10-QPeriod: Q2 FY2010

CAPITAL ONE FINANCIAL CORP Quarterly Report for Q2 Ended Jun 30, 2010

Filed August 9, 2010For Securities:COFCOF-PLCOF-PICOF-PKCOF-PNCOF-PJ

Summary

Capital One Financial Corporation reported a strong second quarter of 2010, with net income available to common shareholders of $608 million, or $1.33 per diluted share, a significant improvement from the net loss of $277 million reported in the same period of 2009. This turnaround was driven by a substantial decrease in the provision for loan and lease losses, reflecting improved credit performance trends across its portfolios, and a benefit from a $1.0 billion reduction in the allowance for loan and lease losses. Total revenue for the quarter saw a slight increase compared to the prior year's managed basis, though it declined sequentially from the first quarter of 2010 due to a run-off in certain loan portfolios and weaker consumer loan demand. The company also adopted new accounting standards effective January 1, 2010, which resulted in the consolidation of previously off-balance sheet securitization trusts. This significantly increased reported assets and liabilities but did not alter the underlying economic risk. The adoption required a substantial addition to the allowance for loan and lease losses. Despite this accounting change and ongoing economic uncertainty, Capital One's capital ratios remained strong, with its Tier-1 risk-based capital ratio at 9.9% and a tangible common equity to tangible managed assets ratio of 6.1% at the end of the quarter. The company expects loan balances to stabilize and begin modest growth in 2011, supported by a favorable outlook for credit performance.

Financial Highlights

36 data points
Beta

Net Income

$608.00M

EPS (Diluted)

$1.33

Total Assets

$197.49B

Free Cash Flow

$2.71B

Financial Statements
Beta
Operating Income$1.53B
Interest Expense$738.00M
Net Income$608.00M
EPS (Basic)$1.34
EPS (Diluted)$1.33
Shares Outstanding (Basic)452.00M
Shares Outstanding (Diluted)456.00M

Key Highlights

  • 1Reported net income of $608 million ($1.33 per diluted share) for Q2 2010, a significant improvement from a net loss of $277 million ($-0.66 per diluted share) in Q2 2009.
  • 2Experienced a $755 million decrease in the provision for loan and lease losses in Q2 2010 compared to Q2 2009, driven by improved credit performance.
  • 3Adoption of new accounting standards consolidated previously off-balance sheet securitization trusts, increasing reported assets and liabilities.
  • 4Tier-1 risk-based capital ratio stood at 9.9% as of June 30, 2010, exceeding regulatory minimums.
  • 5Tangible common equity to tangible managed assets ratio increased to 6.1% at the end of Q2 2010.
  • 6Total loans held for investment decreased by 7% ($9.7 billion) during the first six months of 2010, primarily due to charge-offs and portfolio run-offs.
  • 7Net charge-off rate improved to 5.36% in Q2 2010 from 5.64% in Q2 2009, with management believing net charge-offs peaked in Q1 2010.

Frequently Asked Questions

The primary driver for the improved profitability was a significant reduction in the provision for loan and lease losses. This reduction was attributable to continued improvement in credit performance trends across Capital One's portfolios, reflecting a slowly improving economy and the company's strategic actions to enhance underwriting standards and exit less attractive portfolios. Additionally, a substantial reduction in the allowance for loan and lease losses in Q2 2010 contributed to the positive net income.

Effective January 1, 2010, Capital One adopted new accounting standards that required the consolidation of previously off-balance sheet securitization trusts. This led to a significant increase in reported assets (approximately $41.9 billion) and liabilities (approximately $44.3 billion) on the balance sheet. A one-time after-tax charge of $2.9 billion was recorded to retained earnings due to the adoption, primarily related to establishing a loan loss reserve for the newly consolidated loans. While these changes impacted the presentation of financial statements, the company stated they did not alter the economic risk to the business.

Capital One anticipates that its portfolio balances will stabilize over the next few quarters and begin to grow modestly in 2011, dependent on broader economic trends and consumer/commercial demand. While quarterly margins are expected to decline in the near term due to factors like a decline in the domestic card revenue margin and stabilization of funding costs, the company expects pre-provision earnings to decline into early 2011 before beginning to grow later in the year. Reductions in the allowance for loan and lease losses are expected to cushion the impact of declining pre-provision earnings.

The representation and warranty reserve increased significantly from $238 million at December 31, 2009, to $853 million at June 30, 2010. This increase was primarily attributed to the company's ability to extend the timeframe over which repurchase liabilities are estimated to the full life of loans sold by its subsidiaries. The company recorded $404 million in provision expense for this exposure in the second quarter of 2010, which included $6 million for settlements of repurchase requests.