Capital One’s (COF) third quarter net income from continuing operations of $1.03 per share was substantially better than the Zacks Consensus Estimate of 11 cents. This also compares favorably with a net loss from continuing operations of 64 cents in the prior-year quarter.
Results for the quarter benefited primarily by increased revenue and almost stable expenses as a result of the absence of the FDIC special assessment that impacted the second quarter. However, an increased provision and decrease in average deposits were on the downside.
Net income came in at $425.6 million or 94 cents per share, compared to $224.2 million or 53 cents in the earlier quarter, prior to the impact related to the redemption of preferred shares and preferred dividend payment.
Total managed revenues for the quarter increased 11.6% sequentially and 9.9% year-over-year to $4.6 billion. The sequential increase in revenue was driven primarily by higher yields in Domestic Card, lower funding costs, an improvement in valuation adjustments to retained securitization interests, and opportunistic moves in the investment portfolio that resulted in gains from securities sales.
Managed net interest margin increased 84 basis points (bps) sequentially but decreased 58 bps on a year-over-year basis to 7.01%.
Net interest income increased 10.1% sequentially and 12.7% year-over-year to $3.3 billion. Non-interest income increased 15.5% sequentially and 3.6% year-over-year to $1.3 billion.
Provision for loan losses increased 15.6% sequentially and 21.9% year-over-year to $2.2 billion. Provision expense increased sequentially due to an anticipated increase in charge-offs as well as a $31.7 million allowance in the third quarter compared to a second quarter release of $166.2 million.
Non-interest expense for the quarter decreased 4.1% sequentially but increased 9.5% year-over-year to $1.7 billion. The sequential decrease was driven primarily by the absence of the FDIC special assessment charges that impacted the second quarter as well as modestly lower marketing and restructuring expenses.
The managed efficiency ratio decreased to 38.36% from 45.28% in the prior quarter, driven largely by increasing revenue.
Average deposits for the quarter decreased 3.1% over the prior quarter to $115.9 billion.
Credit quality significantly deteriorated during the quarter. Allowance as a percentage of reported loans held for investment increased 24 bps from the prior quarter to 5.08%. Net charge-offs increased 0.7% sequentially and 29.2% year-over-year to $1.1 billion. Net charge-off rate deteriorated 28 bps sequentially and 100 bps year-over-year to 4.53%. The 30-plus day performing delinquency rate increased 40 bps sequentially and 26 bps year-over-year to 4.11%.
The Tangible Common Equity (TCE) ratio for the quarter was 6.2%, an improvement from the prior quarter level of 5.7%. The Tier 1 risk-based capital ratio increased to an estimated 11.8 %, and continues to be well above the regulatory well-capitalized minimum.
Tangible book value per share of common stock was $27.02 at Sept. 30, 2009, compared to $25.34 at June 30, 2009, and $31.63 at Sept. 30, 2008.
We anticipate continued synergies from the company’s geographic diversification and expense management initiatives, but weakening demand for new loans and worsening credit quality will be a drag on upcoming results.
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