10-QPeriod: Q2 FY2006

CAPITAL ONE FINANCIAL CORP Quarterly Report for Q2 Ended Jun 30, 2006

Filed August 7, 2006For Securities:COFCOF-PLCOF-PICOF-PKCOF-PNCOF-PJ

Summary

Capital One Financial Corporation (COF) reported solid financial results for the second quarter of 2006, demonstrating continued profitability and diversified loan growth. Net income rose by 4% year-over-year to $552.6 million, although diluted EPS saw a 12% decrease, impacted by the Hibernia acquisition and increased share count from prior equity redemptions. Revenue growth, driven by the expanding managed loan portfolio and the Hibernia acquisition, was offset by higher provisions for loan losses, marketing expenses, and operating costs. The company highlighted strong loan growth across its U.S. Card, Auto Finance, and Global Financial Services segments, which collectively contributed significantly to overall portfolio expansion. The newly established Banking segment, reflecting legacy Hibernia operations, also showed positive performance with a notable contribution to net income and substantial deposit growth. Capital One continues to maintain a strong balance sheet with significant liquidity and capital ratios well above regulatory requirements. Key strategic initiatives include the pending acquisition of North Fork Bancorporation, Inc., valued at approximately $14.6 billion, which is expected to close in the fourth quarter of 2006. The company also managed market risk effectively through derivative instruments and ensured adequate funding through various facilities and deposit gathering efforts, reinforcing its robust financial position.

Key Highlights

  • 1Net income increased by 4% to $552.6 million for the quarter ended June 30, 2006, compared to the prior year.
  • 2Managed loans outstanding grew significantly, driven by expansion in the U.S. Card, Auto Finance, and Global Financial Services segments, alongside contributions from the Hibernia acquisition.
  • 3The company is actively pursuing a major strategic acquisition of North Fork Bancorporation, Inc., valued at approximately $14.6 billion, expected to close in Q4 2006.
  • 4Capital ratios remain strong and well above regulatory "well capitalized" thresholds.
  • 5Non-interest income saw a notable increase of 8% year-over-year, primarily due to growth in servicing and securitization income.
  • 6The company is focused on strategic diversification beyond its U.S. credit card business, including expansion into branch banking and international markets.
  • 7Despite an increase in operating expenses, driven by integration and infrastructure investments, operating expenses as a percentage of average managed assets continued to decline, indicating improved efficiency.

Frequently Asked Questions

For the quarter ended June 30, 2006, Capital One reported a net income of $552.6 million, a 4% increase year-over-year. Diluted earnings per share decreased by 12% to $1.78, influenced by the Hibernia acquisition and increased share count. Total revenue grew to $2.91 billion, up from $2.45 billion in the prior year period, driven by strong loan portfolio growth and non-interest income.

Capital One is pursuing a significant strategic acquisition of North Fork Bancorporation, Inc., valued at approximately $14.6 billion, expected to close in the fourth quarter of 2006. This acquisition, along with the integration of Hibernia, is central to the company's diversification strategy. The company also continues to invest in infrastructure and technology, which is reflected in higher operating expenses but is expected to drive long-term efficiency and competitive advantage.

Capital One reported strong growth in its managed loan portfolio, with diversification across U.S. Card, Auto Finance, Global Financial Services, and Banking segments. While net charge-off rates decreased significantly year-over-year on both reported and managed bases due to favorable U.S. credit conditions and lower bankruptcy rates, the company noted continued credit quality deterioration in its U.K. business. The allowance for loan losses was increased to reflect loan growth and U.K. credit issues.

The company projects diluted earnings per share between $7.40 and $7.80 for 2006, representing a 10-16% increase over 2005, including the expected impact of the North Fork acquisition. Managed loan growth is anticipated to be between 7% and 9%, with continued stability in return on assets (ROA). The company aims to expand its consumer financial services offerings through organic growth and acquisitions.