Capital One 2006 Annual Report Download

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FORGING OUR VISION OF BANKING
2006 annual report

Table of contents

  • Page 1
    FORGING OUR VISION OF BANKING 2006 annual report

  • Page 2

  • Page 3
    ... Strategy We transformed our company this year with the integration of Hibernia and the acquisition of North Fork. With North Fork, we've become the 11th largest bank in America based on deposits. We have a growth platform in one of the best banking markets in the United States-the greater New York...

  • Page 4
    ... strong national consumer businesses in credit cards, auto finance, home loans, installment loans, small business and healthcare finance. In local banking, we now have the leading market share in Louisiana, a top three position in the greater New York region and a strong growth platform in Texas. We...

  • Page 5
    ... this year with the integration of Hibernia and the acquisition of North Fork." We acquired North Fork for $13.2 billion. That's a lot of money-our shareholders' money. Our investors have been patient as we've transformed our company. I am committed to making sure that our shareholders get paid for...

  • Page 6
    ... profitable U.S. Card business. Global Financial Services Global Financial Services, or GFS, is our portfolio of emerging national scale growth businesses, including small business lending, home loans, installment lending and healthcare finance, along with our international businesses in Canada and...

  • Page 7
    ... our customers get great rates for mortgages, home equity loans, and home equity lines of credit through a unique, user-friendly consultation process. We are also building a winning franchise in Canada. We're a national player in Canada in credit cards, and we're growing our business and our brand...

  • Page 8
    ...this business since our acquisition of Summit Acceptance Corporation in 1998. Since that time, COAF has transformed itself into one of the top national players in auto finance. In 2006, COAF delivered net income of $233.5 million, up 77%. Origination volumes were strong with managed loans at the end...

  • Page 9
    ...® gives our customers loan approvals in minutes and the ability to shop and save like a cash buyer. The auto finance business is challenging. COAF faces fierce competition and has been the beneficiary of a favorable credit environment in 2006. In addition, COAF's dealer network is relatively mature...

  • Page 10
    ... 700 branches in New York, New Jersey, Connecticut, Louisiana and Texas with $85.8 billion in total deposits. North Fork and Hibernia have proven banking models. Both institutions are known for their great people. And each of our banks has a deep appreciation for our customers and our communities...

  • Page 11
    ... our company. Our Human Resources team, led by Matt Schuyler, continues to develop programs and strategies that help make Capital One a destination for great talent. Our efforts are paying off. Capital One recently was named to Fortune's list of the "100 Best Places to Work." Our Board of Directors...

  • Page 12
    ... have more than doubled in the past two years with the acquisitions of Hibernia and North Fork. The introduction of new cultures from high-performing companies is making us better. We're incredibly proud to be working with all of our new banking associates and look forward to accomplishing great...

  • Page 13
    FINANCIAL SUMMARY managed loans ($ in billions) net income ($ in millions) diluted earnings per share Managed loans are comprised of reported loans and off-balance-sheet securitized loans. 11

  • Page 14
    ...-positioned to continue building a resilient and profitable U.S. Card business. managed loans ($ in billions) net income ($ in millions) $21.8 $16.4 $10.0 $99.3 $163.8 $132.1 $8.5 $233.5 2003 2004 2005 2006 2003 2004 2005 2006 auto finance Capital One Auto Finance®, or COAF, delivered...

  • Page 15
    ... 2003 2004 2005 2006 banking In 2006, we transformed our company with the integration of Hibernia and the acquisition of North Fork. We have a strong foundation to build on, with over 700 branches in New York, New Jersey, Connecticut, Louisiana and Texas and $85.8 billion in total deposits. Our...

  • Page 16
    14

  • Page 17
    ... 17.27 10.65 2.99 Managed Metrics: Revenue margin(1) Net interest margin(1) Delinquency rate Net charge-off rate Return on average assets Operating expense as a % of average loans Average loans held for investment Year-end loans held for investment Year-end total loan accounts 10.63% 6.86 3.02 2.84...

  • Page 18
    ..., Global Financial Services President Horizon Consulting Group David R. Lawson President, Capital One Auto Finance® Lewis Hay, III C, F Chairman, President and CEO FPL Group, Inc. Gary L. Perlin Chief Financial Officer Principal Accounting Officer John A. Kanas President, Banking Capital One...

  • Page 19
    ...Identification No.) 1680 Capital One Drive McLean, Virginia (Address of Principal Executive Offices) 22102 (Zip Code) RegistrantÂ'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...

