Capital One 2005 Annual Report Download

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branching out
2005 annual report

Table of contents

  • Page 1
    branching out 2005 annual report

  • Page 2
    ... One, we believe that the essence of strategy is figuring out where the world is going and then working backwards from that vision to position our company to win. Here's where we believe the world of consumer banking is going. Consumer lending businesses, like credit cards and home equity, used...

  • Page 3
    ...businesses. Capital One already has the scarcest commodity - a national scale credit card business. We're building growth platforms during critical consolidation windows in key consumer lending businesses. And we've added the capability to gather deposits and compete locally in banking with Hibernia...

  • Page 4
    ... results. Our profits were up 16% to $1.6 billion, and our managed charge-off rate was near an industry low at 5% in 2005. The credit card market is intensely competitive and highly consolidated. In certain market segments, like the prime revolver segment, our competitors are offering 0% balance...

  • Page 5
    ... 2005, including Hibernia's home loan originations. We're Creating A Leading Brand Capital One has built one of the largest customer franchises in the United States with almost 50 million customer accounts. Early on, we relied on the MasterCard® and Visa® brands to build our credit card business...

  • Page 6
    ... 2003 $1,809 $1,544 $1,136 $642 $470 $900 net income ($ in millions) 2000 2001 2002 2003 2004 2005 $6.21 $3.93 $2.91 $2.24 $4.85 $6.73 diluted earnings per share 2004 2005 2000 2001 2002 2003 Managed loans are comprised of reported loans and off-balance-sheet securitized loans. -5-

  • Page 7
    ... services Global Financial Services (GFS) delivered solid performance in 2005, powered by strong results in our Small Business, Installment Lending, Home Loans, and Canadian Credit Card businesses. GFS loan growth in 2005 further diversified our assets and built future earnings power. managed loans...

  • Page 8
    ...63 3.94 Managed Metrics: Revenue margin Net interest margin Delinquency rate Net charge-off rate Return on average assets Operating expense as a % of average loans Average consumer loans Year-end consumer loans Year-end total accounts(1) (1) Does not include the accounts of Hibernia Corporation. 12...

  • Page 9
    ..., Global Financial Services David R. Lawson Lewis Hay, IIIF, G Chairman, President and CEO FPL Group, Inc. Executive Vice President; President and Chief Executive Officer, Capital One Auto Finance Pierre E. LeroyA Former President Worldwide Construction & Forestry Division and Worldwide Parts...

  • Page 10
    ... Employer Identification No.) 1680 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...

  • Page 11
    ... accelerated filer ⌧ Accelerated filer â-« Non-accelerated filer â-« Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes â-« No ⌧ The aggregate market value of the voting stock held by non-affiliates of the registrant as of the close of...

  • Page 12
    ... ONE FINANCIAL CORPORATION 2005 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Business Overview Business Description Geographic Diversity Enterprise Risk Management Technology/Systems Funding and Liquidity Competition Intellectual Property Employees Supervision and Regulation Statistical Information...

  • Page 13
    ... strategy has been to apply our methodologies to consumer financial products and services beyond credit cards, such as automobile and small business lending. Our common stock is listed on the New York Stock Exchange under the symbol COF. Our principal executive office is located at 1680 Capital One...

  • Page 14
    ... annual percentage rates, fees and credit limits, rewards programs and other special features. We routinely test new products to develop ones that appeal to different and changing consumer preferences. Our customized products include both products offered to a wide range of consumer credit risk...

  • Page 15
    .... The Company' s Corporate Audit Services department also assesses risk and the related quality of internal controls and risk management through its audit activities. Corporate Audit Services reports on the scope and results of its work to the Audit and Risk Committee of the Board of Directors. 6

  • Page 16
    ... oversight of credit policy and credit programs while maintaining the ability of operating units to respond flexibly to changing market and competitive conditions. The Company' s Chief Credit Officer manages a corporate Credit Risk Management staff and chairs the Credit Policy Committee, a committee...

  • Page 17
    ... information is also reported to the Executive Committee and the Audit and Risk Committee of the Board of Directors. Corporate Audit Services also assesses operational risk and the related quality of internal controls and quality of risk management through its audit activities. The key tools used...

