Capital One 2000 Annual Report Download - page 26

INTRODUCTION
Capital One Financial Corporation (the "Corporation") is a holding
company whose subsidiaries provide a variety of products and
services to consumers using its Information-Based Strategy ("IBS").
The principal subsidiaries are Capital One Bank (the "Bank"), which
offers credit card products, and Capital One, F.S.B. (the "Savings
Bank"), which offers consumer lending products (including credit
cards) and deposit products. The Corporation and its subsidiaries
are collectively referred to as the "Company." As of December 31,
2000, the Company had 33.8 million accounts and $29.5 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, credit
quality, the level of marketing expense and operating efficiency.
The Company's revenues consist primarily of interest income on
consumer loans and securities, and non-interest income consist-
ing of servicing income on securitized loans, fees (such as annual
membership, cash advance, cross-sell, interchange, overlimit, and
other fee income, collectively "fees") and gains on the securitiza-
tions of loans. The Company's primary expenses are the costs of
funding assets, credit losses, operating expenses (including
salaries and associate benefits), marketing expenses and income
taxes.
Significant marketing expenses (e.g., advertising, printing,
credit bureau costs and postage) to implement the Company's new
product strategies are incurred and expensed prior to the acquisi-
tion of new accounts while the resulting revenues are recognized
over the life of the acquired accounts. Revenues recognized are a
function of the response rate of the initial marketing program,
usage and attrition patterns, credit quality of accounts, product pric-
ing and effectiveness of account management programs.
EARNINGS SUMMARY
The following discussion provides a summary of 2000 results com-
pared to 1999 results and 1999 results compared to 1998 results.
Each component is discussed in further detail in subsequent sec-
tions of this analysis.
Year Ended December 31, 2000
Compared to Year Ended December 31, 1999
Net income of $469.6 million, or $2.24 per share, for the year ended
December 31, 2000, compares to net income of $363.1 million, or
$1.72 per share, in 1999. The $106.5 million, or 29%, increase in
net income is primarily the result of an increase in both asset and
account volumes and an increase in net interest margin. Net inter-
est income increased $536.3 million, or 51%, as average earning
assets increased 37% and the net interest margin increased to
11.99% from 10.86%. The provision for loan losses increased
$335.2 million, or 88%, as the average reported consumer loans
increased 50% combined with the reported net charge-off rate
increase to 4.64% in 2000 from 3.59% in 1999. Non-interest income
increased $662.1 million, or 28%, primarily due to the increase in
average accounts of 41%. Increases in marketing expenses of
$174.2 million, or 24%, and salaries and benefits expense of $243.2
million, or 31%, reflect the increase in marketing investment in
existing and new product opportunities and the cost of operations
to manage the growth in the Company's accounts and products
offered. Average managed consumer loans grew 25% for the year
ended December 31, 2000, to $22.6 billion from $18.0 billion for
the year ended December 31, 1999, and average accounts grew
41% for the same period as a result of the continued success of the
Company's marketing and account management strategies.
Year Ended December 31, 1999
Compared to Year Ended
December 31, 1998
Net income of $363.1 million, or
$1.72 per share, for the year ended
December 31, 1999, compares to
net income of $275.2 million, or
$1.32 per share, in 1998. The 32%
increase in net income of $87.9 mil-
lion is primarily the result of an
increase in both asset and account
volumes and an increase in net
interest margin. Net interest income
increased $365.4 million, or 53%, as
average earning assets increased
34% and the net interest margin
increased to 10.86% from 9.51%.
The provision for loan losses
increased $115.9 million, or 43%, as
the average reported consumer
loans increased 43%, offset by the
reported net charge-off rate decrease
to 3.59% in 1999 from 4.24% in 1998.
24 md&a
Management’s Discussion and Analysis of
Financial Condition and Results of Operations