UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
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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)
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(703) 205-1000
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(Registrant's telephone number, including area code)
(Not Applicable)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of October 31, 2000, there were 196,943,642 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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September 30, 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.............................................11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..........................30
Signatures................................................30
<PAGE>
Item 1.
CAPITAL ONE FINANCIAL CORPORATION
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share data) (unaudited)
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
--------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Assets:
Cash and due from banks $ 81,403 $ 134,065
Federal funds sold and resale agreements 12,688
Interest-bearing deposits at other banks 128,377 112,432
--------------------------------------------------------------------- -------------- --------------
Cash and cash equivalents 222,468 246,497
Securities available for sale 1,652,330 1,856,421
Consumer loans 12,331,088 9,913,549
Less: Allowance for loan losses (457,000) (342,000)
--------------------------------------------------------------------- -------------- --------------
Net loans 11,874,088 9,571,549
Premises and equipment, net 560,974 470,732
Interest receivable 93,817 64,637
Accounts receivable from securitizations 1,403,377 661,922
Other 571,771 464,685
--------------------------------------------------------------------- -------------- --------------
Total assets $ 16,378,825 $ 13,336,443
--------------------------------------------------------------------- -------------- --------------
Liabilities:
Interest-bearing deposits $ 6,323,924 $ 3,783,809
Other borrowings 2,820,533 2,780,466
Senior notes 4,119,101 4,180,548
Interest payable 109,842 116,405
Other 1,230,037 959,608
--------------------------------------------------------------------- -------------- --------------
Total liabilities 14,603,437 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
1,000,000,000 and 300,000,000 shares, and 199,670,421 issued
as of September 30, 2000 and December 31, 1999, respectively 1,997 1,997
Paid-in capital, net 559,595 613,590
Retained earnings 1,348,081 1,022,296
Cumulative other comprehensive loss (25,337) (31,262)
Less: Treasury stock, at cost; 2,944,210 and 2,624,006
shares as of September 30, 2000 and December 31, 1999,
respectively (108,948) (91,014)
--------------------------------------------------------------------- ------------- --------------
Total stockholders' equity 1,775,388 1,515,607
--------------------------------------------------------------------- -------------- --------------
Total liabilities and stockholders' equity $ 16,378,825 $ 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 Nine Months Ended
September 30 September 30
---------------------------------------------------- ---------- ---------- ----------- -----------
2000 1999 2000 1999
---------------------------------------------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Consumer loans, including fees $ 606,872 $ 386,727 $ 1,607,695 $ 1,064,987
Securities available for sale 23,367 24,256 70,946 74,001
Other 1,474 1,053 5,026 3,892
---------------------------------------------------- ---------- ---------- ----------- -----------
Total interest income 631,713 412,036 1,683,667 1,142,880
Interest Expense:
Deposits 90,197 38,003 205,936 88,383
Other borrowings 55,967 20,824 144,335 67,572
Senior notes 72,679 76,980 203,071 230,129
---------------------------------------------------- ---------- ---------- ----------- -----------
Total interest expense 218,843 135,807 553,342 386,084
---------------------------------------------------- ---------- ---------- ----------- -----------
Net interest income 412,870 276,229 1,130,325 756,796
Provision for loan losses 193,409 114,061 470,944 262,948
---------------------------------------------------- ---------- ---------- ----------- -----------
Net interest income after provision for loan losses 219,461 162,168 659,381 493,848
Non-Interest Income:
Servicing and securitizations 307,343 311,217 860,741 876,777
Service charges and other fees 424,087 275,900 1,140,025 743,227
Interchange 65,039 33,946 161,570 97,732
---------------------------------------------------- ---------- ---------- ----------- -----------
Total non-interest income 796,469 621,063 2,162,336 1,717,736
Non-Interest Expense:
Salaries and associate benefits 264,171 199,048 735,625 572,703
Marketing 233,188 175,163 646,686 529,493
Communications and data processing 78,064 68,755 221,819 189,305
Supplies and equipment 66,325 48,076 176,766 127,083
Occupancy 30,721 19,117 83,263 49,412
Other 146,488 119,262 406,982 315,815
---------------------------------------------------- ---------- ---------- ----------- -----------
Total non-interest expense 818,957 629,421 2,271,141 1,783,811
---------------------------------------------------- ---------- ---------- ----------- -----------
Income before income taxes 196,973 153,810 550,576 427,773
Income taxes 74,850 58,448 209,219 162,554
---------------------------------------------------- ---------- ---------- ----------- -----------
Net income $ 122,123 $ 95,362 $ 341,357 $ 265,219
---------------------------------------------------- ---------- ---------- ----------- -----------
Basic earnings per share $ 0.62 $ 0.48 $ 1.73 $ 1.34
---------------------------------------------------- ---------- ---------- ----------- -----------
Diluted earnings per share $ 0.58 $ 0.45 $ 1.63 $ 1.26
---------------------------------------------------- ---------- ---------- ----------- -----------
Dividends paid per share $ 0.03 $ 0.03 $ 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
(dollars 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 265,219 265,219
Other comprehensive income (loss), net of income tax:
Unrealized losses on securities, net of
income tax benefit of $58,019 (94,662) (94,662)
Foreign currency translation adjustments 1,775 1,775
------- ----------
Other comprehensive loss (92,887) (92,887)
----------
Comprehensive income 172,332
Cash dividends - $.08 per share (15,492) (15,492)
Purchases of treasury stock (80,004) (80,004)
Issuances of common stock 45 (740) 20 8,228 7,508
Exercise of stock options (22,614) 54,087 31,473
Common stock issuable under incentive plan 47,221 47,221
Other items, net 3,737 3,737
--------------------------------------------------- ----------- ------ ----------- ----------- ------------ --------- ----------
Balance, September 30, 1999 199,670,421 $1,997 $ 625,771 $ 929,585 $ (32,232) $ (87,940) $1,437,181
--------------------------------------------------- ----------- ------ ----------- ----------- ------------ --------- ----------
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 341,357 341,357
Other comprehensive income, net of income tax:
Unrealized gains on securities, net of
income taxes of $5,549 9,053 9,053
Foreign currency translation adjustments (3,128) (3,128)
------- ----------
