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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934. |
For the fiscal year ended December 31, 2004.
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED). |
For the transition period from to
Commission File No. 1-13300
CAPITAL ONE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 54-1719854 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
| 1680 Capital One Drive McLean, Virginia |
22102 | |
| (Address of Principal Executive Offices) | (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 on Which Registered | |
| Common Stock, $.01 Par Value |
New York Stock Exchange | |
| Preferred Stock Purchase Rights* |
New York Stock Exchange | |
| Upper DECs®** |
New York Stock Exchange |
| * | Attached to each share of Common Stock is a Right to acquire 1/100th of a share of the Registrant’s Cumulative Participating Preferred Stock, par value $.01 per share, which Rights are not presently exercisable. |
| ** | Each Upper DEC consisted of a senior note and a forward purchase contract that requires the holder to purchase shares of common stock of the Corporation on May 17, 2005 or earlier under certain conditions. The senior notes were remarketed on February 14, 2005. |
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x 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, 2005.
Common Stock, $.01 Par Value: $19,198,980,433*
| * | In determining this figure, the registrant assumed that the executive officers of the registrant and the registrant’s directors are affiliates of the registrant. Such assumption shall not be deemed to be conclusive for any other purpose. The number of shares outstanding of the registrant’s common stock as of the close of business on January 31, 2005. |
Common Stock, $.01 Par Value: 247,182,857 shares
DOCUMENTS INCORPORATED BY REFERENCE
| 1. | Portions of the Proxy Statement for the annual meeting of stockholders to be held on April 28, 2005 are incorporated by reference into Part III. |
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CAPITAL ONE FINANCIAL CORPORATION
2004 ANNUAL REPORT ON FORM 10-K
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PART I
| Item 1. | B usiness. |
Capital One Financial Corporation (the “Corporation”) is a holding company, incorporated in Delaware on July 21, 1994, whose subsidiaries market a variety of consumer financial products and services. In 2004, the Corporation became a bank holding company. The Corporation’s subsidiary, Capital One Bank (the “Bank”), a Virginia state chartered bank, currently offers credit card products and takes retail deposits; the Bank can also, consistent with its charter, engage in a wide variety of lending and other financial activities. Capital One, F.S.B. (the “Savings Bank”), a federally chartered savings bank, offers consumer and commercial lending and consumer deposit products, and Capital One Auto Finance, Inc. (“COAF”) offers automobile and other motor vehicle financing products. Capital One Services, Inc., another subsidiary of the Corporation, provides various operating, administrative and other services to the Corporation and its subsidiaries. Unless indicated otherwise, the terms “Company”, “we”, “us”, and “our” refer to the Corporation and its consolidated subsidiaries.
As of December 31, 2004, we had 48.6 million accounts and $79.9 billion in managed consumer loans outstanding. We are among the five largest issuers of Visa® (“Visa”) and MasterCard® (“MasterCard”) credit cards in the United States based on managed credit card loans outstanding as of December 31, 2004. Important factors underlying the growth of our managed credit card loans and accounts include credit card industry dynamics, including the level of competition, and our business strategies around building, analyzing and applying results derived from large quantities of data to reduce credit risk, mass customize products for consumers and improve operational efficiency. We generally have labeled these strategies our “Information Based Strategy” or “IBS”. With the conversion of the Corporation to a bank holding company and the conversion of the Bank to a full-service bank, the Bank has the ability to engage in a variety of consumer lending and other banking activities.
We offer our products throughout the United States. We also offer our products outside of the United States principally through Capital One Bank (Europe) plc, an indirect subsidiary of the Bank organized and located in the United Kingdom (the “U.K. Bank”), and a branch of the Bank in Canada. Our U.K. Bank has authority to accept deposits and provide credit card and installment loans.
We generally strive to use IBS to differentiate among customers based on credit risk, usage and other characteristics and to match customer characteristics with appropriate product offerings. To do this, we have built, and continue to enhance, sophisticated models and information systems, while employing a well-trained staff and a flexible culture to identify, develop and market credit card or other products and services to satisfy the demands of a competitive and ever changing marketplace. By actively testing a wide variety of product and service features, marketing channels and other aspects of offerings, we design customized solicitations, products and services that are targeted at specific credit customer segments, thereby enhancing response levels and maximizing returns on investment within given underwriting parameters.
We build on information derived from our initial sources with continued integrated testing and model development to improve the quality, performance and profitability of our solicitation and account management initiatives. We use this approach in all areas of our business, including solicitations, account management, credit line management, pricing strategies, usage stimulation, collections, recoveries, and account and balance retention.
Our common stock is listed on the New York Stock Exchange under the symbol COF and our Upper DECs® securities are listed on the New York Stock Exchange under the symbol COFPRC. Our principal executive office is located at 1680 Capital One Drive, McLean, Virginia 22102 (telephone number (703) 720-1000). The Corporation maintains a website at www.capitalone.com. Documents available on our website include the Corporation’s (i) Code of Business Conduct and Ethics, (ii) Corporate Governance Principles; (iii) and charters for the Audit and Risk, Compensation, Finance, and Governance and Nominating Committees. These documents are also available in print to any shareholder who requests a copy. In addition, we make available free of charge
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through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after electronic filing or furnishing of such material with the SEC.
With more than 48.6 million accounts, Capital One is one of the world’s largest financial services franchises. We are a diversified financial services corporation focused primarily on consumer lending. Our principal business segments are domestic credit card lending, automobile and other motor vehicle financing and global financial services. For further discussion of our segments, see pages 45-47 in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reportable Segments” and pages 68-70 in Item 8 “Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 2”.
U.S. Card Segment. We offer a wide variety of credit card products throughout the United States. We customize our products to appeal to different consumer preferences and needs by combining different product features, including 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 profiles, as well as products aimed at special consumer interests. Our pricing strategies are risk-based; lower risk customers may likely be offered products with more favorable pricing and we expect these products to yield lower delinquencies and credit losses. On products offered to higher risk customers, however, we are likely to experience higher delinquencies and losses, and we price these products accordingly.
Auto Finance Segment. We also apply IBS to our auto finance business. Through COAF, we purchase retail installment contracts, secured by automobiles or other motor vehicles, through dealer networks throughout the United States. Additionally, we utilize direct marketing to offer automobile financing directly to consumers. Our direct marketed products include financing for the purchase of new and used vehicles, as well as refinancing of existing motor vehicle loans. In October 2001, we acquired PeopleFirst Inc., the nation’s largest online provider of direct motor vehicle loans. In January 2005, we acquired Onyx Acceptance Corporation, an auto finance company that provides financing to franchised and select independent dealerships throughout the United States. Similar to our credit card strategy, we customize product features, such as interest rate, loan amount, and loan terms, enabling us to lend to customers with a wide range of credit profiles.
Global Financial Services Segment. Our Global Financial Services (“GFS”) segment includes a variety of diverse products for consumers in the United States and internationally. Domestically, GFS manages installment lending, healthcare financing (through Amerifee Corporation, which we acquired in May 2001), and small business lending activities. In addition, in 2004, the Company entered into a definitive agreement to acquire a mortgage lending business, eSmartloan and an insurance brokerage business, InsLogic. Both acquisitions closed in early 2005. We have, and may in the future achieve further diversification through acquisition, organic growth or both. GFS also includes our international businesses, where we are using methodologies and approaches we have learned in our U.S. credit card and other consumer lending businesses in new geographies. Internationally, we are currently operating primarily in the United Kingdom and Canada. In 2004, we continued to grow in the number of accounts and loan balances in our international lending business, with most of our growth coming from the United Kingdom. The Company also completed its acquisition of Hfs Group, a home equity broker in the United Kingdom, in January 2005.
Recent Developments—Pending Acquisition of Hibernia Corporation
On March 6, 2005, we entered into an Agreement and Plan of Merger with Hibernia Corporation (“Hibernia”), a financial holding company that provides a wide array of financial products and services through its bank and non-bank subsidiaries, including a full range of deposit products, small business, commercial, mortgage and private and international banking, trust and investment management, brokerage, investment banking and insurance. Under the merger agreement. Hibernia would merge with and into the Company, and we would continue as the surviving corporation.
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Subject to the terms and conditions of the merger agreement, which has been unanimously approved by the Boards of Directors of both companies, each share of Hibernia common stock will have the right, subject to proration, to elect to receive cash or the Company’s common stock, in either case having a value equal to $15.35 plus the value at closing of 0.2261 of a share of the Company’s common stock. Based on the Company’s closing NYSE stock price of $78.08 on March 4, 2005, the transaction is valued at $33.00 per Hibernia share, for a total transaction value of approximately $5.3 billion. Hibernia stock options will be converted into options on shares of the Company’s common stock in connection with the closing, if not exercised before that time. Each outstanding Hibernia restricted share will be converted into the right to receive the per share merger consideration (with the same terms as the Hibernia restricted shares, including transfer restrictions) elected by the holder of the Hibernia restricted share, subject to proration. Additionally, the Company shall be required to appoint the Chairman of the Board of Directors of Hibernia to the Company’s Board of Directors, for a term expiring at the Company’s 2006 Annual Meeting.
The merger is subject to certain conditions, including approval by Hibernia stockholders, receipt of regulatory approvals, the delivery of customary opinions from counsel to the Company and counsel to Hibernia that the merger will qualify as a tax-free reorganization for federal income tax purposes and other customary closing conditions.
This report on Form 10-K discusses the Company’s business as of the end of fiscal 2004 and before giving effect to the proposed merger.
Loan portfolio concentration within a specific geographic region may be regarded differently based upon the current and expected credit characteristics and performance of the portfolio. Our consumer loan portfolio is geographically diverse. See page 92 in Item 8 “Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 20” of this form.
Risk is an inherent part of the Company’s business and activities. The Company has an Enterprise Risk Management (ERM) program designed to ensure appropriate and comprehensive oversight and management of risk. The ERM program has three components. First, the Board of Directors and senior management committees oversee risk and risk management practices. Second, the centralized departments headed by the Chief Enterprise Risk Officer and the Chief Credit Officer establish risk management methodologies, processes and standards. Third, the individual business areas throughout the Company are responsible for managing risk in their businesses and performing ongoing identification, assessment and response to risks. The Company’s ERM framework includes eight categories of risk: credit, liquidity, market, operational, legal, strategic, reputation, and compliance.
Board and Senior Management Oversight
The Company utilizes a series of Board and senior management committees to oversee the management of risk. The Audit and Risk Committee of the Board of Directors oversees the Company’s accounting, financial reporting, internal controls and risk assessment and management processes. The Audit and Risk Committee also reviews periodic reporting on significant Company risks and mitigation activities and the compliance with corporate risk policies, while the Board Finance Committee oversees liquidity and market risk. The Executive Committee, a committee of senior management chaired by the Chief Executive Officer, provides guidance to senior executives regarding strategic risk and provides an integrated view of risk through reports by the Company’s other senior management committees:
| • | Enterprise Risk Management Committee—provides advice and counsel to the Chief Enterprise Risk Officer and other executives on enterprise risk management governance, process, methodologies and reporting, with a primary focus on operational and compliance risk. |
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| • | Corporate Reputation Committee—provides advice and counsel to the Executive Vice President responsible for corporate reputation and governance and other executives in examining legitimate business needs, standard industry practices and general corporate ethics in accordance with the Company’s vision and strategy with respect to its reputation with internal and external stakeholders, including its associates, investors and customers. |
| • | Corporate Infrastructure Committee—provides advice and counsel to the President, U.S. Card and other executives on infrastructure matters such as people management, operations, facilities, suppliers and technology. |
| • | Credit Policy Committee—provides advice and counsel to the Chief Credit Officer and other executives on credit policy decisions; approves certain credit policies; reviews data pertaining to the credit control environment, including Board approved risk tolerances; reviews regulatory, audit and credit review findings; assesses the adequacy of corrective actions; and provides direction on credit risk management. |
| • | Asset and Liability Management Committee—provides advice and counsel to the Chief Financial Officer and other executives on the acquisition and deployment of funds, off-balance sheet activities related to the management of interest rate risk, and trading activities. |
Integrity, Ethical Values and Risk Management Culture
The Company maintains its risk management culture through various mechanisms designed to bring the consideration of risk into daily decision making. The Company has a corporate Code of Business Conduct and Ethics, available on the Corporate Governance page of its website at www.capitalone.com/about, under which each associate is obligated to behave with integrity in dealing with customers and business partners and to comply with applicable laws and regulations. The Company also has a corporate values training program and an associate performance management process that emphasize achieving business results while maintaining integrity and sound business management. The Company’s risk management culture is also encouraged through frequent direction and communications from the Board of Directors, senior leadership, corporate and departmental risk management policies, risk management and compliance training programs and on-going risk assessment activities in the business.
Organizational Structure
The Company’s organizational structure supports consideration of risk in decision making. The corporate ERM department designs and facilitates the implementation in the business of methodologies to identify and assess risk, analyze and aggregate risk and mitigation reporting and to evaluate and enhance the risk management culture. For significant risks reported to the senior management committees and the Board, specific executives are designated as accountable for the management and monitoring of each such risk. Across the Company, individual business areas utilize Business Risk Offices staffed by associates from the business who oversee implementation of methodologies and tools for risk identification, assessment and reporting. The Company’s Corporate Audit Services department also assesses risk and the related quality of internal controls and risk management through its audit activities.
Risk Identification, Assessment and Response
The Company utilizes a corporate methodology for the management of risk across the individual business areas. Key risk exposures are identified by each business area and assessed according to potential likelihood and impact, as well as, the quality of the related controls. If appropriate, mitigation plans are developed for risks and the business tracks progress against the plans. Individual business units are required to conduct self assessments across each of the eight risk categories at least annually.
Monitoring and Reporting
The Company monitors its key risks, mitigation plans and its risk management capability through a system of on-going measurement and reporting to business area management, the Chief Enterprise Risk Officer, senior
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management committees and the Board and its committees. Additionally, Corporate Audit Services performs separate evaluations of the system of internal control and risk management capability. Corporate Audit Services reports on the scope and results of its work to the Audit and Risk Committee of the Board of Directors.
Credit Risk Management
Successful management of credit risk, the risk that borrowers may default on their financial obligations to the Company, is important to the Company’s success. There are four primary sources of credit risk: (1) changing economic conditions, which affect consumers’ ability to pay; (2) changing competitive environment, which affects consumer debt loads and borrowing patterns; (3) the Company’s underwriting strategies and standards, which drive the selection of customers and the terms offered; and (4) the quality of the Company’s internal controls, which establish a process to test that underwriting conforms to Company standards and identify credit quality issues so the Company can act upon them a timely manner. The Company is focused on managing each of these sources of credit risk.
The Company’s Chief Credit Officer is charged with overall management of credit risk. The goal is to provide strong central oversight of credit policy and 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 of senior management. The Credit Policy Committee oversees and approves corporate credit policy and credit performance. Its members include the Chief Credit Officer, the Chief Enterprise Risk Officer and the Presidents of the Company’s three operating divisions. The Chief Credit Officer and his staff review and approve all large scale new credit programs. Smaller credit programs are approved by Senior Credit Officers appointed by the Credit Policy Committee and supervised by the Chief Credit Officer and his staff. All credit programs must also be approved by the appropriate operating executives. These organizational structures are designed so that each of the Company’s business units applies standardized practices in measuring and managing credit risk, and that all relevant factors, such as credit outlook, profitability, and the competitive, economic, and regulatory environment, are considered in making credit decisions.
The Board of Directors has established policies that limit the level and composition of risk in the total lending portfolio. The Company’s Credit Policy Committee has established policies that govern credit administration and individual lending decisions. The centralized Credit Risk Management group monitors overall composition and quality of the credit portfolio.
The Company’s credit risk profile is managed to maintain resilience to factors outside of the Company’s control, strong risk-adjusted returns, and increased diversification.
The Company’s guiding principles, strengthened central governance, and Board-directed credit risk tolerances are designed to keep senior executives well-informed of credit trends so they can make appropriate credit and business decisions for the Company. The Company enhances/preserves day-to-day market responsiveness and flexibility by empowering its business line managers to develop credit strategies and programs aligned with the Company’s credit risk policies and objective of long-term business profitability. The credit program development process considers the evolving needs of the target market, the competitive environment, and the economic outlook. Senior Credit Officers, who are appointed by the Credit Policy Committee, oversee all credit program development.
Most of the Company’s credit strategies rely heavily on the use of sophisticated proprietary scoring models. These models consider many variables, including credit scores developed by nationally recognized scoring firms. The models are validated, monitored and maintained in accordance with detailed policies and procedures to help maintain their continued validity. The Company’s Chief Scoring Officer, a member of the Chief Credit Officer’s staff, oversees the development and implementation of key statistical models.
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Liquidity Risk Management
Liquidity risk refers to exposures generated from the use and availability of various funding sources to meet its current and future operating needs. The management of liquidity risk is overseen by the Chief Financial Officer with the advice and guidance from the Asset and Liability Management Committee and its sub-committee on funding chaired by the Treasurer. The Company currently manages and mitigates its liquidity risk through the use of a variety of funding sources to establish a maturity pattern that provides a prudent mixture of short-term and long-term funds. See page 49 in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity Risk Management” for additional information.
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 and its sub-committee on risk management chaired by the Vice President of Global Planning. The Company currently manages and mitigates its interest rate sensitivity through several techniques, which include, but are not limited to, changing the maturity and repricing characteristics of various balance sheet categories and by entering into interest rate swaps. The Company currently manages and mitigates its exposure to foreign currency exchange risk by entering into hedges for all material foreign currency denominated transactions. See page 51 in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk Management” for additional information.
Operational Risk Management
Operational risk is the risk of direct or indirect loss resulting from inadequate or failed processes, systems, people, or exposure to external events.
Operational risk is a normal part of business for any financial services firm. It may manifest itself in many ways, such as fraud by employees or persons outside the Company, business interruptions, errors related to processing and systems, and model errors. The risk of loss includes the potential for legal actions arising as a result of an operational deficiency or as a result of noncompliance with applicable laws or regulatory standards. The Company could also suffer financial loss, face regulatory action, not be able to service customers and suffer damages to its reputation.
The key governance forum for operational risk is the ERM Committee, described above. The Committee reviews significant operational risks from business unit self assessments, progress against mitigation plans and analyses of the Company’s operational loss event experience. In addition, key risk management initiatives and programs are reviewed by the Committee. Operational risk information is also shared with 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 operational risk management group of the ERM department is responsible for building and implementing methodologies and supporting technology to assist business areas in the management of operational risk, as well as aggregating, quantifying, analyzing and reporting the results. The individual business areas utilize Business Risk Offices staffed by associates who are trained in operational loss event collection, operational risk assessment and mitigation planning and reporting.
The key tools used in operational risk management are a risk self assessment process, an operational loss event database and economic capital quantification. Key risk exposures are identified by each business area and evaluated according to potential impact and likelihood, as well as the quality of the related controls. If appropriate, mitigation plans are developed for certain identified risks and progress is tracked against the plans. Business units are required to conduct self assessments at least annually. This data is combined with scenario analyses to quantify economic capital for operational risk. The capital methodology is intended to create incentives for business areas to improve their control environments.
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There are many specialized activities designed to mitigate key operational risks facing the Company. These include a dedicated fraud management department, programs for third party supplier risk management, information security and business continuity planning, development and maintenance of required policies and procedures, and decision model analysis.
Legal Risk Management
Legal risk represents the risk of loss related to (i) new and changed laws and regulations, (ii) interpretations of law, (iii) the Company’s legal entity structure and (iv) the drafting of contracts. The management of legal risk, domestically and internationally, is overseen by the Company’s General Counsel. Due to the Company’s significant reliance on certain contractual relationships, including with its funding providers, as well as its evolving corporate structure and heavily regulated industry, the Company faces significant levels of legal risk. The Company also faces risk of loss from litigation, which is primarily managed by the Company’s legal department.
Strategic Risk Management
Strategic risk is the risk to earnings or capital from operating the Company in a competitive environment. The Executive Committee, described above, is the principal management forum for discussion of strategic risk. The Company assesses strategic risk in its annual planning process, which includes both a top-down process set by the Board of Directors and a bottom-up process led by business lines. The Company also performs quarterly business reviews for the Executive Committee to compare business performance and risk assessments to plan. Consideration of strategic risk is also a vital component of due diligence when evaluating acquisitions or new products, ventures or markets.
Reputation Risk Management
Reputation risk represents the risk to earnings or capital arising from negative public or associate opinion. The management of reputation risk is overseen by the Executive Vice President of Corporate Reputation and Governance with the advice and guidance of the Corporate Reputation Committee, a committee of senior management. The Company currently utilizes qualitative criteria to assess reputation risk. Several measures, both internal and external, are considered to gauge changes to the Company’s reputation and overall reputation risk and include brand market research, customer studies, internal operational loss event data and external measures.
Compliance Risk Management
Compliance risk is the risk of non-conformance to laws, rules and regulations. The management of compliance risk is overseen by the Chief Enterprise Risk Officer with the advice and guidance of the ERM Committee and its sub-committee on compliance risk, chaired by the Chief Compliance Officer. The corporate compliance organization, a part of the ERM department, provides the business areas with consulting, training and assistance in the implementation of business processes to ensure compliance with applicable laws and regulations. The business areas assess compliance risk through the Company’s enterprise risk self assessment process and conduct monitoring and remediation activities for which the compliance organization establishes standards.
We leverage information technology to achieve our business objectives and to develop and deliver products and services that satisfy our customers’ needs. A key part of our strategic focus is the development of efficient, flexible computer and operational systems to support complex marketing and account management strategies and the development of new and diversified products. We believe that the continued development and integration of these systems is an important part of our efforts to reduce costs, improve quality and provide faster, more flexible technology services. Consequently, we continuously review capabilities and develop or obtain systems, processes and competencies to meet our unique business requirements. As part of our continuous efforts to review and
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improve our technologies, we may either develop such capabilities internally or rely on third party outsourcers who have the ability to deliver technology that is of higher quality, lower cost, or both. Over time, we have increasingly relied on third party outsourcers to help us deliver systems and operational infrastructure.
A discussion of our funding programs and liquidity has been included in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Funding” on pages 47-51.
Each of our credit card and other financial products is marketed to specific consumer populations across the credit spectrum. The terms of each product are actively managed to achieve a balance between risk and expected performance. For example, credit card product terms typically include the ability to reprice individual accounts upwards or downwards based on the customer’s payment and other performance. In addition, since 1998, we have marketed low non-introductory rate cards to consumers with low-risk and established credit profiles to take advantage of the favorable risk return characteristics of this consumer type. Industry competitors have continuously solicited our customers with these and other interest rate strategies. Management believes the competition has put, and will continue to put, additional pressure on our pricing and general product feature strategies.
As a marketer of credit card and other financial products, we face intense competition in all aspects of our business from numerous bank and non-bank providers of financial services. Many of these companies are substantially larger and have more resources than we do. In addition, our industry has experienced substantial consolidation and may continue to do so; this consolidation continues to create competitors who are larger and have more resources than we do. In addition, such consolidated and/or larger competitors may have a more diversified product and customer base, operational efficiencies and more versatile technology platforms than we do. Consolidation has, and may continue, to increase competitive pressures on both us and other companies in our industry.
We compete with international, national, regional and local issuers of Visa® and MasterCard® credit cards. In addition, American Express®, Discover Card® and, to a certain extent, smart cards and debit cards, represent additional competition to the general purpose credit card. 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. In motor vehicle finance, we face competition from banks and non-bank lenders who provide financing for dealer-originated loans. Additionally, we face competition from a small, but growing number of online automobile finance providers. We also face competition from lenders in our installment loan, small business and other lending businesses. We believe that our IBS allows us to compete effectively in both our current and new markets. There can be no assurance, however, that our ability to market products and services successfully or to obtain adequate yield on our loans will not be impacted by the nature of the competition that now exists or may later develop.
In addition, some of our competitors may be substantially larger than we are, which may give those competitors advantages, including a more diversified product and customer base, operational efficiencies, broad-based local distribution capabilities, lower cost funding and more versatile technology platforms. These competitors may also consolidate with other financial institutions in ways that enhance these advantages.
As part of our overall and ongoing strategy to protect and enhance our intellectual property, we rely on a variety of protections, including copyrights, trademarks, trade secrets, patents and certain restrictions on disclosure. We also undertake other measures to control access to and distribution of our other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use certain intellectual
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property or proprietary information without authorization. Our precautions may not prevent misappropriation or infringement of our intellectual property or proprietary information. In addition, our competitors also file patent applications for innovations that are used in our industry. The ability of our competitors to obtain such patents may adversely affect our ability to compete. Conversely, our ability to obtain such patents may increase our competitive advantage. There can be no assurance that we will be successful in such efforts, or that the ability of our competitors to obtain such patents may not adversely impact our financial results.
As of December 31, 2004, we employed 14,481 employees whom we refer to as “associates.” A central part of our philosophy is to attract and maintain a highly capable staff. We view current associate relations to be satisfactory. None of our associates is covered under a collective bargaining agreement.
General
On July 6, 2004, the Board of Governors of the Federal Reserve System approved the Corporation’s application pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, as amended (the “BHC Act”) (12 U.S.C. § 1842(a)(1)) to become a bank holding company (“BHC”) as a result of the Bank’s proposal to amend its Virginia charter to remove existing restrictions on its activities and thereby permit the Bank to engage in the full range of lending, deposit-taking and other activities permissible under Virginia and federal banking laws and regulations. The Corporation made this change to allow for a more efficient corporate structure and rationalized funding base. On October 1, 2004, the Corporation registered as a BHC with the Federal Reserve and became subject to the requirements of the BHC Act, including limiting its nonbanking activities to those that are permissible for a BHC. Such activities include those that are so closely related to banking as to be incident thereto such as consumer lending and other activities that have been approved by the Federal Reserve Bank of Richmond by regulation or order. Certain servicing activities are also permissible for a BHC if conducted for or on behalf of the BHC or any of its affiliates. Impermissible activities for BHCs include activities that are related to commerce such as retail sales of nonfinancial products. The Corporation does not engage in any significant activities impermissible for a BHC and therefore, does not anticipate a significant change in its activities as a result of this change in legal structure.
The Bank is a banking corporation chartered under Virginia law and a member of the Federal Reserve System, the deposits of which are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation (the “FDIC”). In addition to regulatory requirements imposed as a result of the Bank’s international operations (discussed below), the Bank is subject to comprehensive regulation and periodic examination by the Bureau of Financial Institutions of the Virginia State Corporation Commission (the “Bureau of Financial Institutions”), the Federal Reserve Board (the “Federal Reserve”), the Federal Reserve Bank of Richmond and the FDIC.
The Savings Bank is a federal savings bank chartered by the Office of Thrift Supervision (the “OTS”) and is a member of the Federal Home Loan Bank System. Its deposits are insured by the Savings Association Insurance Fund of the FDIC. The Savings Bank is subject to comprehensive regulation and periodic examination by the OTS and the FDIC.
The Corporation is also registered as a financial institution holding company under Virginia law and as such is subject to periodic examination by Virginia’s Bureau of Financial Institutions. The Corporation’s automobile financing activities, conducted by COAF and its subsidiaries, fall under the scrutiny of the state 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 and indirect subsidiaries represent a major source of funds for the Corporation to pay dividends on its stock, make payments on its debt securities and meet its other obligations.
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There are various federal and Virginia law limitations on the extent to which the Bank and the Savings Bank can finance or otherwise supply funds to the Corporation through dividends, loans or otherwise. These limitations include minimum regulatory capital requirements, Federal Reserve, OTS and Virginia law requirements concerning the payment of dividends out of net profits or surplus, Sections 23A and 23B of the Federal Reserve Act, Regulation W under governing transactions between an insured depository institution and its affiliates and general federal and Virginia regulatory oversight to prevent unsafe or unsound practices. In general, federal banking laws prohibit, without first obtaining regulatory approval, an insured depository institution, such as the Bank and the Savings Bank, from making dividend distributions if such distributions are not paid out of available earnings or would cause the institution to fail to meet applicable capital adequacy standards. Under OTS regulations, other limitations apply to the Savings Bank’s ability to pay dividends, the magnitude of which depends upon the extent to which the Savings Bank meets its regulatory capital requirements. In addition, under Virginia law, the Bureau of Financial Institutions may limit the payment of dividends by the Bank if the Bureau of Financial Institutions determines that such a limitation would be in the public interest and necessary for the Bank’s safety and soundness.
Capital Adequacy
The Company, the Bank and the Savings Bank are currently subject to capital adequacy guidelines adopted by the Federal Reserve and the OTS, respectively. For a further discussion of the capital adequacy guidelines, see pages 52-53 in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Adequacy” and pages 82-83 in Item 8 “Financial Statements and Supplementary Data—Note 15—Regulatory Matters”. The Bank and the Savings Bank were well capitalized under these guidelines as of December 31, 2004.