  • Page 20
    ... of the Act.) Yes " No ⌧ The aggregate market value of the voting stock held by non-affiliates of the registrant as of the close of business on January 31, 2007. Common Stock, $.01 Par Value: $32,670,240,108* * In determining this figure, the registrant assumed that the executive officers of the...

  • Page 21
    CAPITAL ONE FINANCIAL CORPORATION 2007 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Item 1. Business Overview Business Description Geographic Diversity Enterprise Risk Management Technology/Systems Funding and Liquidity Competition Intellectual Property Employees Supervision and Regulation ...

  • Page 22
    THIS PAGE LEFT INTENTIONALLY BLANK.

  • Page 23
    ..., including the level of competition, and our customer oriented business strategies and brand. 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 Drive, McLean, Virginia 22102 (telephone number (703) 720...

  • Page 24
    ...branch network. Products include commercial and consumer loans, commercial and consumer deposit account services, commercial credit cards, treasury management services, trust services and other banking related products, such as insurance, brokerage services, merchant services, and investment banking...

  • Page 25
    ...reporting. Our 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. Credit...

  • Page 26
    .... Market Risk Management Market risk refers to exposures generated from changes in interest rates and foreign currency exchange rates. The management of market risk is overseen by the Chief Financial Officer with the advice and guidance from the Asset and Liability Management Committee. We currently...

  • Page 27
    ... 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 our audit activities. The key tools used in operational risk management are a risk self assessment process...

  • Page 28
    ...cards and debit cards. 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. We compete with national and state banks for deposits, commercial loans and trust accounts and with savings...

  • Page 29
    ... a national association, the deposits of which are insured by the Deposit Insurance Fund of the FDIC up to applicable limits. The Savings Bank is a federal savings bank chartered by the Office of Thrift Supervision (the Â"OTSÂ") and is a member of the Federal Home Loan Bank System. Its deposits are...

  • Page 30
    ... by the New York State Banking Department (Â"NYSBDÂ") of the FDIC. Superior is a national association, the deposits of which are insured by the Deposit Insurance Fund of the FDIC up to applicable limits. The Corporation is also registered as a financial institution holding company under Virginia law...

  • Page 31
    ... certain investment limitations. For example, federal savings banks are not permitted to make consumer loans (i.e., certain open-end or closed-end loans for personal, family or household purposes, excluding credit card loans) in excess of 35% of the savings bankÂ's assets. Federal savings banks are...

  • Page 32
    ... activities of the Banks as consumer lenders also are subject to regulation under various federal laws, including the Truthin-Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act (the Â"FCRAÂ"), the Community Reinvestment Act and the Service members Civil Relief Act, as well...

  • Page 33
    ... business operations, including sales and trading 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. NFB Agency Corp. (Â"NFB AgencyÂ") is a New York...

  • Page 34
    ... Exchange Commission (Â"SECÂ") 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 Oversight Board...

  • Page 35
    ...ways that adversely impact our business. The OFT has concluded the initial part of its industry wide investigation into alleged unfair contract terms in lending agreements and to how credit card companies calculate default charges, such as late, overlimit and returned check fees, in the U.K. The OFT...

  • Page 36
    ..., our commercial lending businesses, and our businesses in international markets also compete on a similar variety of factors, including price, loan terms, product features and customer service. Our banking business competes with national and state banks for deposits, loans, and trust accounts, and...

  • Page 37
    .... If the models and approaches we use to select, manage, and underwrite our consumer and commercial customers become less predictive of future charge-offs (due, for example, to changes in the competitive environment or in the economy), our credit losses and returns may deteriorate. Business mix. We...

  • Page 38
    ... OperationsÂ- Interest Rate RiskÂ" contained in this Annual Report on Form 10-K for the year ended December 31, 2006. We May Fail To Realize All of the Anticipated Benefits of our Mergers with Hibernia Corporation and North Fork Bancorporation The success of our mergers with Hibernia and North Fork...

  • Page 39
    ...prevented member banks from issuing American Express cards. The Corporation, the Bank and the Savings Bank are named defendants in this lawsuit. Separately, a number of entities, each purporting to represent a class of retail merchants, also have filed antitrust lawsuits against MasterCard, Visa and...

  • Page 40
    ... factors include changes in consumer confidence levels, the publicÂ's perception of the use of credit cards and other consumer debt, and changing attitudes about incurring debt and the stigma of personal bankruptcy. We May Face Limited Availability of Financing, Variation in Our Funding Costs and...