  • Page 18
    ... services for Capital One' s North American portfolio of consumer and small business credit card accounts. The Company believes that its transfer to this new technology platform will allow it to achieve cost savings and product and service flexibility while reducing operational risk. Funding...

  • Page 19
    ... financing for dealer-originated loans. We also face competition from a small, but growing number of online automobile finance providers. The National Bank competes with national and state banks for deposits, loans and trust accounts and with savings and loan associations and credit unions for loans...

  • Page 20
    ... agencies having supervisory authority under applicable sales finance laws or consumer finance laws in most states. The Corporation also faces regulation in the international jurisdictions in which it conducts business. Dividends and Transfers of Funds Dividends to the Corporation from its direct...

  • Page 21
    ... mortgage backed and mortgage 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 twelve months. Failure to qualify under the QTL Test could subject the Savings Bank...

  • Page 22
    ... banks properly manage several elements of their credit card lending programs, including line assignments, over-limit practices, minimum payment and negative amortization, workout and settlement programs, and the accounting methodology used for various assets and income items related to credit card...

  • Page 23
    ... practices, public offerings, publication of research reports, use and safekeeping of client funds and securities, capital structure, record-keeping and the conduct of directors, officers and employees. USA PATRIOT Act of 2001 On October 26, 2001, the President signed into law the USA PATRIOT Act of...

  • Page 24
    ... the Securities and Exchange Commission ("SEC") and contains a number of significant changes relating to the responsibilities of directors and officers and reporting and governance obligations of SEC reporting companies. In addition, the Sarbanes-Oxley Act also created the Public Company Accounting...

  • Page 25
    ... agreements and questioning how credit card companies calculate default charges, such as late, overlimit and returned check fees, in the U.K. The OFT asserts that the Unfair Terms in Consumer Contracts Regulations 1999 render unenforceable consumer lending agreement terms relating to default charges...

  • Page 26
    ... services and consumer loans such as home equity lines and other mortgage related products that offer consumer debt consolidation. Thus, the cost to acquire new accounts will continue to vary among product lines and may rise. Other companies may compete with us for customers by offering lower...

  • Page 27
    ... payments. We select our customers, manage their accounts and establish prices and credit limits using proprietary models and other techniques designed to 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...

  • Page 28
    ... capital availability. In addition, customers may not accept the new products and services offered. Diversification Risk. An important element of our strategy is our effort to continue diversifying beyond our U.S. credit card business. Our ability to successfully diversify is impacted by a number...

  • Page 29
    ...our existing businesses. We are currently undertaking a project with Total System Services, Inc. ("TSYS") to transfer to a new technological platform that will result in TSYS providing processing services for Capital One' s North American portfolio of consumer and small business credit card accounts...

  • Page 30
    ... as interest rates and exchange rates change. Changes in interest rates also affect the balances our customers carry on their credit cards and affect the rate of pre-payment for installment loan products. When interest rates fall, there may be more low-rate product alternatives available to our...

  • Page 31
    ...to raise additional funds at higher interest rates. In our credit card business, we could, subject to legal and competitive constraints, mitigate this risk by increasing the interest rates we charge, although such changes may increase opportunities for our competitors to offer attractive products to...

  • Page 32
    ... class action antitrust lawsuits, which were subsequently consolidated, against the associations relating to certain debit card products. In April 2003, the associations agreed to settle the lawsuit in exchange for payments to plaintiffs and for changes in policies and interchange rates for debit...

  • Page 33
    ...,000 square foot headquarters building on 31 acres of land at 1680 Capital One Drive, McLean, Virginia. The building houses our primary executive offices and Northern Virginia staff and is leased through December 2010. In December 2005, we exercised our option to purchase the headquarters and land...

  • Page 34
    PART II Item 5. Market for Company's Common Equity and Related Stockholder Matters. (c) Total Number of Shares Purchased as Part of Publicly Announced Plans (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans Period (a) Total Number of Shares Purchased(1) (b) Average Price Paid...

