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 March 31, 1999
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 April 30, 1999, there were 65,836,721 shares of the registrant's Common
Stock, par value $.01 per share, outstanding.
<PAGE>
CAPITAL ONE FINANCIAL CORPORATION
FORM 10-Q
INDEX
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March 31, 1999
PAGE
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 4. Submission of Matters to a Vote of Security Holders... 29
ITEM 6. Reports on Form 8-K................................... 29
Signatures............................................ 30
<PAGE>
ITEM 1.
CAPITAL ONE FINANCIAL CORPORATION
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share data) (unaudited)
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
- ------------------------------------------------------------- ------------------ -----------
<S> <C> <C>
Assets:
Cash and due from banks $ 13,276 $ 15,974
Federal funds sold and resale agreements 261,800
Interest-bearing deposits at other banks 34,041 22,393
- ------------------------------------------------------------- ------------ ------------
Cash and cash equivalents 47,317 300,167
Securities available for sale 1,770,398 1,796,787
Consumer loans 7,245,847 6,157,111
Less: Allowance for loan losses (251,000) (231,000)
- ------------------------------------------------------------- ------------ ------------
Net loans 6,994,847 5,926,111
Premises and equipment, net 283,159 242,147
Interest receivable 66,184 52,917
Accounts receivable from securitizations 637,563 833,143
Other 352,159 268,131
- ------------------------------------------------------------- ------------ ------------
Total assets $ 10,151,627 $ 9,419,403
- ------------------------------------------------------------- ------------ ------------
Liabilities:
Interest-bearing deposits $ 2,204,162 $ 1,999,979
Other borrowings 1,171,440 1,644,279
Senior notes 4,610,049 3,739,393
Interest payable 87,501 91,637
Other 661,279 575,788
- ------------------------------------------------------------- ------------ ------------
Total liabilities 8,734,431 8,051,076
Capital Securities 97,984 97,921
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, 66,556,792 issued as of
March 31, 1999 and December 31, 1998 666 666
Paid-in capital, net 606,929 599,498
Retained earnings 757,071 679,838
Cumulative other comprehensive income 22,554 60,655
Less: Treasury stock, at cost; 801,412 and 896,970
shares as of March 31, 1999 and December 31, 1998,
respectively (68,008) (70,251)
------------ ------------
Total stockholders' equity 1,319,212 1,270,406
------------ ------------
Total liabilities and stockholders' equity $ 10,151,627 $ 9,419,403
- ------------------------------------------------------------- ------------ ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
CAPITAL ONE FINANCIAL CORPORATION
Condensed Consolidated Statements of Income
(in thousands, except per share data) (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
- ----------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
Interest Income:
Consumer loans, including fees $325,067 $229,638
Federal funds sold and resale agreements 1,487 5,078
Other 26,517 23,326
- ------------------------------------------------------------ -------- --------
Total interest income 353,071 258,042
Interest Expense:
Deposits 23,942 14,138
Other borrowings 23,837 16,053
Senior and deposit notes 72,495 63,029
- ------------------------------------------------------------ -------- --------
Total interest expense 120,274 93,220
- ------------------------------------------------------------ -------- --------
Net interest income 232,797 164,822
Provision for loan losses 74,586 85,866
- ------------------------------------------------------------ -------- --------
Net interest income after provision for loan losses 158,211 78,956
Non-Interest Income:
Servicing and securitizations 271,954 168,655
Service charges and other fees 222,453 132,445
Interchange 30,219 14,799
- ------------------------------------------------------------ -------- --------
Total non-interest income 524,626 315,899
Non-Interest Expense:
Salaries and associate benefits 179,194 107,953
Marketing 176,088 75,000
Communications and data processing 58,072 29,363
Supplies and equipment 36,704 22,615
Occupancy 13,914 10,644
Other 85,996 43,308
- ------------------------------------------------------------ -------- --------
Total non-interest expense 549,968 288,883
- ------------------------------------------------------------ -------- --------
Income before income taxes 132,869 105,972
Income taxes 50,490 40,269
- ------------------------------------------------------------ -------- --------
Net income $ 82,379 $ 65,703
- ------------------------------------------------------------ -------- --------
Basic earnings per share $ 1.25 $ 1.00
- ------------------------------------------------------------ -------- --------
Diluted earnings per share $ 1.18 $ 0.96
- ------------------------------------------------------------ -------- --------
Dividends paid per share $ 0.08 $ 0.08
- ------------------------------------------------------------ -------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
CAPITAL ONE FINANCIAL CORPORATION
Condensed Consolidated Statements of Changes in Stockholders' Equity
(in thousands, except per share data) (unaudited)
<TABLE>
<CAPTION>
Cumulative
Other Total
Common Stock Paid-in Retained Comprehensive Treasury Stockholders'
Shares Amount Capital, Net Earnings Income Stock Equity
- ------------------------------------------- ----------- --------- ------------ ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 66,557,230 $ 666 $ 513,561 $ 425,140 $ 2,539 $ (48,647) $ 893,259
Comprehensive income:
Net income 65,703 65,703
Other comprehensive income, net of income tax:
Unrealized gains on securities net of income
taxes of $134 (218) (218)
Foreign currency translation adjustments 4 4
--------------- ------------
Other comprehensive income (214) (214)
------------
Comprehensive income 65,489
Cash dividends - $.08 per share (5,093) (5,093)
Purchases of treasury stock (2,364) (2,364)
Issuances of common stock 572 960 1,532
Exercise of stock options 1,500 (3,531) 5,646 2,115
Common stock issuable under incentive plan 32,395 32,395
Other items, net 182 182
- ----------------------------------------- ----------- --------- ----------- ----------- --------------- ----------- ------------
Balance, March 31, 1998 66,558,730 $666 $ 543,179 $485,750 $ 2,325 $ (44,405) $ 987,515
- ----------------------------------------- ----------- --------- ----------- ----------- --------------- ----------- ------------
Balance, December 31, 1998 66,556,792 $666 $ 599,498 $679,838 $ 60,655 $ (70,251) $ 1,270,406
Comprehensive income:
Net income 82,379 82,379
Other comprehensive income, net of income tax:
Unrealized losses on securities, net of income
tax benefit of $18,927 (38,177) (38,177)
Foreign currency translation adjustments 76 76
--------------- ------------
Other comprehensive income (38,101) (38,101)
------------
Comprehensive income 44,278
Cash dividends - $.08 per share (5,166) (5,166)
Purchases of treasury stock (24,266) (24,266)
Issuances of common stock 621 20 2,398 3,039
Exercise of stock options (16,436) 24,111 7,675
Common stock issuable under incentive plan 21,307 21,307
Other items, net 1,939 1,939
- ----------------------------------------- ----------- ------- ----------- ----------- --------------- ---------- ------------
Balance, March 31, 1999 66,556,792 $ 666 $606,929 $ 757,071 $ 22,554 $ (68,008) $ 1,319,212
- ----------------------------------------- ----------- ------- ----------- ----------- --------------- ---------- ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
CAPITAL ONE FINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(in thousands) (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
- --------------------------------------------------------------------------- ------------------ ------------------
1999 1998
- --------------------------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Operating Activities:
Net income $ 82,379 $ 65,703
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 74,586 85,866
Depreciation and amortization, net 35,874 16,278
Stock compensation plans 21,307 32,413
(Increase) decrease in interest receivable (13,267) 7,670
Decrease (increase) in accounts receivable from securitizations 152,514 (107,818)
Increase in other assets (70,234) (16,976)
Decrease in interest payable (4,136) (904)
Increase in other liabilities 85,491 146,112
- --------------------------------------------------------------------------- ------------------ ------------------
Net cash provided by operating activities 364,514 228,344
- --------------------------------------------------------------------------- ------------------ ------------------
Investing Activities:
Purchases of securities available for sale (349,918) (670,782)
Proceeds from sales of securities available for sale 337,059 102,271
Proceeds from maturities of securities available for sale 25,014 303,344
Net (increase) decrease in consumer loans (1,173,929) 46,659
Recoveries of loans previously charged off 25,145 10,976
Additions of premises and equipment, net (65,614) (18,761)
- --------------------------------------------------------------------------- ------------------ ------------------
Net cash used for investing activities (1,202,243) (226,293)
- --------------------------------------------------------------------------- ------------------ ------------------
Financing Activities:
Net increase (decrease) in interest-bearing deposits 204,183 (152,804)
Net decrease in other borrowings (472,839) (72,498)
Issuances of senior notes 895,500 505,064
Maturities of senior notes (25,000) (373,666)
Dividends paid (5,166) (5,093)
Purchases of treasury stock (24,266) (2,364)
Net proceeds from issuances of common stock 4,792 1,532
Proceeds from exercise of stock options 7,675 2,115
- --------------------------------------------------------------------------- ------------------ ------------------
Net cash provided by (used for) financing activities 584,879 (97,714)
- --------------------------------------------------------------------------- ------------------ ------------------
Decrease in cash and cash equivalents (252,850) (95,663)
Cash and cash equivalents at beginning of period 300,167 237,723
- --------------------------------------------------------------------------- ------------------ ------------------
Cash and cash equivalents at end of period $ 47,317 $ 142,060
- --------------------------------------------------------------------------- ------------------ ------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
CAPITAL ONE FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(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 offers consumer lending products (including credit
cards) and deposit products. The Corporation and its subsidiaries are
collectively referred to as the "Company."
