Capital One 1998 Annual Report Download - page 52

50Capital One Financial Corporation
Notes to Consolidated Financial Statements (continued)
(Currencies in Thousands, Except Per Share Data)
Note I
Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Year Ended December 31
(Shares in Thousands) 1998 1997 1996
Numerator:
Net income $275,231 $189,381 $155,267
Denominator:
Denominator for basic earnings
per share
—
Weighted average shares 65,590 66,070 66,228
Effect of dilutive securities:
Stock options 3,996 1,578 790
Restricted stock 23 8
Dilutive potential
common shares 3,998 1,581 798
Denominator for diluted
earnings per share
—
Adjusted weighted average
shares 69,588 67,651 67,026
Basic earnings per share $ 4.20 $ 2.87 $ 2.34
Diluted earnings per share $ 3.96 $ 2.80 $ 2.32
Options to purchase 2,145,281; 949,484 and 20,725 shares
of common stock during 1998, 1997 and 1996, respectively, were
not included in the computation of diluted earnings per share
because the options’ exercise prices were greater than the average
market price of the common shares and, therefore, their inclusion
would be antidilutive.
Note J
Purchase of Summit Acceptance Corporation
On July 31, 1998, the Company acquired Summit Acceptance Cor-
poration (“Summit”), based in Dallas, Texas. Summit is an indirect
automobile finance lender with approximately 180 employees and
managed loans of approximately $263,000 as of the purchase
date. The acquisition price of $53,585 was paid through the
issuance of approximately 476,000 shares of the Company’s com-
mon stock from treasury. The acquisition has been accounted for as
a purchase business combination. The purchase price has been
allocated based on estimated fair values at the date of acquisition,
resulting in goodwill of approximately $68,000 to be amortized on
a straight-line basis over fifteen years. The results of Summit have
been included in the Consolidated Financial Statements since
the date of acquisition.
Note H
Income Taxes
Deferred income taxes reflect the net tax effects of temporary dif-
ferences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company’s deferred tax
assets and liabilities as of December 31, 1998 and 1997, were
as follows:
1998 1997
Deferred tax assets:
Allowance for loan losses $ 75,738 $ 60,900
Finance charge and fee income
receivables 45,605 17,570
Stock incentive plans 35,949 11,466
State taxes, net of federal benefit 7,310 2,694
Other 37,078 16,890
Subtotal 201,680 109,520
Valuation allowance (14,168)
Total deferred tax assets 187,512 109,520
Deferred tax liabilities:
Securitizations 29,728 26,822
Tax-deferred revenue 10,255 10,167
Other 7,814 9,133
Total deferred tax liabilities 47,797 46,122
Net deferred tax assets before unrealized
gains on securities available for sale 139,715 63,398
Unrealized gains on securities available for sale (38,772) (1,602)
Net deferred tax assets $100,943 $ 61,796
During 1998, the Company established a valuation allowance
related to certain federal, state and international loss carryforwards
acquired or generated during the year. The net operating losses
expire between 2002 and 2018.
Significant components of the provision for income taxes attrib-
utable to continuing operations were as follows:
Year Ended December 31
1998 1997 1996
Federal taxes $244,536 $138,877 $119,027
State taxes 471 393 1,715
Deferred income taxes (76,317) (23,198) (27,529)
Income taxes $168,690 $116,072 $ 93,213
The reconciliation of income tax attributable to continuing oper-
ations computed at the U.S. federal statutory tax rate to income tax
expense was:
Year Ended December 31
1998 1997 1996
Income tax at statutory
federal tax rate 35.00% 35.00% 35.00%
Other, primarily state taxes 3.00 3.00 2.50
Income taxes 38.00% 38.00% 37.50%