  • Page 35
    ... accounting change, net of taxes of $8.8 Net income Dividend payout ratio Per Common Share: Basic earnings per share Diluted earnings per share Dividends Book value as of year-end Selected Year-End Reported Balances: Liquidity portfolio Consumer loans Allowance for loan losses Total assets Interest...

  • Page 36
    ... (the "Savings Bank"), which offers consumer and commercial lending and consumer deposit products, Hibernia National Bank (the "National Bank") which offers a broad spectrum of financial products and services to consumers, small businesses and commercial clients, and Capital One Auto Finance, Inc...

  • Page 37
    ... by reward partners and changes that the Company may make to the reward programs in the future. To the extent assumptions used by management do not prevail, rewards costs could differ significantly, resulting in either a higher or lower future rewards liability, as applicable. Finance Charge and Fee...

  • Page 38
    ... be otherwise paid over the periods indicated, are summarized in Table 9. Of the Company' s total managed loans, 43% and 52% were included in off-balance sheet securitizations for the years ended December 31, 2005 and 2004, respectively. Letters of Credit and Financial Guarantees As a result of the...

  • Page 39
    ..., servicing fees, finance charges, and other fees, net of charge-offs, and interest paid to investors of securitizations are recognized as servicing and securitizations income on the "reported" income statement. The Company' s "managed" consolidated financial statements reflect adjustments made...

  • Page 40
    ... slightly higher one-time charges in 2005, offset by lower 2005 charges related to the corporate-wide cost initiatives. Although operating expenses increased for the year, operating expense as a percentage of average managed assets continued to decline, reflecting the Company' s improved operating...

  • Page 41
    ... of the Company' s common stock and $2.2 billion in cash and resulted in $3.2 billion of goodwill. In the first quarter of 2005, the Company acquired Onyx Acceptance Corporation, a specialty auto loan originator; Hfs Group, a United Kingdom based home equity broker; InsLogic, an insurance brokerage...

  • Page 42
    ...of servicing and securitizations income for the off-balance sheet loan portfolio. Reported and managed charge-offs for bankruptcies increased $146.8 million and $394.8 million, respectively, in 2005 when compared to the prior year. Cost Reduction Initiatives and Other One-Time Items During 2005, the...

  • Page 43
    ....46 12.89 14.65 (0.43) (1.76) (1) In accordance with the Company's finance charge and fee revenue recognition policy, the amounts billed to customers but not recognized as revenue were $1.0 billion, $1.1 billion and $2.0 billion for the years ended December 31, 2005, 2004 and 2003, respectively. 34

  • Page 44
    ... by businesses acquired in 2005, service charges and other customer-related fees decreased 2% for the year ended December 31, 2005, while the average reported loan portfolio, exclusive of the 2005 acquisitions, grew 7%. The lower growth in service charges and other customer-related fee income when...

  • Page 45
    ... to growth in the reported loan portfolio, increased purchase volumes and increased rates paid to the Company by MasterCard and Visa. Total interchange income is net of $128.2 million and $115.4 million of costs related to the Company' s rewards programs for the years ended December 31, 2004 and...

  • Page 46
    ... million pre-payment penalty related to the refinancing of the McLean headquarters facility and a $28.2 million impairment charge related to its Global Financial Services segment insurance brokerage business compared to a total of $36.4 million in 2004 one-time charges detailed below. 2005 operating...

  • Page 47
    ... on a reported and managed basis, respectively, for the year ended December 31, 2005 compared to the prior year. The decrease in net charge-off rates principally relates to the Company' s continued asset diversification within and beyond U.S. consumer credit cards. The increase in the net charge-off...

  • Page 48
    ... domestic consumer credit card lending activities. Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 The U.S. Card segment provided earnings growth primarily as a result of year over year loan growth and improved operating efficiencies. U.S. Card segment net income for 2005 grew...

  • Page 49
    ... to Year Ended December 31, 2003 Total U.S. Card segment loans increased 5% at December 31, 2004 compared to the prior year. The Company achieved loan growth in this highly competitive segment by continuing to develop innovative new products and leveraging its brand. The contribution to net income...