The accompanying unaudited condensed consolidated financial statements
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 these estimates. Operating results for the three months ended
March 31, 1999 are not necessarily indicative of the results for the year ending
December 31, 1999. The notes to the consolidated financial statements contained
in the Annual Report on Form 10-K for the year ended December 31, 1998 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 1999 presentation.
Note B: Significant Accounting Policies
Cash and Cash Equivalents
Cash paid for interest for the three months ended March 31, 1999 and 1998
was $124,410 and $94,124, respectively. Cash paid for income taxes for the three
months ended March 31, 1999 was $11,008.
Segments
The Company maintains three distinct business segments: lending,
telecommunications and "other." The lending segment is comprised primarily of
credit card lending activities. The telecommunications segment consists
primarily of direct marketing cellular service. "Other" consists of various,
non-lending new business initiatives.
Management measures the performance of its business segments on a
managed basis and makes resource allocation decisions based upon several
factors, including managed revenue generated by the segment, net of direct costs
before marketing expenses. Lending is the Company's only reportable business
segment. Substantially all of the Company's reported assets, revenues and income
are derived from the lending segment.
Note C: Borrowings
In April 1999, the Corporation issued $225,000 of seven-year fixed rate
senior notes under an existing shelf registration. Existing unsecured senior
debt outstanding of the Corporation under previous shelf registrations of
$200,000 and $425,000 totaled $325,000 as of March 31, 1999.
<PAGE>
Note D: Recent Accounting Pronouncements
In January 1999, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), issued by the American Institute of Certified Public
Accountants in March 1998. In accordance with SOP 98-1, the Company capitalizes
certain internal use software costs which would have previously been expensed.
The effect on net income was not material for the three months ended March 31,
1999.
Note E: Earnings Per Share
Earnings per share are calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128. "Earnings per Share" ("SFAS
128"). Pursuant to SFAS 128, basic earnings per share is based only on the
weighted average number of common shares outstanding, excluding any dilutive
effects of options and restricted stock. Diluted earnings per share is based on
the weighted average number of common and common equivalent shares, dilutive
stock options or other dilutive securities outstanding during the year.
The following table sets forth the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
Three Months Ended
March 31
- ---------------------------------------------------------------- --------------------
(shares in thousands) 1999 1998
- ---------------------------------------------------------------- ------- -------
<S> <C> <C>
Numerator:
Net income $ 82,379 65,703
- ---------------------------------------------------------------- ------- -------
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 65,746 65,428
Effect of dilutive securities:
Stock options 4,251 2,985
Restricted stock 2
- ---------------------------------------------------------------- ------- -------
Dilutive potential common shares 4,251 2,987
Denominator for diluted earnings per share -
Adjusted weighted-average shares 69,997 68,415
- ---------------------------------------------------------------- ------- -------
Basic earnings per share $ 1.25 $ 1.00
- ---------------------------------------------------------------- ------- -------
Diluted earnings per share $ 1.18 $ 0.96
- ---------------------------------------------------------------- ------- -------
</TABLE>
Note F: Commitments and Contingencies
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 (which was acquired by First Union Bank on
November 30, 1997) for certain liabilities incurred in litigation arising from
that business, which may include liabilities, if any, incurred in the purported
class action case described below.
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 Bank violated a variety of California 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. This
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.
<PAGE>
In early 1997, the California court entered judgement in favor of the
Bank on all of the plaintiffs' claims. The plaintiffs appealed the ruling to the
California Court of Appeals First Appellate District Division 4. In early 1999,
the Court of Appeals affirmed the trial court's ruling in favor of the Bank on
six counts, but reversed the trial court's ruling on two counts of the
plaintiffs' complaint. The Bank has petitioned for further appellate review of
the ruling on the two remaining counts.
Because no specific measure of damages is demanded in the complaint of
the California case and the trial court entered judgement in favor of the Bank
before the parties completed any significant discovery, 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: Subsequent Events
On April 29, 1999, the Company's Board of Directors approved a
three-for-one stock split of the common stock of the Corporation. The stock
split will be performed through a 200 percent stock distribution on June 1,
1999, to stockholders of record on May 20, 1999. The following reflects the pro
forma share and per share data reported if the stock split occurred as of March
31, 1999:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31
- --------------------------------------------------------------------------------
(shares in thousands) 1999 1998
- ------------------------------------------------------- -------- --------
<S> <C> <C>
Shares outstanding at period end:
Common shares 199,670 199,676
Treasury shares (2,404) (3,277)
Weighted-average shares for the period:
Common shares 197,239 196,284
Dilutive potential common shares 12,752 8,961
Basic earnings per share $ 0.42 $ 0.33
Diluted earnings per share $ 0.39 $ 0.32
</TABLE>
On April 29, 1999, the Board also approved a stock options grant
available to 143 members of senior management. This grant was composed of
2,369,397 options to certain key managers (including 628,145 options to the
Company's Chief Executive Officer ("CEO") and Chief Operating Officer ("COO"))
at the then market price of $169.375 per share (before the effect of the
announced stock split). The CEO and COO gave up their salary for the year of
2001, and their annual cash incentive, annual option grants and Senior Executive
Retirement Plan contributions through the year of 2001 in exchange for these
options. Other members of senior management are also able to participate in the
program by electing to give up all annual stock option grants for the next two
years in exchange for this one-time grant. All options under this grant will
vest if the stock price is at or above $300 per share for at least ten trading
days in any thirty calendar-day period on or before June 15, 2002, or in nine
years or upon a change of control of the Company.
