- The Washington Times - Monday, April 23, 2007

Shares of McLean-based Capital One Financial Corp. fell nearly 6 percent Friday after the company reported a 24-percent drop in first-quarter profits.

Net income for the three months ended March 31 fell to $675.1 million ($1.62 per diluted share) from $883.3 million ($2.86) a year ago, the company said Thursday. Earnings per share fell well below analysts’ average estimate of $1.99, according to Bloomberg News.

Several analysts downgraded their ratings on the company, which markets consumer financial products and services, including credit-card lending, car loans and small business and international credit cards.

“Not much positive came out of the quarter,” Merrill Lynch analyst Kenneth Bruce summed up in a research note to clients, downgrading the company to “neutral.”

Capital One’s management cited weaknesses in the company’s mortgage banking business, which posted a loss of $12.6 million and originated $6.8 billion in loans — down $1 billion from a year ago and $2.5 billion from the previous quarter. The company, which in December acquired North Fork Bancorp for $13.6 billion, said it miscalculated the demand for home loans, especially Alt-A, which fell significantly near the end of the quarter. Alt-A is a mortgage risk category that falls between prime and subprime, but is closer to prime. It is also referred to as “A minus.”

“Assuming no improvement in the unusually weak conditions now present in the secondary market for nonconforming prime mortgage loans, including Alt-A, we expect that reduced volumes and margins would result in our mortgage banking business delivering no incremental earnings for the balance of 2007,” Chief Financial Officer Gary L. Perlin said.

Analysts also highlighted disappointments across Capital One’s other segments, including its marquee credit-card business, where net income was down 18 percent, or $108 million, at $495.3 million. Still, that amount was up from $337.2 million in the previous quarter, which the company attributed to seasonal patterns.

Net income for the company’s auto finance division fell 36 percent, compared with last year’s first quarter, to $44.4 million.

Executives said they were reducing the company’s full-year earnings forecast to between $7 and $7.40 from $7.40 and $7.80.

Chris Brendler, an analyst with Stifel, Nicolaus & Co. Inc., said it will be difficult for the company to even reach its reduced guidance, given the current challenges facing the mortgage banking sector.

“Fortunately, we believe most of these problems are cyclical and/or short-term so we still believe results will be materially better in 2008,” said Mr. Brendler, whose company has an investment banking relationship with Capital One.

Shares of the company closed down $2.54 at $70.26 on the New York Stock Exchange yesterday.

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