  • Page 50
    ... Corporation and the Key Bank non-prime auto loan portfolio, as well as, strong organic originations growth aided, in part, by auto manufacturers' employee-pricing initiatives and other discount programs in 2005. Auto Finance net income decreased for the year ended December 31, 2005, as a result...

  • Page 51
    ... performance of our North American businesses. Global Financial Services net income decreased 13% for the year ended December 31, 2005 as a result of increases in provision for loan losses and non-interest expense and one-time gains on the sales of the Company' s joint venture investment in South...

  • Page 52
    ... rate for the Global Financial Services segment was, up 11 basis points at December 31, 2004. Global Financial Services delinquencies increased primarily as a result of an expansion of the international loan portfolio during 2004. VIII. Funding Funding Availability The Company has established access...

  • Page 53
    ... demand deposits, money market deposits, NOW accounts, and certificates of deposits ("CDs"). Hibernia experienced an increase in incremental deposits since the Gulf Coast Hurricanes due in part to customers receiving federal funds and insurance payments. As of December 31, 2005, the Company had...

  • Page 54
    ... and Average Deposit Rates Year Ended December 31, 2005 Average Deposit Average % of Balance Deposits Rate Non-interest bearing-domestic NOW accounts Money market deposit accounts Savings Accounts Other consumer time deposits Total core deposits Public fund certificate of deposits of $100...

  • Page 55
    ... Company utilizes deposits to fund loan and other asset growth and to diversify funding sources. Core deposits are comprised of domestic non-interest bearing deposits, NOW accounts, money market deposit accounts, savings accounts, certificates of deposit of less than $100,000 and other consumer time...

  • Page 56
    ..., the Company 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 Federal Deposit Insurance Corporation Improvement Act of 1991 limits the use of brokered deposits to...

  • Page 57
    ... or, when available in the case of marketable securities, market expectations. As of December 31, 2005, the Company' s Asset/Liability Management Policy limited the change in projected 12-month net interest income due to instantaneous parallel rate shocks of +/-300 basis points to less than...

  • Page 58
    ... 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' s Asset/Liability Management Policy requires that material foreign currency...

  • Page 59
    ...is currently intense for credit card products. Industry mail volume has increased substantially in recent years, resulting in declines in response rates to the Company' s new customer solicitations over time. Additionally, the increase in other consumer loan products, such as home equity loans, puts...

  • Page 60
    ... drive originations growth. The Company believes that its strong risk management skills, increasing operating scale, full credit spectrum product offerings and multi-channel marketing approach will enable it to continue to increase market share in the Auto Finance industry. Global Financial Services...

  • Page 61
    ...for the years ended December 31, 2005, 2004 and 2003. Year Ended December 31 Average Balance 2005 Income/ Expense Yield/ Rate Average Balance 2004 Income/ Expense Yield/ Rate Average Balance 2003 Income/ Expense Yield/ Rate (Dollars in thousands) Assets: Earning assets Consumer loans(1) Domestic 27...

  • Page 62
    ...2005 vs. 2004 2004 vs. 2003 Change due to(1) Change due to(1) Increase Increase (Decrease) (2) Volume Yield/Rate (Decrease)(2) Volume Yield/Rate (Dollars in thousands) Interest Income: Consumer loans Domestic International Total Small business loans Commercial loans Total loans Securities available...

  • Page 63
    ...C-MANAGED LOAN PORTFOLIO Year Ended December 31 2003 2002 (In Thousands) Year-End Balances: Reported loans: Consumer loans: Credit cards Domestic International Total credit cards Installment loans Domestic International Total installment loans Auto loans(1) Mortgage loans Total consumer loans Small...

  • Page 64
    ... Balances: Reported loans: Consumer loans: Credit cards Domestic International Total credit cards Installment loans Domestic International Total installment loans Auto loans(1) Mortgage loans Total consumer loans Small business loans Commercial loans Total reported loans Securitization Adjustments...

  • Page 65
    ... REPORTED LOAN PORTFOLIO 2005 (Dollars in thousands) Loans Reported: Consumer loans $49,383,370 Small business loans 6,414,243 Commercial loans 4,050,068 Total % of Total Loans 2004 Loans % of Total Loans As of December 31 2003 % of Total Loans Loans 2002 Loans % of Total Loans 2001 Loans % of Total...