<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 using its Information-Based Strategy ("IBS"). The principal
subsidiaries are Capital One Bank (the "Bank"), which offers credit card
products, and Capital One, F.S.B. (the "Savings Bank"), which offers consumer
lending products (including credit cards) and deposit products. The Corporation
and its subsidiaries are collectively referred to as the "Company." As of March
31, 1999, the Company had 18.0 million customers and $17.4 billion in managed
consumer loans outstanding and was one of the largest providers of MasterCard
and Visa credit cards in the world. The Company's profitability is affected by
the net interest income and non-interest income earned on earning assets,
consumer usage patterns, credit quality, the level of marketing expense and
operating efficiency.
Earnings Summary
Net income for the three months ended March 31, 1999 of $82.4 million,
or $1.18 per share, compares to net income of $65.7 million, or $.96 per share,
for the same period in 1998.
The increase in net income is primarily a result of an increase in
asset and account volumes and rates, as well as improved credit quality. Net
interest income increased $68.0 million, or 41%, as the net interest margin
increased to 10.49% from 9.83% and average earning assets increased by 32%. The
provision for loan losses decreased $11.3 million, or 13%, as the reported
charge-off rate decreased 146 basis points to 3.23% from 4.69%, although average
reported loans increased by 43%. Non-interest income increased $208.7 million,
or 66%, primarily as a result of the increase in the average number of accounts
of 42%, an increase in average managed loans of 24% and increases in the amounts
of certain fees charged. Marketing expense increased $101.1 million, or 135%, to
$176.1 million as the Company continued to invest in new product opportunities.
Salaries and associate benefits expense increased $71.2 million, or 66%. The
$88.8 million, or 84%, increase in all other non-interest expenses as well as
the increase in salaries and associate benefits expense primarily reflected
increased staff and the cost of operations and the building of infrastructure to
manage the growth in accounts and new product opportunities. 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 adds back the effect of
off-balance sheet 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 reported
and off-balance sheet loans. Off-balance sheet loans are those which have been
securitized and accounted for as sales in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"), and are
not assets of the Company. Therefore, those loans are not shown on the balance
sheet.
<PAGE>
Table 1 summarizes the Company's managed consumer loan portfolio.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
TABLE 1 - MANAGED CONSUMER LOAN PORTFOLIO
- ------------------------------------------------------------------------------
Three Months Ended
March 31
- -------------------------------------------------- ----------- -----------
(in thousands) 1999 1998
- -------------------------------------------------- ----------- -----------
<S> <C> <C>
Period-End Balances:
Reported consumer loans $ 7,245,847 $ 4,748,186
Off-balance sheet consumer loans 10,198,391 9,254,063
- -------------------------------------------------- ----------- -----------
Total managed consumer loan portfolio $17,444,238 $14,002,249
- -------------------------------------------------- ----------- -----------
Average Balances:
Reported consumer loans $ 6,831,724 $ 4,786,489
Off-balance sheet consumer loans 10,603,806 9,310,986
- -------------------------------------------------- ----------- -----------
Total average managed consumer loan portfolio $17,435,530 $14,097,475
- -------------------------------------------------- ----------- -----------
</TABLE>
Since 1990, the Company has actively engaged in consumer loan
securitization transactions. Securitization involves the transfer by the Company
of a pool of loan receivables to an entity created for securitizations,
generally a trust or other special purpose entity ("the trusts"). The credit
quality of the receivables is supported by credit enhancements, which may be in
various forms including a letter of credit, a cash collateral guaranty or
account, or a subordinated interest in the receivables in the pool. Certificates
representing undivided ownership interests in the receivables are sold to the
public through an underwritten offering or to private investors in private
placement transactions. The Company receives the proceeds of the sale. The
Company retains an interest in the trusts ("seller's interest") equal to the
amount of the receivables transferred to the trust in excess of the principal
balance of the certificates. The Company's interest in the trusts varies as the
amount of the excess receivables in the trusts fluctuates as the accountholders
make principal payments and incur new charges on the selected accounts. The
securitization generally results in the removal of the receivables, other than
the seller's interest, from the Company's balance sheet for financial and
regulatory accounting purposes.
The Company's relationship with its customers is not affected by the
securitization. The Company acts as a servicing agent and receives a fee for
doing so.
Collections received from securitized receivables are used to pay
interest to certificateholders, servicing and other fees, and are available to
absorb the investors' share of credit losses. Amounts collected in excess of
that needed to pay the above amounts are remitted to the Company, as described
in Servicing and Securitizations Income.
Certificateholders in the Company's securitization program are
generally entitled to receive principal payments either through monthly payments
during an amortization period or in one lump sum after an accumulation period.
Amortization may begin sooner in certain circumstances, including if the
annualized portfolio yield (consisting, generally, of interest and fees) for a
three-month period drops below the sum of the certificate rate payable to
investors, loan servicing fees and net credit losses during the period.
<PAGE>
Prior to the commencement of the amortization or accumulation period,
all principal payments received on the trusts' receivables are reinvested in new
receivables to maintain the principal balance of certificates. During the
amortization period, the investors' share of principal payments is paid to the
certificateholders until they are paid in full. During the accumulation period,
the investors' share of principal payments is paid into a principal funding
account designed to accumulate amounts so that the certificates can be paid in
full on the expected final payment date.
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>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE 2 - OPERATING DATA AND RATIOS
- --------------------------------------------------------------------------------
Three Months Ended
March 31
- --------------------------------------------------------------------------------
(dollars in thousands) 1999 1998
- --------------------------------------------- -------------- --------------
<S> <C> <C>
Reported:
Average earning assets $ 8,878,408 $ 6,708,901
Net interest margin(1) 10.49% 9.83%
Loan yield 19.03 19.19
- --------------------------------------------- -------------- --------------
Managed:
Average earning assets $ 19,482,214 $ 16,019,887
Net interest margin(1) 10.59% 10.40%
Loan yield 17.11 17.45
- --------------------------------------------- -------------- --------------
</TABLE>
(1) Net interest margin is equal to net interest income divided by average
earning assets.
Risk Adjusted Revenue and Margin
The Company's products are designed with the objective of maximizing
revenue for the level of risk undertaken. Management believes that comparable
measures for external analysis are the risk adjusted revenue and risk adjusted
margin of the managed portfolio. Risk adjusted revenue is defined as net
interest income and non-interest income less net charge-offs. Risk adjusted
margin measures risk adjusted revenue as a percentage of average earning assets.
It considers not only the loan 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.
The Company markets its card products to specific consumer segments.
The terms of each card product are actively managed in an effort to maximize
return at the consumer level, reflecting the risk and expected performance of
the account. For example, card product terms typically include the ability to
reprice individual accounts upwards or downwards based on the consumer's
performance. In addition, since 1998, the Company has aggressively marketed low
non-introductory rate cards to consumers with the best established credit
profiles to take advantage of the favorable risk return characteristics of this
consumer segment. Industry competitors have continuously solicited the Company's
customers with similar interest rate strategies. Management believes the
competition has put, and will continue to put, additional pressure on the
Company's pricing strategies.
<PAGE>
By applying its IBS and in response to dynamic competitive pressures,
the Company also targets a significant amount of its marketing expense to other
credit card product opportunities. Examples of such products include secured
cards and other customized card products including affinity and co-branded
cards, student cards and other cards targeted to certain markets that are
underserved by the Company's competitors. These products do not have the
immediate impact on managed loan balances of the balance transfer products but
typically consist of lower credit limit accounts and balances that build over
time. The terms of these customized card products tend to include annual
membership fees and higher annual finance charge rates. The profile of the
consumers targeted for these products, in some cases, may also tend to result in
higher account delinquency rates and consequently higher past-due and overlimit
fees as a percentage of loan receivables outstanding than the balance transfer
products.