Other comprehensive income 5,925 5,925
----------
Comprehensive income 347,282
Cash dividends - $.08 per share (15,572) (15,572)
Purchases of treasury stock (136,347) (136,347)
Issuances of common stock 855 13,999 14,854
Exercise of stock options (73,415) 104,414 30,999
Common stock issuable under incentive plan 15,473 15,473
Other items, net 3,092 3,092
--------------------------------------------------- ----------- ------ ----------- ----------- ------------ --------- ----------
Balance, September 30, 2000 199,670,421 $1,997 $ 559,595 $ 1,348,081 $ (25,337) $(108,948) $1,775,388
--------------------------------------------------- ----------- ------ ----------- ----------- ------------ --------- ----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
CAPITAL ONE FINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(in thousands) (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------------------------------------------------------- ------------- -------------
2000 1999
--------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Operating Activities:
Net income $ 341,357 $ 265,219
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 470,944 262,948
Depreciation and amortization, net 174,573 122,518
Stock compensation plans 15,473 47,221
Increase in interest receivable (29,180) (12,433)
(Increase) decrease in accounts receivable from securitizations (741,242) 101,577
Increase in other assets (138,075) (150,303)
Decrease in interest payable (6,563) (3,949)
Increase in other liabilities 270,429 252,634
--------------------------------------------------------------------- ------------- -------------
Net cash provided by operating activities 357,716 885,432
--------------------------------------------------------------------- ------------- -------------
Investing Activities:
Purchases of securities available for sale (644,125) (649,863)
Proceeds from maturities of securities available for sale 83,759 178,884
Proceeds from sales of securities available for sale 778,875 522,357
Proceeds from securitizations of consumer loans 2,476,893 1,714,514
Net increase in consumer loans (5,447,755) (4,136,573)
Recoveries of loans previously charged off 175,151 87,676
Additions of premises and equipment, net (218,454) (273,532)
--------------------------------------------------------------------- ------------- -------------
Net cash used in investing activities (2,795,656) (2,556,537)
--------------------------------------------------------------------- ------------- -------------
Financing Activities:
Net increase in interest-bearing deposits 2,540,115 1,576,421
Net increase (decrease) in other borrowings 39,874 (627,411)
Issuances of senior notes 994,176 1,453,059
Maturities of senior notes (1,056,387) (864,779)
Dividends paid (15,572) (15,492)
Purchases of treasury stock (136,347) (80,004)
Net proceeds from issuances of common stock 17,053 11,098
Proceeds from exercise of stock options 30,999 31,473
--------------------------------------------------------------------- ------------- -------------
Net cash provided by financing activities 2,413,911 1,484,365
--------------------------------------------------------------------- ------------- -------------
Decrease in cash and cash equivalents (24,029) (186,740)
Cash and cash equivalents at beginning of period 246,497 300,167
--------------------------------------------------------------------- ------------- -------------
Cash and cash equivalents at end of period $ 222,468 $ 113,427
--------------------------------------------------------------------- ------------- -------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
CAPITAL ONE FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 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 (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 and nine
months ended September 30, 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.
Note B: Significant Accounting Policies
Cash and Cash Equivalents
Cash paid for interest for the nine months ended September 30, 2000 and
1999 was $559,905 and $384,812, respectively. Cash paid for income taxes for the
nine months ended September 30, 2000 and 1999 was $182,100 and $205,515,
respectively.
Segments
The Company maintains three distinct business segments: lending,
telecommunications and "other." Lending is the Company's only reportable
business segment, based on the definitions provided in Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Substantially all of the Company's reported
assets, revenues and income are derived from the lending segment in all periods
presented. All revenue is generated from external customers and is predominantly
derived in the United States.
Note C: Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." SFAS No. 133 was subsequently amended in June 1999 by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133". SFAS No. 133, SFAS No. 137 and SFAS
No. 138 (all together "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. SFAS 133 as amended is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Company
is in the process of evaluating the impact of the adoption of SFAS 133 as
amended, and based upon the FASB's interpretations to date does not expect it to
have a material effect on the Company's financial position or results of
operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
a replacement of SFAS 125" ("SFAS 140"). SFAS 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain additional disclosures. The disclosure
requirements and collateral provisions of SFAS 140 are effective for fiscal
years ending after December 15, 2000, while the other provisions of the new
standard apply prospectively to transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The adoption of
SFAS 140 is not expected to have a material effect on the Company's financial
position or the results of operations.
Note D: Borrowings
In August 2000, the Bank entered into a multicurrency revolving
credit facility (the "Multicurrency Facility"). The Multicurrency Facility is
intended to finance the Company's business in the United Kingdom and is
comprised of two Tranches, each in the amount of Euro 300,000 ($270,800
equivalent based on the exchange rate at closing). The Tranche A facility is
intended for general corporate purposes whereas the Trabche B facility is
intended to replace and extend the Corporation's prior credit facility for U.K.
pounds sterling and Canadian dollars, which matured on August 29, 2000. The
Corporation serves as guarantor of all borrowings under the Muticurrency
Facility and the Bank's subsidiary, Capital One Bank Europe plc, is eligible to
be added as a borrower under the Bank's guarantee. Tranche A of the commitment
terminates on August 9, 2001, and Tranche B of the commitment terminates August
9, 2004.
In August 2000, the Company entered into four bilateral revolving
credit facilities with different lenders (the "Bilateral Facilities"). The
Bilateral Facilities are being used to finance the Company's business in Canada
and for general corporate purposes. Two of the Bilateral Facitilites are for
Capital One, Inc., guarnateed by the Coporation, and are each in the amount of
C$100,000 ($67,400 equivalent based on exchange rate at closing). The other two
Bilateral Facilities are for the Corporation in the amount of $70,000 and
$30,000. Each of the Bilateral Facilities will terminate on August 10, 2001.
