Capital One 2008 Annual Report Download - page 59

41
In addition, the Company issued Warrant to purchase 12,657,960 of the Companys common shares to the U.S. Treasury as part of the
Securities Purchase Agreement. The Warrant have an exercise price of $42.13 per share. The Warrant expire ten years from the
issuance date. If, on or prior to December 31, 2009, the Company receives aggregate gross cash proceeds of not less than the purchase
price of the Series A Preferred Stock from one or more qualified equity offerings announced after October 13, 2008, the number of
shares of common stock issuable pursuant to the U.S. Treasurys exercise of the Warrant will be reduced by one-half of the original
number of shares, taking into account all adjustments, underlying the Warrant. Pursuant to the Securities Purchase Agreement, the
U.S. Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the
Warrants.
The Company received proceeds of $3.55 billion for the Series A Preferred Stock and the Warrant. The Company allocated the
proceeds based on a relative fair value basis between the Series A Preferred Stock and the Warrant, recording $3.06 billion and $491.5
million, respectively. The fair value of the preferred stock was estimated using independent quotes from third party sources who
considered the structure, subordination and size of the preferred stock issuance in comparison to the trust preferred securities issued by
special purpose trusts established by the Company. Fair value of the stock warrant was estimated using a pricing model with the most
significant assumptions being the forward dividend yield and implied volatility of the Companys stock price. The $3.06 billion of
Series A Preferred Stock is net of a discount of $491.5 million. The discount will be accreted to the $3.55 billion liquidation
preference amount over a five year period. The accretion of the discount and dividends on the preferred stock reduce net income
available to common shareholders.
The Company is subject to a number of restrictions as a result of participation in the CPP. Among these are restrictions on dividend
payments to common shareholders and restrictions on share repurchases. If the Series A Preferred Stock has not been redeemed by
November 14, 2011 or the U.S. Treasury has not transferred the Series A Preferred Stock to a third party, the consent of the U.S
Treasury will be required to (1) declare or pay any dividend or make any distribution on the Companys common stock (other than
regular quarterly cash dividends of not more than $0.375 per share of common stock) or (2) redeem, purchase or acquire any shares of
our common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and
certain other circumstances specified in the Securities Purchase Agreement.
The Company is considered well-capitalized under the applicable capital adequacy guidelines and did not need to participate in the
CPP. However, the Company concluded, following careful analysis and consultation with regulators, that the CPP was an important
step in supporting the financial and economic stability of the U.S. and that the U.S. Treasurys investment provided an attractive
alternative source of capital which we can use for the benefit of our customers and investors.
OCC Minimum Payment Rules
In March 2008, COBNA converted from a Virginia state-charted bank to a national association, which is regulated by the OCC. The
OCC has minimum payment policies for the credit card industry designed to force modest positive amortization for all card accounts.
Under the new policy, the monthly minimum payment is set at 1% of principal balance, plus all interest assessed in the prior cycle,
plus any past due fees and certain other fees assessed in the prior cycle. This compares to the Companys previous policy, which for
most accounts was a flat 3% of principal balance. This will have the effect of increasing the minimum payment for delinquent
customers, while lowering it for many customers who are current.
The Company has converted substantially all accounts to comply with OCC minimum payment policies as of year end.
Secondary Equity Offering
On September 30, 2008, the Company was able to take advantage of favorable market conditions and raised $760.8 million through
the issuance of 15,527,000 shares of common stock at $49.00 per share.
Goodwill Impairment
During the fourth quarter of 2008 the Company recorded an impairment to goodwill of $810.9 million. The impairment was recorded
in the Auto Finance sub-segment. See Section II Critical Accounting Estimates, Valuation of Goodwill and Other Intangible Assets
for additional information.