Table 3 provides income statement data and ratios for the Company's
managed consumer loan portfolio. The causes of increases and decreases in the
various components of risk adjusted revenue are discussed in further detail in
subsequent sections of this analysis.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE 3 - MANAGED RISK ADJUSTED REVENUE
- --------------------------------------------------------------------------------
Three Months Ended
March 31
- --------------------------------------------------- ----------- -----------
(dollars in thousands) 1999 1998
- --------------------------------------------------- ----------- -----------
<S> <C> <C>
Mamaged Income Statement:
Net interest income $ 515,653 $ 416,711
Non-interest income 357,647 220,683
Net charge-offs (171,129) (212,735)
- --------------------------------------------------- ----------- -----------
Risk adjusted revenue $ 702,171 $ 424,659
- --------------------------------------------------- ----------- -----------
Ratios(1):
Net interest margin 10.59% 10.40%
Non-interest income 7.34 5.51
Net charge-offs (3.51) (5.31)
- --------------------------------------------------- ----------- -----------
Risk adjusted margin 14.42% 10.60%
- --------------------------------------------------- ----------- -----------
</TABLE>
(1) 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.
Reported net interest income for the three months ended March 31, 1999
was $232.8 million, compared to $164.8 million for the same period in the prior
year, representing an increase of $68.0 million, or 41%. Net interest income
increased as a result of a 32% increase in average earning assets for the three
months ended March 31, 1999, versus the same period in 1998. The yield on
earning assets increased 52 basis points for the three months ended March 31,
1999, to 15.91% from 15.39%, as compared to the same period in the prior year.
The increase was primarily attributable to the higher proportion of average
consumer loans as a percentage of average earning assets offset by a 16 basis
point decrease in the yield on consumer loans for the three months ended March
31, 1999, to 19.03% from 19.19%, as compared to the same period in the prior
year.
Managed net interest income increased $98.9 million, or 24%, for the
three months ended March 31, 1999, compared to the same period in the prior year
as managed average earning assets increased 22% and the managed net interest
margin increased 19 basis points to 10.59%. The increase in managed net interest
margin principally reflects a decline in funding costs due to lower interest
rates as compared to the same period in the prior year.
<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 months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
TABLE 4 - STATEMENTS OF AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31
- ----------------------------------------- --------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------- --------------------------------------------------------------------------------------
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) $ 6,831,724 $ 325,067 19.03% $ 4,786,489 $ 229,638 19.19%
Federal funds sold and
resale agreements 126,493 1,487 4.70 362,680 5,078 5.60
Other 1,920,191 26,517 5.52 1,559,732 23,326 5.98
- ----------------------------------------- ----------- ----------- ----------- ----------- ------------ -----------
Total earning assets 8,878,408 $ 353,071 15.91% 6,708,901 $ 258,042 15.39%
Cash and due from banks 11,055 18,622
Allowance for loan losses (239,333) (197,333)
Premises and equipment, net 273,416 165,532
Other 1,227,854 840,727
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Total assets $10,151,400 $ 7,536,449
- ----------------------------------------- ------------ ----------- ----------- ------------ ----------- -----------
Liabilities and
Stockholders' Equity:
Interest-bearing liabilities
Deposits $ 2,101,086 $ 23,942 4.56% $ 1,266,064 $ 14,138 4.47%
Other borrowings 1,680,026 23,837 5.68 1,077,082 16,053 5.96
Senior and deposit notes 4,189,839 72,495 6.92 3,683,113 63,029 6.85
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 7,970,951 $ 120,274 6.04% 6,026,259 $ 93,220 6.19%
Other 780,966 462,355
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities 8,751,917 6,488,614
Capital securities 97,954 97,696
Stockholders' equity 1,301,529 950,139
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
Stockholders' equity $10,151,400 $ 7,536,449
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------
Net interest spread 9.87% 9.20%
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Interest income to
average earning assets 15.91% 15.39%
Interest expense to
average earning assets 5.42 5.56
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest margin 10.49% 9.83%
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
(1) Interest income includes past-due fees on loans of approximately $107,148
and $75,951 for the three months ended March 31, 1999 and 1998,
respectively.
<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>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
TABLE 5 - INTEREST VARIANCE ANALYSIS
- ---------------------------------------------------------------------------------------------------
Three Months Ended
March 31, 1999 VS. 1998
- --------------------------------------------------- -----------------------------------------------
Increase Change Due To(1)
(in thousands) (Decrease) Volume Yield/Rate
- --------------------------------------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Interest Income:
Consumer loans $ 95,429 $108,442 $(13,013)
Federal funds sold and resale agreements (3,591) (2,881) (710)
Other 3,191 13,132 (9,941)
- --------------------------------------------------- --------------- --------------- ---------------
Total interest income 95,029 86,007 9,022
Interest Expense:
Deposits 9,804 9,509 295
Other borrowings 7,784 12,849 (5,065)
Senior and deposit notes 9,466 8,761 705
- --------------------------------------------------- --------------- --------------- ---------------
Total interest expense 27,054 42,161 (15,107)
- --------------------------------------------------- --------------- --------------- ---------------
Net interest income(1) $67,975 $ 56,268 $ 11,707
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) The change in interest due to both volume and yield/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 table. The totals for the volume and
yield/rate columns are not the sum of the individual lines.
Servicing and Securitizations Income
In accordance with SFAS 125, the Company records gains or losses on the
securitizations of consumer loan receivables on the date of sale based on the
estimated fair value of assets sold and retained 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
and are included in servicing and securitizations income. This excess cash flow
essentially represents 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
certificateholders, estimated contractual servicing fees and credit losses.
However, exposure to credit losses on the securitized loans is contractually
limited to these cash flows.
Servicing and securitizations income increased $103.3 million, or 61%,
to $272.0 million for the three months ended March 31, 1999, from $168.7 million
in the same period in the prior year. This increase was primarily due to an
increase of 14% in average off-balance sheet consumer loans and decreased
charge-offs on such loans as a result of improving consumer credit.
Certain estimates inherent in the determination of the fair value 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. Any future
gains that will be 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.
<PAGE>
Other Non-Interest Income
Interchange income increased to $30.2 million, or 104%, for the three
months ended March 31, 1999, compared to $14.8 million for the same period in
the prior year. This increase is primarily attributable to increased utilization
from existing customers as well as new account growth. Service charges and other
fees increased to $222.5 million, or 68%, for the three months ended March 31,
1999, compared to $132.4 million for the same period in the prior year. This
increase was primarily due to the increase in average accounts of 42% for the
three months ended March 31, 1999, compared to the same period in the prior
year, a shift to more fee-intensive products and changes in the terms of
overlimit fees charged.
Non-Interest Expense
Non-interest expense for the three months ended March 31, 1999 was
$550.0 million, an increase of $261.1 million, or 90%, over $288.9 million for
the same period in the prior year. Contributing to the increase in non-interest
expense was marketing expense which increased $101.1 million, or 135%, to $176.1
million for the three months ended March 31, 1999, from $75.0 million for the
same period in the prior year as the Company continued to invest in new product
opportunities. Salaries and associate benefits expense increased $71.2 million,
or 66%, for the three months ended March 31, 1999, from $108.0 million for the
same period in the prior year. All other non-interest expenses increased $88.8
million, or 84%, to $194.7 million for the three months ended March 31, 1999,
from $105.9 million for the same period in the prior year. The increase in
salaries and associate benefits expense and all other non-interest expenses was
primarily a result of the 42% increase in the average number of accounts for the
three months ended March 31, 1999, as well as the Company's continued expansion
into new product and geographic markets, which resulted in an increase in staff
and other operational costs associated with the Company's growth pattern.
Income Taxes
The Company's income tax rate was 38% for the three months ended March
31, 1999 and 1998 and includes both state and federal income tax components.