Basel Committee
On May 11, 2004, the Basel Committee on Banking Supervision (the “Committee”) announced that it has achieved consensus on the new Basel Capital Accord (“Basel II”), which proposes establishment of a new framework of capital adequacy for banking organizations; the Committee published the text of the framework on July 26, 2004. Despite the release of the Basel II framework, it is not clear at this time whether and in what manner the new accord will be adopted by bank regulators with respect to banking organizations that they supervise and regulate. Although the Committee’s stated intent is that Basel II will not change the amount of overall capital in the global banking system, adoption of the proposed new accord could require individual banking organizations, including the Company, to increase the minimum level of capital held. The Company will continue to closely monitor regulatory action on this matter and assess the potential impact to the Company.
FDICIA
Among other things, the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires federal bank regulatory authorities to take “prompt corrective action” (“PCA”) with respect to insured depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital ratio levels: well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As of December 31, 2004, each of the Bank and the Savings Bank met the requirements for a “well-capitalized” institution. The “well-capitalized” classification is determined solely for the purposes of applying FDICIA’s PCA provisions, as discussed below, and should not be viewed as describing the condition or future prospects of a depository institution, including the Bank and the Savings Bank. Were the Bank and Savings Bank to lose their status as “well-capitalized” they could be required to increase capital or lose access to deposits.
The Bank and the Savings Bank may accept brokered deposits as part of their funding. Under FDICIA, only “well-capitalized” and “adequately-capitalized” institutions may accept brokered deposits. Adequately-capitalized institutions, however, must first obtain a waiver from the FDIC before accepting brokered deposits,
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and such deposits may not pay rates that significantly exceed the rates paid on deposits of similar maturity from the institution’s normal market area or the national rate on deposits of comparable maturity, as determined by the FDIC, for deposits from outside the institution’s normal market area.
Liability for Commonly-Controlled Institutions
Under the “cross-guarantee” provision of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), insured depository institutions such as the Bank and the Savings Bank may be liable to the FDIC with respect to any loss or reasonably anticipated loss incurred by the FDIC resulting from the default of, or FDIC assistance to, any commonly controlled insured depository institution. The Bank and the Savings Bank are commonly controlled within the meaning of the FIRREA cross-guarantee provision.
Investment Limitation and Qualified Thrift Lender Test
Federally-chartered savings banks such as the Savings Bank are subject to 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 bank’s assets. Federal savings banks are also required to meet the QTL Test, which generally requires a savings bank to maintain at least 65% “portfolio assets” (total assets less (i) specified liquid assets up to 20% of total assets, (ii) intangibles, including goodwill and (iii) property used to conduct business) in certain “qualified thrift investments” (residential mortgages and related investments, including certain 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 to substantial restrictions on its activities, including the activity restrictions that apply generally to bank holding companies and their affiliates and potential loss of grandfathered rights under the GLB Act. As of December 31, 2004, 81% of the Savings Bank’s portfolio assets were held in qualified thrift investments, and the Savings Bank was in compliance with the QTL Test.
Subprime Lending Guidelines
On January 31, 2001, the federal banking agencies, including the Federal Reserve and the OTS, issued “Expanded Guidance for Subprime Lending Programs” (the “Guidelines”). The Guidelines, while not constituting a formal regulation, provide guidance to the federal bank examiners regarding the adequacy of capital and loan loss reserves held by insured depository institutions engaged in “subprime” lending. The Guidelines adopt a broad definition of “subprime” loans which likely covers more than one-third of all consumers in the United States. Because our business strategy is to provide credit card products and other consumer loans to a wide range of consumers, a portion of our loan assets would likely be viewed by the examiners as “subprime.” Thus, under the Guidelines, bank examiners could require the Bank or the Savings Bank to hold additional capital (up to one and one-half to three times the minimally required level of capital, as set forth in the Guidelines), or additional loan loss reserves, against such assets. As described above, as of December 31, 2004 the Bank and the Savings Bank each met the requirements for a “well-capitalized” institution. Federal examiners, however, have wide discretion as to how to apply the Guidelines and there can be no assurances that the Bank or the Savings Bank may not be required to hold additional regulatory capital against such assets.
For purposes of the Subprime Guidelines, we treat as “subprime” all loans in the Bank’s and the Savings Bank’s programs that are targeted at customers either with a Fair, Isaac and Company (“FICO”) score of 660 or below or with no FICO score. The Bank and the Savings Bank hold on average 200% of the total risk-based capital requirement that would otherwise apply to such assets.
FFIEC Account Management Guidance
On January 8, 2003, the Federal Financial Institutions Examination Council (“FFIEC”) released Account Management and Loss Allowance Guidance (the “Guidance”). The Guidance applies to all credit lending of
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regulated financial institutions and generally requires that 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 loans.
We believe that our credit card account management and loss allowance practices are prudent and appropriate and, therefore, consistent with the Guidance. We caution, however, that similar to the subprime Guidelines, the Guidance provides wide discretion to bank regulatory agencies in the application of the Guidance to any particular institution and its account management and loss allowance practices. Accordingly, under the Guidance, bank examiners could require changes in our account management or loss allowance practices in the future, and such changes could have an adverse impact on our financial condition or results of operation.
Regulation of Lending Activities
The activities of the Bank and the Savings Bank as consumer lenders also are subject to regulation under various federal laws, including the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act (the “FCRA”), the Community Reinvestment Act and the Soldiers’ and Sailors’ Civil Relief Act, as well as under various state laws. Depending on the underlying issue and applicable law, regulators are often authorized to impose penalties for violations of these statutes and, in certain cases, to order the Bank and the Savings Bank to compensate injured borrowers. Borrowers may also have a private right of action to bring actions for certain violations. Federal bankruptcy and state debtor relief and collection laws also affect the ability of the Bank and the Savings Bank to collect outstanding balances owed by borrowers. These laws plus state sales finance laws also affect the ability of our automobile financing business to collect outstanding balances.
Privacy and Fair Credit Reporting
The GLB Act requires a financial institution to disclose its privacy policy to customers and consumers, and requires that such customers or consumers be given a choice (through an opt-out notice) to forbid the sharing of nonpublic personal information about them with nonaffiliated third persons. The Corporation and the Bank each have a written privacy notice posted on the Corporation’s web site which is delivered to each of its customers when customer relationships begin, and annually thereafter, in compliance with the GLB Act. In accordance with that privacy notice, the Corporation and the Bank protect the security of information about their customers, educate their employees about the importance of protecting customer privacy, and allow their customers to remove their names from the solicitation lists they use and share with others. The Corporation and the Bank require business partners with whom they share such information to have adequate security safeguards and to abide by the redisclosure and reuse provisions of the GLB Act. The Corporation and the Bank have developed and implemented programs to fulfill the expressed requests of customers and consumers to opt out of information sharing subject to the GLB Act. If the federal or state regulators of the financial subsidiaries establish further guidelines for addressing customer privacy issues, the Corporation and/or the Bank may need to amend their privacy policies and adapt their internal procedures. In addition to adopting federal requirements regarding privacy, the GLB Act also permits individual states to enact stricter laws relating to the use of customer information. California, Vermont and North Dakota have done so by statute, regulation or referendum, and other states may consider proposals which impose additional requirements or restrictions on the Corporation and/or the Bank.
Like other lending institutions, the Bank utilizes credit bureau data in its underwriting activities. Use of such data is regulated under the FCRA on a uniform, nationwide basis, including credit reporting, prescreening, sharing of information between affiliates, and the use of credit data. The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”), which was enacted by Congress and signed into law in 2004, extends the federal preemption of the FCRA permanently, although the law authorizes states to enact identity theft laws that are not inconsistent with the conduct required by the provisions of the FACT Act. If financial institutions and credit bureaus fail to alleviate the costs and consumer frustration associated with the growing crime of identity theft, financial
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institutions could face increased legislative/regulatory and litigation risks. In addition, federal regulators are still in the process of promulgating regulations under the FACT Act; there can be no assurance that such regulations, when enacted, will not have an adverse impact on the Company.
Investment in the Corporation, the Bank and the Savings Bank
Certain acquisitions of capital stock may be subject to regulatory approval or notice under federal or Virginia law. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of capital stock of the Corporation in excess of the amount which can be acquired without regulatory approval. The Bank and the Savings Bank are each “insured depository institutions” within the meaning of the Change in Bank Control Act. Consequently, federal law and regulations prohibit any person or company from acquiring control of the Corporation without, in most cases, prior written approval of the Federal Reserve or the OTS, as applicable. Control is conclusively presumed if, among other things, a person or company acquires more than 25% of any class of voting stock of the Corporation. A rebuttable presumption of control arises if a person or company acquires more than 10% of any class of voting stock and is subject to any of a number of specified “control factors” as set forth in the applicable regulations. Although the Bank is not a “bank” within the meaning of Virginia’s reciprocal interstate banking legislation (Chapter 15 of Title 6.1 of the Code of Virginia), it is a “bank” within the meaning of Chapter 13 of Title 6.1 of the Code of Virginia governing the acquisition of interests in Virginia financial institutions (the “Financial Institution Holding Company Act”). The Financial Institution Holding Company Act prohibits any person or entity from acquiring, or making any public offer to acquire, control of a Virginia financial institution or its holding company without making application to, and receiving prior approval from, the Bureau of Financial Institutions.
USA PATRIOT Act of 2001
On October 26, 2001, the President signed into law the USA PATRIOT Act of 2001 (the “Patriot Act”). The Patriot Act contains sweeping anti-money laundering and financial transparency laws as well as enhanced information collection tools and enforcement mechanics for the U.S. government, including: due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondence accounts for non-U.S. persons; standards for verifying customer identification at account opening; rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; reports by nonfinancial trades and businesses filed with the Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and filing suspicious activities reports by brokers and dealers if they believe a customer may be violating U.S. laws and regulations.
The Department of Treasury in consultation with the Federal Reserve and other federal financial institution regulators has promulgated rules and regulations implementing the Patriot Act which: prohibit U.S. correspondent accounts with foreign banks that have no physical presence in any jurisdiction; require financial institutions to maintain certain records for correspondent accounts of foreign banks; require financial institutions to produce certain records relating to anti-money laundering compliance upon request of the appropriate federal banking agency; require due diligence with respect to private banking and correspondent banking accounts; facilitate information sharing between government and financial institutions; require verification of customer identification, and require financial institutions to have in place an anti-money laundering program.
Interstate Taxation
Several states have passed legislation which attempts to tax the income from interstate financial activities, including credit cards, derived from accounts held by local state residents. Based on the volume of our business in these states and the nature of the legislation passed to date, we currently believe that this development will not materially affect our financial condition. The states may also consider legislation to tax income derived from transactions conducted through the Internet. We currently solicit accounts and take account information via the Internet. It is unclear at this time, however, whether and in what form any such legislation will be adopted, or if adopted, what its impact on us would be.
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Legislation
Legislation has been enacted requiring additional disclosures for credit cards and other types of consumer lending. Such legislation places additional restrictions on the practices of credit card issuers and consumer lenders generally. In addition to the FCRA and FACT Act provisions discussed above, proposals have been made to change existing federal bankruptcy laws, restrict certain consumer lending practices, expand the privacy protections afforded to customers of financial institutions, and reform the federal deposit insurance system. It is unclear at this time whether and in what form any legislation will be adopted or, if adopted, what its impact on the Bank, the Savings Bank, COAF or the Corporation would be. Congress or individual states may in the future consider other legislation that would materially and/or adversely affect the banking or consumer lending industries.
Sarbanes-Oxley Act Compliance
On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) was passed into law. The Sarbanes-Oxley Act applies to all companies that are required to file periodic reports with 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. Certain provisions of the Sarbanes-Oxley Act were effective immediately without action by the SEC; however many provisions required the SEC to issue implementing rules, many of which have now been issued, and became, or will become, effective after their adoption. In addition, the Sarbanes-Oxley Act also created the Public Company Accounting Oversight Board (the “PCAOB”), a private sector, non-profit corporation whose mission is to oversee the auditors of public companies. The PCAOB recommends rulemaking to the SEC and sets certain standards for the auditors which it oversees. Since the passage of the Sarbanes-Oxley Act, the Company has taken a variety of steps which it believes place it in substantial compliance with the effective provisions of the Sarbanes-Oxley Act. The Company continues to monitor SEC rulemaking and PCAOB activities to determine if additional changes are needed to comply with provisions that may become effective in the future. Furthermore, the Company’s management has supervised the design of, or has designed, internal controls and procedures designed to provide reasonable assurances regarding the reliability of its financial reporting and disclosure controls and procedures to ensure that material information regarding the Company is made known to them, particularly during the period in which this Annual Report on Form 10-K is being prepared and has evaluated the effectiveness of those controls as more fully set forth in “Controls and Procedures” below. The Company has, in compliance with Section 404 of the Sarbanes-Oxley Act, certified, in connection with this Annual Report on Form 10-K, that it did not discover, during the execution of its internal control processes, any material weaknesses. In addition, the Company’s management also has disclosed to the Company’s auditors and the Audit and Risk Committee of the Board of Directors any significant deficiencies in the design or operation of its internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information, as well as any fraud, whether or not material, by those that have a significant role in these processes.
International Regulation
The Bank also faces regulation in foreign jurisdictions where it currently, and may in the future, operate. Those regulations may be similar to or substantially different from the regulatory requirements the Bank faces in the United States. In the United Kingdom, the Bank operates through the U.K. Bank, which was established in 2000. The U.K. Bank is regulated by the Financial Services Authority (“FSA”) and licensed by the Office of Fair Trading (“OFT”). The U.K. Bank is an “authorized deposit taker” and thus is able to take consumer deposits in the U.K. The U.K. Bank has also been granted a full license by the OFT to issue consumer credit under the U.K.’s Consumer Credit Act—1974. The FSA requires the U.K. Bank to maintain certain regulatory capital ratios at all times. The U.K. Bank obtains capital through earnings or through additional capital infusion from the Bank, subject to approval under Regulation K of the rules administered by the Federal Reserve. If the U.K. Bank is unable to generate sufficient capital in favorable terms, it may choose to restrict its growth to maintain its required capital levels. In addition, the U.K. Bank is limited by the U.K. Companies Act—1985 in its distribution of dividends to the Bank in that such dividends may only be paid out of the U.K. Bank’s “distributable profits.”
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In Canada, the Bank operates a branch (the “Canadian Branch”) that is regulated by the Office of the Superintendent of Financial Institutions (“OSFI”). The Canadian Branch is a Schedule III Bank under the Canadian Bank Act, and it is subject to various banking and lending laws passed by the Canadian Parliament and various Canadian provinces. OSFI conducts periodic regulatory examinations of the Canadian Branch. The Canadian Branch may engage in the consumer lending activities conducted by the Bank, including credit card lending. The Canadian Branch is not authorized to accept retail deposits from Canadian customers.
As in the U.S., in non-U.S. jurisdictions where we operate, we face a risk that the laws and regulations that are applicable to us (or the interpretations of existing laws by relevant regulators) may change in ways that adversely impact our business. In the United Kingdom, in connection with the December 2003 Government report, “Fair, Clear and Competitive: The Consumer Credit Market in the 21st Century”, the introduction of the Consumer Credit (Amendment) Bill in Parliament was confirmed on November 23, 2004. The Bill is likely to come into force in April 2006 and is expected to cover the following areas: the creation of an “unfair relationship” test for credit agreements, the creation of alternative dispute resolution options for credit agreements, a requirement on lenders to provide annual statements to borrowers outlining the full amount owed and warnings about making only minimum repayments, and a stricter licensing regime that would give the OFT new powers to fine lenders for their behavior. At this time, we cannot predict the extent to which the provisions of the draft bill will remain in the final statute, or, if implemented, how such changes would impact us. In addition, there is a current examination by the OFT of whether the levels of interchange paid by retailers in respect of MasterCard credit and charge cards in the U.K. are too high. The OFT has also launched a similar investigation into Visa interchange fees. The preliminary conclusion of the MasterCard examination is that the levels of interchange are too high which could, if not changed or if agreement is reached on a lower level of interchange, adversely affect the yield on U.K. credit card portfolios, including ours, and could therefore adversely impact our earnings. Other U.K. legal developments include communications with the OFT as to its interpretation of consumer credit law which could lead to changes in the lending agreements from time to time. The OFT is carrying out an industry wide investigation into alleged unfair contract terms in lending agreements and questioning how the Company calculates 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 to the extent that the charge is disproportionately high in relation to the actual cost of the default to the Company. The OFT must seek an agreement with the Company to change its practice or, if this is not possible, obtain a court injunction to prevent the continued use of the alleged unfair term. In February 2005, the Company received a letter from the OFT indicating the OFT is challenging the basis on which the Company calculates its default charges in the U.K. In the event the OFT’s view prevails, the Company’s default charges in the U.K. could be significantly reduced. In addition, should the OFT prevail in its challenge, the Company may also be subject to claims from Customers seeking reimbursement of default charges. The Company is assessing the OFT challenge and cannot state what its eventual outcome will be. Any potential impact could vary based on business strategies or other actions the Company takes to attempt to limit the impact.
In December 2004 the U.K. Bank formally applied to the FSA and Banque de France for permission to close the French Branch as one step in a series of linked events comprising COBEP’s orderly and controlled exit from the French market. All regulatory requirements for the closure of the French Branch have now been met. The U.K. Bank sold its French loan assets to Médiatis SA (“Médiatis”) on 1st October 2004. Since ownership of the loan portfolio was transferred to Médiatis, the U.K. Bank is no longer responsible for portfolio. The U.K. Bank is now providing administrative services to Médiatis. The migration of these services is planned to be completed by the end of March 2005.
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This Annual Report on Form 10-K contains forward-looking statements. We also may make written or oral forward-looking statements in our periodic reports to the Securities and Exchange Commission on Forms 10-Q and 8-K, in our annual report to shareholders, in our proxy statements, in our offering circulars and prospectuses, in press releases and other written materials and in statements made by our officers, directors or employees to third parties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include information relating to our future earnings per share, growth in managed loans outstanding, product mix, segment growth, managed revenue margin, funding costs, operations costs, employment growth, marketing expense, delinquencies and charge-offs. Forward-looking statements also include statements using words such as “expect,” “anticipate,” “hope,” “intend,” “plan,” “believe,” “estimate” or similar expressions. We have based these forward-looking statements on our current plans, estimates and projections, and you should not unduly rely on them.
Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions, including the risks discussed below. Our future performance and actual results may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond our ability to control or predict. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should carefully consider the factors discussed below in evaluating these forward-looking statements.
This section highlights specific risks that could affect our business and us. Although we have tried to discuss key factors, please be aware that other risks may prove to be important in the future. New risks may emerge at any time and we cannot predict such risks or estimate the extent to which they may affect our financial performance. In addition to the factors discussed elsewhere in this report, among the other factors that could cause actual results to differ materially are the following:
We Face Intense Competition in All of Our Markets
We face intense competition from many other providers of credit cards and other consumer financial products and services. In particular, in our credit card activities, we compete with international, national, regional and local bank card issuers, with other general purpose credit or charge card issuers, and to a certain extent, issuers of smart cards and debit cards. We also compete with providers of other types of financial services and consumer loans such as home equity lines and other mortgage related products that offer consumers debt consolidation. We face similar competitive markets in our auto financing, small business lending, home loan lending and installment loan activities as well as in our international markets. Thus, the cost to acquire new accounts will continue to vary among product lines and may rise. Other credit card companies may compete with us for customers by offering lower interest rates and fees, higher credit limits and/or customer services or product features that are more attractive than those we offer. Because customers generally choose credit card issuers (or other sources of financing) based on price (primarily interest rates and fees), credit limit and other product features, customer loyalty is limited. Increased competition has resulted in, and may continue to cause, a decrease in credit card response rates and reduced productivity of marketing dollars invested in certain lines of business. Competition may also have an impact on customer attrition as our customers accept offers from other credit card lenders and/or providers of other consumer lending products, such as home equity financing.
Our diversified lending businesses, including auto lending, small business lending, home loan lending and installment loans business also compete on a similar variety of factors, including price, product features and customer service. These businesses may also experience a decline in marketing efficiency and/or customer attrition. In addition, some of our competitors may be substantially larger than we are, which may give those competitors advantages, including a more diversified product and customer base, operational efficiencies, broad-based local distribution capabilities, lower-cost funding and more versatile technology platforms. These
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competitors may also consolidate with other financial institutions in ways that enhance these advantages and intensify our competitive environment. In addition, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the “GLB Act”), which permits greater affiliations between banks, securities firms and insurance companies, may increase competition in the financial services industry.
In such a competitive environment, we may lose entire accounts, or may lose account balances, to competing financial institutions, or find it more costly to maintain our existing customer base. Customer attrition from any or all of our products, together with any lowering of interest rates or fees that we might implement to retain customers, could reduce our revenues and therefore our earnings. We expect that competition will continue to grow more intense with respect to most of our products, including our diversified products and the products we offer internationally.
We Face Strategic Risks in Sustaining Our Growth and Pursuing Diversification
Our growth strategy is threefold. First, we seek to continue to grow our domestic credit card business. Second, we desire to continue to build and grow our automobile finance business. Third, we hope to continue to diversify our business, both geographically and in product mix, by growing our lending business, including credit cards, internationally, principally in the United Kingdom and Canada, and by identifying, pursuing and expanding new business opportunities, such as branch banking, small business lending and other consumer loan products, including home loan lending and installment lending. Our ability to grow is driven by the success of our fundamental business plan and our revenue may be adversely affected by our continuing diversification and bias toward lower loss assets (because of the potentially lower margins on such accounts), the level of our investments in new businesses or regions and our ability to successfully apply IBS to new businesses. This risk has many components, including:
| • | Customer and Account Growth. Our growth is highly dependent on our ability to retain existing customers and attract new ones, grow existing and new account balances, develop new market segments and have sufficient funding available for marketing activities to generate these customers and account balances. Our ability to grow and retain customers is also dependent on customer satisfaction, which may be adversely affected by factors outside of our control, such as postal service and other marketing and customer service channel disruptions and costs. |
| • | Product and Marketing Development. Difficulties or delays in the development, production, testing and marketing of new products or services, which may be caused by a number of factors including, among other things, operational constraints, technology functionality, regulatory and other capital requirements and legal difficulties, will affect the success of such products or services and can cause losses arising from the costs to develop unsuccessful products and services, as well as decreased 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 diversify beyond our U.S. Credit Card portfolio. Our ability to successfully diversify is impacted by a number of factors, including: identifying appropriate acquisition targets, executing on acquisition transactions, developing strategies to grow our existing diversification business, and the Company’s financial ability to undertake these diversification activities. In addition, part of our diversification strategy has been to grow internationally. Our growth internationally faces additional challenges, including limited access to information, differences in cultural attitudes toward credit, changing regulatory and legislative environments, political developments, exchange rates and differences from the historical experience of portfolio performance in the United States and other countries. |
We May Experience Increased Delinquencies and Credit Losses
Like other credit card lenders and providers of consumer and other financing, we face the risk that our customers will not repay their loans. A customer’s failure to repay is generally preceded by missed payments. In some instances, a customer may declare bankruptcy prior to missing payments, although this is not generally the case. Customers who declare bankruptcy frequently do not repay credit card or other loans. Where we have collateral, we attempt to seize it when customers default on their loans. The value of the collateral may not equal the
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amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from our customers. Rising delinquencies and rising rates of bankruptcy are often precursors of future charge-offs and may require us to increase our allowance for loan losses. Higher charge-off rates and an increase in our allowance for loan losses may hurt our overall financial performance if we are unable to raise revenue to compensate for these losses, may adversely impact the performance of our securitizations, and may increase our cost of funds.
Our ability to assess the credit worthiness of our customers may diminish. We market our products to a wide range of customers including those with less experience with credit products and those with a history of missed payments. We select our customers, manage their accounts and establish prices and credit limits using proprietary models and other techniques designed to accurately 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 for both high and low risk customers. We face a risk that the models and approaches we use to select, manage, and underwrite our customers may become less predictive of future charge-offs due to changes in the competitive environment or in the economy. Intense competition, a weak economy, or even falling interest rates can adversely affect our actual charge-offs and our ability to accurately predict future charge-offs. These factors may cause both a decline in the ability and willingness of our customers to repay their loans and an increase in the frequency with which our lower risk customers defect to more attractive, competitor products. In our auto finance business, declining used-car prices reduce the value of our collateral and can adversely affect charge-offs. We attempt to mitigate these risks by adopting a fairway approach to our predictions of future charge-offs. Nonetheless, there can be no assurance that we will be able to accurately predict charge-offs, and our failure to do so may adversely affect our profitability and ability to grow.
The trends that caused the reduction of charge-offs over the course of 2004 may not continue. During that time, we increased the proportion of lower-risk borrowers in our portfolio and increased the proportion of lower risk asset classes, like auto loans, relative to credit cards. In addition, in 2004, our managed loan portfolio continued to grow. Especially in the credit card business, higher growth rates cause lower charge-off rates in the near term. This is primarily driven by lower charge-offs in the first six to eight months of the life of a pool of new accounts. Finally, although the U.S. economy has been improving, there can be no assurance that these trends will continue in the future.
We hold an allowance for expected losses inherent in our existing reported loan portfolio as provided for by the applicable accounting rules. There can be no assurance, however, that such allowances will be sufficient to account for actual losses. We record charge-offs according to accounting practices consistent with accounting and regulatory guidelines and rules. These guidelines and rules, including among other things, the FFIEC Account Management Guidance, could change and cause our charge-offs to increase for reasons unrelated to the underlying performance of our portfolio. Unless offset by other changes, this could reduce our profits.
We Face Risk From Economic Downturns
Delinquencies and credit losses in the consumer finance industry generally increase during economic downturns or recessions. Likewise, consumer demand may decline during an economic downturn or recession. Accordingly, an economic downturn (either local or national), can hurt our financial performance as accountholders default on their loans or, in the case of credit card accounts, carry lower balances. Furthermore, because our business model is to lend across the credit spectrum, we make loans to lower credit quality customers. These customers generally have higher rates of charge-offs and delinquencies than do higher credit quality customers. Additionally, as we increasingly market our cards internationally, an economic downturn or recession outside the United States also could hurt our financial performance.
Reputational Risk and Social Factors May Impact our Results
Our ability to originate and maintain accounts is highly dependent upon consumer and other external perceptions of our business practices or our financial health. Adverse perceptions regarding our business practices or our financial health could damage our reputation in both the customer and funding markets, leading to difficulties in
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generating and maintaining accounts as well as in financing them. Adverse developments with respect to the consumer or other external perceptions regarding the practices of our competitors, or our industry as a whole, may also adversely impact our reputation. In addition, adverse reputational impacts on third parties with whom we have important relationships, such as our independent auditors, may also adversely impact our reputation. Adverse impacts on our reputation, or the reputation of our industry, may also result in greater regulatory and/or legislative scrutiny, which may lead to laws or regulations that change or constrain the manner in which we engage with our customers and the products we offer them. Adverse reputational impacts or events may also increase our litigation risk. See “We face a Risk of a Complex and Changing Regulatory and Legal Environment”, below. To this end, we carefully monitor internal and external developments for areas of potential reputational risk and have established a Corporate Reputation Committee, a committee of senior management, to assist in evaluating such risks in our business practices and decisions.
In addition, a variety of social factors may cause changes in credit card and other consumer finance use, payment patterns and the rate of defaults by accountholders and borrowers. These social factors include changes in consumer confidence levels, the public’s perception of the use of credit cards and other consumer debt, and changing attitudes about incurring debt and the stigma of personal bankruptcy. Our goal is to manage these risks through a variety of tools such as product design, but these tools may not be sufficient to protect our growth and profitability during a sustained period of economic downturn or recession or a material shift in social attitudes.
We Face Risk Related to the Strength of our Operational, Technology and Organizational Infrastructure
Our ability to grow is also dependent on our ability to build or acquire the necessary operational and organizational infrastructure, manage expenses as we expand, and recruit management and operations personnel with the experience to run an increasingly complex business. Similar to other large corporations, operational risk can manifest itself at Capital One in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees or persons outside the Company and exposure to external events. In addition, we outsource some of our operational functions to third parties; these third parties may experience similar errors or disruptions that could adversely impact us and over which we may have limited control. As we increase the amount of our operational infrastructure that we outsource to third parties, we increase our exposure to this risk. Failure to build and maintain the necessary operational infrastructure can lead to risk of loss of service to customers, legal actions or noncompliance with applicable laws or regulatory standards. In addition, to the extent we experience failures in our ability to build necessary infrastructure, we may experience financial losses related to the write-downs of infrastructure assets. Although we have devoted and will continue to devote resources to building and maintaining our operational infrastructure, including our system of internal controls, there can be no assurance that we will not suffer losses from operational risks in the future. In addition, although we take steps to retain our existing management talent and recruit new talent as needed, we face a competitive market for such talent and there can be no assurance that we will continue to be able to maintain and build a management team capable of running our increasingly large and complex business.
Our ability to grow and compete is also dependent on the strength and capability of our technology systems, which we use both to interface with our customers and to manage our internal financial and other systems. Our ability to develop and deliver new products that meet the needs of our existing customers and attract new ones depends on the functionality of our technology systems. In addition, our ability to develop and implement effective marketing campaigns also depends on our technology. Although we continuously assess and invest in the strength and capability of our technology to meet both our short and long-term needs, there can be no assurance that we will be able to successfully do so, or do so with sustainable costs.
