Capital One 2003 Annual Report Download

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2003

Table of contents

  • Page 1
    ort annual report annual report annual report annual report annual report annual report annual report annual re 2003

  • Page 2
    Capital One has everything it needs for continued success. A winning strategy. Strong values. Thriving businesses. Best-in-class products and first-rate service. Solid financials. A powerful brand identity. Significant market opportunities-and the vision, the passion and the people to make the...

  • Page 3
    ... of managed loans, another sign of the continuing transformation of Capital One from a credit card company to a diversified consumer financial services company. As we continue to grow and diversify our businesses, Capital One has focused on building strong risk management and corporate governance...

  • Page 4
    ...of capital markets investors. We raised another $10.1 billion from depositors by marketing certificates of deposit and other savings instruments. At year-end, with the $22.4 billion on deposit at Capital One F.S.B. and Capital One Bank, we were the country's thirty-fourth largest deposit institution...

  • Page 5

  • Page 6
    ... summary financial summary $ 71.2 $59.7 $45.3 $20.2 $29.5 1999 2000 2001 2002 2003 managed loans ($ in billions) $1, 135.8 $899.6 $642.0 $363.1 $469.6 1999 2000 2001 net income ($ in millions) 2002 2003 $ 4.85 $3.93 $2.24 $2.91 $1.72 1999 2000 2001 diluted earnings per share...

  • Page 7
    ... Return on average equity Capital to assets Allowance for loan losses to loans as of year-end 2.76% 21.34 14.87 4.86 2.63% 21.69 14.55 6.29 Consumer Loan Data: Average reported loans Securitization adjustments Average total managed loans Year-end reported loans Securitization adjustments Year-end...

  • Page 8
    ... profitably serve consumers across the credit spectrum by using information to tailor the product to the individual's financial circumstances, offering every customer the right product at the right time and at the right price. We're now the sixth-largest credit card issuer and an industry leader...

  • Page 9
    $40.9 $33.0 $ 46.3 $1,000.8 $774.3 $1,181.2 2001 2002 2003 2001 2002 2003 U.S. Card managed loans ($ in billions) U.S. Card net income ($ in millions)

  • Page 10
    ... credit card market. It's highly fragmented, so there's plenty of room to build market share by offering consumers real value and innovative, empowering products. Capital One markets auto loans by direct mail, by cross-selling and through car dealers. We're also the leader in Internet auto lending...

  • Page 11
    $8.5 $7.0 $99.3 $4.0 ($35.4) 2001 $10.3 2001 2002 2003 2002 2003 Auto Finance managed loans ($ in billions) Auto Finance net income ($ in millions)

  • Page 12
    ... households 87 times a year on average, the ads have significantly increased the effectiveness of our direct mail and Internet marketing. We're now the title sponsor of the Capital One BowlSM. During the college football season, more than 4.5 million viewers visited capitalonebowl.com to vote...

  • Page 13

  • Page 14
    ... first profits, increasing the Company's net income by $58.6 million. International loans outstanding reached $7.6 billion, up 43% for the year. In the UK, Capital One is the sixth-largest card issuer, with 3 million accounts. We're also one of the top 10 credit card companies in Canada, where we...

  • Page 15
    $22.4 $17.3 $12.8 2001 2002 Deposits ($ in billions) 2003 $ 16.5 $1 1.9 $8.3 2001 2002 2003 Global Financial Services managed loans ($ in billions) $64.8 ($44.6) ($8.1) 2001 2002 2003 Global Financial Services net income ($ in millions)

  • Page 16
    ... supports those efforts with substantial financial contributions to programs that help at-risk youth and meet community needs in job training, housing and health care. Forbes® ranks us as one of its 100 Platinum Best Big Companies in America. Capital One frequently appears on the "choice employer...

  • Page 17
    best people strategically bold intellectually rigorous well-managed ownership open teamwork respect for each other respect for our customers integrity

  • Page 18
    ...and President, Capital One Auto Finance Lewis Hay, III (3) Chairman, President and CEO FPL Group, Inc. Gary L. Perlin Executive Vice President and Chief Financial Officer James V. Kimsey (2) Chairman Emeritus America Online, Inc. Peter A. Schnall Executive Vice President and Chief Credit Officer...

