<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _________ to
_________.
Commission file number 1-13300
CAPITAL ONE FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 54-1719854
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2980 Fairview Park Drive, Suite 1300, Falls Church, Virginia 22042-4525
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(Address of principal executive offices) (Zip Code)
(703) 205-1000
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(Registrant's telephone number, including area code)
(Not Applicable)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
As of October 31, 1996, there were 66,297,405 shares of the registrant's Common
Stock, par value $.01 per share, outstanding.
1
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CAPITAL ONE FINANCIAL CORPORATION
FORM 10-Q
INDEX
September 30, 1996
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income . . . . . . . . . . . . 4
Condensed Consolidated Statements of Changes . . . . . . . . . . .
in Stockholders' Equity . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of
Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . 7
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 26
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
2
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ITEM 1.
CAPITAL ONE FINANCIAL CORPORATION
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share data) (unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1996 1995
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<S> <C> <C>
ASSETS
Cash and due from banks $ 155,474 $ 51,680
Federal funds sold 250,000 465,000
Interest-bearing deposits at other banks 376,050 355,780
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Cash and cash equivalents 781,524 872,460
Securities available for sale 684,989 413,016
Consumer loans held for securitization 1,300,000 400,000
Consumer loans 3,162,008 2,521,679
Less: Allowance for loan losses (92,500) (72,000)
- ----------------------------------------------------------------------------------------------------------
Net loans 3,069,508 2,449,679
Premises and equipment, net 164,630 139,074
Interest receivable 40,694 55,573
Accounts receivable from securitizations 483,239 359,379
Other assets 68,510 70,140
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Total assets $ 6,593,094 $ 4,759,321
=========================================================================================================
LIABILITIES
Interest-bearing deposits $ 1,294,695 $ 696,037
Other short-term borrowings 716,492 809,803
Bank notes 3,363,123 2,491,869
Deposit notes 299,996
Interest payable 56,696 73,931
Other liabilities 160,813 88,490
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Total liabilities 5,891,815 4,160,130
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share; authorized
50,000,000 shares, none issued or outstanding
Common stock, par value $.01 per share; authorized
300,000,000 shares, 66,286,645 and 66,174,567
issued and outstanding at September 30, 1996 and
December 31, 1995, respectively 663 662
Paid-in capital, net 476,921 469,830
Retained earnings 223,695 128,699
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Total stockholders' equity 701,279 599,191
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Total liabilities and stockholders' equity $ 6,593,094 $ 4,759,321
=========================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
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CAPITAL ONE FINANCIAL CORPORATION
Condensed Consolidated Statements of Income
(dollars in thousands, except per share data) (unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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1996 1995 1996 1995
============================================================================================================
<S> <C> <C> <C> <C>
INTEREST INCOME:
Consumer loans, including fees $ 170,593 $ 114,093 $ 408,107 $ 281,848
Federal funds sold 3,885 6,035 16,349 19,300
Other 13,757 8,785 34,674 21,264
- ------------------------------------------------------------------------------------------------------------
Total interest income 188,235 128,913 459,130 322,412
INTEREST EXPENSE:
Deposits 16,569 14,360 40,143 36,293
Other short-term borrowings 7,535 14,765 21,450 52,072
Bank and deposit notes 57,477 40,127 145,622 91,090
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Total interest expense 81,581 69,252 207,215 179,455
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Net interest income 106,654 59,661 251,915 142,957
Provision for loan losses 53,933 18,652 104,211 44,548
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Net interest income after provision for loan losses 52,721 41,009 147,704 98,409
NON-INTEREST INCOME:
Servicing 109,549 98,193 346,850 299,488
Service charges 72,983 23,555 141,641 60,816
Interchange 14,847 9,449 37,264 23,652
Other 9,337 5,663 22,708 17,853
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Total non-interest income 206,716 136,860 548,463 401,809
NON-INTEREST EXPENSE:
Salaries and associate benefits 57,562 36,648 151,493 98,090
Solicitation 60,177 34,267 154,434 109,474
Communications and data processing 20,251 15,438 55,070 46,913
Supplies and equipment 15,486 11,388 42,269 29,713
Occupancy 5,692 3,246 14,711 9,812
Other 37,655 23,821 94,630 67,594
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Total non-interest expense 196,823 124,808 512,607 361,596
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Income before income taxes 62,614 53,061 183,560 138,622
Income taxes 23,793 19,113 68,543 49,919
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Net income $ 38,821 $ 33,948 $ 115,017 $ 88,703
============================================================================================================
Earnings per share $ .58 $ .51 $ 1.72 $ 1.33
============================================================================================================
Weighted average common and
common equivalent shares outstanding 67,058,129 66,726,983 67,021,722 66,701,943
============================================================================================================
Dividends paid per share $ .08 $ .08 $ .24 $ .16
============================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
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CAPITAL ONE FINANCIAL CORPORATION
Condensed Consolidated Statements of Changes in Stockholders' Equity
(dollars in thousands, except per share data) (unaudited)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL, NET EARNINGS EQUITY
======================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 66,067,250 $ 661 $ 462,844 $ 11,052 $ 474,557
Net income 88,703 88,703
Cash dividends - $.16 per share (10,586) (10,586)
Issuance of common stock 40,621 1 780 781
Exercise of stock options 6,582 132 132
Restricted stock grants 35,715
Amortization of deferred
compensation 2,997 2,997
Change in unrealized gains on
securities available for sale,
net of income taxes of $2,342 4,349 4,349
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1995 66,150,168 $ 662 $ 466,753 $ 93,518 $ 560,933
======================================================================================================================
Balance, December 31, 1995 66,174,567 $ 662 $ 469,830 $ 128,699 $ 599,191
Net income 115,017 115,017
Cash dividends - $.24 per share (15,397) (15,397)
Issuance of common stock 104,126 1 2,179 2,180
Exercise of stock options 8,616 139 139
Tax benefit from stock awards 261 261
Restricted stock, net (664) 162 162
Common stock issuable
under incentive plan 4,350 4,350
Other (8) (8)
Change in unrealized gains on
securities available for sale,
net of income taxes of $2,486 (4,616) (4,616)
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BALANCE, SEPTEMBER 30, 1996 66,286,645 $ 663 $ 476,921 $ 223,695 $ 701,279
======================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
5
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CAPITAL ONE FINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(dollars in thousands) (unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
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1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 115,017 $ 88,703
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 104,211 44,548
Depreciation and amortization 31,214 23,438
Stock compensation plans 4,512 2,997
Decrease (increase) in interest receivable 14,879 (16,729)
Increase in accounts receivable from securitizations (123,860) (251,685)
Increase in other assets (1,901) (9,931)
(Decrease) increase in interest payable (17,235) 38,782
Increase in other liabilities 72,323 90,693
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Net cash provided by operating activities 199,160 10,816
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INVESTING ACTIVITIES:
Purchases of securities available for sale (516,884) (403,218)
Proceeds from maturities of securities available for sale 240,040 100,000
Proceeds from securitization of credit card loans 1,445,000 2,775,000
Net increase in consumer loans (3,079,014) (3,610,944)
Recoveries of loans previously charged off 9,974 9,533
Additions of premises and equipment, net (52,731) (44,589)
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Net cash used for investing activities (1,953,615) (1,174,218)
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FINANCING ACTIVITIES:
Net increase in interest-bearing deposits 598,658 477,833
Net decrease in other short-term borrowings (93,311) (1,095,385)
Issuances of bank and deposit notes 1,757,750 2,469,869
Maturities of bank and deposit notes (586,500)
Proceeds from exercise of stock options 139 132
Net proceeds from issuance of common stock 2,180 781
Dividends paid (15,397) (10,586)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,663,519 1,842,644
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(Decrease) increase in cash and cash equivalents (90,936) 679,242
Cash and cash equivalents at beginning of period 872,460 406,880
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Cash and cash equivalents at end of period $ 781,524 $ 1,086,122
==========================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
6
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CAPITAL ONE FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 1996
(dollars in thousands, except per share data) (unaudited)
NOTE A: BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Capital One
Financial Corporation (the "Corporation") and its subsidiaries. The
Corporation is a holding company whose subsidiaries provide a variety of
products to consumers. Capital One Bank (the "Bank") offers credit card
products and Capital One, F.S.B. provides certain consumer lending and deposit
services. The Corporation and its subsidiaries are collectively referred to as
the "Company".
