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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission file number 1-13300
CAPITAL ONE FINANCIAL CORPORATION
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 54-1719854
- - --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2980 Fairview Park Drive, Suite 1300, Falls Church, Virginia 22042-4525
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(703) 205-1000
- - --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
(Not Applicable)
- - --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of April 30, 2000, there were 195,821,956 shares of the registrant's Common
Stock, par value $.01 per share, outstanding.
<PAGE>
CAPITAL ONE FINANCIAL CORPORATION
FORM 10-Q
INDEX
- - --------------------------------------------------------------------------------
March 31, 2000
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....27
Item 6. Reports on Form 8-K... ................................27
Signatures........... .................................28
<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
2000 1999
- - ----------------------------------------------------------- --------------- ---------------
<S> <C> <C>
Assets:
Cash and due from banks $ 84,084 $ 134,065
Federal funds sold and resale agreements 18,000
Interest-bearing deposits at other banks 96,491 112,432
- - ----------------------------------------------------------- --------------- ---------------
Cash and cash equivalents 198,575 246,497
Securities available for sale 1,519,027 1,856,421
Consumer loans 9,449,498 9,913,549
Less: Allowance for loan losses (372,000) (342,000)
- - ----------------------------------------------------------- --------------- ---------------
Net loans 9,077,498 9,571,549
Premises and equipment, net 501,238 470,732
Interest receivable 81,967 64,637
Accounts receivable from securitizations 666,972 661,922
Other 479,781 464,685
- - ----------------------------------------------------------- --------------- ---------------
Total assets $ 12,525,058 $ 13,336,443
- - ----------------------------------------------------------- --------------- ---------------
Liabilities:
Interest-bearing deposits $ 4,096,241 $ 3,783,809
Other borrowings 1,955,978 2,780,466
Senior notes 3,818,936 4,180,548
Interest payable 88,438 116,405
Other 1,014,384 959,608
- - ----------------------------------------------------------- --------------- ---------------
Total liabilities 10,973,977 11,820,836
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, 199,670,421 issued as of
March 31, 2000 and December 31, 1999 1,997 1,997
Paid-in capital, net 598,012 613,590
Retained earnings 1,123,823 1,022,296
Cumulative other comprehensive loss (31,802) (31,262)
Less: Treasury stock, at cost; 4,072,467 and 2,624,006
shares as of March 31, 2000 and December 31, 1999,
respectively (140,949) (91,014)
- - ----------------------------------------------------------- --------------- ---------------
Total stockholders' equity 1,551,081 1,515,607
- - ----------------------------------------------------------- --------------- ---------------
Total liabilities and stockholders' equity $ 12,525,058 $ 13,336,443
- - ----------------------------------------------------------- --------------- ---------------
</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
- - ----------------------------------------------------------- --------------- ---------------
2000 1999
- - ----------------------------------------------------------- --------------- ---------------
<S> <C> <C>
Interest Income:
Consumer loans, including fees $ 488,937 $ 325,067
Securities available for sale 24,734 26,222
Other 1,776 1,782
- - ----------------------------------------------------------- --------------- ---------------
Total interest income 515,447 353,071
Interest Expense:
Deposits 52,120 23,942
Other borrowings 41,454 25,552
Senior notes 68,376 72,495
- - ---------------------------------------------------------- --------------- ---------------
Total interest expense 161,950 121,989
- - ----------------------------------------------------------- --------------- ---------------
Net interest income 353,497 231,082
Provision for loan losses 126,525 74,586
- - ----------------------------------------------------------- --------------- ---------------
Net interest income after provision for loan losses 226,972 156,496
Non-Interest Income:
Servicing and securitizations 270,758 271,954
Service charges and other fees 341,232 222,453
Interchange 43,070 30,219
- - ----------------------------------------------------------- --------------- ---------------
Total non-interest income 655,060 524,626
Non-Interest Expense:
Salaries and associate benefits 234,836 179,194
Marketing 201,938 176,088
Communications and data processing 70,822 58,072
Supplies and equipment 52,274 36,704
Occupancy 25,292 13,914
Other 124,758 84,281
- - ----------------------------------------------------------- --------------- ---------------
Total non-interest expense 709,920 548,253
- - ----------------------------------------------------------- --------------- ---------------
Income before income taxes 172,112 132,869
Income taxes 65,403 50,490
- - ----------------------------------------------------------- --------------- ---------------
Net income $ 106,709 $ 82,379
- - ----------------------------------------------------------- --------------- ---------------
Basic earnings per share $ 0.54 $ 0.42
- - ----------------------------------------------------------- --------------- ---------------