  • Page 19
    ... Capital One Drive McLean, Virginia (Address of Principal Executive Offices) 22102 (Zip Code) Registrant's telephone number, including area code: (703) 720-1000 Securities registered pursuant to section 12(b) of the act: Title of Each Class Name of Each Exchange on Which Registered Common Stock...

  • Page 20
    ...Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 10. Directors and Executive Officers of the Corporation Item 11. Executive Compensation Item 12. Security...

  • Page 21
    ..., 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, offers consumer lending and deposit products, and Capital One Auto Finance, Inc. ("COAF") offers...

  • Page 22
    ...York Stock Exchange under the symbol COFPRC. Our principal executive office is located at 1680 Capital One Drive, McLean, Virginia 22102 (telephone number (703) 720-1000). The Corporation maintains a website at www.capitalone.com. Documents available on our website include the Corporation's (i) Code...

  • Page 23
    ... the Company's accounting, financial reporting, internal controls and risk assessment and management processes. The Audit and Risk Committee also reviews periodic reporting on significant Company risks and mitigation activities and the compliance with corporate risk policies, while the Finance...

  • Page 24
    ...Directors, senior leadership, internal change management consulting, corporate and departmental risk management policies, risk management and compliance training programs and on-going risk assessment activities in the business. Organizational Structure The Company's organizational structure supports...

  • Page 25
    ...corporate credit policy and credit performance. Its members include the Chief Credit Officer, the Chief Enterprise Risk Officer and the Presidents of the Company's three operating divisions. The Chief Credit Officer and his staff review and approve all large scale new credit programs. Smaller credit...

  • Page 26
    ... self assessments at least annually. There are many specialized activities designed to mitigate key operational risks facing the Company. These include a dedicated fraud management department, programs for third party supplier risk management, information security and business continuity planning...

  • Page 27
    ... brand market research, customer studies, internal operational loss event data and external measures. Compliance Risk Management Compliance risk is the risk of non-conformance to laws, rules and regulations. The management of compliance risk is overseen by the Chief Enterprise Risk Officer with...

  • Page 28
    ..., smart cards and debit cards, represent additional competition to the general purpose credit card. 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. In motor vehicle finance, we...

  • Page 29
    ... current associate relations to be satisfactory. None of our associates is covered under a collective bargaining agreement. 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...

  • Page 30
    ... in the Company's report on Form 10-Q, dated August 13, 2002, the Company entered into an informal memorandum of understanding with the bank regulatory authorities with respect to certain issues, including capital, allowance for loan losses, finance charge and fee reserve policies, procedures...

  • Page 31
    ... its direct and indirect subsidiaries represent a major source of funds for the Corporation to pay dividends on its stock, make payments on its debt securities and meet its other obligations. There are various federal and Virginia law limitations on the extent to which the Bank and the Savings Bank...

  • Page 32
    ... 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...

  • Page 33
    ... Bank's programs that are targeted at customers either with a Fair, Isaac and Company ("FICO") score of 660 or below or with no FICO score. The Bank and the Savings Bank hold on average 200% of the total risk-based capital charge that would otherwise apply to such assets. FFIEC Account Management...

  • Page 34
    ... of identity theft, financial institutions could face increased legislative/regulatory and litigation risks. 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...

  • Page 35
    ... at account opening; rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; reports by nonfinancial trades and businesses filed with the Treasury Department's Financial Crimes...

  • Page 36
    ... conducted by the Bank, including credit card lending. The Canadian Branch is also authorized to accept deposits from Canadian customers, but does not currently do so. As in the U.S., in non-U.S. jurisdictions where we operate, we face a risk that the laws and regulations that are applicable to us...

  • Page 37
    ...reduction in the rate of interchange to be paid by retailers in the future. Other U.K. legal developments include communications with the United Kingdom office of fair trading as to its interpretation of consumer credit law which could lead to changes in the lending agreements from time to time. 19

  • Page 38
    ...periodic reports to 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 statements made by our officers, directors or employees to...

  • Page 39
    ... bank card issuers, with other general purpose credit or charge card issuers, and to a certain extent, issuers of smart cards and debit cards and providers of other types of financial services (such as home equity lines and other products). We face similar competitive markets in our auto financing...

