COF

Capital One Financial Corp. 10-Q Summary (Q3 2007)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2007. Capital One Financial Corporation is a diversified financial services company operating through two primary segments: Local Banking (consumer, small business, and commercial deposits/lending) and National Lending (U.S. Card, Auto Finance, and Global Financial Services). The reporting period is significantly impacted by the shutdown of the mortgage origination operations of its wholesale mortgage banking unit, GreenPoint, which is now reported as a discontinued operation.

Key Financial Metrics

Material Changes vs. Prior Period

• Discontinued Operations Impact: The company recorded a net loss of $81.7 million for Q3 2007, driven entirely by an $898.0 million after-tax loss from the shutdown of GreenPoint mortgage origination operations. This contrasts with a net income of $587.8 million in Q3 2006. Excluding discontinued operations, income from continuing operations increased 39% to $816.4 million.
• Loan Portfolio Growth: Managed loans held for investment increased 29% year-over-year to $146.4 billion, primarily due to the December 2006 acquisition of North Fork Bancorporation.
• Deposit Growth: Total deposits rose 75% to $83.3 billion, also largely attributable to the North Fork acquisition.
• Provision Increase: The provision for loan and lease losses increased 38% year-over-year to $595.5 million, reflecting the normalization of consumer credit charge-offs and elevated losses in the auto finance sub-segment.
• Net Interest Margin: Reported net interest margin decreased 84 basis points to 5.52% for the quarter, primarily due to the addition of the lower-yielding North Fork loan portfolio.

Guidance, Outlook, and Risks

• 2007 EPS Guidance: Management affirmed an expectation of approximately $5.00 diluted earnings per share for the full year 2007, inclusive of the impact of a $3.0 billion share repurchase program.
• 2008 Outlook: The company targets a Tangible Common Equity range of 5.5% to 6.0% in 2008. Expectations include low-to-mid single-digit growth in loans and deposits, revenue growth in line with asset growth, and operating efficiency in the mid-40% range.
• Credit Outlook: Management anticipates charge-off dollars of approximately $4.9 billion in 2008, assuming credit normalization concludes by the end of 2007 and elevated U.S. Card delinquencies subside. However, they note that if delinquency rates do not subside, actual charge-offs could exceed this estimate.
• Restructuring: The company announced a cost initiative in Q2 2007, expecting total pre-tax charges of approximately $300 million. $110.4 million was recognized in the first nine months of 2007.
• Risks: Key risks include the volatility of capital markets affecting wholesale funding, credit deterioration in consumer and auto portfolios, and the outcome of ongoing industry litigation regarding interchange fees and antitrust practices involving MasterCard and Visa.

Investor Verification Checklist

• Discontinued Operations: Verify the specific components of the $898 million GreenPoint loss (goodwill write-down, valuation adjustments, restructuring) to understand the non-recurring nature of the Q3 net loss.
• Credit Normalization: Monitor the trend in net charge-off rates for the U.S. Card and Auto Finance segments to assess if the "normalization" cited by management is stabilizing or accelerating.
• Share Repurchases: Confirm the completion status of the $3.0 billion repurchase program and its impact on the denominator for future EPS calculations.
• North Fork Integration: Review the Local Banking segment's performance to gauge the success of integrating North Fork assets and the impact on net interest margins.
• Regulatory Capital: Verify that the company remains "well-capitalized" under both standard and subprime lending guidance, particularly given the elevated charge-off environment.