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Capital One Financial Corp. has slashed its exposure to the auto lending and mortgage sectors, but at midyear it was still battling rapid credit-quality erosion on both fronts.

In reporting its second-quarter results last week, Capital One said it had lingering exposure to GreenPoint Mortgage Funding Inc., which it closed nearly a year ago. It also cited continued deterioration in its auto division, though the division earned $34 million in the quarter.

The McLean, Va., company reported that it has exceeded its goal of halving auto loan originations from fourth-quarter levels, to $1.5 billion, as part of an effort to contain its credit-quality problems. The portfolio shrank 5% from the first quarter and 6.8% from Dec. 31, to $23.4 billion.

However, credit quality remained a concern for the $151 billion-asset Capital One. Its provision for auto loan losses fell 43.5% from the first quarter but rose 26.5% from a year earlier, to $230.6 million. And the delinquency rate in that category rose 120 basis points from the first quarter and 162 basis points from a year earlier, to 7.62%. The rate of net chargeoffs fell 14 basis points from the first quarter but rose 149 basis points from a year earlier, to 3.84%.

While a bright spot in a quarter where overall profits fell 17% from the first quarter and 40% from a year earlier, to $452.9 million, auto finance has a long way to go to erase nearly $200 million in losses from the previous three quarters.

Richard Fairbank, Capital One's chairman, president, and chief executive, has said he would consider closing the auto lending business if it fails to meet risk-adjusted returns. On Thursday he would not say whether the unit had turned the corner; he said a seasonal improvement in chargeoffs had a lot to do with the unit's second-quarter profit. "Our auto finance business continues to face significant challenges," he said during a conference call Thursday. "We are monitoring the business results closely … and we will be prepared to take further appropriate actions."

Richard Shane, an analyst at Jefferies & Co., called the auto unit's second-quarter profit "surprising" and said current trends lead him to believe the business will be unprofitable through 2009. "When you reach an inflection point it can become very profitable very quickly, but it is hard to tell when there will be a reversal," he said in an interview. Capital One has shown patience and "probably won't make a decision based solely on a cyclical trough, no matter how prolonged it might be."

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