  • Page 40
    ... and relations. Our funding risks have been heightened, in particular, due to market perceptions of our lower unsecured debt rating compared to other credit card issuers and the proportion of certain accounts in our loan portfolio viewed by some as "subprime." In addition, our ability to raise funds...

  • Page 41
    ...would be limited, as deposit funding and pricing is not generally determined by corporate debt ratings. The Savings Bank is authorized to engage in a full range of deposit-taking activities, but our ability to use deposits as a source of funding is generally regulated by federal laws and regulations...

  • Page 42
    ...select our customers, manage their accounts and establish prices and credit limits using proprietary models and other techniques designed to accurately predict future charge-offs. Our goal is to set prices and credit limits such that we are appropriately compensated for the credit risk we accept for...

  • Page 43
    ...Market Risk of Interest Rate and Exchange Rate Fluctuations Like other financial institutions, we borrow money from institutions and depositors, which we then lend to customers. We earn interest on the consumer loans we make, and pay interest on the deposits and borrowings we use to fund those loans...

  • Page 44
    ... lending industry. Such new laws or rules could limit the amount of interest or fees we can charge, restrict our ability to collect on account balances, or materially affect us or the banking or credit card industries in some other manner. Additional federal, state and foreign consumer protection...

  • Page 45
    ... new, 570,000 square foot, headquarters building at 1680 Capital One Drive, McLean, Virginia. The building houses our primary executive offices and Northern Virginia staff, and is leased through December 2010, with the right to purchase at a fixed cost at the end of the lease term. Additionally, we...

  • Page 46
    ... of Matters to a Vote of Security Holders. During the fourth quarter of our fiscal year ending December 31, 2003, no matters were submitted for a vote of our stockholders. PART II Item 5. Market for Company's Common Equity and Related Stockholder Matters. The information required by Item 5 is...

  • Page 47
    ... Managed Data Managed consumer loan income Managed yield Managed revenue margin Managed net interest margin Managed delinquency rate Managed net charge-off rate Year-end total managed loans Year-end total accounts (000s) Operating Ratios (Reported): Return on average assets Return on average equity...

  • Page 48
    ... company whose subsidiaries market a variety of financial products and services to consumers using its Information-Based Strategy ("IBS"). The Corporation's principal subsidiaries are Capital One Bank (the "Bank"), which offers credit card products, Capital One, F.S.B. (the "Savings Bank"), which...

  • Page 49
    ...-backed securities by the special purpose entity. The Company removes loan receivables from the consolidated balance sheet for those asset securitizations that qualify as sales in accordance with Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial...

  • Page 50
    ...to the Consolidated Financial Statements-Note R" for quantitative information regarding retained interests. Collections of interest and fees received on securitized receivables are used to pay interest to investors, servicing and other fees, and are available to absorb the investors' share of credit...

  • Page 51
    ...fees and recoveries generated from the securitized loan portfolio, net of charge-offs, in excess of the interest paid to investors of asset-backed securitizations are recognized as servicing and securitizations income on the "reported" income statement. The Company's "managed" consolidated financial...

  • Page 52
    ... the sale of securities and increases in marketing and operating expenses. Managed loans consist of the Company's reported loan portfolio combined with the off-balance sheet securitized loan portfolio. The Company has retained servicing rights for its securitized loans and receives servicing fees in...

  • Page 53
    ...were primarily due to increased credit and recovery efforts, investment in IT infrastructure to support future growth and costs associated with the expansion of the Company's enterprise risk management program and systems to further strengthen internal controls. Year Ended December 31, 2002 Compared...

  • Page 54
    ... reported portfolio toward a greater composition of lower yielding, higher credit quality loans as compared to the prior year. $38.4 million of the increase in net interest income, representing a 12 basis point increase in the net interest margin in 2002, relates to the one-time impact of the change...

  • Page 55
    ...Income/ Expense Year Ended December 31 2002 Average Income/ Yield/ Balance Expense Rate 2001 Income/ Expense (Dollars in thousands) Assets: Earning assets Consumer loans(1) Domestic International Total Securities available for sale Other International Foreign Total Total earning assets Cash and due...

