Capital One 2005 Annual Report Download - page 45

Service charges and other customer-related fees decreased 9% for the year ended December 31, 2004. The decrease was the
result of lower overlimit and annual membership fees generated on the reported loan portfolio resulting from the Company’ s
continued asset diversification beyond U.S. consumer credit cards, a continued bias toward originating higher credit quality,
lower yielding loans and ongoing product modifications.
Interchange
Interchange income, net of rewards expense, increased 8% for the year ended December 31, 2005. This increase is primarily
related to a 15% increase in purchase volumes. Costs associated with the Company’ s rewards programs was $176.9 million
and $128.2 million for the years ended December 31, 2005 and 2004, respectively. The 38% increase in the rewards expense
is due to an increase in purchase volumes and the continued expansion of the rewards program during 2005.
Interchange income increased 26% for the year ended December 31, 2004. This increase is primarily attributable 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 2003, respectively. The 11% increase in the rewards expense is due to an increase in
purchase volumes and an expansion of reward programs during 2004.
Other Non-Interest Income
Other non-interest income includes, among other items, commission and fees earned by the Company’ s mortgage businesses,
gains and losses on sales of securities, gains and losses associated with hedging transactions, service provider revenue
generated by the Company’ s healthcare finance business, gains on the sale of auto loans and income earned related to
urchased charged-off loan portfolios. p
Other non-interest income for the year ended December 31, 2005, included $160.0 million of income related to businesses
acquired during 2005. Exclusive of the income generated from businesses acquired, other non-interest income decreased 20%
from the prior year. This decrease is primarily the result of gains recognized in 2004, including a $31.5 million gain from the
sale of the Company’ s joint venture investment in South Africa and a $41.1 million gain from the sale of the French loan
portfolio, as well as, a $26.3 million reduction in gains recognized from the sale of auto loans in 2005 due to lower volume of
whole loan sales. These reductions in 2005 in other non-interest income were partially offset by a $34.0 million gain from the
sale of previously purchased charged-off loan portfolios during 2005.
Other non-interest income increased 51% for the year ended December 31, 2004. The increase in other non-interest income
was primarily due to $72.6 million in pre-tax gains recognized in 2004 related to the sale of the Company’ s joint venture
investment in South Africa ($31.5 million pre-tax) and sale of the French loan portfolio ($41.1 million pre-tax) and an
increase in income earned from purchased charged-off loan portfolios of $43.7 million for the year ended December 31,
2004. These increases were partially offset by decreases in auto gains of $26.1 million and an $18.0 million increase in losses
alized on the sale of securities and the repurchase of senior notes for the year ended December 31, 2004. re
rovision for loan losses P
The provision for loan losses increased 22% for the year ended December 31, 2005 compared to the prior year. This increase
was driven by 14% growth in the reported loan portfolio, exclusive of Hibernia loans acquired, estimated losses resulting
from the Gulf Coast hurricanes, and an increase in net charge-offs resulting from the enactment of the new bankruptcy
legislation. Exclusive of the estimated losses from the Gulf Coast Hurricanes and the increase in bankruptcy related charge-
offs in 2005 compared to 2004, the provision for loan losses would have increased 8% from the prior year. This provision for
loan losses increase relative to the 14% growth in the reported loan portfolio reflects a continued increase in the concentration
of higher credit quality loans in the reported loan portfolio.
For the year ended December 31, 2004, the provision for loan losses decreased 20%. While the Company’ s reported loan
portfolio increased 16% at December 31, 2004, the impact of the loan growth to the allowance was more than offset by the
loan growth being concentrated in higher credit quality loans, an improvement in collection experience, and improved
economic conditions. Evidence of the improvement in these factors can be seen in the 30-plus day reported delinquency rate
which was 3.85% at December 31, 2004, down 94 basis points from December 31, 2003 and the reported charge-off rate
which was 3.78% for the year ended December 31, 2004, down 196 basis points from the prior year.
N
on-interest expense
Non-interest expense consists of marketing and operating expenses.
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