Diluted earnings per share $ 0.51 $ 0.39
- - ----------------------------------------------------------- --------------- ---------------
Dividends paid per share $ 0.03 $ 0.03
- - ----------------------------------------------------------- --------------- ---------------
</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 (Loss) Stock Equity
- - ------------------------------------------- ----------- ------- ------------ ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 199,670,376 $ 1,997 $ 598,167 $ 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 loss (38,101) (38,101)
-----------
Comprehensive income 44,278
Cash dividends - $.03per 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 199,670,376 $ 1,997 $ 605,598 $ 757,071 $ 22,554 $ (68,008) $ 1,319,212
- - ------------------------------------------- ----------- ------- --------- ----------- -------- ---------- -----------
Balance, December 31, 1999 199,670,421 $ 1,997 $ 613,590 $ 1,022,296 $(31,262) $ (91,014) $ 1,515,607
Comprehensive income:
Net income 106,709 106,709
Other comprehensive income, net of income tax:
Unrealized losses on securities, net of
income tax benefit of $509 (831) (831)
Foreign currency translation adjustments 291 291
-------- -----------
Other comprehensive loss (540) (540)
-----------
Comprehensive income 106,169
Cash dividends - $.03 per share (5,182) (5,182)
Purchases of treasury stock (72,144) (72,144)
Issuances of common stock (1,811) 5,073 3,262
Exercise of stock options (16,427) 17,136 709
Common stock issuable under incentive plan 2,543 2,543
Other items, net 117 117
- - ------------------------------------------- ----------- ------- --------- ----------- -------- ---------- -----------
Balance, March 31, 2000 199,670,421 $ 1,997 $ 598,012 $ 1,123,823 $(31,802) $ (140,949) $ 1,551,081
- - ------------------------------------------- ----------- ------- --------- ----------- -------- ---------- -----------
</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
- - ----------------------------------------------------------- ---------------------------------
2000 1999
- - ----------------------------------------------------------- -------------- --------------
<S> <C> <C>
Operating Activities:
Net income $ 106,709 $ 82,379
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 126,525 74,586
Depreciation and amortization, net 53,434 35,874
Stock compensation plans 2,543 21,307
Increase in interest receivable (17,330) (13,267)
Decrease in accounts receivable from securitizations 106 152,514
Increase in other assets (21,074) (70,234)
Decrease in interest payable (27,967) (4,136)
Increase in other liabilities 54,776 85,491
- - ----------------------------------------------------------- -------------- --------------
Net cash provided by operating activities 277,722 364,514
- - ----------------------------------------------------------- -------------- --------------
Investing Activities:
Purchases of securities available for sale (136,465) (349,918)
Proceeds from sales of securities available for sale 408,858 337,059
Proceeds from maturities of securities available for sale 58,379 25,014
Net increase in consumer loans (322,182) (1,173,929)
Proceeds from securitizations of consumer loans 588,576
Recoveries of loans previously charged off 94,187 25,145
Additions of premises and equipment, net (69,640) (65,614)
- - ----------------------------------------------------------- -------------- --------------
Net cash provided by (used for) investing activities 621,713 (1,202,243)
- - ----------------------------------------------------------- -------------- --------------
Financing Activities:
Net increase in interest-bearing deposits 312,432 204,183
Net decrease in other borrowings (824,488) (472,839)
Issuances of senior notes 895,500
Maturities of senior notes (361,767) (25,000)
Dividends paid (5,182) (5,166)
Purchases of treasury stock (72,144) (24,266)
Net proceeds from issuances of common stock 3,083 4,792
Proceeds from exercise of stock options 709 7,675
- - ----------------------------------------------------------- -------------- --------------
Net cash (used for) provided by financing activities (947,357) 584,879
- - ----------------------------------------------------------- -------------- --------------
Decrease in cash and cash equivalents (47,922) (252,850)
Cash and cash equivalents at beginning of period 246,497 300,167
- - ----------------------------------------------------------- -------------- --------------
Cash and cash equivalents at end of period $ 198,575 $ 47,317
- - ----------------------------------------------------------- -------------- --------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
CAPITAL ONE FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2000
(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, 2000 are not necessarily indicative of the results for the year ending
December 31, 2000. The notes to the consolidated financial statements contained
in the Annual Report on Form 10-K for the year ended December 31, 1999 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 2000 presentation.
On April 29, 1999, the Company's Board of Directors approved a
three-for-one split of the common stock of the Corporation. The stock split was
effected through a 200 percent stock distribution on June 1, 1999 to
stockholders of record on May 20, 1999. For periods prior to the effective date
of the stock split, outstanding shares and per share data contained in this
report have been restated to reflect the impact of the stock split.