  • Page 41
    ...Annual Report on Form 10-K for the year ended December 31, 2006. Item 1B. Unresolved Staff Comments. Not applicable. Item 2. Properties. In March, 2006, we completed the purchase of the previously leased, 570,000 square foot headquarters building located at 1680 Capital One Drive, McLean, Virginia...

  • Page 42
    PART II Item 5. Market for CompanyÂ's Common Equity and Related Stockholder Matters. (c) Total Number of Shares Purchased as Part of Publicly Announced Plans N/A N/A N/A N/A (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans N/A N/A N/A N/A Period October 1-31, 2006 November 1-...

  • Page 43
    ...Â" Â"BusinessÂ-Supervision and RegulationÂ-Dividends and Transfers of FundsÂ" Â"ManagementÂ's Discussion and Analysis of Financial Condition and Results of OperationsÂ-Market Risk ManagementÂ" Â"ManagementÂ's Discussion and Analysis of Financial Condition and Results of OperationsÂ-Capital Adequacy...

  • Page 44
    ...-bearing deposits Total deposits Borrowings StockholdersÂ' equity Reported Metrics: Revenue margin Net interest margin Delinquency rate Net charge-off rate Return on average assets Return on average equity Average equity to average assets Operating expense as a % of average loans Allowance for loan...

  • Page 45
    ..., F.S.B. (the Â"Savings BankÂ") which offers consumer and commercial lending and consumer deposit products Capital One, National Association (Â"CONAÂ") which offers a broad spectrum of financial products and services to consumers, small businesses and commercial clients Capital One Auto Finance, Inc...

  • Page 46
    ... the date of acquisition, the Company recorded the assets acquired and liabilities assumed at fair value. The excess of cost over the fair value of the net assets acquired is recorded on the balance sheet as goodwill. The cost includes the consideration paid and all direct costs associated with the...

  • Page 47
    ... incurred, and is recorded at the time of sale, net of transaction costs. 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 to security holders...

  • Page 48
    ... balance sheet assets and liabilities, thereby limiting the impact on earnings. By using derivative instruments, the Company is exposed to credit and market risk. The Company manages the market risk associated with interest rate and foreign exchange contracts by establishing and monitoring limits...

  • Page 49
    ... and outstanding loan balances are recorded on the Consolidated Balance Sheet. The Company has unused available credit card lines 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 50
    ... as its Â"reportedÂ" financial statements. Loans included in securitization transactions which qualify as sales under GAAP have been removed from the CompanyÂ's Â"reportedÂ" balance sheet. However, servicing fees, finance charges, and other fees, net of charge-offs, and interest paid to investors of...

  • Page 51
    ...dilutive impact from the North Fork acquisition. Revenue growth was fueled by managed loan growth in the Auto Finance and Global Financial Services segments and a full year of Hibernia results, offset by declining revenues in U.S. Card driven by ongoing changes in product strategy. The provision for...

  • Page 52
    ... with more than 350 bank branches in the New York metropolitan area and a nationwide mortgage business. Pursuant to the Merger Agreement, each share of North Fork common stock outstanding at the effective time of the merger was converted into the right to receive either $28.144 in cash or 0.3692 of...

  • Page 53
    ...the mortgage loans held for sale. The Company recognized a mark-to-market gain on the freestanding interest rates swaps of $35.7 million in mortgage banking operations income. MasterCard, Inc. Initial Public Offering In May 2006, MasterCard, Inc. completed an initial public offering of its stock. In...

  • Page 54
    ...Year Ended December 31, 2005 Change 2006 vs. 2005 2005 vs. 2004 (Dollars in thousands) 2006 2004 Earnings (Reported): Net Interest Income $ 5,099,630 Non-Interest Income: Servicing and securitizations 4,209,637 Service charges and other 1,770,340 customer-related fees Mortgage banking operations...

  • Page 55
    ...Auto Finance and Global Financial Services segments that generate lower fee income and continued declining fee revenue from U.S. Card. Excluding $44.7 million contributed by businesses acquired in 2005, service charges and other customer-related fees decreased 2% for the year ended December 31, 2005...

  • Page 56
    ... gains and losses associated with hedging transactions, service provider revenue generated by the CompanyÂ's healthcare finance business, gains on the sale of auto loans and income earned related to purchased charged-off loan portfolios. Other non-interest income for the year ended December 31, 2006...

  • Page 57
    ...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 expenses...

  • Page 58
    ...12% and 11% 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 CompanyÂ's continued asset diversification within and beyond U.S. consumer credit cards. The increase in the net...