We May Face Limited Availability of Financing, Variation in Our Funding Costs and Uncertainty in Our Securitization Financing
In general, the amount, type and cost of our funding, including financing from other financial institutions, the capital markets and deposits, directly impacts our expense in operating our business and growing our assets and therefore, can positively or negatively affect our financial results.
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A number of factors could make such financing more difficult, more expensive or unavailable on any terms both domestically and internationally (where funding transactions may be on terms more or less favorable than in the United States), including, but not limited to, financial results and losses, changes within our organization, specific events that adversely impact our reputation, changes in the activities of our business partners, disruptions in the capital markets, specific events that adversely impact the financial services industry, counter-party availability, changes affecting our assets, our corporate and regulatory structure, interest rate fluctuations, ratings agencies actions, general economic conditions and the legal, regulatory, accounting and tax environments governing our funding transactions. In addition, our ability to raise funds is strongly affected by the general state of the U.S. and world economies, and may become increasingly difficult due to economic and other factors. Also, we compete for funding with other banks, savings banks and similar companies, some of which are publicly traded. Many of these institutions are substantially larger, have more capital and other resources and have better debt ratings than we do. In addition, as some of these competitors consolidate with other financial institutions, these advantages may increase. Competition from these institutions may increase our cost of funds.
In addition, we are substantially dependent on the securitization of consumer loans, which involves the legal sale of beneficial interests in consumer loan balances and is a unique funding market. Despite the size and relative stability of these markets and our position as a leading issuer, if these markets experience difficulties we may be unable to securitize our loan receivables or to do so at favorable pricing levels. If we were unable to continue to securitize our loan receivables at current levels, we would use alternative funding sources to fund increases in loan receivables and meet our other liquidity needs. If we were unable to find cost-effective and stable alternatives, it could negatively impact our liquidity and potentially subject us to certain risks. These risks would include an increase in our cost of funds, an increase in the allowance for loan losses and the provision for possible credit losses as more loans would remain on our consolidated balance sheet, and lower loan growth.
In addition, the occurrence of certain events may cause the securitization transactions to amortize earlier than scheduled, which would accelerate the need for additional funding. This early amortization could, among other things, have a significant effect on the ability of the Bank and the Savings 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. See pages 49-51 in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity Risk Management” contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004.
We May Experience Changes in Our Debt Ratings
In general, ratings agencies play an important role in determining, by means of the ratings they assign to issuers and their debt, the availability and cost of wholesale funding. We currently receive ratings from several ratings entities for our secured and unsecured borrowings. As private entities, ratings agencies have broad discretion in the assignment of ratings. A rating below investment grade typically reduces availability and increases the cost of market-based funding, both secured and unsecured. A debt rating of Baa3 or higher by Moody’s Investors Service, or BBB- or higher by Standard & Poor’s and Fitch Ratings, is considered investment grade. Currently, all three ratings agencies rate the unsecured senior debt of the Bank and the Corporation as investment grade. The following chart shows ratings for Capital One Financial Corporation and Capital One Bank as of December 31, 2004. As of that date, the ratings outlooks were as follows:
| Standard & Poor’s |
Moody’s | Fitch | ||||
| Capital One Financial Corporation |
BBB- | Baa3 | BBB | |||
| Capital One Financial Corporation—Outlook |
Stable | Stable | Stable | |||
| Capital One Bank |
BBB | Baa2 | BBB+ | |||
| Capital One Bank—Outlook |
Stable | Stable | Stable |
Because we depend on the capital markets for funding and capital, we could experience reduced availability and increased cost of funding if our debt ratings were lowered. This result could make it difficult for us to grow at or
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to a level we currently anticipate. The immediate impact of a ratings downgrade on other sources of funding, however, would be limited, as our deposit funding and pricing, as well as some of our unsecured corporate borrowing, is not generally determined by corporate debt ratings.
We Face Exposure from Our Unused Customer Credit Lines
Because we offer our customers credit lines, the full amount of which is most often not used, we have exposure to these unfunded lines of credit. These credit lines could be used to a greater extent than our historical experience would predict. If actual use of these lines were to materially exceed predicted line usage, we would need to raise more funding than anticipated in our current funding plans. It could be difficult to raise such funds, either at all, or at favorable rates.
We Face Market Risk of Interest Rate and Exchange Rate Fluctuations
Like other financial institutions, we borrow money from institutions and depositors, which we then lend to customers. We earn interest on the consumer loans we make, and pay interest on the deposits and borrowings we use to fund those loans. Changes in these two interest rates affect the value of our assets and liabilities. If the rate of interest we pay on our borrowings increases more than the rate of interest we earn on our loans, our net interest income, and therefore our earnings, could fall. Our earnings could also be hurt if the rates on our consumer loans fall more quickly than those on our borrowings.
However, our goal is generally to maintain an interest rate neutral or “matched” position, where interest rates and exchange rates on loans and borrowings or foreign currencies go up or down by the same amount and at the same time so that interest rate and exchange rate changes for loans or borrowings or foreign currencies will not affect our earnings. The financial instruments and techniques we use to manage the risk of interest rate and exchange rate fluctuations, such as asset/liability matching and interest rate and exchange rate swaps and hedges and some forward exchange contracts, may not always work successfully or may not be available at a reasonable cost. Furthermore, if these techniques become unavailable or impractical, our earnings could be subject to volatility and decreases 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 customers. Consequently, their credit card balances may fall and pre-payment rates for installment loan products may rise. We can mitigate this risk by reducing the interest rates we charge or by refinancing installment loan products. However, these changes can reduce the overall yield on our portfolio if we do not adequately provide for them in our interest rate hedging strategies. When interest rates rise, there are fewer low-rate alternatives available to customers. Consequently, credit card balances may rise (or fall more slowly) and pre-payment rates on installment lending products may fall. In this circumstance, we may have 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 our customers and consequently increase customer attrition from our portfolio. Rising interest rates across the industry may also lead to higher delinquencies as customers face increasing interest payments both on our products and on other loans they may hold. See pages 51-52 in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Interest Rate Risk Management” contained in the Annual Report on Form 10-K for the year ended December 31, 2004.
We Face the Risk of a Complex and Changing Regulatory and Legal Environment
We operate in a heavily regulated industry and are therefore subject to an array of banking, consumer lending and deposit laws and regulations that apply to almost every element of our business. Failure to comply with these laws and regulations could result in financial, structural and operational penalties, including receivership. In
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addition, efforts to comply with these laws and regulations may increase our costs and/or limit our ability to pursue certain business opportunities. See “Supervision and Regulation” above. Federal and state laws and rules, as well as rules to which we are subject in foreign jurisdictions in which we conduct business, significantly limit the types of activities in which we may engage. For example, federal and state consumer protection laws and rules, and laws and rules of foreign jurisdictions where we conduct business, limit the manner in which we may offer and extend credit. In addition, we are subject to a wide array of other laws and regulations that govern other aspects of how we conduct our business, such as in the areas of employment and intellectual property. From time to time, the U.S. Congress, the states and foreign governments consider changing these laws and may enact new laws or amend existing laws to regulate further the consumer lending industry or companies in general. Such new laws or rules could limit the amount of interest or fees we can charge, restrict our ability to collect on account balances, or materially affect us or the banking or credit card industries in some other manner. Additional federal, state and foreign consumer protection legislation also could seek to expand the privacy protections afforded to customers of financial institutions and restrict our ability to share or receive customer information.
In addition, banking regulators possess broad discretion to issue or revise regulations, or to issue guidance, which may significantly impact us. For example, the Federal Trade Commission has issued, and will continue to issue, a variety of regulations under the FACT Act of 2003, and the Federal Reserve has also announced proposed rule-making, both of which may impact us. We cannot, however, predict whether and how any new guidelines issued or other regulatory actions taken by the banking or other regulators will be applied to the Bank or the Savings Bank, in what manner such regulations might be applied, or the resulting effect on the Corporation, the Bank or the Savings Bank. There can be no assurance that this kind of regulatory action will not have a negative impact on the Company and/or our financial results.
Finally, we face possible risks from the outcomes of certain industry litigation. In 1998, the United States Department of Justice filed an antitrust lawsuit against the MasterCard and Visa membership associations composed of financial institutions that issue MasterCard or Visa credit or debit cards (“associations”), 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 (“American Express”) and Discover Financial Services, (“Discover”). In 2001, a New York district court entered judgment in favor of the Department of Justice and ordered the associations, among other things, to repeal these policies. The United States Second Court of Appeals affirmed the district court and on October 4, 2004, the United States Supreme Court denied certiorari in the case.
Immediately following the Supreme Court’s decision, Discover filed a lawsuit against the associations under United States federal antitrust law. The suit alleges, among other things, that the associations engaged in anticompetitive business practices aimed at monopolizing the bank card market. The complaint, among other things, requests civil monetary damages, which could be trebled. Neither the Corporation nor any of its entities is a named defendant in this lawsuit.
In addition, on November 15, 2004, American Express Travel Related Services Company, Inc., filed a lawsuit against the associations and several member banks under the United States federal antitrust law. Capital One Bank; Capital One, F.S.B.; and Capital One Financial Corporation are named defendants. See Item 8 “Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 16” on pages 84-86 of this form for more information.
Also, several merchants have filed class action suits, which have been consolidated, against the associations under federal antitrust law relating to certain debit card products. In April 2003, the associations agreed to settle the suit in exchange for payments to plaintiffs by MasterCard of $1 billion and Visa of $2 billion, both over a ten-year period, and for changes in policies and interchange rates for debit cards. Certain merchant plaintiffs have opted out of the settlements and have commenced separate suits. Additionally, consumer class action suits with claims mirroring the merchants’ allegation have been filed in several courts. Finally, the associations, as well as member banks, continue to face additional lawsuits regarding policies, practices, products and fees.
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With the exception of the American Express civil antitrust lawsuit, the Company and its affiliates are not parties to the suits described above and therefore will not be directly liable for any amount related to any possible or known settlements, the suits filed by merchants who have opted out of the settlements of those suits, or the class action suits pending in state and federal courts. However, the banks are member banks of MasterCard and Visa and thus may be affected by settlements or suits relating to these issues. In addition, it is possible that the scope of these suits may expand and that other member banks, including the Company, may be brought into the suits or future suits. Given the complexity of the issues raised by these suits and the uncertainty regarding: (i) the outcome of these suits, (ii) the likelihood and amount of any possible judgment against the associations, (iii) the likelihood and the amount and validity of any claim against the associations’ member banks, including the Company, and (iv) the effects of these suits, in turn, on competition in the industry, member banks, and interchange and association fees, we cannot determine at this time the long-term effects of these suits on us.
Fluctuations in Our Expenses and Other Costs May Hurt Our Financial Results
Our expenses and other costs, such as operating and marketing expenses, directly affect our earnings results. In light of the extremely competitive environment in which we operate, and because the size and scale of many of our competitors provides them with increased operational efficiencies, it is important that we are able to successfully manage such expenses. Many factors can influence the amount of our expenses, as well as how quickly they grow. For example, further increases in postal rates or termination of our negotiated service arrangement with the United States Postal Service could raise our costs for postal service. As our business develops, changes or expands, additional expenses can arise from management of outsourced services, asset purchases, structural reorganization, a reevaluation of business strategies and/or expenses to comply with new or changing laws or regulations. Other factors that can affect the amount of our expenses include legal and administrative cases and proceedings, which can be expensive to pursue or defend. In addition, changes in accounting fluctuations can significantly affect how we calculate expenses and earnings.
The statistical information required by Item 1 can be found in Item 6 “Selected Financial Data”, Item 7 “Management Discussion and Analysis of Financial Condition and Results of Operations” and in Item 8, “Financial Statements and Supplementary Data”, as follows:
| I. | Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential | pages 36-37 | ||
| II. | Investment Portfolio | page 70 | ||
| III. | Loan Portfolio | pages 36-37; 40-41; 43-45; 56-57; 64-65 | ||
| IV. | Summary of Loan Loss Experience | pages 43-45; 72 | ||
| V. | Deposits | pages 48-49; 73-75 | ||
| VI. | Return on Equity and Assets | page 27 | ||
| VII. | Other Borrowings | pages 47-49; 73-75 |
We lease our new, 570,000 square foot, headquarters building at 1680 Capital One Drive, McLean, Virginia. The building houses our primary executive offices and Northern Virginia staff, and is leased through December 2010, with the right to purchase at a fixed cost at the end of the lease term.
Additionally, we own approximately 316 acres of land in Goochland County, Virginia purchased for the construction of an office campus to consolidate certain operations in the Richmond area. In 2002, two office buildings and a support facility consisting of approximately 365,000 square feet were completed and occupied. In 2003 four office buildings and a training center consisting of approximately 690,000 square feet were completed and occupied. In 2004, one additional office building consisting of approximately 130,000 square feet was completed with expected occupancy in the first quarter of 2005.
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Other owned facilities include 460,000 square feet in office buildings and a 120,000 square foot support facility in Tampa, Florida; 140,000 square feet in office and production buildings in Seattle, Washington; 460,000 square feet in office, data and production buildings in Richmond, Virginia; a 484,000 square foot facility in Nottingham, Great Britain, from which we conduct credit, collections, customer service and other operations.
We currently lease 1.65 million square feet of office space from which credit, collections, customer service and other operations are conducted, in Virginia, Texas, Idaho, California, Massachusetts, the United Kingdom, Canada, and insignificant space for business development in other locations. We are currently migrating out of approximately 275,000 square feet of leased office space and into our new campuses in McLean, Virginia and Goochland County, Virginia.
Generally, we use our properties to support all three of our business segments, although our properties located outside of the U.S. are used principally to support our Global Financial Services segment, and our properties in Texas and California are used principally to support our Auto Finance segment.
The information required by Item 3 is included in Item 8, “Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 16” on pages 84-86.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter of our fiscal year ending December 31, 2004, no matters were submitted for a vote of our stockholders.
| Item 5. | Market for Company’s Common Equity and Related Stockholder Matters. |
| Period | (a) Total Number of |
(b) Average Price |
(c) Total Number of |
(d) Maximum Number | |||||
| October 1-31, 2004 |
3,799 | $ | 73.18 | N/A | N/A | ||||
| November 1-30, 2004 |
24,283 | $ | 77.86 | N/A | N/A | ||||
| December 1-31, 2004 |
249,143 | $ | 81.45 | N/A | N/A | ||||
| Total |
277,225 | $ | 81.02 | N/A | N/A | ||||
| (1) | Shares purchased represent share swaps made in connection with stock option exercises and the withholding of shares to cover taxes on restricted stock lapses. |
The remaining information required by Item 5 is included under the following:
| Item 1 | “Business—Overview” | Page 3 | ||
| Item 1 | “Business—Supervision and Regulation—Dividends and Transfers of Funds” | Page 11 | ||
| Item 7 | “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk Management” | Pages 51-52 | ||
| Item 7 | “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Adequacy” | Pages 52-53 | ||
| Item 7 | “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Dividend Policy” | Pages 53-54 | ||
| Item 8 | “Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 15” | Page 82-83 | ||
| Item 8 | “Financial Statements and Supplementary Data—Selected Quarterly Financial Data” | Page 100 |
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| Item 6. | Selected Financial Data |
| (Dollars in Millions, Except Per Share Data) | 2004(1) | 2003(1) | 2002(1) | 2001 | 2000 | Five Year Compound Growth Rate |
|||||||||||||||||
| Income Statement Data: |
|||||||||||||||||||||||
| Interest income |
$ | 4,794.4 | $ | 4,367.7 | $ | 4,180.8 | $ | 2,921.1 | $ | 2,453.9 | 24.19 | % | |||||||||||
| Interest expense |
1,791.4 | 1,582.6 | 1,461.7 | 1,171.0 | 801.0 | 27.06 | % | ||||||||||||||||
| Net interest income |
3,003.0 | 2,785.1 | 2,719.1 | 1,750.1 | 1,652.9 | 22.65 | % | ||||||||||||||||
| Provision for loan losses |
1,220.9 | 1,517.5 | 2,149.3 | 1,120.5 | 812.9 | 23.41 | % | ||||||||||||||||
| Net interest income after provision for loan losses |
1,782.1 | 1,267.6 | 569.8 | 629.6 | 840.0 | 22.14 | % | ||||||||||||||||
| Non-interest income |
5,900.2 | 5,415.9 | 5,466.8 | 4,463.8 | 3,065.1 | 19.85 | % | ||||||||||||||||
| Non-interest expense |
5,322.2 | 4,856.7 | 4,585.6 | 4,058.0 | 3,147.7 | 16.64 | % | ||||||||||||||||
| Income before income taxes and cumulative effect of accounting change |
2,360.1 | 1,826.8 | 1,451.0 | 1,035.4 | 757.4 | 32.54 | % | ||||||||||||||||
| Income taxes |
816.6 | 676.0 | 551.4 | 393.4 | 287.8 | 30.72 | % | ||||||||||||||||
| Income before cumulative effect of accounting change |
1,543.5 | 1,150.8 | 899.6 | 642.0 | 469.6 | 33.57 | % | ||||||||||||||||
| Cumulative effect of accounting change, net of taxes of $8.8 |
— | 15.0 | — | — | — | ||||||||||||||||||
| Net income |
$ | 1,543.5 | $ | 1,135.8 | $ | 899.6 | $ | 642.0 | $ | 469.6 | 33.57 | % | |||||||||||
| Dividend payout ratio |
1.66 | % | 2.14 | % | 2.61 | % | 3.48 | % | 4.43 | % | |||||||||||||
| Per Common Share: |
|||||||||||||||||||||||
| Basic earnings per share |
$ | 6.55 | $ | 5.05 | $ | 4.09 | $ | 3.06 | $ | 2.39 | 28.91 | % | |||||||||||
| Diluted earnings per share |
6.21 | 4.85 | 3.93 | 2.91 | 2.24 | 29.27 | % | ||||||||||||||||
| Dividends |
0.11 | 0.11 | 0.11 | 0.11 | 0.11 | ||||||||||||||||||
| Book value as of year-end |
33.99 | 25.75 | 20.44 | 15.33 | 9.94 | ||||||||||||||||||
| Selected Year-End Reported Balances: |
|||||||||||||||||||||||
| Liquidity portfolio |
$ | 10,384.1 | $ | 7,464.7 | $ | 5,064.9 | $ | 3,467.4 | $ | 1,859.0 | 39.45 | % | |||||||||||
| Consumer loans |
38,215.6 | 32,850.3 | 27,343.9 | 20,921.0 | 15,112.7 | 30.98 | % | ||||||||||||||||
| Allowance for loan losses |
(1,505.0 | ) | (1,595.0 | ) | (1,720.0 | ) | (840.0 | ) | (527.0 | ) | 34.49 | % | |||||||||||
| Total assets |
53,747.3 | 46,283.7 | 37,382.4 | 28,184.0 | 18,889.3 | 32.15 | % | ||||||||||||||||
| Interest-bearing deposits |
25,636.8 | 22,416.3 | 17,326.0 | 12,839.0 | 8,379.0 | 46.62 | % | ||||||||||||||||
| Borrowings |
9,637.0 | 14,812.6 | 11,930.7 | 9,330.8 | 6,976.5 | 6.72 | % | ||||||||||||||||
| Stockholders’ equity |
8,388.2 | 6,051.8 | 4,623.2 | 3,323.5 | 1,962.5 | 40.80 | % | ||||||||||||||||
| Selected Average Reported Balances: |
|||||||||||||||||||||||
| Liquidity portfolio |
$ | 10,528.6 | $ | 6,961.2 | $ | 4,467.7 | $ | 3,038.4 | $ | 1,764.3 | 39.03 | % | |||||||||||
| Consumer loans |
34,265.7 | 28,677.6 | 25,036.0 | 17,284.3 | 11,487.8 | 34.91 | % | ||||||||||||||||
| Allowance for loan losses |
(1,473.0 | ) | (1,627.0 | ) | (1,178.2 | ) | (637.8 | ) | (402.2 | ) | 40.47 | % | |||||||||||
| Total assets |
50,648.1 | 41,195.4 | 34,201.7 | 23,346.3 | 15,209.6 | 35.51 | % | ||||||||||||||||
| Interest-bearing deposits |
24,313.3 | 19,768.0 | 15,606.9 | 10,373.5 | 5,339.5 | 54.51 | % | ||||||||||||||||
| Borrowings |
8,520.2 | 12,978.0 | 11,381.1 | 8,056.7 | 6,870.0 | 6.99 | % | ||||||||||||||||
| Stockholders’ equity |
7,295.5 | 5,323.5 | 4,148.2 | 2,781.2 | 1,701.0 | 38.96 | % | ||||||||||||||||
| Reported Metrics: |
|||||||||||||||||||||||
| Revenue margin |
19.08 | % | 21.95 | % | 26.28 | % | 30.01 | % | 35.60 | % | |||||||||||||
| Net interest margin |
6.44 | 7.45 | 8.73 | 8.45 | 12.47 | ||||||||||||||||||
| Delinquency rate |
3.85 | 4.79 | 6.12 | 4.84 | 7.26 | ||||||||||||||||||
| Net charge-off rate |
3.78 | 5.74 | 5.03 | 4.76 | 5.46 | ||||||||||||||||||
| Return on average assets |
3.05 | 2.76 | 2.63 | 2.75 | 3.09 | ||||||||||||||||||
| Return on average equity |
21.16 | 21.34 | 21.69 | 23.08 | 27.61 | ||||||||||||||||||
| Average equity to average assets |
14.40 | 12.92 | 12.13 | 11.91 | 11.18 | ||||||||||||||||||
| Operating expense as a % of average loans |
11.63 | 13.04 | 14.04 | 17.21 | 19.51 | ||||||||||||||||||
| Allowance for loan losses to consumer loans |
3.94 | 4.86 | 6.29 | 4.02 | 3.49 | ||||||||||||||||||
| Managed Metrics: |
|||||||||||||||||||||||
| Revenue margin |
12.89 | % | 14.65 | % | 16.93 | % | 18.23 | % | 20.99 | % | |||||||||||||
| Net interest margin |
7.88 | 8.64 | 9.23 | 9.40 | 11.11 | ||||||||||||||||||
| Delinquency rate |
3.82 | 4.46 | 5.60 | 4.95 | 5.23 | ||||||||||||||||||
| Net charge-off rate |
4.41 | 5.86 | 5.24 | 4.65 | 4.56 | ||||||||||||||||||
| Return on average assets |
1.73 | 1.52 | 1.47 | 1.54 | 1.78 | ||||||||||||||||||
| Operating expense as a % of average loans |
5.41 | 5.94 | 6.66 | 8.35 | 9.90 | ||||||||||||||||||
| Average consumer loans |
$ | 73,711.7 | $ | 62,911.9 | $ | 52,799.6 | $ | 35,612.3 | $ | 22,634.9 | 32.50 | % | |||||||||||
| Year-end consumer loans |
$ | 79,861.3 | $ | 71,244.8 | $ | 59,746.5 | $ | 45,264.0 | $ | 29,524.0 | 31.60 | % | |||||||||||
| Year-end total accounts |
48.6 | 47.0 | 47.4 | 43.8 | 33.8 | 15.43 | % | ||||||||||||||||
| (1) | Certain prior period amounts have been reclassified to conform to the current period presentation for the Financial Accounting Standards Board Staff Position, “Accounting for Accrued Interest Receivable Related to Securitized and Sold Receivables under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, (“FSP on AIR”) that was issued April 2003. The Company reclassified $460.6 million, $577.0 million, and $509.7 million in subordinated finance charge and fee receivables on the investors’ interest in securitized loans for December 2004, 2003 and 2002, respectively, from “Consumer loans” to “Accounts receivable from securitizations” on the Consolidated Balance Sheet. The Company also reclassified $69.2 million, $74.8 million, and $76.2 million for the years ended December 31, 2004, 2003, and 2002, respectively, in interest income derived from such balances from “Consumer loan interest income” to “Other Interest Income” on the Consolidated Statements of Income. The reported delinquency rate would have been 4.08%, 5.13%, and 6.51% before the reclassification at December 31, 2004, 2003 and 2002, respectively. The reported net charge-off rate would have been 3.73%, 5.64% and 4.93% before the reclassification for the years ended December 31, 2004, 2003 and 2002, respectively. |
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Introduction
Capital One Financial Corporation (the “Corporation”) is a holding company whose subsidiaries market a variety of consumer financial products and services. In 2004, the Corporation became a bank holding company. The Corporation’s principal subsidiaries are Capital One Bank (the “Bank”) which currently offers credit card products and takes retail deposits, Capital One, F.S.B. (the “Savings Bank”), which offers consumer and commercial lending and consumer deposit products, and Capital One Auto Finance, Inc. (“COAF”) which offers automobile and other motor vehicle financing products. The Corporation and its subsidiaries are hereafter collectively referred to as the “Company”. As of December 31, 2004, the Company had 48.6 million accounts and $79.9 billion in managed consumer loans outstanding and was one of the largest providers of MasterCard and Visa credit cards in the world.
The Company’s profitability is affected by the net interest income and non-interest income generated on earning assets, consumer usage and payment patterns, credit quality, levels of marketing expense and operating efficiency. The Company’s revenues consist primarily of interest income on consumer loans (including past-due fees) and securities and non-interest income consisting of servicing income on securitized loans, fees (such as annual membership, cash advance, cross-sell, interchange, overlimit and other fee income, collectively “fees”) and gains on the securitizations of loans. Loan securitization transactions qualifying as sales under accounting principles generally accepted in the United States (“GAAP”) remove the loan receivables from the consolidated balance sheet; however, the Company continues to both own and service the related accounts. The Company generates earnings from its managed loan portfolio that includes both on-balance sheet and off-balance sheet loans. Interest income, fees, and recoveries in excess of the interest paid to investors and charge-offs generated from off-balance sheet loans are recognized as servicing and securitizations income.
The Company’s primary expenses are the costs of funding assets, provision for loan losses, operating expenses (including salaries and associate benefits), marketing expenses and income taxes. Marketing expenses (e.g., advertising, printing, credit bureau costs and postage) to implement the Company’s new product strategies are incurred and expensed prior to the acquisition of new accounts while the resulting revenues are recognized over the life of the acquired accounts. Revenues recognized are a function of the response rate of the initial marketing program, usage and attrition patterns, credit quality of accounts, product pricing and effectiveness of account management programs.
Significant Accounting Policies
The Notes to the Consolidated Financial Statements contain a summary of the Company’s significant accounting policies, including a discussion of recently issued accounting pronouncements. Several of these policies are considered to be important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. These policies include determination of the level of allowance for loan losses, accounting for securitization transactions, recognition of customer reward costs and finance charge and fee revenue recognition.
Additional information about accounting policies can be found in Item 8 “Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 1” on page 62.
Allowance for Loan Losses
The allowance for loan losses is maintained at the amount estimated to be sufficient to absorb probable principal losses, net of principal recoveries (including recovery of collateral), inherent in the existing reported loan portfolio. The provision for loan losses is the periodic cost of maintaining an adequate allowance. The amount of allowance necessary is determined primarily based on a migration analysis of delinquent and current accounts and forward loss curves. The entire balance of an account is contractually delinquent if the minimum payment is
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not received by the payment due date. In evaluating the sufficiency of the allowance for loan losses, management takes into consideration the following factors: recent trends in delinquencies and charge-offs including bankrupt, deceased and recovered amounts; forecasting uncertainties and size of credit risks; the degree of risk inherent in the composition of the loan portfolio; economic conditions; legal and regulatory guidance; credit evaluations and underwriting policies; seasonality; and the value of collateral supporting the loans. To the extent credit experience is not indicative of future performance or other assumptions used by management do not prevail, loss experience could differ significantly, resulting in either higher or lower future provision for loan losses, as applicable.
Accounting for Securitization Transactions
Loan securitization involves the transfer of a pool of loan receivables to a trust or other special purpose entity. The trust sells an undivided interest in the pool of loan receivables to third-party investors through the issuance of asset backed securities and distributes the proceeds to the Company as consideration for the loans transferred. The Company removes loan receivables from the Consolidated Balance Sheets for securitizations that qualify as sales in accordance with Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities – a Replacement of FASB Statement No. 125 (“SFAS 140”). The trusts are qualified special purpose entities as defined by SFAS 140 and are not subsidiaries of the Company and are not included in the Company’s consolidated financial statements. The gain on sale recorded from off-balance sheet securitizations is based on the estimated fair value of the assets sold and retained and liabilities 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, estimated contractual servicing fees and credit losses. Gains on securitization transactions, fair value adjustments related to residual interests and earnings on the Company’s securitizations are included in servicing and securitizations income in the Consolidated Statements of Income and amounts due from the trusts are included in accounts receivable from securitizations on the Consolidated Balance Sheets.
Certain estimates inherent in the determination of the fair value of the retained interests are influenced by factors outside the Company’s control, and as a result, such estimates could materially change and actual results could be materially different from such estimates. Any future gains that will be recognized in accordance with SFAS 140 will be dependent on the timing and amount of future securitizations. The Company intends to continuously assess the performance of new and existing securitization transactions, and therefore the valuation of retained interests, as estimates of future cash flows change.