  • Page 56
    ... Analysis Year Ended December 31 2003 vs. 2002 2002 vs. 2001 Change due to(1) Change due to(1) Increase Yield/ Increase Yield/ (Decrease)(2) Volume Rate (Decrease)(2) Volume Rate (Dollars in thousands) Interest Income: Consumer loans Domestic International Total Securities available for sale Other...

  • Page 57
    ...primarily reflects a shift in the mix of the reported loan portfolio towards higher credit quality, lower fee-generating loans and a decrease in the number of accounts compared to the prior year. Service charges and other customer-related fees increased by $401.4 million, or 26%, to $1.9 billion for...

  • Page 58
    ... and recovery efforts of $137.1 million, investment in IT infrastructure to support future growth of $30.0 million and costs associated with the expansion of the Company's enterprise risk management programs and systems to further strengthen internal controls. Non-interest expense for the year ended...

  • Page 59
    ... significant risks and potential returns. Table 3 summarizes the Company's managed consumer loan portfolio. Table 3: Managed Consumer Loan Portfolio Year Ended December 31 2002 2001 2000 (Dollars in thousands) Year-End Balances: Reported consumer loans: Domestic International Total Securitization...

  • Page 60
    ... the one-time impact of the change in recoveries assumption for the year ended December 31, 2002. Revenue Margin The Company's products are designed with the objective of maintaining strong risk-adjusted returns and providing diversification across the credit spectrum and consumer lending products...

  • Page 61
    Table 5 provides income statement data and ratios for the Company's reported and managed consumer loan portfolio. The causes of increases and decreases in the various components of revenue are discussed in sections previous to this analysis. Table 5: Revenue Margin Year Ended December 31 2003 2002...

  • Page 62
    ... of small balance loans spread across the full credit spectrum. The Company believes delinquencies to be a primary indicator of loan portfolio credit quality at a point in time. Table 6 shows the Company's consumer loan delinquency trends for the years presented on a reported and managed basis. The...

  • Page 63
    ... the principal amount of losses (excluding accrued and unpaid finance charges, fees and fraud losses) less current period principal recoveries. The Company charges off credit card loans at 180 days past the due date and generally charges off other consumer loans at 120 days past the due date or upon...

  • Page 64
    ... 45% increase in average reported loans, a rise in net charge-offs, the revised application of the "Expanded Guidance for Subprime Lending Programs" ("Subprime Guidelines") issued by the four federal banking agencies, and the aforementioned one-time impact of the $133.4 million change in recoveries...

  • Page 65
    ... an Enterprise and Related Information. Management decision making is performed on a managed portfolio basis, and such information about reportable segments is provided on a managed basis. The Company maintains its books and records on a legal entity basis for the preparation of financial statements...

  • Page 66
    ...stock issued in connection with the acquisition of PeopleFirst. Global Financial Services Segment The Global Financial Services segment consists of international lending activities, installment lending, small business lending, patient financing and other investment businesses. Total Global Financial...

  • Page 67
    ...for general purposes of the Bank's business in the United Kingdom. The Corporation and the Bank serve as guarantors of all borrowings by Capital One Bank (Europe), plc under the Multicurrency Facility. Internationally, the Company has funding programs available to foreign investors or to raise funds...

  • Page 68
    ...expand its retail deposit gathering efforts through both direct and broker marketing channels. The Company uses its IBS capabilities to test and market a variety of retail deposit origination strategies, including via the Internet, as well as, to develop customized account management programs. As of...

  • Page 69
    ...borrowings includes secured borrowings for the Company's on-balance sheet auto loan securitizations, junior subordinated capital income securities, federal funds purchased and resale agreements and other short-term borrowings. The terms of the lease and credit facility agreements related to certain...

  • Page 70
    ...would use its investment securities and money market instruments in addition to alternative funding sources to fund increases in loan receivables and meet its other liquidity needs. The resulting change in the Company's current liquidity sources could potentially subject the Company to certain risks...

  • Page 71
    ... to changing foreign currency exchange rates. The hedging of foreign currency exchange rates is limited to certain intercompany obligations related to international operations. These derivatives expose the Company to certain credit risks. The Company has established policies and limits, as...

