SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FormFORM 10-K
(Mark One)(MARK ONE)
[X] Annual Report Pursuant to SectionANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of the Securities Exchange Act
ofOR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended DecemberFOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.1998.
[_] Transition Report Pursuant to SectionTRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the Securities
Exchange Act ofOR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)(NO FEE REQUIRED).
For the transition period from ____________ to ____________.
Commission File No.FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-13300
CAPITAL ONE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 54-1719854
(State or other jurisdiction of(STATE OR OTHER JURISDICTION (I.R.S. Employer Identification No.EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
incorporation or organization)
2980 Fairview Park Drive, SuiteFAIRVIEW PARK DRIVE, SUITE 1300
Falls Church, VirginiaFALLS CHURCH, VIRGINIA 22042-4525
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 205-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registeredSECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
Common Stock, $.01 Par Value New York Stock Exchange
Preferred Stock Purchase Rights* New York Stock Exchange
Purchase Rights*
- -------__________
* Attached to each share of Common Stock is a Right to acquire 1/100th of a
share of the Registrant's Cumulative Participating Preferred Stock, par value
$.01 per share, which Rights are not presently exercisable.
Securities registered pursuant to Section 12(g) of the Act:SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ----- -----_______
-------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on February 27, 1998.26, 1999.
Common Stock, $.01 Par Value -- $4,346,943,962*
- ---------------Value: $8,318,490,040*
__________
* In determining this figure, the registrant assumed that the executive officers
of the registrant and the registrant's directors are affiliates of the
registrant. Such assumption shall not be deemed to be conclusive for any other
purpose.
The number of shares outstanding of the registrant's common stock as of the
close of business on February 27, 1998:26, 1999:
Common Stock, $.01 Par Value - 65,453,614Value: 65,855,648 shares
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to stockholders for the year ended December
31, 19971998 are incorporated by reference into Parts I, II and IV.
2. Portions of the Proxy Statement for the annual meeting of stockholders to
be held on April 23, 199829, 1999 are incorporated by reference into Part III.
2_______________________________________________________________________________
CAPITAL ONE FINANCIAL CORPORATION
19971998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
ITEMItem 1. BUSINESS.....................................................................4
Overview..........................................................................4Business.................................................................................. 1
Overview.................................................................................. 1
Lines of Business.................................................................5
Competition.......................................................................8
Employees.........................................................................8Business......................................................................... 2
Competition............................................................................... 5
Employees................................................................................. 6
Supervision and Regulation........................................................9
Cautionary Statements............................................................12Regulation................................................................ 6
Risk Factors.............................................................................. 10
Statistical Information..........................................................16
ITEMInformation................................................................... 14
Item 2. PROPERTIES..................................................................16
ITEMProperties................................................................................ 14
Item 3. LEGAL PROCEEDINGS...........................................................16
ITEMLegal Proceedings......................................................................... 14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................17
ITEMSubmission of Matters to a Vote of Security Holders....................................... 15
Item 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS...........17
ITEMMarket for Company's Common Stock and Related Stockholder Matters......................... 15
Item 6. SELECTED FINANCIAL DATA.....................................................17
ITEMSelected Financial Data................................................................... 15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................17
ITEMManagement's Discussion and Analysis of Financial Condition and Results of Operations..... 15
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................17
ITEMQuantitative and Qualitative Disclosures about Market Risk................................ 15
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................18
ITEMFinancial Statements and Supplementary Data............................................... 15
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.........................................18
ITEMChanges in and Disagreements with Accountants on Accounting and Financial Disclosure...... 15
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY............................18
ITEMDirectors and Executive Officers of the Company........................................... 16
Item 11. EXECUTIVE COMPENSATION.....................................................18
ITEMExecutive Compensation.................................................................... 16
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............18
ITEMSecurity Ownership of Certain Beneficial Owners and Management............................ 16
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................18
ITEMCertain Relationships and Related Transactions............................................ 16
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............19Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 16
3ii
PART I
ITEM 1. BUSINESS.
Overview
- --------OVERVIEW
Capital One Financial Corporation (the "Corporation"), is a holding company,
incorporated in Delaware on July 21, 1994, whose subsidiaries provide a variety
of products and services to consumers.consumers using its proprietary information-based
strategy ("IBS"). The Corporation's principal subsidiary, Capital One Bank (the
"Bank"), a limited purpose Virginia state chartered credit card bank, offers
credit card products. Capital One, F.S.B. (the "Savings Bank"), a federally
chartered savings bank, provides certainoffers consumer lending and deposit services.products. Capital
One Services, Inc., another subsidiary of the Corporation, provides various
operating, administrative and other services to the Corporation and its
subsidiaries. Unless indicated otherwise, the term "Company" refers to the
Corporation and its consolidated subsidiaries and for periods prior to the
Separation (as defined herein), Signet Bank'sBank's/1/ credit card division. The
Company's common stock is listed on the New York Stock Exchange under the symbol
COF. The Company's principal executive office is located at 2980 Fairview Park
Drive, Suite 1300, Falls Church, Virginia 22042-4525 (telephone number (703)
205-1000).
The Company is one of the oldest continually operating bank card issuers in
the United States having commenced operations in 1953, the same year as the formation of
what is now MasterCard International.International, and is one of the oldest continually
operating bank card issuers in the United States. The Company is among the ten
largest issuers of Visa and MasterCard credit cards in the U.S. based on managed
credit card loans outstanding as of December 31, 1997.1998. The growth in the
Company's managed credit card loans and accounts washas been due largely to credit
card industry dynamics and the success of the Company's proprietary information-
based strategy ("IBS")IBS initiated in 1988.
The Bank offers two brands of credit cards, Visa and MasterCard, and within
each brand, premium ("platinum" and "gold") cards and unsecured and secured
standard credit card products.
Prior to November 22, 1994, the Bank conducted its operations as a division of
Signet Bank, a wholly-owned subsidiary of Signet Banking Corporation ("Signet")./1/
Pursuant to the terms of an agreement among Signet, Signet Bank and the
Corporation, Signet Bank contributed designated assets and liabilities of its
credit card division intoto the Bank, initially established as a subsidiary of
Signet Bank (the "Separation"). Signet Bank immediately distributed the capital
stock of the Bank to Signet, which then contributed such stock to the
Corporation. Concurrently with the Separation, the Corporation issued 7,125,000
shares of the Corporation's common stock, par value $.01 ("Common Stock") in an
initial public offering. On February 28, 1995, Signet distributed all of the
remaining shares of the Common Stock held by it to Signet shareholders of record
as of February 10, 1995.
In June 1996, the Company established the Savings Bank to expand the Company's
product offerings and its relationship with its cardmembers. The Savings Bank
currently offers Visatakes deposits and MasterCardoffers credit cards and installment loans, in each
case both unsecured and secured. The Savings Bank expects to offer multiple
financial products and services to existing cardmembers and other households
using the Company's IBS and existing information technology systems.
Through a branch of the Bank in the United Kingdom and several non-bank
operating subsidiaries, the Company offers credit card products outside of the
United States, with an initial focus on the United Kingdom and Canada. The
Company also offers various non-card consumer lending products, automobile
financing and telecommunications services through its subsidiaries.
Information-Based Strategy
The Company's IBS is designed to allow the Company to differentiate among
customers based on credit risk, usage and other characteristics and to match
customer characteristics with appropriate product offerings. IBS involves
developing sophisticated models, information systems, well-trained personnel and
a flexible culture to create credit card or other products and services that
address the demands of changing consumer and competitive markets. By using
sophisticated statistical modeling techniques, the Company segments its
potential customer lists based upon the integrated use of credit scores,
demographics, customer behavioral characteristics and other criteria. By
actively testing a wide variety of product and service features, marketing
channels and other aspects of its offerings, the Company designs and targets
customized solicitations at various customer segments, thereby enhancing
customer response levels and maximizing returns on investment within given
underwriting parameters.
- --------------------___________________
/1/ Signet Bank and Signet Banking Corporation have since been acquired by First
Union National Bank and First Union Corporation, respectively, as of November
30, 1997.
4
Continued integrated testing and model development builds on information
gained from earlier phases and is intended to improve the quality, performance
and profitability of the Company's solicitation and account management
initiatives. The Company applies IBS to all areas of its business, including
solicitations, account management, credit line management, pricing strategies,
usage stimulation, collections, recoveries and account and balance retention.
LinesBUSINESS SEGMENTS
The Company maintains three distinct business segments: lending,
telecommunications and "other." The lending segment is comprised primarily of
Business
- -----------------
Productscredit card lending activities. The telecommunications segment consists
primarily of direct marketing of wireless telephone service. "Other" consists
of various, non-lending new business initiatives, including taking deposits.
Lending
The Company offers an array of Visa and MasterCardgeneral purpose credit card products to
consumers throughout the United States and in Canada and the United Kingdom.Kingdom and Canada.
Products consist of varying annual percentage rates ("APRs"), finance charges and fee
combinations (annual membership, past-due, overlimit, returned check, cash
advance and other fees), credit limits and other special features or services,
depending on the risk profile and other characteristics of the targeted consumer
segment. The Company offers platinumpremium ("platinum" and "gold") cards and unsecured
and secured standard credit card products. The Company's credit card and other
lending opportunities include, and are expected to continue to include, low
introductory and intermediate-rate balance transfer products, low non-
introductory rate products, and other customized credit card products, such as
secured cards, affinity and co-branded cards, student cards and other cards
tailored for specific consumer segments. The Company's customized products are
distinguished by a varied range of credit lines, pricing structures and other
characteristics. Platinum and gold cards, whichfor example, generally have higher
lines of credit and additional ancillary benefits, and
unsecured and secured standard card products.benefits. The Company uses information
derived from proprietary statistical models and targets consumers with carefully
matched combinations of pricing, credit analysis and packaging. The Company's
pricing philosophy reflects a risk-based approach where consumers with better
credit qualifications generally merit more favorable pricing. The Company
continually tests new product offerings and pricing combinations targeted to
different consumer segments. The Company refers to its product offerings and services by generations.
InFor example, the early 1990's, the Company initially targeted its offerings to experienced
users of general purpose credit card products offeringCompany's low introductory interestnon-introductory
rate products, with accounts repricing to higher rates after six to 16 months
from the date of origination, "First Generation Products." After the
introductory period, the accounts may be repriced upwards based on individual
customer performance. First Generation Products permit cardholders to use
Company issued credit line checks for cash or purchases or, under balance
transfer programs, to pay down other card balances. The Company manages the
repricing of these First Generation Products to maximize return on investment at
the consumer level, taking into consideration the risk and expected performance
of these products.
Faced with increased competition for First Generation Products, since the
middle 1990's, the Company began to test a number of other markets and product
offerings, resulting in the development of "Second Generation Products." Second
Generation Products consist of secured card products and other customized credit
card products including affinity and co-branded, college student and other
accounts. Many Second Generation Productswhich are offeredmarketed to consumers with limitedthe best established credit
history, which historically have not been solicitedprofiles, are characterized by lenders tohigher credit lines, lower yields and an
expectation of lower delinquencies and credit losses than the same extent as more experienced, affluent credit users. The Company provides
credit to these underserved marketstraditional low
introductory rate balance transfer products. On the other hand, certain other
customized card products are characterized by utilizing its IBS to better evaluate the
credit risk of these consumers and to apply a risk-based pricing strategy to
optimize profitability within the context of acceptable risks. As a result,
Second Generation Products are generally designed to have lower credit lines, and
higher APRs and fees, including annual membership fees. Second Generation
Products also tend to have balances that build over time, less attrition, higher
operational costs,yields
(including fees) and in some cases, higher delinquencies and consequentlycredit losses than
the Company's traditional products. These products also involve higher
past-dueoperational costs but exhibit better response rates, less adverse selection,
less attrition and overlimit fee income as a percentage of total receivables
outstandinggreater ability to reprice than First Generation Products. See "Cautionary Statements" herein.the Company's traditional
introductory rate products.
Additionally, the Company has been applying, and expects to continue applying its IBS to other financial and
non-financial products and services,
includingservices. On July 31, 1998, the resellingCompany completed the
acquisition of telecommunication services, "Third Generation
Products."Summit Acceptance Corporation ("Summit"), a Texas corporation.
Summit is an automobile finance lender located in Dallas, Texas. It offers
loans throughout the United States, secured by automobiles, which are marketed
principally through dealer networks. Summit is the Company's platform to test
and apply its IBS to the automobile loan market.
The Company has also expanded its existing credit card operations outside of the United
States, with an initial focus on the United Kingdom and Canada. The Company has
establishedexperienced growth in the Savings Bank,number of accounts and loan balances in its
international business. To support the U.K. branchcontinued growth of its United Kingdom
business and any future business in Europe, in July 1998, the Company opened a
new operations center in Nottingham, England.
Telecommunications
The Company continues its efforts to market telecommunications services
through its subsidiary America One Communications, Inc. ("America One").
America One's initial business, the reselling of wireless services through
direct marketing channels, has recently begun to experience growth in the number
of customers and accounts. As a result of the Bankexpenses necessary to build the
operations to support this new business and several non-bank operating subsidiaries to identify and expand these
opportunities and is in various stages of developing and test marketing a number
ofacquire new products and services.
The significant growthaccounts, to date
of the Company's consumer accounts and
managed loan balances initially was due largely to credit card industry dynamics
and the success of the Company's IBS in generating the First Generation
Products. More recently, Second Generation Products significantly contribute to
the growth in number of the Company's consumer accounts but do not have an
immediate impact on managed loan balances, as these products have lower balances
that build over time. The Company's product mix at any time may vary as the
5this business negatively impacts earnings.
2
Company intends to remain flexible in allocation of marketing investment spent
on specific products to take advantage of market opportunities as they arise.
Geographic Diversity
Loan portfolio concentration within a specific geographic region or
demographic portion of the population may be regarded as positive or negative
based upon the current and expected credit characteristics and performance of
the portfolio. The Company's consumer loan portfolio is geographically diverse.