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete consolidated financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates. Operating results for the three and nine months ended
September 30, 1996 are not necessarily indicative of the results for the year
ending December 31, 1996. The notes to the consolidated financial statements
contained in the Annual Report on Form 10-K for the year ended December 31, 1995
should be read in conjunction with these condensed consolidated financial
statements. Certain prior period amounts have been reclassified to conform to
the 1996 presentation.
NOTE B: SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash paid for interest for the nine months ended September 30, 1996 and
1995 was $224,450 and $140,673, respectively. Cash paid for income taxes for
the nine months ended September 30, 1996 and 1995 was $64,675 and $46,727,
respectively.
EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of common and
common equivalent shares outstanding, including dilutive stock options and
restricted stock.
7
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NOTE C: BORROWINGS
The Company funds itself with a combination of interest bearing deposits,
short-term borrowings, bank and deposit notes. In addition, the Corporation
filed a registration statement on Form S-3 with the Securities and Exchange
Commission for the issuance from time to time of up to $200 million aggregate
principal amount of senior and subordinated debt, preferred stock and common
stock. The registration statement was declared effective on September 25,
1996.
NOTE D: STOCK PLANS
The Company has determined that it will continue to account for associate
stock-based compensation under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and accordingly, will adopt the
disclosure provisions of SFAS No. 123, "Accounting for Stock Based
Compensation."
NOTE E: COMMITMENTS AND CONTINGENCIES
During 1995, the Corporation and the Bank became involved in three
purported class action suits relating to certain collection practices engaged
in by Signet Bank and, subsequently, by the Bank. The complaints in these
three cases allege that Signet Bank, the Corporation and/or the Bank violated a
variety of federal and state statutes and constitutional and common law duties
by filing collection lawsuits, obtaining judgements and pursuing garnishment
proceedings in the Virginia state courts against defaulted credit card
customers who were not residents of Virginia. These cases have been filed in
the Superior Court of California in the County of Alameda, Southern Division,
on behalf of a class of California residents, in the United States District
Court for the District of Connecticut on behalf of a nationwide class, and in
the United States District Court for the Middle District of Florida on behalf
of a nationwide class (except for California). The complaints in these three
cases seek unspecified statutory damages, compensatory damages, punitive
damages, restitution, attorneys' fees and costs, a permanent injunction and
other equitable relief.
On July 31, 1996, the Florida case was dismissed without prejudice, which
permits further proceedings. The plaintiff has since noticed her appeal to the
United States Court of Appeals for the Eleventh Circuit and refiled certain
claims arising out of state law in Florida state court.
On September 30, 1996, the Connecticut court entered judgement in favor
of the Bank on plaintiff's federal claims and dismissed without prejudice
plaintiff's state law claims. The plaintiff has refiled, on behalf of a class
of Connecticut residents, her claims arising out of state law in a Connecticut
state court.
In connection with the transfer of substantially all of Signet Bank's
credit card business to the Bank in November 1994, the Corporation and the Bank
agreed to indemnify Signet Bank for certain liabilities incurred in litigation
arising from that business, which may include liabilities, if any, incurred in
the three purported class action cases described above. Because no specific
measure of damages is demanded in any of the complaints and each of these cases
is in early stages of litigation, an informed assessment of the ultimate
outcome of these cases cannot be made at this time. Management believes,
however, that there are meritorious defenses to these lawsuits and intends to
defend them vigorously.
8
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The Company is commonly subject to various other pending and threatened
legal actions arising from the conduct of its normal business activities. In
the opinion of management of the Company, the ultimate aggregate liability, if
any, arising out of any pending or threatened action will not have a material
adverse effect on the consolidated financial condition of the Company. At the
present time, however, management is not in a position to determine whether any
pending or threatened litigation will have a material adverse effect on the
Company's results of operations in any future reporting period.
NOTE F: RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes the accounting for certain financial asset transfers, including
securitization transactions, and will become effective for transactions entered
into on or after January 1, 1997. The Company is currently evaluating the
impact, if any, of SFAS No. 125 on the Company's future results of operations
and financial condition.
9
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ITEM 2.
CAPITAL ONE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Capital One Financial Corporation (the "Corporation") is a holding company
whose subsidiaries provide a variety of products to consumers. Capital One
Bank (the "Bank") offers credit card products and Capital One, F.S.B. (the
"Savings Bank") provides certain consumer lending and deposit services. The
Corporation and its subsidiaries are collectively referred to as the "Company".
The Company is one of the largest providers of MasterCard and Visa credit cards
in the United States. At September 30, 1996, the Company had 8.2 million
customers and $12.1 billion in managed loans outstanding. The Company's
profitability is affected by the net interest margin and non-interest income
earned on earning assets, customer usage patterns, credit quality, solicitation
expenses and operating costs.
EARNINGS SUMMARY
Net income for the three months ended September 30, 1996 of $38.8 million,
or $.58 per share, compares to net income of $33.9 million, or $.51 per share,
for the same period in 1995.