Note B: Significant Accounting Policies
Cash and Cash Equivalents
Cash paid for interest for the three months ended March 31, 2000 and
1999 was $189,917 and $124,410, respectively. Cash paid for income taxes for the
three months ended March 31, 2000 and 1999 was $22 and $11,008, respectively.
Note C: Recent Accounting Pronouncements
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 137 defers the effective date of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (together
"SFAS 133 as amended") to all fiscal quarters of all fiscal years beginning
after June 15, 2000. SFAS 133 as amended will require the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through earnings. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The adoption of SFAS 133 as amended is not expected to
have a material effect on the Company's financial position or results of
operations.
Note D: Stock Repurchase
On February 22, 2000, the Company's Board of Directors approved the
repurchase of up to 10,000,000 shares of the Company's common stock over the
next two years, in addition to the 1,687,500 shares then remaining under the
Company's repurchase programs approved in 1997 and 1998. As of March 31, 2000,
the Company had 9,783,900 shares available for repurchase under these programs.
Note E: Earnings Per Share
Basic earnings per share is based 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.
<PAGE>
The following table sets forth the computation of basic and diluted
earnings per share.
Three Months Ended
March 31
- - --------------------------------------------- ---------------------------
(shares in thousands) 2000 1999
- - --------------------------------------------- ----------- -----------
Numerator:
Net income $ 106,709 $ 82,379
- - --------------------------------------------- ----------- -----------
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 196,645 197,239
Effect of dilutive securities:
Stock options 12,065 12,752
- - --------------------------------------------- ----------- -----------
Dilutive potential common shares 12,065 12,752
Denominator for diluted earnings per share -
Adjusted weighted-average shares 208,710 209,991
- - --------------------------------------------- ----------- -----------
Basic earnings per share $ 0.54 $ 0.42
- - --------------------------------------------- ----------- -----------
Diluted earnings per share $ 0.51 $ 0.39
- - --------------------------------------------- ----------- -----------
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.
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 California Supreme Court rejected the Bank's Petition
for Review of the remaining two counts and remitted them to the trial court for
further proceedings. In August 1999, the trial court denied without prejudice
plaintiffs' motion to certify a class on the one remaining common law claim. In
November 1999, the United States Supreme Court denied the Bank's writ of
certiorari on the remaining two counts, declining to exercise its discretionary
power to review these issues.
Subsequently, the Bank moved for summary judgement on the two remaining
counts and for a ruling that a class cannot be certified in this case. These
motions are pending.
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 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 27, 2000, the stockholders of the Company voted to approve an
amendment to the Company's restated certificate of incorporation to increase the
number of authorized shares of common stock from 300 million to one billion.
<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, 2000, the Company had 25.3 million accounts and $20.3 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, 2000 of $106.7
million, or $.51 per share, compares to net income of $82.4 million, or $.39 per
share, for the same period in 1999.
The increase in net income is primarily a result of an increase in
asset and account volumes and rates. Net interest income increased $122.4
million, or 53%, as the net interest margin increased to 12.23% from 10.41% and
average earning assets increased by 30%. The provision for loan losses increased
$51.9 million, or 70%, as the reported net charge-off rate increased 71 basis
points to 3.94% from 3.23% and average reported loans increased 42%.
