Capital One 2004 Annual Report Download - page 54

amounts collected in excess of that needed to pay the above amounts are remitted, in general, to the Company.
Under certain conditions, some of the cash collected may be retained to ensure future payments to investors. For
amortizing securitizations, amounts collected in excess of the amount that is used to pay the above amounts are
generally remitted to the Company, but may be paid to investors in further reduction of their outstanding
principal. See page 87-89 in Item 8 “Financial Statements and Supplementary Data—Notes to the Consolidated
Financial Statements—Note 18” for quantitative information regarding revenues, expenses and cash flows that
arise from securitization transactions.
Securitization transactions may amortize earlier than scheduled due to certain early amortization triggers, which
would accelerate the need for funding. Additionally, early amortization would have a significant impact on the
ability of the Bank and Savings Bank to meet regulatory capital adequacy requirements as all off-balance sheet
loans experiencing such early amortization would be recorded on the balance sheet and accordingly would
require incremental regulatory capital. As of December 31, 2004, no early amortization events related to its off-
balance sheet securitizations have occurred. The Company believes that it has the ability to continue to utilize
off-balance sheet securitization arrangements as a source of liquidity.
The amounts of investor principal from off-balance sheet consumer loans as of December 31, 2004 that are
expected to amortize into the Company’s consumer loans, or be otherwise paid over the periods indicated, are
summarized in Table 13. Of the Company’s total managed loans, 52% and 53% were included in off-balance
sheet securitizations for the years ended December 31, 2004 and 2003, respectively.
Funding Commitments Related to Synthetic Fuel Tax Credit Transaction
In June 2004, the Corporation established and consolidated Capital One Appalachian LLC (“COAL”). COAL is a
special purpose entity established to invest a 24.9% minority ownership interest in a limited partnership. The
partnership was established to operate a facility which produces a coal-based synthetic fuel that qualifies for tax
credits pursuant to Section 29 of the Internal Revenue Code. COAL purchased its interest in the partnership from
a third party paying $2.1 million in cash and agreeing to pay an estimated $115.0 million comprised of fixed note
payments, variable payments and the funding of its 24.9% share of the operating losses of the partnership. Actual
total payments will be based on the amount of tax credits generated by the partnership through the end of 2007.
In exchange, COAL will receive an estimated $137.7 million in tax benefits resulting from a combination of
deductions, allocated partnership operating losses, and tax credits. The Corporation has guaranteed COAL’s
commitments to both the partnership and the third party. As of December 31, 2004, the Company has recorded
$19.7 million in tax benefits and had an estimated remaining commitment for fixed note payments, variable
payments and the funding of its 24.9% share of the operating losses of the partnership of $100.2 million.
Guarantees
Residual Value Guarantees
In December 2000, the Company entered into a 10-year agreement for the lease of the headquarters building
being constructed in McLean, Virginia. The agreement called for monthly rent to commence upon completion,
which occurred in the first quarter of 2003, and is based on LIBOR rates applied to the cost of the building
funded. If, at the end of the lease term, the Company does not purchase the property, the Company guarantees a
maximum residual value of up to $114.8 million representing approximately 72% of the $159.5 million cost of
the building. This agreement, made with a multi-purpose entity that is a wholly-owned subsidiary of one of the
Company’s lenders, provides that in the event of a sale of the property, the Company’s obligation would be equal
to the sum of all amounts owed by the Company under a note issuance made in connection with the lease
inception. As of December 31, 2004, the value of the building was estimated to be above the maximum residual
value that the Company guarantees; thus, no deficiency existed and no liability was recorded relative to this
property.
Other Guarantees
In connection with certain installment loan securitization transactions, the transferee (off-balance sheet special
purpose entity receiving the installment loans) entered into interest rate hedge agreements (the “swaps”) with a
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