Rewards
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, based on purchase volume. The Company establishes a reward liability based on points earned which are ultimately expected to be redeemed and the average cost per point redemption. As points are redeemed, the rewards liability is relieved. The cost of reward programs is reflected as a reduction to interchange income. The rewards liability will be affected over time as a result of changes in the number of account holders in the reward programs, the actual amount of points earned and redeemed, general economic conditions, the actual costs of the rewards, changes made 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 Revenue Recognition
The Company recognizes earned finance charges and fee income on loans according to the contractual provisions of the credit arrangements. When the Company does not expect full payment of finance charges and fees, it does not accrue the estimated uncollectible portion as income (hereafter the “suppression amount”). To calculate the
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suppression amount, the Company first estimates the uncollectible portion of finance charge and fee receivables using a formula based on historical account migration patterns and current delinquency status. This formula is consistent with that used to estimate the allowance related to expected principal losses on reported loans. The suppression amount is calculated by adding any current period change in the estimate of the uncollectible portion of finance charge and fee receivables to the amount of finance charges and fees charged-off (net of recoveries) during the period. The Company subtracts the suppression amount from the total finance charges and fees billed during the period to arrive at total reported revenue.
The amount of finance charges and fees suppressed were $1.1 billion and $2.0 billion for the years ended December 31, 2004 and 2003, respectively. The reduction in the suppression amount was driven by the Company’s continued asset diversification beyond U.S. consumer credit cards, a continued bias toward originating higher credit quality, lower yielding loans, improved collections experience, ongoing product modifications and an overall improvement in general economic conditions. These factors drove a reduction in total finance charges and fees billed during the period and increased the likelihood of collectibility. Both the lower volume of finance charges and fees billed and the higher expectations of collectibility drove the reduction in the amount of finance charges and fees suppressed. Actual payment experience could differ significantly from management’s assumption, resulting in higher or lower future finance charge and fee income.
Off-Balance Sheet Arrangements
Off-Balance Sheet Securitizations
As discussed in “Significant Accounting Policies—Accounting for Securitization Transactions,” the Company actively engages in off-balance sheet securitization transactions of loans for funding purposes. The Company receives the proceeds from third party investors for securities issued from the Company’s securitization vehicles which are collateralized by transferred receivables from the Company’s portfolio. Securities outstanding totaling $41.2 billion as of December 31, 2004, represent undivided interests in the pools of consumer loan receivables that are sold in underwritten offerings or in private placement transactions.
The securitization of consumer loans has been a significant source of liquidity for the Company. Maturity terms of the existing securitizations vary from 2005 to 2019 and, for 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 Company believes that it has the ability to continue to utilize off-balance sheet securitization arrangements as a source of liquidity; however, a significant reduction or termination of the Company’s off-balance sheet securitizations could require the Company to draw down existing liquidity and/or to obtain additional funding through the issuance of secured borrowings or unsecured debt, the raising of additional deposits or the slowing of asset growth to offset or to satisfy liquidity needs.
Recourse Exposure
The credit quality of the receivables transferred is supported by credit enhancements, which may be in various forms including interest-only strips, subordinated interests in the pool of receivables, cash collateral accounts, cash reserve accounts and accrued interest and fees on the investor’s share of the pool of receivables. Some of these credit enhancements are retained by the seller and are referred to as retained residual interests. The Company’s retained residual interests are generally restricted or subordinated to investors’ interests and their value is subject to substantial credit, repayment and interest rate risks on transferred assets if the off-balance sheet loans are not paid when due. The investors and the trusts only have recourse to the retained residual interests, not the Company’s assets. See pages 87-89 in Item 8 “Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 18” for quantitative information regarding retained interests.
Collections and Amortization
Collections of interest and fees received on securitized receivables are used to pay interest to investors, servicing and other fees, and are available to absorb the investors’ share of credit losses. For revolving securitizations,
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amounts collected in excess of that needed to pay the above amounts are remitted, in general, to the Company. Under certain conditions, some of the cash collected may be retained to ensure future payments to investors. For amortizing securitizations, amounts collected in excess of the amount that is used to pay the above amounts are generally remitted to the Company, but may be paid to investors in further reduction of their outstanding principal. See page 87-89 in Item 8 “Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 18” for quantitative information regarding revenues, expenses and cash flows that arise from securitization transactions.
Securitization transactions may amortize earlier than scheduled due to certain early amortization triggers, which would accelerate the need for funding. Additionally, early amortization would have a significant impact on the ability of the Bank and Savings Bank to meet regulatory capital adequacy requirements as all off-balance sheet loans experiencing such early amortization would be recorded on the balance sheet and accordingly would require incremental regulatory capital. As of December 31, 2004, no early amortization events related to its off-balance sheet securitizations have occurred. The Company believes that it has the ability to continue to utilize off-balance sheet securitization arrangements as a source of liquidity.
The amounts of investor principal from off-balance sheet consumer loans as of December 31, 2004 that are expected to amortize into the Company’s consumer loans, or be otherwise paid over the periods indicated, are summarized in Table 13. Of the Company’s total managed loans, 52% and 53% were included in off-balance sheet securitizations for the years ended December 31, 2004 and 2003, respectively.
Funding Commitments Related to Synthetic Fuel Tax Credit Transaction
In June 2004, the Corporation established and consolidated Capital One Appalachian LLC (“COAL”). COAL is a special purpose entity established to invest a 24.9% minority ownership interest in a limited partnership. The partnership was established to operate a facility which produces a coal-based synthetic fuel that qualifies for tax credits pursuant to Section 29 of the Internal Revenue Code. COAL purchased its interest in the partnership from a third party paying $2.1 million in cash and agreeing to pay an estimated $115.0 million comprised of fixed note payments, variable payments and the funding of its 24.9% share of the operating losses of the partnership. Actual total payments will be based on the amount of tax credits generated by the partnership through the end of 2007. In exchange, COAL will receive an estimated $137.7 million in tax benefits resulting from a combination of deductions, allocated partnership operating losses, and tax credits. The Corporation has guaranteed COAL’s commitments to both the partnership and the third party. As of December 31, 2004, the Company has recorded $19.7 million in tax benefits and had an estimated remaining commitment for fixed note payments, variable payments and the funding of its 24.9% share of the operating losses of the partnership of $100.2 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 completion, which occurred in the first quarter of 2003, and is based on LIBOR rates applied to the cost of the building funded. If, at the end of the lease term, the Company does not purchase the property, the Company guarantees a maximum residual value of up to $114.8 million representing approximately 72% of the $159.5 million cost of the building. This agreement, made with a multi-purpose entity that is a wholly-owned subsidiary of one of the Company’s lenders, provides that in the event of a sale of the property, the Company’s obligation would be equal to the sum of all amounts owed by the Company under a note issuance made in connection with the lease inception. As of December 31, 2004, the value of the building was estimated to be above the maximum residual value that the Company guarantees; thus, no deficiency existed and no liability was recorded relative to this property.
Other Guarantees
In connection with certain installment loan securitization transactions, the transferee (off-balance sheet special purpose entity receiving the installment loans) entered into interest rate hedge agreements (the “swaps”) with a
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counterparty to reduce interest rate risk associated with the transactions. In connection with the swaps, the Corporation entered into letter agreements guaranteeing the performance of the transferee under the swaps. If at anytime the Class A invested amount equals zero and the notional amount of the swap is greater than zero resulting in an “Early Termination Date” (as defined in the securitization transaction’s Master Agreement), then (a) to the extent that, in connection with the occurrence of such Early Termination Date, the transferee is obligated to make any payments to the counterparty pursuant to the Master Agreement, the Corporation shall reimburse the transferee for the full amount of such payment and (b) to the extent that, in connection with the occurrence of an Early Termination Date, the transferee is entitled to receive any payment from the counterparty pursuant to the Master Agreement, the transferee will pay to the Corporation the amount of such payment. At December 31, 2004, the maximum exposure to the Corporation under the letter agreements was approximately $6.1 million.
Reconciliation to GAAP Financial Measures
The Company’s consolidated financial statements prepared in accordance with GAAP are referred to as its “reported” financial statements. Loans included in securitization transactions which qualify as sales under GAAP have been removed from the Company’s “reported” balance sheet. However, 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 related to effects of securitization transactions qualifying as sales under GAAP. The Company generates earnings from its “managed” loan portfolio which includes both the on-balance sheet loans and off-balance sheet loans. The Company’s “managed” income statement takes the components of the servicing and securitizations income generated from the securitized portfolio and distributes the revenue and expense to appropriate income statement line items from which it originated. For this reason, the Company believes the “managed” consolidated financial statements and related managed metrics to be useful to stakeholders.
As of and for the Year Ended December 31, 2004
| (Dollars in thousands) | Total Reported | Securitization Adjustments(1) |
Total Managed(2) | |||||||
| Income Statement Measures |
||||||||||
| Net interest income |
$ | 3,002,978 | $ | 3,631,764 | $ | 6,634,742 | ||||
| Non-interest income |
5,900,157 | (1,675,571 | ) | 4,224,586 | ||||||
| Total revenue |
8,903,135 | 1,956,193 | 10,859,328 | |||||||
| Provision for loan losses |
1,220,852 | 1,956,193 | 3,177,045 | |||||||
| Net charge-offs |
1,295,568 | 1,956,193 | 3,251,761 | |||||||
| Balance Sheet Measures |
||||||||||
| Consumer loans |
$ | 38,215,591 | $ | 41,645,708 | $ | 79,861,299 | ||||
| Total assets |
53,747,255 | 41,044,776 | 94,792,031 | |||||||
| Average consumer loans |
34,265,668 | 39,446,005 | 73,711,673 | |||||||
| Average earning assets |
46,655,669 | 37,584,633 | 84,240,302 | |||||||
| Average total assets |
50,648,052 | 38,844,527 | 89,492,579 | |||||||
| Delinquencies |
1,472,194 | 1,581,884 | 3,054,078 | |||||||
| (1) | Includes adjustments made related to the effects of securitization transactions qualifying as sales under GAAP and adjustments made to reclassify to “managed” loans outstanding the collectible portion of billed finance charge and fee income on the investors’ interest in securitized loans excluded from loans outstanding on the “reported” balance sheet in accordance with Financial Accounting Standards Board Staff Position, “Accounting for Accrued Interest Receivable Related to Securitized and Sold Receivables under FASB Statement 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” issued April 2003. |
| (2) | The managed loan portfolio does not include auto loans which have been sold in whole loan sale transactions where the Company has retained servicing rights. |
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Adoption of Accounting Pronouncements and Accounting Changes
In December 2003, the Company adopted the expense recognition provisions of Statement of Financial Accounting Standard No. 123 Accounting for Stock Based Compensation (“SFAS 123”), prospectively to all awards granted, modified or settled after January 1, 2003. The adoption of SFAS 123 resulted in the recognition of compensation expense of $5.0 million for the year ended December 31, 2003. Compensation expense resulted from the discounts provided under the Associate Stock Purchase Plan and the amortization of the estimated fair value of stock options granted during 2003.
In July 2003, the Company adopted the provisions of FASB interpretation No. 46(R), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, Revised (“FIN 46(R)”). The Company has consolidated all material variable interest entities (“VIEs”) for which the Company is the primary beneficiary, as defined by FIN 46(R). The consolidation of the VIEs resulted in a $15.0 million ($23.9 pre-tax) charge for the cumulative effect of a change in accounting principle.
In 2002, the Company changed its financial presentation of recoveries which resulted in a one-time increase in the Company’s allowance for loan losses of $133.4 million, and a corresponding increase in the recognition of interest income of $38.4 million (pre-tax) and non-interest income of $44.4 million (pre-tax). Therefore, net income for the year ended December 31, 2002 was negatively impacted by $31.4 million after-tax.
Consolidated Earnings Summary
The following discussion provides a summary of 2004 results compared to 2003 results and 2003 results compared to 2002 results. Each component is discussed in further detail in subsequent sections of this analysis.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net income increased to $1.5 billion, or $6.21 per share (diluted), for the year ended December 31, 2004, compared to net income of $1.1 billion, or $4.85 per share (diluted), in 2003. This represents 36% net income growth and 28% earnings per share growth in 2004. The growth in earnings for 2004 was primarily driven by an increase in the managed consumer loan portfolio, a reduction in the provision for loan losses, and an increase in servicing and securitization income and other non-interest income, offset in part by an increase in marketing and operating expenses.
Managed loans consist of the Company’s reported loan portfolio combined with the off-balance sheet securitized loan portfolio. The Company has retained servicing rights for its securitized loans and receives servicing fees in addition to the excess spread generated from the off-balance sheet loan portfolio. Average managed loans increased $10.8 billion, or 17%, to $73.7 billion for the year ended December 31, 2004 from $62.9 billion for the prior year.
The managed net interest margin for the year ended December 31, 2004, decreased to 7.88% from 8.64% for the year ended December 31, 2003. This decrease was due to a reduction in managed earning asset yields, slightly offset by a reduction in the cost of funds. Managed loan yields decreased by 83 basis points to 13.05% for the year ended December 31, 2004, from 13.88% in the prior year. The decrease in managed loan yields resulted from the Company’s continued asset diversification beyond U.S. consumer credit cards and a bias toward originating higher credit quality, lower yielding loans. In addition, the Company built the average size of its liquidity portfolio by $3.5 billion to $10.5 billion in 2004, from $7.0 billion in 2003, placing additional downward pressure on managed earning asset yields as the yield on the liquidity portfolio is lower than the yield on consumer loans.
For the year ended December 31, 2004, the provision for loan losses decreased to $1.2 billion from $1.5 billion for the year ended December 31, 2003. The decrease in the provision for loan losses reflects a reduction in net charge-offs, improving delinquency rates and lower forecasted charge-offs for the reported loan portfolio at
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December 31, 2004. The improvements in the Company’s credit quality metrics are a result of the continued asset diversification beyond U.S consumer credit cards, continued bias toward originating higher credit quality, lower yielding loans, improved collection experience and an overall improvement in general economic conditions compared with the prior year.
Servicing and securitization income increased $432.1 million as a result of a 16% increase in the average off-balance sheet loan portfolio for the year ended December 31, 2004 when compared with the prior year, partially offset by a reduction in the excess spread generated by the off-balance sheet portfolio due to a higher concentration of higher credit quality, lower yielding loans.
For the year ended December 31, 2004, other non-interest income increased $100.6 million, or 51%, when compared to the prior year. This increase is primarily attributable to $72.6 million in pre-tax gains recognized in 2004 on the sale of the Company’s joint venture investment in South Africa and sale of the French loan portfolio. The remaining variance is due to increases in income derived from purchased charged-off loan portfolios, slightly offset by a decrease in auto gains and an increase in losses on sales of securities available for sale and losses on the repurchases of senior notes during 2004.
Marketing expense increased $219.4 million, or 20%, to $1.3 billion for the year ended December 31, 2004, compared to the prior year. The increase in marketing expense resulted from favorable opportunities to originate loans during 2004 combined with continued brand investments. Operating expenses increased $246.1 million, or 7%, for the year ended December 31, 2004 to $4.0 billion from $3.7 billion for the prior year. The increases were primarily related to charges associated with corporate-wide cost reduction initiatives, charges related to a change in asset capitalization thresholds and charges related to the impairment of internally developed software. Although operating expenses increased, operating expenses as a percentage of average managed loans for the year ended December 31, 2004 fell 53 basis points to 5.41% from 5.94% for the prior year. This reduction reflects the continued improvement in the Company’s operating efficiencies.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net income increased to $1.1 billion, or $4.85 per share, for the year ended December 31, 2003, compared to net income of $899.6 million, or $3.93 per share, in 2002. This represents 26% net income growth and 23% earnings per share growth in 2003. The growth in earnings for 2003 was primarily attributable to the growth in the Company’s managed loan portfolio, a reduction in the provision for loan losses and increases in the sales of auto loans, offset in part by the adoption of new accounting pronouncements (discussed above), a reduction in the managed net interest margin, net losses on the sale of securities and increases in marketing and operating expenses.
Managed loans consist of the Company’s reported loan portfolio combined with the off-balance sheet securitized loan portfolio. The Company has retained servicing rights for its securitized loans and receives servicing fees in addition to the excess spread generated from the off-balance sheet loan portfolio. Average managed loans increased $10.1 billion, or 19%, to $62.9 billion for 2003 from $52.8 billion for 2002.
The managed net interest margin for the year ended December 31, 2003, decreased to 8.64% from 9.23% for the year ended December 31, 2002. This decrease was due to a reduction in managed earning asset yields. Managed loan yields decreased by 76 basis points to 13.88% for the year ended December 31, 2003, from 14.64% compared to the prior year. The decrease in managed loan yields resulted from the shift in the mix of the managed loan portfolio to higher credit quality, lower yielding loans, an increase in low introductory rate accounts compared to the prior year and reduced pricing on many of the Company’s new loans in response to lower funding costs and increased competitive pressure. In addition, the Company built its average liquidity portfolio by $2.5 billion to $7.0 billion in 2003, from $4.5 billion in 2002, placing additional downward pressure on managed earning asset yields.
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For the year ended December 31, 2003, the provision for loan losses decreased to $1.5 billion from $2.1 billion for the year ended December 31, 2002. Excluding the impact of the one-time change in recoveries estimate of $133.4 million for the year ended December 31, 2002, the provision decreased $498.4 million, or 25%. The decrease in the provision for loan losses reflects improving delinquency rates and lower forecasted charge-offs for the reported loan portfolio at December 31, 2003. The decrease in delinquency and forecasted charge-off rates reflects a change in the mix of the reported loan portfolio towards a higher concentration of higher credit quality loans; as a result the allowance to reported loans decreased to 4.86% at December 31, 2003 from 6.29% at December 31, 2002.
For the year ended December 31, 2003, pre-tax gains on sales of auto loans increased $38.2 million to $66.4 million from $28.2 million for the year ended December 31, 2002.
During 2003, the Company realized pre-tax losses on the sales of securities totaling $9.4 million, compared to $77.5 million of after-tax gains on sales of securities recognized in 2002. In addition, there were no gains on the repurchase of senior bank notes recognized during 2003, compared to pre-tax gains of $27.0 million recognized in 2002. The Company routinely evaluates its liquidity portfolio positions and rebalances its investment portfolio when appropriate, which results in periodic gains and losses.
Marketing expense increased $47.8 million to $1.1 billion for the year ended December 31, 2003, compared to the prior year. The increase in marketing expense resulted from favorable opportunities to originate higher credit quality loans during 2003 combined with continued branding efforts. Operating expenses increased $223.3 million for the year ended December 31, 2003 to $3.7 billion from $3.5 billion for the prior year. The increases were primarily due to increased credit and recovery efforts, investment in IT infrastructure to support future growth and costs associated with the expansion of the Company’s enterprise risk management program and systems to further strengthen internal controls.
Consolidated Statements of Income
Net Interest Income
Net interest income is comprised of interest income and past-due fees earned and deemed collectible from the Company’s consumer loans and income earned on securities, less interest expense on borrowings, which includes interest-bearing deposits, borrowings from senior and subordinated notes and other borrowings.
Reported net interest income for the year ended December 31, 2004 increased $217.9 million, or 8%, to $3.0 billion compared to $2.8 billion for the prior year. The increase in net interest income is primarily a result of a 25% increase in the Company’s reported average earning assets for the year ended December 31, 2004 compared to the prior year, offset by a decrease in earning asset yields. The reported net interest margin decreased 101 basis points to 6.44% for the year ended December 31, 2004 compared to 7.45% for the prior year. The decrease was primarily due to a decrease in the reported loan yield, slightly offset by a decrease in the cost of funds. The reported loan yield decreased 135 basis points to 12.36% for the year ended December 31, 2004, compared to 13.71% for the year ended December 31, 2003. The yield on reported loans decreased due to the Company’s continued asset diversification beyond U.S. consumer credit cards and continued bias toward originating higher credit quality, lower yielding loans when compared with the prior year. In addition, the Company increased the average size of its liquidity portfolio by $3.5 billion during 2004. The yield on liquidity portfolio assets is lower than those on consumer loans and served to reduce the overall earning assets yields.
Reported net interest income for the year ended December 31, 2003, was $2.8 billion compared to $2.7 billion for 2002. Excluding the one-time impact of the change in recoveries estimate of $38.4 million for the year ended December 31, 2002, net interest income for the year ended December 31, 2003 increased $27.6 million, or 1% compared to the prior year. The slight increase in net interest income is primarily a result of a 20% increase in the
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Company’s earning assets for the year ended December 31, 2003 compared to the prior year, offset by a decrease in earning asset yields. The reported net interest margin was 7.45% for the year ended December 31, 2003 compared to 8.73% for the prior year. Excluding the one-time impact of the change in recoveries estimate of 12 basis points, the net interest margin decreased 116 basis points for the year ended December 31, 2003. The decrease was primarily due to a decrease in the reported loan yield. The reported loan yield decreased 144 basis points to 13.71% for the year ended December 31, 2003, compared to 15.15% for the year ended December 31, 2002. The yield on reported loans decreased due to a shift in the mix of the reported loan portfolio towards a greater composition of lower yielding, higher credit quality loans and an increase in low introductory rate accounts compared to the prior year. In addition, the Company increased its average liquidity portfolio by $2.5 billion during 2003. The yield on liquidity portfolio assets is significantly lower than those on consumer loans and served to reduce the overall earning assets yields.
Table 1 provides average balance sheet data and an analysis of net interest income, net interest spread (the difference between the yield on earning assets and the cost of interest-bearing liabilities) and net interest margin for each of the years ended December 31, 2004, 2003 and 2002.
Table 1: Statements of Reported Average Balances, Income and Expense, Yields and Rates
| Year Ended December 31 | ||||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||||||||||||
| (Dollars in thousands) | Average Balance |
Income/ Expense |
Yield/ Rate |
Average Balance |
Income/ Expense |
Yield/ Rate |
Average Balance |
Income/ Expense |
Yield/ Rate |
|||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||
| Earning assets |
||||||||||||||||||||||||||||||
| Consumer loans(1) |
||||||||||||||||||||||||||||||
| Domestic |
$ | 30,725,908 | $ | 3,844,036 | 12.51 | % | $ | 25,923,208 | $ | 3,578,994 | 13.81 | % | $ | 22,248,006 | $ | 3,436,392 | 15.45 | % | ||||||||||||
| International |
3,539,760 | 390,384 | 11.03 | % | 2,754,408 | 353,301 | 12.83 | % | 2,788,013 | 356,069 | 12.77 | % | ||||||||||||||||||
| Total consumer loans |
34,265,668 | 4,234,420 | 12.36 | % | 28,677,616 | 3,932,295 | 13.71 | % | 25,036,019 | 3,792,461 | 15.15 | % | ||||||||||||||||||
| Securities available for sale |
8,879,785 | 312,374 | 3.52 | % | 5,335,492 | 192,594 | 3.61 | % | 3,873,186 | 184,407 | 4.76 | % | ||||||||||||||||||
| Other |
||||||||||||||||||||||||||||||
| Domestic |
2,577,403 | 192,901 | 7.48 | % | 2,836,531 | 215,957 | 7.61 | % | 1,951,996 | 187,230 | 9.59 | % | ||||||||||||||||||
| International |
932,813 | 54,725 | 5.87 | % | 512,658 | 26,808 | 5.23 | % | 286,398 | 16,668 | 5.82 | % | ||||||||||||||||||
| Total Other |
3,510,216 | 247,626 | 7.05 | % | 3,349,189 | 242,765 | 7.25 | % | 2,238,394 | 203,898 | 9.11 | % | ||||||||||||||||||
| Total earning assets |
46,655,669 | $ | 4,794,420 | 10.28 | % | 37,362,297 | $ | 4,367,654 | 11.69 | % | 31,147,599 | $ | 4,180,766 | 13.42 | % | |||||||||||||||
| Cash and due from banks |
506,483 | 387,167 | 507,355 | |||||||||||||||||||||||||||
| Allowance for loan losses |
(1,473,003 | ) | (1,627,020 | ) | (1,178,243 | ) | ||||||||||||||||||||||||
| Premises and equipment, net |
874,960 | 833,343 | 802,544 | |||||||||||||||||||||||||||
| Other |
4,083,943 | 4,239,626 | 2,922,469 | |||||||||||||||||||||||||||
| Total assets |
$ | 50,648,052 | $ | 41,195,413 | $ | 34,201,724 | ||||||||||||||||||||||||
| Liabilities and Equity: |
||||||||||||||||||||||||||||||
| Interest-bearing liabilities |
||||||||||||||||||||||||||||||
| Deposits |
||||||||||||||||||||||||||||||
| Domestic |
$ | 22,517,293 | $ | 916,343 | 4.07 | % | $ | 18,550,273 | $ | 817,515 | 4.41 | % | $ | 14,650,582 | $ | 748,809 | 5.11 | % | ||||||||||||
| International |
1,795,996 | 93,202 | 5.19 | % | 1,217,690 | 74,135 | 6.09 | % | 956,360 | 63,080 | 6.60 | % | ||||||||||||||||||
| Total Deposits |
24,313,289 | 1,009,545 | 4.15 | % | 19,767,963 | 891,650 | 4.51 | % | 15,606,942 | 811,889 | 5.20 | % | ||||||||||||||||||
| Senior and subordinated notes |
7,203,423 | 486,812 | 6.76 | % | 5,915,300 | 423,826 | 7.16 | % | 5,668,343 | 408,205 | 7.20 | % | ||||||||||||||||||
| Other borrowings |
||||||||||||||||||||||||||||||
| Domestic |
8,518,817 | 295,029 | 3.46 | % | 7,061,192 | 267,066 | 3.78 | % | 5,689,369 | 240,530 | 4.23 | % | ||||||||||||||||||
| International |
1,360 | 56 | 4.12 | % | 1,532 | 23 | 1.50 | % | 23,350 | 1,030 | 4.41 | % | ||||||||||||||||||
| Total Other borrowings |
8,520,177 | 295,085 | 3.46 | % | 7,062,724 | 267,089 | 3.78 | % | 5,712,719 | 241,560 | 4.23 | % | ||||||||||||||||||
| Total interest-bearing liabilities |
40,036,889 | $ | 1,791,442 | 4.47 | % | 32,745,987 | $ | 1,582,565 | 4.83 | % | 26,988,004 | $ | 1,461,654 | 5.42 | % | |||||||||||||||
| Other |
3,315,616 | 3,125,956 | 3,065,570 | |||||||||||||||||||||||||||
| Total liabilities |
43,352,505 | 35,871,943 | 30,053,574 | |||||||||||||||||||||||||||
| Equity |
7,295,547 | 5,323,470 | 4,148,150 | |||||||||||||||||||||||||||
| Total liabilities and equity |
$ | 50,648,052 | $ | 41,195,413 | $ | 34,201,724 | ||||||||||||||||||||||||
| Net interest spread |
5.81 | % | 6.86 | % | 8.00 | % | ||||||||||||||||||||||||
| Interest income to average earning assets |
10.28 | % | 11.69 | % | 13.42 | % | ||||||||||||||||||||||||
| Interest expense to average earning assets |
3.84 | % | 4.24 | % | 4.69 | % | ||||||||||||||||||||||||
| Net interest margin |
6.44 | % | 7.45 | % | 8.73 | % | ||||||||||||||||||||||||
| (1) | Interest income includes past-due fees on loans of approximately $792.0 million, $799.3 million and $955.8 million for the years ended December 31, 2004, 2003 and 2002, respectively. Interest income includes $38.4 million related to the one-time impact of the change in recoveries assumption for the year ended December 31, 2002. This resulted in a 12 basis point increase in the net interest margin. |
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Table of Contents
Interest Variance Analysis
Net interest income is affected by changes in the average interest rate generated on earning assets and the average interest rate paid on interest-bearing liabilities. In addition, net interest income is affected by changes in the volume of earning assets and interest-bearing liabilities. Table 2 sets forth the dollar amount of the increases and decreases in interest income and interest expense resulting from changes in the volume of earning assets and interest-bearing liabilities and from changes in yields and rates.
