01—Abstract
Summary
Summary of the 10-K/A filed March 22, 2000. Cited figures are marked; the original filing is the authoritative source.
Capital One Financial Corporation's 1999 Form 10-K shows a company in hyper-growth mode, with net income up 32% to $363.1 milliona ($1.72 diluted EPS, versus $1.32 in 1998) and a return on average equity of 25.8%.
Managed consumer loans reached $20.2 billionb at year-end, up 16% from $17.4 billion, and the company ended 1999 with 23.7 million accounts, up about 42% from 16.7 million. Growth was driven by the Information-Based Strategy (IBS), a data-driven approach to targeting, pricing, and managing credit card accounts. The managed net interest margin expanded to 10.83% from 9.91%, and the managed net charge-off rate improved to 3.85% from 5.33%, which supported a sharp rise in risk-adjusted revenue.
The growth came at a cost. Non-interest expense rose 68% to $2.5 billionc, led by marketing spending of $731.9 million (up 64%) and salaries and benefits of $780.2 million (up 64%). Management expects 2000 marketing expense to exceed 1999 levels, and it forecasts that delinquencies will rise moderately through 2000, with charge-offs following.
Reported (on-balance-sheet) delinquencies rose to 5.92%d from 4.70%, and the company has already moved a large share of its loans off balance sheet: 51% of managed loans were securitized at year-end, down from 65%. Investors should therefore weigh the strong reported earnings against the company's dependence on securitization funding, its high marketing investment, and its exposure to credit-cycle changes. The company also reported a 1999 telecommunications pullback, as its America One wireless reseller faced competitive pressure, and it pursued international growth in the UK and Canada.
Management targets a 25% return on equity and roughly 30% EPS growth for 2000, and the board authorized up to 10 million additional share repurchases over two years. Regulatory positioning as a unitary thrift holding company, plus the Gramm-Leach-Bliley Act, were noted as having limited near-term impact on its operations.
02—Key points
Key Highlights
- Net income rose 32% to $363.1 million, or $1.72 diluted EPS, in 1999, up from $275.2 million, or $1.32, in 1998; ROE was 25.8%.
- Managed consumer loans grew 16% to $20.2 billion at year-end, and active accounts grew about 42% to 23.7 million.
- Managed net interest margin widened to 10.83% from 9.91%, driven by higher consumer loan yields of 17.59%, largely from past-due and overlimit fees.
- Managed net charge-off rate improved to 3.85% from 5.33%, and the managed risk-adjusted margin rose to 15.69% from 11.41%.
- Non-interest expense jumped 68% to $2.5 billion, with marketing up 64% to $731.9 million and salaries up 64% to $780.2 million, reflecting aggressive growth investment.
- Management expects delinquencies and charge-offs to increase moderately in 2000, and it targets a 25% ROE and about 30% EPS growth.
- Reported delinquencies rose to 5.92% from 4.70%, and securitized loans fell to 51% of managed loans from 65%, as the balance sheet grew substantially.
03—Questions
Frequently Asked Questions
How profitable was Capital One in 1999, and what drove the improvement?
Net income was $363.1 million, or $1.72 per diluted share, up 32% from $275.2 million, or $1.32, in 1998. Profit growth came from strong growth in managed loans and accounts, a wider managed net interest margin (up 92 basis points to 10.83%), and a lower managed net charge-off rate (3.85%, down from 5.33%). Higher past-due and overlimit fees also contributed to revenue, and these fees are sensitive to delinquency trends.
What are the main risks investors should watch?
Key risks include the company's reliance on securitization for funding; the 2000 outlook calling for moderately higher delinquencies and charge-offs; intense competition that is reducing credit card response rates and raising customer acquisition costs; and large marketing and expense commitments. Management also cautioned that a recession would likely cause delinquencies and charge-offs to rise more quickly. The telecommunications business (America One) has already faced competitive pressure and reduced marketing investment.
How much of Capital One's loan portfolio is on the balance sheet?
Reported consumer loans were $9.9 billion at year-end 1999, versus $20.2 billion in total managed loans. The remaining $10.3 billion, or about 51% of managed loans, was off balance sheet through securitizations, down from 65% in 1998. Off-balance sheet loans are excluded from reported assets, so the managed portfolio figures are better for judging the company's overall credit exposure.
What are management's 2000 targets and capital return plans?
Management targets a 25% return on equity and roughly 30% earnings-per-share growth over 1999 in 2000, while expecting marketing expense to exceed 1999's $731.9 million. On February 22, 2000, the board authorized repurchases of up to 10 million additional shares over two years, on top of the 2.25 million shares remaining under earlier programs. The company paid an annual dividend of $0.11 per share, a very low payout ratio of about 5.7%.
Are there any material legal or regulatory issues?
The most notable legal matter is a purported California class action over collection practices, related to lawsuits filed in Virginia courts against non-resident customers. The Bank won at trial and on most appeal counts, and the U.S. Supreme Court declined review of the remaining counts in November 1999. Management said the outcome cannot be assessed and that it intends to defend the case vigorously. The company is also monitoring Gramm-Leach-Bliley and possible state privacy and interstate taxation rules, which management views as having limited near-term impact.
04—Continue