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Bank earnings can be tough to navigate. The Motley Fool is here to help guide you through Capital One's (NYSE: COF  ) most recent earnings release.

The income
For the second quarter in a row, Capital One reported a net income of $1.1 billion, as its earnings per share stood at $1.86. Compared to the third quarter of 2012 its revenue was down, expenses were up, and profit was down. Sounds rough, but the bank's CEO didn't think so.

Longtime Chairman and CEO Richard Fairbank noted, "Our businesses continue to deliver attractive, sustainable, and resilient returns and generate capital on a strong trajectory." He also added that Capital One remains "focused on important levers that will sustain and improve our profitability and our ability to distribute capital."

While net income was flat, Capital One's income from continuing operations was down by $100 million when compared to the second quarter -- but this was in large part thanks to increased litigation expense. The reason for flat net income was a loss of $180 million to an increased provision for mortgage losses in the second quarter.

The margins
Capital One was one of the only banks to watch its net interest margin rise from the second quarter to the third, as shown in the chart below:

Net Interest Margin


3Q 2012

2Q 2013

3Q 2013

Capital One








US Bancorp (NYSE: USB  )




FifthThird Bank (NASDAQ: FITB  )




Source: Company Earnings Reports

It should be noted that Capital One has a higher margin than its peers thanks in large part to its substantial credit card portfolio. Capital One also saw improvement in its total net revenue margin from the second quarter to the third, rising from 8.46% to 8.54%.

For the third consecutive quarter, Capital One also watched its assets shrink, as its assets have fallen from $313 billion on Dec. 31, 2012 to $290 billion as of Sep. 30, 2013, a decline of approximately 7%. Over that same time period PNC, Wells Fargo, and US Bancorp have all watched their assets rise:

Assets ($billions)


4Q 2012

3Q 2013

Capital One



US Bancorp









Source: Company Earnings Reports

Although Capital One had declining assets and stable net income levels, its return on average assets shrunk from 1.66% to 1.53%. This is because return on average assets is calculated using income from continuing operations.

The one-time charges
Capital One's expenses rose from the second and third quarters of 2012, but this was almost entirely attributable to its $101 million increase in its litigation reserves. Were it not for this increase in litigation reserves, Capital One's performance would likely have eclipsed its performance in both the second quarter of this year and the third quarter of last year.

In addition, Capital One watched its provision for credit losses (what it expects to lose on loans) rise by almost $100 million when compared to the second quarter, but noted this was primarily attributable to "seasonally higher Auto Finance provision and a smaller allowance release in Home Loans."

The takeaway
While Capital One produced stable performance quarter over quarter and delivered strong results again, the biggest takeaway from this quarter's release was the strong growth in its tangible book value per share -- the value that is actually available to shareholders. As shown in the chart below, it continued its steady stream of growth and has risen almost 12% over the past year:

Source: Company Earnings Report

Despite a slight dip in the second quarter, this is one metric that should help filter through the noise of Capital One's release and provide assurance moving forward. 

Beyond earnings
While Capital One has seen its tangible book value rise -- many banks have seen massive gains in their stock prices over the past few years. Have you kicked yourself for missing them? There's good news: It's not too late. Bargains of a lifetime are still available, but you need to know where to look. The Motley Fool's new report "Finding the Next Bank Stock Home Run" will show you how and where to find these deals. It's completely free -- click here to get started.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 21, 2013, at 11:00 AM, BAndersen6 wrote:

    Banks that focus on service and customer satisfaction will do better in the long run and retain existing customers , I work for McGladrey and there's a newsletter about this very topic with great advice for financial institutions looking to improve performance " Eight ways for your financial institution to boost performance now "

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