  • Page 66
    ... 198,823 0.44% Total $ 3,423,820 3.24% $ 3,054,078 3.82% $ 3,177,929 4.46% $ 3,345,394 5.60% $ 2,241,647 4.95% (1) 2002 reported and managed delinquency rates include 28 basis point and 13 basis point increases, respectively, related to the one-time impact of the 2002 change in recoveries assumption...

  • Page 67
    ... the Company' s net charge-offs for the periods presented on a reported and managed basis. Year Ended December 31 (Dollars in thousands) 2005 2004 2003 2002 2001 Reported: Average loans outstanding $ 34,265,668 $ 28,677,616 $ 25,036,019 $ 17,284,306 $ 40,734,237 Net charge-offs 1,295,568 1,646,360...

  • Page 68
    ...shows a summary of nonperforming assets for the periods indicated. 2005 Nonaccrual loans: Consumer Small business Commercial Total nonperforming loans Foreclosed assets Excess bank-owned property Total nonperforming assets (1) 17,557 29,292 58,757 105,606 7,537 899 $ 114,042 $ The Company assumed...

  • Page 69
    ... consumer loans Small business loans Commercial loans Total charge-offs Principal recoveries: Consumer loans: Domestic International Total consumer loans Small business loans Commercial loans Total principal recoveries Net charge-offs Balance at end of year Allowance for loan losses to loans at end...

  • Page 70
    Item 7A. Quantitative and Qualitative Disclosures about Market Risk. The information required by Item 7A is included in Item 7, "Management' s Discussion and Analysis of Financial Condition and Results of Operations-Market Risk Management" on pages 47-49. 61

  • Page 71
    ... Federal funds sold and resale agreements Interest-bearing deposits at other banks Cash and cash equivalents Securities available for sale Loans Less: Allowance for loan losses Net loans Accounts receivable from securitizations Premises and equipment, net Interest receivable Goodwill Other Total...

  • Page 72
    ...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 non-interest expense Income before income taxes and cumulative effect of accounting change...

  • Page 73
    ...CHANGES IN STOCKHOLDERS' EQUITY Common Stock (In Thousands, Except Per Share Data) Balance, December 31, 2002 Comprehensive income: Net income Other comprehensive income, net of income tax: Unrealized losses on securities, net of income tax benefit of $12,247 Foreign currency translation adjustments...

  • Page 74
    ... sales of securities available for sale Gains on sales of auto loans Losses on repurchase of senior notes Stock plan compensation expense Changes in assets and liabilities, net of effects from purchase of companies acquired: (Increase) decrease in interest receivable (Increase) decrease in accounts...

  • Page 75
    ... Corporation is a diversified financial services company whose subsidiaries market a variety of financial products and services to consumers. The principal subsidiaries are Capital One Bank (the "Bank"), which offers credit card products and deposit products, Capital One, F.S.B. (the "Savings Bank...

  • Page 76
    ... include credit cards and home equity loans), mortgage loans held for sale, and loans originated by the Company. The Company' s acquired loans, subject to SOP 03-3, are recorded at fair value and no separate valuation allowance is recorded at the date of acquisition. The Company reviews each loan at...

  • Page 77
    ... purchase volumes. The Company recognizes interchange income as earned. Annual membership fees and direct loan origination costs are deferred and amortized over one year on a straight-line basis. Dealer fees and premiums are deferred and amortized over the average life of the related loans using...

  • Page 78
    ... used by management do not prevail, loss experience could differ significantly, resulting in either higher or lower future provision for loan losses, as applicable. The Company generally charges off credit card loans at 180 days past the due date, and generally charges off other consumer loans...

  • Page 79
    ...Stock Issued to Employees ("APB 25") and related Interpretations in accounting for its stock-based compensation plans. No compensation cost has been recognized for the Company' s fixed stock options for years prior to 2003, as the exercise price of all such options equals or exceeds the market value...

  • Page 80
    ... stock of Hibernia Corporation ("Hibernia"), a financial holding company with operations in Louisiana and Texas. Hibernia offers a variety of banking products and services, including consumer, commercial and small business loans and demand and term deposit accounts. The acquisition was accounted...