The increase in net income is primarily a result of an increase in both
asset volumes and rates. Net interest income increased $47.0 million, or 79%,
as average earning assets increased 22% and the net interest margin increased
to 8.23% from 5.60%. The provision for loan losses increased $35.3 million, as
average loans increased 19%, the reported net charge-off rate increased to
3.45% from 2.30% and the reported delinquency rate increased to 6.58% from
4.67%. Non-interest income increased $69.9 million, or 51%, primarily as a
result of the increase in average managed loans of 19%, a shift to more
fee-based products and a change in the timing and amount of certain fees
charged. Increases in solicitation expense of $25.9 million, or 76%, and other
non-interest expense of $46.1 million, or 51%, reflect the increase in
marketing investment in existing and new product opportunities and the cost of
operations to manage the growth in accounts.
Net income for the nine months ended September 30, 1996 of $115.0 million,
or $1.72 per share, compares to net income of $88.7 million, or $1.33 per
share, for the same period in 1995. This 30% increase primarily reflects the
growth in loans and accounts and an improvement in the net interest margin and
non-interest income described above. Each component of net income is discussed
in further detail in subsequent sections of this analysis.
MANAGED LOAN PORTFOLIO
The Company analyzes its financial performance on a managed loan portfolio
basis. Managed loan data adjusts the income statement and balance sheet to add
back the effect of securitized loans. Increases or decreases in the interest
paid by the Company on variable rate securitizations generally are offset by
corresponding increases or decreases in the amount of excess servicing income
the Company receives. The Company evaluates its interest rate exposure on a
managed portfolio basis.
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The Company's managed loan portfolio is comprised of on-balance sheet
consumer loans, consumer loans held for securitization and securitized
consumer loans. Securitized loans are not assets of the Company and,
therefore, are not shown on the balance sheet. Table 1 summarizes the
Company's managed loan portfolio.
TABLE 1 - MANAGED LOAN PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 30
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(dollars in thousands) 1996 1995
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<S> <C> <C>
PERIOD-END BALANCES:
Consumer loans held for securitization $1,300,000 $600,000
On-balance sheet consumer loans 3,162,008 2,412,318
Securitized consumer loans 7,679,032 7,189,094
- -------------------------------------------------------------------------------------------------
Total managed loan portfolio $12,141,040 $10,201,412
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
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(dollars in thousands) 1996 1995
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<S> <C> <C>
AVERAGE BALANCES:
Consumer loans held for securitization $993,478 $436,954
On-balance sheet consumer loans 2,961,643 2,896,726
Securitized consumer loans 7,625,933 6,358,967
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Total managed loan portfolio $11,581,054 $9,692,647
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
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(dollars in thousands) 1996 1995
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<S> <C> <C>
AVERAGE BALANCES:
Consumer loans held for securitization $599,270 $348,534
On-balance sheet consumer loans 2,718,262 2,515,451
Securitized consumer loans 7,547,108 5,825,655
- -------------------------------------------------------------------------------------------------
Total managed loan portfolio $10,864,640 $8,689,640
=================================================================================================
</TABLE>
Since 1990, the Company has actively engaged in credit card loan
securitization transactions which are treated as sales under generally accepted
accounting principles. For securitized loans, amounts that would previously
have been reported as interest income, interest expense, service charges and
provision for loan losses are instead included in non-interest income as
servicing income. Because credit losses are absorbed against servicing income
over the life of these transactions such income may vary depending upon the
credit performance of the securitized loans. However, exposure to credit losses
on the securitized loans is contractually limited to these cash flows.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes the accounting for certain financial asset transfers, including
securitization transactions, and will become effective for transactions entered
into on or after January 1, 1997. The Company is currently evaluating the
impact, if any, of SFAS No. 125 on the Company's future results of operations
and financial condition.
11
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Table 2 indicates the impact of the credit card securitizations on the
income statement, average assets, return on average assets and net interest
margin for the periods presented. The Company intends to continue to
securitize credit card loans.
TABLE 2 - IMPACT OF CREDIT CARD SECURITIZATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- ------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME (AS REPORTED):
Net interest income $ 106,654 $ 59,661 $ 251,915 $ 142,957
Provision for loan losses 53,933 18,652 104,211 44,548
Non-interest income 206,716 136,860 548,463 401,809
Non-interest expense 196,823 124,808 512,607 361,596
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 62,614 53,061 183,560 138,622
- ------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS FOR SECURITIZATIONS:
Net interest income 160,581 102,934 479,007 300,153
Provision for loan losses 87,286 37,877 236,693 97,778
Non-interest income (73,295) (65,057) (242,314) (202,375)
Non-interest expense - - - -
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes - - - -
- ------------------------------------------------------------------------------------------------------------------
MANAGED STATEMENTS OF INCOME (AS ADJUSTED):
Net interest income 267,235 162,595 730,922 443,110
Provision for loan losses 141,219 56,529 340,904 142,326
Non-interest income 133,421 71,803 306,149 199,434
Non-interest expense 196,823 124,808 512,607 361,596
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 62,614 $ 53,061 $ 183,560 $ 138,622
==================================================================================================================
OPERATING DATA AND RATIOS:
REPORTED:
Average earning assets $ 5,182,877 $ 4,259,858 $ 4,491,002 $3,717,076
Return on average assets 2.55% 2.74% 2.94% 2.80%
Net interest margin(1) 8.23% 5.60% 7.48% 5.13%
MANAGED:
Average earning assets $12,808,810 $10,618,825 $12,038,110 $9,542,731
Return on average assets 1.13% 1.20% 1.20% 1.18%
Net interest margin(1) 8.35% 6.12% 8.10% 6.19%
YIELD ON MANAGED PORTFOLIO 15.14% 12.95% 14.71% 13.02%
==================================================================================================================
</TABLE>
(1) Net interest margin is equal to net interest income divided by average
earning assets.
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NET INTEREST INCOME
Net interest income is interest and past-due fees earned from the Company's
loans and securities less interest expense on borrowings, which includes
certificates of deposit in denominations of $100,000 or greater ("large
denomination CDs"), federal funds purchased, borrowings from banks and bank and
deposit notes.
Net interest income for the three months ended September 30, 1996, was
$106.7 million compared to $59.7 million for the same period in 1995,
representing an increase of $47.0 million, or 79%. For the nine months ended
September 30, 1996, net interest income was $251.9 million compared to $143.0
million for the same period in 1995, representing an increase of $109.0
million, or 76%. Net interest income increased as a result of growth in
earning assets and an increase in net interest margin. Average earning assets
increased 22% and 21% for the three and nine months ended September 30, 1996,
respectively, versus the same periods in 1995. The yield on earning assets
increased 243 and 206 basis points for the three and nine months ended
September 30, 1996, respectively, to 14.53% from 12.10% and to 13.63% from
11.57%, as compared to the same periods in the prior year. The increases were
primarily attributable to a 356 and a 328 basis point increase in the yield on
consumer loans for the three and nine months ended September 30, 1996,
respectively, to 17.25% from 13.69% and to 16.40% from 13.12%, as compared to
the same periods in the prior year. The yield on consumer loans increased due
to the repricing of introductory rate loans to higher rates in accordance with
their respective terms over the past year, changes in product mix and the
increase in the amount of past-due fees charged from both a change in terms and
as the delinquency rate increased. An additional factor for the increased net
interest margin was the decrease in average rates paid on borrowed funds for
the three and nine months ended September 30, 1996 to 6.36% from 6.63% and to
6.35% from 6.76%, respectively, as compared to the same periods in 1995. These
decreases primarily reflect decreases in short-term market rates from period to
period.
