Capital One 1996 Annual Report Download - page 25

Capital One 23
in 1995 as compared to 1994. Risk adjusted margin
decreased to 6.99% for the year ended December 31, 1995
from pro forma risk adjusted margin of 7.29% in 1994. This
decrease resulted from an increase in managed net interest
margin to 6.28% in 1995 from pro forma managed net
interest margin of 5.74% in 1994, a decrease in managed
non-interest income as a percent of managed earning
assets to 2.75% in 1995 from pro forma of 2.88% in 1994
offset by an increase in managed net charge-offs as a per-
centage of managed earning assets to 2.04% in 1995 from
pro forma of 1.33% in 1994. The cause of increases and
decreases in the various components of risk adjusted rev-
enue are discussed in further detail in subsequent sections
of this analysis.
Net Interest Income
Net interest income is interest and past-due fees earned
from the Company’s consumer loans and securities
less interest expense on borrowings, which include inter-
est-bearing deposits, short-term borrowings and borrow-
ings from senior and deposit notes. Prior to the Separation,
interest expense represented amounts allocated to the
Company by Signet to fund consumer loans and other
assets. The interest expense paid on the allocated borrow-
ings by the Company was based on average historic rates
paid by Signet. See “Funding” for a detailed description of
the funding allocations.
Net interest income for the year ended December 31,
1996 was $365.5 million compared to $208.0 million for
1995, representing an increase of $157.5 million, or 76%.
Net interest income increased as a result of growth in earn-
ing assets and an increase in the net interest margin.
Average earning assets increased 23% for the year ended
December 31, 1996 to $4.8 billion from $3.9 billion for the
year ended December 31, 1995. The reported net interest
margin increased to 7.62% in 1996 from 5.35% in 1995
primarily attributable to a 269 basis point increase in the
yield on consumer loans and a 38 basis point decrease in
the cost of funds. The yield on consumer loans increased to
16.21% for the year ended December 31, 1996 from 13.52%
for the year ended December 31, 1995. The yield increase
was impacted by the repricing of introductory rate loans to
higher rates in accordance with their respective terms,
changes in product mix to higher yielding, second genera-
tion products and the increase in the amount of past-due
fees from both a change in terms and an increase in the
delinquency rate. The average rates paid on borrowed
funds decreased to 6.32% for the year ended December 31,
1996 from 6.70% in 1995 primarily reflecting decreases in
short-term market rates from year to year.
The managed net interest margin for the year ended
December 31, 1996 increased to 8.16% from 6.28% for the
year ended December 31, 1995. This increase was primari-
ly the result of a 164 basis point increase in consumer loan
yield for the year ended December 31, 1996 and a reduction
of 46 basis points in borrowing costs for the same period, as
compared to 1995. The increase in consumer loan yield to
14.76% for the year ended December 31, 1996 from 13.12%
in 1995 principally reflected the 1996 repricing of introduc-
tory rate loans, changes in product mix and the increase in
past-due fees charged on delinquent accounts as noted
above. Additionally, the decrease in average rates paid on
managed interest-bearing liabilities to 5.84% for the year
ended December 31, 1996 versus 6.30% for the year ended
December 31, 1995, reflected decreases in short-term
market rates from year to year.
Net interest income for the year ended December 31,
1995 increased $43.0 million, or 26%, to $208.0 million
from $165.0 million in 1994. This increase was the result of
a 66% increase in the average balance of, and a 75 basis
point increase in yield on, earning assets offset by signifi-
cant increases in the cost of funds. Net interest margin
decreased 167 basis points to 5.35% in 1995 from 7.02% in
1994 as the yield increase on earning assets to 11.76% from
11.01% was more than offset by a cost of funds increase of
267 basis points to 6.70% from 4.03%.
The average yield on consumer loans increased 236
basis points to 13.52% in 1995 from 11.16% in 1994. This
increase primarily reflected the repricing of introductory
rate consumer loans to higher rates in accordance with
their terms and the repricing of variable rate consumer
loans to higher rates based on the increase in average
short-term market interest rates. The net interest margin
‘94*
Managed Net
Interest Margin
‘95 ‘96
*Pro forma.
5.74% 6.28%
8.16%