See Note NP to Consolidated Financial Statements on page 5453 of the Company's
Annual Report to its stockholders for the year ended December 31, 19971998 (the
"Annual Report"), which is incorporated herein by reference.
Origination and Risk Management
The Company's primary method of account acquisition isCompany originates accounts through (i) applications mailed directly to
prospective accountholders, (ii) direct mail solicitation.and telemarketing solicitations for
accounts from individuals whose creditworthiness was prescreened, (iii)
arrangements with affinity groups, (iv) conversion of existing non-premium
accounts to premium accounts, (v) application information taken over the
telephone or through the Internet from prospective accountholders, (vi)
newspaper, magazine, radio, television and Internet advertisements and (vii)
location or event marketing. For account originations and solicitation activity
since 1990, the Company has focused largely on prescreened direct mail and
telemarketing targeted to multiple consumer segments with varying combinations
of product structure and pricing. In general, the Company's prescreening and
underwriting criteria are intended to identify and avoid potential losses.
These procedures are based on limited information, however, and it is not
possible for the Company to identify all potential losses. Since the
introduction of IBS in 1988, the Company has steadily increased its marketing
efforts and has developed a sophisticated screening process to target potential
consumers. The Company tracks and periodically reviews the results of each
solicitation. Management information systems and processes enable management to
monitor the effectiveness of prescreening and underwriting criteria, and such
criteria are modified based on the results obtained from this process.
The Company employs a comprehensive risk management process that integrates
all aspects of an account's life cycle, from origination to closure. Marketing
and credit policy decisions are made by a credit policy group consisting of
senior management representatives from the credit operations, risk management
and marketing and analysis units. This group originates credit policy from the
viewpoints of both profitability and credit risk, based on prescreening
criteria, proprietary model development and usage, as well as reviews of test
programs and test results. Significant test results are reviewed before the
widespread introduction of a tested policy or product.
The Company uses various credit risk scores, generated by both third party
providers of scoring models and by proprietary models. These scores are used,
together with other criteria, in multiple screening reviews at both the
prescreening stage and the credit application stage. Score usage continues after
the account has been established and throughout its life cycle to adjust credit
lines, pricing and collection policies.
Credit Operations
The Company's credit extension process is actively managed by senior
management and is designed to bring consistency in credit practices and
operating efficiencies. The Company's scoring technology and verification
procedures are highly automated with limited judgmental review. The credit
evaluation process is based on proprietary models using, among other things,
scores developed by nationally recognized scoring firms and tailored to
individual programs. These scores are validated, monitored and maintained by the
Company as part of IBS. The scores provide a statistically measurable way to
make decisions about applications, to evaluate risk and to modify credit
extension policies.
The Company's prescreened account solicitation process generally utilizes
information from credit reporting agencies to identify consumers who are likely
to be approved for a credit card account. The sets of underwriting criteria
used to prescreen potential applicants vary from time to time in accordance with
the Company's established policies and procedures relating to the operation of
its consumer revolving lending business, as such policies may be changed from
time to time, and include various models, including risk models, designed to
predict the credit risk of potential cardholders. In order to establish the
amount of the customer's credit line, the information on returned applications
is analyzed and may be verified. Each customer whose credit request meets all of
the underwriting criteria is generally offered a line of credit equal to or in
excess of a minimum level which is established for each product offering.
3
The Company may also manually review applications that are rejected by the
Company's credit scoring system because of inconsistencies in application
information, an inquiry from a rejected applicant or for other reasons. Credit
analysts then have the ability to override decisions made by the system upon the
receipt of additional information from an applicant or otherwise.
For non-pre-screened solicitations, the Company acquires names of prospective
customers from a variety of sources, including list vendors, and then edits the
list utilizing internal and external sources to ensure quality and accuracy.
The prospective customers on the final list are mailed solicitations.
Prospective customers who respond to a solicitation are approved or declined
based on the characteristics drawn from both the application submitted and a
credit reporting agency.
Under the Company's secured credit card program, an accountholder provides the
Company with a sum of money in the form of a check or money order as security
for such accountholder's payment obligations arising under the secured credit
card. The funds equal all, or a portion, of the credit limit available to the
accountholder. If a secured credit card account becomes delinquent, the Company
may immediately withdraw funds from the deposit account to satisfy the
accountholder's payment obligations. Notwithstanding this right to immediately
withdraw funds, the Company typically will not withdraw funds until shortly
before the secured credit card account is charged off as uncollectible.
Account Management
Management has found that active account management is necessary in order to
respond to the changing economic environment and cardholder risk, usage and
payment patterns. The Company applies new credit scores to each account severalmultiple
times aeach year and new behavioral scores for open accounts each month. This
information is used in account management strategies relating to credit lines,
pricing, usage stimulation, retention and collection. For creditworthy and
profitable accounts, such periodic review may result in more favorable pricing,
higher credit lines or other enhancements which, based on testing, are likely to
increase account usage or the overall profitability of an account. Conversely,
for delinquent or other accounts with significant credit risk, periodic review
may result in an account being reassigned to a higher risk category and hence
not being eligible for credit line increases or, in certain circumstances,
having pricing adjusted upward or the credit line reduced.
The IBS approach has allowed the Company to develop customized collections and
pricing strategies based on cardholder behavior. Similarly, IBS has been used in
developing the Company's retention strategies. The Company has developed
integrated systems which evaluate account profitability and risk, test various
strategies for cost and effectiveness in retaining cardholders and assist
service representatives in negotiating potential pricing alternatives. Certain
of the Company's products, including the introductory interest rate program and
balance transfer program, have a repricing feature after an initial period. The
Company has developed methodologies for retaining these accounts and the
balances in these accounts after the expiration of the initial period.
Credit Operations
The Company's credit extension process is actively managed by senior
management and is designed to bring consistency in credit practices and
operating efficiencies. The Company's scoring technology and verification
procedures are highly automated with limited judgmental review. The credit
evaluation process is based on proprietary models using, among other things,
scores developed by nationally recognized scoring firms and tailored
6
to individual programs. These scores are validated, monitored and maintained by
the Company as part of IBS. The scores provide a statistically measurable way to
make decisions about applications, to evaluate risk and to modify credit
extension policies.
For pre-approved account solicitations, which constitute one of the
primary methods of marketing, the Company's current process generally begins
with a prescreening review which identifies consumers who are likely to be
approved for a credit card account. In the prescreening process, the Company
provides a set of credit history and other criteria to credit reporting
agencies, which generate lists with desired attributes. The Company further
refines this list by applying additional sets of underwriting criteria resulting
in a new list which represents the consumers who receive direct mail
solicitations. The Company also employs additional underwriting criteria that
are based upon proprietary models designed to predict the relative credit risk
of potential account holders. Those persons who receive marketing packages
generally must fill out acceptance certificates which are used to initiate a
back-end verification process in which an applicant's credit information is
reviewed a second time, updated and verified against criteria established by
lending guidelines. Once the acceptance certificates are returned and sorted
and current credit reporting agency reports are obtained, the acceptance
certificates are processed through the Company's underwriting criteria. Each
approved applicant is offered a line of credit commensurate with the results of
the back-end credit verification.
The Company manually reviews applications that are rejected by the
Company's credit scoring system because of inconsistencies in application
information, inquiry from a rejected applicant or for other reasons. Credit
analysts then have the ability to override decisions made by the system upon the
receipt of additional information from an applicant or otherwise.
For non-pre-approved solicitations, the Company acquires names of
prospective customers from a variety of sources and then edits the list
utilizing internal and external sources. The prospective customers on the final
list are mailed solicitations. Prospective customers who respond to a
solicitation are approved or declined based on the characteristics drawn from
both the application submitted and a credit reporting agency.
Collection Procedures
The Company generally considers an account delinquent if a minimum payment due
thereunder is not received by the Company by the cardholder'saccountholder's payment due
date. The Company makes use of behavioral scoring models designed to predict
the probability of an account charging off. Based on the behavioral score and
certain other factors, the Company determines the timing of the collection
activity to be implemented for the account. Delinquent accounts are first directed to the pre-collection system, where
appropriate early collection actions are taken. Earlycurrently
referred for contact with delinquent
cardholders may include payment reminders by telephone, by billing statementphone between seven and by mail. In most cases, an account is restricted and privileges are suspended60 days after contractual
delinquency, depending on the riskinessaccountholder's risk profile. In any event, the
accountholder's statement reflects the request for payment of the account between four and 105 days after the
account enters the Company's collections department. The Company may also, at
its discretion, enter into arrangements with delinquent account holders to
extend or otherwise change payment schedules.past due amounts.
Efforts to collect delinquent credit card accounts are generally made by the
Company's regular collectionscollection group, but may also be madesupplemented in certain cases by third-party collection
agents.agencies.
The focus of the Company's response to an early stage delinquency is
rehabilitation and identification of the causes for delinquency. The Company's
policies and procedures are designed to encourage cardholdersaccountholders to pay
delinquent amounts; for example, once a delinquent account has re-established a
payment pattern with three consecutive minimum monthly payments, it can be re-agedre-
aged as current. AnFederal guidelines restrict how frequently an account can generally be
re-aged, once inrenewed or extended.
The Company reserves the life ofright to suspend charging privileges at any time
after an account enters the account.collections process. In most cases, an account is
restricted and charging privileges are suspended no later than 105 days after
contractual delinquency. The Company may also, at its discretion, enter into
arrangements with delinquent accountholders to extend or otherwise change
payment schedules.
4
During the fourth quarter of 1997, the Company modified its methodology for
charging off credit card loans. The Company now charges off as uncollectible an
account (net of collateral) at 180 days past-due versus the prior practice of
charging off the account in the next billing cycle after becoming 180 days past-
due. In connection with a secured card account, except as set forth below, funds
deposited as collateral will generally be applied to payment on the account
shortly before the account is charged off as uncollectible. With respect to
bankrupt customers, the Company generally charges off the account within 30 days
after the Company receives the bankruptcy petition and, with respect to secured
credit card accounts, funds deposited as collateral will be applied in
satisfaction of the account only after the bankruptcy automatic stay is lifted.
The Company charges off accounts of deceased customers within 60 days of
receiving proper notice if no estate exists against which a proof of claim can
be filed, no other party remits payments or no other responsible party is
available. The Company's credit 7
evaluation, servicing and charge off policies
and collection practices may change over time in accordance with the business
judgment of the Company, applicable law and guidelines established by applicable
regulatory authorities.
Technology/Systems
A key part of the Company's strategic focus is the development of flexible,
high-volume systems capable of handling the Company's growth and changes in
marketing and account management strategies. Management believes that the
continued development and integration of these systems is important to its
efforts to reduce its operating costs and maintain a competitive advantage.
The Company has developed proprietary integrated systems which allow
employeesassociates to manage the large volumes of data collected through the IBS process
and to utilize such data in the Company's account solicitations, application
processing, account management and retention strategies. The Company maintains a
data warehouse that holds basic information on 120 million households, detailed
data on nearly 12 million customers and performance/ profitability information
on more than 4,000 product, pricing and feature combinations. The Company uses this
information to predict consumer behavior and then matches prospects to credit cardslending
products with various terms and fees. These systems also allow the Company's
customer service representatives to access account specific information when
responding to customer inquiries.
Funding
The Company's primary methods of funding include loan securitizations, issuing
certificates of deposit, senior notes,and deposit notes and other borrowings, and fed
funds purchased from financial institutions. For a discussion of the Company's
funding program, see pages 19-20 and pages 29-3128-29 of the Annual Report under the
respective headings "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- ManagedOperations--Managed Consumer Loan Portfolio" and "--
Funding," which are incorporated herein by reference.
Competition
- -----------COMPETITION
As a marketer of credit card products, the Company faces intense and
increasing competition in all aspects of its business from numerous bank and
non-bank providers of financial services. Many of these companies are
substantially larger and have more resources than the Company. The Company
competes with national, regional and local issuers of Visa and MasterCard credit
cards. In addition, American Express, Discover Card, Diner's Club and, to a
certain extent, smart cards and debit cards, represent additional competition in
the general purpose credit card market. In general, customers are attracted to
credit card issuers largely on the basis of price, credit limit and other
product features and customer loyalty is often limited. The Company believes
that IBS together with its strategy of pursuing Second Generation Products, will allow it to more effectively compete in this and new markets.
There can be no assurance, however, that the Company's ability to market its
services successfully or to obtain adequate yield on its loans will not be
impacted by the nature of the competition that now exists or may later develop.
In addition, the Company faces competition in seeking public funding from
banks, savings banks, money market funds and a wide variety of other entities
that take deposits and/or sell debt securities, some of which are publicly
traded. Many of these companies are substantially larger, have more capital and
other resources and have better financial ratings than the Company. Accordingly,
there can be no assurance that competition from these other borrowers will not
increase the Company's cost of funds.
Employees
- ---------5
EMPLOYEES
As of December 31, 1997,1998, the Company employed 5,72410,073 full-time and 189359 part-
time employees.employees, which the Company refers to as "associates." A central part of
the Company's philosophy is to attract and maintain a highly capable staff. The
Company views current employeeassociate relations to be satisfactory. None of the
Company's employeesassociates are covered under collective bargaining agreements.