  • Page 81
    ... Company over Hibernia' s net assets acquired ("goodwill") is as follows: Costs to acquire Hibernia: Capital One common stock issued Cash consideration paid Fair value of employee stock options Investment banking, legal, and consulting fees Total consideration paid for Hibernia Hibernia's net assets...

  • Page 82
    ... domestic credit card lending activities. The Auto Finance segment consists of automobile and other motor vehicle financing activities. The Global Financial Services segment consists of international lending activities, small business lending, installment loans, home loans, healthcare financing and...

  • Page 83
    ...provision (benefit) Net income (loss) $ Loans receivable $ U.S. Card 4,655,897 3,219,567 2,207,888 3,499,918 780,357 1,387,301 48,609,571 $ $ $ Auto Finance 797,936 80,712 279,981 342,761 92,126 163,780 9,997,497 Year Ended December 31, 2004 Global Total Financial Services Other Managed $ 1,421...

  • Page 84
    ... impairment charge related to the write-off of the Company' s insurance brokerage business. The charge was recorded in non-interest expense and fully allocated to the Global Financial Services segment. Other During, 2005, the Company sold previously purchased charged-off loan portfolios resulting in...

  • Page 85
    ... Years Market Value Totals Amortized Cost Totals December 31, 2005 U.S. Treasury and other U.S. government agency obligations $ 867,737 $ 2,741,771 $ 789,664 $ 4,020 $ Collateralized mortgage obligations 84,531 3,840,768 85,777 - Mortgage backed securities 4,528 3,601,471 509,398 9,683 Asset backed...

  • Page 86
    ... at December 31, 2005 and 2004. Mortgage-Backed Securities. The unrealized losses of the Company' s investment in federal agency mortgage-backed securities were caused by interest rate increases. The contractual cash flows of these investments are guaranteed by an agency of the U.S. government...

  • Page 87
    ...) 2005 2004 Year-End Balances: Reported loans: Consumer loans: Credit cards Domestic International Total credit cards Installment loans Domestic International Total installment loans Auto loans Mortgage loans Total consumer loans Small business loans Commercial loans Total reported loans $ 16...

  • Page 88
    ... Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer ("SOP 03-3") and are as follows: (In Thousands) 2005 Contractually required principal and interest at acquisition: Consumer Small business Commercial Total Nonaccretable difference (expected losses...

  • Page 89
    ...25 7.37 Interest-bearing deposits Senior notes Bank-fixed rate Mandatory convertible securities Corporation Total Other borrowings Secured borrowings Junior capital income securities and subordinated debentures FHLB advances Federal funds purchased and resale agreements Other short-term borrowings...

  • Page 90
    ...time may offer and sell senior or subordinated debt securities, preferred stock, common stock, common equity units and stock purchase contracts. The Corporation' s shelf registration statement had $2.5 billion available at December 31, 2005. During 2005, the Company issued $500.0 million of ten year...

  • Page 91
    ...Federal Reserve Home Loan Bank (FHLB) advances which are secured by the Company' s investment in FHLB stock and by a blanket floating lien on portions of the Company' s residential mortgage loan portfolio. FHLB stock totaled $105.2 million at December 31, 2005 and is included in securities available...

  • Page 92
    ...the Company' s stock-based compensation plans as of December 31, 2005, 2004 and 2003: Available For Issuance Plan Name 2004 Stock Incentive Plan(1) 2002 Non-Executive Officer Stock Incentive Plan(2) 1999 Stock Incentive Plan(2) 1994 Stock Incentive Plan(2) 1999 Non-Employee Directors Stock Incentive...

  • Page 93
    ... package for the Company' s Chief Executive Officer (CEO). This package included 573,000 stock options which were granted at the fair market value at the grant date. These options will vest upon the fifth anniversary date of the grant or upon departure from employment with Capital One for reasons...

  • Page 94
    ... million in compensation expense for the years ended December 31, 2005, 2004 and 2003, respectively. Under the Purchase Plan, associates of the Company are eligible to purchase common stock through monthly salary deductions of a maximum of 15% and a minimum of 1% of monthly base pay. To date, the...