The managed net interest margin for the three and nine months ended
September 30, 1996 increased to 8.35% from 6.12% and to 8.10% from 6.19%,
respectively, as compared to the same periods in the prior year. This increase
was primarily the result of a 219 and a 169 basis point increase in loan yield
for the three and nine months ended September 30, 1996, respectively, and a
reduction of 39 and 54 basis points in borrowing costs for the same periods,
respectively, as compared to the same periods in the prior year. The increase
in loan yield to 15.14% and 14.71% for the three and nine months ended
September 30, 1996, respectively, from 12.95% and 13.02% for the same periods
in 1995, principally reflects the repricing of introductory rate loans, changes
in product mix and the increase in past-due fees charged on delinquent accounts
as noted above. Additionally, the decrease in average rates paid on managed
interest-bearing liabilities to 5.91% and 5.81% for the three and nine months
ended September 30, 1996, respectively, versus 6.30% and 6.35% during the same
periods in 1995, reflects decreases in short-term market rates from period to
period.
13
<PAGE> 14
Table 3 provides average balance sheet data, an analysis of net interest
income, net interest spread (the difference between the yield on earning assets
and the cost of interest-bearing liabilities) and net interest margin for the
three and nine months ended September 30, 1996 and 1995.
TABLE 3 - STATEMENTS OF AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets
Consumer loans(1) $3,955,121 $170,593 17.25% $3,333,680 $ 114,093 13.69%
Federal funds sold 281,598 3,885 5.52 406,256 6,035 5.94
Other securities 946,158 13,757 5.82 519,922 8,785 6.76
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets 5,182,877 $188,235 14.53% 4,259,858 $ 128,913 12.10%
Cash and due from banks 30,405 9,178
Allowance for loan losses (80,830) (70,396)
Premises and equipment, net 160,140 118,845
Other assets 799,109 646,804
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $6,091,701 $4,964,289
=================================================================================================================================
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Deposits $1,234,066 $ 16,569 5.37% $ 899,706 $ 14,360 6.38%
Other short-term borrowings 465,596 7,535 6.47 956,075 14,765 6.18
Bank and deposit notes 3,434,769 57,477 6.69 2,321,784 40,127 6.91
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,134,431 $ 81,581 6.36% 4,177,565 $ 69,252 6.63%
Other liabilities 259,028 231,984
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,393,459 4,409,549
Equity 698,242 554,740
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $6,091,701 $4,964,289
=================================================================================================================================
Net interest spread 8.17% 5.47%
=================================================================================================================================
Interest income to
average earning assets 14.53% 12.10%
Interest expense to
average earning assets 6.30 6.50
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest margin 8.23% 5.60%
=================================================================================================================================
</TABLE>
(1) Interest income includes past-due fees on loans of $30,198 and $13,371 for
the three months ended September 30, 1996 and 1995, respectively.
14
<PAGE> 15
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets
Consumer loans(1) $3,317,532 $ 408,107 16.40% $2,863,985 $ 281,848 13.12%
Federal funds sold 404,953 16,349 5.38 432,999 19,300 5.94
Other securities 768,517 34,674 6.02 420,092 21,264 6.75
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets 4,491,002 $ 459,130 13.63% 3,717,076 $ 322,412 11.57%
Cash and due from banks 14,590 5,086
Allowance for loan losses (76,264) (68,541)
Premises and equipment, net 151,845 113,592
Other assets 640,089 464,122
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $5,221,262 $4,231,335
=================================================================================================================================
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Deposits $ 961,515 $ 40,143 5.57% $ 745,160 $ 36,293 6.49%
Other short-term borrowings 449,256 21,450 6.37 1,059,408 52,072 6.55
Bank and deposit notes 2,941,689 145,622 6.60 1,732,747 91,090 7.01
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4,352,460 $ 207,215 6.35% 3,537,315 $ 179,455 6.76%
Other liabilities 211,059 166,737
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,563,519 3,704,052
Equity 657,743 527,283
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $5,221,262 $4,231,335
=================================================================================================================================
Net interest spread 7.28% 4.81%
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income to
average earning assets 13.63% 11.57%
Interest expense to
average earning assets 6.15 6.44
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest margin 7.48% 5.13%
=================================================================================================================================
</TABLE>
(1) Interest income includes past-due fees on loans of $65,208 and $34,445 for
the nine months ended September 30, 1996 and 1995, respectively.
15
<PAGE> 16
INTEREST VARIANCE ANALYSIS
Net interest income is affected by changes in the average interest rate
earned on earning assets and the average interest rate paid on interest-bearing
liabilities. In addition, net interest income is affected by changes in the
volume of earning assets and interest-bearing liabilities. Table 4 sets forth
the dollar amount of the increase (decrease) in interest income and interest
expense resulting from changes in the volume of earning assets and
interest-bearing liabilities and from changes in yields and rates for the three
and nine months ended September 30, 1996 versus the comparable periods in the
prior year.
TABLE 4 - INTEREST VARIANCE ANALYSIS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 VS 1995 SEPTEMBER 30, 1996 VS 1995
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE CHANGE DUE TO* INCREASE CHANGE DUE TO*
(dollars in thousands) (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Consumer loans $56,500 $23,579 $32,921 $126,259 $ 48,961 $ 77,298
Federal funds sold (2,150) (1,745) (405) (2,951) (1,202) (1,749)
Other securities 4,972 6,343 (1,371) 13,410 15,942 (2,532)
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 59,322 30,839 28,483 136,718 73,583 63,135
INTEREST EXPENSE
Deposits 2,209 4,743 (2,534) 3,850 9,529 (5,679)
Other short-term borrowings (7,230) (7,907) 677 (30,622) (29,173) (1,449)
Bank and deposit notes 17,350 18,663 (1,313) 54,532 60,132 (5,600)
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 12,329 15,305 (2,976) 27,760 39,345 (11,585)
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income* $46,993 $14,844 $32,149 $108,958 $ 34,027 $ 74,931
=================================================================================================================================
</TABLE>
*The change in interest due to volume and rate has been allocated in proportion
to the relationship of the absolute dollar amounts of the change in each. The
changes in income and expense are calculated independently for each line in the
schedule. The totals for the volume and rate columns are not the sum of the
individual lines.