8
Supervision and Regulation
- --------------------------SUPERVISION AND REGULATION
General
The Bank is a banking corporation chartered under Virginia law and a member of
the Federal Reserve System, the deposits of which are insured by the Bank
Insurance Fund (the "BIF") of the Federal Deposit Insurance Corporation (the
"FDIC"). The Bank is subject to comprehensive regulation and periodic
examination by the Bureau of Financial Institutions of the Virginia State
Corporation Commission (the "Bureau of Financial Institutions"), the Federal
Reserve Board (the "Federal Reserve"), the Federal Reserve Bank of Richmond, the
FDIC and in the FDIC.case of the United Kingdom branch of the Bank, the Financial
Services Authority. The Bank is not a "bank" under the Bank Holding Company Act
of 1956, as amended (the "BHCA"), because it (i) engages only in credit card
operations, (ii) does not accept demand deposits or deposits that the depositor
may withdraw by check or similar means for payment to third parties or others,
(iii) does not accept any savings or time depositdeposits of less than $100,000, other
than as permitted as collateral for extensions of credit, (iv) maintains only
one office that accepts deposits and (v) does not engage in the business of
making commercial loans. Due to the Bank's status as a limited purpose credit
card bank, any non-credit card operations which may be conducted by the Company
must be conducted in other operating subsidiaries of the Company.
The Savings Bank is a federal savings bank chartered by the Office of Thrift
Supervision (the "OTS") and is a member of the Federal Home Loan Bank System.
Its deposits are insured by the Savings Association Insurance Fund ("SAIF") of
the FDIC. Pursuant to recent legislation recapitalizing the SAIF,
insurance premiums currently paid by SAIF-insured institutions are equivalent to
the rates paid by BIF-insured institutions. The Savings Bank is subject to comprehensive regulation and periodic
examination by the OTS and the FDIC.
The Corporation is not a bank holding company under the BHCA as a result of
the Corporation's ownership of the Bank because the Bank is not a "bank" as
defined under the BHCA. If the Bank failed to meet the credit card bank
exemption criteria described above, the Bank's status as an insured depository
institution would make the Corporation subject to the provisions of the BHCA,
including certain restrictions as to the types of business activities in which a
bank holding company and its affiliates may engage. Becoming a bank holding
company under the BHCA would affect the Corporation's ability to engage in
certain non-banking businesses. In addition, for purposes of the BHCA, if the
Bank failed to qualify for the credit card bank exemption, any entity that
acquired direct or indirect control of the Bank and also engaged in activities
not permitted for bank holding companies could be required either to discontinue
the impermissible activities or to divest itself of control of the Bank.
As a result of the Corporation's ownership of the Savings Bank, the
Corporation is a unitary savings and loan holding company subject to regulation
by the OTS and the provisions of the Savings and Loan Holding Company Act. As a
unitary savings and loan holding company, the Corporation generally is not
restricted under existing laws as to the types of business activities in which
it may engage so long as the Savings Bank continues to meet the qualified thrift
lender test (the "QTL Test"). If the Corporation ceased to be a unitary savings
and loan holding company as a result of its acquisition of an additional savings
institution or as a result of the failure of the Savings Bank to meet the QTL
Test, the types of activities that the Corporation and its non-savings
association subsidiaries would be able to engage in would generally be limited
to those eligible for bank holding companies.
The Corporation is also registered as a financial institution holding company
under Virginia law and as such is subject to periodic examination by the Bureau
of Financial Institutions.
Dividends and Transfers of Funds
The principal source of funds for the Corporation to pay dividends on stock,
make payments on debt securities and meet other obligations is dividends from
its direct and indirect subsidiaries. There are various federal and Virginia law
limitations on the extent to which the Bank and the Savings Bank can finance or
otherwise supply funds to the Corporation through dividends, loans or otherwise.
These limitations include minimum regulatory capital requirements, Federal
Reserve, Board, OTS and Virginia law requirements concerning the payment of dividends
out of net profits or surplus, Sections 23A and 23B of the Federal Reserve Act
governing transactions between an insured depository institution and its
affiliates and general federal and Virginia regulatory oversight to prevent
unsafe or unsound practices. In general, federal banking laws prohibit an
insured depository institution, such as the Bank
6
and the Savings Bank, from making dividend distributions if such distributions
are not paid out of
9
available earnings or would cause the institution to fail to
meet applicable capital adequacy standards. In addition, the Savings Bank is
required to give the OTS at least 30 days' advance notice of any proposed
dividend. Under OTS regulations, other limitations apply to the Savings Bank's
ability to pay dividends, the magnitude of which depends upon the extent to
which the Savings Bank meets its regulatory capital requirements. In addition,
under Virginia law, the Bureau of Financial Institutions may limit the payment
of dividends by the Bank if the Bureau of Financial Institutions determines that
such a limitation would be in the public interest and necessary for the Bank's
safety and soundness.
Capital Adequacy
The Bank and the Savings Bank are currently subject to capital adequacy
guidelines adopted by the Federal Reserve Board and the OTS, respectively. For a
further discussion of the capital adequacy guidelines, see pages 31-32page 29 of the Annual
Report under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- CapitalOperations--Capital Adequacy" and page 52
in Note JK to
Consolidated Financial Statements on page 51, which are incorporated herein by
reference.
FDICIA
Among other things, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") requires federal bank regulatory authorities to take "prompt
corrective action" ("PCA") in respect of insured depository institutions that do
not meet minimum capital requirements. FDICIA establishes five capital ratio
levels: well capitalized, adequately capitalized,well-capitalized, adequately-capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Under applicable
regulations, an insured depository institution is considered to be wellwell-
capitalized if it maintains a Tier 1 risk-based capital ratio (or core capital
to risk-adjusted assets in the case of the Savings Bank) of at least 6.00%, a
total risk-based capital ratio of at least 10.00% and a Tier 1 leverage capital
ratio (or core capital ratio in the case of the Savings Bank) of at least 5.00%,
and is not otherwise in a "troubled condition" as specified by its appropriate
federal regulatory agency. An insured depository institution is considered to be
adequately capitalizedadequately-capitalized if it maintains a Tier 1 risk-based capital ratio (or
core capital to risk-adjusted assets in the case of the Savings Bank) of at
least 4.00%, a total risk-based capital ratio of at least 8.00% and a Tier 1
leverage capital ratio (or core capital ratio in the case of the Savings Bank)
of at least 4.00% (3.00% for certain highly rated institutions), and does not
otherwise meet the well capitalizedwell-capitalized definition. The three undercapitalized
categories are based upon the amount by which the insured depository institution
falls below the ratios applicable to adequately
capitalizedadequately-capitalized institutions. The
capital categories are determined solely for the purposes of applying FDICIA's
prompt corrective action ("PCA")PCA provisions, as discussed below, and such capital categories may not
constitute an accurate representation of the overall financial condition or
prospects of the Bank or the Savings Bank.
As of December 31, 1997,1998, each of the Bank and the Savings Bank met the
requirements for a "well capitalized""well-capitalized" institution. A "well capitalized""well-capitalized"
classification should not necessarily be viewed as describing the condition or
future prospects of a depository institution, including the Bank and the Savings
Bank.
Under FDICIA's PCA system, an insured depository institution in the
"undercapitalized category" must submit a capital restoration plan guaranteed by
its parent company. The liability of the parent company under any such guarantee
is limited to the lesser of 5.00% of the insured depository institution's assets
at the time it became undercapitalized, or the amount needed to comply with the
plan. An insured depository institution in the undercapitalized category also is
subject to limitations in numerous areas including, but not limited to, asset
growth, acquisitions, branching, new business lines, acceptance of brokered
deposits and borrowings from the Federal Reserve. Progressively more burdensome
restrictions are applied to insured depository institutions in the
undercapitalized category that fail to submit or implement a capital plan and to
insured depository institutions that are in the significantly undercapitalized
or critically undercapitalized categories. In addition, an insured depository
institution's primary federal banking agency is authorized to downgrade the
institution's capital category to the next lower category upon a determination
that the institution is in an unsafe or unsound condition or is engaged in an
unsafe or unsound practice. An unsafe or unsound practice can include receipt by
the institution of a less than satisfactory rating on its most recent
examination with respect to its capital, asset quality, management, earnings or
liquidity.
"Critically undercapitalized" insured depository institutions (which are
defined to include institutions that still have a positive net worth) may not,
beginning 60 days after becoming "critically undercapitalized," make any 10
payment
of principal or interest on their subordinated debt (subject to certain limited
exceptions). Thus, in the event an institution became "critically
undercapitalized," it would generally be prohibited from making payments on its
subordinated debt securities. In addition, "critically undercapitalized"
institutions are subject to appointment of a receiver or conservator.
7
FDICIA requires the federal banking agencies to review the risk-based capital
standards to ensure that they adequately address interest-rateinterest rate risk,
concentration of credit risk and risks from non-traditional activities. The OTS
amended its risk-based capital rules to incorporate interest rate risk
requirements under which a savings bank must hold additional capital if it
projects an excessive decline in "net portfolio value" in the event interest
rates increase or decrease by two percentage points. These standards are not yet
in effect.
FDICIA also requires the FDIC to implement a system of risk-based premiums for
deposit insurance pursuant to which the premiums paid by a depository
institution will be based on the probability that the FDIC will incur a loss in
respect of such institution. The FDIC has since adopted a system that imposes
insurance premiums based upon a matrix that takes into account an institution's
capital level and supervisory rating.
The Bank and the Savings Bank may accept brokered deposits as part of their
funding. Under FDICIA, only "well capitalized""well-capitalized'" and "adequately capitalized""adequately-capitalized"
institutions may accept brokered deposits. "Adequately capitalized""Adequately-capitalized"
institutions, however, must first obtain a waiver from the FDIC before accepting
brokered deposits, and such deposits may not pay rates that significantly exceed
the rates paid on deposits of similar maturity from the institution's normal
market area or the national rate on deposits of comparable maturity, as
determined by the FDIC, for deposits from outside the institution's normal
market area.
Liability for Commonly-Controlled Institutions
Under the "cross-guarantee" provision of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA"), insured depository institutions
such as the Bank and the Savings Bank may be liable to the FDIC in respect of
any loss or reasonably anticipated loss incurred by the FDIC resulting from the
default of, or FDIC assistance to, any commonly controlled insured depository
institution. The Bank and the Savings Bank are commonly controlled within the
meaning of the FIRREA cross guaranteecross-guarantee provision.
Investment Limitation and Qualified Thrift Lender Test
Federally-chartered savings banks such as the Savings Bank are subject to
certain investment limitations. For example, federal savings banks are not
permitted to make consumer loans (i.e., certain open-end or closed-end loans for
personal, family or household purposes, excluding credit card loans) in excess
of 35% of the savings bank's assets. Federal savings banks are also required to
meet the QTL Test, which generally requires a savings bank to maintain at least
65% "portfolio assets" (total assets less (i) specified liquid assets up to 20%
of total assets, (ii) intangibles, including goodwill and (iii) property used to
conduct business) in certain "qualified thrift investments" (residential
mortgages and related investments, including certain mortgage-backedmortgage backed and
mortgage-relatedmortgage related investments, small business related securities, certain state
and federal housing investments, education loans and credit card loans) on a
monthly basis in nine out of every 12 months. Failure to qualify under the QTL
Test could subject the Savings Bank to substantial restrictions on its
activities and to certain other penalties, and could subject the Company to the
provisions of the BHCA, including the activity restrictions that apply generally
to bank holding companies and their affiliates. The Savings Bank has been
granted a two-year exception from the QTL Test, but must be in full compliance
with the test by June 30, 1998. As of December 31, 1997, 93.68%1998, 86.07%
of the Savings Bank's portfolio assets were held in qualified thrift
investments, and the Savings Bank was in compliance with the QTL Test.
Lending Activities
The activities of the Bank and the Savings Bank as consumer lenders are also
subject to extensive regulation under various federal laws including the Truth-in-LendingTruth-
in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act,
the Community Reinvestment Act and the Soldiers' and Sailors' Civil Relief Act,
as well as to various state laws. Regulators are authorized to impose penalties
for violations of these statutes and, in certain cases, to order the Bank and
the Savings Bank to pay restitution to injured borrowers. Borrowers may also
bring actions for certain violations. Federal bankruptcy and state debtor relief
and collection laws also affect the ability of 11
the Bank and the Savings Bank to
collect outstanding balances owed by borrowers who seek relief under these
statutes.
8
Year 2000
On October 15, 1998, the Office of the Comptroller of the Currency --
Department of Treasury, the Federal Reserve, the FDIC and the OTS -- Department
of Treasury, together published Interagency Guidelines establishing Year 2000
Standards for Safety and Soundness. These were made effective November 2, 1998,
by the Federal Reserve (Amendments to Regulation H Membership of State Banking
Institutions in the Federal Reserve System, Appendix D-2 -- Interagency
Guidelines Establishing Year 2000 Standards for Safety and Soundness) (the
"Standards"). Among other things, the Standards require components and
timetables for the review of mission critical systems for year 2000 readiness,
renovation of internal and external mission critical systems, testing of mission
critical systems, business resumption contingency planning, remediation
contingency planning, customer risk assessment and involvement of the board of
directors and management. The Company's year 2000 plan is subject to and in
compliance with the Standards. For a further discussion of the Company's
preparation for the year 2000, see pages 33-34 of the Annual Report under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Business Outlook -- Year 2000."
Legislation
From time to time legislation has been proposed in Congress to limit interest
rates and fees that could be charged on credit card accounts or otherwise
restrict practices of credit card issuers. Various bills have also been
introduced that would eliminate a separate savings bank charter, possibly
requiring that existing savings banks become banksbanks; eliminate or restrict the
authority of a unitary savings and loan holding company to engage in activities
ineligible for bank holding companies; and repeal in some respects the
provisions of the Glass-Steagall Act prohibiting certain banking organizations
from engaging in certain securities activities and the provisions of the BHCA
prohibiting affiliations between banking organizations and non-
bankingnon-banking
organizations. Legislation has also been proposed to change existing federal
bankruptcy laws. It is unclear at this time whether and in what form any such
legislation will be adopted or, if adopted, what its impact on the Bank, the
Savings Bank or the Company would be. Congress may in the future consider other
legislation that would materially affect the banking or credit card industries.