Table 2: Interest Variance Analysis
| Year Ended December 31 | ||||||||||||||||||||||||
| 2004 vs. 2003 | 2003 vs. 2002 | |||||||||||||||||||||||
| Change due to(1) | Change due to(1) | |||||||||||||||||||||||
| (Dollars in thousands) | Increase (Decrease) |
Volume | Yield/ Rate |
Increase (Decrease)(2) |
Volume | Yield/ Rate |
||||||||||||||||||
| Interest Income: |
||||||||||||||||||||||||
| Consumer loans |
||||||||||||||||||||||||
| Domestic |
$ | 265,042 | $ | 621,769 | $ | (356,727 | ) | $ | 142,602 | $ | 527,384 | $ | (348,003 | ) | ||||||||||
| International |
37,083 | 91,268 | (54,185 | ) | (2,768 | ) | (4,294 | ) | 3,123 | |||||||||||||||
| Total consumer loans |
302,125 | 716,011 | (413,886 | ) | 139,834 | 516,636 | (338,426 | ) | ||||||||||||||||
| Securities available for sale |
119,780 | 124,802 | (5,022 | ) | 8,187 | 59,359 | (51,172 | ) | ||||||||||||||||
| Other |
||||||||||||||||||||||||
| Domestic |
(23,056 | ) | (19,446 | ) | (3,610 | ) | 28,727 | 72,817 | (44,090 | ) | ||||||||||||||
| International |
27,917 | 24,302 | 3,615 | 10,140 | 11,984 | (1,844 | ) | |||||||||||||||||
| Total Other |
4,861 | 11,471 | (6,610 | ) | 38,867 | 86,542 | (47,675 | ) | ||||||||||||||||
| Total interest income |
426,766 | 997,989 | (571,223 | ) | 186,888 | 764,253 | (538,989 | ) | ||||||||||||||||
| Interest Expense: |
||||||||||||||||||||||||
| Deposits |
||||||||||||||||||||||||
| Domestic |
98,828 | 164,969 | (66,141 | ) | 68,706 | 181,224 | (112,518 | ) | ||||||||||||||||
| International |
19,067 | 31,243 | (12,176 | ) | 11,055 | 16,202 | (5,147 | ) | ||||||||||||||||
| Total Deposits |
117,895 | 192,915 | (75,020 | ) | 79,761 | 197,260 | (117,499 | ) | ||||||||||||||||
| Senior and subordinated notes |
62,986 | 88,136 | (25,150 | ) | 15,621 | 17,704 | (2,083 | ) | ||||||||||||||||
| Other borrowings |
||||||||||||||||||||||||
| Domestic |
27,963 | 51,829 | (23,866 | ) | 26,536 | 53,744 | (27,208 | ) | ||||||||||||||||
| International |
33 | (3 | ) | 36 | (1,007 | ) | (590 | ) | (417 | ) | ||||||||||||||
| Total Other borrowings |
27,996 | 51,821 | (23,825 | ) | 25,529 | 52,916 | (27,387 | ) | ||||||||||||||||
| Total interest expense |
208,877 | 332,758 | (123,881 | ) | 120,911 | 289,535 | (168,624 | ) | ||||||||||||||||
| Net interest income |
$ | 217,889 | $ | 631,687 | $ | (413,798 | ) | $ | 65,977 | $ | 492,017 | $ | (387,664 | ) | ||||||||||
| (1) | The change in interest due to both volume and rates has been allocated in proportion to the relationship of the absolute dollar amounts of the change in each. The changes in income and expense are calculated independently for each line in the table. The totals for the volume and yield/rate columns are not the sum of the individual lines. |
| (2) | The change in interest income includes $38.4 million related to the one-time impact of the change in recoveries assumption for the year ended December 31, 2002. |
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Table of Contents
Servicing and Securitizations Income
Servicing and securitizations income represents servicing fees, excess spread and other fees relating to consumer loan receivables sold through securitization and other sale transactions, as well as gains and losses resulting from securitization transactions and fair value adjustments of the retained interests.
Servicing and securitizations income increased $432.1 million, or 13%, to $3.6 billion for the year ended December 31, 2004, from $3.2 billion for the year ended December 31, 2003. This increase was primarily the result of a 16% increase in the average off-balance sheet loan portfolio for the year ended December 31, 2004, compared to the prior year, partially offset by a reduction in the excess spread generated by the off-balance sheet portfolio due to a higher concentration of higher credit quality, lower yielding loans.
Servicing and securitizations income increased $406.2 million, or 14%, to $3.2 billion for the year ended December 31, 2003, from $2.8 billion for the year ended December 31, 2002. This increase was primarily the result of a 24% increase in the average off-balance sheet loan portfolio for the year ended December 31, 2003, compared to the prior year, offset in part by a reduction in the excess spread generated by the off-balance sheet loan portfolio due to decreased interest and fees and an increase in charge-offs.
Service Charges and Other Customer-Related Fees
Service charges and other customer-related fees decreased by $147.5 million, or 9%, to $1.5 billion for the year ended December 31, 2004 compared to $1.6 billion for the year ended December 31, 2003. The decrease is 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.
Service charges and other customer-related fees decreased by $307.6 million, or 16%, to $1.6 billion for the year ended December 31, 2003 compared to $1.9 billion for the year ended December 31, 2002. $44.4 million of the decrease relates to the one-time impact of the change in recoveries estimate recognized in 2002. The remaining decrease primarily reflects a shift in mix of the reported loan portfolio towards higher credit quality, lower fee-generating loans and a decrease in the number of accounts compared to the prior year.
Interchange Income
Interchange income increased $99.0 million, or 26%, to $475.8 million for the year ended December 31, 2004, compared to $376.8 million for the prior year. 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.
Interchange income decreased $71.0 million, or 16%, to $376.8 million for the year ended December 31, 2003, from $447.8 million for the year ended December 31, 2002. This decrease is primarily attributable to the securitization of higher interchange yielding loans moving them off-balance sheet. Total interchange income is net of $115.4 million of costs related to the Company’s rewards programs for the year ended December 31, 2003, compared to $104.9 million for the year ended December 31, 2002.
Other Non-Interest Income
Other non-interest income includes, among other items, 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 purchased charged-off loan portfolios.
38
Table of Contents
Other non-interest income increased $100.6 million, or 51%, to $297.9 million for the year ended December 31, 2004 compared to $197.3 million for the prior year. 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, when compared to 2003. These increases were partially offset by decreases in auto gains of $26.1 million and an $18.0 million increase in losses realized on the sale of securities and the repurchase of senior notes for the year ended December 31, 2004 when compared with the prior year.
Other non-interest income decreased $78.6 million, or 28%, to $197.3 million for the year ended December 31, 2003 compared to $275.9 million for the prior year. The decrease in other non-interest income was primarily due to $9.4 million of losses recognized on sales of securities for the year ended December 31, 2003, compared to $77.5 million of gains recognized on sales of securities for the year ended December 31, 2002. In addition, there were no gains recognized for senior note repurchases in 2003, compared to $27.0 million recognized in 2002. There was a $23.6 million decrease in the fair value of free-standing derivatives for the year ended December 31, 2003. These decreases were offset in part by a $38.2 million increase in gains on sales of auto loans for the year ended December 31, 2003 and an increase in income earned from purchased charged-off loan portfolios of $34.5 million for the year ended December 31, 2003, compared to 2002.
Non-Interest Expense
Non-interest expense, which consists of marketing and operating expenses, increased $465.5 million, or 10%, to $5.3 billion for the year ended December 31, 2004 compared to $4.9 billion for the year ended December 31, 2003. Marketing expense increased $219.4 million, or 20%, for the year ended December 31, 2004, compared to the prior year. The increase in marketing expense is the result of favorable opportunities to originate loans during 2004 combined with continued brand investments. Operating expenses were $4.0 billion for the year ended December 31, 2004, compared to $3.7 billion for December 31, 2003. The increase in operating expense of $246.1 was primarily due to $161.2 million in pre-tax charges consisting of $124.8 million in employee termination benefits and facility consolidation costs related to corporate-wide cost reduction initiatives, $20.6 million related to a change in asset capitalization thresholds and $15.8 million related to impairment of internally developed software. Additionally, a $41.8 million increase in professional services expense and a $50.5 million increase in expenses related to credit recovery efforts contributed to the increase in operating expense for the year ended December 31, 2004 when compared with the prior year. Although operating expenses increased, operating expenses as a percentage of average managed loans for the year ended December 31, 2004 fell 53 basis points to 5.41% from 5.94% for the prior year. This reduction reflects the continued improvement in the Company’s operating efficiencies.
Non-interest expense increased $271.1 million, or 6%, to $4.9 billion for the year ended December 31, 2003 compared to $4.6 billion for the year ended December 31, 2002. Marketing expense increased $47.8 million, or 4%, for the year ended December 31, 2003, compared to the prior year. The increase is the result of the Company investing in new and existing product opportunities. Operating expenses were $3.7 billion for the year ended December 31, 2003, compared to $3.5 billion for December 31, 2002. The increase in operating expense of $223.3 was primarily due to increased credit and recovery efforts of $137.1 million, investment in IT infrastructure to support future growth of $30.0 million and costs associated with the expansion of the Company’s enterprise risk management programs and systems to further strengthen internal controls.
Income Taxes
The Company’s income tax rate was 34.6%, 37% and 38% for the years ended December 31, 2004, 2003 and 2002, respectively. The decrease in the 2004 income tax rate was primarily due to increased profitability in the Company’s International businesses which are in lower taxed territories, investment in synthetic fuel credits and ongoing tax planning activities. The effective rate includes state, federal and international income tax components.
39
Table of Contents
Managed Consumer Loan Portfolio
The Company’s managed consumer loan portfolio is comprised of on-balance sheet and off-balance sheet loans.
The Company analyzes its financial performance on a managed consumer loan portfolio basis. The managed consumer loan portfolio includes securitized loans for which the Company has retained significant risks and potential returns. Table 3 summarizes the Company’s managed consumer loan portfolio.
Table 3: Managed Consumer Loan Portfolio
| Year Ended December 31 | |||||||||||||||
| (Dollars in thousands) |
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||
| Year-End Balances: |
|||||||||||||||
| Reported consumer loans: |
|||||||||||||||
| Domestic |
$ | 33,704,160 | $ | 29,848,366 | $ | 24,581,555 | $ | 18,546,426 | $ | 12,591,561 | |||||
| International |
4,511,431 | 3,001,903 | 2,762,375 | 2,374,588 | 2,521,151 | ||||||||||
| Total |
38,215,591 | 32,850,269 | 27,343,930 | 20,921,014 | 15,112,712 | ||||||||||
| Securitization Adjustments(1): |
|||||||||||||||
| Domestic |
35,622,362 | 33,749,566 | 29,834,441 | 22,747,293 | 13,961,714 | ||||||||||
| International |
6,023,346 | 4,644,961 | 2,568,166 | 1,595,656 | 449,600 | ||||||||||
| Total |
41,645,708 | 38,394,527 | 32,402,607 | 24,342,949 | 14,411,314 | ||||||||||
| Managed consumer loan portfolio: |
|||||||||||||||
| Domestic |
69,326,522 | 63,597,932 | 54,415,996 | 41,293,719 | 26,553,275 | ||||||||||
| International |
10,534,777 | 7,646,864 | 5,330,541 | 3,970,244 | 2,970,751 | ||||||||||
| Total |
$ | 79,861,299 | $ | 71,244,796 | $ | 59,746,537 | $ | 45,263,963 | $ | 29,524,026 | |||||
| Average Balances: |
|||||||||||||||
| Reported consumer loans: |
|||||||||||||||
| Domestic |
$ | 30,725,908 | $ | 25,923,208 | $ | 22,248,006 | $ | 14,648,298 | $ | 9,320,165 | |||||
| International |
3,539,760 | 2,754,408 | 2,788,013 | 2,636,008 | 2,167,611 | ||||||||||
| Total |
34,265,668 | 28,677,616 | 25,036,019 | 17,284,306 | 11,487,776 | ||||||||||
| Securitization Adjustments(1): |
|||||||||||||||
| Domestic |
34,286,547 | 30,980,006 | 25,812,000 | 17,718,683 | 10,804,845 | ||||||||||
| International |
5,159,458 | 3,254,331 | 1,951,547 | 609,328 | 342,241 | ||||||||||
| Total |
39,446,005 | 34,234,337 | 27,763,547 | 18,328,011 | 11,147,086 | ||||||||||
| Managed consumer loan portfolio: |
|||||||||||||||
| Domestic |
65,012,455 | 56,903,214 | 48,060,006 | 32,366,981 | 20,125,010 | ||||||||||
| International |
8,699,218 | 6,008,739 | 4,739,560 | 3,245,336 | 2,509,852 | ||||||||||
| Total |
$ | 73,711,673 | $ | 62,911,953 | $ | 52,799,566 | $ | 35,612,317 | $ | 22,634,862 | |||||
| (1) | Includes adjustments made related to the effects of securitization transactions qualifying as sales under GAAP and adjustments made to reclassify to “managed” loans outstanding the collectible portion of billed finance charge and fee income on the investors’ interest in securitized loans excluded from loans outstanding on the “reported” balance sheet in accordance with Financial Accounting Standards Board Staff Position, “Accounting for Accrued Interest Receivable Related to Securitized and Sold Receivables under FASB Statement 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” issued April 2003. |
40
Table of Contents
Table 4 indicates the impact of the consumer loan securitizations on average earning assets, net interest margin and loan yield for the periods presented. The Company intends to continue to securitize consumer loans.
Table 4: Comparison of Managed and Reported Operating Data and Ratios
| Year Ended December 31 | ||||||||||||
| (Dollars in thousands) |
2004 | 2003 | 2002 | |||||||||
| Reported: |
||||||||||||
| Average earning assets |
$ | 46,655,669 | $ | 37,362,297 | $ | 31,147,599 | ||||||
| Net interest margin(1) |
6.44 | % | 7.45 | % | 8.73 | % | ||||||
| Loan yield(2) |
12.36 | % | 13.71 | % | 15.15 | % | ||||||
| Managed: |
||||||||||||
| Average earning assets |
$ | 84,240,302 | $ | 69,873,159 | $ | 57,266,637 | ||||||
| Net interest margin(1) |
7.88 | % | 8.64 | % | 9.23 | % | ||||||
| Loan yield(2) |
13.05 | % | 13.88 | % | 14.64 | % | ||||||
| (1) | Reported and managed net interest margin increased 12 basis points and 7 basis points, respectively, as a result of the one-time impact of the change in recoveries assumption for the year ended December 31, 2002. |
| (2) | Reported and managed loan yield increased 15 basis points and 7 basis points, respectively, as a result of the one-time impact of the change in recoveries assumption for the year ended December 31, 2002. |
Return on Average Assets
The Company’s products are designed with the objective of maintaining strong risk-adjusted returns and providing diversification across the credit spectrum and consumer lending products. Management believes that a comparable measure for external analysis is the Company’s return on average assets.
The Company has aggressively marketed lending products to high credit quality consumers. In addition, the Company continues to diversify its products beyond U.S. consumer credit cards. While these products typically consist of lower yielding loans compared with those previously made, they provide favorable impacts on managed charge-offs, operating expenses and marketing as a percentage of average assets.
Table 5 provides income statement data and ratios for the Company’s reported and managed consumer loan portfolio. The causes of increases and decreases in the various components of net income are discussed in sections previous to this analysis.
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Table of Contents
Table 5: Return on Average Assets
| Year Ended December 31 | |||||||||||||||||||||
| (Dollars in thousands) | 2004 | 2003 | 2002 | ||||||||||||||||||
| Reported: |
|||||||||||||||||||||
| Average Assets |
$ | 50,648,052 | $ | 41,195,413 | $ | 34,201,724 | |||||||||||||||
| Revenue(1) |
8,903,135 | 17.58 | % | 8,201,013 | 19.91 | % | 8,185,948 | 23.93 | % | ||||||||||||
| Less Expense: |
|||||||||||||||||||||
| Provision |
(1,220,852 | ) | (2.41 | ) | (1,517,497 | ) | (3.68 | ) | (2,149,328 | ) | (6.28 | ) | |||||||||
| Operating |
(3,984,439 | ) | (7.87 | ) | (3,738,301 | ) | (9.07 | ) | (3,514,957 | ) | (10.28 | ) | |||||||||
| Marketing |
(1,337,780 | ) | (2.64 | ) | (1,118,422 | ) | (2.72 | ) | (1,070,624 | ) | (3.13 | ) | |||||||||
| Tax |
(816,582 | ) | (1.61 | ) | (675,914 | ) | (1.64 | ) | (551,395 | ) | (1.61 | ) | |||||||||
| Cumulative Effect of Accounting Change(2) |
— | — | (15,037 | ) | (0.04 | ) | — | — | |||||||||||||
| Net Income (ROA) |
$ | 1,543,482 | 3.05 | % | $ | 1,135,842 | 2.76 | % | $ | 899,644 | 2.63 | % | |||||||||
| Managed: |
|||||||||||||||||||||
| Average Assets |
$ | 89,492,579 | $ | 74,822,509 | $ | 61,411,901 | |||||||||||||||
| Revenue(1) |
10,859,328 | 12.13 | % | 10,238,540 | 13.68 | % | 9,695,512 | 15.79 | % | ||||||||||||
| Less Expense: |
|||||||||||||||||||||
| Provision |
(3,177,045 | ) | (3.55 | ) | (3,555,024 | ) | (4.75 | ) | (3,658,892 | ) | (5.96 | ) | |||||||||
| Operating |
(3,984,439 | ) | (4.45 | ) | (3,738,301 | ) | (5.00 | ) | (3,514,957 | ) | (5.72 | ) | |||||||||
| Marketing |
(1,337,780 | ) | (1.49 | ) | (1,118,422 | ) | (1.49 | ) | (1,070,624 | ) | (1.74 | ) | |||||||||
| Tax |
(816,582 | ) | (0.91 | ) | (675,914 | ) | (0.90 | ) | (551,395 | ) | (0.90 | ) | |||||||||
| Cumulative Effect of Accounting Change(2) |
— | — | (15,037 | ) | (0.02 | ) | — | — | |||||||||||||
| Net Income (ROA) |
$ | 1,543,482 | 1.73 | % | $ | 1,135,842 | 1.52 | % | $ | 899,644 | 1.47 | % | |||||||||
| (1) | Revenue equals net interest income plus non-interest income. |
| (2) | Cumulative effect of accounting change is related to the adoption of FASB interpretation No. 46, Consolidation of Variable Interest Entities. |
Asset Quality
The asset quality of a portfolio is generally a function of the initial underwriting criteria used, levels of competition, account management activities and demographic concentration, as well as general economic conditions. The Company’s credit risk profile is managed to maintain strong risk adjusted returns and increased diversification across the full credit spectrum and in each of its lending products. Certain customized lending products have, in some cases, higher delinquency and charge-off rates. The costs associated with higher delinquency and charge-off rates are considered in the pricing of individual products.
Delinquencies
The Company’s loan portfolio is comprised of predominantly small balance loans spread across the full credit spectrum. The Company believes delinquencies to be a primary indicator of loan portfolio credit quality at a point in time. Table 6 shows the Company’s consumer loan delinquency trends for the years presented on a reported and managed basis. The entire balance of an account is contractually delinquent if the minimum payment is not received by the payment due date. Delinquencies not only have the potential to impact earnings if the account charges off, but they also result in additional costs in terms of the personnel and other resources dedicated to resolving the delinquencies.
The 30-plus day delinquency rate for the reported consumer loan portfolio decreased 94 basis points to 3.85% at December 31, 2004, from 4.79% at December 31, 2003. The 30-plus day delinquency rate for the managed consumer loan portfolio was 3.82% at December 31, 2004, down 64 basis points from 4.46% at December 31, 2003. Both reported and managed consumer loan delinquency rate decreases principally reflect the Company’s continued asset diversification beyond U.S. consumer credit cards, a continued bias toward originating higher credit quality loans, improved collections experience and an overall improvement in general economic conditions.
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Table 6: Delinquencies
| As of December 31 | ||||||||||||||||||||||||||||||
| 2004 | 2003 | 2002(1) | 2001 | 2000 | ||||||||||||||||||||||||||
| (Dollars in thousands) |
Loans | % of Total Loans |
|
Loans | % of Total Loans |
|
Loans | % of Total Loans |
|
Loans | % of Total Loans |
|
Loans | % of Total Loans |
| |||||||||||||||
| Reported: |
||||||||||||||||||||||||||||||
| Loans outstanding |
$ | 38,215,591 | 100.00 | % | $ | 32,850,269 | 100.00 | % | $ | 27,343,930 | 100.00 | % | $ | 20,921,014 | 100.00 | % | $ | 15,112,712 | 100.00 | % | ||||||||||
| Loans delinquent: |
||||||||||||||||||||||||||||||
| 30-59 days |
741,723 | 1.94 | % | 755,930 | 2.30 | % | 762,040 | 2.79 | % | 494,871 | 2.37 | % | 418,967 | 2.77 | % | |||||||||||||||
| 60-89 days |
313,559 | 0.82 | % | 362,766 | 1.10 | % | 373,451 | 1.37 | % | 233,206 | 1.11 | % | 242,770 | 1.61 | % | |||||||||||||||
| 90-119 days |
196,457 | 0.51 | % | 207,353 | 0.63 | % | 238,091 | 0.87 | % | 144,957 | 0.69 | % | 178,001 | 1.18 | % | |||||||||||||||
| 120-149 days |
120,589 | 0.32 | % | 149,246 | 0.45 | % | 174,651 | 0.64 | % | 85,580 | 0.41 | % | 136,932 | 0.91 | % | |||||||||||||||
| 150 or more days |
99,866 | 0.26 | % | 98,164 | 0.31 | % | 125,636 | 0.45 | % | 53,943 | 0.26 | % | 120,641 | 0.79 | % | |||||||||||||||
| Total |
$ | 1,472,194 | 3.85 | % | $ | 1,573,459 | 4.79 | % | $ | 1,673,869 | 6.12 | % | $ | 1,012,557 | 4.84 | % | $ | 1,097,311 | 7.26 | % | ||||||||||
| Loans delinquent by geographic area: |
||||||||||||||||||||||||||||||
| Domestic |
1,380,022 | 4.05 | % | 1,509,370 | 5.06 | % | 1,611,650 | 6.56 | % | 930,077 | 5.02 | % | 1,034,995 | 8.23 | % | |||||||||||||||
| International |
92,172 | 2.04 | % | 64,089 | 2.13 | % | 62,219 | 2.25 | % | 82,480 | 3.47 | % | 62,316 | 2.46 | % | |||||||||||||||
| Managed: |
||||||||||||||||||||||||||||||
| Loans outstanding |
$ | 79,861,299 | 100.00 | % | $ | 71,244,796 | 100.00 | % | $ | 59,746,537 | 100.00 | % | $ | 45,263,963 | 100.00 | % | $ | 29,524,026 | 100.00 | % | ||||||||||
| Loans delinquent: |
||||||||||||||||||||||||||||||
| 30-59 days |
1,299,782 | 1.63 | % | 1,335,231 | 1.87 | % | 1,366,072 | 2.29 | % | 934,681 | 2.06 | % | 605,040 | 2.05 | % | |||||||||||||||
| 60-89 days |
664,629 | 0.83 | % | 718,247 | 1.01 | % | 753,735 | 1.26 | % | 502,959 | 1.11 | % | 349,250 | 1.18 | % | |||||||||||||||
| 90-119 days |
479,404 | 0.60 | % | 488,471 | 0.69 | % | 526,710 | 0.88 | % | 353,750 | 0.78 | % | 251,690 | 0.85 | % | |||||||||||||||
| 120-149 days |
336,924 | 0.42 | % | 365,971 | 0.51 | % | 394,721 | 0.66 | % | 251,434 | 0.56 | % | 184,061 | 0.62 | % | |||||||||||||||
| 150 or more days |
273,339 | 0.34 | % | 270,009 | 0.38 | % | 304,156 | 0.51 | % | 198,823 | 0.44 | % | 154,613 | 0.53 | % | |||||||||||||||
| Total |
$ | 3,054,078 | 3.82 | % | $ | 3,177,929 | 4.46 | % | $ | 3,345,394 | 5.60 | % | $ | 2,241,647 | 4.95 | % | $ | 1,544,654 | 5.23 | % | ||||||||||
| (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. |
Net Charge-Offs
Net charge-offs include the principal amount of losses (excluding accrued and unpaid finance charges and fees and fraud losses) less current period principal recoveries. The Company charges off credit card loans at 180 days past the due date and generally charges off other consumer loans at 120 days past the due date or upon repossession of collateral. Costs to recover previously charged-off accounts are recorded as collection expenses in other non-interest expense.
For the year ended December 31, 2004, the reported and managed net charge-off rates decreased 196 and 145 basis points, to 3.78% and 4.41%, respectively when compared with the prior year. The decrease in net charge-off rates principally relates to the Company’s continued asset diversification beyond U.S. consumer credit cards, a continued bias toward originating higher credit quality loans, improved collections experience and an overall improvement in general economic conditions.
Table 7 shows the Company’s net charge-offs for the years presented on a reported and managed basis.
Table 7: Net Charge-offs
| Year Ended December 31 | ||||||||||||||||||||
| (Dollars in thousands) |
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
| Reported: |
||||||||||||||||||||
| Average loans outstanding |
$ | 34,265,668 | $ | 28,677,616 | $ | 25,036,019 | $ | 17,284,306 | $ | 11,487,776 | ||||||||||
| Net charge-offs |
1,295,568 | 1,646,360 | 1,259,684 | 822,257 | 627,312 | |||||||||||||||
| Net charge-offs as a percentage of average loans outstanding |
3.78 | % | 5.74 | % | 5.03 | % | 4.76 | % | 5.46 | % | ||||||||||
| Managed: |
||||||||||||||||||||
| Average loans outstanding |
$ | 73,711,673 | $ | 62,911,953 | $ | 52,799,566 | $ | 35,612,617 | $ | 22,634,862 | ||||||||||
| Net charge-offs |
3,251,761 | 3,683,887 | 2,769,249 | 1,655,947 | 1,031,590 | |||||||||||||||
| Net charge-offs as a percentage of average loans outstanding |
4.41 | % | 5.86 | % | 5.24 | % | 4.65 | % | 4.56 | % | ||||||||||
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Provision For Loan Losses
The allowance for loan losses is maintained at an amount estimated to be sufficient to absorb probable principal losses, net of principal recoveries (including recovery of collateral), inherent in the existing reported loan portfolio. The provision for loan losses is the periodic cost of maintaining an adequate allowance. Management believes that, for all relevant periods, the allowance for loan losses was adequate to cover anticipated losses in the total reported loan portfolio under then current conditions, met applicable legal and regulatory guidance and was consistent with GAAP. There can be no assurance as to future credit losses that may be incurred in connection with the Company’s loan portfolio, nor can there be any assurance that the loan loss allowance that has been established by the Company will be sufficient to absorb such future credit losses. The allowance is a general allowance applicable to the reported consumer loan portfolio. The amount of allowance necessary is determined primarily based on a migration analysis of delinquent and current accounts and forward loss curves. In evaluating the sufficiency of the allowance for loan losses, management also takes into consideration the following factors: recent trends in delinquencies and charge-offs including bankrupt, deceased and recovered amounts; forecasting uncertainties and size of credit risks; the degree of risk inherent in the composition of the loan portfolio; economic conditions; legal and regulatory guidance; credit evaluations and underwriting policies; seasonality; and the value of collateral supporting the loans.
Table 8 sets forth the activity in the allowance for loan losses for the periods indicated. See “Asset Quality,” “Delinquencies” and “Net Charge-Offs” for a more complete analysis of asset quality.
Table 8: Summary of Allowance for Loan Losses
| Year Ended December 31 | ||||||||||||||||||||
| (Dollars in thousands) |
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
| Balance at beginning of year |
$ | 1,595,000 | $ | 1,720,000 | $ | 840,000 | $ | 527,000 | $ | 342,000 | ||||||||||
| Provision for loan losses: |
||||||||||||||||||||
| Domestic |
1,085,467 | 1,388,463 | 2,025,885 | 1,048,972 | 705,195 | |||||||||||||||
| International |
135,385 | 129,034 | 123,443 | 71,485 | 107,666 | |||||||||||||||
| Total provision for loan losses |
1,220,852 | 1,517,497 | 2,149,328 | 1,120,457 | 812,861 | |||||||||||||||
| Other |
(15,284 | ) | 3,863 | (9,644 | ) | 14,800 | (549 | ) | ||||||||||||
| Charge-offs: |
||||||||||||||||||||
| Domestic |
(1,614,075 | ) | (1,858,176 | ) | (1,363,565 | ) | (908,065 | ) | (693,106 | ) | ||||||||||
| International |
(135,198 | ) | (146,152 | ) | (127,276 | ) | (110,285 | ) | (79,296 | ) | ||||||||||
| Total charge-offs |
(1,749,273 | ) | (2,004,328 | ) | (1,490,841 | ) | (1,018,350 | ) | (772,402 | ) | ||||||||||
| Principal recoveries: |
||||||||||||||||||||
| Domestic |
410,493 | 320,349 | 203,412 | 176,102 | 136,334 | |||||||||||||||
| International |
43,212 | 37,619 | 27,745 | 19,991 | 8,756 | |||||||||||||||
| Total principal recoveries |
453,705 | 357,968 | 231,157 | 196,093 | 145,090 | |||||||||||||||
| Net charge-offs |
(1,295,568 | ) | (1,646,360 | ) | (1,259,684 | ) | (822,257 | ) | (627,312 | ) | ||||||||||
| Balance at end of year |
$ | 1,505,000 | $ | 1,595,000 | $ | 1,720,000 | $ | 840,000 | $ | 527,000 | ||||||||||
| Allowance for loan losses to loans at end of year |
3.94 | % | 4.86 | % | 6.29 | % | 4.02 | % | 3.49 | % | ||||||||||
| Allowance for loan losses by geographic distribution: |
||||||||||||||||||||
| Domestic |
$ | 1,354,849 | $ | 1,477,314 | $ | 1,636,405 | $ | 784,857 | $ | 451,074 | ||||||||||
| International |
150,151 | 117,686 | 83,595 | 55,143 | 75,926 | |||||||||||||||
For the year ended December 31, 2004, the provision for loan losses decreased $296.7 million, or 20%, to $1.2 billion from $1.5 billion for the year ended December 31, 2003. While the Company’s reported loan portfolio increased 16% to $38.2 billion at December 31, 2004 from $32.9 billion at December 31, 2003, 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
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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.