  • Page 72
    ... in economic value of equity due to an adverse 100 basis point rate shock is less than 3%. As of December 31, 2003, the Company was in compliance with all of its interest rate risk management related policies. The precision of the measures used to manage interest rate risk is limited due to the...

  • Page 73
    ... rates on outstanding credit card loans within five years. Foreign Exchange Risk The Company is exposed to changes in foreign exchange rates which may impact translated income and expense associated with foreign operations. In order to limit earnings exposure to foreign exchange risk, the Company...

  • Page 74
    ...Corporation and available for contribution. In August 2000, the Bank received regulatory approval and established a subsidiary bank in the United Kingdom. In connection with the approval of its former branch office in the United Kingdom, the Company committed to the Federal Reserve that, for so long...

  • Page 75
    ... portfolio towards higher credit quality loans, changes in consumer payment behavior, and the level of investments in its diversification businesses. The Company expects to achieve these results based on the continued success of its business strategies and its current assessment of the competitive...

  • Page 76
    ... of opportunity identified by the Company's testing processes, marketing expenditures may fluctuate significantly from quarter to quarter. However, the Company expects its strategy of increasing the proportion of higher credit quality credit cards and diversified products in its loan portfolio will...

  • Page 77
    .... The Company's strategy for its U.S. Card business is to gradually increase the proportion of higher credit quality loans in its portfolio and to offer compelling, value-added products to its customers, such as Lifestyles and Rewards credit cards. The competitive environment is currently intense...

  • Page 78
    ... U.K. and Canada. The Company expects that the Global Financial Services segment will continue to grow as the Company continues to diversify its loan portfolio. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The information required by Item 7A is included in Item 7, "Management...

  • Page 79
    ... 8. Financial Statements and Supplementary Data CONSOLIDATED BALANCE SHEETS December 31 (In Thousands, Except Per Share Data) Assets: Cash and due from banks Federal funds sold and resale agreements Interest-bearing deposits at other banks Cash and cash equivalents Securities available for sale...

  • Page 80
    ... loan losses Non-Interest Income: Servicing and securitizations Service charges and other customer-related fees Interchange Other Total non-interest income Non-Interest Expense: Salaries and associate benefits Marketing Communications and data processing Supplies and equipment Occupancy Other Total...

  • Page 81
    CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Common Stock (In Thousands, Except Per Share Data) Balance, December 31, 2000 Comprehensive income: Net income Other comprehensive income, net of income tax: Unrealized gains on securities, net of income taxes of $5,927 Foreign currency ...

  • Page 82
    ... of accounting change Provision for loan losses Depreciation and amortization, net Losses (gains) on sales of securities available for sale Gains on repurchase of senior notes Gains on sales of auto loans Stock plan compensation expense Decrease (increase) in interest receivable Increase in accounts...

  • Page 83
    ...including credit cards) and deposit products, and Capital One Auto Finance, Inc. ("COAF") which offers primarily automobile financing products. The Corporation and its subsidiaries are collectively referred to as the "Company." Basis of Presentation The accompanying Consolidated Financial Statements...

  • Page 84
    ... 123"), to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. In December 2003, the Company adopted the expense recognition provisions of SFAS 123...

  • Page 85
    ... the card-issuing bank through the interchange network. Interchange fees are set by MasterCard International Inc. and Visa U.S.A. Inc. and are based on cardholder purchase volumes. The Company recognizes interchange income as earned. The Company offers to its customers certain rewards programs based...

  • Page 86
    .... Useful lives for premises and equipment are as follows: buildings and improvements-5-39 years; furniture and equipment-3-10 years; computers and software-3 years. Goodwill The Company performs annual impairment tests for acquisition goodwill in accordance with Statement of Financial Accounting...

  • Page 87
    ... tax rates and laws that will be in effect when the differences are expected to reverse. Segments The accounting policies of operating and reportable segments, as defined by the Statement of Financial Accounting Standard No. 131, Disclosures about Segments of an Enterprise and Related Information...

  • Page 88
    ... losses and provision for loan losses. Starting in 2002, the Company classifies the portion of recoveries related to finance charges and fees as revenue. All prior period recoveries were reclassified to conform to the current financial statement presentation of recoveries. This classification had no...