  • Page 95
    ... Retirement Savings Plan in which substantially all former associates of Hibernia who have completed one year of service are eligible to participate. The Company matches a portion of associate contributions with the Company' s common stock. Participants may elect to immediately transfer Company...

  • Page 96
    ... the Company' s deferred tax assets and liabilities as of December 31, 2005 and 2004 were as follows: December 31 2005 2004 Deferred tax assets: Allowance for loan losses Unearned income Stock incentive plan Securities available for sale Net operating losses State taxes, net of federal benefit Stock...

  • Page 97
    ...855 $ 816,582 $ 667,082 Federal taxes State taxes International taxes Deferred income taxes Income taxes The reconciliation of income tax attributable to continuing operations computed at the U.S. federal statutory tax rate to income tax expense was: Year Ended December 31 2005 2004 2003 35.00% 35...

  • Page 98
    ... in strategic direction related to the Company' s insurance brokerage business held in the Global Financial Services segment, the Company recognized a $25.5 million goodwill impairment loss. The impairment charge was recorded in other non-interest expense in the consolidated income statement. In...

  • Page 99
    ... an accelerated basis over their respective estimated useful lives. Intangible assets are recorded in Other assets on the balance sheet. Amortization expense related to purchase accounting intangibles totaled $9.9 million for the year ended December 31, 2005. Amortization expense for intangibles is...

  • Page 100
    ... of the total risk-based capital charge that would otherwise apply to such assets. This results in higher levels of regulatory capital at the Bank and the Savings Bank. Additionally, regulatory restrictions exist that limit the ability of the Bank, Savings Bank and National Bank to transfer funds to...

  • Page 101
    ... credit card lines. While this amount represented the total unused available credit card lines, the Company has not experienced, and does not anticipate, that all of its customers will exercise their entire available line at any given point in time. The Company generally has the right to increase...

  • Page 102
    ... share of the operating losses totaling $104.6 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...

  • Page 103
    ... class action antitrust lawsuits, which were subsequently consolidated, against the associations relating to certain debit card products. In April 2003, the associations agreed to settle the lawsuit in exchange for payments to plaintiffs and for changes in policies and interchange rates for debit...

  • Page 104
    ... future cash flows from excess finance charges and past-due fees over the sum of the return paid to security holders, estimated contractual servicing fees and credit losses. The Company periodically reviews the key assumptions and estimates used in determining the value of the interest-only strip...

  • Page 105
    ... consumer loan receivables, the weighted average percentage 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...

  • Page 106
    ... policies, the Company reviews its risk profile on a monthly basis. The Company' s Asset and Liability Management Committee is responsible for approving hedging strategies. The resulting strategies are then incorporated into the Company' s overall interest rate risk management strategies. Fair Value...

  • Page 107
    ... loans. The forward rate agreements allow the Company to "lock-in" functional currency equivalent cash flows associated with the foreign currency denominated loans. During the year ended December 31, 2005, the Company recognized $3.1 million of losses, recorded in other non-interest income, related...

  • Page 108
    ...agreements and interest-bearing deposits at other banks approximate fair value. Securities available for sale The fair value of securities available for sale was determined using current market prices. See Note 4 for fair values by type of security. Loans The net carrying amount of credit card loans...

  • Page 109
    ... The carrying amount of federal funds purchased and resale agreements, FHLB advances, and other short-term borrowings approximates fair value. The fair value of secured borrowings was calculated by discounting the future cash flows using estimates of market rates for corresponding contractual terms...

  • Page 110
    ... credit card lines and letters of credit and financial guarantees as defined in Note 19 are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. 2005 2004 Fair Contract Fair Contract Value...

  • Page 111
    ... between domestic and foreign operations. Note 26 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 112
    ... February 27, 2006, the Company sold a combination of Company originated charged-off loans and purchased charged-off loan portfolios. The sale resulted in the acceleration of future portfolio returns of approximately $84.0 million, subject to finalization. The pre-tax income will be reflected in the...

  • Page 113
    ...assets as of December 31, 2005 and approximately $163.2 million of revenues and $30.6 million of net income for the year ended December 31, 2005, of our consolidated financial statements. Based on this assessment, management has concluded that the Company' s internal control over financial reporting...

