10-QPeriod: Q1 FY2010

CAPITAL ONE FINANCIAL CORP Quarterly Report for Q1 Ended Mar 31, 2010

Filed May 7, 2010For Securities:COFCOF-PLCOF-PICOF-PKCOF-PNCOF-PJ

Summary

Capital One Financial Corporation reported a significant turnaround in the first quarter of 2010, with net income of $636.3 million, a substantial improvement from a net loss of $172.3 million in the same period of 2009. This recovery was primarily driven by a widening net interest margin, benefiting from lower funding costs and higher asset yields, and a substantial reduction in the provision for loan and lease losses, reflecting improved credit performance and stabilizing economic conditions. The adoption of new accounting standards for consolidation of securitization trusts on January 1, 2010, had a material impact on the financial statements. While increasing assets and liabilities, it also led to a significant increase in the allowance for loan and lease losses. Management noted that despite the change in accounting presentation, the economic risk to the business remained unchanged. The Credit Card segment was a key driver of profitability, with net income soaring to $489.6 million from $3.3 million in the prior year, largely due to improved margins and lower loss provisions. The Commercial Banking segment, however, reported a net loss of $49.5 million, impacted by ongoing stress in the commercial real estate portfolio.

Financial Highlights

34 data points
Beta

Net Income

$636.00M

EPS (Diluted)

$1.40

Total Assets

$200.71B

Free Cash Flow

$1.95B

Financial Statements
Beta
Operating Income$720.00M
Interest Expense$802.00M
Net Income$636.00M
EPS (Basic)$1.41
EPS (Diluted)$1.40
Shares Outstanding (Basic)451.00M
Shares Outstanding (Diluted)455.00M

Key Highlights

  • 1Net income rebounded to $636.3 million ($1.40 per diluted share) in Q1 2010, a significant improvement from a net loss of $172.3 million ($(0.44) per diluted share) in Q1 2009.
  • 2Net interest margin expanded significantly to 7.10% in Q1 2010 from 4.94% (managed basis) in Q1 2009, driven by lower funding costs and higher asset yields.
  • 3The provision for loan and lease losses decreased to $1.48 billion in Q1 2010 from $1.28 billion (reported) or $2.13 billion (managed) in Q1 2009, reflecting improving credit quality.
  • 4The Credit Card segment saw a dramatic increase in net income to $489.6 million from $3.3 million in the prior year's quarter, benefiting from margin expansion and lower loss provisions.
  • 5The Commercial Banking segment reported a net loss of $49.5 million, reflecting continued stress in the commercial real estate portfolio.
  • 6Total loans held for investment decreased by 5% to $130.1 billion as of March 31, 2010, from $136.8 billion as of December 31, 2009.
  • 7Capital One adopted new accounting standards effective January 1, 2010, resulting in the consolidation of securitization trusts, adding approximately $41.9 billion in assets and $44.3 billion in related debt to the balance sheet.

Frequently Asked Questions

The primary driver of Capital One's improved financial performance was a combination of a significant expansion in its net interest margin, benefiting from lower funding costs and higher asset yields, and a substantial reduction in the provision for loan and lease losses. This was supported by signs of stabilization and improvement in overall credit conditions and economic factors.

The adoption of new accounting standards on January 1, 2010, led to the consolidation of previously off-balance sheet securitization trusts. This resulted in a significant increase in reported assets (approximately $41.9 billion) and liabilities (approximately $44.3 billion) on the balance sheet. It also led to a substantial increase in the allowance for loan and lease losses by $4.3 billion and a $2.9 billion after-tax charge to retained earnings on January 1, 2010. Management stated that these accounting changes did not alter the economic risk to the business.

Capital One expects the quarterly Domestic Card revenue margin to decline through the remainder of 2010 and into early 2011 due to regulatory impacts from the Credit CARD Act (fee regulations), potential diminishing credit-related revenue benefits, and an expected increase in promotional interest rates on new originations. The company anticipates non-interest expense as a percentage of loans to increase due to declining loan balances and higher marketing expenses. However, they expect the provision for loan and lease losses to decline, cushioning the impact on earnings.

The acquisition of Chevy Chase Bank, completed on February 27, 2009, resulted in a partial quarter impact in Q1 2009, whereas Q1 2010 results include a full quarter's impact. This contributed to higher revenues and expenses in Q1 2010 compared to Q1 2009, particularly within the Consumer Banking segment. The mortgage portfolio acquired from Chevy Chase Bank performed largely in line with expectations at acquisition, with no impairment recognized.