<PAGE>
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, 1997
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
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 54-1719854
------------------------------- -------------------
(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
- ------------------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(703) 205-1000
----------------------------------------------------
(Registrant's telephone number, including area code)
(Not Applicable)
----------------------------------------------------
(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, 1997, there were 65,639,321 shares of the registrant's Common
Stock, par value $.01 per share, outstanding.
1
<PAGE>
CAPITAL ONE FINANCIAL CORPORATION
FORM 10-Q
INDEX
- --------------------------------------------------------------------------------
September 30, 1997
<TABLE>
<CAPTION>
PAGE
----
<S> <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............................. 28
Signatures................................................... 28
</TABLE>
2
<PAGE>
ITEM 1.
- -------
CAPITAL ONE FINANCIAL CORPORATION
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 57,772 $ 48,724
Federal funds sold and resale agreements 152,575 450,000
Interest-bearing deposits at other banks 22,267 30,252
----------- -----------
Cash and cash equivalents 232,614 528,976
Securities available for sale 1,033,946 877,851
Consumer loans 4,329,799 4,343,902
Less: Allowance for loan losses (147,000) (118,500)
----------- -----------
Net loans 4,182,799 4,225,402
Premises and equipment, net 180,740 174,661
Interest receivable 35,539 78,590
Accounts receivable from securitizations 539,925 502,520
Other assets 106,208 79,445
----------- -----------
Total assets $ 6,311,771 $ 6,467,445
=========== ===========
LIABILITIES:
Interest-bearing deposits $ 1,050,014 $ 943,022
Other borrowings 321,463 530,983
Senior notes 3,307,801 3,694,237
Deposit notes 299,996 299,996
Interest payable 65,798 80,362
Other liabilities 327,036 178,454
----------- -----------
Total liabilities 5,372,108 5,727,054
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
CAPITAL ONE BANK'S FLOATING RATE JUNIOR
SUBORDINATED CAPITAL INCOME SECURITIES: 97,599
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, 66,567,979 and 66,325,261
issued as of September 30, 1997 and
December 31, 1996, respectively 666 663
Paid-in capital, net 504,167 481,383
Retained earnings 373,921 258,345
Less: Treasury stock, at cost; 972,639 shares as of
September 30, 1997 (36,690)
----------- -----------
Total stockholders' equity 842,064 740,391
----------- -----------
Total liabilities and stockholders' equity $ 6,311,771 $ 6,467,445
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
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
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Consumer loans, including fees $ 153,377 $ 170,593 $ 443,374 $ 408,107
Federal funds sold and resale agreements 3,753 3,885 12,030 16,349
Other 21,840 13,757 59,030 34,674
----------- ----------- ----------- -----------
Total interest income 178,970 188,235 514,434 459,130
INTEREST EXPENSE:
Deposits 9,052 16,569 28,124 40,143
Other borrowings 9,168 7,535 26,145 21,450
Senior and deposit notes 63,596 57,477 191,555 145,622
----------- ----------- ----------- -----------
Total interest expense 81,816 81,581 245,824 207,215
----------- ----------- ----------- -----------
Net interest income 97,154 106,654 268,610 251,915
Provision for loan losses 72,518 53,933 168,481 104,211
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 24,636 52,721 100,129 147,704
NON-INTEREST INCOME:
Servicing and securitizations 180,348 109,549 498,943 346,850
Service charges 75,801 72,983 186,727 141,641
Interchange 12,606 14,847 33,326 37,264
Other 12,178 9,337 34,036 22,708
----------- ----------- ----------- -----------
Total non-interest income 280,933 206,716 753,032 548,463
NON-INTEREST EXPENSE:
Salaries and associate benefits 73,214 57,562 213,137 151,493
Solicitation 60,781 60,177 159,827 154,434
Communications and data processing 25,935 20,251 72,045 55,070
Supplies and equipment 21,721 15,486 58,200 42,269
Occupancy 8,198 5,692 23,387 14,711
Other 36,154 37,655 115,009 94,630
----------- ----------- ----------- -----------
Total non-interest expense 226,003 196,823 641,605 512,607
----------- ----------- ----------- -----------
Income before income taxes 79,566 62,614 211,556 183,560
Income taxes 30,236 23,793 80,392 68,543
----------- ----------- ----------- -----------
Net income $ 49,330 $ 38,821 $ 131,164 $ 115,017
=========== =========== =========== ===========
Earnings per share $ .72 $ .58 $ 1.92 $ 1.72
=========== =========== =========== ===========
Dividends paid per share $ .08 $ .08 $ .24 $ .24
=========== =========== =========== ===========
Weighted average common and
common equivalent shares outstanding 68,254,046 67,058,129 68,385,168 67,021,722
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
CAPITAL ONE FINANCIAL CORPORATION
Condensed Consolidated Statements of Changes in Stockholders' Equity
(dollars in thousands, except per share data) (unaudited)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------------------- PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL, NET EARNINGS STOCK EQUITY
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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)
Issuances 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
Foreign currency translation (8) (8)
Change in unrealized gains on
securities available for sale,
net of income taxes of $2,486 (4,616) (4,616)
------------- ------------- ------------- ------------- ------------- -------------
Balance, September 30, 1996 66,286,645 $ 663 $ 476,921 $ 223,695 $ 701,279
============= ============= ============= ============= ============= =============
Balance, December 31, 1996 66,325,261 $ 663 $ 481,383 $ 258,345 $ 740,391
Net income 131,164 131,164
Cash dividends - $.24 per share (15,512) (15,512)
Purchases of treasury stock 1,552 $ (37,467) (35,915)
Issuances of common stock 112,949 1 3,208 469 3,678
Exercise of stock options 129,890 2 2,611 308 2,921
Tax benefit from stock awards 298 298
Restricted stock, net (121) 80 80
Common stock issuable
under incentive plan 15,035 15,035
Foreign currency translation (112) (112)
Change in unrealized gains
on securities available for
sale, net of income taxes of $177 36 36
------------- ------------- ------------- ------------- ------------- -------------
Balance, September 30, 1997 66,567,979 $ 666 $ 504,167 $ 373,921 $ (36,690) $ 842,064
============= ============= ============= ============= ============= =============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
CAPITAL ONE FINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(in thousands) (unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 131,164 $ 115,017
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 168,481 104,211
Depreciation and amortization 27,188 31,214
Stock compensation plans 15,115 4,512
Decrease in interest receivable 43,051 14,879
Increase in accounts receivable from securitizations (37,405) (123,860)
(Increase) decrease in other assets (30,443) 10,949
Decrease in interest payable (14,564) (17,235)
Increase in other liabilities 148,582 72,323
----------- -----------
Net cash provided by operating activities 451,169 212,010
----------- -----------
INVESTING ACTIVITIES:
Purchases of securities available for sale (914,194) (529,734)
Proceeds from maturities of securities available for sale 774,534 240,040
Proceeds from securitization of consumer loans 1,733,669 1,445,000
Net increase in consumer loans (1,878,797) (3,079,014)
Recoveries of loans previously charged off 19,250 9,974
Additions of premises and equipment, net (45,629) (52,731)
----------- -----------
Net cash used for investing activities (311,167) (1,966,465)
----------- -----------
FINANCING ACTIVITIES:
Net increase in interest-bearing deposits 106,992 598,658
Net decrease in other borrowings (209,520) (93,311)
Issuances of senior notes 480,000 1,457,754
Maturities of senior notes (866,436) (586,500)
Issuances of deposit notes 299,996
Issuances of preferred beneficial interests 97,428
Proceeds from exercise of stock options 2,921 139
Net proceeds from issuances of common stock 3,678 2,180
Purchases of treasury stock (35,915)
Dividends paid (15,512) (15,397)
----------- -----------
Net cash (used for) provided by financing activities (436,364) 1,663,519
----------- -----------
Decrease in cash and cash equivalents (296,362) (90,936)
Cash and cash equivalents at beginning of period 528,976 872,460
----------- -----------
Cash and cash equivalents at end of period $ 232,614 $ 781,524
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
CAPITAL ONE FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 1997
(currencies 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 and
services to consumers. The principal subsidiaries are Capital One Bank (the
"Bank"), which offers credit card products, and Capital One, F.S.B. (the
"Savings Bank"), which 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 ("GAAP") 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 GAAP 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 GAAP
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, 1997 are not necessarily indicative of the results
for the year ending December 31, 1997. The notes to the consolidated financial
statements contained in the Annual Report on Form 10-K for the year ended
December 31, 1996 should be read in conjunction with these condensed
consolidated financial statements. All significant intercompany balances and
transactions have been eliminated. Certain prior period amounts have been
reclassified to conform to the 1997 presentation.