Non-interest income increased $130.4 million, or 25%, primarily as a result of
the increase in the average number of accounts of 41%. Marketing expense
increased $25.9 million, or 15%, to $201.9 million as the Company continued to
invest in existing and new product opportunities. Salaries and associate
benefits expense increased $55.6 million, or 31%. The $80.2 million, or 42%,
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 to manage the growth in the Company's accounts and products
offered. 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 1 - MANAGED CONSUMER LOAN PORTFOLIO
- - ----------------------------------------------------------------------
Three Months Ended
March 31
- - ---------------------------------------- ---------------------------
(in thousands) 2000 1999
- - ---------------------------------------- ------------ ------------
Period-End Balances:
Reported consumer loans $ 9,449,498 $ 7,245,847
Off-balance sheet consumer loans 10,849,992 10,198,391
- - ---------------------------------------- ------------ ------------
Total managed consumer loan portfolio $ 20,299,490 $ 17,444,238
- - ---------------------------------------- ------------ ------------
Average Balances:
Reported consumer loans $ 9,704,933 $ 6,831,724
Off-balance sheet consumer loans 10,476,440 10,603,806
- - ---------------------------------------- ------------ ------------
Total managed consumer loan portfolio $ 20,181,373 $ 17,435,530
- - ---------------------------------------- ------------ ------------
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 2 - OPERATING DATA AND RATIOS
- - -----------------------------------------------------------------------------
Three Months Ended
March 31
- - ---------------------------------------- ----------------------------------
(dollars in thousands) 2000 1999
- - ---------------------------------------- --------------- ---------------
Reported:
Average earning assets $ 11,561,128 $ 8,878,408
Net interest margin(1) 12.23% 10.41%
Loan yield 20.15 19.03
- - ---------------------------------------- --------------- ---------------
Managed:
Average earning assets $ 22,037,568 $ 19,482,214
Net interest margin(1) 11.23% 10.55%
Loan yield 18.06 17.11
- - ---------------------------------------- --------------- ---------------
(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 specifically targeted consumer
populations. 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 type. 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 a
significant, immediate impact on managed loan balances; rather they 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 low non-introductory rate
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 3 - MANAGED RISK ADJUSTED REVENUE
- - ---------------------------------------------------------------------------
Three Months Ended
March 31
- - --------------------------------------- --------------------------------
(dollars in thousands) 2000 1999
- - --------------------------------------- ------------- -------------
Managed Income Statement:
Net interest income $ 618,854 $ 513,938
Non-interest income 489,297 357,647
Net charge-offs (195,276) (171,129)
- - --------------------------------------- ------------- -------------
Risk adjusted revenue $ 912,875 $ 700,456
- - --------------------------------------- ------------- -------------
Ratios:(1)
Net interest margin 11.23% 10.55%
Non-interest income 8.88 7.34
Net charge-offs (3.54) (3.51)
- - --------------------------------------- ------------- -------------
Risk adjusted margin 16.57% 14.38%
- - --------------------------------------- ------------- -------------
(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 notes.
Reported net interest income for the three months ended March 31, 2000
was $353.5 million, compared to $231.1 million for the same period in the prior
year, representing an increase of $122.4 million, or 53%. Net interest income
increased as a result of an increase of 182 basis points in the net interest
margin, as well as a 30% increase in average earning assets for the three months
ended March 31, 2000, versus the same period in the prior year. The yield on
earning assets increased 192 basis points to 17.83% for the three months ended
March 31, 2000, from 15.91% for the same period in the prior year. The increase
was primarily attributable to the increase of 112 basis points in the yield on
consumer loans, along with a higher proportion of average consumer loans as a
percentage of average earning assets as compared to the same period in the prior
year.
Managed net interest income increased $104.9 million, or 20%, for the
three months ended March 31, 2000, compared to the same period in the prior year
as managed average earning assets increased 13% and the managed net interest
margin increased 68 basis points to 11.23%. The increase in managed net interest
margin principally reflects an increase in the amount of average consumer loans
as a percentage of average earning assets, slightly offset by the increased
volume and rates of the Company's retail deposits program.
<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, 2000 and 1999.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
Table 4 - STATEMENTS OF AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
- - --------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31
- - ------------------------------------- ------------------------------------------------------------------------------------
2000 1999
- - ---------------------------------- --------------------------------------- --------------------------------------------
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) $ 9,704,933 $ 488,937 20.15% $ 6,831,724 $325,067 19.03%