SERVICING INCOME
Servicing income increased $11.4 and $47.4 million, or 12% and 16%, for
the three and nine months ended September 30, 1996, respectively, from the same
periods in 1995, primarily due to increases in net interest income on
securitized loans offset by increased charge-offs on such loans. Average
securitized loans increased 20% and 30% for the three and nine months ended
September 30, 1996 compared to the same periods in the prior year. Net
interest income on securitized loans increased $57.6 and $178.9 million, or 56%
and 60%, for the three and nine months ended September 30, 1996, respectively,
as a result of the loan growth and an increase in the securitized portfolio's
net interest margin to 8.42% and 8.46% for the three and nine months ended
September 30, 1996, respectively, from 6.47% and 6.87% for the same periods in
the prior year. This increase in net interest margin is the result of an
increase in yield on securitized loans of 148 and 99 basis points for the three
and nine months ended September 30, 1996, respectively, as a result of
repricing introductory rate accounts and a decrease for the same periods in the
cost of funds on securitized loans of 47 and 60 basis points as short-term
rates declined from the same periods in the prior year. Charge-offs on
securitized loans for the three and nine months ended September 30, 1996
increased $49.4 and $138.9 million, respectively, or 131% and 142%, for the
same periods compared to the prior year due to the increase in average
securitized loans, an increase in the average age of accounts (generally
referred to as "seasoning") and general economic trends in consumer credit
performance.
16
<PAGE> 17
OTHER NON-INTEREST INCOME
Other non-interest income increased 151% and 97%, to $97.2 and $201.6
million for the three and nine months ended September 30, 1996, compared to
$38.7 and $102.3 million for the same periods in the prior year. The increase
in other non-interest income was due to an increase in the average number of
accounts of 35% and 28% for the three and nine months ended September 30, 1996,
respectively, an increase in charge volume, a shift to more fee-based products
and a change in the timing and amount of overlimit fees charged.
NON-INTEREST EXPENSE
Non-interest expense for the three and nine months ended September 30, 1996
was $196.8 and $512.6 million, respectively, an increase of 58% and 42% over
$124.8 and $361.6 million, for the same periods in the prior year. Contributing
to the increase in non-interest expense were solicitation expenses, which rose
$25.9 and $45.0 million, or 76% and 41% for the three and nine months ended
September 30, 1996, respectively, compared to the same periods in the prior
year. This increase represents the Company's continued investment in new
products and services (see "Business Outlook" for further discussion). All
other non-interest expenses increased $46.1 and $106.1 million, or 51% and 42%,
to $136.6 and $358.2 million for the three and nine months ended September 30,
1996, respectively, from $90.5 and $252.1 million in the same periods in the
prior year. The increase in other non-interest expense was primarily a result
of an increase in the average number of accounts of 35% and 28% for the three
and nine months ended September 30, 1996, respectively, a product mix shift to
more service intensive accounts, an increase in charge volume and an increase in
certain costs associated with information systems enhancements.
INCOME TAXES
The Company's effective income tax rate increased to 38% and 37.34% for the
three and nine months ended September 30, 1996, respectively, as compared to 36%
for the same periods in 1995 and includes both state and federal income tax
components. The increase in the effective tax rate is primarily the result of
increased state tax expense as the Company expands its operations into multiple
jurisdictions.
ASSET QUALITY
The asset quality of a portfolio is generally a function of the following:
the initial underwriting criteria used, seasoning of the accounts, account
management activities and geographic, demographic, or other forms of
concentration, as well as general economic conditions. The average age of the
accounts is an important indicator of the stability of delinquency and loss
levels; a portfolio consisting of older accounts generally behaves more
predictably than a newly generated portfolio. New accounts initially exhibit a
rising trend of delinquency and credit losses which reaches a more steady state
of delinquency and net losses generally within three years from origination.
17
<PAGE> 18
DELINQUENCIES
Table 5 shows loan delinquency trends for the periods presented on a
reported and managed loan basis. The entire balance of an account is
contractually delinquent if the minimum payment is not received by the billing
date. The Company generally continues to accrue interest until the loan is
charged off.
TABLE 5 - DELINQUENCIES*
<TABLE>
<CAPTION>
SEPTEMBER 30
- --------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------
% of % of
(dollars in thousands) LOANS TOTAL LOANS LOANS TOTAL LOANS
========================================================================================================
<S> <C> <C> <C> <C>
REPORTED:
Loans outstanding $ 4,462,008 100.00% $ 3,012,318 100.00%
Loans delinquent:
30 - 59 days 102,732 2.30% 52,221 1.73%
60 - 89 days 63,781 1.43 31,526 1.05
90 or more days 127,139 2.85 57,022 1.89
- -------------------------------------------------------------------------------------------------------
Total $ 293,652 6.58% $ 140,769 4.67%
=======================================================================================================
MANAGED:
Loans outstanding $12,141,040 100.00% $10,201,412 100.00%
Loans delinquent:
30 - 59 days 224,309 1.85% 134,142 1.31%
60 - 89 days 134,977 1.11 76,365 0.75
90 or more days 285,521 2.35 133,461 1.31
- -------------------------------------------------------------------------------------------------------
Total $ 644,807 5.31% $ 343,968 3.37%
=======================================================================================================
</TABLE>
*Includes credit card loans held for securitization.
The delinquency rate for reported loans was 6.58% at September 30, 1996, up
from 4.67% for the same date in 1995 and up from 5.42% at June 30, 1996. The
increase in the reported delinquency rate from September 30, 1995 to September
30, 1996 reflects seasoning of the Company's retained interests in
securitization trusts, general economic trends in consumer credit performance
and the fact that a significant portion of the non-balance transfer product
portfolio, such as secured cards, affinity and co-branded cards, joint account
cards, college student cards and other cards targeted to other non-balance
transfer market segments, is included in reported loans. The Company's
non-balance transfer products historically have higher delinquency rates than
the typical balance transfer loans. In the case of secured card loans,
collateral mitigates the increased risk and impact of charge-offs. The costs
associated with higher delinquency and charge-off rates are considered in the
pricing of individual products. The 116 basis point increase in the reported
delinquency rate to 6.58% at September 30, 1996 from 5.42% at June 30, 1996
reflects the factors discussed above.
The delinquency rate for the managed loan portfolio was 5.31% at September
30, 1996, up from 3.37% for the same date in 1995 and up from 4.59% at June 30,
1996. The managed portfolio's delinquency rate at September 30, 1996 reflects
the continued seasoning of accounts and loan balances, the increased presence of
non-balance transfer products and general economic trends in consumer credit
performance.
18
<PAGE> 19
NET CHARGE-OFFS
Net charge-offs include the principal amount of losses (excluding accrued
and unpaid finance charges, fees and fraud losses) less current period
recoveries. Table 6 presents the Company's net charge-offs for the periods
presented on a reported and managed basis.
