Capital One posts first quarter loss as delinquencies grow

Capital One Financial Corp. (COF) reported a $111.9 million first-quarter loss as it added $124.1 million to reserves for sour loans. Shares of Capital One, which soared 12.5 percent earlier today, are declining some 9 percent in after-hours trading.

The per share loss was 45 cents, compared with last year's net income of $548.5 million, or $1.47 a share, and follows a net loss of $1.4 billion, or $3.74 per common share in the fourth quarter of 2008 on impaired-goodwill charges. Net loss from continuing operations for the first quarter was $86.9 million, or $0.39 per share, missing analyst estimates by four cents.

Revenues in the first quarter of 2009 declined to $3.7 billion or 5.6 percent relative to the fourth quarter of 2008. The company blamed it on declining purchase volumes, changes in the mix of earning assets, and the combination of improving early stage delinquencies and worsening later stage delinquencies.

Adding to the bad news, Capital One said that its previous estimate of $8.6 billion in charge-offs in 2009 loans was too low and "has chosen not to specifically update its outlook for managed charge-offs given significant uncertainty in the economy," according to its statement.

"While our first quarter results reflected significant pressures from the worsening economy, our balance sheet remained a source of strength," said Richard D. Fairbank, Capital One's Chairman and CEO. Of course, that remains to be seen.

On the brighter side, auto finance delinquencies and charge-off rates improved in the first quarter, and total deposits increased 11.5 percent from the fourth quarter. "Deposits now comprise approximately two thirds of our funding, providing a lower cost of funds while enabling us to support our lending without participating in any government-assisted funding program such as TLGP or TALF," said Gary L. Perlin , Capital One's CFO.

While both CEO and CFO reiterated the strength of Capital One's balance sheet, they have acknowledged the "economic challenges," particularly deterioration in the labor market, as the main cause that drove increasing delinquency and charge-off rates across the company's lending businesses, with the exception of Auto Finance, in the first quarter. The U.S. card charge-off rate increased to 8.4 percent for the first quarter of 2009, above the 8.1 percent charge-off rate expectation articulated in the fourth quarter of 2008.

With an 8.5 percent unemployment rate and economic conditions generally worsening still, the company will likely take similar steps as other financials are taking such as closing unused accounts and scaling back credit lines at the same time as they increase provisions for loan losses.

So far this quarter, several financial companies have reported losses or big profit declines in the first quarter, reflecting the effects of the deteriorating economy with sharp increases in soured consumer and commercial loans.

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