Securities available for sale 1,681,537 24,734 5.88 1,876,636 26,222 5.59
Other 174,658 1,776 4.07 170,048 1,782 4.19
- - ---------------------------------- ------------ ------------- --------- ------------ ----------- ---------
Total earning assets 11,561,128 $ 515,447 17.83% 8,878,408 $353,071 15.91%
Cash and due from banks 91,068 11,055
Allowance for loan losses (347,000) (239,333)
Premises and equipment, net 496,600 273,416
Other 1,237,114 1,227,854
- - ---------------------------------- ------------ ------------- --------- ------------ ----------- ---------
Total assets $13,038,910 $ 10,151,400
- - ---------------------------------- ------------ ------------- --------- ------------ ----------- ---------
Liabilities and
Stockholders' Equity:
Interest-bearing liabilities
Deposits $ 3,894,250 $ 52,120 5.35% $ 2,101,086 $ 23,942 4.56%
Other borrowings 2,504,724 41,454 6.62 1,777,980 25,552 5.75
Senior and deposit notes 4,019,484 68,376 6.80 4,189,839 72,495 6.92
- - ---------------------------------- ------------ ------------- --------- ------------ ----------- ---------
Total interest-bearing liabilities 10,418,458 $ 161,950 6.22% 8,068,905 $121,989 6.05%
Other 1,053,551 780,966
- - ---------------------------------- ------------ ------------- --------- ------------ ----------- ---------
Total liabilities 11,472,009 8,849,871
Stockholders' equity 1,566,901 1,301,529
- - ---------------------------------- ------------ ------------- --------- ------------ ----------- ---------
Total liabilities and
stockholders' equity $13,038,910 $ 10,151,400
- - ---------------------------------- ------------ ------------- --------- ------------ ----------- ---------
Net interest spread 11.61% 9.86%
- - ---------------------------------- ------------ ------------- --------- ------------ ----------- ---------
Interest income to
average earning assets 17.83% 15.91%
Interest expense to
average earning assets 5.60 5.50
- - ---------------------------------- ------------ ------------- --------- ------------ ----------- ---------
Net interest margin 12.23% 10.41%
- - ---------------------------------- ------------ ------------- --------- ------------ ----------- ---------
</TABLE>
(1) Interest income includes past-due fees on loans of approximately $162,775
and $107,148 for the three months ended March 31, 2000 and 1999,
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 5 - INTEREST VARIANCE ANALYSIS
- - --------------------------------------------------------------------------------
Three Months Ended
March 31, 2000 vs. 1999
- - ------------------------------------------------------------------------------
Increase Change due to(1)
(in thousands) (Decrease) Volume Yield/Rate
- - ----------------------------- ---------- --------- ----------
Interest Income:
Consumer loans $163,870 $143,767 $ 20,103
Securities available for sale (1,488) (8,323) 6,835
Other (6) 199 (205)
- - ----------------------------- -------- -------- ----------
Total interest income 162,376 115,910 46,466
Interest Expense:
Deposits 28,178 23,394 4,784
Other borrowings 15,902 11,599 4,303
Senior and deposit notes (4,119) (2,912) (1,207)
- - ----------------------------- -------- -------- ----------
Total interest expense 39,961 36,434 3,527
- - ----------------------------- -------- -------- ----------
Net interest income(1) $122,415 $ 77,556 $ 44,859
- - ----------------------------- -------- -------- ----------
(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
Servicing and securitizations income represents servicing fees, excess
spread and other fees relating to consumer loan receivables sold through
securitization transactions, as well as gains and losses recognized as a result
of the securitization transactions. Servicing and securitizations income
decreased $1.2 million to $270.8 million for the three months ended March 31,
2000, from $272.0 million for the same period in the prior year. This decrease
was primarily due to the slight decrease in average off-balance sheet consumer
loans.
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.
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 $43.1 million, or 43%, for the three
months ended March 31, 2000, compared to $30.2 million for the same period in
the prior year. This increase is primarily attributable to new account growth.
Service charges and other fees increased to $341.2 million, or 53%, for the
three months ended March 31, 2000, compared to $222.5 million for the same
period in the prior year. This increase was due to the increase in average
accounts of 41% for the three months ended March 31, 2000, compared to the same
period in the prior year, increased fee-generating customer behavior and
increased ancillary product sales through the use of IBS.
Non-Interest Expense
Non-interest expense for the three months ended March 31, 2000 was
$709.9 million, an increase of $161.7 million, or 29%, over $548.3 million for
the same period in the prior year. Contributing to the increase in non-interest
expense was marketing expense which increased $25.9 million, or 15%, to $201.9
million for the three months ended March 31, 2000, from $176.1 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 $55.6 million,
or 31%, for the three months ended March 31, 2000, from $179.2 million for the
same period in the prior year. All other non-interest expenses increased $80.2
million, or 42%, to $273.1 million for the three months ended March 31, 2000,
from $193.0 million for the same period in the prior year. The Company's
continued expansion into new product and geographic markets resulted in an
increase in staff and other operational costs associated with the Company's
growth and was necessary to support the 41% increase in the average number of
accounts.
