10-QPeriod: Q2 FY2007

CAPITAL ONE FINANCIAL CORP Quarterly Report for Q2 Ended Jun 30, 2007

Filed August 9, 2007For Securities:COFCOF-PLCOF-PICOF-PKCOF-PNCOF-PJ

Summary

Capital One Financial Corporation (COF) reported strong growth and profitability for the quarter ended June 30, 2007, with net income increasing by 36% year-over-year to $750.4 million and diluted EPS rising to $1.89. This performance was significantly boosted by the acquisition of North Fork Bank in late 2006, contributing to an 82% increase in total deposits and a 33% rise in managed loans held for investment. Net interest income saw a substantial 30% increase, driven by both higher volumes and improved margins in the U.S. Card segment. The company also announced a cost-reduction initiative, incurring $101.1 million in restructuring charges in the quarter. Despite the overall positive results, the company is navigating a normalizing credit environment, leading to an 11% increase in the provision for loan and lease losses. The Auto Finance segment, in particular, experienced elevated loss levels due to recent portfolio growth and a transition in its underwriting models. Capital One remains focused on strategic integration, cost management, and returning capital to shareholders, having repurchased $1.75 billion in shares during the quarter, including an accelerated share repurchase program.

Key Highlights

  • 1Net income increased by 36% year-over-year to $750.4 million.
  • 2Diluted EPS grew to $1.89, a 6% increase from the prior year.
  • 3Total deposits surged by 82% to $85.7 billion, largely due to the North Fork acquisition.
  • 4Managed loans held for investment increased by 33% to $144.2 billion.
  • 5Net interest income grew by 30% to $1.56 billion.
  • 6The company initiated a cost-reduction program, recognizing $101.1 million in restructuring charges.
  • 7$1.75 billion in share repurchases were executed during the quarter.

Frequently Asked Questions

The acquisition of North Fork Bank, completed in December 2006, significantly boosted Capital One's financial results. It contributed to an 82% increase in total deposits to $85.7 billion and a 33% rise in managed loans held for investment to $144.2 billion. The acquisition also drove a substantial 30% increase in net interest income and contributed to the overall net income growth of 36% for the quarter.

Capital One experienced an 11% increase in the provision for loan and lease losses, reflecting a normalizing credit environment. The Auto Finance segment, in particular, saw elevated loss levels due to recent portfolio growth and changes in underwriting models. The company expects rising charge-off dollars in the U.S. Card segment due to declining loan balances, pushing the charge-off rate higher and stabilizing around 5% by year-end 2007. While credit normalization is a factor, the company is also implementing strategic pricing and risk management adjustments across its portfolios.

Capital One is actively returning capital to shareholders through share repurchases, executing $1.75 billion in repurchases during the quarter, including a $1.5 billion accelerated share repurchase (ASR) program. Concurrently, the company announced and began implementing a broad-based cost-reduction initiative, recognizing $101.1 million in restructuring charges in the second quarter. This initiative aims to improve the company's competitive cost position and enhance operational efficiency.

The U.S. Card segment showed robust revenue growth driven by higher asset and purchase volumes, alongside improved margins, leading to a 28% increase in net income. The Auto Finance segment's profits declined due to increased provision expense and elevated loss levels, particularly in the dealer prime portfolio. Global Financial Services reported a 62% increase in net income for the quarter, driven by strong revenue growth in North America and a favorable credit outlook in the UK. The Mortgage Banking segment reported a modest profit after a net loss in the prior quarter, benefiting from market value adjustments on mortgage servicing rights, though origination volumes declined due to market challenges and tighter underwriting standards.