Investment in the Corporation, the Bank and the Savings Bank
Certain acquisitions of capital stock may be subject to regulatory approval or
notice under federal or Virginia law. Investors are responsible for insuring
that they do not, directly or indirectly, acquire shares of capital stock of the
Company in excess of the amount which can be acquired without regulatory
approval.
The Bank and the Savings Bank are each "insured depository institutions"
within the meaning of the Change in Bank Control Act. Consequently, federal law
and regulations prohibit any person or company from acquiring control of the
Company without, in most cases, prior written approval of the Federal Reserve
Board or
the OTS, as applicable. Control is conclusively presumed if, among other things,
a person or company acquires more than 25% of any class of voting stock of the
Corporation. A rebuttable presumption of control arises if a person or company
acquires more than 10% of any class of voting stock and is subject to any of a
number of specified "control factors" as set forth in the applicable
regulations.
Although the Bank is not a "bank" within the meaning of Virginia's reciprocal
interstate banking legislation (Chapter 15 of Title 6.1 of the Code of
Virginia), it is a "bank" within the meaning of Chapter 13 of Title 6.1 of the
Code of Virginia governing the acquisition of interests in Virginia financial
institutions (the "Financial Institution Holding Company Act"). The Financial
Institution Holding Company Act prohibits any person or entity from acquiring,
or making any public offer to acquire, control of a Virginia financial
institution or its holding company without making application to, and receiving
prior approval from, the Bureau of Financial Institutions.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
permits bank holding companies, with Federal Reserve Board approval, to acquire
banks located in states other than the holding company's home state without
regard to whether the transaction is prohibited under state law. In addition, as
of June 1, 1997, national and state banks with different home states are
permitted to merge across state lines, with approval of the appropriate federal
banking agency, unless the home state of a participating bank passed legislation
prior to this date expressly prohibiting interstate bank mergers. Virginia has
not passed such legislation but has elected to permit such interstate bank
mergers.
Interstate Taxation
Several states have passed legislation which attempts to tax the income from
interstate financial activities, including credit cards, derived from accounts
held by local state residents. Based on the volume of its business in these
states and the nature of the legislation passed to date, the Company currently
believes that this development will not materially affect the financial
condition of the Bank, the Savings Bank or the Company. Cautionary Statements
- ---------------------
InformationThe states may also
consider legislation to tax income derived from transactions conducted through
the Internet. The Company currently solicits accounts and takes account
information via the Internet. It is unclear at this time, however, whether and
in what form any such legislation will be adopted or, statements provided byif adopted, what its
impact on the Company from timewould be.
9
RISK FACTORS
This Annual Report on form 10-K contains forward-looking statements. We may
also make written or oral forward-looking statements in our periodic reports to
time may
contain certain "forward-looking information,"the Securities and Exchange Commission on Forms 10-Q and 8-K, in our annual
report to shareholders, in our proxy statements, in our offering circulars and
prospectuses, in press releases and other written materials and in oral
statements made by our officers, directors or employees to third parties.
Statements that are not historical facts, including statements about our beliefs
and expectations, are forward-looking statements. Forward-looking statements
include information relating to growth in diluted earnings per share, returnsreturn on
equity,
12
growth in managed loans outstanding and consumercustomer accounts, net interest
margins, funding costs, operations costs and employment growth, marketing
expense, delinquencies and charge offs. Such forward-lookingcharge-offs. Forward-looking statements may be identified
by the use of terminologyalso include
statements using words such as "may," "will," "expect," "anticipate," "goal,"intend," "target,"plan,"
"forecast,"believe," "project," "continue""estimate" or comparable terminology and may
involve certain risks or uncertainties and are qualified in their entirety by
the cautionary statements provided below. The cautionarysimilar expressions. These statements are being
made pursuant to the provisions of the Private Securities Litigation Reform Act
of 1995 (the "Act")based on
current plans, estimates and with the intention of obtaining the benefits of the
"safe harbor" provisions of the Act for any such forward-looking information.
Many of the cautionary factors discussed below, as well as other factors,
have also been discussed in the Company's prior public filings. Thoughprojections, and therefore you should not place
undue reliance on them.
Although the Company has attemptedtried to list comprehensivelydiscuss all important factors, the Company
wishes to caution investorsplease be
aware that other factors in the futurerisks may prove to be important in affecting the Company's results of operations.future. New factorsrisks may
emerge from time toat any time and it is not possible for managementthe Company to predict all of
such factors, nor can it assess the impact of each such factor on the businessrisks
or to estimate the extent to which any factor, or combinationthey may affect the Company's financial
performance.
Forward-looking statements are not guarantees of factors, may causefuture performance. They
involve risks, uncertainties and assumptions, including the risks discussed
below. The Company's future performance and actual results tomay differ materially
from those containedexpressed in anythese forward-looking statements. The Company cautions investors not to place undue reliance on any forward-
looking statements, as they speak onlyMany of the factors
that will determine these results and values are beyond the Company's views as of the date the
statement was made. The Company further cautions readersability to
control or predict. This section highlights specific risks that any forward-
looking information provided bycould affect
the Company is not a guarantee of future
performance and that actual results could differ materially from those in the
forward-looking information as a result of various factors, including, but not
limited to, the following:its business.
Intense Competition
The Company faces intense and increasing competition from numerousmany other providers of credit
cards and other financial products and services who may
employ various competitive strategies. Theservices. In particular, the Company
faces competition fromcompetes with national, regional and local bank card issuers, of bank cards in each of its markets.
Additionally, the Company competesand with other
general purpose credit or charge card issuers. The Company also competes, to a
lesser extent, with "smart card" and debit card providers and to a certain extent, smartwith single
purpose card or debit card providers.issuers, such as department stores. Many of these companies are
substantially larger than the Company and have more capital and other resources
than the Company.Company does. Additionally, many of the Company's competitors are
pricingother credit card products at attractivecompanies compete with
the Company for customers by offering lower interest rates atand fees. Because
customers generally choose credit card issuers based on price (mostly interest
rates and fees), credit limit and other product features, customer loyalty is
limited. The Company may lose entire accounts, or below those
currently charged by the Company.may lose account balances, to
competing card issuers.
In the past, the Company has faced intense competition primarily with its First Generation Products. Management,low
introductory rate credit cards. Recently, however, the competition with the
Company's other credit card products, such as its low fixed rate cards, secured
cards and other customized cards, has also become more intense. The Company
expects that competition will continue to grow more intense with respect to all
of its products, including the Company's products in the future,
competitive pressures will increase for SecondUnited Kingdom and
Third Generation Products,
including competition for its productsCanada, the telecommunications services offered by America One and services in markets outside of the
United States.automobile loans offered by Summit.
Accounts and Loan Balances Will Fluctuate
The Company's aggregate accounts orand loan balances and the growth rate thereofat which they grow are
affected by a number of internal and external factors. Becausefactors, including how the Company's product mix significantly influences account and loan balance growth,
the allocation of Company allocates its
marketing investment among different products will
cause fluctuations inand the aggregate number of accounts and in outstanding loan
balances. Moreover, as IBS is designed to take advantage of market
opportunities, difficulties exist in forecasting the allocation of marketing
investment and projections of account and loan balance growth and accompanying
Company results will vary from time to time. In addition, external factors such
as attrition ofrate at which customers
transfer their accounts and loan balances to competing card issuersissuers. Accounts
and loan balances are also affected by general economic conditions, which may
increase or decrease the amount of spending by customers and their ability to
repay their loans, and other factors beyond the control of the Company
couldBecause the Company designed its IBS to take advantage of market
opportunities, it is difficult for the Company to forecast how it will spend its
marketing funds and on which products. Likewise, the Company's account and loan
balance growth is affected by many factors, including the ones mentioned above.
The Company's results, therefore, will vary results. Consumers are attracted to credit card issuers largely on the
basisas marketing investments, accounts
and loan balances fluctuate.
10
Difficulty of price, credit limitSustaining and other product features and, once an account is
originated, customer loyalty may be limited.
Ability to Sustain and ManageManaging Growth
The Company's growth strategy for future growth has been, and is expectedthreefold. First, the Company seeks to
continue to be, to applygrow its proprietary IBS to itsdomestic credit card business. Second, the Company desires
to grow its lending business as
well asinternationally, in the United Kingdom, Canada and
beyond. Third, the Company hopes to other businesses,identify and pursue new business
opportunities, both financial and non-financial, to identify new
business opportunities and to make informed investment decisions about its
existing products and services. Managementnon-financial. The Company's management
believes that, through continued
application of its IBS, the Company can grow its credit card portfolio both
domestically and internationally and develop new productproducts and service
offerings necessary to sustain growth.services.
However, there are a number of factors that can impactaffect the Company's ability to
sustain growth. As mentioned throughout
this section, continued growth of the
13
Company's credit card portfolio will depend on a number of factors, including
(i)do so including:
. the Company's ability to retain existing customers and to attract new
consumers and retain existing
consumers; (ii)customers;
. the growth of existing and new account balances;
(iii). the delinquency and charge off levels of delinquencies and charge offs; (iv)accounts;
. the availability of funding on favorable terms;
(v). the amount of funds available for marketing expendituresinvestment used to solicit new
consumers
and (vi)customers;
. general economic and other factors.
Continued growth through expansion and product diversification will depend
on additional factors. Thefactors;
. a favorable interest rate environment;
. the Company's development of new products and services
will be affected by the ability of the Company to internally build or to acquire the necessary operational and
organizational infrastructure necessary to engage in new
businessesinfrastructure; and
. the Company's ability to recruit experienced personnel to assist in the management and operations
personnel.
The Company's expansion internationally is affected by additional factors such
as limited access to information, differences in cultural attitudes toward
credit, new regulatory and legislative environments and differences from the
United States historical experience of these businesses and the availability of capital necessary to fund
these new businesses. Additionally, difficultiesportfolio performance in different
countries.
Difficulties or delays in the development, production, testing and marketing
of new products or services including, but not
limited to, awill affect the success of such products or
services. Such difficulties could include:
. failure to implement new product or service programs when
anticipated, theon time;
. failure of customers to accept these products or services when
planned,services;
. operational difficulties or delays;
. losses associated witharising from the testing of new products or services or
financial,services; and
. legal orand other difficulties as may arise indifficulties.
In addition, the course of such
implementation, will affect the success of anyCompany's new product or business. In
addition,and services may not achieve the same
financial results as the Company attempts to diversify and expandhas achieved in the past from its offerings beyond
credit cards, and more particularly beyond financial services, there can be no
assurance that the historical financial results achieved from the Company's credit card
business will necessarily be reflective of the results from other
products and services.business.
Limited Availability of Financing and Variable Funding Costs
TheLike most credit card companies, the Company's primary source of funding is
the securitization of consumer loans, and to date,loans. Securitization transactions involve the
sale of beneficial interests in consumer loan balances. Until now, the Company
has completed securitization transactions on terms that it believes are
favorable. Difficulties or delays in the
securitization of the Company's receivables, or changes in credit enhancement
rates, impact the cost andThe availability of securitization funding. Such
difficulties, delays or changes may result from adverse developmentsfunding, however, depends on how
difficult and expensive such funding is. Securitizations can be affected by
many factors, such as whether a third party will guarantee the Company's
obligations and the rates at which accountholders have repaid their balances in
the availability of credit enhancement for securitizations or in the performance of
the securitized assets or from changes in the currentpast. In addition, legal, regulatory, accounting and tax environment governing securitizations. Therechanges can be no
assurance that themake
securitization market will continue tofunding more difficult, more expensive or unavailable on any
terms. Securitizations may not always offer the Company an
attractive funding, alternative, and
the Company couldmay have to seek other more expensive funding sources.
More generally,sources in the future.
In general, the amount, type and cost of anythe Company's financing available toaffects the
Company to fund its operations, and any changes to that financing, including
changes resulting fromCompany's financial results. Changes within the Company's organization, orchanges
in the activities of parties with which the Company has agreements or understandings includingwith,
and changes affecting the Company's investments could all make the financing
available to the Company more difficult, more expensive or unavailable on any
activities affecting any investment, may impact Company results. The Company
faces competition in seeking funding fromterms. In addition, banks, savings banks money market
funds and a wide varietysimilar companies compete with the
Company for funding. Some of other entities that take deposits and/or sell debt
securities, some of whichthese institutions are publicly traded. Many of
these companiesinstitutions are substantially larger, have more capital and other
resources and have better financial ratings than the Company. Accordingly, there can be no assurance that
competitionCompetition from
these other borrowers will notmay increase the Company's cost of funds. Events that
disrupt capital markets and other reasons beyond the Company's control could
also make the Company's funding sources more expensive or unavailable.
11
Risk of Increased Delinquencies and Credit QualityLosses
The costsCompany, like other consumer lenders, faces the risk that accountholders
will not repay their loans, resulting in accounts becoming uncollectible.
Consumers who miss payments on their loans often fail to repay them, and
consumers who file for protection under the bankruptcy laws generally do not
repay their loans. Therefore, the rate of an increase in delinquenciesmissed payments, or "delinquencies,"
on the Company's portfolio of loans, and credit losses could have a
material adverse effect onthe rate at which consumers may be
expected to file for bankruptcy, can be used to predict the future rate at which
the Company charges off its consumer loans. A high charge-off rate would hurt
the Company's financial performance and the performance of the Company's
securitizedsecuritizations.
Widespread increases in past-due payments and nonpayment are most likely to
occur if the country or a regional area encounters an economic downturn, such as
a recession, but they could also occur for other reasons. For example, fraud
can cause loss. In addition, the age and rate of growth, or "seasoning," of a
consumer loan trusts. Delinquenciesportfolio also affects the rate of missed payments and credit
losses are influenced by a number of external and internal factors. First, a
national or regional economic slowdown or recession increases the risk of
defaults and credit losses. Costs associated with an increase in the number of
customers seeking protection under the bankruptcy laws, resulting in accounts
beingloans
charged off as uncollectible,uncollectible. If the Company makes fewer loans than it has in
the past, the proportion of new loans in its portfolio will decrease and the
effectsdelinquency rate and charge-off rate may increase. Therefore, the seasoning of
fraud by third parties or
customers are additional factors. "Seasoning" of accounts (increases in the
average age of a credit card issuer's portfolio) affects the Company's level of
delinquencies and losses which may require higher loan loss provisions (and
reserves). A decreaseand reserves. This would
result in account originations or balances and the attrition of
such accounts or balances could significantly impact the seasoning of the
overall portfolio, resulting in increases in the overall percentage of
delinquencies and losses.lower earnings unless offset by other changes.
