Capital One 2000 Annual Report Download - page 39

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DIVIDEND POLICY
Although the Company expects to reinvest a substantial portion of
its earnings in its business, the Company intends to continue to pay
regular quarterly cash dividends on the Common Stock. The decla-
ration and payment of dividends, as well as the amount thereof, is
subject to the discretion of the Board of Directors of the Company
and will depend upon the Company's results of operations, finan-
cial condition, cash requirements, future prospects and other
factors deemed relevant by the Board of Directors. Accordingly,
there can be no assurance that the Corporation will declare and pay
any dividends. As a holding company, the ability of the Company to
pay dividends is dependent upon the receipt of dividends or other
payments from its subsidiaries. Applicable banking regulations and
provisions that may be contained in borrowing agreements of the
Company or its subsidiaries may restrict the ability of the Com-
pany's subsidiaries to pay dividends to the Corporation or the ability
of the Corporation to pay dividends to its stockholders.
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 inter-
est 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 for-
eign 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.
Additional information regarding off-balance sheet financial
instruments can be found in Note N to the Consolidated Financial
Statements.
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, prima-
rily the London InterBank Offering Rate, as a result of its issuance of
interest-bearing deposits, variable rate loans and variable rate secu-
ritizations. 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 dis-
tribution 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 mar-
ket 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 2.5% below the
mean managed net interest income of the distribution. As of
December 31, 2000, the Company was in compliance with the pol-
icy; more than 99% of the outcomes generated by the model
produced a managed net interest income of no more than 1% below
the mean outcome. The interest rate scenarios evaluated as of
December 31, 2000 included scenarios in which short-term interest
rates rose in excess of 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 expo-
sure 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, competitive factors as well as certain
legal constraints may limit the repricing of credit card loans.
Interest rate sensitivity at a point in time can also be analyzed
by measuring the mismatch in balances of earning assets and inter-
est-bearing liabilities that are subject to repricing in future periods.
Table 12 reflects the interest rate repricing schedule for earn-
ing assets and interest-bearing liabilities as of December 31, 2000.