Capital One Financial Corporation — 2011 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2011. Capital One is a diversified financial services holding company operating through Credit Card, Consumer Banking and Commercial Banking businesses. Its products include credit cards, auto and home loans, deposits, and commercial lending and treasury services. The company reported $135.9 billion in loans and $128.2 billion in deposits at year-end.
Financial and operating results
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $16.279 billion | $16.171 billion |
| Net interest income | $12.741 billion | $12.457 billion |
| Net interest margin | 7.27% | 7.09% |
| Provision for loan and lease losses | $2.360 billion | $3.907 billion |
| Non-interest expense | $9.332 billion | $7.934 billion |
| Income from continuing operations, net of tax | $3.253 billion | $3.050 billion |
| Net income | $3.147 billion | $2.743 billion |
| Diluted EPS | $6.80 | $6.01 |
| Net cash from operating activities | $7.455 billion | $8.142 billion |
| Year-end total assets | $206.019 billion | $197.503 billion |
| Year-end stockholders’ equity | $29.666 billion | $26.541 billion |
- Net income increased 15%, primarily reflecting lower credit costs and reduced mortgage repurchase provisions; higher operating and marketing costs partly offset the improvement.
- Year-end loans grew 8% to $135.9 billion; deposits grew 5% to $128.2 billion. Other debt, excluding securitized debt, was $23.0 billion; securitized debt was $16.5 billion.
- Allowance for loan and lease losses fell to $4.25 billion from $5.63 billion, or 3.13% of loans versus 4.47%. Net charge-off rate improved to 2.94% from 5.18%; 30-plus-day delinquency was 3.95% versus 4.23%.
- Liquidity reserves were $35.8 billion, down from $38.9 billion. Cash and cash equivalents were $5.84 billion at year-end.
- Tier 1 common equity ratio was 9.7%, up from 8.8%; Tier 1 risk-based capital was 12.0%, versus 11.6%; total risk-based capital was 14.9%, versus 16.8%. The company and its banks reported meeting applicable capital requirements; the banks were well capitalized.
- Fourth-quarter 2011 net income was $407 million and diluted EPS was $0.88, compared with $697 million and $1.52 in fourth-quarter 2010.
Material changes and segment performance
- Credit Card net income was $2.277 billion, broadly level with 2010. Purchase volume rose 26%; the segment’s net charge-off rate fell to 4.92% from 8.79%. Higher marketing, legal and operating costs offset credit improvement.
- Consumer Banking net income declined 11% to $809 million. Auto originations rose 61% to $12.5 billion and year-end auto loans grew 22%; legacy home loans continued to run off.
- Commercial Banking net income rose to $532 million from $160 million, supported by higher revenue and a substantially lower provision. Year-end commercial loans increased 14% and deposits 17%.
- Capital One acquired the HBC Canadian credit card portfolio for approximately $1.4 billion and the Kohl’s portfolio for approximately $3.7 billion during 2011. ING Direct closed on February 17, 2012, after year-end, for approximately $6.3 billion in cash and 54.0 million shares; it had approximately $83.0 billion in deposits at December 31, 2011. The HSBC U.S. card-business acquisition remained pending, with an estimated $2.6 billion premium and an expected second-quarter 2012 close, subject to approvals.
Outlook, risks and unusual items
- Management expected 2012 operating expenses to rise significantly because of ING Direct and HSBC integration and direct operating costs. It anticipated a potentially significant negative effect on 2012 EPS from dilution, integration expenses, purchase accounting and building allowances for acquired revolving accounts; it expected combined acquisition benefits in 2013 and beyond.
- Management expected loan growth in 2012 from acquisitions, while noting that ING Direct home-loan runoff and legacy home-loan runoff could reduce Consumer Banking loan volumes. It expected auto growth to continue and Commercial Banking to remain steady, while credit trends could normalize and become more seasonal.
- The ING Direct-related interest-rate swaps were economic hedges but not designated for hedge accounting. Capital One recorded a $277 million mark-to-market loss in 2011, largely offset by a $259 million gain on securities sales. The swaps were terminated at acquisition in February 2012 with a $355 million net loss at termination.
- The mortgage representation-and-warranty reserve was $943 million at year-end, up from $816 million. The filing estimated reasonably possible additional losses beyond the accrual could be as high as $1.5 billion, while cautioning actual losses could exceed that estimate. Open repurchase requests involved approximately $2.1 billion of original loan principal; this is not an estimate of losses.
- Other notable items included a $102 million provision for anticipated U.K. payment-protection-insurance refunds and $40 million of related regulatory expense. Capital One also disclosed an ongoing SEC investigation focused largely on its method for determining auto-finance loan-loss reserves for certain 2007 quarters.
- Management identified economic weakness, unemployment and housing conditions, credit losses, interest-rate and funding pressures, acquisition integration, regulatory change, litigation, operational and cyber risks, and competition as material risks. The filing describes substantial new and proposed requirements under Dodd-Frank, CFPB oversight and Basel capital and liquidity frameworks.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management reported effective internal controls and no material weaknesses.
Important facts for investors to verify
- Whether credit quality and allowance releases remain sustainable as portfolio growth resumes; review reserve coverage and acquired-loan provisioning.
- The range and status of mortgage repurchase litigation, the $943 million reserve, and the stated potential additional loss exposure of up to $1.5 billion.
- Actual 2012 acquisition costs, dilution, purchase-accounting effects and progress toward expected integration benefits, including the status and terms of the HSBC transaction.
- Liquidity and funding composition after ING Direct, including deposit retention and cost, short-term FHLB advances, and the effect of higher regulatory capital and liquidity requirements.
- Performance of the U.K. card business after PPI refunds and regulatory changes, and any material developments in the SEC investigation or other disclosed litigation.