NOTE B: SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash paid for interest for the nine months ended September 30, 1997 and
1996 was $260,388 and $222,450, respectively. Cash paid for income taxes for the
nine months ended September 30, 1997 and 1996 was $94,295 and $64,675,
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.
SECURITIZATIONS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 125"), effective January 1, 1997, which establishes the accounting for
certain financial asset transfers including securitization transactions. SFAS
125 requires an entity, after a transfer of financial assets that meets the
criteria for sale accounting, to recognize the financial servicing assets it
controls and the liabilities it has incurred and to derecognize financial assets
for which control has been relinquished.
7
<PAGE>
Under SFAS 125, the Company records gains or losses on the securitization
of consumer loan receivables prospectively for transfers made after January 1,
1997 based on the estimated fair value of assets obtained and liabilities
incurred in the sale. Gains represent the present value of estimated excess cash
flows the Company has retained over the estimated outstanding period of the
receivables. This excess cash flow represents essentially an "interest only"
("I/O") strip, consisting of the excess of finance charges and past-due fees
over the sum of the return paid to certificate holders, estimated contractual
servicing fees and credit losses. Certain estimates inherent in the
determination of the I/O strip are influenced by factors outside the Company's
control, and, as a result, such estimates could materially change in the near
term.
NOTE C: BORROWINGS
In August 1997, the Company entered into a three-year $350,000 equivalent
unsecured revolving credit arrangement (the "UK/Canada Facility"), which will be
used to finance the Company's expansion in the United Kingdom and Canada. The
UK/Canada Facility is comprised of two tranches: a Tranche A Facility in the
amount of (Pounds)156,458 ($249,800 equivalent based on the exchange rate at
closing) and a Tranche B Facility in the amount of C$139,609 ($100,200
equivalent based on the exchange rate at closing). An amount of (Pounds)34,574
or C$76,910 ($55,200 equivalent based on the exchange rate at closing) may be
transferred between the Tranche A Facility and the Tranche B Facility,
respectively, upon the request of the Company. Each tranche under the facility
is structured as a three-year commitment and will be available for general
corporate purposes. The Corporation serves as the guarantor of all borrowings
under the UK/Canada Facility. As of September 30, 1997, the Company had $3,600
equivalent outstanding under the UK/Canada Facility.
In September 1997, the Savings Bank completed the purchase of the national
retail deposit franchise of JCPenney National Bank. Retail deposit balances
acquired under the agreement were approximately $421,000.
In October 1997, the Bank established a program for the issuance of debt
instruments to be offered outside of the United States. Under this program, the
Bank from time to time may issue instruments in the aggregate principal amount
of $1,000,000 equivalent outstanding at any one time. Instruments under this
program may be denominated in any currency or currencies.
NOTE D: ASSOCIATE STOCK PLANS
In September 1997, the Company granted options, under the 1994 Stock
Incentive Plan, to purchase 537,147 common shares at the then market price of
$37.56 per share. These options vest over a period of three years. Additionally,
in October 1997, 625,000, or twenty-five percent, of the performance-based
options granted in 1995 to the Company's Chief Executive Officer and Chief
Operating Officer vested as the market price of the Company's stock remained at
or above $43.75 for at least ten trading days in a 30 consecutive calendar day
period. The Company recognized $8,599 and $15,115 of compensation cost for the
three and nine months ended September 30, 1997, respectively, relating to its
associate stock plans.
NOTE E: STOCK REPURCHASE
In July 1997, the Company's Board of Directors voted to repurchase up to
two million shares of the Company's common stock over the next two years in
order to mitigate the dilutive impact of shares issuable under its benefit
plans, including its dividend reinvestment and stock purchase plan, associate
stock purchase plan and option programs. During the third quarter of 1997, the
Company repurchased
8
<PAGE>
one million shares under this program. Certain treasury shares were reissued in
connection with the Company's associate stock plans.
NOTE F: COMMITMENTS AND CONTINGENCIES
During 1995, the Company and the Bank became involved in a purported class
action suit relating to certain collection practices engaged in by Signet Bank
and, subsequently, by the Bank. The complaint in this case alleges that Signet
Bank and/or the Company violated a variety of California state statutes and
constitutional and common law duties by filing collection lawsuits, obtaining
judgments and pursuing garnishment proceedings in the Virginia state courts
against defaulted credit card customers who were not residents of Virginia. The
case was filed in the Superior Court of California in the County of Alameda,
Southern Division, on behalf of a class of California residents. The complaint
in this case seeks unspecified statutory damages, compensatory damages, punitive
damages, restitution, attorneys' fees and costs, a permanent injunction and
other equitable relief. Similar cases were also filed 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).
In February 1997, the California court entered judgment in favor of the
Bank on all of the plaintiffs' claims. The plaintiffs have appealed the ruling
to California Court of Appeal First Appellate District Division 4, and the
appeal is pending.
The Florida and the Connecticut cases have now been resolved in favor of
the Company and the Bank and the plaintiffs have elected either to dismiss with
prejudice any remaining claims or not to appeal the judgments issued in favor of
the Company and the Bank.
In connection with the transfer of substantially all of Signet Bank's
credit card business to the Bank in November 1994, the Company 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 the complaint of the California case and it
remains in early stages of litigation, an informed assessment of the ultimate
outcome of this case cannot be made at this time. Management believes, however,
that there are meritorious defenses to this lawsuit and intends to continue to
defend it vigorously.
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, 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 the resolution of pending
or threatened litigation will have a material effect on the Company's results of
operations in any future reporting period.
NOTE G: RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 128 ("SFAS 128"), "Earnings per
Share," which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements, primary
and fully diluted earnings per share are replaced with basic and diluted
earnings per share. Basic earnings per share exclude the dilutive effect of
stock options. The impact of SFAS 128 on the calculation of earnings per share
for the three and nine months ended September 30, 1997 and 1996 was not
material.
9
<PAGE>
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 and services to consumers. The
principal subsidiaries are Capital One Bank (the "Bank"), which offers credit
card products, and Capital One, F.S.B. (the "Savings Bank"), which 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 world. As of
September 30, 1997, the Company had 10.7 million customers and $13.5 billion in
managed consumer 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, the level of solicitation expenses and
operating efficiency.
EARNINGS SUMMARY
Net income for the three months ended September 30, 1997 of $49.3 million,
or $.72 per share, compares to net income of $38.8 million, or $.58 per share,
for the same period in the prior year.
The increase in net income is primarily a result of an increase in asset
and account volumes. Net interest income decreased $9.5 million, or 9%, as the
net interest margin decreased to 7.02% from 8.23%, offset by an increase in
average earning assets of 7%. The provision for loan losses increased $18.6
million, or 34%, as the reported net charge-off rate increased to 4.57% from
3.45%. Non-interest income increased $74.2 million, or 36%, primarily as a
result of the increase in average managed accounts of 28%, a shift to more fee-
based accounts, a change in the timing and amount of certain fees charged and
the incremental impact of securitization accounting. Increases in salaries and
associate benefits expense of $15.7 million, or 27%, and other non-interest
expenses of $13.5 million, or 10%, primarily reflected the cost of operations to
manage the growth in accounts and additional expense associated with the
Company's associate stock plans.