For the year ended December 31, 2003, the provision for loan losses decreased to $1.5 billion, or 29%, from $2.1 billion for the year ended December 31, 2002. This decrease resulted from the improving credit quality of the reported loan portfolio. The 30-plus day reported delinquency rate was 4.79% at December 31, 2003, down from 6.12% at December 31, 2002. While, the Company’s reported loan portfolio increased to $32.9 billion at December 31, 2003 from $27.3 billion at December 31, 2002, the impact of the loan growth to the allowance was mitigated by the growth being concentrated in higher credit quality loans and an improvement in collection experience.
Reportable Segments
The Company manages its business by three distinct operating segments: U.S. Card, Auto Finance and Global Financial Services. The U.S. Card, Auto Finance and Global Financial Services segments are considered reportable segments based on quantitative thresholds applied to the managed loan portfolio for reportable segments provided by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Management decision making is performed on a managed portfolio basis, and such information about reportable segments is provided on a managed basis.
The Company maintains its books and records on a legal entity basis for the preparation of financial statements in conformity with GAAP. The following table presents information prepared from the Company’s internal management information system, which is maintained on a line of business level through allocations from the consolidated financial results.
Table 9: Segments (Managed Basis)
| U.S. Card | Auto Finance | Global Financial Services | ||||||||||||||||||||||
| (Dollars in thousands) |
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | ||||||||||||||||||
| Loans receivable |
$ | 48,609,571 | $ | 46,278,750 | $ | 9,997,497 | $ | 8,466,873 | $ | 21,240,325 | $ | 16,507,937 | ||||||||||||
| Net income |
1,387,301 | 1,181,169 | 163,780 | 99,291 | 213,080 | 64,839 | ||||||||||||||||||
| Net charge-off rate |
5.05 | % | 6.88 | % | 3.28 | % | 4.62 | % | 3.39 | % | 3.83 | % | ||||||||||||
| 30+ Delinquency rate |
3.97 | 4.60 | 5.50 | 7.55 | 2.81 | 2.70 | ||||||||||||||||||
U.S. Card Segment
The U.S. Card segment consists of domestic credit card lending activities. Total U.S. Card segment loans increased 5% to $48.6 billion at December 31, 2004, compared to $46.3 billion at December 31, 2003. The Company achieved loan growth in this highly competitive segment by continuing to develop innovative new products and leverage its brand. The contribution to net income from the U.S. Card segment increased $206.1 million, or 17%, to $1.4 billion for the year ended December 31, 2004 when compared with the prior year. The increase in net income is attributable to growth in the loan portfolio, improving credit quality and operating efficiencies, partially offset by $62.1 million in after-tax severance and facility consolidation charges related to cost reduction initiatives and $9.6 million in after-tax charges related to a change in asset capitalization thresholds allocated to the U.S. Card segment during 2004.
The U.S. Card segment’s net charge-off rate decreased 183 basis points to 5.05% for the year ended December 31, 2004 when compared with the prior year. The reduction in the net charge-off rate resulted from a decrease in net charge-offs of $527.2 million, or 19%, while average U.S. Card segment loans grew 11% during 2004. The decrease in net charge-offs was driven by the Company’s continued bias toward originating higher credit quality loans, improved collections experience and an overall improvement in general economic conditions.
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The 30-plus day delinquency rate for the U.S. Card segment was 3.97% at December 31, 2004, down 63 basis points from December 31, 2003. The decrease in delinquencies is due to the Company’s continued bias toward originating higher credit quality loans, improved collections experience, and an overall improvement in general economic conditions.
Auto Finance Segment
The Auto Finance segment primarily consists of automobile financing activities. Total Auto Finance segment loans increased 18% to $10.0 billion at December 31, 2004, compared to $8.5 billion at December 31, 2003. The increase in auto loans was primarily the result of growth in prime loans originated through the internet and growth in loans originated in the dealer segment. For the year ended December 31, 2004, the net income contribution from the Auto Finance segment increased $64.5 million, or 65% compared to 2003, as a result of growth in the loan portfolio and improving credit loss experience.
The Company sold $901.3 million and $1.9 billion of auto loans in 2004 and 2003, respectively. These transactions resulted in pre-tax gains of $40.3 million and $66.4 million for the years ended December 31, 2004 and 2003, respectively. Pre-tax gains allocated to the Auto Finance segment, inclusive of allocations related to funds transfer pricing, were $41.7 million and $57.3 million in 2004 and 2003, respectively. During 2004, the Company terminated its forward flow auto receivables agreement; however, the Company plans to continue to sell auto receivables through other channels.
For the year ended December 31, 2004, the Auto Finance segment’s net charge-off rate was 3.28%, down 134 basis points from the prior year. Net charge-offs of Auto Finance segment loans decreased $54.8 million, or 15%, while average Auto Finance loans for the year ended December 31, 2004 grew $1.5 billion, or 19%, compared to the prior year. The decrease in the charge-off rate was primarily driven by improved loan quality, collections performance and favorable industry trends, partially offset by a $20.4 million one-time acceleration of charge-offs related to a change in the charge-off recognition process for auto loans in bankruptcy.
The 30-plus day delinquency rate for the Auto Finance segment was 5.50 % at December 31, 2004, down 205 basis points from 7.55% at December 31, 2003. The decrease in delinquencies was the result of a higher mix of prime loans and improved delinquency performance of non-prime loans.
Global Financial Services Segment
The Global Financial Services segment includes international lending activities (including credit card lending), installment lending, small business lending and healthcare financing. Total Global Financial Services segment loans increased 29% to $21.2 billion at December 31, 2004, compared to $16.5 billion at December 31, 2003. The increase in total loans reflects the Company’s continued successful efforts to diversify its loan portfolio, an increase in account growth and the impact of changes in foreign currency exchange rates. Net income contribution from the Global Financial Services segment for the year ended December 31, 2004, increased $148.2 million, to $213.1 million, compared to the prior year. Global Financial Services segment net income includes after-tax charges of $17.0 million related to severance and facility consolidation resulting from cost reduction initiatives, $2.4 million related to changes in asset capitalization thresholds, and $10.3 million from the impairment of internally developed software. The overall improvement in the Global Financial Services segment’s financial performance was primarily due to the success of many of the Company’s larger diversification businesses in the U.S. and U.K.
During 2004, the Company sold its interest in a South African joint venture with a book value of $3.9 million to its joint venture partner. The Company received $26.2 million in cash, was forgiven $9.2 million in liabilities and recognized a pre-tax gain of $31.5 million. Also during 2004, the Company sold its French loan portfolio with a book value of $144.8 million to an external party. The Company received $178.7 million in cash, recorded $7.2 million in notes receivable and recognized a pre-tax gain of $41.1 million. The respective gains were recorded in non-interest income and reported in the Global Financial Services segment.
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The Global Financial Services segment’s net charge-off rate was 3.39% for 2004, down 44 basis points when compared with the prior year. Net charge-offs increased $99.1 million, or 19% during 2004 while average Global Financial Services segment loans grew $4.7 billion, or 34%. The decrease in the net charge-off rate was driven primarily by a bias toward originating higher credit quality loans within the Global Financial Services segment, improved collection experience and an overall improvement in economic conditions.
The 30-plus day delinquency rate for the Global Financial Services segment was 2.81% at December 31, 2004, up 11 basis points from 2.70% at December 31, 2003. Global Financial Services delinquencies increased primarily as a result of an expansion of the international loan portfolio during 2004.
Funding
Funding Availability
The Company has established access to a variety of funding alternatives in addition to securitization of its consumer loans. Table 10 illustrates the Company’s unsecured funding sources.
Table 10: Funding Availability
| (Dollars or dollar equivalents in millions) | Effective/ Issue Date |
Availability(1)(5) | Outstanding | Final Maturity(4) | ||||||
| Senior and Subordinated Global Bank Note Program(2) |
1/03 | $ | 1,800 | $ | 4,877 | — | ||||
| Senior Domestic Bank Note Program(3) |
4/97 | — | $ | 232 | — | |||||
| Credit Facility |
6/04 | $ | 750 | — | 6/07 | |||||
| Collateralized Revolving Credit Facility |
— | $ | 4,153 | $ | 197 | — | ||||
| Corporation shelf registration |
7/02 | $ | 1,948 | N/A | — | |||||
| (1) | All funding sources are non-revolving except for the Credit Facility and the Collateralized Revolving Credit Facility. Funding availability under the credit facilities is subject to compliance with certain representations, warranties and covenants. Funding availability under all other sources is subject to market conditions. |
| (2) | The notes issued under the Global Senior and Subordinated Bank Note Program may have original terms of thirty days to thirty years from their date of issuance. This program was updated in April 2004. |
| (3) | The notes issued under the Senior Domestic Bank Note Program have original terms of one to ten years. The Senior Domestic Bank Note Program is no longer available for issuances. |
| (4) | Maturity date refers to the date the facility terminates, where applicable. |
| (5) | Availability does not include unused conduit capacity related to securitization structures of $5.5 billion at December 31, 2004. |
The Senior and Subordinated Global Bank Note Program gives the Bank the ability to issue securities to both U.S. and non-U.S. lenders and to raise funds in U.S. and foreign currencies. The Senior and Subordinated Global Bank Note Program had $4.9 billion outstanding at December 31, 2004. During 2004, under the Senior and Subordinated Global Bank Note Program, the Bank issued $500.0 million of ten-year, 5.125% fixed rate bank notes in February and $500.0 million of five-year, 5.00% fixed rate bank notes in June. Prior to the establishment of the Senior and Subordinated Global Bank Note Program, the Bank issued senior unsecured debt through its $8.0 billion Senior Domestic Bank Note Program, of which $231.6 million was outstanding at December 31, 2004. The Bank did not renew the Senior Domestic Bank Note Program for future issuances following the establishment of the Senior and Subordinated Global Bank Note Program.
In June 2004, the Company terminated its Domestic Revolving and Multicurrency Credit Facilities and replaced them with a new revolving credit facility providing for an aggregate of $750.0 million in unsecured borrowings from various lending institutions to be used for general corporate purposes (the “Credit Facility”). The Credit Facility is available to the Corporation, the Bank, the Savings Bank and Capital One Bank (Europe) plc. The Corporation’s availability has been increased to $500.0 million under the Credit Facility. All borrowings under the Credit Facility are based on varying terms of London InterBank Offering Rate (“LIBOR”).
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In April 2002, COAF entered into a revolving warehouse credit facility collateralized by a security interest in certain auto loan assets (the “Collateralized Revolving Credit Facility”). As of December 31, 2004, the credit facility had the capacity to issue up to $4.4 billion in secured notes. The Collateralized Revolving Credit Facility has multiple participants each with a separate renewal date. The facility does not have a final maturity date. Instead, each participant may elect to renew the commitment for another set period of time. Interest on the facility is based on commercial paper rates.
As of December 31, 2004, the Corporation had one effective shelf registration statement under which the Corporation from time to time may offer and sell senior or subordinated debt securities, preferred stock, common stock, common equity units and stock purchase contracts.
The Company continues to expand its retail deposit gathering efforts through both direct and broker marketing channels. As a result of the Company becoming a bank holding company and the amendment of the Bank’s Virginia charter, the Bank began accepting deposits of less than $100 thousand through its brokered channel. This change lowers the cost of deposits gathered through the brokered channel and materially expands its potential capacity. The Company uses its data analysis capabilities to test and market a variety of retail deposit origination strategies, including via the Internet, as well as, to develop customized account management programs. As of December 31, 2004, the Company had $25.6 billion in interest-bearing deposits of which $2.3 billion were held in foreign banking offices and $12.2 billion represented large denomination certificates of $100 thousand or more with original maturities up to ten years.
Table 11 shows the maturities of domestic time certificates of deposit in denominations of $100 thousand or greater (large denomination CDs) as of December 31, 2004.
Table 11: Maturities of Domestic Large Denomination Certificates—$100,000 or More
| December 31, 2004 | ||||||
| (dollars in thousands) | Balance | Percent | ||||
| Three months or less |
$ | 1,045,000 | 8.58 | % | ||
| Over 3 through 6 months |
1,099,953 | 9.03 | % | |||
| Over 6 through 12 months |
2,383,230 | 19.56 | % | |||
| Over 12 months through 10 years |
7,653,882 | 62.83 | % | |||
| Total |
$ | 12,182,065 | 100.00 | % | ||
Table 12 reflects the costs of other borrowings of the Company as of and for each of the years ended December 31, 2004, 2003 and 2002.
Table 12: Short-term Borrowings
| (Dollars in Thousands) | Maximum Outstanding as of any Month-End |
Outstanding as of Year-End |
Average Outstanding |
Average Interest Rate |
Year-End Interest Rate |
||||||||||
| 2004: |
|||||||||||||||
| Federal funds purchased and resale agreements |
$ | 1,154,073 | $ | 1,154,073 | $ | 503,482 | 1.29 | % | 1.78 | % | |||||
| Other |
1,318,404 | 201,622 | 763,303 | 3.85 | 2.10 | ||||||||||
| Total |
$ | 1,355,695 | $ | 1,266,785 | 2.83 | % | 1.83 | % | |||||||
| 2003: |
|||||||||||||||
| Federal funds purchased and resale agreements |
$ | 1,025,000 | $ | 45,000 | $ | 412,637 | 1.01 | % | 0.97 | % | |||||
| Other |
1,835,238 | 1,152,947 | 1,006,804 | 2.82 | 1.81 | ||||||||||
| Total |
$ | 1,197,947 | $ | 1,419,441 | 2.30 | % | 1.78 | % | |||||||
| 2002: |
|||||||||||||||
| Federal funds purchased and resale agreements |
$ | 1,741,911 | $ | 554,887 | $ | 1,118,185 | 1.66 | % | 1.26 | % | |||||
| Other |
1,418,184 | 897,208 | 844,715 | 2.96 | 2.09 | ||||||||||
| Total |
$ | 1,452,095 | $ | 1,962,900 | 2.22 | % | 1.77 | % | |||||||
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Additional information regarding funding can be found on pages 73-75 in Item 8 “Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 6”.
Funding Obligations
Table 13 summarizes the amounts and maturities of the contractual funding obligations of the Company, including off-balance sheet funding.
Table 13: Funding Obligations
| As of December 31, 2004 | |||||||||||||||
| Total | Up to 1 year | 1-3 years | 4-5 years | After 5 years | |||||||||||
| Interest-bearing deposits |
$ | 25,636,802 | $ | 7,682,475 | $ | 9,132,041 | $ | 7,591,092 | $ | 1,231,194 | |||||
| Senior and subordinated notes |
6,874,790 | 1,456,523 | 1,525,175 | 1,996,209 | 1,896,883 | ||||||||||
| Other borrowings(1) |
9,637,019 | 4,837,008 | 3,946,622 | 853,389 | — | ||||||||||
| Operating leases |
214,723 | 41,275 | 70,182 | 68,753 | 34,513 | ||||||||||
| Off-balance sheet securitization amortization |
41,102,148 | 8,379,324 | 15,003,728 | 11,708,133 | 6,010,963 | ||||||||||
| Total obligations |
$ | 83,465,482 | $ | 22,396,605 | $ | 29,677,748 | $ | 22,217,576 | $ | 9,173,553 | |||||
| (1) | Other borrowings includes secured borrowings for the Company’s on-balance sheet auto loan securitizations, junior subordinated capital income securities, federal funds purchased and resale agreements and other short-term borrowings. |
The terms of the lease and credit facility agreements related to certain other borrowings and operating leases in Table 13 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, 2004, 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, deposits, securitizations and other assets and liabilities.
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, 2004, the Corporation, the Bank, the Savings Bank and COAF collectively had over $10.5 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, 2004, the Company had $10.7 billion of such securities, cash and cash equivalents.
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, 2004 the Company funded approximately 52% of its managed loans through off-balance sheet securitizations. The Company expects to securitize additional loan principal receivables during 2005. The Company’s securitization program has maturities in 2005 and through 2019. 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
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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 and the Savings 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, which have remained resilient through adverse conditions. 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 Table 13. The Company utilizes deposits to fund loan and other asset growth and to diversify funding sources.
Direct deposits are deposits marketed to and received from individual customers without the use of a third-party intermediary. Other deposits are deposits generally obtained through the use of a third-party intermediary. Included in the Company’s other deposits at December 31, 2004, were brokered deposits of $9.1 billion, compared to $8.3 billion at December 31, 2003. These deposits represented 36% and 37% of total deposits at December 31, 2004 and 2003, respectively. If these brokered deposits are not renewed 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 deposits to “well-capitalized” insured depository institutions and, with a waiver from the Federal Deposit Insurance Corporation, to “adequately capitalized” institutions. At December 31, 2004, the Bank and Company were “well-capitalized” as defined under the federal bank regulatory guidelines. Based on the Company’s historical access to the brokered deposit market, it expects to replace maturing brokered deposits with new brokered deposits or with the Company’s direct deposits.
Other funding programs established by the Company include senior notes. At December 31, 2004, the Company had $6.9 billion in senior notes outstanding that mature in varying amounts from 2005 to 2014, as compared to $7.0 billion at December 31, 2003.
An additional source of funding for the Bank is provided by its global bank note program. Notes may be issued under this program with maturities of thirty days or more from the date of issue. During 2004, the Bank issued $1.0 billion (par value) of bank notes. At December 31, 2004, the Bank had $5.1 billion in bank notes outstanding. The bank notes are included in long-term debt and senior and subordinated notes in the Company’s balance sheet.
The Company also held $9.3 billion in available-for-sale investment securities and $1.4 billion of cash and cash equivalents at December 31, 2004, compared to $5.9 billion in investment securities and $2.0 billion of cash and
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cash equivalents at December 31, 2003. As of December 31, 2004, the weighted average life of the investment securities was approximately 3.6 years. These investment securities, along with cash and cash equivalents, provide increased liquidity and flexibility to support the Company’s funding requirements.
The Company has a $750.0 million credit facility committed through June 2007. The Company may take advances under the facility subject to covenants and conditions customary in a transaction of this nature. This facility may be used for general corporate purposes and was not drawn upon at December 31, 2004.
Derivative Instruments
The Company enters into interest rate swap agreements in order to manage interest rate exposure. In most cases, this exposure is related to the funding of fixed rate assets with floating rate obligations, including off-balance sheet securitizations. The Company also enters into forward foreign currency exchange contracts and cross currency swaps 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 has established policies and limits, as well as collateral agreements, to manage credit risk related to derivative instruments.
Additional information regarding derivative instruments can be found on pages 89-91 in Item 8 “Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 19”.
Market Risk Management
Interest Rate Risk
Interest rate risk refers to changes in earnings or the net present value of assets and off-balance sheet positions less liabilities (termed “economic value of equity”) due to interest rate changes. To the extent that managed interest income and expense do not respond equally to changes in interest rates, or that all rates do not change uniformly, earnings and economic value of equity could be affected. The Company’s managed net interest income is affected primarily by changes in short-term interest rates, as variable rate card receivables, securitization bonds and corporate debts are repriced. The Company manages and mitigates its interest rate sensitivity through several techniques, which include, but are not limited to, changing the maturity and repricing characteristics of various balance sheet categories and by entering into interest rate swaps.
The Company’s measurement of interest rate risk considers both earnings and market value exposures. The consolidated balance sheet and all off-balance sheet positions are included in the analysis. When available, contractual maturities related to balance sheet and off-balance sheet positions are assumed. Balance sheet positions lacking contractual maturities and those with a likelihood of maturing prior to their contractual term are assumed to mature consistent with business line expectations or, when available in the case of marketable securities, market expectations. The Company’s Asset/Liability Management Policy limits the change in projected 12-month net interest income due to instantaneous parallel rate shocks of up to 300 basis points to less than 3% of base net interest income. As of December 31, 2004 the Company estimated a 2.6% increase in 12 month net interest income for an immediate 300 basis point rate increase and a 2.9% decline in 12 month net interest income for an immediate 300 basis point rate decline. The impacts to net interest income resulting from the rate shocks do not consider the impact of loan convexity.
In addition to limits related to possible changes in 12-month net interest income, the Asset/Liability Management Policy limits the pre-tax change in economic value of equity due to instantaneous parallel rate shocks of 100 basis points to less than 6%. As of December 31, 2004, the estimated reduction in economic value of equity due to an adverse 100 basis point rate shock is 2.1%.
As of December 31, 2004, the Company was in compliance with all of its interest rate risk management related policies. The precision of the measures used to manage interest rate risk is limited due to the inherent uncertainty
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of the underlying forecast assumptions. The measurement of interest rate sensitivity also does not consider the effects of changes in the overall level of economic activity associated with various interest rate scenarios or reflect the ability of management to take action to further mitigate exposure to changes in interest rates. This action may include, within legal and competitive constraints, the repricing of interest rates on outstanding credit card loans.
Table 14 reflects the interest rate repricing schedule for earning assets and interest-bearing liabilities as of December 31, 2004.
Table 14: Interest Rate Sensitivity
| As of December 31, 2004—Subject to Repricing |
||||||||||||||||
| (Dollars in Millions) | Within 180 Days |
>180 Days- 1 Year |
>1 Year- 5 Years |
Over 5 Years |
||||||||||||
| Earning assets: |
||||||||||||||||
| Federal funds sold and resale agreements |
$ | 774 | $ | — | $ | — | $ | — | ||||||||
| Interest-bearing deposits at other banks |
310 | — | — | — | ||||||||||||
| Securities available for sale |
74 | 414 | 7,695 | 1,117 | ||||||||||||
| Other |
175 | 28 | 120 | 137 | ||||||||||||
| Consumer loans |
14,539 | 2,357 | 9,950 | 11,370 | ||||||||||||
| Total earning assets |
15,872 | 2,799 | 17,765 | 12,624 | ||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||
| Interest-bearing deposits |
3,669 | 4,013 | 16,724 | 1,231 | ||||||||||||
| Senior and subordinated notes |
1,457 | — | 3,521 | 1,897 | ||||||||||||
| Other borrowings |
3,237 | 999 | 4,181 | 1,220 | ||||||||||||
| Total interest-bearing liabilities |
8,363 | 5,012 | 24,426 | 4,348 | ||||||||||||
| Non-rate related net assets |
— | — | — | (6,911 | ) | |||||||||||
| Interest sensitivity gap |
7,509 | (2,213 | ) | (6,661 | ) | 1,365 | ||||||||||
| Impact of swaps |
2,016 | (413 | ) | (1,603 | ) | — | ||||||||||
| Impact of consumer loan securitizations |
(3,318 | ) | (334 | ) | (6,193 | ) | 9,845 | |||||||||
| Interest sensitivity gap adjusted for impact of securitizations and swaps |
$ | 6,207 | $ | (2,960 | ) | $ | (14,457 | ) | $ | 11,210 | ||||||
| Adjusted gap as a percentage of managed assets |
6.55 | % | (3.12 | ) % | (15.25 | ) % | 11.82 | % | ||||||||
| Adjusted cumulative gap |
$ | 6,207 | $ | 3,247 | $ | (11,210 | ) | $ | — | |||||||
| Adjusted cumulative gap as a percentage of managed assets |
6.55 | % | 3.43 | % | (11.82 | ) % | 0.00 | % | ||||||||
Foreign Exchange 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 all material foreign currency denominated transactions be hedged. As of December 31, 2004, the estimated reduction in 12-month earnings due to adverse foreign exchange rate movements corresponding to a 95% probability is less than 1%. The precision of this estimate is also limited due to the inherent uncertainty of the underlying forecast assumptions.
Capital Adequacy
Effective October 1, 2004, the Corporation registered as a bank holding company (“BHC”) with the Federal Reserve Bank of Richmond and became subject to the requirements of the Bank Holding Company Act of 1956, as amended. As a result of becoming a BHC, the Bank has amended its Virginia charter which removes
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restrictions on its activities and therefore permits the Bank to engage in a full range of lending, deposit-taking and other activities permissible under Virginia and federal banking laws and regulations. The Corporation also filed a notice with the Federal Reserve Bank of Richmond to retain its non-banking subsidiaries, including the Savings Bank and COAF, upon its conversion to a BHC.
The Company and the Bank are subject to capital adequacy guidelines adopted by the Federal Reserve Board (the “Federal Reserve”) while and the Savings Bank is subject to capital adequacy guidelines adopted by the Office of Thrift Supervision (the “OTS”) (collectively, the “regulators”). The capital adequacy guidelines require the Company, the Bank and the Savings Bank to maintain specific capital levels based upon quantitative measures of their assets, liabilities and off-balance sheet items. In addition, the Bank and Savings Bank must also adhere to the regulatory framework for prompt corrective action.
The most recent notifications received from the regulators categorized the Bank and the Savings Bank as “well-capitalized.” As of December 31, 2004, the Company’s, the Bank’s and the Savings Bank’s capital exceeded all minimum regulatory requirements to which they were subject, and there were no conditions or events since the notifications discussed above that management believes would have changed either the Company, the Bank or the Savings Bank’s capital category.
The Company, the Bank and Savings Bank treat a portion of their loans as “subprime” under the “Expanded Guidance for Subprime Lending Programs” (the “Subprime Guidelines”) issued by the four federal banking agencies and have assessed their capital and allowance for loan losses accordingly. Under the Subprime Guidelines, the Company, the Bank and the Savings Bank exceed the minimum capital adequacy guidelines as of December 31, 2004.
For purposes of the Subprime Guidelines, the Company has treated as subprime all loans in the Bank’s and Savings Bank’s targeted subprime programs to customers either with a FICO score of 660 or below or with no FICO score. The Bank and Savings Bank hold on average 200% of the total risk-based capital requirement that would otherwise apply to such assets. This results in higher levels of required regulatory capital at the Bank and the Savings Bank. As of December 31, 2004, approximately $5.3 billion or 18.3% of the Bank’s, and $2.3 billion or 16.6% of the Savings Bank’s, on-balance sheet assets were treated as subprime for purposes of the Subprime Guidelines.
The Company currently expects to operate each of the Bank and Savings Bank in the future with a total risk-based capital ratio of at least 12%. The Corporation has a number of alternatives available to meet any additional regulatory capital needs of the Bank and the Savings Bank, including substantial liquidity held at the Corporation and available for contribution.
Additionally, certain regulatory restrictions exist that limit the ability of the Bank and the Savings Bank to transfer funds to the Corporation. As of December 31, 2004, retained earnings of the Bank and the Savings Bank of $715.9 million and $633.3 million, respectively, were available for payment of dividends to the Corporation without prior approval by the regulators.
Additional information regarding capital adequacy can be found on pages 82-83 in Item 8 “Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 15”.
Dividend Policy
Although the Company expects to reinvest a substantial portion of its earnings in its business, the Company also intends to continue to pay regular quarterly cash dividends on its common stock. The declaration and payment of dividends, as well as the amount thereof, are subject to the discretion of the Board of Directors of the Company and will depend upon the Company’s results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. Accordingly, there can be no assurance
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that the Corporation will declare and pay any dividends. As a holding company, the ability of the Corporation to pay dividends is dependent upon the receipt of dividends or other payments from its subsidiaries. Applicable banking regulations and provisions that may be contained in borrowing agreements of the Corporation or its subsidiaries may restrict the ability of the Corporation’s subsidiaries to pay dividends to the Corporation or the ability of the Corporation to pay dividends to its stockholders.
Business Outlook
This business outlook section summarizes the Company’s expectations for earnings for 2005, and its primary goals and strategies for continued growth. The statements contained in this section are based on management’s current expectations and do not take into account any acquisitions, including the pending acquisition of Hibernia, that might occur during the year. Certain statements are forward looking, and therefore actual results could differ materially from those in our forward looking statements. Factors that could materially influence results are set forth throughout this section and on page 18 in Item 1 “Business – Risk Factors.”
Earnings Goals
The Company expects diluted earnings per share results between $6.60 and $7.00 in 2005, which represents an increase of between 6% and 13% over its diluted earnings per share of $6.21 in 2004. The expected diluted earnings per share results for 2005 include the impact of the issuance of common stock under the forward purchase contracts in May of 2005 related to the upper DECs issued in April of 2002.
The Company’s 2005 earnings per share estimate is based on its expectations for continued strong earnings in its U.S. Card segment and increasing earnings contributions from its Auto Finance and Global Financial Services segments. The Company anticipates its managed loan growth rate in 2005 to be between 12 and 15 percent, with a higher growth rate in its diversification businesses than in its U.S. Card business.
The Company’s earnings are a function of its revenues (net interest income and non-interest income), consumer usage, payment and attrition patterns, the credit quality and growth rate of its earning assets (which affect fees, charge-offs and provision expense) and the Company’s marketing and operating expenses. Specific factors likely to affect the Company’s 2005 earnings are the portion of its loan portfolio it holds in lower loss assets, changes in consumer payment behavior, the competitive, legal, regulatory and reputational environment and the level of investments and growth in its diversification businesses.
The Company expects to achieve these results based on the continued success of its business strategies and its current assessment of the competitive, regulatory and funding market environments that it faces (each of which is discussed elsewhere in this document), as well as the expectation that the geographies in which the Company competes will not experience significant consumer credit quality erosion, as might be the case in an economic downturn or recession.