Asset Quality
The asset quality of a portfolio is generally a function of the initial
underwriting criteria used, seasoning of the accounts, levels of competition,
account management activities and demographic concentration, as well as general
economic conditions. The seasoning 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.
<PAGE>
Delinquencies
Table 6 shows the Company's consumer loan delinquency trends for the
periods presented on a reported and managed basis. The entire balance of an
account is contractually delinquent if the minimum payment is not received by
the payment due date. Delinquencies not only have the potential to impact
earnings if the account charges off, they also are costly in terms of the
personnel and other resources dedicated to resolving the delinquencies.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
TABLE 6 - DELINQUENCIES
- ---------------------------------------------------------------------------------------------------------
March 31
- ------------------------------------------- -------------------------------------------------------------
1999 1998
- ------------------------------------------- ----------------------------------- -------------------------
% of % of
(dollars in thousands) Loans Total Loans Loans Total Loans
- ------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Reported:
Loans outstanding $ 7,245,847 100.00% $ 4,748,186 100.00%
Loans delinquent:
30-59 days 152,503 2.10 92,673 1.95
60-89 days 80,479 1.11 59,435 1.25
90 or more days 119,363 1.65 100,971 2.13
- ------------------------------------------- ----------- ----------- ----------- -----------
Total $ 352,345 4.86% $ 253,079 5.33%
- ------------------------------------------- ----------- ----------- ----------- -----------
Managed:
Loans outstanding $17,444,238 100.00% $14,002,249 100.00%
Loans delinquent:
30-59 days 325,762 1.87 283,346 2.02
60-89 days 176,479 1.01 179,974 1.29
90 or more days 292,564 1.68 342,261 2.44
- ------------------------------------------- ----------- ----------- ----------- -----------
Total $ 794,805 4.56% $ 805,581 5.75%
- ------------------------------------------- ----------- ----------- ----------- -----------
</TABLE>
The 30-plus day delinquency rate for the reported consumer loan
portfolio was 4.86% as of March 31, 1999, down 47 basis points from 5.33% as of
March 31, 1998, and up 16 basis points from 4.70% as of December 31, 1998. The
30-plus day delinquency rate for the managed consumer loan portfolio was 4.56%
as of March 31, 1999, down 119 basis points from 5.75% as of March 31, 1998 and
down 14 basis points from 4.70% as of December 31, 1998. Both the reported and
managed consumer loan delinquency rate decreases as of March 31, 1999,
principally reflected improvements in consumer credit performance and less
seasoned accounts.
<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 shows the Company's net charge-offs for the periods
presented on a reported and managed basis.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
TABLE 7 - NET CHARGE-OFFS
- ----------------------------------------------------------------------------------------------------
Three Months Ended
March 31
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998
- ----------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Reported:
Average loans outstanding $ 6,831,724 $ 4,786,489
Net charge-offs 55,250 56,062
Net charge-offs as a percentage of average loans outstanding 3.23% 4.69%
- ----------------------------------------------------------------------- ----------- -----------
Managed:
Average loans outstanding $17,435,530 $14,097,475
Net charge-offs 171,129 212,735
Net charge-offs as a percentage of average loans outstanding 3.93% 6.04%
- ----------------------------------------------------------------------- ----------- -----------
</TABLE>
Net charge-offs of managed loans decreased $41.6 million, or 20%, while
average managed consumer loans grew 24% for the three months ended March 31,
1999, from the same period in the prior year. For the three months ended March
31, 1999, the Company's net charge-offs as a percentage of managed loans were
3.93%, compared to 6.04% for the same period in the prior year. The decrease in
reported and managed net charge-off rates were the result of improved general
economic trends, a shift in portfolio mix to higher quality credit and improved
recovery efforts.
Provision and Allowance for Loan Losses
The allowance for loan losses is maintained at the amount estimated to
be sufficient to absorb probable future losses, net of recoveries (including
recovery of collateral), inherent in the existing reported loan portfolio. The
provision for loan losses is the periodic cost of maintaining an adequate
allowance. Management believes that the allowance for loan losses is adequate to
cover anticipated losses in the reported homogeneous 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 reported
homogeneous consumer loan portfolio. The amount of allowance necessary is
determined primarily based on a migration analysis of delinquent and current
accounts. In evaluating the sufficiency of the allowance for loan losses,
management also takes into consideration the following factors: recent trends in
delinquencies and charge-offs including bankrupt, deceased and recovered
amounts; historical trends in loan volume; forecasting uncertainties and size of
credit risks; the degree of risk inherent in the composition of the loan
portfolio; economic conditions; credit evaluations and underwriting policies.
<PAGE>
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>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
TABLE 8 - SUMMARY OF ALLOWANCE FOR LOAN LOSSES
- -----------------------------------------------------------------------------------------------------
Three Months Ended
March 31
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998
- -------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Balance at beginning of period $ 231,000 $ 183,000
Provision for loan losses 74,586 85,866
Other 664 196
Charge-offs (80,395) (67,038)
Recoveries 25,145 10,976
- -------------------------------------------------------------------------- ---------- ----------
Net charge-offs (55,250) (56,062)
- -------------------------------------------------------------------------- ---------- ----------
Balance at end of period $ 251,000 $ 213,000
- -------------------------------------------------------------------------- ---------- ----------
Allowance for loan losses to loans at period-end 3.46% 4.49%
- -------------------------------------------------------------------------- ---------- ----------
</TABLE>
For the three months ended March 31, 1999, the provision for loan
losses decreased to $74.6 million, or 13%, as the reported charge-off rate
decreased to 3.23% from 4.69% for the comparable period in the prior year,
offset by an increase in average reported loans of 43%. The allowance for loan
losses as a percentage of reported consumer loans decreased to 3.46% as of March
31, 1999, from 4.49% as of March 31, 1998 as reported loans increased to $7.2
billion as of March 31, 1999, an increase of 53% from March 31, 1998. For the
three months ended March 31, 1999, the Company increased the allowance for loan
losses by $20 million primarily due to the growth in reported loans.
Funding
The Company has established access to a wide range of domestic funding
alternatives, in addition to securitization of its consumer loans. The Company
primarily issues senior unsecured debt of the Bank through its $8.0 billion bank
note program, of which $4.3 billion was outstanding as of March 31, 1999, with
original terms of one to ten years.
Internationally, the Company has funding programs designed for foreign
investors or to raise funds in foreign currencies. The Company has accessed the
international securitization market for a number of years with both US$ and
foreign denominated transactions. Both of the Company's committed revolving
credit facilities offer foreign currency funding options. The Bank has
established a $1.0 billion Euro Debt Issuance program that is targeted to
non-U.S. investors. The Company funds its foreign assets by directly or
synthetically borrowing or securitizing in the local currency to mitigate the
financial statement effect of currency translation.
The Company has significantly expanded its retail deposit gathering
efforts through both direct and broker marketing channels. The Company uses its
IBS capabilities to test and market a variety of retail deposit origination
strategies, as well as to develop customized account management programs. As of
March 31, 1999, the Company had $2.2 billion in interest-bearing deposits, with
original maturities up to five years.