Note E: Comprehensive Income
Comprehensive income for the three months ended September 30, 2000 and
1999 was as follows:
Three Months Ended
September 30
----------------------------------------- -----------------------
2000 1999
----------------------------------------- ----------- -----------
Comprehensive Income:
Net income $ 122,123 $ 95,362
Other comprehensive income (loss) 8,486 (44,950)
----------------------------------------- ----------- -----------
Total comprehensive income $ 130,609 $ 50,412
----------------------------------------- ----------- -----------
Note F: Associate Stock Plans
The Corporation's June 11, 1998 stock options grant to senior
management vested in September 2000. This grant included approximately 2,500,000
performance-based options.
Note G: Earnings Per Share
Basic earnings per share is based on the weighted average number of
common shares outstanding, excluding any dilutive effects of options. 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 Nine Months Ended
September 30 September 30
-------------------------------------------------- --------------------- --------------------
(shares in thousands) 2000 1999 2000 1999
-------------------------------------------------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 122,123 $ 95,362 $ 341,357 $ 265,219
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 196,255 197,424 196,303 197,562
Effect of dilutive securities:
Stock options 13,800 12,718 12,829 13,108
-------------------------------------------------- ---------- ---------- --------- ---------
Denominator for diluted earnings per share -
Adjusted weighted-average shares 210,055 210,142 209,132 210,670
-------------------------------------------------- ---------- --------- --------- ---------
Basic earnings per share $0.62 $0.48 $ 1.73 $ 1.34
-------------------------------------------------- ---------- --------- --------- ---------
Diluted earnings per share $ 0.58 $ 0.45 $ 1.63 $ 1.26
-------------------------------------------------- ---------- --------- --------- ---------
</TABLE>
Note H: 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. The
motion for summary judgement was granted in favor of the Bank on both counts,
but the plaintiffs were granted leave to amend the complaint. Plaintiff has
filed an Amended Complaint and the Bank's Demurrer is 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.
<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 (including credit cards) and deposit products. The Corporation and its
subsidiaries are collectively referred to as the "Company." As of September 30,
2000, the Company had 29.4 million customers and $24.2 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 September 30, 2000 of $122.1
million, or $0.58 per share, compares to net income of $95.4 million, or $.45
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 $136.6 million, or 49%, as the net interest margin increased to
11.95% from 11.40% and average earning assets increased by 43%. The provision
for loan losses increased $79.3 million, or 70%, as average reported loans
increased 55% and delinquencies increased. Non-interest income increased $175.4
million, or 28%, primarily as a result of an increase in average accounts of 41%
and an increase in the frequency of certain fees charged due to increased
purchase volume. Marketing expense increased $58.0 million, or 33%, to $233.2
million as the Company continues to invest in new product opportunities.
Increases in salaries and associate benefits expense of $65.1 million, or 33%,
and other non-interest expense (excluding marketing) of $66.4 million, or 26%,
primarily reflected increased staff and 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.
Net income for the nine months ended September 30, 2000 was $341.4
million, or $1.63 per share, compared to net income of $265.2 million, or $1.26
per share, for the same period in 1999. This increase in net income primarily
reflected the increases in asset and account volumes accompanied by an increase
in net interest margin as discussed above. 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 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 No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment 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
September 30
----------------------------------------------- --------------------------------
(in thousands) 2000 1999
----------------------------------------------- --------------- ---------------
Period-End Balances:
Reported consumer loans $ 12,331,088 $ 8,286,210
Off-balance sheet consumer loans 11,821,063 10,231,201
----------------------------------------------- --------------- ---------------
Total managed consumer loan portfolio $ 24,152,151 $ 18,517,411
----------------------------------------------- --------------- ---------------
Average Balances:
Reported consumer loans $ 12,093,781 $ 7,790,933
Off-balance sheet consumer loans 10,926,377 10,371,042
----------------------------------------------- --------------- ---------------
Total average managed consumer loan portfolio $ 23,020,158 $ 18,161,975
----------------------------------------------- --------------- ---------------
Nine Months Ended
September 30
----------------------------------------------- --------------------------------
(in thousands) 2000 1999
----------------------------------------------- --------------- ---------------
Average Balances:
Reported consumer loans $ 10,614,434 $ 7,346,484
Off-balance sheet consumer loans 10,763,801 10,387,868
----------------------------------------------- --------------- ---------------
Total average managed consumer loan portfolio $ 21,378,235 $ 17,734,352
----------------------------------------------- --------------- ---------------
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.
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 Nine Months Ended
September 30 September 30
---------------------------- --------------------------------- --------------------------------
(dollars in thousands) 2000 1999 2000 1999
---------------------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Reported:
Average earning assets $ 13,822,750 $ 9,688,556 $ 12,363,221 $ 9,262,944
Net interest margin(1) 11.95% 11.40% 12.19% 10.89%
Loan yield 20.07 19.86 20.20 19.33
---------------------------- --------------- --------------- --------------- --------------
Managed:
Average earning assets $ 24,749,127 $ 20,059,598 $ 23,127,022 $ 19,650,812
Net interest margin(1) 10.75% 11.14% 10.94% 10.86%
Loan yield 18.06 17.92 18.02 17.49
---------------------------- --------------- --------------- --------------- --------------
</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 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.