In addition, the Company markets many of its Second Generation Productssecured card products and other
customized credit card products to consumers with limited credit histories. As a
result, these underserved markets sometimes have less experience with credit
risk and performance. These markets, in some cases, in
addition to thealso have higher delinquency
and credit loss rates associated with this
market, there is little historical experience with respect to credit risk and
performance of these underserved markets. Accordingly, althoughcharge-off rates. Although the Company believes that by utilizing its IBS can help it canto
effectively price these products in relation to their relative risk, there can be no assurance that the Company's
risk-based pricing system willCompany may not
set high enough fees and rates for these accounts to offset the negative impact of the expected higher
delinquency and loss rates.
14
Generalrates that the Company expects.
Risk of Economic ConditionsDownturns and Social Factors
Delinquencies and credit losses in the credit card industry generally increase
during periods of an economic downturn or recession. Such periods also
may be accompanied by decreasedLikewise, consumer demand
for consumer loans, thereby
affectingmay decline during an economic downturn or recession. Accordingly, an economic
downturn or recession (either local or national) can hurt the Company's
ability to sustain its growth. Althoughfinancial performance as accountholders default on their loans or carry lower
balances. As the Company increasingly markets its cards internationally, an
economic downturn or recession outside the United States could also hurt the
Company's financial performance. A variety of social factors may also cause
changes in credit card use, payment patterns and the rate of defaults by
accountholders. Social factors include changes in consumer confidence levels,
the public's perception of the use of credit cards and changing attitudes about
incurring debt and the stigma of personal bankruptcy. The Company believes that
it can manage these risks through its underwriting criteria and product design enable it to manage
the risks inherent in the consumer loans it makes, no assurance can be given
that suchdesign.
Nevertheless, underwriting criteria and design will afford adequate protection inmay not be enough to protect the
Company's growth and profitability during a sustained period of economic
downturn or recession.recession or a material shift in social attitudes.
Risk of Interest Rate Risks
Interest rate fluctuations affectFluctuations
The Company, like other financial institutions, borrows money from
institutions and depositors in order to lend money to customers. The Company
earns interest on the Company's netconsumer loans it makes, and pays interest marginon the deposits
and borrowings it uses to fund those loans. The difference between these two
rates affects the value of itsthe Company's assets and liabilities. If the rate of
interest the Company pays on its borrowings increases more than the rate of
interest the Company earns on its loans, the Company's earnings could fall. The
continued legalCompany's earnings could also be hurt if the rates on its consumer loans fall
more quickly than those on its borrowings.
The Company manages these risks partly by changing the interest rates it
charges on its customer accounts. The success of repricing accounts to match an
increase or commercial
availabilitydecrease in the Company's borrowing rates depends on the overall
product mix of such accounts, the actual amount of accounts repriced, the rate
at which the Company is originating new accounts, and the Company's ability to
retain accounts (and the related loan balances) after being repriced. For
example, if the Company increases the interest rate it charges on its consumer
loan accounts and the accountholders close their accounts as a result, then the
Company won't be able to match its increased borrowing costs as quickly.
The Company also manages the risk of interest rate fluctuations through
various financial instruments and techniques, (includingsuch as interest rate swaps and
similar financial instruments, loan repricing, hedging and other techniques) usedtechniques. The goal is to
maintain an interest rate neutral or "matched" position, where interest rates on
loans and borrowings go up or down by the same amount and at the same time. The
Company to manage the risk of such fluctuations and the continuing operational viability
of thosecannot, however, always achieve this position at a reasonable cost.
Furthermore, if these techniques will influence Company results.
The impact of repricing accounts and the overall product mix of accounts,
including the actual amount of accounts (and related loan balances) repriced and
the level and type of account originations at that time and the ability of the
Company to use account management techniques to retain repriced accounts and the
related loan balances, affectsbecome unavailable or impractical, then the
Company's net interest margin.earnings could be hurt.
12
Regulation and Legislation The effects of,Can Change
Federal and changes in, monetary and fiscal policies,state laws and regulations (including financial, consumer regulatory or otherwise), otherrules significantly limit the types of activities
of governments, agencies and similar organizations and social and
economic conditions, such as inflation and changes in taxation ofwhich the Company's
earnings influence Company goals and projections.engages. For example, fromfederal and state consumer
protection laws and rules limit the manner in which the Company may offer and
extend credit. From time to time, the United States Congress has proposed legislationand the states
consider changing these laws and may enact new laws or amend existing laws to
regulate further the consumer lending industry. Such new laws or rules could
limit the amount of interest rates andor fees that
could be charged on credit card accountsthe Company can charge or to otherwise restrict practices of
credit card issuers. If this or similar legislation was adopted, the Company'sits
ability to collect on account balances, or maintain previous levels of periodic
rate finance charges and other fees and charges could be adversely affected.
Failure by the Company to comply with any such requirements also could adversely
affect the Company's ability to enforce the receivables. Additionally, changes
have been proposed to the federal bankruptcy laws. Changes in federal
bankruptcy laws and any changes to state debtor relief and collection laws could
adverselymaterially affect the Company if such changes result in, among other things,
accounts being charged off as uncollectible and additional administrative
expenses. It is unclear at this time whether and in what form any legislation
will be adopted or if adopted, what its impact on the Company would be.
Congress may in the future consider other legislation that would materially
affect the
banking or credit card industries.industries in some other manner. Various bills have also
been introduced that would eliminate a separate savings bank charter, possibly
requiring that existing savings banks become banks; eliminate or restrict the
authority of a unitary savings and loan holding company to engage in activities
ineligible for bank holding companies; and repeal in some respects the
provisions of the Glass-Steagall Act prohibiting certain banking organizations
from engaging in certain securities activities and the provisions of the BHCA
prohibiting affiliations between banking organizations and non-banking
organizations. The laws governing bankruptcy and debtor relief also could
change, making it more expensive or more difficult for the Company to collect
from its customers. Congress is currently considering legislation that would
change the existing federal bankruptcy laws. Because it is not clear whether or
in what form Congress may adopt this legislation, the Company cannot predict how
this legislation may affect the Company, the Bank or the Savings Bank.
In addition, the existing laws and rules are complex. If the Company fails
to comply with them it might not be able to collect its loans in full, or it
might be required to pay damages or penalties to its customers. For these
reasons, new or changes in existing laws or rules could hurt the Company's
profits.
Expenses and Other Costs Will Fluctuate
The Company's expenses and other costs, such as associate and marketing
expenses, directly effect its earnings results. Many factors can influence the
amount and rate of growth in the Company's expenses, (including employee
and marketing expenses) as well has how quickly they grow. As the
Company's business develops, changes or changes and
expands, into new market areas; the acquisitionadditional expenses can arise
from asset purchases, structural reorganization or a reevaluation of assets (variable, fixed or
other) and the impact of unusual items resulting from the Company's ongoing
evaluation of its business
strategies, asset valuations and organizational
structures will all impact Company results. Additionally, otherstrategies. Other factors that can affect expenses include
the costs and other effects of legal and
administrative cases and proceedings, settlements and investigations, claims and changes in those items, developmentswhich can be expensive to pursue or
assertions by or againstdefend. In addition, accounting policies that change can significantly effect
how the Company adoptionscalculates its expenses and earnings.
Risk of new, or changesTechnology Delays and Year 2000 Compliance
The Company uses its sophisticated computer systems in existing, accounting policiesall aspects of its
business, from IBS to payment processing to customer service. The Company also
uses various outside vendors of computer systems and practices and the application of such policies
and practices.
Technologyproducts. System delays,
malfunctions and errors in the proprietarythese systems could cause delays and third party
systems and networks used byadditional costs
in most areas in which the Company for payment processing, collections and
other services and operations may lead to delays, additional costs to the
Company, and,relies on computers. In addition, if
computer problems are not corrected in a timely fashion, customer dissatisfaction
whichquickly, customers could ultimatelybecome
dissatisfied. This could affect the Company's customer base and the level of
service it is ableprovides.
The "Year 2000 Issue," for example, has arisen because many computer systems
around the world use two digits instead of four digits to provide to its customers.define a year. As a
result, many computers will read the year 2000 as 1900 unless these computers
are modified or replaced. The Company's preparations for the year 2000 are
described on pages 33-34 of the Annual Report under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Business Outlook - Year 2000 compliance issue
may result in such system delays or malfunctions.2000." The Company has formed a Year
2000 project team to identify software systems and computer-related devices that
require modification, and the project team has
15
developed a plan to address any system issues and is making and testing all
required modifications within the plan time frame. Although the Company expects to have all of its system
modifications completecompleted and tested extensively by the end of 1998, allowing a
sufficient amount of time to test systems in 1999, but
unforeseen problems could arise inif the Company, or the companies with which it
does business, are not prepared for the year 2000 giving rise to2000. The Company relies heavily
on its computers and any delays andor malfunctions which may impact
Companycould hurt the Company's
financial results. In addition, vendors used by the Company is in discussions with outside third
party providers ofmight not be year
2000 compliant. If these vendors don't provide the products, services or
systems and networks, to determine whetherthat the Company needs, the Company's outside vendors have addressed their Year 2000 systems issues.
Althoughbusiness and operations could be
hurt. For example, if the Company is taking certain precautionary measures to assure that it
is not vulnerable to the failure by its third party vendors to make necessary
system modifications, there can be no assurance thatUnited States postal service or the Company's
third party
vendors will successfully address all Yeartelephone carriers are not year 2000 issues.compliant, the Company's ability to solicit
new customers and service the accounts of its existing customers could be
disrupted or delayed.
13
Statistical Information
- -----------------------
The statistical information required by Item 1 is in the Annual Report, and is
incorporated herein by reference, as follows:
Page in the Company's Annual
Report to its Stockholders for
Guide 3 Disclosure the Year Ended December 31, 1997
------------------ --------------------------------
I. Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rates and
Interest Differential 22-24
II. Investment Portfolio 46
III. Loan Portfolio 19-20, 26-29, 32-34, 54
IV. Summary of Loan Loss Experience 26-29, 47
V. Deposits 23, 29
VI. Return on Equity and Assets 17
VII. Other Borrowings 29-31
PAGE IN THE COMPANY'S ANNUAL
REPORT TO ITS STOCKHOLDERS FOR
GUIDE 3 DISCLOSURE THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------- ---------------------------------
I. Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential............................ 20-24
II. Investment Portfolio................................................ 45
III. Loan Portfolio...................................................... 19-20, 25-28, 30, 53
IV. Summary of Loan Loss Experience..................................... 26-28, 46
V. Deposits............................................................ 23, 28-29
VI. Return on Equity and Assets......................................... 17
VII. Other Borrowings.................................................... 28-29
ITEM 2. PROPERTIES.
The Company leases its principal executive office at 2980 Fairview Park Drive,
Suite 1300, Falls Church, Virginia, consisting of approximately 43,400 square
feet. The lease commenced January 1, 1995 and expires February 29, 2000.
Thethe Company has the rightexercised its
option to extend the lease until February 28, 2005.
The Company owns administrative offices and credit card facilities in
Richmond, Virginia, consisting of approximately 470,000 square feet, from which
it conducts its credit, collections, customer service and other operations. The
Company also leases additional facilities consisting of an aggregate of
approximately 1,467,0001,800,000 square feet (excluding the principal executive office)
from which credit, collections, customer service and other operations are
conducted, primarily in Virginia, Florida, Texas and Texas.London. The Company recently purchasedalso
owns a facility in Nottingham, Great Britain, consisting of approximately
267,000 square feet. The Company also expects to lease or purchase additional
facilities in Florida, Texas, Virginia, Washington and Virginiathe United Kingdom
consisting of an aggregate of approximately 186,0001,180,000 square feet.
ITEM 3. LEGAL PROCEEDINGS.
During 1995, the Company anda lawsuit was filed against the Bank became involved inon behalf of a purportedputative
class action suit relating toof California debtors alleging that certain collection practices engaged
in by Signet Bank and, subsequently, by the Bank. The complaint in this case alleges that Signet
Bank and/or the Bank violated a variety ofcertain California
state statuteslaws and constitutional and common law duties byduties. Specifically, plaintiffs
allege that filing collection lawsuits obtaining
judgements and pursuing garnishment proceedings in the Virginia state courts
against California debtors who had
defaulted on their credit card customers who were not residents of Virginia.
This caseagreements, obtaining judgments in Virginia and
enforcing those judgments using Virginia garnishments proceedings was filed inimproper.
In early 1997, the Superior Court of California in the County of Alameda, Southern Division, on behalf of a class of California
16
residents. The complaint seeks unspecified statutory damages, compensatory
damages, punitive damages, restitution, attorneys' fees and costs, a permanent
injunction and other equitable relief.
In February 1997, the California courtAlmeda
entered judgementjudgment in favor of the Bank on all of the plaintiff'splaintiffs' claims. The
plaintiffs have appealed the ruling to the California Court of Appeal, First Appellate District Division 4, andAppeals. In early
1999, the appeal is pending.California Court of Appeals affirmed the trial court's ruling in favor
of the Bank on six counts, but reversed the trial court's ruling on two counts
of the plaintiffs' complaint. The Bank intends to petition for further
appellate review of the California Court of Appeals ruling on the two remaining
counts.