<PAGE>
Table 9 shows the maturation of certificates of deposit in
denominations of $100,000 or greater ("large denomination CDs") as of March 31,
1999.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE 9 - MATURITIES OF LARGE DENOMINATION CERTIFICATES-$100,000 OR MORE
- --------------------------------------------------------------------------------
March 31, 1999
- ---------------------------------------------------------- ---------------------
(dollars in thousands) Balance Percent
- ---------------------------------------------------------- ---------------------
<S> <C> <C>
Three months or less $ 100,072 18.04%
Over 3 through 6 months 21,054 3.79
Over 6 through 12 months 115,141 20.76
Over 12 months through 5 years 318,490 57.41
- ---------------------------------------------------------- ---------------------
Total $ 554,757 100.00%
- ---------------------------------------------------------- ---------------------
</TABLE>
The Company's other borrowings portfolio consists of $1.2 billion in
borrowings maturing within one year and $15.3 million in borrowings maturing
after one year.
Table 10 shows the Company's unsecured funding availability and
outstandings as of March 31, 1999.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
TABLE 10 - FUNDING AVAILABILITY
- --------------------------------------------------------------------------------------------------------------------
March 31, 1999
- -------------------------------------------------- ------------ ----------------- ---------------- -----------------
Effective/ Final
(dollars or dollar equivalents in millions) Issue Date Availability(1) Outstanding Maturity(4)
- -------------------------------------------------- ------------ ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Domestic revolving credit facility 11/96 $1,700 11/00
UK/Canada revolving credit facility 8/97 350 $ 183 8/00
Senior bank note program(2) 4/97 8,000 4,281 -
Non-U.S. bank note program 10/97 1,000 5 -
Corporation Shelf Registration 7/98 625 324 -
Deposit note program 4/97 2,000 -
Capital securities(3) 1/97 100 98 2/27
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All funding sources are revolving except for the Corporation Shelf
Registration and the floating rate junior subordinated capital income
securities. Funding availability under the credit facilities is subject to
compliance with certain representations, warranties and covenants. Funding
availability under all other sources is subject to market conditions.
(2) Includes availability to issue up to $200 million of subordinated bank
notes, none outstanding as of March 31, 1999.
(3) Qualifies as Tier 1 capital at the Corporation and Tier 2 capital at the
Bank.
(4) Maturity date refers to the date the facility terminates, where applicable.
The domestic revolving 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. The borrowings of the Savings Bank are limited to $750 million.
The commitment terminates on November 24, 2000; however, it may be extended for
an additional one-year period.
The UK/Canada revolving credit facility is used to finance the
Company's expansion in the United Kingdom and Canada. The facility is comprised
of two tranches: a Tranche A facility in the amount of (pound)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 (pound)34.6 million or C$76.9
million ($55.2 million equivalent based on the exchange rates at closing) may be
transferred between the Tranche A facility and the Tranche B facility,
respectively, upon the request of the Company. The Corporation serves as the
guarantor of all borrowings under the UK/Canada revolving facility. The
commitment terminates on August 29, 2000; however, it may be extended for two
additional one-year periods.
<PAGE>
The Corporation has two shelf registration statements 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 amount of
securities registered is limited to a $625 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 or composite currencies
as shall be designated by the Corporation. The Corporation issued $225 million
of seven-year fixed rate senior notes in April 1999, $200 million of ten-year
fixed rate senior notes in July 1998 and $125 million of seven-year fixed rate
senior notes in December 1996. The remaining amount of securities available for
issuance under the Corporation's shelf registrations is $75 million.
Liquidity
Liquidity refers to the Company's ability to meet its cash needs. The
Company meets its cash requirements by securitizing assets, gathering deposits
and through issuing debt. 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 1999 to
2008 and typically have accumulation periods during which principal payments are
aggregated to make payments to investors. As payments on the loans are
accumulated 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 believes 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. Additionally,
the Company maintains a portfolio of high-quality securities such as U.S.
Treasuries and other U.S. government obligations, 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 March 31, 1999, the Company held $1.8 billion in such securities.
Capital Adequacy
The Bank and the Savings Bank are subject to capital adequacy
guidelines adopted by the Federal Reserve Board (the "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 maintain
specific capital levels based upon quantitative measures of their assets,
liabilities and off-balance sheet items.
The most recent notifications received from the regulators categorized
the Bank and the Savings Bank as "well-capitalized." To be categorized as
"well-capitalized," the Bank and the Savings Bank must maintain minimum capital
ratios as set forth in Table 11. As of March 31, 1999, there were no conditions
or events since the notifications discussed above that management believes would
have changed either the Bank or the Savings Bank's capital category.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
TABLE 11 - REGULATORY CAPITAL RATIOS
- ---------------------------------------------------------------------------------------------------------
To Be "Well-Capitalized" Under
Minimum for Capital Prompt Corrective Action
Ratios Adequacy Purposes Provisions
- --------------------------------- ------------ ----------------------- ----------------------------------
<S> <C> <C> <C>
March 31, 1999
Capital One Bank
Tier 1 Capital 10.30% 4.00% 6.00%
Total Capital 13.03 8.00 10.00
Tier 1 Leverage 10.18 4.00 5.00
Capital One, F.S.B.(1)
Tangible Capital 9.75% 1.50% 6.00%
Total Capital 12.00 12.00 10.00
Core Capital 9.75 8.00 5.00
- --------------------------------- ------------ ----------------------- ----------------------------------
March 31, 1998
Capital One Bank
Tier 1 Capital 14.08% 4.00% 6.00%
Total Capital 16.94 8.00 10.00
Tier 1 Leverage 11.34 4.00 5.00
Capital One, F.S.B.(1)
Tangible Capital 9.34% 1.50% 6.00%
Total Capital 15.99 12.00 10.00
Core Capital 9.34 8.00 5.00
- --------------------------------- ------------ ----------------------- ----------------------------------
</TABLE>
(1) Until June 30, 1999, the Savings Bank is subject to capital requirements
that exceed minimum capital adequacy requirements, including the
requirement to maintain a minimum Core Capital ratio of 8% and a Total
Capital ratio of 12%.
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
a branch in the United Kingdom, the Company will maintain a minimum Tier 1
Leverage ratio of 3.0%. As of March 31, 1999, the Company's Tier 1 Leverage
ratio was 13.06%.
Additionally, certain regulatory restrictions exist which limit the
ability of the Bank and the Savings Bank to transfer funds to the Corporation.
As of March 31, 1999, retained earnings of the Bank of $89.3 million were
available for payment of dividends to the Corporation without prior approval by
the Federal Reserve.
Off-Balance Sheet Risk
The Company is subject to off-balance sheet risk in the normal course
of business including commitments to extend credit, reduce the interest rate
sensitivity of its securitization transactions and its off-balance sheet
financial instruments. The Company enters into interest rate swap agreements in
the management of its interest rate exposure. The Company also enters into
forward foreign currency exchange contracts and currency swaps to reduce its
sensitivity to changing foreign currency exchange rates. These off-balance sheet
financial instruments involve elements of credit, interest rate or foreign
currency exchange rate risk in excess of the amount recognized on the balance
sheet. These instruments also present the Company with certain credit, market,
legal and operational risks. The Company has established credit policies for
off-balance sheet instruments as it has for on-balance sheet instruments.
Interest Rate Sensitivity
Interest rate sensitivity refers to the change in earnings that may
result from changes in the level of interest rates. To the extent that managed
interest income and expense do not respond equally to changes in interest rates,
or that all rates do not change uniformly, earnings could be affected. The
Company's managed net interest income is affected by changes in short-term
interest rates, primarily LIBOR, as a result of its issuance of interest-bearing
deposits, variable rate loans and variable rate securitizations. The Company
manages and mitigates its interest rate sensitivity through several techniques
which include, but are not limited to, changing the maturity, repricing and
distribution of assets and liabilities and entering into interest rate swaps.
