Capital One Reports Loss From Closing Mortgage Unit

Delinquencies on the Rise For Credit Cards, Car Loans

Capital One Financial of McLean posted its first quarterly loss ever, from the expense of shutting down its mortgage lender, and warned of additional challenges in the credit card and auto finance businesses.

The company said it lost $81.6 million (21 cents a share) for the three months ended Sept. 30, compared with a profit of $587.8 million ($1.89) in the third quarter last year.

The results included $898 million in costs associated with the closing of GreenPoint Mortgage, which was announced in August as credit-market turmoil began to inflict widespread damage on financial institutions and the mortgage industry. Yesterday's announcement offered a glimpse into how the credit crunch might affect other areas of lending.

Capital One reported an increasing number of delinquencies and defaults in both the credit card and auto finance sectors. As a result, the company said its expenses associated with covering bad loans have increased.

The company said 4.7 percent of its loans were delinquent in the third quarter, up from 3.7 percent in the comparable quarter last year. And the proportion of loans written off increased to 3.96 percent from 3.25 a year earlier. Capital One warned that the number of loan defaults is likely to increase over the next year.

Richard D. Fairbank, chairman and chief executive, told analysts during a conference call that he does not think the trends indicate a worsening economic picture.

"We see a strong economy," he said. "I think there's more uncertainty . . . than usual at the moment . . . which is why we're being extra careful," he said.

Fairbank described the tightening credit market as a return to historically normal levels and said the low interest rates of recent years are an aberration.

"We all knew that can't last forever," he said. In contrast to other credit card companies, Fairbank said he has not seen major changes in how consumers use credit cards.

Capital One has moved aggressively into the banking sector, expanding beyond its roots as a credit card issuer through a series of acquisitions.

Quarterly revenue rose to $3.77 billion from $3.06 billion a year earlier. And the company said it benefited from cost cutting. Capital One announced this year that it would lay off 2,000 employees.

Capital One's quarterly loss beat estimates of a loss of 30 cents per share, according to a poll of analysts by Thomson Financial. Its shares fell 90 cents, to $66, yesterday, down from a recent high of $81.85 in mid-June.

Christopher Brender, an analyst at Stifel Nicolaus, said the report showed reason for concern. "I'm definitely disappointed with the outlook for credit," he said. "The more curious thing is they're not really blaming the economy . . . If you're investing in the stock, you've got to be concerned about, 'what if the economy does weaken.' "

The credit card business remained profitable for Capital One, with earnings up 21.5 percent from a year earlier. The company said rising delinquencies were largely a result of changing credit policies. This summer, Capital One told some customers that it would raise the interest rates and alter the grace periods on their credit cards.

In auto finance, the company said a combination of tighter credit and rising delinquencies contributed to a loss of $3.8 million.

There are signs that the collapse in the mortgage markets has taken a toll on consumer spending, said Scott Hoyt, director of consumer economics at Moody's Economy.com.

"Consumers for a while were using their housing as ATM machines," he said. Now they have increasingly turned to credit cards as a source of money, he said. Consumers already have considerable debt and may not have room to borrow more.

"If [credit card issuers] were to cut back significantly, that would have the potential to be a blow to spending," he said.