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, lifestyle 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>
<CAPTION>
-------------------------------------------------------------------------------------
Table 3 - MANAGED RISK ADJUSTED REVENUE
-------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- ------------------------ ----------------------------
(dollars in thousands) 2000 1999 2000 1999
----------------------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Managed Income Statement:
Net interest income $ 665,059 $ 558,889 $ 1,898,265 $ 1,599,926
Non-interest income 619,909 438,645 1,663,631 1,194,769
Net charge-offs (218,404) (176,019) (621,324) (511,152)
----------------------------- ----------- ----------- ------------- -------------
Risk adjusted revenue $ 1,066,564 $ 821,515 $ 2,940,572 $ 2,283,543
----------------------------- ----------- ----------- ------------- -------------
Ratios(1):
Net interest margin 10.75% 11.14% 10.94% 10.86%
Non-interest income 10.02 8.75 9.59 8.11
Net charge-offs (3.53) (3.51) (3.58) (3.47)
----------------------------- ----------- ----------- ------------- -------------
Risk adjusted margin 17.24% 16.38% 16.95% 15.49%
----------------------------- ----------- ----------- ------------- -------------
</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 includes interest-bearing deposits, other borrowings and borrowings from
senior notes.
Reported net interest income for the three months ended September 30,
2000 was $412.9 million, compared to $276.2 million for the same period in the
prior year, representing an increase of $136.6 million, or 49%. For the nine
months ended September 30, 2000, net interest income was $1.1 billion compared
to $756.8 million for the same period in 1999, representing an increase of
$373.5 million, or 49%. Net interest margin increased 55 and 130 basis points to
11.95% and 12.19% for the three and nine months ended September 30, 2000,
respectively, compared to the same periods in the prior year. These increases
were primarily a result of the increases in the yield on earning assets of 127
and 171 basis points for the three and nine months ended September 30, 2000,
respectively, to 18.28% from 17.01% and to 18.16% from 16.45%, respectively, as
compared to the same periods in the prior year. The increase in the yield on
earning assets was primarily attributable to an increase in the average balance
in the reported consumer loan portfolio of 55% and 44% for the three and nine
months ended September 30, 2000, respectively, as well as an increase in the
yield on those consumer loans. The yield on consumer loans increased 21 and 87
basis points, respectively as a result of a slight shift in the mix of the
portfolio to higher yielding assets and an increase in the frequency of past-due
fees charged as compared to the same periods in the prior year.
<PAGE>
Managed net interest income increased $106.2 million, or 19%, and
$298.3 million, or 19%, for the three and nine months ended September 30, 2000,
respectively, compared to the same periods in the prior year. The increases in
managed net interest income were the result of managed average earning assets
increasing 18% and the managed net interest margin increasing 8 basis points to
10.94% for the nine months ended September 30, 2000, respectively. The increase
in managed net interest margin principally reflects increases in average earning
asset composition and earning asset yields discussed above.
Table 4 provides average balance sheet data, an analysis of net
interest income, net interest spread (the difference between the yield on
earning assets and the cost of interest-bearing liabilities) and net interest
margin for the three and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Table 4 - STATEMENTS OF AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
-------------------------------------------------------------------------------------------------------------
Three Months Ended September 30
---------------------------------- -------------------------------------------------------------------------
2000 1999
---------------------------------- ------------------------------------ ----------------------------------
Average Income/ Yield/ Average Income/ Yield/
(dollars in thousands) Balance Expense Rate Balance Expense Rate
---------------------------------- ------------ ----------- --------- ------------ ----------- -------
Assets:
Earning assets
<S> <C> <C> <C> <C> <C> <C>
Consumer loans(1) $ 12,093,781 $ 606,872 20.07% $ 7,790,933 $ 386,727 19.86%
Securities available for sale 1,557,088 23,367 6.00 1,683,839 24,256 5.76
Other 171,881 1,474 3.43 213,784 1,053 1.97
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Total earning assets 13,822,750 $ 631,713 18.28% 9,688,556 $ 412,036 17.01%
Cash and due from banks 110,126 44,732
Allowance for loan losses (415,333) (272,667)
Premises and equipment, net 563,388 399,289
Other assets 2,025,685 1,359,173
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Total assets $ 16,106,616 $ 11,219,083
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Liabilities and Equity:
Interest-bearing liabilities
Deposits $ 5,787,748 $ 90,197 6.23% $ 3,001,711 $ 38,003 5.06%
Other borrowings 3,084,407 55,967 7.26 1,333,434 20,824 6.25
Senior notes 4,139,665 72,679 7.02 4,494,440 76,980 6.85
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Total interest-bearing liabilities 13,011,820 $ 218,843 6.73% 8,829,585 $ 135,807 6.15%
Other 1,351,476 928,919
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Total liabilities 14,363,296 9,758,504
Equity 1,743,320 1,460,579
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Total liabilities and equity $ 16,106,616 $ 11,219,083
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Net interest spread 11.55% 10.86%
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Interest income to
average earning assets 18.28% 17.01%
Interest expense to
average earning assets 6.33 5.61
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Net interest margin 11.95% 11.40%
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
</TABLE>
(1) Interest income includes past-due fees on loans of approximately $206,880
and $122,409 for the three months ended September 30, 2000 and 1999,
respectively.