Net income for the nine months ended September 30, 1997 of $131.2 million,
or $1.92 per share, compares to net income of $115.0 million, or $1.72 per
share, for the same period in 1996. This 14% increase in net income primarily
reflected a 17% growth in average managed loans. Each component is discussed in
further detail in subsequent sections of this analysis.
MANAGED CONSUMER LOAN PORTFOLIO
The Company analyzes its financial performance on a managed consumer loan
portfolio basis. Managed consumer loan data adjusts the balance sheet and income
statement to add back the effect of securitizing consumer loans. The Company
also evaluates its interest rate exposure on a managed portfolio basis.
The Company's managed consumer loan portfolio is comprised of on-balance
sheet loans, loans held for securitization and securitized loans. Securitized
loans are not assets of the Company and, therefore, are not shown on the balance
sheet. Reported consumer loans consist of on-balance sheet loans and loans held
for securitization and exclude securitized loans.
10
<PAGE>
Table 1 summarizes the Company's managed consumer loan portfolio.
TABLE 1 - MANAGED CONSUMER LOAN PORTFOLIO
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
-------------------------------
(in thousands) 1997 1996
----------- -----------
<S> <C> <C>
PERIOD-END BALANCES:
Consumer loans held for securitization $ 1,300,000
On-balance sheet consumer loans $ 4,329,799 3,162,008
Securitized consumer loans 9,142,796 7,679,032
----------- -----------
Total managed consumer loan portfolio $13,472,595 $12,141,040
----------- -----------
AVERAGE BALANCES:
Consumer loans held for securitization $ 993,478
On-balance sheet consumer loans $ 3,847,150 2,961,643
Securitized consumer loans 9,070,817 7,625,933
----------- -----------
Total average managed consumer loan
portfolio $12,917,967 $11,581,054
----------- -----------
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------------
(in thousands) 1997 1996
----------- -----------
<S> <C> <C>
AVERAGE BALANCES:
Consumer loans held for securitization $ 132,146 $ 599,270
On-balance sheet consumer loans 3,834,547 2,718,262
Securitized consumer loans 8,765,192 7,547,108
----------- -----------
Total average managed consumer loan
portfolio $12,731,885 $10,864,640
----------- -----------
</TABLE>
Since 1990, the Company has actively engaged in consumer loan
securitization transactions. 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" ("SFAS 125"), effective January 1, 1997, which establishes the
accounting for certain financial asset transfers including securitization
transactions. SFAS 125 requires an entity, after a transfer of financial assets
that meets the criteria for sale accounting, to recognize the financial
servicing assets it controls and the liabilities it has incurred and to
derecognize financial assets for which control has been relinquished.
Under SFAS 125, the Company records gains or losses on the securitization
of consumer loan receivables prospectively for transfers made after January 1,
1997 based on the estimated fair value of assets obtained and liabilities
incurred in the sale. Gains represent the present value of estimated excess cash
flows the Company has retained over the estimated outstanding period of the
receivables. This excess cash flow represents essentially an "interest only"
("I/O") strip, consisting of the excess of finance charges and past-due fees
over the sum of the return paid to certificate holders, estimated contractual
servicing fees and credit losses. Certain estimates inherent in the
determination of the I/O strip are influenced by factors outside the Company's
control, and, as a result, such estimates could materially change in the near
term.
The adoption of SFAS 125 did not have a material effect on securitization
income during the first six months of 1997. During the third quarter of 1997,
there was a $16 million incremental impact on credit card securitization income
resulting from SFAS 125. This incremental impact on credit card securitization
income from SFAS 125 is expected to result in a similar amount being recorded in
the fourth quarter of 1997, but may not be representative of future periods. Any
future gains that will be
11
<PAGE>
recognized in accordance with SFAS 125 will be dependent on the timing and
amount of future securitizations. The Company will continuously assess the
performance of new and existing securitization transactions as estimates of
future cash flows change.
Table 2 indicates the impact of the consumer loan securitizations on
average earning assets, net interest margin and loan yield for the periods
presented. The Company intends to continue to securitize consumer loans.
TABLE 2 - OPERATING DATA AND RATIOS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- --------------------------
(dollars in thousands) 1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REPORTED:
Average earning assets $ 5,537,280 $ 5,182,877 $ 5,558,685 $ 4,491,002
Net interest margin(1) 7.02% 8.23% 6.44% 7.48%
Loan yield 15.95 17.25 14.90 16.40
MANAGED:
Average earning assets $14,608,097 $12,808,810 $14,323,877 $12,038,110
Net interest margin(1) 9.05% 8.35% 8.73% 8.10%
Loan yield 16.06 15.14 15.56 14.71
----------- ----------- ----------- -----------
</TABLE>
(1) Net interest margin is equal to net interest income divided by average
earning assets.
RISK ADJUSTED REVENUE AND MARGIN
In originating its consumer loan portfolio in recent years, the Company has
pursued a low introductory interest rate strategy with accounts repricing to
higher rates after six to sixteen months from the date of origination ("first
generation products"). The amount of repricing is actively managed in an effort
to maximize return at the consumer level, reflecting the risk and expected
performance of the account. Separately, accounts also may be repriced upwards or
downwards based on individual customer performance. Many of the Company's first
generation products have a balance transfer feature under which customers can
transfer balances, held in their other obligations, to the Company. The
Company's historic managed loan growth has been principally the result of this
balance transfer feature. Industry competitors have continuously solicited the
Company's customers with similar low-rate introductory strategies. Management
believes that these competitive pressures have and will continue to put
additional pressure on low-rate introductory strategies.
In applying its Information-Based Strategies ("IBS") and in response to
competitive pressures during late 1994, the Company began to shift a significant
amount of its solicitation expense to second generation product opportunities.
Second generation products consist of secured card products and other customized
card products including affinity and co-branded cards, college student cards and
other cards targeted to certain markets that were underserved by the Company's
competitors. These products do not have the immediate impact on managed loan
balances of the first generation products but typically consist of lower credit
limit accounts which build balances over time. The terms of the second
generation products tend to include annual membership fees and higher annual
finance charge rates. The profile of the customers targeted for the second
generation products and the lower credit limit and, in some cases, balances
associated with these products also tend to result in higher delinquency and
consequently higher past-due and overlimit fees as a percentage of loan balances
outstanding than the first generation products.
Although these second generation products have differing characteristics,
both the first generation and second generation products meet the Company's
objective of maximizing revenue for the level of risk undertaken. Management
believes that comparable measures for external analysis are the
12
<PAGE>
risk adjusted revenue and risk adjusted margin of the portfolio. Risk adjusted
revenue is defined as net interest income and non-interest income (exclusive of
credit card SFAS 125 gains) less net charge-offs. Risk adjusted margin measures
risk adjusted revenue as a percentage of average earning assets. It considers
not only the finance charge yield and net interest margin, but also the fee
income associated with these products. By deducting net charge-offs,
consideration is given to the risk inherent in these differing products.
Table 3 provides income statement data and ratios for the Company's
managed consumer loan portfolio. The cause of increases and decreases in the
various components of risk adjusted revenue is discussed in further detail in
subsequent sections of this analysis.
TABLE 3 - MANAGED RISK ADJUSTED REVENUE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
(dollars in thousands) 1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
MANAGED INCOME STATEMENT:
Net interest income $ 330,670 $ 267,235 $ 937,691 $ 730,922
Non-interest income 202,490(1) 133,421 529,124(1) 306,149
Net charge-offs (215,041) (121,362) (601,074) (318,541)
--------- --------- --------- ---------
Risk adjusted revenue $ 318,119 $ 279,294 $ 865,741 $ 718,530
========= ========= ========= =========
RATIOS(2):
Net interest margin 9.05% 8.35% 8.73% 8.10%
Non-interest income 5.54 4.16 4.93 3.39
Net charge-offs (5.88) (3.79) (5.60) (3.53)
--------- --------- --------- ---------
Risk adjusted revenue
margin 8.71% 8.72% 8.06% 7.96%
========= ========= ========= =========
</TABLE>
(1) Excludes the $16 million incremental impact on credit card securitization
income resulting from the implementation of SFAS 125.