Managed Revenue Margin
The Company expects its managed revenue margin (defined as managed net interest income plus managed non-interest income divided by average managed earning assets) to be modestly lower over time as a result of the Company’s continuing diversification efforts and its bias towards lower loss assets. Due to their product features, these assets may generate lower fee and interest revenue as a percentage of average loan balance than the Company’s current portfolio. However, as discussed more fully below, assets held in the Company’s diversification businesses typically have higher average balances than the loans in the Company’s current portfolio and, as a result, the Company is expected to have lower operating and marketing expenses as a percentage of average managed loans. The Company also expects these assets to have lower charge-offs.
Marketing Investment
The Company expects its’ marketing investment, including brand, in 2005 to be similar to that experienced in 2004, subject to opportunities it perceives in the competitive market. The Company believes the branded
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franchise that it is building strengthens and enables its current and future direct marketing and mass customization strategies across product lines. The Company cautions, however, that an increase or decrease in marketing expense, including brand, does not necessarily correlate to a comparable increase or decrease in loan balances or accounts due to, among other factors, the long-term nature of brand building, customer attrition and utilization patterns, variations in customer response rates and shifts over time in targeting consumers and/or products that have varying marketing acquisition costs.
The Company expects to vary its marketing across its various products depending on the competitive dynamics of the various markets in which it participates. The Company expects to adjust its marketing allocations from time to time to target specific product lines that it believes offer attractive response rates and opportunities.
Due to the nature of competitive market dynamics and therefore the limited periods of opportunity identified by the Company’s testing processes, marketing expenditures may fluctuate significantly from quarter to quarter. However, the Company expects that the higher growth rate in its diversification businesses than its U.S. card business will lead to a gradual decline through 2005 in its marketing costs as a percentage of average managed loans; however, the Company expects that absolute 2005 marketing costs will be similar to 2004 levels.
Operating Cost Trends
The Company believes that a successful focus on managing operating costs is a critical component of its financial outlook. The Company measures operating efficiency using a variety of metrics which vary by specific department or business unit. Nevertheless, the Company believes that overall annual operating costs as a percentage of managed loans (defined as all non-interest expense less marketing, divided by average managed loans) is an appropriate gauge of the operating efficiency of the Company as a whole. As the Company continues its move to more diversified businesses, the Company expects operating costs as a percentage of its average managed loans to decline over time as a result of efficiency gains related to, among other things, servicing higher balance, higher credit quality accounts.
Managed Loan Growth
The Company expects managed loans to grow between 12 and 15 percent in 2005, with a higher growth rate in its diversification businesses than in its U.S. Card business.
Managed Delinquencies and Net Charge-offs
The Company’s managed net charge-off rate improved during 2004 due to its continued asset diversification beyond U.S. consumer credit cards, a continued bias toward originating higher credit quality loans, improved collections experience and improving economic conditions. The Company does not expect to continue to realize improvement at the same rate. The Company expects its managed charge-off rate will stay in the 4 percent to 4.5 percent range in 2005, with quarterly variations.
The Company’s managed delinquency rate decreased modestly during the fourth quarter of 2004. Generally, fluctuations in delinquency levels can have several effects, including changes in the amounts of past-due and overlimit fees assessed (lower delinquencies typically cause lower assessments), changes to the non-accrued amounts for finance charges and fees (lower delinquencies typically decrease non-accrued amounts), increased or decreased collections expenses, and/or changes in the reported allowance for loan losses and the associated provision expenses. The Company’s reported allowance for loan losses in a given period is a function of reported charge-offs in the period, the reported delinquency status of reported loans and other factors, such as the Company’s assessment of general economic conditions and the amount of outstanding loans added to the reported balance sheet during the period.
The Company expects a net reported allowance build in 2005, with an expected allowance release in the first quarter of 2005 related to the seasonal decrease in loans expected in the quarter. The outlook is based on current
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and expected reported charge-off and delinquency rates, as well as expected reported loan growth, a higher growth rate in its diversification businesses than its U.S. Card business, and a continuation of current economic conditions. This outlook is sensitive to general economic conditions, employment trends, and bankruptcy trends, in addition to growth of the Company’s reported loans.
Managed Return on Assets
The Company expects that its managed return on assets will be between 1.7 and 1.8 percent for the full year of 2005, with some quarterly variability.
The Company’s Core Strategy: IBS
The Company’s core strategy has been, and is expected to continue to be, to apply its proprietary IBS to its consumer lending businesses and other financial products. The Company continues to seek to identify new product and new market opportunities, and to make investment decisions based on the Company’s intensive testing and analysis. The Company’s objective is to continue diversifying its consumer finance activities, which may include expansion into additional geographic markets, other consumer loan products (including home loan lending and installment lending), small business lending, and/or the branch banking business.
The Company’s lending products and other products are subject to intense competitive pressures that management anticipates will continue to increase as the lending markets mature, and it could affect the economics of decisions that the Company has made or will make in the future in ways that it did not anticipate, test or analyze.
U.S. Card Segment
The Company’s U.S. Card segment consisted of $48.6 billion of U.S. consumer credit card loans as of December 31, 2004, marketed to consumers across the full credit spectrum. The Company’s strategy for its U.S. Card segment is to offer compelling, value-added products to its customers. The Company expects balanced growth across the various credit risk segments of its credit card portfolio in 2005.
The competitive environment 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, has put pressure on growth throughout the credit card industry. These competitive pressures are continuing to increase due to, among other things, increasing consolidation within the industry. Despite this intense pressure, the Company continues to believe that its IBS capabilities will enable it to originate new credit card accounts that exceed the Company’s return on investment requirements and to generate a loan growth rate in excess of the industry growth rate.
The Company’s credit card products marketed to consumers with less established or higher risk credit profiles continue to experience steady mail volume and increased pricing competition from across the industry. These products generally feature higher annual percentage rates, lower credit lines, and annual membership fees. These products produce revenues more quickly than higher credit quality loans. Additionally, since these borrowers are generally viewed as higher risk, they tend to be more likely to pay late or exceed their credit limit, which results in additional fees assessed to their accounts. The Company’s strategy has been, and is expected to continue to be, to offer competitive annual percentage rates and annual membership fees on these accounts.
Auto Finance Segment
The Company’s Auto Finance segment consisted of $10.0 billion of U.S. auto loans as of December 31, 2004, marketed across the full credit spectrum, via direct and dealer marketing channels. The Company sold $901.3 million of auto finance receivables in 2004. The Company plans to continue to sell auto receivables in 2005.
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In January 2005, the Company acquired Onyx Acceptance Corporation, an indirect auto finance provider. This acquisition will provide expanded growth opportunities by enhancing the Company’s product line, especially among prime and near prime borrowers. The transaction, including the associated restructuring charges, is not expected to have a material effect on Capital One’s earnings in 2005.
The Company expects that in 2005 the Auto Finance segment will continue to grow loans at a faster pace than the U.S. Card segment.
Global Financial Services Segment
The GFS segment consisted of $21.2 billion of loans as of December 31, 2004, primarily consisting of installment loans and small business receivables originated within the U.S. and credit card loans and installment loans originated outside of the U.S., primarily in the U.K. and Canada.
In January 2005, the Company acquired Hfs Group, a UK-based home equity broker. This acquisition broadens and deepens the Company’s presence in the UK market by adding an additional customer channel and gaining experience in additional lending products.
In February 2005, the Company acquired eSmartloan, a U.S. based home equity broker. This acquisition broadens and enhances the Company’s capabilities in the growing U.S. home equity market by acquiring a position as a home equity originator and a proprietary scalable technology platform.
In January 2005, the Company acquired InsLogic, an insurance brokerage firm. This acquisition will allow the Company to leverage its direct marketing capabilities by offering consumers insurance brokerage services. InsLogic brings proprietary technology, an operational platform and strong carrier relationships.
The products contained within the GFS segment play a key role in the asset diversification strategy of the Company, and thus the Company expects the GFS segment will grow its loan portfolio and profits at a faster pace than the U.S. Card segment.
| 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 51-52.
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| Item 8. | Financial Statements and Supplementary Data |
CONSOLIDATED BALANCE SHEETS
| December 31 (In Thousands, Except Share and Per Share Data) | 2004 | 2003 | ||||||
| Assets: |
||||||||
| Cash and due from banks |
$ | 327,517 | $ | 382,212 | ||||
| Federal funds sold and resale agreements |
773,695 | 1,010,319 | ||||||
| Interest-bearing deposits at other banks |
309,999 | 587,751 | ||||||
| Cash and cash equivalents |
1,411,211 | 1,980,282 | ||||||
| Securities available for sale |
9,300,454 | 5,866,628 | ||||||
| Consumer loans |
38,215,591 | 32,850,269 | ||||||
| Less: Allowance for loan losses |
(1,505,000 | ) | (1,595,000 | ) | ||||
| Net loans |
36,710,591 | 31,255,269 | ||||||
| Accounts receivable from securitizations |
4,081,271 | 4,748,962 | ||||||
| Premises and equipment, net |
817,704 | 902,600 | ||||||
| Interest receivable |
252,857 | 214,295 | ||||||
| Other |
1,173,167 | 1,315,670 | ||||||
| Total assets |
$ | 53,747,255 | $ | 46,283,706 | ||||
| Liabilities: |
||||||||
| Interest-bearing deposits |
$ | 25,636,802 | $ | 22,416,332 | ||||
| Senior and subordinated notes |
6,874,790 | 7,016,020 | ||||||
| Other borrowings |
9,637,019 | 7,796,613 | ||||||
| Interest payable |
237,227 | 256,015 | ||||||
| Other |
2,973,228 | 2,746,915 | ||||||
| Total liabilities |
45,359,066 | 40,231,895 | ||||||
| Stockholders’ Equity: |
||||||||
| Preferred stock, par value $.01 per share; authorized 50,000,000 shares, none issued or outstanding |
— | — | ||||||
| Common stock, par value $.01 per share; authorized 1,000,000,000 shares, 248,354,259 and 236,352,914 issued as of December 31, 2004 and 2003, respectively |
2,484 | 2,364 | ||||||
| Paid-in capital, net |
2,711,327 | 1,937,302 | ||||||
| Retained earnings |
5,596,372 | 4,078,508 | ||||||
| Cumulative other comprehensive income |
144,759 | 83,158 | ||||||
| Less: Treasury stock, at cost; 1,520,962 and 1,310,582 shares as of December 31, 2004 and 2003, respectively |
(66,753 | ) | (49,521 | ) | ||||
| Total stockholders’ equity |
8,388,189 | 6,051,811 | ||||||
| Total liabilities and stockholders’ equity |
$ | 53,747,255 | $ | 46,283,706 | ||||
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF INCOME
| Year Ended December 31 (In Thousands, Except Per Share Data) | 2004 | 2003 | 2002 | ||||||
| Interest Income: |
|||||||||
| Consumer loans, including past-due fees |
$ | 4,234,420 | $ | 3,932,295 | $ | 3,792,461 | |||
| Securities available for sale |
312,374 | 192,594 | 184,407 | ||||||
| Other |
247,626 | 242,765 | 203,898 | ||||||
| Total interest income |
4,794,420 | 4,367,654 | 4,180,766 | ||||||
| Interest Expense: |
|||||||||
| Deposits |
1,009,545 | 891,650 | 811,889 | ||||||
| Senior and subordinated notes |
486,812 | 423,826 | 408,205 | ||||||
| Other borrowings |
295,085 | 267,089 | 241,560 | ||||||
| Total interest expense |
1,791,442 | 1,582,565 | 1,461,654 | ||||||
| Net interest income |
3,002,978 | 2,785,089 | 2,719,112 | ||||||
| Provision for loan losses |
1,220,852 | 1,517,497 | 2,149,328 | ||||||
| Net interest income after provision for loan losses |
1,782,126 | 1,267,592 | 569,784 | ||||||
| Non-Interest Income: |
|||||||||
| Servicing and securitizations |
3,643,808 | 3,211,662 | 2,805,501 | ||||||
| Service charges and other customer-related fees |
1,482,658 | 1,630,185 | 1,937,735 | ||||||
| Interchange |
475,810 | 376,785 | 447,747 | ||||||
| Other |
297,881 | 197,292 | 275,853 | ||||||
| Total non-interest income |
5,900,157 | 5,415,924 | 5,466,836 | ||||||
| Non-Interest Expense: |
|||||||||
| Salaries and associate benefits |
1,642,721 | 1,570,415 | 1,557,887 | ||||||
| Marketing |
1,337,780 | 1,118,422 | 1,070,624 | ||||||
| Communications and data processing |
475,355 | 448,110 | 406,071 | ||||||
| Supplies and equipment |
349,920 | 344,049 | 357,953 | ||||||
| Occupancy |
206,614 | 185,179 | 205,531 | ||||||
| Other |
1,309,829 | 1,190,548 | 987,515 | ||||||
| Total non-interest expense |
5,322,219 | 4,856,723 | 4,585,581 | ||||||
| Income before income taxes and cumulative effect of accounting change |
2,360,064 | 1,826,793 | 1,451,039 | ||||||
| Income taxes |
816,582 | 675,914 | 551,395 | ||||||
| Income before cumulative effect of accounting change |
1,543,482 | 1,150,879 | 899,644 | ||||||
| Cumulative effect of accounting change, net of taxes of $8,832 |
— | 15,037 | — | ||||||
| Net income |
$ | 1,543,482 | $ | 1,135,842 | $ | 899,644 | |||
| Basic earnings per share before cumulative effect of accounting change |
$ | 6.55 | $ | 5.12 | $ | 4.09 | |||
| Basic earnings per share after cumulative effect of accounting change |
$ | 6.55 | $ | 5.05 | $ | 4.09 | |||
| Diluted earnings per share before cumulative effect of accounting change |
$ | 6.21 | $ | 4.92 | $ | 3.93 | |||
| Diluted earnings per share after cumulative effect of accounting change |
$ | 6.21 | $ | 4.85 | $ | 3.93 | |||
| Dividends paid per share |
$ | 0.11 | $ | 0.11 | $ | 0.11 | |||
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
| Common Stock |
Paid-In Capital, Net |
Deferred Compensation |
Retained Earnings |
Cumulative Other Comprehensive Income (Loss) |
Treasury Stock |
Total Stockholders’ Equity |
||||||||||||||||||||||||
| (In Thousands, Except Per Share Data) |
Shares |
Amount |
||||||||||||||||||||||||||||
| Balance, December 31, 2001 |
217,656,985 | $ | 2,177 | $ | 1,394,596 | $ | (44,488 | ) | $ | 2,090,761 | $ | (84,598 | ) | $ | (34,970 | ) | $ | 3,323,478 | ||||||||||||
| Comprehensive income: |
||||||||||||||||||||||||||||||
| Net income |
— | — | — | — | 899,644 | — | — | 899,644 | ||||||||||||||||||||||
| Other comprehensive income, net of income tax: |
||||||||||||||||||||||||||||||
| Unrealized gains on securities, net of income taxes of $28,619 |
— | — | — | — | — | 46,694 | — | 46,694 | ||||||||||||||||||||||
| Foreign currency translation adjustments |
— | — | — | — | — | 41,816 | — | 41,816 | ||||||||||||||||||||||
| Loss on cash flow hedging instruments, net of income tax benefit of $11,938 |
— | — | — | — | — | (19,478 | ) | — | (19,478 | ) | ||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | — | 69,032 | — | 69,032 | ||||||||||||||||||||||
| Comprehensive income |
— | — | — | — | — | — | — | 968,676 | ||||||||||||||||||||||
| Cash dividends—$.11 per share |
— | — | — | — | (23,457 | ) | — | — | (23,457 | ) | ||||||||||||||||||||
| Issuance of mandatory convertible securities |
— | — | 36,616 | — | — | — | — | 36,616 | ||||||||||||||||||||||
| Issuances of common and restricted stock |
7,968,831 | 80 | 317,454 | (85,231 | ) | — | — | 18 | 232,321 | |||||||||||||||||||||
| Exercise of stock options |
1,447,346 | 14 | 55,585 | — | — | — | — | 55,599 | ||||||||||||||||||||||
| Amortization of deferred compensation |
— | — | — | 27,749 | — | — | — | 27,749 | ||||||||||||||||||||||
| Other items, net |
— | — | 2,189 | — | — | — | — | 2,189 | ||||||||||||||||||||||
| Balance, December 31, 2002 |
227,073,162 | 2,271 | 1,806,440 | (101,970 | ) | 2,966,948 | (15,566 | ) | (34,952 | ) | 4,623,171 | |||||||||||||||||||
| Comprehensive income: |
||||||||||||||||||||||||||||||
| Net income |
— | — | — | — | 1,135,842 | — | — | 1,135,842 | ||||||||||||||||||||||
| Other comprehensive income, net of income tax: |
||||||||||||||||||||||||||||||
| Unrealized losses on securities, net of income tax benefit of $12,247 |
— | — | — | — | — | (20,853 | ) | — | (20,853 | ) | ||||||||||||||||||||
| Foreign currency translation adjustments |
— | — | — | — | — | 71,290 | — | 71,290 | ||||||||||||||||||||||
| Unrealized gain on cash flow hedging instruments, net of income taxes of $28,359 |
— | — | — | — | — | 48,287 | — | 48,287 | ||||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | — | 98,724 | — | 98,724 | ||||||||||||||||||||||
| Comprehensive income |
1,234,566 | |||||||||||||||||||||||||||||
| Cash dividends—$.11 per share |
— | — | — | — | (24,282 | ) | — | — | (24,282 | ) | ||||||||||||||||||||
| Purchase of treasury stock |
— | — | — | — | — | — | (14,569 | ) | (14,569 | ) | ||||||||||||||||||||
| Issuances of common and restricted stock, net of forfeitures |
3,755,271 | 38 | 201,515 | (165,906 | ) | — | — | — | 35,647 | |||||||||||||||||||||
| Exercise of stock options |
5,524,481 | 55 | 147,532 | — | — | — | — | 147,587 | ||||||||||||||||||||||
| Amortization of deferred compensation |
— | — | — | 40,743 | — | — | — | 40,743 | ||||||||||||||||||||||
| Common stock issuable under incentive plan |
— | — | 8,706 | — | — | — | — | 8,706 | ||||||||||||||||||||||
| Other items, net |
— | — | 242 | — | — | — | — | 242 | ||||||||||||||||||||||
| Balance, December 31, 2003 |
236,352,914 | 2,364 | 2,164,435 | (227,133 | ) | 4,078,508 | 83,158 | (49,521 | ) | 6,051,811 | ||||||||||||||||||||
| Comprehensive income: |
||||||||||||||||||||||||||||||
| Net income |
— | — | — | — | 1,543,482 | — | — | 1,543,482 | ||||||||||||||||||||||
| Other comprehensive income, net of income tax: |
||||||||||||||||||||||||||||||
| Unrealized losses on securities, net of income tax benefit of $29,048 |
— | — | — | — | — | (51,112 | ) | — | (51,112 | ) | ||||||||||||||||||||
| Foreign currency translation adjustments |
— | — | — | — | — | 65,242 | — | 65,242 | ||||||||||||||||||||||
| Unrealized gain on cash flow hedging instruments, net of income taxes of $26,516 |
— | — | — | — | — | 47,471 | — | 47,471 | ||||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | — | 61,601 | — | 61,601 | ||||||||||||||||||||||
| Comprehensive income |
1,605,083 | |||||||||||||||||||||||||||||
| Cash dividends—$.11 per share |
— | — | — | — | (25,618 | ) | — | — | (25,618 | ) | ||||||||||||||||||||
| Purchase of treasury stock |
— | — | — | — | — | — | (17,232 | ) | (17,232 | ) | ||||||||||||||||||||
| Issuances of common and restricted stock, net of forfeitures |
(59,534 | ) | (1 | ) | 7,182 | 16,729 | — | — | — | 23,910 | ||||||||||||||||||||
| Exercise of stock options |
12,060,879 | 121 | 622,940 | — | — | — | — | 623,061 | ||||||||||||||||||||||
| Amortization of deferred compensation |
— | — | — | 87,431 | — | — | — | 87,431 | ||||||||||||||||||||||
| Common stock issuable under incentive plan |
— | — | 39,743 | — | — | — | — | 39,743 | ||||||||||||||||||||||
| Balance, December 31, 2004 |
248,354,259 | $ | 2,484 | $ | 2,834,300 | $ | (122,973 | ) | $ | 5,596,372 | $ | 144,759 | $ | (66,753 | ) | $ | 8,388,189 | |||||||||||||
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31 (In Thousands) | 2004 | 2003 | 2002 | |||||||||
| Operating Activities: |
||||||||||||
| Net Income |
$ | 1,543,482 | $ | 1,135,842 | $ | 899,644 | ||||||
| Adjustments to reconcile net income to cash provided by operating activities: |
||||||||||||
| Cumulative effect of accounting change |
— | 23,869 | — | |||||||||
| Provision for loan losses |
1,220,852 | 1,517,497 | 2,149,328 | |||||||||
| Depreciation and amortization, net |
381,852 | 384,016 | 383,527 | |||||||||
| Impairment of long-lived assets |
69,769 | 10,250 | — | |||||||||
| Losses (gains) on sales of securities available for sale |
23,049 | 9,366 | (77,515 | ) | ||||||||
| Gains on sales of auto loans |
(40,342 | ) | (66,436 | ) | (28,213 | ) | ||||||
| Losses (gains) on repurchase of senior notes |
4,287 | — | (26,969 | ) | ||||||||
| Stock plan compensation expense |
127,174 | 49,449 | 27,749 | |||||||||
| (Increase) decrease in interest receivable |
(38,562 | ) | 3,217 | (112,053 | ) | |||||||
| Decrease (increase) in accounts receivable from securitizations |
664,204 | (1,132,630 | ) | (645,775 | ) | |||||||
| Decrease (increase) in other assets |
307,960 | 557,347 | (857,116 | ) | ||||||||
| (Decrease) increase in interest payable |
(18,788 | ) | 19,934 | 47,921 | ||||||||
| Increase (decrease) increase in other liabilities |
282,818 | (473,612 | ) | 746,501 | ||||||||
| Net cash provided by operating activities |
4,527,755 | 2,038,109 | 2,507,029 | |||||||||
| Investing Activities: |
||||||||||||
| Purchases of securities available for sale |
(6,564,370 | ) | (4,609,649 | ) | (5,748,073 | ) | ||||||
| Proceeds from maturities of securities available for sale |
1,713,373 | 1,451,582 | 1,329,994 | |||||||||
| Proceeds from sales of securities available for sale |
1,274,862 | 1,671,025 | 3,255,488 | |||||||||
| Proceeds from sale of automobile loans |
931,003 | 2,007,263 | 1,519,582 | |||||||||
| Proceeds from securitizations of consumer loans |
10,854,927 | 11,466,122 | 12,533,886 | |||||||||
| Net increase in consumer loans |
(18,927,583 | ) | (20,946,541 | ) | (22,499,904 | ) | ||||||
| Principal recoveries of loans previously charged off |
453,705 | 357,968 | 231,157 | |||||||||
| Additions of premises and equipment, net |
(208,975 | ) | (262,650 | ) | (275,436 | ) | ||||||
| Net cash used in investing activities |
(10,473,058 | ) | (8,864,880 | ) | (9,653,306 | ) | ||||||
| Financing Activities: |
||||||||||||
| Net increase in interest-bearing deposits |
3,220,470 | 5,090,367 | 4,486,997 | |||||||||
| Net increase in other borrowings |
1,840,148 | 1,253,025 | 2,369,290 | |||||||||
| Issuances of senior notes |
998,190 | 2,489,878 | 300,000 | |||||||||
| Maturities of senior notes |
(1,031,892 | ) | (1,059,940 | ) | (562,605 | ) | ||||||
| Repurchases of senior notes |
(128,747 | ) | — | (203,453 | ) | |||||||
| Issuance of mandatory convertible securities |
— | — | 725,075 | |||||||||
| Purchases of treasury stock |
(17,232 | ) | (4,069 | ) | — | |||||||
| Dividends paid |
(25,618 | ) | (24,282 | ) | (23,457 | ) | ||||||
| Net proceeds from issuances of common stock |
23,910 | 25,147 | 232,321 | |||||||||
| Proceeds from exercise of stock options |
497,003 | 118,149 | 33,649 | |||||||||
| Net cash provided by financing activities |
5,376,232 | 7,888,275 | 7,357,817 | |||||||||
| (Decrease) increase in cash and cash equivalents |
(569,071 | ) | 1,061,504 | 211,540 | ||||||||
| Cash and cash equivalents at beginning of year |
1,980,282 | 918,778 | 707,238 | |||||||||
| Cash and cash equivalents at end of year |
$ | 1,411,211 | $ | 1,980,282 | $ | 918,778 | ||||||
See Notes to Consolidated Financial Statements.
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Note 1
Significant Accounting Policies
Business
The Consolidated Financial Statements include the accounts of Capital One Financial Corporation (the “Corporation”) and its subsidiaries. The Corporation is a bank holding 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”), which offers consumer lending (including credit cards) and deposit products, and Capital One Auto Finance, Inc. (“COAF”) which offers primarily automobile financing products. The Corporation and its subsidiaries are collectively referred to as the “Company.”
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) that require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
All significant intercompany balances and transactions have been eliminated. Certain prior years’ amounts have been reclassified to conform to the 2004 presentation.
The following is a summary of the significant accounting policies used in preparation of the accompanying Consolidated Financial Statements.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions, (“SFAS 153”). SFAS 153 requires exchanges of nonmonetary assets to be measured at the fair value of the assets exchanged. SFAS 153 applies to nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 is not expected to have a material impact on the consolidated earnings or financial position of the Company.
In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment, (“SFAS 123(R)”) which requires compensation cost related to share-based payment transactions to be recognized in the financial statements, and that the cost be measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. In December 2003, the Company adopted the expense recognition provisions of Statement of Financial Accounting Standard No. 123, Accounting for Stock Based Compensation, (“SFAS 123”), under the prospective method allowed by Statement of Financial Accounting Standard No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123, (“SFAS 148”), to all awards granted, modified, or settled after January 1, 2003. The provisions of SFAS 123(R) must be applied using the modified prospective method which requires the Company to recognize compensation expense for the unvested portion of all awards granted prior to January 1, 2003. The adoption of SFAS 123(R) is not expected to have a material impact on the consolidated earnings or financial position of the Company.
In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, (“SFAS 150”). SFAS 150 provides guidance on the reporting of various types of financial instruments as liabilities or equity. SFAS 150 is effective for instruments entered into or modified after May 31, 2003 and it is effective for pre-existing instruments beginning July 1, 2003. The adoption of SFAS 150 did not have an impact on the consolidated earnings or financial position of the Company.
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In April 2003, the FASB issued Statement of Financial Accounting Standard No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, (“SFAS 149”). SFAS 149 amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, for certain decisions made by the FASB as part of the Derivatives Implementation Group (“DIG”) process and clarifies the definition of a derivative. SFAS 149 also contains amendments to existing accounting pronouncements to provide more consistent reporting of contracts that are derivatives or contracts that contain embedded derivatives that require separate accounting. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS 149 did not have an impact on the consolidated earnings or financial position of the Company.
In April 2003, the FASB issued FASB Staff Position on Accounting for Accrued Interest Receivable Related to Securitized and Sold Receivables under SFAS No. 140, (the “FSP on AIR”). The FSP on AIR adopts the provisions of the Interagency Advisory on the Accounting Treatment of Accrued Interest Receivable Related to Credit Card Securitizations (the “AIR Advisory”) issued jointly by the Office of the Comptroller of the Currency, The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision. Under the AIR Advisory and the FSP on AIR, any subordinated finance charge and fee receivables on the investors’ interest in securitized loans should be treated as retained beneficial interests and not reported as part of “Loans Receivable” or other terminology implying that it has not been subordinated to the senior interests in the securitization. The FSP on AIR became effective for fiscal quarters beginning after March 31, 2003. The Company reclassified $460.6 million and $577.0 million in subordinated finance charge and fee receivables on the investors’ interest in securitized loans for December 31, 2004 and 2003, respectively, from “Consumer loans” to “Accounts receivable from securitizations” on the Consolidated Balance Sheets and reclassified $69.2 million, $74.8 million, and $76.2 million for the years ended December 31, 2004, 2003, and 2002, respectively, in interest income derived from such balances from “Consumer Loan Interest Income” to “Other Interest Income” on the Consolidated Statements of Income. Information required for the reclassification was unavailable for periods prior to 2002.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (“FIN 46”). In December 2003, the FASB issued FASB Interpretation 46 (Revised December 2003), Consolidation of Variable Interest Entities, and Interpretation of ARB No. 51 (“FIN 46(R)”) to provide clarification of certain provisions of FIN 46 as originally issued, and to defer the effective dates for certain entities. These interpretations address consolidation of business enterprises of variable interest entities (“VIEs”), which have certain characteristics. These characteristics include either that the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties; or that the equity investors in the entity lack one or more of the essential characteristics of a controlling financial interest. The Company elected to early adopt the provisions of FIN 46 for the interim period ended September 30, 2003. The Company has consolidated all material VIEs for which the Company is the primary beneficiary, as defined under FIN 46, effective July 1, 2003. The Company recorded premises and equipment of $139.8 million, other borrowings of $178.3 million and recognized a charge of $15.0 million, net of tax, for a cumulative effect of a change in accounting principle for the year ended December 31, 2003.