TABLE 6 - NET CHARGE-OFFS*
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1996 1995
=======================================================================================================
<S> <C> <C> <C> <C>
REPORTED:
Average loans outstanding $ 3,955,121 $3,333,680 $ 3,317,532 $2,863,985
Net charge-offs 34,076 19,182 81,848 40,897
Net charge-offs as a percentage
of average loans outstanding 3.45% 2.30% 3.29% 1.90%
=======================================================================================================
MANAGED:
Average loans outstanding $11,581,054 $9,692,647 $10,864,640 $8,689,640
Net charge-offs 121,362 57,028 318,541 138,696
Net charge-offs as a percentage
of average loans outstanding 4.19% 2.35% 3.91% 2.13%
=======================================================================================================
</TABLE>
*Includes consumer loans held for securitization.
Net charge-offs of managed loans increased $64.3 and $179.8 million, or
113% and 130%, for the three and nine months ended September 30, 1996 from the
comparable periods in the prior year. For the three and nine months ended
September 30, 1996, the Company's net charge-offs as a percentage of managed
loans was 4.19% and 3.91%, respectively, compared to 2.35% and 2.13% for the
same periods in the prior year. This increase in net charge-offs is the result
of continued seasoning of the portfolio and general economic trends in consumer
credit performance.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is the periodic expense of maintaining an
adequate allowance at the amount estimated to be sufficient to absorb possible
future losses, net of recoveries (including recovery of collateral), inherent
in the existing on-balance sheet loan portfolio. In evaluating the adequacy of
the allowance for loan losses, the Company takes into consideration several
factors including economic trends and conditions, overall asset quality, loan
seasoning and trends in delinquencies and expected charge-offs. The Company's
primary guideline is a calculation which uses current delinquency levels and
other measures of asset quality to estimate net charge-offs. Consumer loans are
typically charged off when they are six months past-due, unless the customer is
determined to be bankrupt, in which case the account is generally charged off
within 30 days of verification. Once a loan is charged off, it is the
Company's policy to continue to pursue the collection of principal and
interest.
19
<PAGE> 20
Management believes that the allowance for loan losses is adequate to
cover anticipated losses in the on-balance sheet loan portfolio under current
conditions. There can be no assurance as to the future credit losses that may
be incurred in connection with the Company's loan portfolio, nor can there be
any assurance that the loan loss allowance that has been established by the
Company will be sufficient to absorb such future credit losses. The allowance
is a general allowance applicable to the entire on-balance sheet loan
portfolio. Table 7 sets forth the activity in the allowance for loan losses for
the periods indicated.
TABLE 7 - SUMMARY OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $74,000 $70,516 $72,000 $68,516
Provision for loan losses 53,933 18,652 104,211 44,548
Net deduction arising in securitization
transactions (19,829) (1,752) (27,938) (6,880)
Increase from consumer loan purchase 9,000 9,000
Loans charged off (28,114) (20,129) (74,747) (45,201)
Recoveries of loans previously
charged off 3,510 3,229 9,974 9,533
- -------------------------------------------------------------------------------------------------------
Net loans charged off* (24,604) (16,900) (64,773) (35,668)
- -------------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $92,500 $70,516 $92,500 $70,516
=======================================================================================================
Allowance for loan losses to
loans at period-end* 2.93% 2.92% 2.93% 2.92%
=======================================================================================================
</TABLE>
*Excludes consumer loans held for securitization.
For the three and nine months ended September 30, 1996, the provision
increased to $53.9 and $104.2 million, respectively, from $18.7 and $44.5
million in the comparable periods of the prior year. This increase is due to an
increase in the average reported loan balance of 19% and 16%, to $4.0 and $3.3
billion for the three and nine months ended September 30, 1996, respectively,
from $3.3 and $2.9 billion in the comparable periods of the prior year,
increases in the net charge-off rate and the delinquency rate, as well as a
shift in the composition of reported loans and seasoning of the portfolio.
Growth in non-balance transfer products, which have historically higher
charge-off rates than balance transfer products, increases the amount of
provision necessary to absorb credit losses.
The allowance for loan losses increased an additional $9.0 million in the
third quarter of 1996 in connection with the purchase of approximately $185
million of consumer loans from Signet Bank. This purchase represents the
culmination of an agreement with Signet Bank and the former parent of the
Company, Signet Banking Corporation, to hold consumer loans for the Company
until it could establish subsidiaries authorized to hold and originate such
loans.
20
<PAGE> 21
LIQUIDITY AND FUNDING
Liquidity refers to the Company's ability to meet its cash needs. The
Company meets its cash requirements by securitizing assets and by debt funding.
A significant source of liquidity for the Company has been the securitization
of credit card loans. Maturity terms of the existing securitizations vary from
1996 to 2001 and typically have accumulation periods during which principal
payments are aggregated to make payments to investors. As payments on the loans
are accumulated for the participants in the securitization and are no longer
reinvested in new loans, the Company's funding requirements for such new loans
increase accordingly. The occurrence of certain events may cause the
securitization transactions to amortize earlier than scheduled which would
accelerate the need for funding.
As such loans amortize or are otherwise paid, the Company's funding needs
will increase accordingly. The Company believes that it can securitize credit
card loans, purchase federal funds and establish other funding sources to fund
the amortization or other payment of the securitizations in the future,
although no assurance can be given to that effect.
The Company maintains a portfolio of high-quality securities such as U.S.
Government, U.S. Government agency mortgage-backed securities, Eurodollar time
deposits, federal funds and other cash equivalents in order to provide adequate
liquidity and to meet its on-going cash needs. At September 30, 1996, the
Company held $1.5 billion in such securities.
Interest-bearing liabilities increased $0.9 billion, or 18%, to $5.7
billion at September 30, 1996 from $4.8 billion at June 30, 1996. The increase
is primarily the result of an increase in other short-term borrowings and bank
and deposit notes of $457 and $329 million, respectively, from June 30, 1996 to
September 30, 1996 and reflects the need for funding the quarter's loan growth.
Table 8 shows the maturation of large denomination CDs at September 30, 1996
TABLE 8 - MATURITIES OF DOMESTIC LARGE DENOMINATION CDS OF $100,000
OR MORE
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
- ------------------------------------------------------------------------
(dollars in thousands) BALANCE PERCENT
- ------------------------------------------------------------------------
<S> <C> <C>
3 months or less $722,549 84.77%
Over 3 through 6 months 57,063 6.69
Over 6 through 12 months 72,774 8.54
- ------------------------------------------------------------------------
Total $852,386 100.00%
========================================================================
</TABLE>
In additon to large denomination CD's, retail deposits of $442 million
have been raised through the Savings Bank as an additional source of Company
funding.
The Company also had $70 million outstanding on its $1.715 billion
revolving credit arrangement. The additional unused commitment is available as
funding needs may arise.