  • Page 114
    ... Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Capital One Financial Corporation as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended...

  • Page 115
    ... REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Capital One Financial Corporation We have audited the accompanying consolidated balance sheets of Capital One Financial Corporation as of December 31, 2005 and 2004, and the related consolidated statements of income, changes...

  • Page 116
    ... is a tabulation of the Company's unaudited quarterly results for the years ended December 31, 2005 and 2004. 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 11,856 and...

  • Page 117
    ... 2005 pursuant to Exchange Act Rules 13a-14 and 13a-15. These controls and procedures for financial reporting are the responsibility of the Corporation' s management. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company' s disclosure controls...

  • Page 118
    ... end of the Corporation' s 2005 fiscal year. Item 11. Executive Compensation. The information required by Item 11 will be included in the Proxy Statement under the headings "Information About Our Directors and Executive Officers-Compensation of the Board," "Compensation of Executive Officers" and...

  • Page 119
    ... Forma Financial Information and Exhibits" of Form 8-K on Exhibit 99.1 a copy of its press release dated November 22, 2005, which announced the merger consideration to be paid to former Hibernia Corporation shareholders in connection with Capital One' s acquisition of Hibernia Corporation based upon...

  • Page 120
    ... liabilities of that section. The Corporation makes available to investors, free of charge, its reports to the SEC pursuant to the Securities Exchange Act of 1934, including its Reports on Forms 8-K, 10-Q and 10-K, through the Company' s website at www.capitalone.com/about/invest/financial/, as soon...

  • Page 121
    ...by the undersigned, thereunto 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...

  • Page 122
    ...-K" are to the Corporation' s Annual Report on Form 10-K for the year ended December 31, 2005, filed March 9, 2005. Exhibit Number Description 2.1 Agreement and Plan of Merger, dated as of March 6, 2005, between Capital One Financial Corporation and Hibernia Corporation (incorporated by reference...

  • Page 123
    ... between Capital One Bank, Morgan Guaranty Trust Company of New York, London Office, and the Paying Agents named therein (incorporated by reference to Exhibit 4.9 of the 1998 Form 10-K). Upper DECs® form of certificate (incorporated by reference to Exhibit 4.9 of the Corporation' s Report on Form...

  • Page 124
    ...-Employee Directors Stock Incentive Plan Deferred Share Units Award Agreement between Capital One Financial Corporation and certain of its Directors. (incorporated by reference to Exhibit 10.3 of the Corporation' s quarterly report on Form 10-Q for the period ending September 30, 2004). Employment...

  • Page 125
    ...to the Amended and Restated Change of Control Employment Agreement, between certain senior executive officers and Capital One Financial Corporation (incorporated by reference to Exhibit 10.10.1 of the 2003 Form 10-K). Capital One Financial Corporation Excess Savings Plan, as amended (incorporated by...

  • Page 126
    ... s quarterly report on Form 10-Q for the period ending June 30, 2004). Amendment No. 1 to the Credit Agreement dated April 29, 2004 by and between Capital One Financial Corporation, Capital One Bank, Capital One, F.S.B., and Capital One Bank (Europe) plc, as Borrowers, and J.P. Morgan Securities Inc...

  • Page 127
    ... Capital One Financial Corporation and certain of its executives pursuant to the Company' s 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.20.3 of the 2004 Form 10-K). Computation of Ratio of Earnings to Combined Fixed Charges. Capital One Financial Corporation Code of Business...

  • Page 128
    ... Corporation (www.capitalone.com) is a financial holding company whose principal subsidiaries, Capital One Bank, Capital One, F.S.B., Capital One Auto Finance, Inc. and Hibernia National Bank (www.hibernia.com), offer a broad spectrum of financial products and services to consumers, small businesses...

  • Page 129
    Created and produced by Capital One and the following: Fultz and Associates, Inc., Production Vedros and Associates, Photography Allied Printing Services, Inc., Printing 1680 Capital One Drive McLean, VA 22102 703 720-1000 www.capitalone.com Printed on recycled paper.