Capital One 1996 Annual Report Download - page 21

Capital One 19
costs of $59.8 million, or 41%, and other non-interest
expenses of $155.9 million, or 44%, reflect the increase in
marketing investment in existing and new product oppor-
tunities and the cost of operations to build infrastructure
and manage the growth in accounts. Average managed con-
sumer loans grew 24% for the year ended December 31,
1996, to $11.3 billion from $9.1 billion for the year ended
December 31, 1995, and average managed accounts grew
30% for the same period to 7.5 million from 5.7 million as a
result of the continued success of the Company’s solicita-
tion and account management strategies.
Year Ended December 31, 1995 Compared to
Year Ended December 31, 1994
Net income for the year ended December 31, 1995 of
$126.5 million increased $31.2 million, or 33%, over
net income of $95.3 million in 1994. The increase in net
income was partially attributable to the $31.9 million
(after-tax) nonrecurring charge for 1994 settlement costs to
terminate a long-term data processing services contract.
Other factors affecting net income include the increase
in net interest income of $43.0 million, or 26%, the result of
a 66% increase in average earning assets, offset by a
decrease in the net interest margin to 5.35% from 7.02%.
The decrease in net interest margin reflected overall increas-
es in average short-term market interest rates plus the
absence of a stand-alone hedging program prior to the
Separation. The provision for loan losses increased $35.2
million, or 114%, as average reported consumer loans
increased 37% and the reported net charge-off rate
increased to 2.03% in 1995 from 1.13%
in 1994 as the accounts seasoned. Non-interest income
increased $156.1 million, or 39%, primarily due to the
increase in average managed loans, including those securi-
tized. Increases in solicitation costs of $45.9 million, or
46%, and other non-interest expenses (excluding the con-
tract termination expense of $49.0 million) of $116.2 mil-
lion, or 50%, reflect the increase in marketing investment
in existing and new product opportunities and the cost of
operations to manage the growth in accounts. Average
managed loans grew to $9.1 billion, or 47%, from $6.2 bil-
lion as a result of the success of the Company’s solicitation
and account management strategies.
Managed Consumer Loan Portfolio
The Company analyzes its financial performance on a
managed consumer loan portfolio basis. Managed con-
sumer loan data adjusts the balance sheet and income
statement to add back the effect of securitizing consumer
loans. The Company also evaluates its interest rate
exposure on a managed portfolio basis.
The Company’s managed consumer loan portfolio is com-
prised of on-balance sheet loans, loans held for securitiza-
tion and securitized loans. Securitized loans are not
assets of the Company and, therefore, are not shown on the
balance sheet. Reported consumer loans consist of on-balance
sheet loans and loans held for securitization and excludes
securitized loans. Table 1 summarizes the Company’s
managed consumer loan portfolio.
Table 1 Managed Consumer Loan Portfolio
Year Ended December 31
(in thousands) 1996 1995 1994 1993 1992
Year-End Balances:
Consumer loans held for securitization $ 400,000
On-balance sheet consumer loans $ 4,343,902 2,521,679 $2,228,455 $1,862,744 $1,304,560
Securitized consumer loans 8,460,067 7,523,801 5,150,000 2,969,656 680,000
Total managed consumer loan portfolio $12,803,969 $10,445,480 $7,378,455 $4,832,400 $1,984,560
Average Balances:
Consumer loans held for securitization $ 699,044 $ 402,602 $ 432,581 $ 393,835
On-balance sheet consumer loans 2,952,864 2,537,606 1,854,103 1,819,543 $ 772,742
Securitized consumer loans 7,616,553 6,149,070 3,910,739 1,052,187 680,000
Total average managed consumer loan portfolio $11,268,461 $ 9,089,278 $6,197,423 $3,265,565 $1,452,742