Investors have gotten a look at the kind of banking company Capital One Financial Corp. is becoming.
On Thursday the McLean, Va., financial services company reported first-quarter earnings that included results for Hibernia Corp., the New Orleans banking company it acquired in November. A day later North Fork Bancorp. Inc., the Melville, N.Y., company Capital One is buying, reported its earnings.
Neither company's results blew away last year's numbers, but analysts said North Fork's results did not present any nasty surprises. That fact was viewed as a positive development by analysts who had thought deteriorating fundamentals might have prompted its sale.
Though Hibernia's net income fell from a year earlier, the company showed a huge improvement from the fourth quarter.
Capital One is putting its name on Hibernia branches today. In a supplement included with its first-quarter earnings report, it said that earnings from its banking operations rose 155% from Hibernia's earnings for the fourth quarter but fell 9% from its earnings a year earlier, to $78.2 million.
During the quarter Capital One moved Hibernia's auto loans out of its banking operations and replaced them with its online deposits. Those changes, along with other adjustments, left its banking business with $43 million of earnings.
On Friday, North Fork said its first-quarter earnings fell 19% from a year earlier but were flat from the fourth quarter, at $210 million, because of the flattened yield curve and a balance-sheet repositioning.
Last month Capital One agreed to buy the $57 billion-asset North Fork for $14.6 billion. The deal is expected to close in the fourth quarter.
Many of North Fork's figures fell from a year earlier, but there were bright spots. Commercial loans rose 31%, to $11.7 billion, and made up 34% of the loan portfolio, 6 percentage points higher than a year earlier. Deposits rose 3.2% in the same time frame and 3% from the fourth quarter, to $37.7 billion.
Expenses rose 4.7% from a year earlier but fell 6% from the fourth quarter, to $258.2 million. Noninterest income fell 8.1% from a year earlier, to $168 million, and mortgage banking income fell 13.5%, to $96 million. Mortgage originations at North Fork's GreenPoint Mortgage fell 22%, to $7.8 billion.
John A. Kanas, North Fork's chairman, president, and chief executive officer, said in an interview that the results were "precisely what we expected." Though the margin shrank 6 basis points from the fourth quarter and 23 basis points from a year earlier, to 3.56%, he said he was "quite pleased that the margin held where it held."
Mark Fitzgibbon, the director of research at Sandler O'Neill & Partners LP, said in an interview Friday that there "weren't any big surprises" at North Fork. After the results were released, he upgraded the company's shares to "buy," from "hold," because of their price and Capital One's acquisition plans.
"A lot of people thought … [Mr. Kanas] sold the bank because earnings were going to be a disaster, but they weren't," he said.
However, on Friday Mr. Kanas reiterated something he said when he announced his deal with Capital One: "Regional banks are having a tough time for the most part. That can't be expected to change as long as interest rates remain as they are."
Capital One found some positives in its banking operations, which are largely in areas that were hit by Hurricane Katrina. The $89 billion-asset company added $500 million of deposits in the first quarter. About $4.5 billion of deposits have been added since Katrina hit the Gulf Coast on Aug. 29, and a fourth of them do not bear interest.
Richard Fairbank, Capital One's chairman and CEO, cautioned during Thursday's earnings conference call that "a significant amount" of deposits could run off as customers deploy funds for rebuilding. He said that the loan portfolio for its banking operations shrank as a result of post-Katrina balance declines.
According to financial supplements, that portfolio shrank 2% from the fourth quarter but rose 2% from a year earlier, to $16.1 billion.
The first-quarter net chargeoff rate in Capital One's banking operations was 0.38%. Mr. Fairbank said his company is taking a "cautious underwriting stance" while "being appropriately conservative in booking new loans."
Edwin Groshans, an analyst at Swiss Reinsurance Co.'s Fox-Pitt, Kelton Inc., said in an interview that he was encouraged by the low chargeoff rate. "Credit quality is phenomenal, given what is happening" in Hibernia markets. "So far the deposits appear to still be growing. That's a pretty big positive."
Mr. Fairbank gave more details on how Capital One is handling Hibernia. It has moved a number of banking operations to Dallas to keep the bank running if another natural disaster hit the Gulf Coast. It plans to convert Hibernia's systems in June.
He made few projections about North Fork, though he said Capital One would maintain the full-year earnings guidance it gave before it announced the deal - $7.40 to $7.80 a share. He warned about being "too cocky" when an analyst suggested an accelerated conversion to capitalize on any disruption from JPMorgan Chase & Co.'s deal to buy Bank of New York Co.'s branch network.
"The conventional wisdom in the banking business is that anytime big banks buy smaller ones, all the other players lick their chops," he said. "We have got to remind ourselves that … community banks are licking their chops thinking we will be like many of the other ones."
Capital One's first-quarter earnings rose 215% from the fourth quarter and 74% from a year earlier, to $883.3 million, because of improved credit quality, as well as a pair of special items that added $119 million of gains.
Mr. Fairbank was generally positive about his company's overall credit quality. Net chargeoffs fell 33% from the fourth quarter and 9% from a year earlier, to $301 million. Its loan-loss provision shrank 70% from the fourth quarter and 34% from a year earlier, to $170.3 million.
"There is so much noise in the credit environment these days … but it does look pretty darn strong. We don't see any red flags," he said.