The Company measures exposure to its interest rate risk through the use
of a simulation model. The model generates a distribution of possible
twelve-month managed net interest income outcomes based on (i) a set of
plausible interest rate scenarios, as determined by management based upon
historical trends and market expectations, (ii) all existing financial
instruments, including swaps, and (iii) an estimate of ongoing business activity
over the coming twelve months. The Company's asset/liability management policy
requires that based on this distribution there be at least a 95% probability
that managed net interest income achieved over the coming twelve months will be
no more than 3% below the mean managed net interest income of the distribution.
As of March 31, 1999, the Company was in compliance with the policy; more than
95% of the outcomes generated by the model produced a managed net interest
income of no more than 1.0% below the mean outcome. The interest rate scenarios
evaluated as of March 31, 1999, included scenarios in which short-term interest
rates rose by as much as 400 basis points or fell by as much as 175 basis points
over twelve months.
The analysis does not consider the effects of the changed level of
overall economic activity associated with various interest rate scenarios.
Further, in the event of a rate change of large magnitude, management would
likely take actions to further mitigate its exposure to any adverse impact. For
example, management may reprice interest rates on outstanding credit card loans
subject to the right of the consumers in certain states to reject such repricing
by giving timely written notice to the Company and thereby relinquishing
charging privileges. However, the repricing of credit card loans may be limited
by competitive factors as well as certain legal constraints.
Interest rate sensitivity at a point in time can also be analyzed by
measuring the mismatch in balances of earning assets and interest-bearing
liabilities that are subject to repricing in future periods.
<PAGE>
BUSINESS OUTLOOK
Earnings, Goals and Strategies
This business outlook section summarizes the Company's expectations for
earnings for the year ending December 31, 1999, and its primary goals and
strategies for continued growth. The statements contained in this section are
based on management's current expectations. Certain statements are forward
looking 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, 1998
(Part I, Item 1, Risk Factors).
The Company has set an earnings target increase of approximately 30%
over 1998 earnings and a return on equity in excess of 20%. 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), marketing expenses and operating
expenses.
Product and Market Opportunities
The Company's strategy for future growth has been, and is expected to
continue to be, to apply its proprietary IBS to its lending business as well as
to other businesses, both financial and non-financial, including
telecommunications services. The Company will seek to identify new product
opportunities and to make informed investment decisions regarding new and
existing products. The Company's lending and other financial and non-financial
products are subject to competitive pressures, which management anticipates will
increase as these markets mature.
Lending. Lending includes credit card and other consumer lending products.
Credit card opportunities include, and are expected to continue to include, low
introductory and intermediate rate balance transfer products, low
non-introductory rate products, as well as other customized credit card
products, such as secured cards, affinity and co-branded cards, student cards
and other cards tailored for specific consumer segments. The Company expects
continued growth across a broad spectrum of new and existing customized
products, which are distinguished by a varied range of credit lines, pricing
structures and other characteristics. For example, the Company's low
non-introductory rate products, which are marketed to consumers with the best
established credit profiles, are characterized by higher credit lines, lower
yields and an expectation of lower delinquencies and credit losses than the
traditional low introductory rate balance transfer products. On the other hand,
certain other customized card products are characterized by lower credit lines,
higher yields (including fees) and in some cases, higher delinquencies and
credit losses than the Company's traditional products. These products also
involve higher operational costs but exhibit better response rates, less adverse
selection, less attrition and a greater ability to reprice than the Company's
traditional introductory rate products. More importantly, as a whole, all of
these customized products continue to have less volatile returns than the
traditional products in recent market conditions.
On July 31, 1998, the Company completed the acquisition of Summit
Acceptance Corporation ("Summit"), a Texas corporation. Summit is an indirect
automobile finance lender located in Dallas, Texas. Summit is the Company's
platform to test and apply its IBS to the automobile loan market.
Telecommunications. The Company expects to continue its efforts to market
telecommunications services through its subsidiary America One Communications,
Inc. ("America One"). America One's initial business, the reselling of wireless
services through direct marketing channels, has recently begun to experience
growth in the number of customers and accounts. As a result of the expenses
necessary to build the operations to support this new business and to acquire
new accounts, to date this business negatively impacts earnings.
International Expansion. The Company has expanded its existing operations
outside of the United States, with an initial focus on the United Kingdom and
Canada. The Company has experienced growth in the number of accounts and loan
balances in its international business. To support the continued growth of its
United Kingdom business and any future business in Europe, the Company opened a
new operations center in Nottingham, England in July 1998 and expanded it in
early 1999.
<PAGE>
The Company will continue to apply its IBS in an effort to balance the
mix of credit card products with other financial and non-financial products and
services to optimize profitability within the context of acceptable risk. The
Company's growth through expansion and product diversification will be affected
by the ability to internally build or acquire the necessary operational and
organizational infrastructure, recruit experienced personnel and fund these new
businesses. Although management believes it has the personnel, financial
resources and business strategy necessary for continued success, there can be no
assurance that the Company's historical financial performance will necessarily
reflect its results of operations and financial condition in the future.
Marketing Investment
The Company expects its 1999 marketing expenses to exceed 1998's
expense level, as the Company continues to invest in its various credit card
products and services, and other financial and non-financial products and
services. The Company cautions, however, that an increase in marketing expenses
does not necessarily equate to a comparable increase in outstanding balances or
accounts based on historical results. As the Company's portfolio continues to
increase, additional growth to offset attrition requires increasing amounts of
marketing. Intense competition in the credit card market has resulted in a
decrease in credit card response rates and reduced productivity of marketing
dollars invested in certain lines of business. In addition, the cost to acquire
new accounts varies across product lines and is expected to rise as the Company
moves beyond the domestic card business. With competition affecting the
profitability of existing introductory rate card products, the Company has been
allocating, and expects to continue to allocate, a greater portion of its
marketing expense to other customized credit card products and other financial
and non-financial products. Additionally, the cost to acquire an America One
wireless account includes the cost of providing a free phone to the customer,
and consequently is substantially more than the cost to acquire a credit card
account. The Company intends to continue a flexible approach in its allocation
of marketing expenses. The actual amount of marketing investment is subject to a
variety of external and internal factors, such as competition in the consumer
credit industry, general economic conditions affecting consumer credit
performance, the asset quality of the Company's portfolio and the identification
of market opportunities across product lines that exceed the Company's targeted
rates of return on investment.
The amount of marketing expense allocated to various products or
businesses will influence the characteristics of the Company's portfolio as the
various products or businesses are characterized by different account growth,
loan growth and asset quality characteristics. The Company currently expects
continued strong account growth and loan growth in 1999. Actual growth, however,
may vary significantly depending on the Company's actual product mix and the
level of attrition on the Company's managed portfolio, which is primarily
affected by competitive pressures.
Impact of Delinquencies, Charge-Offs and Attrition
The Company's earnings are particularly sensitive to delinquencies and
charge-offs on the Company's portfolio and on the level of attrition due to
competition in the credit card industry. 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 impact of
higher or lower charge-offs that ultimately result from varying levels of
delinquencies. Delinquencies and net charge-offs are impacted by general
economic trends in consumer credit performance, including bankruptcies, the
continued seasoning of the Company's portfolio and the product mix.
The Company's expectations for 1999 earnings are based on management's
belief that the average credit quality of the Company's assets is improving.
Management expects that during the first half of 1999 delinquencies and
charge-offs will remain stable. Management projects, however, that charge-off
levels may increase in the second half of 1999. Management cautions that
delinquency and charge-off levels are not always predictable and may vary from
projections. In the case of an economic downturn or recession, delinquencies and
charge-offs are likely to increase. 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 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 Year 2000 Issue and the Company's State of Readiness
The year 2000 problem is a result of computer systems using two digits
rather than four digits to define an applicable year. The Company utilizes a
significant number of internal computer software programs and operating systems
across its entire organization. In addition, the Company depends on its external
business vendors to provide external services for its operations. To the extent
the software applications of the Company or its vendors contain codes that are
unable to appropriately interpret the year 2000 and beyond, some level of
modification, or even possibly replacement of such applications, may be
necessary.