Income Taxes
The Company's income tax rate was 38% for the three months ended March
31, 2000 and 1999 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 factor
as 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
- - -------------------------- -----------------------------------------------------------------
2000 1999
- - -------------------------- ------------------------------- -------------------------------
% of % of
(dollars in thousands) Loans Total Loans Loans Total Loans
- - -------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Reported:
Loans outstanding $ 9,449,498 100.00% $ 7,245,847 100.00%
Loans delinquent:
30-59 days 218,967 2.32 152,503 2.10
60-89 days 148,925 1.57 80,479 1.11
90 or more days 247,463 2.62 119,363 1.65
- - -------------------------- -------------- -------------- -------------- --------------
Total $ 615,355 6.51% $ 352,345 4.86%
- - -------------------------- -------------- -------------- -------------- --------------
Managed:
Loans outstanding $ 20,299,490 100.00% $ 17,444,238 100.00%
Loans delinquent:
30-59 days 377,320 1.86 325,762 1.87
60-89 days 250,595 1.24 176,479 1.01
90 or more days 438,929 2.16 292,564 1.68
- - -------------------------- -------------- -------------- -------------- --------------
Total $ 1,066,844 5.26% $ 794,805 4.56%
- - -------------------------- -------------- -------------- -------------- --------------
</TABLE>
The 30-plus day delinquency rate for the reported consumer loan
portfolio was 6.51% as of March 31, 2000, up 165 basis points from 4.86% as of
March 31, 1999, and up 59 basis points from 5.92% as of December 31, 1999. The
30-plus day delinquency rate for the managed consumer loan portfolio was 5.26%
as of March 31, 2000, up 70 basis points from 4.56% as of March 31, 1999 and up
3 basis points from 5.23% as of December 31, 1999. Both the reported and managed
consumer loan delinquency rate increases as of March 31, 2000, principally
reflected more 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) 2000 1999
- - ------------------------------------------------------------ ------------- -------------
<S> <C> <C>
Reported:
Average loans outstanding $ 9,704,933 $ 6,831,724
Net charge-offs 95,669 55,250
Net charge-offs as a percentage of average loans outstanding 3.94% 3.23%
- - ------------------------------------------------------------ ------------- -------------
Managed:
Average loans outstanding $ 20,181,373 $ 17,435,530
Net charge-offs 195,276 171,129
Net charge-offs as a percentage of average loans outstanding 3.87% 3.93%
- - ------------------------------------------------------------ ------------- -------------
</TABLE>
Net charge-offs of managed loans increased $24.1 million, or 14%, while
average managed consumer loans grew 16% for the three months ended March 31,
2000, from the same period in the prior year. For the three months ended March
31, 2000, the Company's managed net charge-offs as a percentage of average
managed loans were 3.87%, compared to 3.93% for the same period in the prior
year. The increase in the reported net charge-off rate was the result of
variations in the mix of the reported consumer loan portfolio.
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 entire reported
homogeneous consumer loan portfolio, including the Company's international
portfolio which to date has performed with relatively lower loss and delinquency
rates than the overall 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 8 - SUMMARY OF ALLOWANCE FOR LOAN LOSSES
- - ----------------------------------------------------------------------------
Three Months Ended
March 31
- - ------------------------------------------------ ---------- ----------
(dollars in thousands) 2000 1999
- - ------------------------------------------------ ---------- ----------
Balance at beginning of period $ 342,000 $ 231,000
Provision for loan losses 126,525 74,586
Other (856) 664
Charge-offs (147,654) (80,395)
Recoveries 51,985 25,145
- - ------------------------------------------------ ---------- ----------
Net charge-offs (95,669) (55,250)
- - ------------------------------------------------ ---------- ----------
Balance at end of period $ 372,000 $ 251,000
- - ------------------------------------------------ ---------- ----------
Allowance for loan losses to loans at period-end 3.94% 3.46%
- - ------------------------------------------------ ---------- ----------
For the three months ended March 31, 2000, the provision for loan
losses increased to $126.5 million, or 70%, as the reported charge-off rate
increased to 3.94% from 3.23% for the comparable period in the prior year. The
allowance for loan losses as a percentage of reported consumer loans increased
to 3.94% as of March 31, 2000, from 3.46% as of March 31, 1999. For the three
months ended March 31, 2000, the Company increased the allowance for loan losses
by $30.0 million primarily due to the growth in reported loans and increased
delinquencies.
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 $3.3 billion was outstanding as of March 31, 2000, with
original terms of one to ten years.
Internationally, the Company has funding programs designed for foreign
investors or to raise funds in foreign currencies. The Company has accessed the
international securitization market for a number of years with both US$ 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 Medium Term Note 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, including the Internet, as well as to develop customized account
management programs. As of March 31, 2000, the Company had $4.1 billion in
interest-bearing deposits, with maturities up to ten years.
<PAGE>
Table 9 shows the maturities of certificates of deposit in
denominations of $100,000 or greater (large denomination CDs) as of March 31,
2000.
- - ----------------------------------------------------------------------------
TABLE 9 - MATURITIES OF LARGE DENOMINATION CERTIFICATES-$100,000 OR MORE
- - ----------------------------------------------------------------------------
March 31, 2000
- - ---------------------------------------------------------------
(dollars in thousands) Balance Percent
- - ------------------------------ ------------ --------
Three months or less $ 240,319 19.79%
Over 3 through 6 months 198,780 16.37
Over 6 through 12 months 172,052 14.16
Over 12 months through 5 years 603,368 49.68
- - ----------------------------- ------------ --------
Total $ 1,214,519 100.00%
- - ------------------------------ ------------ --------
The Company's other borrowings portfolio consists of $1.2 billion in
borrowings maturing within one year and $782.4 million in borrowings maturing
after one year.
