Capital One Financial Corporation announced earnings for 2007 of $1.6 billion, or $3.97 per share (diluted). Earnings from continuing operations for the full year were $2.6 billion or $6.55 per share (diluted), versus the prior year’s $2.4 billion, or $7.65 earnings per share (diluted). Net income for the fourth quarter of 2007 was $226.6 million, or $0.60 earnings per share (diluted). Fourth quarter 2007 earnings from continuing operations were $321.6 million, or $0.85 earnings per share (diluted) compared to $402.6 million, or $1.17 earnings per share (diluted) in the fourth quarter of 2006. These results are consistent with those reported by the company on January 10, 2008 and provide additional information regarding segment performance.
Earnings from continuing operations excludes the loss from discontinued operations related to the shutdown of GreenPoint Mortgage, announced in August 2007, of $0.25 per share (diluted) for the fourth quarter of 2007 and $2.58 per share (diluted) for full year 2007.
“As the economy has weakened, we have selectively pulled back loan growth and maintained appropriately conservative underwriting standards,” said Richard D. Fairbank, Capital One’s Chairman and Chief Executive Officer. “We feel confident that our strong balance sheet, resilient businesses, and decisive actions will allow us to successfully navigate the cyclical economic weakness and we remain poised to generate above average returns on the other side of the cycle.”
Total Company Results
— Managed loans held for investment at the end of 2007 were $151.4 billion, up $5.2 billion or 3.6 percent over the end of 2006. Increases during the year came primarily in the Auto and Global Financial Services portfolios. Managed loans increased from the third quarter of 2007 by $6.6 billion, or 4.6 percent, driven largely by seasonal growth in U.S. Card and Auto. The company expects managed loan growth in the low single digits in 2008.
— Total managed revenue was up 5.7 percent relative to the third quarter of 2007, driven largely by revenue margin expansion and seasonal loan growth in our U.S. Card portfolio. The company expects 2008 revenue growth to be in the low single digits.
— On a managed basis, the fourth quarter 2007 provision for loan losses was approximately $1.9 billion. This was comprised of approximately $1.3 billion in charge-offs and an allowance build of approximately $650 million. The allowance is driven by the loss outlook at year-end which reflects fourth quarter credit metrics and a recognition of the weakening trends in the U.S. economy as the company entered 2008.
— Fourth quarter operating expenses of $1.7 billion included approximately $140 million of legal liabilities and reserves. Full year 2007 operating expenses were $6.6 billion, leading to an efficiency ratio of 47 percent. The company expects its 2008 operating expenses to be at least $200 million below 2007, leading to an efficiency ratio in the mid-forty percent range for 2008.
— Total deposits of $83.0 billion at the end of the fourth quarter of 2007 were essentially flat with the previous quarter.
“The company ended 2007 with a year-end ratio of tangible common equity (TCE) to tangible managed assets of 5.8 percent. In the current environment we intend, through internal capital generation, to manage toward the high end or above our target range of 5.5 – 6.0 percent,” said Gary L. Perlin, Capital One’s Chief Financial Officer. “We will maintain our strong liquidity position and continue to take actions to sustain profitability through the cycle.”
National Lending Segment
— Profits for the National Lending segment were up $59.8 million as compared to the fourth quarter of 2006, driven by increased profits in U.S. Card and Global Financial Services.
— The managed charge-off rate for the National Lending segment in the fourth quarter of 2007 was 4.73 percent versus 3.96 percent in the third quarter of 2007 and 3.63 percent in the fourth quarter of 2006. The delinquency rate of 5.17 percent for National Lending increased from 4.70 percent at the end of the third quarter and 4.09 percent as of December 31, 2006. Credit metrics have risen year over year due to credit normalization, secondary effects of changes to pricing and fee policies in U.S. Card, and deterioration in the company’s U.S. consumer loan portfolio due to weakening in the U.S. economy.
U.S. Card highlights
— U.S. Card reported record net income for 2007 of $2.1 billion, versus $1.8 billion in 2006. Fourth quarter net income was $521.9 million, a 54.8 percent increase, year over year as revenue growth and expense reductions more than offset increased charge-offs and allowance build.
— Revenues increased 27.2 percent from the fourth quarter of 2006 largely as a result of pricing changes implemented in some of the company’s products after completion of the card holder system conversion.
— Non-interest expenses decreased 6.1 percent to $3.3 billion in 2007 from $3.5 billion in 2006. Non-interest expenses in the fourth quarter of 2007 were relatively flat compared to the third quarter of 2007.
— Managed loans at the end of 2007 were $52.1 billion, a decline of 2.9 percent from the end of 2006, and an increase of 5.1 percent from the end of the third quarter of 2007. The year over year decline was a result of a reduction in the marketing of teaser rate offers in the prime market and a $600.0 million portfolio sale in the first quarter of 2007. The increase in managed loans relative to the third quarter was due primarily to seasonality.
— Charge-offs rose in the fourth quarter of 2007 to 5.40 percent from 3.82 percent in the fourth quarter of 2006, and delinquencies rose to 4.95 percent from 3.74 percent. The increases resulted from continued normalization of consumer credit, pull-back from the prime revolver market throughout the year, impacts of U.S. Card’s pricing and fee policy changes made in the second and third quarters, and economic weakening evidenced in recently released economic indicators. In addition, credit metrics in the fourth quarter of 2007 reflect expected seasonal patterns on a sequential quarter basis. The company expects the U.S. Card managed charge-off rate to be in the mid-6 percent range in the first half of 2008.