  • Page 59
    ... Hibernia National Bank. Based upon the information available at the time of this review, the majority of the consumer portfolio and a portion of the commercial portfolio were determined not to have been impaired at the acquisition date. Therefore, the related SOP 03-3 contra accounts were adjusted...

  • Page 60
    Ending Loans increased year over year by 8% and was driven by a combination of both new customer acquisitions as well as growth and retention of balances from existing customers. Purchase Volume growth of 13% shows continued growth within the rewards business along with healthy retail sales growth. ...

  • Page 61
    ...the sale of auto loans, inclusive of allocations related to funds transfer pricing, compared to the prior year. For the year ended, December 31, 2005, the Auto Finance segmentÂ's net charge-off rate was down 58 basis points from the prior year. Net charge-offs of Auto Finance segment loans increased...

  • Page 62
    ... 9,175 10,155 The Global Financial Services segment consists of international (UK and Canada) lending, small business lending, installment loans, home loans, healthcare finance and other consumer financial service activities, extending Capital OneÂ's national scale lending franchise and providing...

  • Page 63
    ... Average loans held for investment Net charge-off rate 30+ day delinquency rate Core deposits Total deposits Number of active ATMs Number of locations $ $ $ $ Beginning in 2006, Capital One added a Banking segment. The Banking segment represents the results of the legacy Hibernia business lines...

  • Page 64
    ... and Subordinated Global Bank Note Program(2) Senior Domestic Bank Note Program(3) Credit Facility Capital One Auto Loan Facility I Capital One Auto Loan Facility II Corporation Shelf Registration (1) (2) (3) (4) (5) Effective/ Issue Date 1/03 4/97 6/04 Â- 3/05 10/05 Availability (1)(5) $ 1,800...

  • Page 65
    ..., such as the internet. With the acquisitions of North Fork and Hibernia, Capital One acquired new channels for deposit growth. The branch network offers a broad set of deposit products that include demand deposits, money market deposits, NOW accounts, and certificates of deposits (Â"CDsÂ"). As of...

  • Page 66
    ... for the CompanyÂ's on-balance sheet auto loan securitizations, junior subordinated capital income securities and debentures, FHLB advances, federal funds purchased and resale agreements and other short-term borrowings. The terms of the lease and credit facility agreements related to certain...

  • Page 67
    ... at maturity, 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...

  • Page 68
    ... currency exchange contracts to reduce sensitivity 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...

  • Page 69
    ... more quickly than the rates it pays on its borrowings and deposits. Changes in interest rates and competitor responses to those changes may affect the rate of customer pre-payments for mortgages and auto and installment loans and may affect the balances customers carry on their credit cards. These...

  • Page 70
    ...the Office of the Comptroller of the Currency (the Â"OCCÂ"), and North Fork Bank is subject to capital adequacy guidelines adopted by the Federal Deposit Insurance Corporation (the Â"FDICÂ") (collectively the Â"regulatorsÂ"). The capital adequacy guidelines require the Company, the Bank, the Savings...

  • Page 71
    ... 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, CONA, North Fork Bank and Superior to transfer funds to the Corporation. As of December 31, 2006, retained...

  • Page 72
    ... attrition rates. The Company believes these changes made over the last several years position the U.S. Card business to deliver sustainable bottom-line returns through low credit losses, long-term customer relationships, diversified revenue streams, and improving operating efficiency. Auto Finance...

  • Page 73
    ...the North Fork acquisition. Loan balances in the areas most impacted by the Gulf Coast hurricanes continued to decline, while loan balances continued to grow in other parts of Louisiana and in Texas. Late in the year, the Company began to see encouraging signs of renewed growth in small business and...

  • Page 74
    ... fees on loans of approximately $699.5 million, $776.5 million and $792.0 million for the years ended December 31, 2006, 2005 and 2004, respectively. (2) Prior period amounts have been reclassified to conform with current period presentation. Average Balance 2006 Income/ Expense 2004 Yield/ Rate...

  • Page 75
    ... ANALYSIS Year Ended December 31 2006 vs. 2005 Change due to(1) (Dollars in thousands) Interest Income: Consumer loans Domestic International Total Commercial loans Total loans held for investment Mortgage loans held for sale(2) Securities available for sale(2) Other Domestic(2) International Total...

  • Page 76
    ... in thousands) Year-End Balances: Reported loans held for investment: Consumer loans Credit cards Domestic International Total credit card Installment loans Domestic International Total installment loans Auto loans(1) Mortgage loans Total consumer loans Commercial loans Total reported loans held for...