21
<PAGE> 22
On April 30, 1996, the Bank amended and restated its existing $3.5 billion
bank note program. Under the amended bank note program, the Bank may issue
from time to time up to $4.5 billion of senior bank notes with maturities from
30 days to 30 years and up to $200 million of subordinated bank notes with
maturities from 5 to 30 years. At September 30, 1996, the Company had $3.4
billion in senior bank notes outstanding. As of September 30, 1996, no
subordinated bank notes have been issued.
Also on April 30, 1996, the Bank established a deposit note program under
which the Bank may issue from time to time up to $2.0 billion of deposit notes
with maturities from 30 days to 30 years from the date of issue. At September
30, 1996, the Company had $300 million in deposit notes outstanding.
In addition, the Corporation filed a registration statement on Form S-3
with the Securities and Exchange Commission for the issuance from time to time
of $200 million aggregate principal amount of senior and subordinated debt and
preferred and common stock, which was declared effective on September 25,
1996. As of September 30, 1996, no debt or stock has been issued under this
registration statement.
In January 1996, the Company implemented a dividend reinvestment and stock
purchase plan (the "DRIP") to provide existing stockholders with the
opportunity to purchase additional shares of the Company's common stock by
reinvesting quarterly dividends or making optional cash investments. The
Company uses proceeds from the DRIP for general corporate purposes.
CAPITAL ADEQUACY
At September 30, 1996, the Bank's risk-based Tier I capital ratio was
10.61%, its risk-based total capital ratio was 11.86% and its Tier I leverage
ratio was 8.95%. The Bank's ratio of common equity to managed assets was
4.99%. The Company anticipates maintaining a strong capital position. The
Bank is subject to the capital adequacy guidelines adopted by the Federal
Reserve Board. At September 30, 1996, the Bank exceeded the requirements of a
"well-capitalized" institution as defined in the Federal Deposit Insurance
Corporation Improvement Act of 1991.
During 1996, the Bank received final regulatory approval to establish a
branch office in the United Kingdom. In connection with such approval, the
Company committed to the Federal Reserve Board that, for so long as the Bank
maintains such branch in the United Kingdom, the Company will maintain a
minimum Tier I leverage ratio of 3.0%. At September 30, 1996, the Company's
Tier I leverage ratio was 11.46%.
The Savings Bank is subject to capital adequacy guidelines adopted by the
Office of Thrift Supervision. At September 30, 1996, the Savings Bank's
tangible capital ratio was 8.00%, its risk-based capital ratio was 13.69% and
its leverage ratio was 8.00%. At September 30, 1996, the Savings Bank also
exceeded the requirements of a "well-capitalized" institution as defined in the
Federal Deposit Insurance Corporation Improvement Act of 1991.
22
<PAGE> 23
OFF-BALANCE SHEET RISK
The Company is subject to off-balance sheet risk in the normal course of
business including commitments to extend credit, excess servicing income from
securitization and interest rate swap agreements ("swaps"). In order to reduce
interest rate sensitivity and to match asset and liability repricings, the
Company has entered into swaps which involve elements of credit or interest
rate risk in excess of the amount recognized on the balance sheet. Swaps
present the Company with certain credit, market, legal and operational risks.
The Company has established credit policies to manage these risks.
At September 30, 1996, the Company had $2.1 billion in notional amount of
swaps to match asset and liability repricings, the majority of which reduce
exposure relating to the mismatch of quarterly repricing consumer loan assets
and medium-term fixed rate bank notes. The fair value, based on the forward
yield curve, at September 30, 1996 of swap positions for which the Company is
exposed to credit risk from counterparties is $32.9 million. Tables 9 and 10
reflect the maturity and activity of swap positions, respectively, at September
30, 1996 and for the three and nine months then ended.
TABLE 9 - MATURITY OF INTEREST RATE SWAPS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
- ---------------------------------------------------------------------------------------------------------
WITHIN OVER ONE AVERAGE
ONE TO FIVE LIFE
(dollars in millions) YEAR YEARS TOTAL (YEARS)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST RATE SWAPS:
RECEIVE FIXED/PAY FLOATING:
Notional amount $1,024 $1,080 $2,104 1.40
Weighted average rates received 7.38% 7.52% 7.45%
Weighted average rates paid 5.53% 5.57% 5.55%
=========================================================================================================
</TABLE>
Weighted average rates received and paid are based on the contractual rates in
effect at September 30, 1996. Floating rates under the interest rate swap
contracts are based on varying terms of LIBOR.
TABLE 10 - SUMMARY OF INTEREST RATE SWAPS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------
(dollars in millions) NOTIONAL AMOUNT NOTIONAL AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RECEIVE FIXED/PAY FLOATING:
Beginning of period $2,104 $2,144 $2,144 $ 539
Additions 1,605
Maturities 40
- ---------------------------------------------------------------------------------------------------------
End of period $2,104 $2,144 $2,104 $2,144
=========================================================================================================
RECEIVE FLOATING/PAY FLOATING:
Beginning of period $ 260 $ 260 $ 260
Additions $ 260
Maturities 260 260
- ---------------------------------------------------------------------------------------------------------
End of period $ $ 260 $ $ 260
=========================================================================================================
</TABLE>
23
<PAGE> 24
BUSINESS OUTLOOK
This business outlook section summarizes the Company's expectations for
earnings for the year ending December 31, 1996 and its primary goals and
strategies for continued growth. The statements contained in this section are
based on management's current expectations. Certain of the statements are
forward looking statements, and actual results could differ materially.
Factors which could materially influence results are set forth in the last
paragraph of this section and in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 (Part I, Item I, Cautionary Statements).
Consistent with Company targets, the Company expects that earnings per
share for the year ending December 31, 1996, will increase by approximately 20%
over earnings per share for the year ended December 31, 1995 and will result in
a return on equity in excess of 20%.
The Company's strategy for future growth has been, and it is expected will
continue to be, to apply its proprietary information-based strategy ("IBS") to
its credit card business as well as to other businesses, both financial and
non-financial, to identify new product opportunities. See the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 for a further
description of the Company's IBS (Part I, Item 1, Business). Coincident with
its growth strategy, the Company expects to increase substantially its
marketing (solicitation) expenses in 1996, as compared to 1995, and to invest
in new products or services that management believes will produce above 20%
target earnings growth and return on equity.
Historically, the Company has concentrated its efforts on credit card
opportunities. These opportunities have included, and it is expected will
continue to include, various low-rate balance transfer products, as well as
other non-balance transfer credit card products. Generally, these non-balance
transfer credit card products tend to have lower credit lines, balances that
build over time, less attrition, higher margins (including fees), higher
operational costs and, in some cases, higher delinquencies and credit losses
than the Company's traditional low-rate balance transfer products. In general,
these non-balance transfer products have overall higher returns than the
traditional balance transfer products in current market conditions. The
Company uses its IBS in an effort to balance the mix of credit card products to
optimize profitability within the context of acceptable risk. The Company
expects that its growth in credit card accounts and managed loans outstanding
will continue through calendar year 1996, although at a more moderate pace,
with a mix of balance transfer and non-balance transfer products. Actual
growth quarter over quarter and year over year may vary, however, as the
Company plans to remain flexible in the allocation of marketing expenses spent
on specific products to take advantage of market opportunities as they emerge.
