interest income and robust non-interest income, particularly from servicing and securitizations, along with strong purchase volumes impacting interchange fees. Despite the overall positive performance, the company faced headwinds from increased provision for loan losses, influenced by the significant impact of the Gulf Coast Hurricanes and an anticipated spike in bankruptcies due to new legislation. Management focused on strategic initiatives, including diversification into Auto Finance and Global Financial Services segments, which showed strong loan growth and are becoming a larger part of the overall managed loan portfolio. Capital ratios remained strong and well above regulatory requirements, indicating a stable financial position.

Key Highlights

  • 1Net income for the nine months ended September 30, 2005, increased by 13% to $1.53 billion, compared to $1.35 billion in the prior year.
  • 2Diluted earnings per share for the nine months increased to $5.82 from $5.45 in the same period last year.
  • 3Total revenue for the nine months grew by 11% to $7.34 billion, driven by higher net interest income and non-interest income.
  • 4The company experienced a significant increase in the provision for loan losses, up 23% for the nine months, primarily due to the impact of the Gulf Coast Hurricanes and new bankruptcy legislation.
  • 5Loan growth continued, with managed loans increasing by 12% year-over-year to $84.77 billion.
  • 6The Auto Finance and Global Financial Services segments are showing strong growth, now representing 45% of the managed loan portfolio, up from 39% in the prior year.
  • 7Capital ratios remain strong, with Tier 1 Capital ratios for Capital One Bank and Capital One, F.S.B. well above regulatory 'well-capitalized' thresholds.

Frequently Asked Questions

The primary drivers were a significant increase in net interest income, up 19% year-over-year, and robust growth in non-interest income, particularly from servicing and securitizations, and interchange fees due to higher purchase volumes.

The company recorded an increase in its provision for loan losses due to the impact of the Gulf Coast Hurricanes and an anticipated rise in bankruptcies related to the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which led to an additional build in the allowance for loan losses.

Capital One is actively diversifying its loan portfolio beyond U.S. credit cards into its Auto Finance and Global Financial Services segments. These segments now constitute 45% of the managed loan portfolio, up from 39% a year prior. This diversification is strategic, aiming for higher credit quality assets, although these segments may generate lower yields compared to the U.S. Card segment.

Management expects diluted earnings per share to be on the lower end of the $6.60 to $7.00 range for the full year 2005, inclusive of the pending Hibernia acquisition. The company anticipates continued managed loan growth around 12% and expects operating costs as a percentage of managed loans to decline due to efficiency gains and diversification into faster-growing segments.