Because no specific measure of damages is demanded in the complaint forof the
California case and the trial court entered judgementjudgment in favor of the Bank before
the parties completed any significant discovery, an informed assessment of the
ultimate outcome of this case cannot be made at this time. Management believes,
however, that there are meritorious defenses to this lawsuit and intends to
defend it vigorously.
The Company is commonly subject to various other pending and threatened legal
actions arising from the conduct of its normal business activities. In the
opinion of management, the ultimate aggregate liability, if any, arising out of
any pending or threatened action will not have a material adverse effect on the
consolidated financial condition of the Company. At the present time, however,
management is not in a position to determine whether the resolution of any
pending or threatened litigation will have a material adverse effect on the
Company's results of operations in any future reporting period.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the Company's fiscal year ending December 31,
1997,1998, no matters were submitted to a vote of the stockholders of the Company.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The information required by Item 5 is included under "Supervision and
Regulation -- DividendsRegulation-Dividends and Transfers of Funds" herein and in the Annual Report on
pages 29-3228-29 under the headings "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Funding"Operations--Funding" and "-- Capital"--Capital
Adequacy," on page 3735 under the heading "Selected Quarterly Financial Data" and
on page 5251 in Note JK to Consolidated Financial Statements, and is incorporated
herein by reference and filed as part of Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by Item 6 is included in the Annual Report on page 17
under the heading "Selected Financial and Operating Data," and is incorporated
herein by reference and filed as part of Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by Item 7 is included in the Annual Report on pages
18-3618-34 under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and is incorporated herein by reference
and filed as part of Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by Item 7A is included in the Annual Report on pages
32-3430-31 under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- InterestOperations--Interest Rate Sensitivity," and is
incorporated herein by reference and filed as part of Exhibit 13.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is included in the Annual Report on page 3937
under the heading "Report of Independent Auditors," on pages 40-5538-54 under the
headings "Consolidated Balance Sheets," "Consolidated Statements of Income,"
"Consolidated Statements of Changes in Stockholders' Equity," "Consolidated
Statements of Cash Flows" and "Notes to Consolidated Financial Statements" and
on page 3735 under the heading "Selected Quarterly Financial Data," and is
incorporated herein by reference and filed as part of Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required by Item 10 is included in the Company's 19971999 Proxy
Statement (the "Proxy Statement") on pages 5-95-7 under the heading "Information
About Our Directors and Executive Officers" and on page 4 under the heading
"Information About Capital One's Common Stock Ownership - SectionOwnership--Section 16(a)
Beneficial Ownership Reporting Compliance," and is incorporated herein by
reference. The Proxy Statement will be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days of the end of the
Corporation's 19971998 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is included in the Proxy Statement on
pages 8-9 under the heading "Information About Our Directors and Executive
Officers -- CompensationOfficers--Compensation of the Board" andBoard," on pages 10-1510-16 under the heading
"Compensation of Executive Officers,Officers" and on pages 17-20 under the heading
"Report on Executive Compensation of the Compensation Committee," and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is included in the Proxy Statement on pages 3-4page
3 under the heading "Information About Capital One's Common Stock Ownership,"
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is included in the Proxy Statement on
page 9 under the heading "Information About Our Directors and Executive
Officers
- -- RelatedOfficers--Related Party Transactions with Directors," and is incorporated herein
by reference.
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements of Capital One
Financial Corporation, included in the Annual Report, are incorporated herein by
reference in Item 8:
Report of Independent Auditors, Ernst & Young LLP
Consolidated Balance Sheets - AsSheets--As of December 31, 1998 and 1997
Consolidated Statements of Income--Years ended December 31, 1998, 1997 and
1996
Consolidated Statements of Income - YearsChanges in Stockholders' Equity--Years ended
December 31, 1998, 1997 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - YearsFlows--Years ended December 31, 1998, 1997 1996 and
19951996
Notes to Consolidated Financial Statements
Selected Quarterly Financial Data - AsData--As of and for the Yearsyears ended December 31,
19971998 and 19961997
(2) All schedules are omitted since the required information is either not
applicable, not deemed material, or is shown in the respective financial
statements or in notes thereto.
(3) Exhibits:
16
The following exhibits are incorporated by reference or filed herewith.
References to (i) the "1994 Form 10-K" are to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994; (ii) the "1995 Form 10-K" are to
the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and1995;
(iii) the "1996 Form 10-K" are to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
Exhibit Number Description
-------------- -----------1996; and (iv) the "1997 Form 10-K" are to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
EXHIBIT
- ----------
NUMBER DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of Capital One Financial Corporation (incorporated by reference to Exhibit 3.1
of the 1994 Form 10-K).
3.2 Restated Bylaws of Capital One Financial Corporation (as amended January 24, 1995) (incorporated by reference to
Exhibit 3.2 of the 1994 Form 10-K).
4.1 Specimen certificate representing the Common Stock (incorporated by reference to Exhibit 4.1 of the 1997 Form 10-K).
3.2 Restated Bylaws of Capital One Financial Corporation (as amended
January 24, 1995) (incorporated by reference to Exhibit 3.2 of
the 1994 Form 10-K).
4.1 Specimen certificate representing the Common Stock.
4.2 Rights Agreement dated as of November 16, 1995 between Capital One Financial Corporation and Mellon Bank, N.A.
(incorporated by reference to Exhibit 4.1 of the Company's Report on Form 8-K, filed November 16, 1995).
4.3 Amended and Restated Issuing and Paying Agency Agreement dated as of April 30, 1996 between Capital One Bank and
Chemical Bank (including exhibits A-1, A-2, A-3 and A-4 thereto) (incorporated by reference to Exhibit 4.1 of
19
the
Company's quarterly report on Form 10-Q for the period ending June 30, 1996).
4.4 Issuing and Paying Agency Agreement dated as of April 30, 1996 between Capital One Bank and Chemical Bank (including
exhibits A-1 and A-2 thereto) (incorporated by reference to Exhibit 4.2 of the Company's quarterly report on Form 10-Q
for the period ending June 30, 1996).
4.5.1 Senior Indenture and Form T-1 dated as of November 1, 1996 among the Company and Harris Trust and Savings Bank
(incorporated by reference to Exhibit 4.1 of the Company's Report on Form 8-K, filed November 13, 1996).
4.5.2 Copy of 7.25% Notes Due 2003 (incorporated by reference to Exhibit 4.5.2 of the 1996 Form 10-K).
4.6.1 Declaration of Trust, dated as of January 28, 1997, between the Bank and The First National Bank of Chicago, as
trustee (including the Certificate of Trust executed by First Chicago Delaware Inc., as Delaware trustee)
(incorporated by reference to Exhibit 4.6.1 of the 1996 Form 10-K).
4.6.2 Copies of Certificates Evidencing Capital Securities (incorporated by reference to Exhibit 4.6.2 of the 1996 Form
10-K).
4.6.3 Amended and Restated Declaration of Trust, dated as of January 31, 1997, by and among the Bank, The First National
Bank of Chicago and First Chicago Delaware Inc. (incorporated by reference to Exhibit 4.6.3 of the 1996 Form 10-K).
4.7 Indenture, dated as of January 31, 1997, between the Bank and The First National Bank of Chicago (incorporated by
reference to Exhibit 4.7 of the 1996 Form 10-K).
4.8.2 Copy of 7 1/8% Notes due 2008.
17
4.9 Issue and Paying Agency Agreement dated as of October 24, 1997 between Capital One Bank, Morgan Guaranty Trust Company
of New York, London Office, and the Paying Agents named therein.
10.1 Amended and Restated Distribution Agreement dated April 30, 1996 among Capital One Bank and the agents named therein
(incorporated by reference to Exhibit 10.1 of the Company's quarterly report on Form 10-Q for period ending June 30,
1996).
10.1.1 Amendment to Amended and Restated Distribution Agreement dated April 21, 1998 among Capital One Bank and the agents
named therein.
10.2 Distribution Agreement dated April 30, 1996, among Capital One Bank and the agents named therein (incorporated by
reference to Exhibit 10.2 of the Company's quarterly report on Form 10-Q for period ending June 30, 1996).
10.2.1 Amendment to Distribution Agreement dated April 30, 1998, among Capital One Bank and the agents named therein.
10.3.1 Change of Control Employment Agreement dated as of November 1, 1994 between Capital One Financial Corporation and
Richard D. Fairbank (incorporated by reference to Exhibit 10.12 of the 1994 Form 10-K).
10.3.2 Amendment to the Change of Control Agreement between Capital One Financial Corporation and Richard D. Fairbank dated
as of September 15, 1995 (incorporated by reference to Exhibit 10.12.1 of the 1995 Form 10-K).
10.3.3 Amended and Restated Change of Control Employment Agreement dated as of December 18, 1997 between Capital One
Financial Corporation and Richard D. Fairbank (incorporated by reference to Exhibit 10.3.3 of the 1997 Form 10-K).
10.4.1 Change of Control Employment Agreement dated as of November 1, 1994 between Capital One Financial Corporation and
Nigel W. Morris (incorporated by reference to Exhibit 10.13 of the 1994 Form 10-K).
10.4.2 Amendment to the Change of Control Agreement between Capital One Financial Corporation and Nigel W. Morris dated as of
September 15, 1995 (incorporated by reference to Exhibit 10.13.1 of the 1995 Form 10-K).
10.4.3 Amended and Restated Change of Control Employment Agreement dated as of December 18, 1997 between Capital One
Financial Corporation and Nigel W. Morris (incorporated by reference to Exhibit 10.4.3 of the 1997 Form 10-K).
10.6.1 Change of Control Employment Agreement dated as of November 1, 1994, between Capital One Financial Corporation and
John G. Finneran, Jr. (incorporated by reference to Exhibit 10.15 of the 1994 Form 10-K).
10.6.2 Amendment to Change of Control Employment Agreement dated as of December 18, 1997 between Capital One Financial
Corporation and John G. Finneran, Jr. (incorporated by reference to Exhibit 10.15 of the 1997 Form 10-K).
18
10.7 Capital One Financial Corporation 1994 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.9 of
the 1996 Form 10-K).
10.8 Intentionally left blank.
10.9 Form of Change of Control Agreement between Capital One Financial Corporation and certain of its senior executives.
10.10 Form of Amendment to Change of Control Agreement between Capital One Financial Corporation and certain of its
senior executives.
10.11 Capital One Financial Corporation Excess Savings Plan, as amended (incorporated by reference to Exhibit 10.20 of the
1995 Form 10-K).
10.12 Capital One Financial Corporation Excess Benefit Cash Balance Plan, as amended (incorporated by reference to Exhibit
10.21 of the 1995 Form 10-K).
10.13 Capital One Financial Corporation 1994 Deferred Compensation Plan, as amended (incorporated by reference to Exhibit
10.22 of the 1995 Form 10-K).
10.14 1995 Non-Employee Directors Stock Incentive Plan, (incorporated by reference to Registrant's Registration Statement on
Form S-8 Commission File No. 33-91790, filed May 1, 1995).
10.15 Intentionally left blank.
10.16 Consulting Agreement dated as of April 5, 1995, by and between Capital One Financial Corporation and American
Management Systems, Inc. (incorporated by reference to Exhibit 10.33 of the 1995 Form 10-K).
10.17.1 Amended and Restated Lease Agreement dated as of October 14, 1998 between First Security Bank of Utah, N.A., as owner
trustee for the COB Real Estate Trust 1995-1, as lessor and Capital One Realty, Inc., as lessee.
10.17.2 Guaranty dated as of October 14, 1998 from Capital One Bank in favor of First Security Bank, N.A., as owner trustee
for the COB Real Estate Trust 1995-1, First Union National Bank, as indenture trustee, Lawyers Title Realty Services,
Inc., as deed of trust trustee, and the Note Purchasers, Registered Owners and LC Issuer referred to therein.
10.18 Amended and Restated Credit Agreement, dated as of November 25, 1996, among Capital One Financial Corporation, Capital
One Bank, Capital One, F.S.B. and The Chase Manhattan Bank, as administrative agent (incorporated by reference to
Exhibit 10.21 of the 1996 Form 10-K).
10.19 Revolving Credit Facility Agreement dated as of August 29, 1997 by and among Capital One Finance Company and Capital
One Inc., as original borrowers, Capital One Financial Corporation, as original guarantor, and the agents and lenders
named therein (incorporated by reference to Exhibit 10.19 of the 1997 Form 10-K).
13 The portions of Capital One Financial Corporation's 1998 Annual Report to Stockholders that are incorporated by
reference herein.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
19
(b) Reports on Form 8-K
The Company filed on October 13, 1998 a Current Report on Form 8-K dated October
13, 1998, Commission File No. 1-13300, enclosing its press release dated October
13, 1998.
The Company filed on October 21, 1998 a Current Report on Form 8-K dated October
20, 1998, Commission File No. 1-13300, enclosing its press release dated October
20, 1998.
The Company filed on December 8, 1998 a Current Report on Form 8-K dated
December 7, 1998, Commission File No. 1-13300, enclosing its press release dated
December 7, 1998.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAPITAL ONE FINANCIAL CORPORATION
By: /s/ David M. Willey
---------------------------
David M. Willey
Senior Vice President, Finance and Accounting,
Treasurer and Assistant Secretary
Date: March 25, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON THE 25TH DAY OF MARCH, 1999.
SIGNATURE TITLE
--------- -----
/s/ Richard D. Fairbank Director, Chairman and Chief Executive
- -------------------------- Officer (Principal Executive Officer)
Richard D. Fairbank
/s/ Nigel W. Morris Director, President and Chief Operating Officer
- --------------------------
Nigel W. Morris
/s/ David M. Willey Senior Vice President, Finance and Accounting,
- -------------------------- Treasurer and Assistant Secretary
David M. Willey (Principal Accounting and Financial Officer)
/s/ W. Ronald Dietz Director
- --------------------------
W. Ronald Dietz
/s/ James A. Flick, Jr. Director
- --------------------------
James A. Flick, Jr.