(2) As a percentage of average managed earning assets.
NET INTEREST INCOME
Net interest income is interest and past-due fees earned from the
Company's consumer loans and securities less interest expense on borrowings,
which include interest-bearing deposits, other borrowings and borrowings from
senior and deposit notes.
Net interest income for the three months ended September 30, 1997 was
$97.2 million, compared to $106.7 million for the same period in the prior year,
representing a decrease of $9.5 million, or 9%. For the nine months ended
September 30, 1997, net interest income was $268.6 million compared to $251.9
million for the same period in 1996, representing an increase of $16.7 million,
or 7%. Average earnings assets increased 7% and 24% for the three and nine
months ended September 30, 1997, respectively, versus the same periods in 1996.
The yield on earning assets decreased 160 and 129 basis points for the three and
nine months ended September 30, 1997, respectively, to 12.93% from 14.53% and to
12.34% from 13.63%, as compared to the same periods in the prior year. The
decreases were primarily attributable to a 130 and 150 basis point decrease in
the yield on consumer loans for the three and nine months ended September 30,
1997, respectively, to 15.95% from 17.25% and to 14.90% from 16.40%, as compared
to the same periods in the prior year. The yield on consumer loans decreased due
to the securitization and, as a result, removal from the balance sheet of higher
yielding second generation products during the fourth quarter of 1996, offset by
an increase in the amount of past-due fees charged as compared to the same
period in the prior year.
13
<PAGE>
Table 4 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, 1997 and 1996.
TABLE 4 - STATEMENTS OF AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
---------------------------------------------------------------------------------------
1997 1996
------------------------------------------ ------------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(dollars in thousands) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets
Consumer loans(1) $ 3,847,150 $ 153,377 15.95% $ 3,955,121 $ 170,593 17.25%
Federal funds sold and
resale agreements 255,594 3,753 5.87 281,598 3,885 5.52
Other securities 1,434,536 21,840 6.09 946,158 13,757 5.82
------------ ------------ ------------ ------------ ------------ ------------
Total earning assets $ 5,537,280 $ 178,970 12.93% $ 5,182,877 $ 188,235 14.53%
Cash and due from banks 114,882 30,405
Allowance for loan losses (123,250) (80,830)
Premises and equipment, net 184,272 160,140
Other assets 843,326 799,109
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 6,556,510 $ 6,091,701
============ ============ ============ ============ ============ ============
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Deposits $ 851,916 $ 9,052 4.25% $ 1,234,066 $ 16,569 5.37%
Other borrowings 594,519 9,168 6.17 465,596 7,535 6.47
Senior and deposit notes 3,686,416 63,596 6.90 3,434,769 57,477 6.69
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing liabilities $ 5,132,851 $ 81,816 6.38% $ 5,134,431 $ 81,581 6.36%
Other liabilities 485,218 259,028
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities 5,618,069 5,393,459
Preferred beneficial interests 97,568
Equity 840,873 698,242
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities and equity $ 6,556,510 $ 6,091,701
============ ============ ============ ============ ============ ============
Net interest spread 6.55% 8.17%
============ ============ ============ ============ ============ ============
Interest income to
average earning assets 12.93% 14.53%
Interest expense to
average earning assets 5.91 6.30
------------ ------------ ------------ ------------ ------------ ------------
Net interest margin 7.02% 8.23%
============ ============ ============ ============ ============ ============
</TABLE>
(1) Interest income includes past-due fees on loans of approximately $39,123 and
$30,198 for the three months ended September 30, 1997 and 1996, respectively.
14
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
---------------------------------------------------------------------------------
1997 1996
--------------------------------------- ---------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(dollars in thousands) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets
Consumer loans(1) $ 3,966,693 $ 443,374 14.90% $ 3,317,532 $ 408,107 16.40%
Federal funds sold and
resale agreements 289,363 12,030 5.54 404,953 16,349 5.38
Other securities 1,302,629 59,030 6.04 768,517 34,674 6.02
----------- ----------- ----------- ----------- ----------- -----------
Total earning assets $5,558,685 $ 514,434 12.34% $ 4,491,002 459,130 13.63%
Cash and due from banks 104,136 14,590
Allowance for loan losses (120,637) (76,264)
Premises and equipment, net 182,265 151,845
Other assets 778,536 640,089
----------- ----------- ----------- ----------- ----------- -----------
Total assets $ 6,502,985 $ 5,221,262
=========== =========== =========== =========== =========== ===========
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Deposits $ 887,019 $ 28,124 4.23% $ 961,515 $ 40,143 5.57%
Other borrowings 567,425 26,145 6.14 449,256 21,450 6.37
Senior and deposit notes 3,754,264 191,555 6.80 2,941,689 145,622 6.60
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities $ 5,208,708 $ 245,824 6.29% $ 4,352,460 $ 207,215 6.35%
Other liabilities 406,167 211,059
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities 5,614,875 4,563,519
Preferred beneficial interests 86,798
Equity 801,312 657,743
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and equity $ 6,502,985 $ 5,221,262
=========== =========== =========== =========== =========== ===========
Net interest spread 6.05% 7.28%
=========== =========== =========== =========== =========== ===========
Interest income to
average earning assets 12.34% 13.63%
Interest expense to
average earning assets 5.90 6.15
----------- ----------- ----------- ----------- ----------- -----------
Net interest margin 6.44% 7.48%
=========== =========== =========== =========== =========== ===========
</TABLE>
(1) Interest income includes past-due fees on loans of approximately $89,336 and
$65,208 for the nine months ended September 30, 1997 and 1996, respectively.
Managed net interest income increased $63.4 million, or 24%, to $330.7
million for the three months ended September 30, 1997 compared to the same
period in the prior year as managed average earning assets increased 14% and
managed net interest margin increased 70 basis points to 9.05%. For the nine
months ended September 30, 1997, managed net interest income increased $206.8
million, or 28%, to $937.7 million compared to the same period in the prior year
as managed average earning assets increased 19% and managed net interest margin
increased 63 basis points to 8.73%. The increases in managed net interest margin
principally reflect growth in second generation loans and increases in past-due
fee terms.
15
<PAGE>
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 5 sets forth
the dollar amount of the increases (decreases) 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.
TABLE 5 - INTEREST VARIANCE ANALYSIS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 VS 1996 SEPTEMBER 30, 1997 VS 1996
-------------------------------------- --------------------------------------
Increase Change due to(1) Increase Change due to(1)
(in thousands) (Decrease) Volume Rate (Decrease) Volume Rate
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Consumer loans $ (17,216) $ (4,564) $ (12,652) $ 35,267 $ 74,882 $ (39,615)
Federal funds sold
and resale agreements (132) (372) 240 (4,319) (4,792) 473
Other 8,083 7,407 676 24,356 24,203 153
---------- ---------- ---------- ---------- ---------- ----------
Total interest income (9,265) 12,329 (21,594) 55,304 101,757 (46,453)
INTEREST EXPENSE:
Deposits (7,517) (4,491) (3,026) (12,019) (2,928) (9,091)
Other borrowings 1,633 2,002 (369) 4,695 5,468 (773)
Senior and deposit notes 6,119 4,303 1,816 45,933 41,337 4,596
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense 235 (25) 260 38,609 40,425 (1,816)
---------- ---------- ---------- ---------- ---------- ----------
Net interest income(1) $ (9,500) $ 6,952 $ (16,452) $ 16,695 $ 54,648 $ (37,953)
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
(1) The change in interest due to both volume and rates 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 total for the volume and rate columns are not
the sum of the individual lines.