Table 10 shows the Company's unsecured funding availability and
outstandings as of March 31, 2000.
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
TABLE 10 - FUNDING AVAILABILITY
- - ----------------------------------------------------------------------------------------------------------------
March 31, 2000
- - ------------------------------------------- ------------ --------------- -------------- --------------
Effective/ Final
(dollars or dollar equivalents in millions) Issue Date Availability(1) Outstanding Maturity(4)
- - ------------------------------------------- ------------ --------------- -------------- --------------
<S> <C> <C> <C> <C>
Domestic revolving credit facility 5/99 $1,200 5/03
UK/Canada revolving credit facility 8/97 350 8/00
Senior bank note program(2) 4/97 8,000 $3,265 -
Non-U.S. bank note program 10/97 1,000 5 -
Corporation Shelf Registration 7/98 1,550 549 -
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, 2000.
(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.
In May 1999, the Company entered into a four-year, $1,200,000 unsecured
revolving credit arrangement (the "Credit Facility"). The Credit Facility is
comprised of two tranches: a $810,000 Tranche A facility available to the Bank
and the Savings Bank, including an option for up to $250,000 in multicurrency
availability, and a $390,000 Tranche B facility available to the Corporation,
the Bank and the Savings Bank, including an option for up to $150,000 in
multicurrency availability. Each tranche under the facility is structured as a
four-year commitment and is available for general corporate purposes. All
borrowings under the Credit Facility are based on varying terms of LIBOR. The
Bank has irrevocably undertaken to honor any demand by the lenders to repay any
borrowings which are due and payable by the Savings Bank but have not been paid.
Any borrowings under the Credit Facility will mature on May 24, 2003; however,
the final maturity of each tranche may be extended for three additional one-year
periods with the lenders' consent.
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.
The Corporation has three 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 $1.6 billion 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. At March 31, 2000, the Corporation
had existing unsecured senior debt outstanding under the shelf registrations of
$550 million including $125 million maturing in 2003, $225 million maturing in
2006, and $200 million maturing in 2008.
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 2000 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, 2000, the Company held $1.6 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, 2000, there are no conditions
or events since the notifications discussed above that management believes 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, 2000
Capital One Bank
Tier 1 Capital 11.36% 4.00% 6.00%
Total Capital 13.94 8.00 10.00
Tier 1 Leverage 10.71 4.00 5.00
Capital One, F.S.B.(1)
Tier 1 Capital 10.66% 4.00% 6.00%
Total Capital 12.28 8.00 10.00
Tier 1 Leverage 8.61 4.00 5.00
- - ------------------------------------------- --------------------------- ---------------------------------
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)
Tier 1 Capital 9.75% 4.00% 6.00%
Total Capital 12.00 12.00 10.00
Tier 1 Leverage 9.75 8.00 5.00
- - ------------------------------------------- --------------------------- ---------------------------------
</TABLE>
(1) Before June 30, 1999, the Savings Bank was subject to capital requirements
that exceed minimum capital adequacy requirements, including the requirement
to maintain a minimum Tier 1 Leverage/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, 2000, the Company's Tier 1 Leverage
ratio was 12.42%.
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, 2000, retained earnings of the Bank and the savings bank of
$293.0 million and $101.4 million, respectively, were available for payment of
dividends to the Corporation, without prior approval by the regulators.
Off-Balance Sheet Risk
The Company is subject to off-balance sheet risk in the normal course
of business through commitments to extend credit, securitization transactions
and 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 the London InterBank Offering Rate, 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 that 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, 2000, the Company was in compliance with the policy; more than
99% of the outcomes generated by the model produced a managed net interest
income of no more than 0.25% below the mean outcome. The interest rate scenarios
evaluated as of March 31, 2000, included scenarios in which short-term interest
rates rose by as much as 450 basis points or fell by as much as 250 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, 2000, 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, 1999
(Part I, Item 1, Risk Factors).
The Company has set targets, dependent on the factors set forth below,
to achieve a 25% return on equity in 2000 and to increase its earnings per share
in 2000 by approximately 30% over 1999 earnings per share. 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 and Internet 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,
including automobile financing. Credit card opportunities include, and are
expected to continue to include, a wide variety of highly customized products
with interest rates, credit lines and other features specifically tailored for
numerous 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.
International Expansion
The Company has expanded its existing operations outside of the United
States and has experienced growth in the number of accounts and loan balances in
its international business. To date, the Company's principal operations outside
of the United States have been in the United Kingdom, with additional operations
in Canada. 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. The Company
anticipates entering and doing business in additional countries from time to
time as opportunities arise.