  • Page 89
    ... the year ended December 31, 2002, was negatively impacted by $31.4 million or $.14 per diluted share as a result of the change in estimate. Note B Segments Based on an internal assessment of the information the Company uses to make resource allocation decisions and measure performance, reportable...

  • Page 90
    ... the Company's internal management information system, which is maintained on a line of business level through allocations from legal entities. For the Year Ended December 31, 2003 Global Financial Total Securitization Services Other Managed Adjustments U.S. Card Auto Finance Total Reported Net...

  • Page 91
    ... assets. The Company allocated $32.8 million of these expenses to the U.S. Card segment, $1.6 million to the Other category, $1.1 million to the Auto Finance segment and $3.3 million to the Global Financial Services segment. Note C Securities Available for Sale Securities available for sale as of...

  • Page 92
    ... of year Provision for loan losses Other Charge-offs Principal recoveries Net charge-offs Balance at end of year Loans totaling approximately $454.8 million and $567.4 million, representing amounts which were greater than 90 days past due, were included in the Company's reported loan portfolio as...

  • Page 93
    ... 2.31 6.25 7.75 Interest-bearing deposits Senior notes Bank-fixed rate Bank-variable rate Mandatory convertible securities Corporation Total Other borrowings Secured borrowings Facility financing Junior subordinated capital income securities Federal funds purchased and resale agreements Other short...

  • Page 94
    ... will be reset based on interest rates in effect at the time of remarketing. The holders will use the proceeds of the remarketing to fund their obligations to purchase shares of the Company's common stock under the forward purchase contract, with such number of shares to be determined based upon the...

  • Page 95
    stock, common equity units and stock purchase contracts. The Corporation's shelf registration statement had $1.9 billion available at December 31, 2003. There was $2.2 billion available at December 31, 2002. In November 2003, the Company issued $300.0 million ten-year 6.25% fixed rate senior notes ...

  • Page 96
    ...for general purposes of the Bank's business in the United Kingdom. The Corporation and the Bank serve as guarantors of all borrowings by Capital One Bank (Europe), plc under the Multicurrency Facility. Internationally, the Company has funding programs available to foreign investors or to raise funds...

  • Page 97
    ...three years from the time of grant for restricted stock or accelerated vesting option grants as described below. The following table provides the number of reserved common shares and the number of common shares available for future issuance for each of the Company's stock-based compensation plans as...

  • Page 98
    ... Board of Directors approved a compensation package for the Company's Chief Executive Officer (CEO). This package was comprised of stock options and incentive stock. 360,000 options were granted at the fair market value at the date of grant and will vest in one-third increments over three years. The...

  • Page 99
    ..., as defined by APB 25, accordingly no compensation expense is recognized. In April 1999, all non-employee directors of the Company were given the option to receive performance-based options under this plan in lieu of their annual cash retainer and their time-vesting options for each of 1999, 2000...

  • Page 100
    ... its benefit plans, including the Purchase Plan, dividend reinvestment plan and stock incentive plans. In July 1998 and February 2000, the Company's Board of Directors voted to increase this amount by 4,500,000 and 10,000,000 shares, respectively, of the Company's common stock. For the years ended...

  • Page 101
    ...$64.3 million for the years ended December 31, 2003, 2002 and 2001, respectively. Other Postretirement Benefits The Company sponsors postretirement benefit plans to provide health care and life insurance to retired employees. Net periodic postretirement benefit expense was $9.4 million, $6.8 million...

  • Page 102
    ... loan losses Unearned income Stock incentive plan Foreign Net operating losses State taxes, net of federal benefit Derivative instruments Other Subtotal Valuation allowance Total deferred tax assets Deferred tax liabilities: Securitizations Deferred revenue Securities available for sale Other Total...

  • Page 103
    ... 3.00 3.00 37.00% 38.00% 38.00% Income tax at statutory federal tax rate Other, including state taxes Income taxes Note L Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: Year Ended December 31 2003 2002 2001 $1,150,879 (15,037) $1,135,842...

  • Page 104
    ...a summary of goodwill. Auto Finance $218,957 - - $218,957 Global Financial Services $140,018 (4,591) 1,551 $136,978 Balance at December 31, 2002 Impairment Loss Foreign Currency Translation Balance at December 31, 2003 Total $358,975 (4,591) 1,551 $355,935 In December 2003, the Company recognized...