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30
---------------------------------- ------------------------------------------- -----------------------------
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) $ 10,614,434 $ 1,607,695 20.20% $ 7,346,484 $ 1,064,987 19.33%
Securities available for sale 1,585,893 70,946 5.96 1,743,930 74,001 5.66
Other 162,894 5,026 4.11 172,530 3,892 3.01
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Total earning assets 12,363,221 $ 1,683,667 18.16% 9,262,944 $ 1,142,880 16.45%
Cash and due from banks 97,519 18,133
Allowance for loan losses (380,056) (255,167)
Premises and equipment, net 532,504 331,584
Other assets 1,672,996 1,303,482
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Total assets $ 14,286,184 $ 10,660,976
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Liabilities and Equity:
Interest-bearing liabilities
Deposits $ 4,729,623 $ 205,936 5.81% $ 2,461,154 $ 88,383 4.79%
Other borrowings 2,760,087 144,335 6.97 1,568,835 67,572 5.74
Senior notes 3,940,315 203,071 6.87 4,436,182 230,129 6.92
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Total interest-bearing liabilities 11,430,025 $ 553,342 6.45% 8,466,171 $ 386,084 6.08%
Other liabilities 1,210,290 815,606
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Total liabilities 12,640,315 9,281,777
Equity 1,645,869 1,379,199
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Total liabilities and equity $ 14,286,184 $ 10,660,976
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Net interest spread 11.71% 10.37%
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Interest income to
average earning assets 18.16% 16.45%
Interest expense to
average earning assets 5.97 5.56
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
Net interest margin 12.19% 10.89%
---------------------------------- ------------ ----------- ------- ------------ ----------- -------
</TABLE>
(1) Interest income includes past-due fees on loans of approximately $554,245
and $341,470 for the nine months ended September 30, 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>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Table 5 - INTEREST VARIANCE ANALYSIS
------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, 2000 vs 1999 September 30, 2000 vs 1999
-------------------------------- -------------------------------------- -----------------------------------------
Increase Change due to(1) Increase Change due to(1)
(in thousands) (Decrease) Volume Yield/Rate (Decrease) Volume Yield/Rate
-------------------------------- ----------- ----------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Consumer loans $ 220,145 $ 215,874 $ 4,271 $ 542,708 $ 493,030 $ 49,678
Securities available for sale (889) (5,784) 4,895 (3,055) (8,608) 5,553
Other 421 (1,218) 1,639 1,134 (354) 1,488
-------------------------------- ----------- ----------- ----------- ------------ ------------- ------------
Total interest income 219,677 186,985 32,692 540,787 412,815 127,972
Interest Expense:
Deposits 52,194 41,795 10,399 117,553 95,530 22,023
Other borrowings 35,143 31,286 3,857 76,763 59,878 16,885
Senior notes (4,301) (14,973) 10,672 (27,058) (25,565) (1,493)
-------------------------------- ----------- ----------- ----------- ------------ ------------- ------------
Total interest expense 83,036 69,349 13,687 167,258 142,239 25,019
-------------------------------- ----------- ----------- ----------- ------------ ------------- ------------
Net interest income(1) $ 136,641 $ 122,919 $ 13,722 $ 373,529 $ 275,538 $ 97,991
-------------------------------- ----------- ----------- ----------- ------------ ------------- ------------
</TABLE>
(1) The change in interest due to both volume and rates has been allocated in
proportion to the relationship of the absolute dollar amounts of the change
in each. The changes in income and expense are calculated independently for
each line in the table. The totals for the volume and yield/rate columns
are not the sum of the individual lines.
Servicing and Securitizations Income
Servicing and securitization 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 $3.9 million, or 1%, to $307.3 million for the three months ended
September 30, 2000, from $311.2 million in the same period in the prior year.
Servicing and securitizations income decreased $16.0 million, or 2%, to $860.7
million for the nine months ended September 30, 2000, from $876.8 million in the
same period in the prior year. These decreases were primarily due to the
decrease in net spread on the off-balance sheet loan portfolio as a result of
the increase in interest paid to certificateholders driven by higher interest
rates.
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 receivable and
are included in servicing and securitization 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.
Other Non-Interest Income
Interchange income increased to $65.0 million and $161.6 million, or
92% and 65%, for the three and nine months ended September 30, 2000,
respectively, compared to $33.9 million and $97.7 million for the same periods
in the prior year. These increases are primarily attributable to increased
purchase volume and new account growth in the three and nine months ended
September 30, 2000. Service charges and other fees increased to $424.1 million
and $1.1 billion, or 54% and 53%, for the three and nine months ended September
30, 2000, respectively, compared to $275.9 million and $743.2 million for the
same periods in the prior year. These increases were primarily due to the
increase in average accounts of 41% and 40% for the three and nine months ended
September 30, 2000, respectively, compared to the same period in the prior year.
Non-Interest Expense
Non-interest expense for the three and nine months ended September 30,
2000 was $819.0 million and $2.3 billion, respectively, an increase of 30% and
27% over $629.4 million and $1.8 billion, respectively, for the same periods in
the prior year. Contributing to the increase in non-interest expense for the
three and nine months ended September 30, 2000 was salaries and associate
benefits expense which increased $65.1 million, or 33%, and $162.9 million, or
28%, respectively. Marketing expense increased $58.0 million and $117.2 million,
or 33% and 22%, to $233.2 million and $646.7 million for the three and nine
months ended September 30, 2000, respectively, as the Company continued to
invest in new and existing product opportunities. All other non-interest
expenses increased $66.4 million and $207.2 million, or 26% and 30%, to $321.6
million and $888.8 million for the three and nine months ended September 30,
2000, respectively, from $255.2 million and $681.6 million for the same periods
in the prior year. These increases were primarily a result of the 41% and 40%
increases in the average number of accounts for the three and nine months ended
September 30, 2000, respectively, as compared to the same periods in the prior
year, as well as the Company's continued expansion into new product and
geographic markets, which resulted in a corresponding increase in all
operational costs.
Income Taxes
The Company's income tax rate was 38% for the three and nine months
ended September 30, 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
in the delinquency and loss levels of the portfolio. Accounts tend to exhibit a
rising trend of delinquency and credit losses as they season.