  • Page 77
    ... Managed loans held for investment: Consumer loans Credit cards Domestic International Total credit card Installment loans Domestic International Total installment loans Auto loans(1) Mortgage loans Total consumer loans Commercial loans Total managed loans held for investment (1) 2006 2005 Year...

  • Page 78
    ...PORTFOLIO As of December 31 2006 (Dollars in thousands) Loans Reported: Consumer $ 64,767,900 loans Commercial 31,744,239 loans Total $ 96,512,139 % of Total Loans 67.11% $ 32.89% 100.00% $ 2005 % of Total Loans 82.51% $ 17.49% 100.00% $ 2004 % of Total Loans 92.95% $ 7.05% 100.00% $ 2003 % of Total...

  • Page 79
    ...459 0.22% Total 3,423,820 3.24% $ 3,054,078 3.82% $ 3,177,929 4.46% $ 3,345,394 5.60% $ 4,414,045 3.02% $ (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. 61

  • Page 80
    ... CHARGE-OFFS Table F shows the CompanyÂ's net charge-offs for the periods presented on a reported and managed basis. Year Ended December 31 2004 $ 34,265,668 1,295,568 (Dollars in thousands) Reported: Average loans held for investment Net charge-offs Net charge-offs as a percentage of average loans...

  • Page 81
    ... 31 2006 2005 $ 25,232 $ 17,557 88,049 57,598 105,606 82,830 7,537 11,838 899 4,308 $ 98,976 $ 114,042 (Dollars in thousands) Nonaccrual loans held for investment: Consumer Commercial Total nonperforming loans held for investment Foreclosed assets Excess bank-owned property Total nonperforming...

  • Page 82
    ...losses Acquisitions Other Charge-offs: Consumer loans: Domestic International Total consumer loans Commercial loans Total charge-offs Principal recoveries: Consumer loans Domestic International Total consumer loans Commercial loans Total principal recoveries Net charge-offs(1) Balance at end of year...

  • Page 83
    Item 7A. Quantitative and Qualitative Disclosures about Market Risk The information required by Item 7A is included in Item 7, Â"ManagementÂ's Discussion and Analysis of Financial Condition and Results of OperationsÂ-Market Risk ManagementÂ" on pages 51-52. 65

  • Page 84
    ...: 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 Mortgage loans held for sale Loans held for investment Less: Allowance for loan and lease losses Net loans held for investment Accounts...

  • Page 85
    ... Income: Servicing and securitizations Service charges and other customer-related fees Mortgage banking operations Interchange Other Total non-interest income Non-Interest Expense: Salaries and associate benefits Marketing Communications and data processing Supplies and equipment Occupancy Other...

  • Page 86
    ... for restricted stock awards and stock options Balance, December 31, 2004 Comprehensive income: Net income Other comprehensive income, net of income tax: Unrealized losses on securities, net of income tax benefit of $31,706 Foreign currency translation adjustments Unrealized gains in cash flow...

  • Page 87
    ... available for sale Gains on sales of auto loans Losses on repurchase of senior notes Mortgage loans held for sale: Transfers in and originations Loss on sales Proceeds from sales Stock plan compensation expense Changes in assets and liabilities, net of effects from purchase of companies acquired...

  • Page 88
    ... motor vehicle financing products; Capital One, N.A. (Â"CONAÂ"), a national association that offers a broad spectrum of financial products and services to consumers, small businesses and commercial clients; and North Fork Bank (Â"North Fork BankÂ"), a New York state chartered non-member bank that...

  • Page 89
    ... 25, Accounting for Stock Issued to Employees and related Interpretations in accounting for its stock based compensation plans. Results for prior periods have not been restated. The Company has two active stock-based compensation plans, one employee plan and one non-employee director plan, which are...

  • Page 90
    ... benefits) to be classified as financing cash flows. Significant Accounting Policies Cash and Cash Equivalents Cash and cash equivalents includes cash and due from banks, federal funds sold and resale agreements and interest-bearing deposits at other banks. Cash paid for interest for the years ended...

  • Page 91
    ... 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 to security holders, estimated contractual servicing fees and credit losses. To the extent assumptions used by management do not prevail, fair value estimates of the...

  • Page 92
    ...in market interest rates. The MSR balance was $252.3 million at December 31, 2006. See Note 18 for additional detail. Rewards Liability The Company offers credit cards that provide reward program members with various rewards such as airline tickets, free or deeply discounted products or cash rebates...