  • Page 105
    ... Guidelines, the Company has treated as "subprime" all loans in the Bank's and Savings Bank's targeted "subprime" programs to customers either with a FICO score of 660 or below or with no FICO score. The Bank and Savings Bank hold on average 200% of the total risk-based capital charge that would...

  • Page 106
    Additionally, federal banking laws exist that limit the ability of the Bank and the Savings Bank to transfer funds to the Corporation. As of December 31, 2003, retained earnings of the Bank and the Savings Bank of $1.6 billion and $426.7 million, respectively, were available for payment of dividends...

  • Page 107
    ... class action securities cases. All twelve actions were filed in the United States District Court for the Eastern District of Virginia. Each complaint also named as "Individual Defendants" several of the Corporation's executive officers. On October 1, 2002, the Court consolidated these twelve...

  • Page 108
    ...business, executive officers and directors of the Company may have consumer loans issued by the Company. Pursuant to the Company's policy, such loans are issued on the same terms as those prevailing at the time for comparable loans to unrelated persons and do not involve more than the normal risk of...

  • Page 109
    ... the time of sale in servicing and securitizations income on the Consolidated Statements of Income. The related receivable is the interest-only strip, which is based on the present value of the estimated future cash flows from excess finance charges and past-due fees over the sum of the return paid...

  • Page 110
    ... of static pool credit losses is not considered materially different from the assumed charge-off rates used to determine the fair value of the retained interests. The Company acts as a servicing agent and receives contractual servicing fees of between 2% and 6% of the investor principal outstanding...

  • Page 111
    ... financial instrument. The Company manages the market risk associated with interest rate and foreign exchange contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. The Company periodically uses interest rate swaps as part of its interest rate risk...

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    ... forward exchange contracts to hedge foreign currency denominated investments against fluctuations in exchange rates. The purpose of the Company's foreign currency hedging activities is to protect the Company from the risk of adverse affects from movements in exchange rates. During the year ended...

  • Page 113
    ... protect against adverse movements in exchange rates. For the year ended December 31, 2003 and 2002, net losses of $6.0 million and $3.2 million related to these derivatives were included in the cumulative translation adjustment. Non-Trading Derivatives The Company uses interest rate swaps to manage...

  • Page 114
    ... States. The Company reviews each potential customer's credit application and evaluates the applicant's financial history and ability and willingness to repay. Loans are made primarily on an unsecured basis; however, certain loans require collateral in the form of cash deposits and automobiles and...

  • Page 115
    ... the balance sheet. Financial Liabilities Interest-bearing deposits The fair value of interest-bearing deposits was calculated by discounting the future cash flows using estimates of market rates for corresponding contractual terms. Other borrowings The carrying amount of federal funds purchased and...

  • Page 116
    ... Activities The Company's international activities are primarily performed through Capital One Bank (Europe) plc, a subsidiary bank of the Bank that provides consumer lending and other financial products in Europe and Capital One Bank-Canada Branch, a foreign branch office of the Bank that provides...

  • Page 117
    ...items between domestic and foreign operations. Note W Capital One Financial Corporation (Parent Company Only) Condensed Financial Information The following Parent Company Only financial statements are provided in accordance with Regulation S-X of the Securities and Exchange Commission which requires...

  • Page 118
    ... notes Stock plan compensation expense Decrease (increase) in other assets Decrease (increase) in other liabilities Net cash provided by operating activities Investing Activities: Increase in investment in subsidiaries Increase in loans to subsidiaries Net cash used in investing activities Financing...

  • Page 119
    ... an objective assessment of the degree to which the Company's Management meets its responsibility for financial reporting. Their opinion on the financial statements is based on auditing procedures, which include reviewing accounting systems and internal controls and performing selected tests of...

  • Page 120
    ...Board of Directors and Stockholders Capital One Financial Corporation We have audited the accompanying consolidated balance sheets of Capital One Financial Corporation as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in stockholders' equity, and cash flows...