Delinquencies
Table 6 shows the Company's consumer loan delinquency trends for the
periods presented 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
---------------------------------------------------------------------------------------
September 30
----------------------- --------------------------------------------------------------
2000 1999
----------------------- ------------------------------ -----------------------------
Percent of Percent of
(dollars in thousands) Loans Total Loans Loans Total Loans
----------------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Reported:
Loans outstanding $ 12,331,088 100.00% $ 8,286,210 100.00%
Loans delinquent:
30-59 days 324,006 2.63 193,051 2.33
60-89 days 198,832 1.61 106,666 1.29
90 or more days 362,726 2.94 167,812 2.02
----------------------- -------------- -------------- -------------- -------------
Total $ 885,564 7.18% $ 467,529 5.64%
----------------------- -------------- -------------- -------------- -------------
Managed:
Loans outstanding $ 24,152,151 100.00% $ 18,517,411 100.00%
Loans delinquent:
30-59 days 483,595 2.00 379,764 2.05
60-89 days 289,636 1.20 211,022 1.14
90 or more days 512,717 2.12 345,630 1.87
----------------------- -------------- ------------- -------------- -------------
Total $ 1,285,948 5.32% $ 936,416 5.06%
----------------------- -------------- ------------- -------------- -------------
</TABLE>
The 30-plus day delinquency rate for the reported consumer loan
portfolio was 7.18% as of September 30, 2000, up 154 basis points from 5.64% as
of September 30, 1999 and up 36 basis points from 6.82% as of June 30, 2000. The
delinquency rate for the managed consumer loan portfolio was 5.32% as of
September 30, 2000, up 26 basis points from 5.06% as of September 30, 1999 and
down 3 basis points from 5.35% as of June 30, 2000. Both the reported and
managed consumer loan delinquency rate increases as of September 30, 2000 from
the same period in the prior year principally reflected more seasoned accounts.
In addition, the mix of the reported loan portfolio in the current period
includes more accounts that tend to have higher delinquencies than the portfolio
average.
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 Nine Months Ended
September 30 September 30
------------------------------------- ------------------------------ ------------------------------
(dollars in thousands) 2000 1999 2000 1999
------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Reported:
Average loans outstanding $ 12,093,781 $ 7,790,933 $ 10,614,434 $ 7,346,484
Net charge-offs 142,759 75,737 352,173 190,792
Net charge-offs as a percentage
of average loans outstanding 4.72% 3.89% 4.42% 3.46%
------------------------------------- -------------- -------------- -------------- --------------
Managed:
Average loans outstanding $ 23,020,158 $ 18,161,975 $ 21,378,235 $ 17,734,352
Net charge-offs 218,404 176,019 621,324 511,152
Net charge-offs as a percentage
of average loans outstanding 3.80% 3.88% 3.88% 3.84%
------------------------------------- -------------- -------------- -------------- --------------
</TABLE>
Net charge-offs of managed loans increased $42.4 million and $110.2
million, or 24% and 22%, while average managed consumer loans grew 27% and 21%
for the three and nine months ended September 30, 2000, respectively, compared
to the same periods in the prior year. For the three and nine months ended
September 2000, the Company's net charge-offs as a percentage of average managed
loans outstanding were 3.80% and 3.88%, respectively, compared to 3.88% and
3.84% for the same periods in the prior year.
Provision and Allowance for Loan Losses
The allowance for loan losses is maintained at an 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 Nine Months Ended
September 30 September 30
------------------------------------------------- ------------------------- ------------------------
(dollars in thousands) 2000 1999 2000 1999
------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 407,000 $ 266,000 $ 342,000 $ 231,000
Provision for loan losses 193,409 114,061 470,944 262,948
Other (650) 1,676 (3,771) 2,844
Charge-offs (211,099) (107,447) (527,324) (278,469)
Recoveries 68,340 31,710 175,151 87,677
------------------------------------------------- ----------- ----------- ----------- -----------
Net charge-offs (142,759) (75,737) (352,173) (190,792)
------------------------------------------------- ----------- ----------- ----------- -----------
Balance at end of period $ 457,000 $ 306,000 $ 457,000 $ 306,000
------------------------------------------------- ----------- ----------- ----------- -----------
Allowance for loan losses to loans at period-end 3.71% 3.69% 3.71% 3.69%
------------------------------------------------- ----------- ----------- ----------- -----------
</TABLE>
For the three and nine months ended September 30, 2000, the provision
for loan losses increased to $193.4 million and $470.9 million or 70% and 79%,
respectively, from $114.1 million and $262.9 million for the comparable periods
in the prior year.
Funding
The Company has established access to a variety of funding
alternatives, in addition to securitization of its consumer loans. In June 2000,
the Company established a $5.0 billion global senior and subordinated bank note
program, of which $994 million was outstanding as of September 30, 2000 with
original terms of three to five years. The Company has historically issued
senior unsecured debt of the Bank through its $8.0 billion domestic bank note
program, of which $2.6 billion was outstanding as of September 30, 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
allowing the bank to borrow from both U.S. and non-U.S. lenders. In addition,
the Company has multiple committed revolving credit facilities offering foreign
currency funding options. Furthermore, the Bank has a $1.0 billion Euro Medium
Term Note program that is targeted specifically 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 continues to expand 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
September 30, 2000, the Company had $6.3 billion in interest-bearing deposits,
with original maturities of up to ten years.
<PAGE>
Table 9 shows the maturity distribution of certificates of deposit in
denominations of $100,000 or greater ("large denomination CDs") as of September
30, 2000.
------------------------------------------------------------------------
Table 9 - MATURITEIS OF LARGE DENOMINATION CERTIFICATES-$100,000 OR MORE
------------------------------------------------------------------------
September 30, 2000
------------------------- ------------------------
(dollars in thousands) Balance Percent
------------------------- ------------- ---------
3 months or less $ 387,725 15.03%
Over 3 through 6 months 276,412 10.71
Over 6 through 12 months 769,893 29.84
Thereafter 1,145,919 44.42
------------------------- ------------- ---------
Total $ 2,579,949 100.00%
------------------------- ------------- ---------
The Company's other borrowings portfolio consists of $2.2 billion in
borrowings maturing within one year and $599.4 million in borrowings maturing
after one year.