SERVICING AND SECURITIZATIONS INCOME
Servicing and securitizations income increased $70.8 million and $152.1
million, or 65% and 44%, for the three and nine months ended September 30, 1997,
respectively, from the same periods in the prior year, primarily due to average
securitized loans increasing 19% and 16% and to a lesser extent the
implementation of SFAS 125 (see "Managed Consumer Loan Portfolio" for the effect
of SFAS 125 on servicing and securitizations income) for the three and nine
months ended September 30, 1997, respectively, from the same periods in the
prior year. This resulted in increases in net interest income and non-interest
income on securitized loans and was offset by increased charge-offs on such
loans. Net interest income on securitized loans increased $72.9 million and
$190.1 million, or 45% and 40%, for the three and nine months ended September
30, 1997, respectively, from the same periods in the prior year, as a result of
the loan growth and an increase in the securitized portfolio's net interest
margin to 10.30% and 10.18% for the three and nine months ended September 30,
1997, respectively, from 8.42% and 8.46%, respectively, 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 206 and 190 basis points for the three
and nine months ended September 30, 1997, respectively, as a result of the
securitization of second generation products and an increase in the amount of
past-due fees charged as a result of both a change in terms and an increase in
the delinquency rate on securitized loans from period to period. Non-interest
income on serviced and securitized loans increased $81.7 million and $186.5
million, or 225% and 178%, for the three and nine months ended September 30,
1997, respectively, from the same periods in the prior year,
16
<PAGE>
as a result of loan and account growth, the securitization of second generation
products, changes in the terms of overlimit fees charged and the incremental
impact of income resulting from SFAS125. Charge-offs of securitized loans for
the three and nine months ended September 30, 1997 increased $83.8 million and
$224.5 million, or 96% and 95%, compared to the same periods in 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.
OTHER NON-INTEREST INCOME
Other non-interest income increased 4% and 26% to $100.6 million and
$254.1 million for the three and nine months ended September 30, 1997,
respectively, compared to $97.2 million and $201.6 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 28% and 32% for the three and nine
months ended September 30, 1997, respectively, offset by the securitization of a
higher percentage of more fee intensive second generation products in 1997
compared to the prior year.
Managed other non-interest income, excluding the incremental impact on
credit card securitization income resulting from SFAS 125, increased $69.1
million and $223.0 million, or 52% and 73%, for the three and nine months ended
September 30, 1997, respectively, primarily due to loan and account growth of
second generation products and changes in the terms of overlimit fees charged.
NON-INTEREST EXPENSE
Non-interest expense for the three and nine months ended September 30,
1997 was $226.0 million and $641.6 million, respectively, an increase of 15% and
25% over $196.8 million and $512.6 million for the same periods in the prior
year. Contributing to the increase in non-interest expense was salaries and
associate benefits expense, which rose $15.7 million and $61.6 million, or 27%
and 41%, for the three and nine months ended September 30, 1997, respectively,
compared to the same periods in the prior year. This increase reflected
additional staff associated with the cost of operations to manage the growth in
accounts and $8.6 million and $15.1 million, respectively, in additional expense
associated with the Company's associate stock plans. All other non-interest
expenses increased $13.5 million and $67.4 million, or 10% and 19%, to $152.8
million and $428.5 million for the three and nine months ended September 30,
1997, respectively, from $139.3 million and $361.1 million for the same periods
in the prior year. The increase in other non-interest expenses was primarily a
result of an increase in the average number of accounts of 28% and 32% for the
three and nine months ended September 30, 1997, respectively, offset by
efficiencies gained from improved processes and investments in information
technology.
INCOME TAXES
The Company's effective income tax rate increased to 38% for the three and
nine months ended September 30, 1997, as compared to 38% and 37.34% for the
three and nine months ended September 30, 1996 and includes both state and
federal income tax components. The increase in the effective tax rate was
primarily the result of increased state tax expense as the Company expanded its
operations into multiple products and jurisdictions.
17
<PAGE>
ASSET QUALITY
The asset quality of a portfolio is generally a function of 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 also an
important indicator of the delinquency and loss levels of the portfolio.
Accounts tend to exhibit a rising trend of delinquency and credit losses as they
season.
DELINQUENCIES
Table 6 shows the Company's consumer loan delinquency trends for the
periods presented as reported for financial statement purposes and on a managed
basis. The entire balance of an account is contractually delinquent if the
minimum payment is not received by the payment due date. However, the Company
generally continues to accrue interest until the loan is charged off.
TABLE 6 - DELINQUENCIES(1)
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------------------------------------------------
1997 1996
--------------------------- ---------------------------
% OF % OF
(dollars in thousands) LOANS TOTAL LOANS LOANS TOTAL LOANS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REPORTED:
Loans outstanding $ 4,329,799 100.00% $ 4,462,008 100.00%
Loans delinquent:
30-59 days 81,929 1.89 102,732 2.30
60-89 days 49,686 1.15 63,781 1.43
90 or more days 99,572 2.30 127,139 2.85
----------- ----------- ----------- -----------
Total $ 231,187 5.34% $ 293,652 6.58%
=========== =========== =========== ===========
MANAGED:
Loans outstanding $13,472,595 100.00% $12,141,040 100.00%
Loans delinquent:
30-59 days 286,194 2.12 224,309 1.85
60-89 days 177,434 1.32 134,977 1.11
90 or more days 393,070 2.92 285,521 2.35
----------- ----------- ----------- -----------
Total $ 856,698 6.36% $ 644,807 5.31%
=========== =========== =========== ===========
</TABLE>
(1) Includes consumer loans held for securitization.
The delinquency rate for reported loans was 5.34% as of September 30,
1997, down from 6.58% as of September 30, 1996 and 5.53% as of June 30, 1997.
The delinquency rate for the total managed consumer loan portfolio was 6.36% as
of September 30, 1997, up from 5.31% as of September 30, 1996 and up slightly
from 6.33% as of June 30, 1997. The reported portfolio's delinquency rate
decrease as of September 30, 1997, when compared to September 30, 1996,
principally reflected the securitization of certain second generation
receivables during the fourth quarter of 1996. The managed portfolio's
delinquency rate increase as of September 30, 1997, when compared to September
30, 1996, principally reflected general economic trends in consumer credit
performance.
18
<PAGE>
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 7 presents the Company's net charge-offs for the periods
presented on a reported and managed basis.
TABLE 7 - NET CHARGE-OFFS (1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- ---------------------------
(dollars in thousands) 1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REPORTED:
Average loans outstanding $ 3,847,150 $ 3,955,121 $ 3,966,693 $ 3,317,532
Net charge-offs 43,967 34,076 139,901 81,848
Net charge-offs as a percentage
of average loans outstanding 4.57% 3.45% 4.70% 3.29%
============ ============ ============ ============
MANAGED:
Average loans outstanding $12,917,967 $11,581,054 $12,731,885 $10,864,640
Net charge-offs 215,041 121,362 601,074 318,541
Net charge-offs as a percentage
of average loans outstanding 6.66% 4.19% 6.29% 3.91%
============ ============ ============ ============
</TABLE>
(1) Includes consumer loans held for securitization.
Net charge-offs of managed loans increased $93.7 million and $282.5
million, or 77% and 89%, while average managed consumer loans grew 12% and 17%
for the three and nine months ended September 30, 1997, respectively, from the
same periods in the prior year. For the three and nine months ended September
30, 1997, the Company's net charge-offs as a percentage of managed loans were
6.66% and 6.29%, respectively, compared to 4.19% and 3.91% for the same periods
in the prior year. The increase in managed net charge-offs was the result of
continued seasoning of the portfolio and general economic trends in consumer
credit performance. The increase in the reported charge-off rate for the three
and nine months ended September 30, 1997 reflected less growth in the first nine
months of 1997 versus 1996 resulting in seasoning of the reported loan
portfolio. This increase was also compounded by 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 (net of any collateral) in the next billing cycle after
becoming 180 days past-due, although earlier charge-offs may occur on accounts
of bankrupt or deceased customers. Bankrupt customers' accounts are generally
charged off within 30 days after receipt of the bankruptcy petition. Once a loan
is charged off, it is the Company's policy to continue to pursue the collection
of principal and interest for non-bankrupt accounts.