/s/ Patrick W. Gross Director
- --------------------------
Patrick W. Gross
/s/ James V. Kimsey Director
- --------------------------
James V. Kimsey
/s/ Stanley I. Westreich Director
- --------------------------
Stanley I. Westreich
21
EXHIBITS TO CAPITAL ONE FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
DATED DECEMBER 31, 1998
COMMISSION FILE NO. 1-13300
EXHIBIT
- ------------
NUMBER DESCRIPTION
- ------------ --------------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of Capital One Financial Corporation (incorporated by reference to Exhibit 3.1
of the 1994 Form 10-K).
3.2 Restated Bylaws of Capital One Financial Corporation (as amended January 24, 1995) (incorporated by reference to
Exhibit 3.2 of the 1994 Form 10-K).
4.1 Specimen certificate representing the Common Stock (incorporated by reference to Exhibit 4.1 of the 1997 Form 10-K).
4.2 Rights Agreement dated as of November 16, 1995 between Capital One Financial Corporation and Mellon Bank, N.A.
(incorporated by reference to Exhibit 4.1 of the Company's Report on Form 8-K, filed November 16, 1995).
4.3 Amended and Restated Issuing and Paying Agency Agreement dated as of April 30, 1996 between Capital One Bank and
Chemical Bank (including exhibits A-1, A-2, A-3 and A-4 thereto) (incorporated by reference to Exhibit 4.1 of the
Company's quarterly report on Form 10-Q for the period ending June 30, 1996).
4.4 Issuing and Paying Agency Agreement dated as of April 30, 1996 between Capital One Bank and Chemical Bank (including
exhibits A-1 and A-2 thereto) (incorporated by reference to Exhibit 4.2 of the Company's quarterly report on Form 10-Q
for the period ending June 30, 1996).
4.5.1 Senior Indenture and Form T-1 dated as of November 1, 1996 among the Company and Harris Trust and Savings Bank
(incorporated by reference to Exhibit 4.1 of the Company's Report on Form 8-K, filed November 13, 1996).
4.5.2 Copy of 7.25% Notes Due 2003 (incorporated by reference to Exhibit 4.5.2 of the 1996 Form 10-K).
4.6.1 Declaration of Trust, dated as of January 28, 1997, between the Bank and The First National Bank of Chicago, as
trustee (including the Certificate of Trust executed by First Chicago Delaware Inc., as Delaware trustee)
(incorporated by reference to Exhibit 4.6.1 of the 1996 Form 10-K).
4.6.2 Copies of Certificates Evidencing Capital Securities (incorporated by reference to Exhibit 4.6.2 of the 1996 Form 10-
K).
4.6.3 Amended and Restated Declaration of Trust, dated as of January 31, 1997, by and among the Bank, The First National
Bank of Chicago and First Chicago Delaware Inc. (incorporated by reference to Exhibit 4.6.3 of the 1996 Form 10-K).
22
4.7 Indenture, dated as of January 31, 1997, between the Bank and The First National Bank of Chicago (incorporated by
reference to Exhibit 4.7 of the 1996 Form 10-K).
4.8.2 Copy of 7 1/8% Notes due 2008.
4.9 Issue and Paying Agency Agreement dated as of October 24, 1997 between Capital One Bank, Morgan Guaranty Trust Company
of New York, London Office, and the Paying Agents named therein.
10.1 Amended and Restated Distribution Agreement dated April 30, 1996 among Capital One Bank and the agents named therein
(incorporated by reference to Exhibit 10.1 of the Company's quarterly report on Form 10-Q for period ending June 30,
1996).
10.1.1 Amendment to Amended and Restated Distribution Agreement dated April 21, 1998 among Capital One Bank and the agents
named therein.
10.2 Distribution Agreement dated April 30, 1996, among Capital One Bank and the agents named therein (incorporated by
reference to Exhibit 10.2 of the Company's quarterly report on Form 10-Q for period ending June 30, 1996).
10.2.1 Amendment to Distribution Agreement dated April 30, 1998, among Capital One Bank and the agents named therein.
10.3.1 Change of Control Employment Agreement dated as of November 1, 1994 between Capital One Financial Corporation and
Richard D. Fairbank (incorporated by reference to Exhibit 10.12 of the 1994 Form 10-K).
10.3.2 Amendment to the Change of Control Agreement between Capital One Financial Corporation and Richard D. Fairbank dated
as of September 15, 1995 (incorporated by reference to Exhibit 10.12.1 of the 1995 Form 10-K).
10.3.3 Amended and Restated Change of Control Employment Agreement dated as of December 18, 1997 between Capital One
Financial Corporation and Richard D. Fairbank (incorporated by reference to Exhibit 10.3.3 of the 1997 Form 10-K).
10.4.1 Change of Control Employment Agreement dated as of November 1, 1994 between Capital One Financial Corporation and
Nigel W. Morris (incorporated by reference to Exhibit 10.13 of the 1994 Form 10-K).
10.4.2 Amendment to the Change of Control Agreement between Capital One Financial Corporation and Nigel W. Morris dated as of
September 15, 1995 (incorporated by reference to Exhibit 10.13.1 of the 1995 Form 10-K).
10.4.3 Amended and Restated Change of Control Employment Agreement dated as of December 18, 1997 between Capital One
Financial Corporation and Nigel W. Morris (incorporated by reference to Exhibit 10.4.3 of the 1997 Form 10-K).
10.1 Amended and Restated Distribution Agreement dated April 30,
1996 among Capital One Bank and the agents named therein
(incorporated by reference to Exhibit 10.1 of the Company's
quarterly report on Form 10-Q for period ending June 30, 1996).
10.2 Distribution Agreement dated April 30, 1996, among Capital One
Bank and the agents named therein (incorporated by reference to
Exhibit 10.2 of the Company's quarterly report on Form 10-Q for
period ending June 30, 1996).
10.3.1 Change of Control Employment Agreement dated as of November 1,
1994 between Capital One Financial Corporation and Richard D.
Fairbank (incorporated by reference to Exhibit 10.12 of the
1994 Form 10-K).
10.3.2 Amendment to the Change of Control Agreement between Capital
One Financial Corporation and Richard D. Fairbank dated as of
September 15, 1995 (incorporated by reference to Exhibit
10.12.1 of the 1995 Form 10-K).
20
10.3.3 Amended and Restated Change of Control Employment Agreement
dated as of December 18, 1997 between Capital One Financial
Corporation and Richard D. Fairbank.
10.4.1 Change of Control Employment Agreement dated as of November
1, 1994 between Capital One Financial Corporation and Nigel
W. Morris (incorporated by reference to Exhibit 10.13 of the
1994 Form 10-K).
10.4.2 Amendment to the Change of Control Agreement between Capital
One Financial Corporation and Nigel W. Morris dated as of
September 15, 1995 (incorporated by reference to Exhibit
10.13.1 of the 1995 Form 10-K).
10.4.3 Amended and Restated Change of Control Employment Agreement
dated as of December 18, 1997 between Capital One Financial
Corporation and Nigel W. Morris.
10.5.1 Change of Control Employment Agreement dated as of November
1, 1994 between Capital One Financial Corporation and James
M. Zinn (incorporated by reference to Exhibit 10.14 of the
1994 Form 10-K).
10.5.2 Amendment to Change of Control Employment Agreement dated as
of December 18, 1997 between Capital One Financial
Corporation and James M. Zinn.
10.6.1 Change of Control Employment Agreement dated as of November 1, 1994, between Capital One Financial Corporation and
John G. Finneran, Jr. (incorporated by reference to Exhibit 10.15 of the 1994 Form 10-K).
10.6.2 Amendment to Change of Control Employment Agreement dated as
of December 18, 1997 between Capital One Financial
Corporation and John G. Finneran, Jr.
10.7 Capital One Financial Corporation 1994 Stock Incentive Plan,
as amended (incorporated by reference to Exhibit 10.9 of the
1996 Form 10-K).
10.8 Capital One Financial Corporation Senior Executive Short-Term
Cash Incentive Plan (terminated effective November 16, 1995)
(incorporated by reference to Exhibit 10.17 of the 1994 Form
10-K).
10.9 Capital One Financial Corporation Senior Executive Long-Term
Cash Incentive Plan (terminated effective November 16, 1995)
(incorporated by reference to Exhibit 10.18 of the 1994 Form
10-K).
10.10 Capital One Financial Corporation Executive Employee
Supplemental Retirement Plan (terminated effective November
16, 1995) (incorporated by reference to Exhibit 10.19 of the
1994 Form 10-K).
21
10.11 Capital One Financial Corporation Excess Savings Plan, as
amended (incorporated by reference to Exhibit 10.20 of the
1995 Form 10-K).
10.12 Capital One Financial Corporation Excess Benefit Cash Balance
Plan, as amended (incorporated by reference to Exhibit 10.21
of the 1995 Form 10-K).
10.13 Capital One Financial Corporation 1994 Deferred Compensation
Plan, as amended (incorporated by reference to Exhibit 10.22
of the 1995 Form 10-K).
10.14 1995 Non-Employee Directors Stock Incentive Plan,
(incorporated by reference to Registrant's Registration
Statement on Form S-8 Commission File No. 33-91790, filed May
1, 1995).
10.15 Capital One Financial Corporation Severance Pay Plan
(terminated effective October 23, 1997) (incorporated by
reference to Exhibit 10.26 of the 1994 Form 10-K).
10.16 Consulting Agreement dated as of April 5, 1995, by and
between Capital One Financial Corporation and American
Management Systems, Inc. (incorporated by reference to
Exhibit 10.33 of the 1995 Form 10-K).
10.17.1 Participation Agreement dated as of January 5, 1996, among
Capital One Bank, as construction agent and as lessee, First
Security Bank of Utah, N.A., as owner/trustee for the COB
Real Estate Trust 1995-1, NationsBank of Texas, N.A., as
administrative agent and the holders and lenders named
therein (incorporated by reference to Exhibit 10.34.1 of the
1995 Form 10-K).
10.17.2 First Amendment to Operative Documents dated as of June 5,
1996, among Capital One Bank, as construction agent and as
lessee, First Security Bank of Utah, N.A., as owner/trustee
for the COB Real Estate Trust 1995-1, NationsBank of Texas,
N.A., as administrative agent, initial lender and initial
holder named therein (incorporated by reference to Exhibit
10.3 of the Company's quarterly report on Form 10-Q for
period ending June 30, 1996).
10.17.3 Second Amendment to Operative Agreements dated as of October
11, 1996, among Capital One Bank, as construction agent and
as lessee, First Security Bank of Utah, N.A., as
owner/trustee for the COB Real Estate Trust 1995-1,
NationsBank of Texas, N.A., as administrative agent, initial
lender and initial holder named therein (incorporated by
reference to Exhibit 10.20.3 of the 1996 Form 10-K).
10.17.4 Assignment, Consent and Third Amendment to Operative
Agreement dated November 8, 1996, by and among Capital One
Bank, Capital One Realty, Inc., First Security Bank of Utah,
N.A., as owner/trustee for the COB Real Estate Trust 1995-1,
and NationsBank of Texas, N.A., as administrative
22
agent (incorporated by reference to Exhibit 10.20.4 of the
1996 Form 10-K).
10.17.5 Lease Agreement dated as of January 5, 1996, between First
Security Bank of Utah, N.A., as owner/trustee for the COB
Real Estate Trust 1995-1, as lessor and Capital One Bank, as
lessee (incorporated by reference to Exhibit 10.34.2 of the
1995 Form 10-K).
10.17.6 Credit Agreement dated as of January 5, 1996, among First
Security Bank of Utah, N.A., as owner/trustee for the COB
Real Estate Trust 1995-1, as borrower, the lenders named
therein and NationsBank of Texas, N.A., as administrative
agent (incorporated by reference to Exhibit 10.34.3 of the
1995 Form 10-K).
10.17.7 Fourth Amendment to Operative Agreements dated as of April
10, 1997 by and among Capital One Bank, Capital One Realty,
Inc., First Security Bank of Utah, N.A., as owner/trustee for
the COB Real Estate Trust 1995-1, and NationsBank of Texas,
N.A., as administrative agent.
10.18 Amended and Restated Credit Agreement, dated as of November
25, 1996, among Capital One Financial Corporation, Capital
One Bank, Capital One, F.S.B. and The Chase Manhattan Bank,
as administrative agent (incorporated by reference to Exhibit
10.21 of the 1996 Form 10-K).
10.18.1 Change of Control Employment Agreement dated as of May 14,
1996 between Capital One Financial Corporation and James P.
Donehey.
10.18.2 Amendment to Change of Control Employment Agreement dated as
of December 18, 1997 between Capital One Financial
Corporation and James P. Donehey.
10.19 Revolving Credit Facility Agreement dated as of August 29,
1997 by and among Capital One Finance Company and Capital One
Inc., as original borrowers, Capital One Financial
Corporation, as original guarantor, and the agents and
lenders named therein.
13 The portions of the Company's 1997 Annual Report to
Stockholders which are incorporated by reference herein.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated December 22,
1997, Commission File No. 1-13300, announcing 1997 and 1998 Earnings
Expectations and a New Compensation Program.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAPITAL ONE FINANCIAL CORPORATION
Date: March 18, 1998 By /s/ James M. Zinn
---------------------------------
James M. Zinn
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 18th day of March, 1998.
SIGNATURES TITLE
---------- -----
/s/ Richard D. Fairbank Director, Chairman and Chief Executive
- ----------------------------- Officer
Richard D. Fairbank (Principal Executive Officer)
/s/ Nigel W. Morris Director, President and Chief Operating
- ----------------------------- Officer
Nigel W. Morris
/s/ James M. Zinn Senior Vice President and
- ----------------------------- Chief Financial Officer
James M. Zinn (Principal Accounting and Financial
Officer)
/s/ W. Ronald Dietz Director
- -----------------------------
W. Ronald Dietz
/s/ James A. Flick, Jr. Director
- -----------------------------
James A. Flick, Jr.