  • Page 93
    ... the card-issuing bank through the interchange network. Interchange fees are set by MasterCard International Inc. (Â"MasterCardÂ") and Visa U.S.A. Inc. (Â"VisaÂ") and are based on cardholder purchase volumes. The Company recognizes interchange income as earned. Annual membership fees and direct loan...

  • Page 94
    ... common stock of North Fork Bancorporation (Â"North ForkÂ"), a regional bank holding company headquartered in New York conducting commercial and retail banking from branch locations in the New York, New Jersey, and Connecticut, with a complementary national mortgage banking business. The acquisition...

  • Page 95
    ... acquired (Â"goodwillÂ") is as follows: Costs to acquire North Fork: Capital One common stock issued Cash consideration paid Fair value of employee stock options Investment banking, legal, and consulting fees Total consideration paid for North Fork North ForkÂ's net assets at fair value: North Fork...

  • Page 96
    ... 16, 2005, the Company acquired 100% of the outstanding common stock of Hibernia Corporation (Â"HiberniaÂ"), 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...

  • Page 97
    ...on a line of business level through allocations from the consolidated financial results. See Note 1, Significant Accounting Policies, for the accounting policies of the reportable segments. Year Ended December 31, 2006 Auto Finance $ 1,437,795 16,106 494,835 599,807 $ Global Financial Services 1,817...

  • Page 98
    ...Auto Finance segment and the remainder was held in the Other category for the years ended December 31, 2005 and 2004, respectively. During 2005, the Company closed on the sale of its Tampa, Florida facilities. The ultimate sales price was greater than the impaired value of the held-for-sale property...

  • Page 99
    ... Global Financial Services segment, $0.6 million was allocated to the Auto Finance segment, and the remainder of the balance was held in the Other category. During 2005, the Company recognized a $28.2 million impairment charge related to the write-off of the CompanyÂ's insurance brokerage business...

  • Page 100
    ... are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the CompanyÂ's investment. Since the decline in market value is attributable to changes in interest rates and not credit quality...

  • Page 101
    ... of year Provision for loan losses Acquisitions Other Charge-offs Principal recoveries Net charge-offs Balance at end of year Loans totaling approximately $573.0 million and $422.3 million, representing amounts which were greater than 90 days past due, were included in the CompanyÂ's reported loan...

  • Page 102
    ...credit cards Installment loans Domestic International Total installment loans Auto loans Mortgage loans Total consumer loans Commercial loans Total reported loans held for investment Note 7 Loans Acquired in a Transfer In conjunction with the Hibernia merger transaction in 2005, the Company acquired...

  • Page 103
    ...SOP 03-3 were transferred to mortgage loans held for sale. Loans acquired during each year for which it was probable at acquisition that all contractually required payments would not be collected are as follows: 2006 Contractually required payments receivable at acquisition Consumer Commercial Total...

  • Page 104
    ...5.69% 6.13% Interest-bearing deposits Senior and subordinated notes Bank notesÂ-fixed rate 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 Total...

  • Page 105
    ... of the Company, maintained twenty agreements to transfer pools of consumer loans accounted for as secured borrowings at December 31, 2006. The agreements were entered into between 2003 and 2006, relating to the transfers of pools of consumer loans totaling $26.3 billion. Principal payments on the...

  • Page 106
    ... 50 percent on the third anniversary date or three years from the date of grant. The Company also issues cash equity units which are recorded as liabilities as expense is recognized. Cash equity units are not issued out of the CompanyÂ's stock-based compensation plans because they are settled with...

  • Page 107
    ... date using a Black-Scholes option-pricing model. The fair value of options granted during 2006, 2005 and 2004 was estimated using the weighted average assumptions summarized below: Assumptions Dividend yield Volatility factors of stockÂ's expected market price(1) Average risk-free interest rate...

  • Page 108
    ... for unvested cash equity units of $64.3 million, based on the stock price at that date. That cost is expected to be recognized over the next 3 years. 2007 CEO Grant In December 2006, the CompanyÂ's Board of Directors approved a compensation package for the CompanyÂ's Chief Executive Officer (CEO...

  • Page 109
    ... to paid-in capital in equity. As shares are committed to be released, the Company reports compensation expense equal to the current market value of the shares, and the shares become outstanding for earnings per share calculations. Dividends on allocated ESOP shares are recorded as a reduction...

  • Page 110
    ... loss Benefit obligation at end of year Change in plan assets: Fair value of plan assets t beginning of year Actual return on plan assets Employer contributions Plan assets acquired through acquisition Benefits paid Fair value of plan assets at end of year Funded status at end of year Balance Sheet...