Table 10 shows the Company's unsecured funding availability and
outstandings as of September 30, 2000.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Table 10 - FUNDING AVAILABILITY
--------------------------------------------------------------------------------------------------------
September 30, 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
Multicurrency credit facility 8/00 541 8/04
Bilateral revolving credit facilities 8/00 205 8/01
Senior global bank note program 6/00 5,000 $ 994 -
Senior domestic bank note program(2) 4/97 8,000 2,571 -
Non-U.S. bank note program 10/97 1,000 5 -
Corporation Shelf Registration 8/99 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 Capital 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 September 30, 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 August 2000, the Bank entered into a multicurrency revolving
credit facility (the "Multicurrency Facility"). The Multicurrency Facility is
intended to finance the Company's business in the United Kingdom and is
comprised of two Tranches, each in the amount of Euro 300 million ($270.8
million equivalent based on the exchange rate at closing). The Tranche A
facility is intended for general corporate purposes whereas the Tranche B
facility is intended to replace and extend the Corporation's prior credit
facility for U.K. pounds sterling and Canadian dollars, which matured on August
29, 2000. The Corporation serves as guarantor of all borrowings under the
Muticurrency Facility and the Bank's subsidiary, Capital One Bank Europe plc, is
eligible to be added as a borrower under the Bank's guarantee. Tranche A of the
commitment terminates on August 9, 2001, and Tranche B of the commitment
terminates August 9, 2004.
In August 2000, the Company entered into four bilateral revolving
credit facilities with different lenders (the "Bilateral Facilities"). The
Bilateral Facilities are being used to finance the Company's business in Canada
and for general corporate purposes. Two of the Bilateral Facitilites are for
Capital One, Inc., guaranteed by the Corporation, and are each in the amount of
C$100.0 million ($67.4 million equivalent based on exchange rate at closing).
The other two Bilateral Facilities are for the Corporation in the amount of
$70 million and $30 million. Each of the Bilateral Facilities will terminate on
August 10, 2001.
In May 1999, the Company entered into a four-year, $1.2 billion
unsecured revolving credit arrangement (the "Credit Facility"). The Credit
Facility is comprised of two tranches: a $810 million Tranche A facility
available to the Bank and the Savings Bank, including an option for up to $250
million in multicurrency availability, and a $390 million Tranche B facility
available to the Corporation, the Bank and the Savings Bank, including an option
for up to $150 million 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 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. As of September 30, 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 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 September 30, 2000, 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 September 30, 2000, 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>
September 30, 2000
Capital One Bank
Tier 1 Capital 8.88% 4.00% 6.00%
Total Capital 11.02 8.00 10.00
Tier 1 Leverage 9.53 4.00 5.00
Capital One, F.S.B.
Tier 1 Capital 9.25% 4.00% 6.00%
Total Capital 12.47 8.00 10.00
Tier 1 Leverage 6.33 4.00 5.00
-------------------------- --------------- -------------------------- -----------------------------------
September 30, 1999
Capital One Bank
Tier 1 Capital 11.58% 4.00% 6.00%
Total Capital 14.31 8.00 10.00
Tier 1 Leverage 10.75 4.00 5.00
Capital One, F.S.B.
Tier 1 Capital 8.84% 4.00% 6.00%
Total Capital 10.51 8.00 10.00
Tier 1 Leverage 7.61 4.00 5.00
-------------------------- --------------- -------------------------- -----------------------------------
</TABLE>
In August 2000, the Bank received regulatory approval and established
a subsidiary bank in the United Kingdom. In connection with the approval of its
former branch office in the United Kingdom, the Company committed to the Federal
Reserve that, for so long as the Bank maintains a branch or subsidiary bank in
the United Kingdom, the Company will maintain a minimum Tier 1 leverage ratio of
3.0%. As of September 30, 2000, the Company's Tier 1 leverage ratio was 11.39%.
Additionally, certain regulatory restrictions exist which limit the
ability of the Bank and the Savings Bank to transfer funds to the Corporation.
As of September 30, 2000, retained earnings of the Bank and the Savings Bank of
$141.9 million and $55.4 million, respectively, were available for payment of
dividends to the Corporation, without prior approval by the Federal Reserve and
the OTS. The Savings Bank, however, is required to give the OTS at least 30
days' advance notice of any proposed dividend and the OTS, in its discretion,
may object to such dividend.
Off-Balance Sheet Risk
The Company is subject to off-balance sheet risk in the normal course
of business including commitments to extend credit, 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 September 30, 2000, the Company was in compliance with the policy; more
than 98% 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 September 30, 2000, included scenarios in which short-term
interest rates rose by over 400 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 Capital One's expectations for
earnings for the years ending December 31, 2000 and 2001, and our 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
Capital One's Annual Report on Form 10-K for the year ended December 31, 1999
(Part I, Item 1, Risk Factors).
We have set targets, dependent on the factors set forth below, to
achieve a 25% return on equity in 2000 and to increase Capital One's earnings
per share by approximately 30% in each of 2000 and 2001 over the prior year's
earnings per share. As discussed elsewhere in this report and below, Capital
One's actual earnings are a function of our revenues (net interest income and
non-interest income on our earning assets), consumer usage and payment patterns,
credit quality of our earning assets (which affects fees and charge-offs),
marketing expenses and operating expenses.
Product and Market Opportunities
Our strategy for future growth has been, and is expected to continue to
be, to apply our proprietary IBS to our lending business as well as to other
businesses, both financial and non-financial, including telecommunications and
Internet services. We will seek to identify new product opportunities and to
make informed investment decisions regarding new and existing products. Our
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. We expect continued growth across a
broad spectrum of new and existing customized products, which are distinguished
by a range of credit lines, pricing structures and other characteristics. For
example, our low introductory and 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 low
delinquencies and credit loss rates. 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 loss rates. These
products also involve higher operational costs but exhibit better response
rates, less adverse selection, less attrition and a greater ability to reprice
than traditional products. More importantly, as a whole, all of these customized
products continue to have less volatile returns than traditional products in
recent market conditions. Based in part on the success of this range of products
and growth in the superprime and prime markets, we are currently on track to
attain our fifth consecutive year of approximately 40% net account growth,
together with strong growth in our managed loan balances during the fourth
quarter of 2000. We believe that leveraging our customer relationships will be a
key to our future growth.