19
<PAGE>
Management believes that the allowance for loan losses is adequate to
cover anticipated losses in the on-balance sheet consumer loan portfolio under
current conditions. There can be no assurance as to future credit losses that
may be incurred in connection with the Company's consumer 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 on-balance sheet
consumer loan portfolio. Table 8 sets forth the activity in the allowance for
loan losses for the periods indicated. See "Asset Quality," "Delinquencies" and
"Net Charge-Offs" for a more complete analysis of asset quality.
TABLE 8 - SUMMARY OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ---------------------
(dollars in thousands) 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at beginning of period $118,500 $ 74,000 $118,500 $ 72,000
Provision for loan losses 72,518 53,933 168,481 104,211
Transfer to loans held for (51) (19,829) (2,705) (27,938)
securitization
Increase from consumer loan purchase 9,000 9,000
Charge-offs (52,697) (28,114) (156,526) (74,747)
Recoveries 8,730 3,510 19,250 9,974
-------- -------- -------- --------
Net charge-offs(1) (43,967) (24,604) (137,276) (64,773)
-------- -------- -------- --------
Balance at end of period $147,000 $ 92,500 $147,000 $ 92,500
======== ======== ======== ========
Allowance for loan losses to loans at
period-end(1) 3.40% 2.93% 3.40% 2.93%
-------- -------- -------- --------
</TABLE>
(1) Excludes consumer loans held for securitization.
For the three and nine months ended September 30, 1997, the provision
increased to $72.5 million and $168.5 million, from $53.9 million and $104.2
million, respectively, for the same periods in the prior year. The allowance for
loan losses as a percentage of loans increased to 3.40% as of September 30, 1997
from 2.93% as of September 30, 1996 due to increases in the net charge-off rate
resulting from continued loan seasoning and general economic trends in consumer
credit performance. The provision increase also reflects the increase in the on-
balance sheet loans balance to $4.3 billion as of September 30, 1997, an
increase of 37% from September 30, 1996.
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.
As discussed in "Managed Consumer Loan Portfolio," a significant source of
liquidity for the Company has been the securitization of consumer loans.
Maturity terms of the existing securitizations vary from 1997 to 2002
(extendible to 2004) 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 consumer
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.
20
<PAGE>
Additionally, the Company maintains a portfolio of high-quality securities
such as U.S. Government, U.S. Government Agency mortgage-backed securities,
commercial paper, interest-bearing deposits with other banks, federal funds and
other cash equivalents in order to provide adequate liquidity and to meet its
ongoing cash needs. As of September 30, 1997, the Company held $1.3 billion in
such securities.
Table 9 shows the maturation of certificates of deposit in denominations
of $100,000 or greater ("large denomination CDs") as of September 30, 1997.
TABLE 9 - MATURITIES OF LARGE DENOMINATION CERTIFICATES $100,000 OR MORE
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
(dollars in thousands) BALANCE PERCENT
-------- --------
<S> <C> <C>
3 months or less $195,664 58.60%
Over 3 through 6 months 96,766 28.98
Over 6 through 12 months 20,503 6.14
Over 1 through 5 years 20,985 6.28
-------- --------
Total $333,918 100.00%
======== ========
</TABLE>
In addition to large denomination CDs, as of September 30, 1997, retail
deposits of $716 million had been raised or acquired as an additional source of
funding.
In September 1997, the Savings Bank completed the purchase of the national
retail deposit franchise of JCPenney National Bank. Retail deposit balances
acquired under the agreement were approximately $421 million.
The Company's other borrowings portfolio consists of $296 million in
borrowings maturing within one year and $25 million in borrowings maturing after
one year.
In November 1996, the Company entered into a four-year, $1.7 billion
unsecured revolving credit arrangement (the "Credit Facility"). The Credit
Facility is comprised of two tranches: a $1.375 billion Tranche A facility
available to the Bank and the Savings Bank, including an option for up to $225
million in multi-currency availability, and a $325 million Tranche B facility
available to the Corporation, the Bank and the Savings Bank, including an option
for up to $100 million in multi-currency availability. Each tranche under the
facility is structured as a four-year commitment and is available for general
corporate purposes. The borrowings of the Savings Bank are limited to $500
million during the first year of the Credit Facility and $750 million
thereafter. The Bank has irrevocably undertaken to honor any demand by the
lenders to repay any borrowings which are due and payable by the Savings Bank
but which have not been paid. Any borrowings under the Credit Facility will
mature on November 24, 2000; however, the final maturity of each tranche may be
extended for three additional one-year periods. The Company had no outstanding
balance on its $1.7 billion revolving credit arrangement as of September 30,
1997. The unused commitment is available as funding needs may arise.
In August 1997, the Company entered into a three-year $350 million
equivalent unsecured revolving credit arrangement (the "UK/Canada Facility"),
which will be used to finance the Company's expansion in the United Kingdom and
Canada. The UK/Canada Facility is comprised of two tranches: a Tranche A
Facility in the amount of (Pounds)156.5 million ($249.8 million equivalent based
on the exchange rate at closing) and a Tranche B Facility in the amount of
C$139.6 million ($100.2 million equivalent based on the exchange rate at
closing). An amount of (Pounds)34.6 million or C$76.9 million ($55.2 million
equivalent based on the exchange rate at closing) may be transferred between the
Tranche A Facility and the Tranche B Facility, respectively, upon the request of
the Company. Each tranche under the facility is
21
<PAGE>
structured as a three-year commitment and will be available for general
corporate purposes. The Corporation serves as the guarantor of all borrowings
under the UK/Canada Facility. As of September 30, 1997, the Company had $3.6
million equivalent outstanding under the UK/Canada Facility.
In April 1997, the Bank increased the aggregate amount of bank notes
available for issuance under its bank note program. Under the program, the Bank
from time to time may issue up to $7.8 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. As of September 30, 1997, the Company
had $3.2 billion in senior bank notes outstanding and no subordinated bank notes
had been issued.
In October 1997, the Bank established a program for the issuance of debt
instruments to be offered outside of the United States. Under this program, the
Bank from time to time may issue instruments in the aggregate principal amount
of one billion dollars equivalent outstanding at any one time. Instruments under
this program may be denominated in any currency or currencies.
In September 1996, the Corporation filed a $200 million shelf registration
statement ($125 million of senior debt securities issued as of September 30,
1997) with the Securities and Exchange Commission under which the Corporation
from time to time may offer and sell (i) senior or subordinated debt securities
consisting of debentures, notes and/or other unsecured evidences, (ii) preferred
stock, which may be issued in the form of depository shares evidenced by
depository receipts and (iii) common stock. The securities will be limited to
$200 million aggregate public offering price or its equivalent (based on the
applicable exchange rate at the time of sale) in one or more foreign currencies,
currency units of composite currencies as shall be designated by the
Corporation.
In April 1996, the Bank established a deposit note program under which the
Bank from time to time may issue up to $2.0 billion of deposit notes with
maturities from 30 days to 30 years from the date of issue. As of September 30,
1997, the Company had $300 million in deposit notes outstanding.
In January 1997, Capital One Capital I, a subsidiary of the Bank created
as a Delaware statutory business trust, issued $100 million aggregate amount of
Floating Rate Junior Subordinated Capital Income Securities that mature on
February 1, 2027. The securities represent a preferred beneficial interest in
the assets of the trust. The net proceeds of the offering of $97 million were
lent to the Bank for general corporate purposes.