  • Page 111
    ... at measurement date Discount rate Rate of compensation increase Assumptions for periodic benefit cost for the year ended Discount rate Expected rate of return on plan assets Rate of compensation increase Assumptions for year-end valuations Health care cost trend rate assumed for next year Rate to...

  • Page 112
    ... Federal Home Loan Bank, or mutual funds consisting of commercial paper issued by a domestic corporation rated Â"primeÂ" by the National Credit Office, or of individual fixed income instruments rated A or P1 or higher, maturing in 180 days or less. The guidelines require that the planÂ's performance...

  • Page 113
    ...taxes attributable to continuing operations were as follows: Year Ended December 31 2006 2005 2004 Current income tax provision: Federal taxes State taxes International taxes Total current provision (benefit) Deferred income tax provision: Federal taxes State taxes International taxes Total deferred...

  • Page 114
    ... derivative gains (losses) Employee stock plans Employee retirement plans Total current provision (benefit) 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 2006 2005 2004 35.00...

  • Page 115
    ... benefits will reduce goodwill. The deferred tax liability for deferred revenue represents late fees, interchange, cash advance fees and overlimit fees. These items are treated as original issue discount (Â"OIDÂ") for tax purposes and recognized over the life of the related credit card receivables...

  • Page 116
    ... 31, 2005 Transfers Additions Adjustments Foreign Currency Translation Balance at December 31, 2006 During 2006, the Company acquired North Fork Bancorporation, Inc., a commercial and retail bank in New York, which created $9.7 billion of goodwill, in the aggregate. The goodwill associated with the...

  • Page 117
    ... at December 31, 2005. In December 2005, based on a change in strategic direction related to the CompanyÂ'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...

  • Page 118
    ...the Office of the Comptroller of the Currency (the Â"OCCÂ"), and North Fork Bank is subject to capital adequacy guidelines adopted by the Federal Deposit Insurance Corporation (the Â"FDICÂ") (collectively the Â"regulatorsÂ"). The capital adequacy guidelines require the Company, the Bank, the Savings...

  • Page 119
    ... for prompt corrective action is not applicable for bank holding companies. The Bank and Savings Bank treat a portion of their loans as Â"subprimeÂ" under the Â"Expanded Guidance for Subprime Lending ProgramsÂ" (the Â"Subprime GuidelinesÂ") issued by the four federal banking agencies that comprise...

  • Page 120
    ...its customers will exercise their entire available line at any given point in time. The Company generally has the right to increase, reduce, cancel, alter or amend the terms of these available lines of credit at any time. As a result of the acquisitions of Hibernia and North Fork, the Company enters...

  • Page 121
    ... credit or debit cards (Â"associationsÂ"), alleging, among other things, that the associations had violated antitrust law and engaged in unfair practices by not allowing member banks to issue cards from competing brands, such as American Express and Discover Financial Services. In 2001, a New York...

  • Page 122
    ...effect upon the CorporationÂ's operations or financial condition. Note 21 Related Party Transactions In the ordinary course of business, executive officers and directors of the Company may have consumer loans issued by the Company. Pursuant to the CompanyÂ's policy, such loans are issued on the same...

  • Page 123
    ...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 to security holders, estimated contractual servicing fees and credit losses. The Company periodically reviews the key assumptions and estimates used in...

  • Page 124
    ... of assets serviced. The Company generally does not record material servicing assets or liabilities for these rights since the contractual servicing fee approximates market rates. Securitization Cash Flows Year Ended December 31 Proceeds from new securitizations Collections reinvested in revolving...

  • Page 125
    ... Company is exposed to credit and market risk. 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. Credit risk is equal to the extent of the fair value gain...

  • Page 126
    ... rate changes on its foreign currency denominated loans. The forward rate agreements allow the Company to Â"lock-inÂ" functional currency equivalent cash flows associated with the foreign currency denominated loans. During the year ended December 31, 2006, the Company recognized no losses related...

  • Page 127
    ... customerÂ's credit application and evaluates the applicantÂ's financial history and ability and willingness to repay. Loans are made on an unsecured and secured basis. Certain commercial, small business, mortgage and automobile loans require collateral in various forms including cash deposits...

  • Page 128
    ...The carrying amounts of cash and due from banks, federal funds sold and resale 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...

  • Page 129
    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 resale agreements, FHLB advances, and ...

  • Page 130
    ...Activities The CompanyÂ'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 BankÂ-Canada Branch, a foreign branch office of the Bank that provides...

