Capital One 2005 Annual Report Download - page 55

The terms of the lease and credit facility agreements related to certain other borrowings and operating leases in Table 9
require several financial covenants (including performance measures and equity ratios) to be met. If these covenants are not
met, there may be an acceleration of the payment due dates noted above. As of December 31, 2005, the Company was not in
default of any such covenants.
Liquidity Risk Management
Liquidity risk management refers to the way the Company manages the use and availability of various funding sources to
meet its current and future operating needs. These needs change as loans grow, securitizations, debt and other deposits
mature, and payments on other obligations are met. Because the characteristics of the Company’ s assets and liabilities
change, liquidity risk management is a dynamic process, affected by the pricing and maturity of investment securities, loans,
eposits, securitizations and other assets and liabilities. d
To facilitate liquidity risk management, the Company uses a variety of funding sources to establish a maturity pattern that
provides a prudent mixture of short-term and long-term funds. The Company obtains funds through the gathering of deposits,
issuing debt and equity, and securitizing assets. Further liquidity is provided to the Company through committed facilities. As
of December 31, 2005, the Corporation, the Bank, the Savings Bank, the National Bank and COAF collectively had over
$10.8 billion in unused commitments under various credit facilities (including the Collateralized Revolving Credit Facility)
and unused conduit capacity available for liquidity needs.
Additionally, the Company maintains a portfolio of highly rated and highly liquid securities in order to provide adequate
liquidity and to meet its ongoing cash needs. As of December 31, 2005, the Company had $13.3 billion of such securities,
cash and cash equivalents, net of pledged securities of $5.1 billion.
As discussed in “Off-Balance Sheet Arrangements,” a significant source of liquidity for the Company has been the
securitization of consumer loans. As of December 31, 2005 the Company funded approximately 43% of its managed loans
(51% excluding Hibernia loans) through off-balance sheet securitizations. The Company expects to securitize additional loan
principal receivables during 2006. The Company’ s securitization program has maturities in 2006 and through 2025. The
revolving securitizations have accumulation periods during which principal payments are aggregated to make payments to
investors. As payments on the loans are accumulated and are no longer reinvested in new loans, the Company’ s funding
requirements for such new loans increase accordingly. The occurrence of certain events may cause the securitization
transactions to amortize earlier than scheduled, which would accelerate the need for funding. Additionally, this early
amortization could have a significant effect on the ability of the Bank, the Savings Bank and the National Bank to meet the
capital adequacy requirements as all off-balance sheet loans experiencing such early amortization would have to be recorded
on the balance sheet and accordingly would require incremental regulatory capital. As such amounts mature or are otherwise
paid, the Company believes it can securitize additional consumer loans, gather deposits, purchase federal funds and establish
other funding sources to fund new loan growth, although no assurance can be given to that effect.
The Company is a leading issuer in the securitization markets. Despite the size and relative stability of these markets and the
Company’ s position as a leading issuer, if these markets experience difficulties the Company may be unable to securitize its
loan receivables or to do so at favorable pricing levels. Factors affecting the Company’ s ability to securitize its loan
receivables or to do so at favorable pricing levels include the overall credit quality of the Company’ s securitized loans, the
stability of the market for securitization transactions, and the legal, regulatory, accounting and tax environments governing
securitization transactions. If the Company was unable to continue to securitize its loan receivables at current levels, 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 resulting change in the Company’ s current liquidity
sources could potentially subject the Company to certain risks. These risks would include an increase in the Company’ s cost
of funds, an increase in the reserve and the provision for possible credit losses as more loans would remain on the Company’ s
consolidated balance sheet, and limited or no loan growth, if the Company were unable to find alternative and cost-effective
funding sources. In addition, if the Company could not continue to remove the loan receivables from the balance sheet the
Company would possibly need to raise additional capital to support loan and asset growth.
Based on past deposit activity, the Company expects to retain a portion of its deposit balances as they mature. Therefore, the
Company anticipates the net cash outflow related to deposits within the next year will be significantly less than reported in
able 13. The Company utilizes deposits to fund loan and other asset growth and to diversify funding sources. T
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 deposits. The Company maintains a
Grand Cayman branch for issuing Eurodollar time deposits.
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