In October 1996, the Company formed a year 2000 project office to
identify software systems and computer-related devices that required
modification for the year 2000. Shortly after its inception, the project office
developed its strategy for the Company's information technology computer-based
systems. This strategy is based, in large part, on the regulatory guidelines
published by the Federal Financial Institutions Examination Counsel. This
strategy calls for five milestones:
o awareness of the existence of information technology systems Company-wide;
o assessment of those systems for year 2000 readiness;
o renovation of those systems and their date coding functions;
o validation (testing) of renovations; and
o implementation of all renovations made.
To implement this strategy, the Company categorized its information
technology ("IT") systems into year 2000 projects and by domestic lending,
United Kingdom operations, America One and Summit. Approximately 80% of the
projects have completed all milestones, which includes substantially all of the
Company's mission critical systems. Another 16% are in the validation and
implementation stages, and the remaining 4% are in the assessment and renovation
stages. The Company expects to complete all project milestones by the end of the
second quarter. In addition to these milestones, the Company is conducting an
internal audit certification of its testing measures and, for systems with cross
functionality, performing integrated testing.
The Company is also addressing the effect of the year 2000 on other
non-IT systems, which are not included as part of the IT project areas set forth
above. These non-IT systems primarily consist of desk top computer applications
and data used by the Company's associates. The Company has inventoried and
assessed these applications and data and expects to complete renovations by the
end of the second quarter of 1999.
In addition, the Company utilizes outside business vendors in its
day-to-day operations and is assessing the overall year 2000 readiness of its
external business vendors and year 2000 compliance of specific vendor systems
used in the Company's operations. These vendors include credit bureaus,
collection agencies, utilities and other related service providers, third party
processors, the U.S. postal service, telephone companies, technology vendors,
and banks that are creditors of the Company or which provide cash management,
trustee, paying agent, stock transfer agent or other services. These vendors
also include third parties that the Company uses to outsource certain operations
for America One, the United Kingdom and Summit. In assessing overall compliance,
the Company requests information from its vendors about their actions to become
year 2000 compliant, placing extensive focus on its high priority vendors. The
Company, however, must rely on the actions of and the information provided by
its vendors and cannot guarantee that vendor systems will, in fact, be
compliant. For high priority vendors that the Company determines may not be
taking appropriate and timely action or have failed to provide sufficient
information, the Company will accelerate contingency planning efforts. The
Company has increased its contingency efforts to accelerate the vendors'
compliance efforts and/or internally build systems for America One's billing
systems and the UK and Summit account processing systems. The Company will
continue to actively monitor the efforts of all of its vendors and take actions
to mitigate year 2000 issues resulting from any failure of its vendors to be
year 2000 compliant.
<PAGE>
The Company's Contingency Plan
The Company has established comprehensive contingency plans for its
critical business units. The Company's general contingency planning strategy has
been refined to include the achievement of four milestones: (i) inventory and
assessment of year 2000 risks, (ii) business impact analysis, (iii) developing
contingency plans to mitigate the risks, and (iv) testing and validation of
these contingency plans. The Company has completed the first three milestones
for all of its critical business units and plans have been documented to
anticipate and mitigate the year 2000 risks that the Company may experience. In
addition, the Company continues to place particular focus on contingency plans
for its United Kingdom account processing system and its America One billing
system. The Company is also conducting an overall corporate assessment to
identify multiple unit, enterprise-wide issues and will develop broad based
plans to take these issues into account during the second quarter of 1999. The
Company will continue to update contingency plans based on changes in its
business situations throughout 1999.
The Costs To Address the Company's Year 2000 Issues
As of March 31, 1999, the Company had spent approximately $7.1 million
for year 2000 remediation of its IT systems. During the first quarter of 1999,
the Company revised its budget projections for a comprehensive integrated test
and an independent quality review of all of its testing and contingency planning
documentation. As a result, the Company increased its estimate for projected
year 2000 costs to up to an additional $8 million during the remainder of 1999.
Included in this estimate is the cost of additional computer systems for
expanded integrated testing and additional quality reviews. Costs associated
with non-IT systems, which are not included, are not expected to be material.
The Risks of the Company's Year 2000 Issues
Although the Company expects to have all of its system modifications
completed and tested extensively by the onset of the new millennium, unforeseen
problems could arise from not being year 2000 compliant. The Company's business
is heavily reliant on computer technologies and problems could arise resulting
in delays and malfunctions that may impact the Company's operations, liquidity
and financial results. In addition, the Company cannot guarantee that all of its
vendors will have completed system renovations and be compliant by the year
2000. Although the Company is developing contingency plans to mitigate the risks
from third party vendors and systems, the failure of third parties to provide
the Company with products, services or systems that meet year 2000 requirements
could materially impact the Company's business and operations. For example,
failure of the U.S. postal service, the Company's local and long distance
carriers or its material third party processors to be year 2000 compliant could
cause disruption or delay in the Company's ability to solicit new customers and
service the accounts of its existing customers.
The estimated year 2000 costs and the Company's expectations that its
systems, and those of its third-party partners and vendors, will be year 2000
compliant are forward looking statements. These statements are based on
management's reasonable estimates and assumptions about future events and are
subject to risks and uncertainties. Although the Company believes it has taken
the necessary precautionary measures to assure the year 2000 will not adversely
affect its business, there is no guarantee that the Company's year 2000
expectations will be achieved and actual results could differ materially.
<PAGE>
Cautionary Factors
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); the
ability of the Company to continue to securitize its credit cards and consumer
loans and to otherwise access the capital markets at attractive rates and terms
to fund its operations and future growth; difficulties or delays in the
development, production, testing and marketing of new products or services;
losses associated with new products or services or expansion internationally;
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 salaries and associate benefits 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 or to
expand internationally; the ability of the Company to recruit experienced
personnel to assist in the management and operations of new products and
services; the ability of the Company and its suppliers to successfully address
year 2000 compliance issues; 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, 1998 (Part I, Item 1, Risk Factors).
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The 1999 Annual Meeting of Stockholders was held April 29, 1999.
(b) The following directors were elected at such meeting:
James A. Flick, Jr.
Patrick W. Gross
James V. Kimsey
The following directors will also continue in their office
after such meeting:
Richard D. Fairbank
Nigel W. Morris
W. Ronald Dietz
Stanley I. Westreich
(c) The following matters were voted upon at such meeting:
ELECTION OF DIRECTORS VOTES FOR VOTES WITHHELD
James A. Flick, Jr. 54,858,490 270,391
Patrick W. Gross 54,873,797 255,084
James V. Kimsey 54,853,387 275,494
Item Votes For Votes Against Abstain
Approval of 1994 Stock
Incentive Plan, as amendment 44,245,145 10,552,837 330,899
Ratification of the selection of
Ernst & Young LLP as independent
auditors of the Company for 1999 54,947,288 39,422 142,171
No other matter was voted upon at such meeting.
Item 6. Reports on Form 8-K
(a) The Company filed a Current Report on Form 8-K, dated January 19, 1999,
Commission File No. 1-13300, enclosing its press release dated January 19, 1999.
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: May 17, 1999 /s/ David M. Willey
------------------------------
David M. Willey
Senior Vice President,
Finance and Accounting
(Chief Accounting Officer
and duly authorized officer
of the Registrant)
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