Auto Finance highlights
— Auto Finance reported a net loss for 2007 of $33.8 million, versus net income of $233.5 million in 2006. In the fourth quarter of 2007, Auto posted a net loss of $112.4 million, primarily due to the effects of credit worsening.
— Increases in charge-off and delinquency rates were a result of expected seasonal patterns, credit normalization and weakening in the U.S. economy. While the company increased its pricing and tightened credit standards in the fourth quarter of 2007, the reduction in competitive intensity allowed the company to originate $3.6 billion of high quality loans, up 11.5 percent, compared to the third quarter of 2007.
— Tightened underwriting and increased prices implemented in the fourth quarter have resulted in better credit profiles and higher pricing on the portfolio. An intended effect of the tightened underwriting has been to reduce the amount of originations. In 2008, the company expects to further reduce originations and focus its dealer prime business on a much smaller network of dealers.
— On January 1, 2008, the company moved Capital One Auto Finance Company (“COAF”), a previously wholly owned finance company subsidiary of Capital One Financial Corporation to become a direct operating subsidiary of Capital One, N.A., a wholly owned banking subsidiary. This legal entity restructuring enhances the holding company’s liquidity profile and COAF’s funding flexibility.
Global Financial Services (GFS) highlights
— GFS reported net income for 2007 of $299.4 million, versus $273.9 million in 2006. Fourth quarter 2007 net income was $23.3 million, a $21.2 million increase over last year’s fourth quarter driven by higher revenue margin and lower operating expenses offset by higher provision expense. The reduction in net income relative to the prior quarter was primarily driven by an increase in provision expense.
— Managed loans grew 8.6 percent, to $29.3 billion during 2007 with growth from North American businesses more than offsetting a modest decline in loans in the UK.
— Strong credit results in the Canadian credit card business and stable and improving credit performance in the UK muted worsening credit trends in the domestic GFS businesses for 2007.
Local Banking Segment highlights — Net income of $111.8 million in the fourth quarter of 2007 was down $78.8 million over the third quarter, due primarily to the third quarter including a release in reserves that resulted from aligning the Banking segment’s allowance methodologies with the company’s methodology.
— Loans held for investment grew $1.7 billion from the third quarter of 2007 to $44.0 billion primarily from the addition of GreenPoint Mortgage loans and increased commercial loan production. Total Bank deposits grew $305.2 million to $73.3 billion.
— The charge-off rate was 28 basis points in the fourth quarter of 2007 compared to 19 basis points in the third quarter, and non-performing loans were 41 basis points at December 31, 2007 compared to 27 basis points at September 30, 2007. While losses remain at very low levels, during the quarter the Bank experienced charge-off increases in its Consumer Real Estate portfolio and Unsecured Lending.
— Integration efforts continue to be on track with the brand conversion and deposit platform conversion scheduled for the first quarter. The company generates earnings from its managed loan portfolio, which includes both on-balance sheet loans and securitized (off-balance sheet) loans. For this reason, the company believes managed financial measures to be useful to stakeholders. In compliance with Regulation G of the Securities and Exchange Commission, the company is providing a numerical reconciliation of managed financial measures to comparable measures calculated on a reported basis using generally accepted accounting principles (GAAP). Please see the schedule titled “Reconciliation to GAAP Financial Measures” attached to this release for more information.
Forward looking statements
The company cautions that its current expectations in this release, in the presentation slides available on the company’s website and in its Form 8-K dated January 23, 2008, for 2008 revenue growth, managed growth, operating efficiencies, operating expense reductions, the expected managed charge-off rate for U.S. Card for the first half of 2008, and estimated loss levels for the twelve months ending December 31, 2008 underlying its provision expenses in the fourth quarter of 2007, and the company’s plans, objectives, expectations, and intentions, are forward-looking statements and actual results could differ materially from current expectations due to a number of factors, including: general economic and business conditions in the U.S. and or the UK, including conditions affecting employment levels, interest rates, consumer income, spending, and savings that may affect consumer bankruptcies, defaults, charge-offs and deposit activity; changes in the credit environment in the U.S. and or the UK; continued intense competition from numerous providers of products and services that compete with Capital One’s businesses; changes in our aggregate accounts and balances, and the growth rate and composition thereof; the company’s ability to execute on its strategic and operational plans; the risk that the company’s acquired businesses will not be integrated successfully and that the cost savings and other synergies from such acquisitions may not be fully realized; the risk that the benefits of the company’s restructuring initiative, including cost savings and other benefits, may not be fully realized; the success of the company’s marketing efforts; general conditions in the wholesale funding markets; and general market conditions in the mortgage industry. A discussion of these and other factors can be found in Capital One’s annual report and other reports filed with the Securities and Exchange Commission, including, but not limited to, Capital One’s report on Form 10-K for the fiscal year ended December 31, 2006, and reports on Form 10-Q and 10-Q/A for the quarters ended March 31, 2007, June 30, 2007 and September 30, 2007.
About Capital One
Capital One Financial Corporation (http://www.capitalone.com) is a financial holding company whose subsidiaries collectively had $83.0 billion in deposits and $151.4 billion in managed loans outstanding as of December 31, 2007. Headquartered in McLean, VA, Capital One has 742 locations in New York, New Jersey, Connecticut, Texas and Louisiana. It is a diversified financial services company whose principal subsidiaries, Capital One, N.A., Capital One Bank, and Capital One Auto Finance, Inc., offer a broad spectrum of financial products and services to consumers, small businesses and commercial clients. A Fortune 500 company, Capital One trades on the New York Stock Exchange under the symbol “COF” and is included in the S&P 100 index.
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