/s/ Patrick W. Gross Director
- -----------------------------
Patrick W. Gross
10.6.2 Amendment to Change of Control Employment Agreement dated as of December 18, 1997 between Capital One Financial
Corporation and John G. Finneran, Jr. (incorporated by reference to Exhibit 10.15 of the 1997 Form 10-K).
10.7 Capital One Financial Corporation 1994 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.9 of
the 1996 Form 10-K).
10.8 Intentionally left blank.
10.9 Form of Change of Control Agreement between Capital One Financial Corporation and certain of its senior executives.
10.10 Form of Amendment to Change of Control Agreement between Capital One Financial Corporation and certain of its
senior executives.
10.11 Capital One Financial Corporation Excess Savings Plan, as amended (incorporated by reference to Exhibit 10.20 of the
1995 Form 10-K).
10.12 Capital One Financial Corporation Excess Benefit Cash Balance Plan, as amended (incorporated by reference to Exhibit
10.21 of the 1995 Form 10-K).
10.13 Capital One Financial Corporation 1994 Deferred Compensation Plan, as amended (incorporated by reference to Exhibit
10.22 of the 1995 Form 10-K).
10.14 1995 Non-Employee Directors Stock Incentive Plan (incorporated by reference to Registrant's Registration Statement on
Form S-8 Commission File No. 33-91790, filed May 1, 1995).
10.15 Intentionally left blank.
10.16 Consulting Agreement dated as of April 5, 1995, by and between Capital One Financial Corporation and American
Management Systems, Inc. (incorporated by reference to Exhibit 10.33 of the 1995 Form 10-K).
10.17.1 Amended and Restated Lease Agreement dated as of October 14, 1998 between First Security Bank of Utah, N.A., as owner
trustee for the COB Real Estate Trust 1995-1, as lessor and Capital One Realty, Inc., as lessee.
10.17.2 Guaranty dated as of October 14, 1998 from Capital One Bank in favor of First Security Bank, N.A., as owner trustee
for the COB Real Estate Trust 1995-1, First Union National Bank, as indenture trustee, Lawyers Title Realty Services,
Inc., as deed of trust trustee, and the Note Purchasers, Registered Owners and LC Issuer referred to therein.
10.18 Amended and Restated Credit Agreement, dated as of November 25, 1996, among Capital One Financial Corporation, Capital
One Bank, Capital One, F.S.B. and The Chase Manhattan Bank, as administrative agent (incorporated by reference to
Exhibit 10.21 of the 1996 Form 10-K).
10.19 Revolving Credit Facility Agreement dated as of August 29, 1997 by and among Capital One Finance Company and Capital
One Inc., as original borrowers, Capital One Financial Corporation, as original guarantor, and the agents and lenders
named therein (incorporated by reference to Exhibit 10.19 of the 1997 Form 10-K).
13 The portions of Capital One Financial Corporation's 1998 Annual Report to Stockholders that are incorporated by
reference herein.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
24
/s/ James V. Kimsey Director
- -----------------------------
James V. Kimsey
/s/ Stanley I. Westreich Director
- -----------------------------
Stanley I. Westreich
25
EXHIBITS TO CAPITAL ONE FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
DATED DECEMBER 31, 1997
COMMISSION FILE NO. 1-13300
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1 Restated Certificate of Incorporation of Capital
One Financial Corporation (incorporated by
reference to Exhibit 3.1 of the 1994
Form 10-K).
3.2 Restated Bylaws of Capital One Financial
Corporation (as amended January 24, 1995)
(incorporated by reference to Exhibit 3.2 of
the 1994 Form 10-K).
4.1 Specimen certificate representing the
Common Stock.
4.2 Rights Agreement dated as of November 16, 1995
between Capital One Financial Corporation and
Mellon Bank, N.A. (incorporated by reference
to Exhibit 4.1 of the Company's Report on
Form 8-K, filed November 16, 1995).
4.3 Amended and Restated Issuing and Paying Agency
Agreement dated as of April 30, 1996 between
Capital One Bank and Chemical Bank (including
exhibits A-1, A-2, A-3 and A-4 thereto)
(incorporated by reference to Exhibit 4.1 of
the Company's quarterly report on Form 10-Q
for the period ending June 30, 1996).
4.4 Issuing and Paying Agency Agreement dated as of
April 30, 1996 between Capital One Bank and
Chemical Bank (including exhibits A-1 and A-2
thereto) (incorporated by reference to
Exhibit 4.2 of the Company's quarterly report
on Form 10-Q for the period ending June 30, 1996).
4.5.1 Senior Indenture and Form T-1 dated as of
November 1, 1996 among the Company and Harris
Trust and Savings Bank (incorporated by
reference to Exhibit 4.1 of the Company's Report
on Form 8-K, filed November 13, 1996).
4.5.2 Copy of 7.25% Notes Due 2003 (incorporated by
reference to Exhibit 4.5.2 of the 1996 Form 10-K).
4.6.1 Declaration of Trust, dated as of January 28,
1997, between the Bank and The First National Bank
of Chicago, as trustee (including the Certificate
of Trust executed by First Chicago Delaware Inc.,
as Delaware trustee) (incorporated by reference
to Exhibit 4.6.1 of the 1996 Form 10-K).
4.6.2 Copies of Certificates Evidencing Capital
Securities (incorporated by reference to
Exhibit 4.6.2 of the 1996 Form 10-K).
4.6.3 Amended and Restated Declaration of Trust,
dated as of January 31, 1997, by and among
the Bank, The First National
Exhibit
Number Description
------ -----------
Bank of Chicago and First Chicago Delaware Inc.
(incorporated by reference to Exhibit 4.6.3 of
the 1996 Form 10-K).
4.7 Indenture, dated as of January 31, 1997, between
the Bank and The First National Bank of Chicago
(incorporated by reference to Exhibit 4.7 of the
1996 Form 10-K).
10.1 Amended and Restated Distribution Agreement dated
April 30, 1996 among Capital One Bank and the
agents named therein (incorporated by reference
to Exhibit 10.1 of the Company's quarterly report
on Form 10-Q for period ending June 30, 1996).
10.2 Distribution Agreement dated April 30, 1996,
among Capital One Bank and the agents named
therein (incorporated by reference to
Exhibit 10.2 of the Company's quarterly report
on Form 10-Q for period ending June 30, 1996).
10.3.1 Change of Control Employment Agreement dated
as of November 1, 1994 between Capital One
Financial Corporation and Richard D. Fairbank
(incorporated by reference to Exhibit 10.12
of the 1994 Form 10-K).
10.3.2 Amendment to the Change of Control Agreement
between Capital One Financial Corporation and
Richard D. Fairbank dated as of September 15,
1995 (incorporated by reference to
Exhibit 10.12.1 of the 1995 Form 10-K).
10.3.3 Amended and Restated Change of Control
Employment Agreement dated as of December 18,
1997 between Capital One Financial Corporation
and Richard D. Fairbank.
10.4.1 Change of Control Employment Agreement dated
as of November 1, 1994 between Capital One
Financial Corporation and Nigel W. Morris
(incorporated by reference to Exhibit 10.13
of the 1994 Form 10-K).
10.4.2 Amendment to the Change of Control Agreement
between Capital One Financial Corporation and
Nigel W. Morris dated as of September 15, 1995
(incorporated by reference to Exhibit 10.13.1
of the 1995 Form 10-K).
10.4.3 Amended and Restated Change of Control
Employment Agreement dated as of December 18,
1997 between Capital One Financial Corporation
and Nigel W. Morris.
10.5.1 Change of Control Employment Agreement dated
as of November 1, 1994 between Capital One
Financial Corporation and James M. Zinn
(incorporated by reference to Exhibit 10.14
of the 1994 Form 10-K).
10.5.2 Amendment to Change of Control Employment
Agreement dated as of December 18, 1997
between Capital One Financial Corporation
and James M. Zinn.
- 2 -
Exhibit
Number Description
------ -----------
10.6.1 Change of Control Employment Agreement dated
as of November 1, 1994, between Capital One
Financial Corporation and John G. Finneran, Jr.
(incorporated by reference to Exhibit 10.15
of the 1994 Form 10-K).
10.6.2 Amendment to Change of Control Employment
Agreement dated as of December 18, 1997
between Capital One Financial Corporation
and John G. Finneran, Jr.
10.7 Capital One Financial Corporation 1994 Stock
Incentive Plan, as amended (incorporated by
reference to Exhibit 10.9 of the 1996 Form 10-K).
10.8 Capital One Financial Corporation Senior
Executive Short-Term Cash Incentive Plan
(terminated effective November 16, 1995)
(incorporated by reference to Exhibit 10.17
of the 1994 Form 10-K).
10.9 Capital One Financial Corporation Senior
Executive Long-Term Cash Incentive Plan
(terminated effective November 16, 1995)
(incorporated by reference to Exhibit 10.18
of the 1994 Form 10-K).
10.10 Capital One Financial Corporation Executive
Employee Supplemental Retirement Plan
(terminated effective November 16, 1995)
(incorporated by reference to Exhibit 10.19
of the 1994 Form 10-K).
10.11 Capital One Financial Corporation Excess
Savings Plan, as amended (incorporated by
reference to Exhibit 10.20 of the 1995
Form 10-K).
10.12 Capital One Financial Corporation Excess
Benefit Cash Balance Plan, as amended
(incorporated by reference to Exhibit 10.21
of the 1995 Form 10-K).
10.13 Capital One Financial Corporation 1994
Deferred Compensation Plan, as amended
(incorporated by reference to Exhibit 10.22
of the 1995 Form 10-K).
10.14 1995 Non-Employee Directors Stock Incentive
Plan, (incorporated by reference to Registrant's
Registration Statement on Form S-8 Commission
File No. 33-91790, filed May 1, 1995).
10.15 Capital One Financial Corporation Severance
Pay Plan (terminated effective October 23, 1997)
(incorporated by reference to Exhibit 10.26
of the 1994 Form 10-K).
10.16 Consulting Agreement dated as of April 5, 1995,
by and between Capital One Financial Corporation
and American Management Systems, Inc.
(incorporated by reference to Exhibit 10.33
of the 1995 Form 10-K).
-3-
Exhibit
Number Description
------ -----------
10.17.1 Participation Agreement dated as of January 5,
1996, among Capital One Bank, as construction
agent and as lessee, First Security Bank of
Utah, N.A., as owner/trustee for the COB
Real Estate Trust 1995-1, NationsBank of
Texas, N.A., as administrative agent and
the holders and lenders named therein
(incorporated by reference to Exhibit 10.34.1
of the 1995 Form 10-K).
10.17.2 First Amendment to Operative Documents dated
as of June 5, 1996, among One Bank, as
construction agent and as lessee, First
Security Bank of Utah, N.A., as owner/trustee
for the COB Real Estate Trust 1995-1,
NationsBank of Texas, N.A., as administrative
agent, initial lender and initial holder named
therein (incorporated by reference to
Exhibit 10.3 of the Company's quarterly report
on Form 10-Q for period ending June 30, 1996).
10.17.3 Second Amendment to Operative Agreements dated
as of October 11, 1996, among Capital One Bank,
as construction agent and as lessee, First
Security Bank of Utah, N.A., as owner/trustee
for the COB Real Estate Trust 1995-1,
NationsBank of Texas, N.A., as administrative
agent, initial lender and initial holder
named therein (incorporated by reference to
Exhibit 10.20.3 of the 1996 Form 10-K).
10.17.4 Assignment, Consent and Third Amendment to
Operative Agreement dated November 8, 1996,
by and among Capital One Bank, Capital One
Realty, Inc., First Security Bank of Utah,
N.A., as owner/trustee for the COB Real
Estate Trust 1995-1, and NationsBank of
Texas, N.A., as administrative agent
(incorporated by reference to Exhibit 10.20.4
of the 1996 Form 10-K).
10.17.5 Lease Agreement dated as of January 5, 1996,
between First Security Bank of Utah, N.A.,
as owner/trustee for the COB Real Estate
Trust 1995-1, as lessor and Capital One Bank,
as lessee (incorporated by reference to
Exhibit 10.34.2 of the 1995 Form 10-K).
10.17.6 Credit Agreement dated as of January 5, 1996,
among First Security Bank of Utah, N.A.,
as owner/trustee for the COB Real Estate
Trust 1995-1, as borrower, the lenders named
therein and NationsBank of Texas, N.A.,
as administrative agent (incorporated by
reference to Exhibit 10.34.3 of the 1995
Form 10-K).
10.17.7 Fourth Amendment to Operative Agreements
dated as of April 10, 1997 by and among
Capital One Bank, Capital One Realty, Inc.,
First Security Bank of Utah, N.A., as
owner/trustee for the COB Real Estate Trust
1995-1, and NationsBank of Texas, N.A., as
administrative agent.
10.18 Amended and Restated Credit Agreement,
dated as of November 25, 1996, among
Capital One Financial Corporation, Capital
One Bank, Capital One, F.S.B. and The
-4-
Exhibit
Number Description
------ -----------
Chase Manhattan Bank, as administrative agent
(incorporated by reference to Exhibit 10.21
of the 1996 Form 10-K).
10.18.1 Change of Control Employment Agreement dated
as of May 14, 1996 between Capital One
Financial Corporation and James P. Donehey.
10.18.2 Amendment to Change of Control Employment
Agreement dated as of December 18, 1997
between Capital One Financial Corporation
and James P. Donehey.
10.19 Revolving Credit Facility Agreement dated
as of August 29, 1997 by and among Capital
One Finance Company and Capital One Inc.,
as original borrowers, Capital One Financial
Corporation, as original guarantor, and the
agents and lenders named therein.
13 The portions of the Company's 1997 Annual
Report to Stockholders which are incorporated
by reference herein.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
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