  • Page 131
    ... of discount of senior notes Stock plan compensation expense Decrease in other assets (Decrease) increase in other liabilities Net cash provided by operating activities Investing Activities: Decrease (increase) in investment in subsidiaries Purchases of securities available for sale (Increase...

  • Page 132
    ... market or privately negotiated transactions from time to time at prevailing market prices. Repurchases under the program will be made in compliance with Rule 10b-18 of the Securities and Exchange act of 1934 (as applicable) and other applicable securities laws. Sale of Mortgage loans held for sale...

  • Page 133
    ... current year acquisition scope exception, managementÂ's assessment of the effectiveness of the internal control over financial reporting excludes the evaluation of the internal controls over financial reporting of North Fork Bancorporation and its subsidiaries (Â"North ForkÂ"), which were acquired...

  • Page 134
    ... Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Capital One Financial Corporation as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholdersÂ' equity, and cash flows for each of the three years in the period ended...

  • Page 135
    ... 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, 2006 and 2005, and the related consolidated statements of income, changes in stockholdersÂ' equity, and cash...

  • Page 136
    ... results for the years ended December 31, 2006 and 2005. The CompanyÂ'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 19,763 and 11,856 common stockholders of record as of December...

  • Page 137
    ...related to the CompanyÂ's card processing, call center desktop and rewards platforms. Based on testing and planning, management continues to believe that its internal controls over financial reporting are adequate. In addition, on December 1, 2006, the Company completed the acquisition of North Fork...

  • Page 138
    ... Directors and Executive OfficersÂ-Compensation of the Board,Â" Â"Compensation of Executive OfficersÂ" and Â"Report of the Compensation Committee on Executive Compensation,Â" and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related...

  • Page 139
    ...exhibits and is incorporated herein by reference. 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 CompanyÂ's website at www.capitalone.com/about/invest...

  • Page 140
    ... 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...

  • Page 141
    ... are to the CorporationÂ's Annual Report on Form 10-K for the year ended December 31, 2005, filed March 2, 2006, as amended on April 12, 2006. Exhibit Number Description 2.1 Agreement and Plan of Merger, dated as of March 6, 2005, between Capital One Financial Corporation and Hibernia Corporation...

  • Page 142
    ... One Bank, The First National Bank of Chicago and First Chicago Delaware Inc (incorporated by reference to Exhibit 4.6.3 of the 2003 Form 10-K). 4.6 Issue and Paying Agency Agreement dated as of October 24, 1997 between Capital One Bank, Morgan Guaranty Trust Company of New York, London Office, and...

  • Page 143
    Exhibit Number Description 4.9.2 Guarantee Agreement, dated as of August 1, 2006, between Capital One Financial Corporation and The Bank of New York, as guarantee trustee (incorporated by reference to Exhibit 4.4 of the CorporationÂ's Current Report on Form 8-K, filed on August 4, 2006). 4.9.3 ...

  • Page 144
    ...to the CompanyÂ's 2004 Stock Incentive Plan (incorporated by reference to Exhibit 99.1 of the CorporationÂ's Report on Form 8-K, filed on December 23, 2005). 10.8 Services Agreement, dated November 8, 2004, between Capital One Financial Corporation, acting through its subsidiary Capital One Services...

  • Page 145
    ... 2002). 10.19.2 Capital One Financial Corporation, 2005 Directors Compensation Plan Summary (incorporated by reference to Exhibit 99.1 of the CorporationÂ's Report on Form 8-K, filed on May 4, 2005). 10.20 Capital One Financial Corporation, 2004 Stock Incentive Plan (incorporated herein by reference...

  • Page 146
    Exhibit Number Description 23* 31.1* 31.2* 32.1* 32.2* * ** Consent of Ernst & Young LLP. Certification of Richard D. Fairbank Certification of Gary L. Perlin Certification** of Richard D. Fairbank Certification** of Gary L. Perlin Indicates a document being filed with this Form 10-K. ...

  • Page 147
    ...Time Capital One's Headquarters 1680 Capital One Drive McLean, VA 22102 Principal Investor Contact Michael Rowen Managing Vice President, Investor Relations Capital One Financial Corporation 1680 Capital One Drive McLean, VA 22102 (703) 720-1000 Common Stock Listed on New York Stock Exchange® Stock...

  • Page 148
    Created and produced by Capital One and the following: Beatley Gravitt Communications Vedros and Associates Photography Fultz and Associates, Inc. Allied Printing Services, Inc. www.capitalone.com Printed on recycled paper. 1680 Capital One Drive McLean, VA 22102 (703) 720-1000