  • Page 121
    ... is a tabulation of the Company's unaudited quarterly results for the years ended December 31, 2003 and 2002. The Company's common shares are traded on the New York Stock Exchange under the symbol COF. In addition, shares may be traded in the over-the-counter stock market. There were 10,227 common...

  • Page 122
    ... to be included in the Corporation's periodic filings with the Securities and Exchange Commission. The Corporation has established a Disclosure Committee consisting of members of senior management to assist in this evaluation. (b) Internal Controls over Financial Reporting. Not applicable. 104

  • Page 123
    ..."Information About Our Directors and Executive Officers" 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 2003 fiscal year. Item 11. Executive Compensation...

  • Page 124
    PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. a) (1) The following consolidated financial statements of Capital One Financial Corporation, included in Item 8, "Financial Statements and Supplementary Data", are incorporated by reference hereto: Consolidated Balance...

  • Page 125
    ..., the Company furnished under Item 9-"Regulation FD Disclosure" of Form 8-K the Board of Directors approval of the 2004 annual compensation of Richard D. Fairbank, Capital One's Chairman and Chief Executive Officer. *Information in this furnished herewith shall not be deemed to be "filed" for the...

  • Page 126
    ... duly authorized. CAPITAL ONE FINANCIAL CORPORATION By: /s/ RICHARD D. FAIRBANK Richard D. Fairbank Chairman of the Board, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf...

  • Page 127
    ... management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 5, 2004 CAPITAL ONE FINANCIAL CORPORATION By: /s/ RICHARD D. FAIRBANK 3. 4. Richard D. Fairbank Chairman of the Board, Chief Executive Officer and President...

  • Page 128
    ..., that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 5, 2004 CAPITAL ONE FINANCIAL CORPORATION By: /s/ GARY L. PERLIN 3. 4. Gary L. Perlin Executive Vice President and Chief Financial Officer 110

  • Page 129
    ... 18, United States Code), I, Richard D. Fairbank, Chairman and Chief Executive Officer of Capital One Financial Corporation, a Delaware corporation ("Capital One"), do hereby certify that: The Annual Report on Form 10-K for the period ended December 31, 2003 (the "Form 10-K") of Capital One fully...

  • Page 130
    ... States Code), I, Gary L. Perlin, Executive Vice President and Chief Financial Officer of Capital One Financial Corporation, a Delaware corporation ("Capital One"), do hereby certify that: The Annual Report on Form 10-K for the period ended December 31, 2003 (the "Form 10-K") of Capital One fully...

  • Page 131
    ... Amendment Number 2 to Rights Agreement dated as of October 18, 2001 between Capital One Financial Corporation and EquiServe Trust Company, N.A. (as successor to First Trust Company of New York) as Rights Agent (incorporated by reference to Exhibit 99.1 of the Corporation's Report on Form 8-K, filed...

  • Page 132
    ...-K). 2002 Associate Stock Purchase Plan (incorporated by reference to Exhibit 4.1 of the Corporation's Form S-8 filed with the Securities and Exchange Commission on October 10, 2002). Lease Agreement, dated as of December 5, 2000, among First Union Development Corporation, as Lessor, and Capital One...

  • Page 133
    ...report on Form 10-Q for the period ending June 30, 2003). Capital One Financial Corporation 1999 Stock Incentive Plan (incorporated by reference to Exhibit 4 of the Corporation's Registration Statement on Form S-8, Commission File No. 333-78609, filed May 17, 1999). Capital One Financial Corporation...

  • Page 134
    ....14 Capital One Financial Corporation 1994 Deferred Compensation Plan, as amended (incorporated by reference to Exhibit 10.13 of the 2002 Form 10-K). 1995 Non-Employee Directors Stock Incentive Plan (incorporated by reference to the Corporation's Registration Statement on Form S-8, Commission File...

  • Page 135
    ... Boulevard McLean, VA 22102 Principal Investor Contact Paul Paquin Vice President, Investor Relations Capital One Financial Corporation 1680 Capital One Drive McLean, VA 22102 (703) 720-1000 Copies of Form 10-K filed with the Securities and Exchange Commission are available without charge, upon...

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    report annual report annual report annual report annual report annual report annual report annual report annual 1680 Capital One Drive McLean, VA 22102 703 720-1000 www.capitalone.com