Internet Services and Products
The Company's Internet services include account decisioning, real-time
account numbering, retail deposit-taking and account servicing. The Company
expects to expand its origination and servicing of products on the Internet,
provided that it can continue to limit fraud and safeguard its customers'
privacy.
Telecommunications
The Company markets telecommunications services through its subsidiary
America One Communications, Inc. ("America One"). The Company is testing various
wireless products and services and expects to focus on underserved markets.
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, fund these new
businesses and manage expenses. 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 results of operations and
financial condition in the future will reflect its historical financial
performance.
Marketing Investment
The Company expects its 2000 marketing expenses to exceed 1999's
expense level, as the Company continues to invest in its various credit card
products and services, brand management 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 grow, generating balances and accounts 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
has reduced the productivity of marketing dollars invested in that line 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 traditional
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.
For example, the cost to acquire an America One wireless account traditionally
has included the cost of providing a free phone to the customer, and
consequently has been 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 Company is also developing a brand marketing strategy
to supplement current strategies. The actual amount of marketing investment is
subject to a variety of external and internal factors, such as competition in
the consumer credit and wireless service industries, 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
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 2000. 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 to 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
degree of seasoning of the Company's portfolio and the product mix.
As of March 31, 2000, the Company had the lowest net charge-off rate
among the top ten credit card issuers in the United States. However, management
expects delinquencies to increase moderately through 2000 and that, as a result,
charge-offs will also increase in 2000. 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 more quickly. In addition, competition in the credit card
industry, as measured by the volume of mail solicitations, declined in 1999 but
remains very high. 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.
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
and other 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, including the flexibility of
financial services companies to obtain, use and share consumer data; 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; 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, 1999 (Part I, Item 1, Risk Factors).
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 2000 Annual Meeting of Stockholders was held April 27, 2000. (b) The
following directors were elected at such meeting:
Richard D. Fairbank
Stanley I. Westreich
The following directors will also continue in their office after such meeting:
Nigel W. Morris
W. Ronald Dietz
James A. Flick, Jr.
Patrick W. Gross
James V. Kimsey
(c) The following matters were voted upon at such meeting:
Election of Directors Votes For Votes Withheld
Richard D. Fairbank 163,967,366 1,583,173
Stanley I. Westreich 163,928,148 1,622,391
Item Votes For Votes Against Abstain
Approval of amendment to
Capital One's restated certificate
of incorporation to increase the
number of authorized shares of
common stock from 300 million
to one billion 114,459,885 50,286,001 804,653
Ratification of the selection of
Ernst & Young LLP as independent
auditors of the Company for 2000 164,603,756 418,561 528,222
No other matter was voted upon at such meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated January
18, 2000, Commission File No. 1-13300, enclosing its press
release dated January 18, 2000.
The Company filed a Current Report on Form 8-K, dated February
23, 2000, Commission File No. 1-13300, enclosing its press
release dated February 23, 2000.
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 15, 2000 /s/ David M. Willey
------------------------------
David M. Willey
Senior Vice President,
Corporate Financial Management
(Chief Accounting Officer
and duly authorized officer
of the Registrant)
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000927628
<NAME> COFC
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-01-2000
<PERIOD-END> Mar-31-2000
<EXCHANGE-RATE> 1
<CASH> 84,084
<INT-BEARING-DEPOSITS> 96,491
<FED-FUNDS-SOLD> 18,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,519,027
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 9,449,498
<ALLOWANCE> (372,000)
<TOTAL-ASSETS> 12,525,058
<DEPOSITS> 4,096,241
<SHORT-TERM> 1,955,978
<LIABILITIES-OTHER> 1,102,822
<LONG-TERM> 3,818,936
0
0
<COMMON> 1,997
<OTHER-SE> 1,549,084
<TOTAL-LIABILITIES-AND-EQUITY> 12,525,058
<INTEREST-LOAN> 488,937
<INTEREST-INVEST> 24,734
<INTEREST-OTHER> 1,776
<INTEREST-TOTAL> 515,447
<INTEREST-DEPOSIT> 52,120
<INTEREST-EXPENSE> 161,950
<INTEREST-INCOME-NET> 353,497
<LOAN-LOSSES> 126,525
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 709,920
<INCOME-PRETAX> 172,112
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106,709
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.51
<YIELD-ACTUAL> 17.83
<LOANS-NON> 0
<LOANS-PAST> 615,355
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 342,000
<CHARGE-OFFS> (147,654)
<RECOVERIES> 51,985
<ALLOWANCE-CLOSE> 372,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