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.
In July 1997, the Company's Board of Directors voted to repurchase up to
two million shares of the Company's common stock over the next two years in
order to mitigate the dilutive impact of shares issuable under its benefit
plans, including its dividend reinvestment and stock purchase plan, associate
stock purchase plan and option programs. During the third quarter of 1997, the
Company repurchased one million shares. Certain treasury shares were reissued in
connection with the Company's associate stock plans.
22
<PAGE>
CAPITAL ADEQUACY
The Bank and the Savings Bank are subject to capital adequacy guidelines
adopted by the Federal Reserve Board ("Federal Reserve") and the Office of
Thrift Supervision (the "OTS") (collectively, the "regulators"), respectively.
The capital adequacy guidelines and the regulatory framework for prompt
corrective action require the Bank and the Savings Bank to attain specific
capital levels based upon quantitative measures of their assets, liabilities and
off-balance sheet items as calculated under Regulatory Accounting Principles.
The inability to meet and maintain minimum capital adequacy levels could result
in regulators taking actions that could have a material effect on the Company's
consolidated financial statements. Additionally, the regulators have broad
discretion in applying higher capital requirements. Regulators consider a range
of factors in determining capital adequacy, such as an institution's size,
quality and stability of earnings, interest rate risk exposure, risk
diversification, management expertise, asset quality, liquidity and internal
controls.
The most recent notifications from the regulators categorized the Bank and
the Savings Bank as "well capitalized." The Bank must maintain minimum Tier 1
Capital, Total Capital and Tier 1 Leverage ratios of 4%, 8% and 4%,
respectively, and the Savings Bank must maintain minimum Tangible Capital, Total
Capital and Core Capital ratios of 1.5%, 8% and 3%, respectively, under capital
adequacy requirements, and both must maintain minimum ratios of 6%, 10% and 5%,
respectively, to be well capitalized under the regulatory framework for prompt
corrective action. As of September 30, 1997, the Bank's Tier 1 Capital, Total
Capital and Tier 1 Leverage ratios were 10.70%, 13.58% and 11.01%, respectively.
As of September 30, 1997, the Savings Bank's Tangible Capital, Total Capital and
Core Capital ratios were 10.70%, 16.52% and 10.70%, respectively. In addition,
the Savings Bank is subject for the first three years of its operations (until
June 30, 1999) to additional capital requirements, including the requirement to
maintain a minimum Total Capital ratio of 12% and a Core Capital ratio of 8%. As
of September 30, 1997, there are no conditions or events since the notifications
discussed above that management believes have changed either the Bank's or the
Savings Bank's capital category. As of September 30, 1997, the Bank's and the
Savings Bank's ratio of capital to managed assets was 5.16% and 9.91%,
respectively.
During 1996, the Bank received regulatory approval and established a
branch office in the United Kingdom. In connection with such approval, the
Company committed to the Federal Reserve that, for so long as the Bank maintains
such branch in the United Kingdom, the Company will maintain a minimum Tier 1
leverage ratio of 3.0%. As of September 30, 1997, the Company's Tier 1 leverage
ratio was 14.09%.
Additionally, certain regulatory restrictions exist which limit the
ability of the Bank and the Savings Bank to transfer funds to the Corporation.
As of September 30, 1997, retained earnings of the Bank and the Savings Bank of
$62.9 million and $21.0 million, respectively, were available for payment of
dividends to the Corporation without prior approval by the regulators. The
Savings Bank is required to give the OTS at least 30 days' advance notice of any
proposed dividend.
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 transactions 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 for off-balance sheet items
as it does for on-balance sheet instruments.
23
<PAGE>
As of September 30, 1997, the Company had $2.2 billion in notional amount
of swaps. The Company evaluates its overall sensitivity to interest rates by
reviewing its asset and liability repricings and the impact of anticipated
transactions. In determining the Company's swap position, management considers
this overall sensitivity to interest rates and makes adjustments as necessary to
meet the Company's objectives. The fair value, based on the forward yield curve,
as of September 30, 1997 of swap positions for which the Company is exposed to
credit risk from highly rated counterparties is approximately $15.0 million.
Tables 10 and 11 reflect the maturity and summary of swap positions,
respectively, as of September 30, 1997 and for the three and nine months ended
September 30, 1997 and 1996.
TABLE 10 - MATURITY OF INTEREST RATE SWAPS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------------------------------
WITHIN OVER ONE AVERAGE
ONE THROUGH FIVE LIFE
(dollars in millions) YEAR YEARS TOTAL (YEARS)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Receive fixed/pay floating:
Notional amount $ 289 $ 791 $ 1,080 1.18
Weighted average rates
received(1) 7.32% 7.60% 7.52%
Weighted average rates
paid(1) 5.81 5.82 5.82
Receive floating/pay fixed:
Notional amount $ 289 $ 791 $ 1,080 1.18
Weighted average rates
received(1) 5.81% 5.82% 5.82%
Weighted average rates
paid(1) 6.25 6.59 6.49
============ ============ ============ ============
</TABLE>
(1) Weighted average rates received and paid are based on the contractual
rates in effect as of September 30, 1997. Floating rates under the interest
rate swap contracts are based on varying terms of LIBOR.
TABLE 11 - SUMMARY OF INTEREST RATE SWAPS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
(in millions) 1997 1996 1997 1996
----------- ----------- ----------- -----------
NOTIONAL AMOUNT NOTIONAL AMOUNT
<S> <C> <C> <C> <C>
Receive fixed/pay floating:
Beginning of period $ 1,580 $ 2,104 $ 2,104 $ 2,144
Maturities 500 1,024 40
----------- ----------- ----------- -----------
End of period $ 1,080 $ 2,104 $ 1,080 $ 2,104
Receive floating/pay fixed:
Beginning of period $ 1,580
Additions $ 1,580
Maturities 500 500
----------- ----------- ----------- -----------
End of period $ 1,080 $ 1,080
=========== =========== =========== ===========
Receive floating/pay floating:
Beginning of period $ 260 $ 260
Maturities 260 260
----------- ----------- ----------- -----------
End of period $ - $ -
=========== =========== =========== ===========
</TABLE>
24
<PAGE>
BUSINESS OUTLOOK
This business outlook section summarizes the Company's expectations for
earnings for the year ending December 31, 1997 and, to a limited extent, for the
year ending December 31, 1998, 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, therefore, actual results could differ materially. Factors which
could materially influence results are set forth throughout this section and in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996
(Part I, Item 1, Cautionary Statements).
The Company has revised upward its previous earnings target and set a new
target, dependent on the factors set forth below, for its earnings per share for
the year ending December 31, 1997 to increase by at least 15% over earnings per
share for the year ended December 31, 1996. The Company also set an earnings
target, dependent on the factors set forth below, for its earnings per share for
the year ending December 31, 1998 to increase by approximately 20% over 1997
earnings. As discussed elsewhere in this report and below, the Company's actual
earnings are a function of its revenues (net interest income and non-interest
income on its earning assets), consumer usage and payment patterns, credit
quality of its earning assets (which affects fees and charge-offs), solicitation
expenses and operating expenses.
The Company's earnings are particularly sensitive to delinquencies and
charge-offs on the Company's portfolio and on the level of attrition from
competition in the credit card industry. In the first half of 1997, the Company
experienced a lower number of delinquent accounts than management had expected
based on the seasonal trends experienced in previous years. As a result, fee
revenue in that period was lower than originally anticipated. More recently, the
Company has experienced an increase in revenues due to the repricing of
introductory rate accounts, increases in overlimit and past-due fees and
continued account growth particularly with its second and third generation
products. The Company's expectations for 1997 earnings are based on management's
belief of a continued increase in revenues, together with a moderating level of
charge-offs and attrition. Management cautions that its expectation of
moderating charge-off levels is based upon recent flattening levels of
delinquencies and bankruptcy petitions. The relationship of these factors and
the effect of the charge-off levels, however, are not always predictable and
have been changing over the past few years. In addition, competition in the
credit card industry, as measured by the volume of mail solicitations, remains
very high. Increased competition can affect the Company's earnings by increasing
the attrition of the Company's outstanding loans (thereby reducing interest and
fee income) and by making it more difficult to retain and attract more
profitable customers.
