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Capital One Reports Second Quarter Earnings

July 15, 1997 at 12:00 AM EDT

FALLS CHURCH, Va. (July 15, 1997) --- Capital One Financial Corporation (NYSE: COF) today announced second quarter 1997 earnings of $39.4 million, or $.58 per share, versus earnings of $42.5 million, or $.63 per share, for the first quarter of 1997 and $38.2 million, or $.57 per share, for the comparable period in the prior year. The level of earnings in the second quarter was consistent with management's lowered expectations as described in its first quarter 1997 Form 10-Q.

Revenue, defined as managed net interest income and non-interest income, declined slightly to $466 million in the second quarter of 1997 versus $468 million in the first quarter of 1997, but increased 42 percent over the $328 million for the comparable period in the prior year. Revenues were lower than expected due to lower rates of delinquency, providing less fee income, and to higher balance attrition. For the quarter, Capital One's managed consumer loan balances increased by $130 million to $12.7 billion. This modest increase reflected greater emphasis on second generation credit card products and the impact of increased balance attrition as a result of increasing industry mail volumes. During the second quarter of 1997, the Company added 673,000 net new accounts, bringing total accounts to 9.8 million. This was the second largest-ever quarterly growth in accounts and represented a 30 percent annualized growth rate.

"Despite a very difficult industry backdrop, we continue to add accounts at a rapid pace," said Richard D. Fairbank, Capital One's Chairman and Chief Executive Officer. "While improved delinquencies are always a positive sign, they do create short-term earnings pressure."

The managed net interest margin was 8.30 percent in the second quarter of 1997, a decrease from 8.83 percent in the first quarter of 1997 and an increase from 7.94 percent in the comparable period of the prior year. The lower margin from the previous quarter reflects decreased late fees and attrition from loans at non-introductory rates.

The managed delinquency rate (30+ days) decreased to 6.33 percent as of June 30, 1997, compared with 6.41 percent as of March 31, 1997. This decline represents improvements in the first half of the year that slightly exceed seasonal effects and is the first time that delinquencies have fallen in eight quarters. The managed net charge-off rate increased to 6.38 percent for the second quarter of 1997 compared with 5.84 percent in the first quarter of 1997. This increase was within expectations and is due to the continued aging of the portfolio and the effect of increases in industry losses.

Marketing investment of $45.0 million declined from $54.1 million in the first quarter 1997 and increased compared to $42.7 million in the comparable period of the prior year. Other non-interest expenses (excluding solicitation expense) for the second quarter of 1997 were $157.0 million versus $159.5 million for the first quarter of 1997 and $116.6 million in the comparable period of the prior year. For the period, total associate headcount remained flat.

"We are now beginning to reap the benefits of our investments in technology and process improvements and our more aggressive management of costs," said Nigel W. Morris, Capital One's President and Chief Operating Officer. "Investments in the last few years are now paying off. In the quarter, we added more than 670,000 accounts and actively reduced our total expenses ­ achieving a nine percent decrease in cost per account."

The allowance for loan losses was maintained at $118.5 million, and decreased slightly to 3.27 percent of on-balance sheet receivables as of June 30, 1997 from 3.37 percent as of March 31, 1997. Capital ratios were strong as of June 30, 1997 at 14.91 percent of reported assets and 6.01 percent of managed assets, compared to 14.22 percent and 5.86 percent, respectively, for the previous quarter.

As a result of current conditions, management has revised its target for earnings growth for 1997. Management now expects that the Company will report earnings for the year ending December 31, 1997 in the range of 5-10 percent higher than the $2.30 per share reported for 1996. Management cautions that actual results could differ from current expectations due to a number of factors, including the level of loans outstanding, delinquencies and charge-offs experienced in the second half of 1997.

The Company also announced that it expects to repurchase up to two million shares of the Company's common stock over the next two years in order to mitigate the impact of shares issuable through dividend reinvestment, employee stock purchase and option programs.

Headquartered in Falls Church, Virginia, Capital One Financial Corporation is a holding company whose principal subsidiaries, Capital One Bank and Capital One, F.S.B., offer financial products and services to consumers. Capital One's subsidiaries collectively had 9.8 million customers and $12.7 billion in managed loans outstanding as of June 30, 1997, and are among the largest providers of MasterCard and Visa credit cards in the United States.