Capital One Financial Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are principally with Q1 2010. Balance-sheet comparisons are with December 31, 2010. Capital One is a diversified financial services holding company operating in Credit Card, Consumer Banking and Commercial Banking.
Financial results and position
| Metric | Q1 2011 / March 31, 2011 | Comparable period / change |
|---|---|---|
| Total revenue | $4.082 billion | Down 5% from $4.289 billion in Q1 2010 |
| Net interest income | $3.140 billion; net interest margin 7.24% | Income down 3%; margin up 14 basis points from 7.10% |
| Provision for loan and lease losses | $534 million | Down 64% from $1.478 billion; included a $561 million allowance release |
| Non-interest expense | $2.162 billion | Up 17% from $1.847 billion |
| Income from continuing operations | $1.032 billion | Up 43% from $720 million |
| Net income / diluted EPS | $1.016 billion / $2.21 | Net income up 60% from $636 million; diluted EPS was $1.40 |
| Net charge-off rate | 3.66% | Down from 6.02% in Q1 2010 and 4.45% in Q4 2010 |
| Total assets / loans held for investment | $199.3 billion / $124.1 billion | Assets up 1% from year-end; loans down 1.5% |
| Deposits / borrowings | $125.4 billion / $39.8 billion | Deposits up 2.6%; borrowings down 5% from year-end |
| Allowance for loan and lease losses | $5.067 billion; 4.08% of loans | Down from $5.628 billion and 4.47% at year-end |
| Liquidity reserves | $40.6 billion | Up $3.5 billion from year-end |
| Capital ratios | Tier 1 common 8.4%; Tier 1 risk-based 10.9%; total risk-based 14.2%; TCE 7.3% | At year-end: 8.8%, 11.6%, 16.8% and 6.9%, respectively |
Net cash provided by operating activities was $1.869 billion, versus $2.024 billion in Q1 2010. Investing activities used $456 million, including $1.444 billion of net acquisition payments; financing activities provided $1.309 billion. Cash and cash equivalents ended the quarter at $7.971 billion.
Material changes and business performance
- Lower credit costs drove the earnings improvement: the provision fell $944 million year over year amid lower charge-offs and delinquencies. Revenue declined and expenses increased, partly offsetting that benefit.
- Credit Card earned $643 million, up from $489 million. Revenue fell 8%, while the segment’s provision declined 62%; expenses rose 29%. Purchase volume increased 16%, and its charge-off rate fell to 6.13% from 10.30%.
- Consumer Banking earned $215 million, down from $305 million, reflecting the absence of a prior-year $128 million mortgage-trust deconsolidation gain and higher provision and expenses. Deposits grew and auto originations increased 91% year over year.
- Commercial Banking earned $148 million, compared with a $49 million loss, primarily due to an allowance release and improved credit performance. Its nonperforming loan rate nevertheless rose to 1.84% from 1.66% at year-end.
- Loans declined seasonally and as exited or repositioned portfolios ran off. Total deposits increased, reflecting growth in savings, money-market and non-interest-bearing accounts and a shift toward lower-cost funding.
Outlook, risks and unusual items
- Management expected modest year-over-year growth in ending loans in 2011, while average loans were expected to be comparable to 2010. It anticipated modest loan growth beginning in Q2, with the Kohl’s portfolio contributing.
- On April 1, 2011, after quarter-end, Capital One acquired Kohl’s private-label card portfolio, with approximately $3.7 billion of principal and interest and more than 20 million customer accounts. Management expected revenue sharing to reduce Domestic Card margins but not materially affect total-company revenue or net interest margins.
- Capital One acquired HBC’s Canadian card portfolio in January for approximately $1.4 billion in receivables. International Card reported an $11 million loss for the quarter, with acquisition-related provision and operating costs contributing.
- Mortgage representation-and-warranty reserves were $846 million, up from $816 million at year-end. Open repurchase claims totaled $1.658 billion in original loan principal; that amount is not an estimate of losses. The company estimated reasonably possible additional losses beyond reserves could reach $1.1 billion, while warning actual losses could be higher.
- Management cited a fragile economic recovery, elevated unemployment, potential credit deterioration, interest-rate and funding-market changes, regulatory implementation costs, and litigation as risks. Dodd-Frank rules were still under assessment. The U.K. PPI review could lead to additional costs, which the company said it could not reliably estimate before completing its review.
- Other notable items: Q1 2010 results included a $128 million pre-tax gain from mortgage-trust deconsolidation; the company identified a management-accounting mapping error and revised previously reported Credit Card average loan yields, with no effect on income-statement amounts. Q1 2011 regulatory capital ratios also reflected completion of a phase-in that added about $15 billion to risk-weighted assets.
Important facts for investors to verify
- Whether improving credit trends and allowance releases continue, and how loss rates evolve as loan growth resumes.
- The realized performance, costs and revenue-sharing effects of the HBC and Kohl’s portfolios.
- Whether mortgage repurchase claims, litigation outcomes or loan performance require reserve increases beyond the $846 million accrual.
- Liquidity and funding composition, including the company’s ability to replace maturing brokered deposits and other wholesale funding.
- The impact of regulatory changes on capital requirements, business structure and operating costs; reported capital ratios are under Basel I and some measures are non-GAAP.
- The filing reports effective disclosure controls as of March 31, 2011. Investors should also review the detailed legal proceedings and credit-quality disclosures, including the SEC inquiry concerning auto-loan loss reserves for certain 2007 quarters.