International Expansion. We have expanded our existing operations
outside of the United States and have experienced growth in the number of
accounts and loan balances in our international business. To date, our principal
operations outside of the United States have been in the United Kingdom, with
additional operations in Canada, South Africa and France. To support the
continued growth of our United Kingdom business and any future business in
Europe, we recently launched a bank in the United Kingdom with authority to
conduct full-service operations. We anticipate entering and doing business in
additional countries from time to time as opportunities arise.
Internet Services and Products. Our Internet services include account
decisioning, real-time account numbering, retail deposit-taking and account
servicing. We have set targets to originate one million accounts and service two
million accounts online by the end of 2000, provided that we can continue to
limit fraud and safeguard our customers' privacy.
Telecommunications. Capital One and Sprint PCS LP have entered into an
agreement to jointly test new product and marketing innovations in the wireless
industry. Through our subsidiary, America One Communications, Inc., we will use
our IBS and direct marketing competencies to identify and test market segments
for Sprint PCS, which will own all accounts generated under this testing
agreement. America One is also in the process of selling its existing accounts
to other telecommunications network service providers. Management does not
expect either the testing arrangement with Sprint PCS or the sale of existing
customer accounts to have a material effect on our financial statements in the
near term.
We will continue to apply our 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. We
continually test new product offerings and pricing combinations, using IBS, to
target different consumer groups. The number of tests we conduct has increased
each year since 1994 and we expect further increases in 2000. Our growth through
expansion and product diversification, however, will be affected by our ability
to build internally or acquire the necessary operational and organizational
infrastructure, recruit experienced personnel, fund these new businesses and
manage expenses. Although we believe we have the personnel, financial resources
and business strategy necessary for continued success, there can be no assurance
that our results of operations and financial condition in the future will
reflect our historical financial performance.
Marketing Investment
We expect our 2000 marketing expenses to exceed 1999's expense level
and to increase through the first quarter of 2001, as we continue to invest in
various credit card products and services, brand management and other financial
and non-financial products and services. We caution, 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 our portfolio
continues to grow, generating balances and accounts to offset attrition requires
increasing amounts of marketing. Although we are one of the leading direct mail
marketers in the credit card industry, increased mail volume throughout the
industry indicates that competition has been accelerating. This 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 we move beyond the domestic card
business. With competition affecting the profitability of traditional card
products, we have been allocating, and expect to continue to allocate, a greater
portion of our marketing expense to other customized credit card products and
other financial and non-financial products. We intend to continue a flexible
approach in our allocation of marketing expenses. We are 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 our portfolio and the identification of market opportunities across
product lines that exceed our targeted rates of return on investment.
The amount of marketing expense allocated to various products or
businesses will influence the characteristics of our portfolio as various
products or businesses are characterized by different account growth, loan
growth and asset quality characteristics. We currently expect continued strong
account growth and loan growth in 2000, particularly in prime customer markets.
Actual growth, however, may vary significantly depending on our actual product
mix and the level of attrition in our managed portfolio, which is primarily
affected by competitive pressures.
Impact of Delinquencies, Charge-Offs and Attrition
Our earnings are particularly sensitive to delinquencies and
charge-offs on our 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 our revenue,
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
our portfolio and the product mix.
As of September 30, 2000, we had one of the lowest net charge-off rates
among the top ten credit card issuers in the United States. We expect
delinquencies and charge-offs to remain steady in the fourth quarter of 2000 but
to increase in 2001. We caution 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, remains very high. Competition can affect our
earnings by increasing attrition of our outstanding loans (thereby reducing
interest and fee income) and by making it more difficult to retain and attract
profitable customers.
Cautionary Factors
The strategies and objectives outlined above, and the other
forward-looking statements contained in this section, involve a number of risks
and uncertainties. Capital One 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 our businesses; with respect to financial and other
products, changes in our aggregate accounts or consumer loan balances and the
growth rate thereof, including changes resulting from factors such as shifting
product mix, amount of our actual marketing expenses and attrition of accounts
and loan balances; an increase in credit losses (including increases due to a
worsening of general economic conditions); our ability to continue to securitize
our credit cards and consumer loans and to otherwise access the capital markets
at attractive rates and terms to fund our 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, our expenses
(including salaries and associate benefits and marketing expenses) as our
business develops or changes or as we expand into new market areas; the
availability of capital necessary to fund our new businesses; our ability to
build the operational and organizational infrastructure necessary to engage in
new businesses or to expand internationally; our ability 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 our 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 6. Reports on Form 8-K
(a) Exhibits
Index of Exhibits
Exhibit Description of Exhibit
10.1 Revolving Credit Facility Agreement dated as of August 10, 2000
by and between Capital One Inc., as borrower, Capital One
Financial Corporation, as guarantor, and Bank Montreal, as
lender.
10.2 Revolving Credit Facility Agreement dated as of August 10, 2000
by and between Capital One Inc., as borrower, Capital One
Financial Corporation, as guarantor, and Bank One Canada, as
lender.
10.3 Revolving Credit Facility Agreement dated as of August 10, 2000
by and between Capital One Financial Corporation, as borrower,
and Citibank, N.A., as lender.
10.4 Revolving Credit Facility Agreement dated as of August 10, 2000
by and between Capital One Financial Corporation, as borrower,
and First Union National Bank, as lender.
10.5 Multicurrency Revolving Credit Facility Agreement dated as of
August 11, 2000 by and between Capital One Bank, as borrower,
Capital One Financial Corporation, as guarantor, and Chase
Manhattan PLC, as lender.
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated July 12, 2000,
Commission File No. 1-13300, enclosing its press release dated July 12,
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: November 8, 2000 /s/ David M. Willey
------------------------------
David M. Willey
Senior Vice President,
Corporate Financial Management
(Chief Accounting Officer
and duly authorized officer
of the Registrant)