The Company's strategy for future growth has been, and is expected to
continue to be, to apply its proprietary IBS to its credit card business as well
as to other businesses, both financial and non-financial, to identify new
product opportunities and to make informed investment decisions regarding its
existing products. See the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 for a further description of the Company's IBS (Part I,
Item 1, Business).
Historically, the Company has concentrated its efforts on credit card
opportunities. These opportunities have included, and are expected to continue
to include, various first generation low-rate balance transfer products, as well
as second generation credit card products. Second generation products are marked
by several features including better response rates, less adverse selection,
higher margins (including fees), lower credit lines, less attrition and less
consumer sensitivity to repricing. However, second generation products involve
higher operational costs and, in some cases, higher delinquencies and credit
losses than the Company's traditional low rate balance transfer products. More
importantly, these second generation products continue to have overall higher
and less volatile returns than the traditional
25
<PAGE>
balance transfer products in recent market conditions. The Company also has been
applying, and expects to continue applying, its IBS to other financial products
and non-financial products ("third generation products"). Third generation
products and services include selected non-card consumer lending products and
the reselling of telecommunication services. The Company has also expanded its
existing operations outside of the United States, with an initial focus on the
United Kingdom and Canada. The Company has established the U.K. branch of the
Bank, the Savings Bank and several non-bank operating subsidiaries to identify
and expand these opportunities. These second and third generation products are
subject to competitive pressures, which management anticipates will increase as
these markets mature.
The Company continues to use its IBS in an effort to balance the mix of
first and second generation credit card products, together with third generation
products and services, to optimize profitability within the context of
acceptable risk. The Company intends to remain flexible in the allocation of
marketing expenses spent on specific products to take advantage of market
opportunities as they emerge and will make its marketing decisions based on the
then current market conditions. As a result, the Company expects to continue to
offer a variety of first, second and third generation products but the mix of
such products in the Company's portfolio may vary significantly over time. To
date, the majority of the Company's outstandings and accounts is comprised of
the first and second generation credit card products and only a relatively small
dollar percentage of assets and accounts has been generated as a result of
expenditures on third generation products and services. 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 anticipates that its 1997 solicitation (marketing) expenses
will exceed such expenses in 1996, as the Company continues to invest in
existing and new first, second and third generation products and services as
marketing opportunities develop. These opportunities are subject to a variety of
external and internal factors that may affect the actual amount of solicitation
expenses, such as competition in the consumer loan industry, general economic
conditions affecting consumer credit performance, the asset quality of the
Company's portfolio and market opportunities for third generation products.
Moreover, as stated above, the Company intends to continue a flexible approach
in its allocation of marketing expenses. With competition affecting the
profitability of existing first generation products, the Company has been and
expects to continue to allocate a greater portion of its marketing expenses to
second and third generation products. In the nine months ended September 30,
1997, the Company allocated more than 70% of its marketing expenses to second
and third generation products, including expansion outside of the U.S.
Moreover, the amount of marketing expenses allocated to various product
generations will influence other factors as the different product generations
are characterized by different account growth, loan growth and asset quality
characteristics. As of September 30, 1997, second and third generation products
constituted approximately one-half of the Company's accounts, but substantially
less than half of the Company's managed loan balances. The Company currently
expects that its growth in consumer accounts and in managed consumer loans will
continue in the last quarter of 1997 and into 1998. Actual growth, however, may
vary significantly depending on the actual mix of products that the Company may
offer and the level of attrition on the Company's managed portfolio, which is
affected by competitive pressures.
26
<PAGE>
The Company currently expects delinquencies to increase, consistent with
historical seasonal patterns, and the increase in the net charge-off rate of its
portfolio to moderate. The delinquency and net charge-off rates of the Company's
consumer loan portfolio are directly correlated to general economic trends in
consumer credit performance. Charge-off rates are also impacted by bankruptcies.
The rates of delinquencies and charge-offs in the credit card industry although
moderating are still at record high levels and are expected by many industry
observers to continue to increase. The actual amount of increases in the
Company's delinquencies and charge-offs will be affected not only by these
general economic trends but by continued seasoning of the Company's portfolio
and the product mix. As delinquency levels fluctuate, the resulting amount of
past-due and overlimit fees, which are significant sources of revenue for the
Company, will also fluctuate. Further, the timing of revenues from increasing or
decreasing delinquencies precedes the related revenue impact of higher or lower
charge-offs that ultimately result from varying levels of delinquencies.
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 intense 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 consumer 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, including changes in
existing laws to regulate further the credit card and consumer loan industry and
the financial services industry, in general; the amount of, and rate of growth
in, the Company's expenses (including associate and marketing 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, 1996 (Part I, Item 1, Cautionary
Statements).
27
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -------
(a) Exhibits:
Exhibit 11-Computation of Per Share Earnings Page 29
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K, dated July 18, 1997,
Commission File No. 1-13300, enclosing its press release dated July
15, 1997.
The Company filed a Current Report on Form 8-K, dated September 24,
1997, Commission File No. 1-13300, enclosing its press release dated
September 24, 1997.
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, 1997 /s/James M. Zinn
----------------
James M. Zinn
Senior Vice President,
Chief Financial Officer
(Chief Accounting Officer
and duly authorized officer
of the Registrant)
28
<PAGE>
EXHIBIT 11
CAPITAL ONE FINANCIAL CORPORATION
COMPUTATION OF PER SHARE EARNINGS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY
Net income $ 49,330 $ 38,821 $ 131,164 $ 115,017
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Average common shares outstanding 66,185,070 66,249,581 66,315,393 66,207,452
Net effect of dilutive restricted stock(1) 3,134 5,623 3,955 8,543
Net effect of dilutive stock options(1) 1,562,346 768,893 1,518,658 691,826
----------- ----------- ----------- -----------
Weighted average common and
common equivalent shares 67,750,550 67,024,097 67,838,006 66,907,821
=========== =========== =========== ===========
EARNINGS PER SHARE $ .73 $ .58 $ 1.93 $ 1.72
=========== =========== =========== ===========
FULLY DILUTED
Net income $ 49,330 $ 38,821 $ 131,164 $ 115,017
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Average common shares outstanding 66,185,070 66,249,581 66,315,393 66,207,452
Net effect of dilutive restricted stock(2) 3,813 6,118 4,612 11,840
Net effect of dilutive stock options(2) 2,065,163 802,430 2,065,163 802,430
----------- ----------- ----------- -----------
Weighted average common and
common equivalent shares 68,254,046 67,058,129 68,385,168 67,021,722
=========== =========== =========== ===========
EARNINGS PER SHARE $ .72 $ .58 $ 1.92 $ 1.72
=========== =========== =========== ===========
</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 the
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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 57,772
<SECURITIES> 1,033,946
<RECEIVABLES> 4,329,799
<ALLOWANCES> (147,000)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 180,740
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 6,311,771
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 666
<OTHER-SE> 841,398
<TOTAL-LIABILITY-AND-EQUITY> 6,311,771
<SALES> 0
<TOTAL-REVENUES> 459,903
<CGS> 0
<TOTAL-COSTS> 226,003
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 72,518
<INTEREST-EXPENSE> 81,816
<INCOME-PRETAX> 79,566
<INCOME-TAX> 30,236
<INCOME-CONTINUING> 49,330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,330
<EPS-PRIMARY> .73
<EPS-DILUTED> .72
<FN>
<F1>NON-CLASSIFIED BALANCE SHEET
<F2>PP&E SHOWN NET
</FN>
</TABLE>