The Company also has been applying, and expects to continue applying, its
IBS to other financial products and non-financial products. The Company has
established the Savings Bank and several non-bank operating subsidiaries to
identify and explore new product opportunities. The Company is in various
stages of developing and test marketing a number of new products or services,
including but not limited to selected non-card consumer lending products and
the reselling of telecommunication services. During the third quarter 1996,
the Company allocated an increased percentage of its marketing expenses to
non-card products or services. To date, only a relatively small dollar volume
of assets and a relatively small number of accounts have been generated as a
result of such expenditures. As the Company continues to apply its IBS to
non-card opportunities and builds the infrastructure necessary to support new
businesses, an increased percentage of the Company's marketing and operating
expenses may be attributable to such businesses.
24
<PAGE> 25
The Company expects to maintain a flexible approach to its marketing
investment. The Company intends to continue applying its IBS to all products,
even established products and businesses, and the results of ongoing testing
will influence the amount and allocation of future marketing investment.
Management believes that, through the continued application of IBS, the Company
can develop product and service offerings to sustain growth, and that it has
the personnel, financial resources and business strategy necessary for
continued success. However, as the Company attempts to apply IBS to diversify
and expand its product offerings beyond credit cards, there can be no assurance
that the historical financial information of the Company will necessarily
reflect the results of operations and financial condition of the Company in the
future. The Company's actual results will be influenced by, among other
things, the factors discussed in this section.
The Company's strategies and objectives outlined above and the other
forward looking statements contained in this section involve a number of risks
and uncertainties. The Company cautions readers that any forward looking
information is not a guarantee of future performance and that actual results
could differ materially. In addition to the factors discussed above, among the
other factors that could cause actual results to differ materially are the
following: continued intensive competition from numerous providers of products
and services which compete with the Company's businesses; with respect to
financial products, changes in the Company's aggregate accounts or loan
balances and the growth rate thereof, including changes resulting from factors
such as shifting product mix, amount of actual marketing expenses made by the
Company, and attrition of accounts and loan balances; an increase in credit
losses (including increases due to a worsening of general economic conditions);
difficulties or delays in the development, production, testing and marketing of
new products or services; losses associated with new products or services;
financial, legal, regulatory or other difficulties that may affect investment
in, or the overall performance of, a product or business; the amount, and rate
of growth in, the Company's expenses (including operating and marketing
(solicitation) expenses) as the Company's business develops or changes or as it
expands into new market areas; the availability of capital necessary to fund
the Company's new businesses; the ability of the Company to build the
operational and organizational infrastructure necessary to engage in new
businesses; the ability of the Company to recruit experienced personnel to
assist in the management and operations of new products and services; and other
factors listed from time to time in the Company's SEC reports, including but
not limited to the Annual Report on Form 10-K for the year ended December 31,
1995 (Part I, Item 1, Cautionary Statements).
25
<PAGE> 26
<TABLE>
<S> <C> <C>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11-Computation of Per Share Earnings Page 27
Exhibit 12-Computation of Ratio of Earnings to Fixed Charges Page 28
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CAPITAL ONE FINANCIAL CORPORATION
---------------------------------
(Registrant)
Date: November 14, 1996 /s/James M. Zinn
-----------------------------
James M. Zinn
Senior Vice President,
Chief Financial Officer
(Chief Accounting Officer
and duly authorized officer
of the Registrant)
26
<PAGE> 1
EXHIBIT 11
CAPITAL ONE FINANCIAL CORPORATION
COMPUTATION OF PER SHARE EARNINGS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
=============================================================================================================================
<S> <C> <C> <C> <C>
PRIMARY
Net income $ 38,821 $ 33,948 $ 115,017 $ 88,703
=============================================================================================================================
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING
Average common shares outstanding 66,249,581 65,641,117 66,207,452 65,624,029
Net effect of dilutive restricted stock (1) 5,623 359,926 8,543 327,958
Net effect of dilutive stock options (1) 768,893 539,121 691,826 333,706
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average common and common
equivalent shares 67,024,097 66,540,164 66,907,821 66,285,693
=============================================================================================================================
EARNINGS PER SHARE $ 0.58 $ 0.51 $ 1.72 $ 1.34
=============================================================================================================================
FULLY DILUTED
Net income $ 38,821 $ 33,948 $ 115,017 $ 88,703
=============================================================================================================================
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Average common shares outstanding 66,249,581 65,641,117 66,207,452 65,624,029
Net effect of dilutive restricted stock (2) 6,118 371,081 11,840 363,129
Net effect of dilutive stock options (2) 802,430 714,785 802,430 714,785
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average common and
common equivalent shares 67,058,129 66,726,983 67,021,722 66,701,943
=============================================================================================================================
EARNINGS PER SHARE $ 0.58 $ 0.51 $ 1.72 $ 1.33
=============================================================================================================================
</TABLE>
(1) Based on the treasury stock method using average market price.
(2) Based on the treasury stock method using the higher of ending or average
market price.
The calculations of common and common equivalent earnings per share and
fully diluted earnings per share are submitted in accordance with
Securities Exchange Act of 1934 Release No. 9083 although both
calculations are not required by footnote 2 to paragraph 14 of APB Opinion
No. 15 because there is dilution of less than 3%. The Registrant has
elected to show fully diluted earnings per share in its financial
statements.
27
<PAGE> 1
EXHIBIT 12
CAPITAL ONE FINANCIAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
- ---------------------------------------------------------------------------
1996 1995
===========================================================================
<S> <C> <C>
Earnings $ 183,560 $ 138,622
Fixed Charges 211,045 180,952
- ---------------------------------------------------------------------------
394,605 319,574
Fixed Charges 211,045 180,952
- ---------------------------------------------------------------------------
Ratio 1.87 1.77
===========================================================================
</TABLE>
28
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 155,474
<SECURITIES> 684,989
<RECEIVABLES> 4,462,008
<ALLOWANCES> (92,500)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 164,630
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 6,593,094
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 663
<OTHER-SE> 700,616
<TOTAL-LIABILITY-AND-EQUITY> 6,593,094
<SALES> 0
<TOTAL-REVENUES> 1,007,593
<CGS> 0
<TOTAL-COSTS> 512,607
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 104,211
<INTEREST-EXPENSE> 207,215
<INCOME-PRETAX> 183,560
<INCOME-TAX> 68,543
<INCOME-CONTINUING> 115,017
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115,017
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.72
<FN>
<F1>Non-classified balance sheet
<F2>PP&E shown net
</TABLE>