The Company has determined that it does not have any significant interest in VIEs for which it is not the primary beneficiary. All securitization transactions that receive sale treatment under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities—a Replacement of SFAS No. 125 (“SFAS 140”), are accomplished through qualifying special purpose entities and such transactions are not subject to the provisions of FIN 46(R). The Company has also evaluated the trust related to the junior subordinated capital income securities under the provisions of FIN 46(R) and has determined that the deconsolidation of the trust would not have a material impact on the consolidated earnings or financial position of the Company.
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 December 31, 2004, 2003 and
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2002 was $1.8 billion, $1.6 billion and $1.4 billion, respectively. Cash paid for income taxes for the years ended December 31, 2004, 2003 and 2002 was $705.1 million, $571.2 million and $585.8 million, respectively.
Securities Available for Sale
The Company classifies all debt securities as securities available for sale. These securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of cumulative other comprehensive income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization or accretion is included in interest income. Realized gains and losses on sales of securities are determined using the specific identification method. The Company evaluates its unrealized loss positions for impairment in accordance with EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”.
Revenue Recognition
The Company recognizes earned finance charges and fee income on loans according to the contractual provisions of the credit arrangements. When the Company does not expect full payment of finance charges and fees, it does not accrue the estimated uncollectible portion as income (hereafter the “suppression amount”). To calculate the suppression amount, the Company first estimates the uncollectible portion of finance charge and fee receivables using a formula based on historical account migration patterns and current delinquency status. This formula is consistent with that used to estimate the allowance related to expected principal losses on reported loans. The suppression amount is calculated by adding any current period change in the estimate of the uncollectible portion of finance charge and fee receivables to the amount of finance charges and fees charged-off (net of recoveries) during the period. The Company subtracts the suppression amount from the total finance charges and fees billed during the period to arrive at total reported revenue. The amount of finance charge and fees suppressed were $1.1 billion, $2.0 billion and $2.2 billion for the years ended December 31, 2004, 2003 and 2002, respectively.
Interchange income is a fee paid by a merchant bank to the card-issuing bank through the interchange network. Interchange fees are set by MasterCard International Inc. (“MasterCard”) and Visa U.S.A. Inc. (“Visa”) and are based on cardholder 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 the interest method for auto loan originations. Direct loan origination costs consist of both internal and external costs associated with the origination of a loan. Deferred fees (net of deferred costs) were $302.5 million and $319.8 million as of December 31, 2004 and 2003, respectively.
Rewards
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, based on purchase volume. The Company establishes a rewards liability based upon points earned which are ultimately expected to be redeemed and the average cost per point redemption. As points are redeemed, the rewards liability is relieved. The estimated cost of reward programs is reflected as a reduction to interchange income. The cost of reward programs related to securitized loans is deducted from servicing and securitizations income.
Loan Securitizations
Loan securitization involves the transfer of a pool of loan receivables to a trust or other special purpose entity. The trust sells an undivided interest in the pool of loan receivables to third-party investors through the issuance of asset backed securities and distributes the proceeds to the Company as consideration for the loans transferred. The Company removes loan receivables from the Consolidated Balance Sheets for securitizations that qualify as sales in accordance with SFAS 140. The trusts are qualified special purpose entities as defined by SFAS 140 and
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are not subsidiaries of the Company and are not included in the Company’s consolidated financial statements. Gains on securitization transactions, fair value adjustments related to residual interests and earnings on the Company’s securitizations are included in servicing and securitizations income in the Consolidated Statements of Income and amounts due from the trusts are included in accounts receivable from securitizations on the Consolidated Balance Sheets.
The gain on sale recorded from off-balance sheet securitizations is based on the estimated fair value of the assets sold and retained and liabilities incurred, and is recorded at the time of sale, net of transaction costs, in servicing and securitizations income on the Consolidated Statements of Income. 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, estimated contractual servicing fees and credit losses. To the extent assumptions used by management do not prevail, fair value estimates of the interest-only strip could differ significantly, resulting in either higher or lower future servicing and securitization income, as applicable.
Allowance for Loan Losses
The allowance for loan losses is maintained at the amount estimated to be sufficient to absorb probable principal losses, net of principal recoveries (including recovery of collateral), inherent in the existing reported loan portfolio. The provision for loan losses is the periodic cost of maintaining an adequate allowance. The amount of allowance necessary is determined primarily based on a migration analysis of delinquent and current accounts and forward loss curves. The entire balance of an account is contractually delinquent if the minimum payment is not received by the payment due date. In evaluating the sufficiency of the allowance for loan losses, management takes into consideration the following factors: recent trends in delinquencies and charge-offs including bankrupt, deceased and recovered amounts; forecasting uncertainties and size of credit risks; the degree of risk inherent in the composition of the loan portfolio; economic conditions; legal and regulatory guidance; credit evaluations and underwriting policies; seasonality; and the value of the collateral supporting the loans. To the extent credit experience is not indicative of future performance or other assumptions 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 charges off credit card loans at 180 days past the due date, and generally charges off other consumer loans, including auto loans, at 120 days past the due date or upon repossession of collateral. Bankrupt consumers’ accounts, excluding auto accounts, are generally charged-off within 30 days of receipt of the bankruptcy petition. Bankrupt auto accounts are charged-off at 120 days past the due date. Amounts collected on previously charged-off accounts related to principal are included in recoveries for the determination of net charge-offs. Costs to recover previously charged-off accounts are recorded as collection expense in other non-interest expense.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. The Company capitalizes direct costs (including external costs for purchased software, contractors, consultants and internal staff costs) for internally developed software projects that have been identified as being in the application development stage. Depreciation and amortization expenses are computed generally by the straight-line method over the estimated useful lives of the assets. Useful lives for premises and equipment are as follows: buildings and improvements—5-39 years; furniture and equipment—3-10 years; computers and software—3 years.
Goodwill
The Company performs annual impairment tests for acquisition goodwill in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”).
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Marketing
The Company expenses marketing costs as incurred. Television advertising costs are expensed during the period in which the advertisements are aired.
Credit Card Fraud Losses
The Company experiences fraud losses from the unauthorized use of credit cards. Transactions suspected of being fraudulent are charged to non-interest expense after a sixty-day investigation period.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Segments
The accounting policies of operating and reportable segments, as defined by the Statement of Financial Accounting Standard No. 131, Disclosures about Segments of an Enterprise and Related Information, (“SFAS 131”) are the same as those described elsewhere in this footnote. Revenue for all segments is derived from external parties. Performance evaluation of and resource allocation to each reportable segment is based on a wide range of indicators to include both historical and forecasted operating results. See Note 2, Segments, for further discussion of the Company’s operating and reportable segments.
Derivative Instruments and Hedging Activities
The Company recognizes all of its derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains and losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation.
For derivative instruments that are designated and qualify as fair value hedges (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk is recognized in current earnings during the period of the change in fair values. For derivative instruments that are designated and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. For derivative instruments that are designated and qualify as hedges of a net investment in a foreign operation, the gain or loss is reported in other comprehensive income as part of the cumulative translation adjustment to the extent it is effective. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change in the fair value.
The Company formally documents all hedging relationships, as well as its risk management objective and strategy for undertaking the hedge transaction. The hedge instrument and the hedged item are designated at the execution of the hedge instrument or upon re-designation during the life of the hedge. At inception, at least quarterly or upon re-designation, the Company also formally assesses whether the derivatives that are used in
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hedging transactions have been highly effective in offsetting changes in the hedged items to which they are designated and whether those derivatives may be expected to remain highly effective in future periods. Hedge effectiveness is assessed and measured under identical time periods. To the extent that hedges qualify under paragraph 68 of SFAS 133, the Company uses the short-cut method to assess effectiveness. Otherwise, the Company utilizes the dollar-offset method or matches the significant terms of the derivative and hedge item to determine that the hedging transactions are/or have been highly effective. Changes in fair value of the hedged item and the hedge instrument are maintained over the life of the hedge and are recorded as of the last day of the month or quarter. The Company will discontinue hedge accounting prospectively when it is determined that a derivative has ceased to be highly effective as a hedge.
Stock-Based Compensation
Prior to 2003, the Company applied Accounting Principles Board Opinion No. 25, Accounting for 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 of the underlying common stock on the date of grant. Effective January 1, 2003, the Company adopted the expense recognition provisions of SFAS No. 123, prospectively to all awards granted, modified, or settled after January 1, 2003. Typically, awards under the Company’s plans vest over a three year period. Therefore, cost related to stock-based compensation included in net income for 2004 and 2003 is less than that which would have been recognized if the fair value method had been applied to all awards since the original effective date of SFAS 123. The effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period is presented in the table below. The fair value of options was estimated at the date of grant using the Black-Scholes option-pricing model and is amortized into expense over the options’ vesting period.
| For the years ended December 31 |
||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| Pro Forma Information |
||||||||||||
| Net income, as reported |
$ | 1,543,482 | $ | 1,135,842 | $ | 899,644 | ||||||
| Stock-based employee compensation expense included in reported net income |
77,800 | 31,842 | 17,204 | |||||||||
| Stock-based employee compensation expense determined under fair value based method(1) |
(192,904 | ) | (173,707 | ) | (174,439 | ) | ||||||
| Pro forma net income |
$ | 1,428,378 | $ | 993,977 | $ | 742,409 | ||||||
| Earnings per share: |
||||||||||||
| Basic—as reported |
$ | 6.55 | $ | 5.05 | $ | 4.09 | ||||||
| Basic—pro forma |
$ | 6.06 | $ | 4.42 | $ | 3.37 | ||||||
| Diluted—as reported |
$ | 6.21 | $ | 4.85 | $ | 3.93 | ||||||
| Diluted—pro forma |
$ | 5.71 | $ | 4.33 | $ | 3.37 | ||||||
| (1) | Includes amortization of compensation expense for current year grants and prior year grants over the options’ vesting period. |
Change in Recoveries Classification
During 2002, the Company changed its financial statement presentation of recoveries of charged-off loans in response to guidelines that were published by the Federal Financial Institutions Examination Council (“FFIEC”) with respect to credit card account management. Prior to 2002, the Company recognized all recoveries of charged-off loans in the allowance for loan losses and provision for loan losses. Starting in 2002, the Company classifies the portion of recoveries related to finance charges and fees as revenue. The 2002 change in the classification of recoveries resulted in a change to the 2002 recoveries estimate used as part of the calculation of the Company’s December 31, 2002, allowance for loan losses and 2002 finance charge and fee revenue. The change in the recoveries estimate resulted in an increase to the allowance for loan losses and a reduction of the amount of finance charges and fees deemed uncollectible under the Company’s revenue recognition policy for
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the year ended December 31, 2002. The change in estimate resulted in an increase of $38.4 million to interest income and $44.4 million to non-interest income offset by an increase in the provision for loan losses of $133.4 million for the year ended December 31, 2002. Therefore, net income for the year ended December 31, 2002, was negatively impacted by $31.4 million or $.14 per diluted share as a result of the change in estimate.
Note 2
Segments
The Company maintains three distinct operating segments: U.S. Card, Auto Finance, and Global Financial Services. The U.S. Card segment consists of domestic credit card lending activities. The Auto Finance segment consists of automobile financing activities. The Global Financial Services segment is comprised of international lending activities (including credit card lending), installment lending, small business lending and healthcare financing. The U.S. Card, Auto Finance and Global Financial Services segments are considered reportable segments based on quantitative thresholds applied to the managed loan portfolio for reportable segments provided by SFAS No. 131 and are disclosed separately. The Other caption includes the Company’s liquidity portfolio, emerging businesses not included in the reportable segments, investments in external companies, and various non-lending activities. The Other caption also includes the net impact of transfer pricing, certain unallocated expenses and gains/losses related to the securitization of assets.
Management decision making is performed on a managed portfolio basis. An adjustment to reconcile the managed financial information to the reported financial information in the consolidated financial statements is provided. This adjustment reclassifies a portion of net interest income, non-interest income and provision for loan losses into non-interest income from servicing and securitization.
The Company maintains its books and records on a legal entity basis for the preparation of financial statements in conformity with GAAP. The following tables present information prepared from the Company’s internal management information system, which is maintained 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.
| For the Year Ended December 31, 2004 | |||||||||||||||||||||||
| U.S. Card | Auto Finance |
Global Financial |
Other | Total Managed |
Securitization Adjustments |
Total Reported | |||||||||||||||||
| Net interest income |
$ | 4,655,897 | $ | 797,936 | $ | 1,421,508 | $ | (240,599 | ) | $ | 6,634,742 | $ | (3,631,764 | ) | $ | 3,002,978 | |||||||
| Non-interest income |
3,219,567 | 80,712 | 844,192 | 80,115 | 4,224,586 | 1,675,571 | 5,900,157 | ||||||||||||||||
| Provision for loan losses |
2,207,888 | 279,981 | 683,612 | 5,564 | 3,177,045 | (1,956,193 | ) | 1,220,852 | |||||||||||||||
| Non-interest expenses |
3,499,918 | 342,761 | 1,265,549 | 213,991 | 5,322,219 | — | 5,322,219 | ||||||||||||||||
| Income tax provision (benefit) |
780,357 | 92,126 | 103,459 | (159,360 | ) | 816,582 | — | 816,582 | |||||||||||||||
| Net income (loss) |
$ | 1,387,301 | $ | 163,780 | $ | 213,080 | $ | (220,679 | ) | $ | 1,543,482 | $ | — | $ | 1,543,482 | ||||||||
| Loans receivable |
$ | 48,609,571 | $ | 9,997,497 | $ | 21,240,325 | $ | 13,906 | $ | 79,861,299 | $ | (41,645,708 | ) | $ | 38,215,591 | ||||||||
| For the Year Ended December 31, 2003 | |||||||||||||||||||||||
| U.S. Card | Auto Finance |
Global Financial |
Other | Total Managed |
Securitization Adjustments |
Total Reported | |||||||||||||||||
| Net interest income |
$ | 4,287,814 | $ | 727,987 | $ | 1,072,098 | $ | (49,985 | ) | $ | 6,037,914 | $ | (3,252,825 | ) | $ | 2,785,089 | |||||||
| Non-interest income |
3,583,357 | 101,984 | 605,821 | (90,536 | ) | 4,200,626 | 1,215,298 | 5,415,924 | |||||||||||||||
| Provision for loan losses |
2,647,406 | 382,952 | 595,543 | (70,877 | ) | 3,555,024 | (2,037,527 | ) | 1,517,497 | ||||||||||||||
| Non-interest expenses |
3,348,894 | 289,414 | 988,321 | 253,963 | 4,880,592 | — | 4,880,592 | ||||||||||||||||
| Income tax provision (benefit) |
693,702 | 58,314 | 29,216 | (114,150 | ) | 667,082 | — | 667,082 | |||||||||||||||
| Net income (loss) |
$ | 1,181,169 | $ | 99,291 | $ | 64,839 | $ | (209,457 | ) | $ | 1,135,842 | $ | — | $ | 1,135,842 | ||||||||
| Loans receivable |
$ | 46,278,750 | $ | 8,466,873 | $ | 16,507,937 | $ | (8,764 | ) | $ | 71,244,796 | $ | (38,394,527 | ) | $ | 32,850,269 | |||||||
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| For the Year Ended December 31, 2002 | ||||||||||||||||||||||||
| U.S. Card | Auto Finance |
Global Financial |
Other | Total Managed |
Securitization Adjustments |
Total Reported | ||||||||||||||||||
| Net interest income |
$ | 3,931,880 | $ | 544,501 | $ | 750,540 | $ | 57,417 | $ | 5,284,338 | $ | (2,565,226 | ) | $ | 2,719,112 | |||||||||
| Non-interest income |
3,874,987 | 65,509 | 504,438 | (33,760 | ) | 4,411,174 | 1,055,662 | 5,466,836 | ||||||||||||||||
| Provision for loan losses |
2,801,423 | 361,717 | 440,616 | 55,136 | 3,658,892 | (1,509,564 | ) | 2,149,328 | ||||||||||||||||
| Non-interest expenses |
3,391,283 | 231,741 | 827,376 | 135,181 | 4,585,581 | — | 4,585,581 | |||||||||||||||||
| Income tax provision (benefit) |
613,381 | 6,290 | (4,883 | ) | (63,393 | ) | 551,395 | — | 551,395 | |||||||||||||||
| Net income (loss) |
$ | 1,000,780 | $ | 10,262 | $ | (8,131 | ) | $ | (103,267 | ) | $ | 899,644 | $ | — | $ | 899,644 | ||||||||
| Loans receivable |
$ | 40,862,142 | $ | 6,992,541 | $ | 11,868,006 | $ | 23,848 | $ | 59,746,537 | $ | (32,402,607 | ) | $ | 27,343,930 | |||||||||
During the year ended December 31, 2004, the Company recognized non-interest expenses which included $124.8 million in early termination and facility consolidation charges related to cost reduction initiatives, $20.6 million related to a change in asset capitalization thresholds and $15.8 million related to impairment of internally developed software. Of these amounts, $109.6 million was allocated to the U.S. Card segment, $45.4 million was allocated to the Global Financial Services segment, $4.5 million was allocated to the Auto Finance segment, and $1.7 million was held in the Other category.
During 2002, the Company expensed $38.8 million related to early termination of leases, unused facility capacity, and accelerated depreciation of related fixed assets. The Company allocated $32.8 million of these expenses to the U.S. Card segment, $1.6 million to the Other category, $1.1 million to the Auto Finance segment and $3.3 million to the Global Financial Services segment.
During the years ended December 31, 2004, 2003 and 2002, the Company sold $901.3 million, $1.9 billion and $1.5 billion respectively, of auto loans. These transactions resulted in pre-tax gains allocated to the Auto Finance segment, inclusive of allocations related to funds transfer pricing, of $41.7 million, $57.3 million and $24.6 million in 2004, 2003 and 2002, respectively. Any unallocated pre-tax gains were held in the Other category for each of the periods.
During the year ended December 31, 2004, the Company changed its practice for charging-off auto loans when notified of a bankruptcy. Auto loans in bankruptcy are now charged-off at 120 days past due. This change in practice resulted in the acceleration of $20.4 million in charge-offs for the Auto Finance segment in 2004.
During 2004, the Company provided notice to terminate its forward flow auto receivables agreement; however, the Company plans to continue to sell auto receivables through other channels.
During 2004, the Company sold its interest in a South African joint venture with a book value of $3.9 million to its joint venture partner. The Company received $26.2 million in cash, was forgiven $9.2 million in liabilities and recognized a pre-tax gain of $31.5 million. Also during 2004, the Company sold its French loan portfolio with a book value of $144.8 million to an external party. The Company received $178.7 million in cash, recorded $7.2 million in notes receivables and recognized a pre-tax gain of $41.1 million. The respective gains were recorded in non-interest income and reported in the Global Financial Services segment.
During 2002, the Company realigned certain aspects of its European operations. Charges related to the realignment of $12.5 million were recognized and allocated to the Global Financial Services segment.
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The $15.0 million ($23.9 million pre-tax) charge for the cumulative effect of a change in accounting principle related to the adoption of FIN 46 was included in non-interest expense and reported in the Other category for segment reporting for the year ended December 31, 2003.
Note 3
Securities Available for Sale
Securities available for sale as of December 31, 2004, 2003 and 2002 were as follows:
| Maturity Schedule | ||||||||||||||||||
| 1 Year or Less |
1–5 Years | 5–10 Years | Over 10 Years |
Market Value Totals |
Amortized Cost Totals | |||||||||||||
| December 31, 2004 |
||||||||||||||||||
| U.S. Treasury and other U.S. government agency obligations |
$ | 324,888 | $ | 3,335,853 | $ | 801,448 | $ | — | $ | 4,462,189 | $ | 4,492,021 | ||||||
| Collateralized mortgage obligations |
138,734 | 3,194,358 | 73,375 | 72,883 | 3,479,350 | 3,495,207 | ||||||||||||
| Mortgage backed securities |
— | 1,163,943 | — | 55,688 | 1,219,631 | 1,220,577 | ||||||||||||
| Other |
24,815 | 389 | 1,052 | 113,028 | 139,284 | 134,558 | ||||||||||||
| Total |
$ | 488,437 | $ | 7,694,543 | $ | 875,875 | $ | 241,599 | $ | 9,300,454 | $ | 9,342,363 | ||||||
| December 31, 2003 |
||||||||||||||||||
| U.S. Treasury and other U.S. government agency obligations |
$ | 792,926 | $ | 1,066,342 | $ | 1,082,814 | $ | — | $ | 2,942,082 | $ | 2,920,310 | ||||||
| Collateralized mortgage obligations |
270,637 | 1,681,920 | 10,718 | — | 1,963,275 | 1,958,782 | ||||||||||||
| Mortgage backed securities |
24,676 | 851,237 | — | — | 875,913 | 871,062 | ||||||||||||
| Other |
3,958 | 507 | — | 80,893 | 85,358 | 81,710 | ||||||||||||
| Total |
$ | 1,092,197 | $ | 3,600,006 | $ | 1,093,532 | $ | 80,893 | $ | 5,866,628 | $ | 5,831,864 | ||||||
Unrealized gains (losses) on securities included gross unrealized gains of $28.2 million, $43.0 million and $80.6 million, and gross unrealized losses of $70.3 million, $11.6 million and $.4 million, as of December 31, 2004, 2003 and 2002, respectively.
The following table shows the Company’s investments’ gross unrealized losses and fair value of the investments in an unrealized loss position, aggregated by investment category, at December 31, 2004 and 2003.
| Less than 12 Months |
Greater than 12 Months |
Total | ||||||||||||||||
| Fair Value | Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value | Unrealized Losses | |||||||||||||
| December 31, 2004 |
||||||||||||||||||
| U.S. Treasury and other U.S. government agency obligations |
$ | 3,243,505 | $ | 39,883 | $ | 89,608 | $ | 5 | $ | 3,333,113 | $ | 39,888 | ||||||
| Collateralized mortgage obligations |
2,116,482 | 20,411 | 143,364 | 3,184 | 2,259,846 | 23,595 | ||||||||||||
| Mortgage backed securities |
600,394 | 4,723 | 84,016 | 2,032 | 684,410 | 6,755 | ||||||||||||
| Other |
4,156 | 29 | — | — | 4,156 | 29 | ||||||||||||
| Total |
$ | 5,964,537 | $ | 65,046 | $ | 316,988 | $ | 5,221 | $ | 6,281,525 | $ | 70,267 | ||||||
| December 31, 2003 |
||||||||||||||||||
| U.S. Treasury and other U.S. government agency obligations |
$ | 559,090 | $ | 3,695 | $ | — | $ | — | $ | 559,090 | $ | 3,695 | ||||||
| Collateralized mortgage obligations |
795,122 | 5,085 | — | — | 795,122 | 5,085 | ||||||||||||
| Mortgage backed securities |
233,112 | 2,822 | — | — | 233,112 | 2,822 | ||||||||||||
| Other |
5,001 | 26 | — | — | 5,001 | 26 | ||||||||||||
| Total |
$ | 1,592,325 | $ | 11,628 | $ | — | $ | — | $ | 1,592,325 | $ | 11,628 | ||||||
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The Company has determined that these investments have only temporary impairment based on a number of criteria, including the timeframe of the unrealized loss position, the nature of the investments and the Company’s intent and ability to hold the fixed income securities to maturity.
U.S. Treasury and other U.S. government agency Obligations. The unrealized losses on the Company’s investments in U.S. Treasury obligations and direct obligations of U.S. government agencies were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2004 and 2003.
Collateralized Mortgage Obligations. The unrealized losses on the Company’s investment in collateralized mortgage obligations were caused by interest rate increases. Since the decline in market value is attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2004 and 2003.
Mortgage-Backed Securities. The unrealized losses on the Company’s investment in federal agency mortgage-backed securities were caused by interest rate increases. The Company purchased these investments at a discount relative to their face amount, and the contractual cash flows of these investments 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 Company’s investment. Since the decline in market value is attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2004 and 2003.
Other. The unrealized losses on the Company’s investments in other items were a reflection of the interest rate environment. Since the decline in market value is attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2004 and 2003.
| Weighted Average Yields | ||||||||||||
| 1 Year or Less |
1–5 Years |
5–10 Years |
Over 10 Years |
|||||||||
| December 31, 2004 |
||||||||||||
| U.S. Treasury and other U.S. government agency obligations |
1.97 | % | 3.04 | % | 4.43 | % | — | |||||
| Collateralized mortgage obligations |
5.57 | 4.97 | 4.15 | 4.37 | % | |||||||
| Mortgage backed securities |
— | 5.16 | — | 4.73 | ||||||||
| Other |
2.61 | 6.47 | 6.76 | 4.88 | ||||||||
| Total |
3.03 | % | 4.16 | % | 4.41 | % | 4.69 | % | ||||
The distribution of mortgage-backed securities and collateralized mortgage obligations is based on average expected maturities. Actual maturities could differ because issuers may have the right to call or prepay obligations.
Weighted average yields were determined based on amortized cost. Gross realized gains on sales of securities were $1.3 million, $10.5 million, and $96.9 million for the years ended December 31, 2004, 2003 and 2002, respectively. Gross realized losses were $24.4 million, $19.9 million, and $19.4 million for the years ended December 31, 2004, 2003 and 2002, respectively.
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Note 4
Allowance for Loan Losses
The following is a summary of changes in the allowance for loan losses:
| Year Ended December 31 | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| Balance at beginning of year |
$ | 1,595,000 | $ | 1,720,000 | $ | 840,000 | ||||||
| Provision for loan losses |
1,220,852 | 1,517,497 | 2,149,328 | |||||||||
| Other |
(15,284 | ) | 3,863 | (9,644 | ) | |||||||
| Charge-offs |
(1,749,273 | ) | (2,004,328 | ) | (1,490,841 | ) | ||||||
| Principal recoveries |
453,705 | 357,968 | 231,157 | |||||||||
| Net charge-offs |
(1,295,568 | ) | (1,646,360 | ) | (1,259,684 | ) | ||||||
| Balance at end of year |
$ | 1,505,000 | $ | 1,595,000 | $ | 1,720,000 | ||||||
Loans totaling approximately $416.9 million and $454.8 million, representing amounts which were greater than 90 days past due, were included in the Company’s reported loan portfolio as of December 31, 2004 and 2003, respectively.
Note 5
Premises and Equipment
Premises and equipment were as follows:
| December 31 | ||||||||
| 2004 | 2003 | |||||||
| Land |
$ | 106,627 | $ | 111,288 | ||||
| Buildings and improvements |
604,072 | 610,419 | ||||||
| Furniture and equipment |
731,026 | 844,447 | ||||||
| Computer software |
440,494 | 348,789 | ||||||
| In process |
98,774 | 182,741 | ||||||
| 1,980,993 | 2,097,684 | |||||||
| Less: Accumulated depreciation and amortization |
(1,163,289 | ) | (1,195,084 | ) | ||||
| Total premises and equipment, net |
$ | 817,704 | $ | 902,600 | ||||
Depreciation and amortization expense was $224.3 million, $260.6 million, and $264.8 million, for the years ended December 31, 2004, 2003 and 2002, respectively.
During 2004, the Company approved plans to liquidate certain premises as part of its facility consolidation efforts. The Company expects to complete the sales within one year. The premises met the held-for-sale criteria of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets and as such, an impairment charge of $54.0 million was recognized in non-interest expense during the year ended December 31, 2004, to write down the properties to fair value less the estimated cost to sell. Depreciation expense is no longer being recognized for these assets. As of December 31, 2004, the carrying value of these assets was $56.9 million.
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Note 6
Borrowings
Borrowings as of December 31, 2004 and 2003 were as follows:
| 2004 | 2003 | |||||||||||
| Outstanding | Weighted Average Rate |
Outstanding | Weighted Average Rate |
|||||||||
| Interest-bearing deposits |
$ | 25,636,802 | 3.95 | % | $ | 22,416,332 | 4.03 | % | ||||
| Senior notes |
||||||||||||
| Bank—fixed rate |
$ | 5,108,606 | 6.04 | % | $ | 5,242,507 | 6.37 | % | ||||
| Bank—variable rate |
— | — | 20,000 | 2.41 | ||||||||
| Mandatory convertible securities |
742,916 | 6.25 | 730,580 | 6.25 | ||||||||
| Corporation |
1,023,268 | 7.37 | 1,022,933 | 7.37 | ||||||||
| Total |
$ | 6,874,790 | $ | 7,016,020 | ||||||||
| Other borrowings |
||||||||||||
| Secured borrowings |
$ | 8,181,860 | 2.99 | % | $ | 6,415,697 | 2.59 | % | ||||
| Facility Financing |
— | — | 83,762 | 6.86 | ||||||||
| Junior subordinated capital income securities |
99,464 | 2.77 | 99,207 | 2.71 | ||||||||
| Federal funds purchased and resale agreements |
1,154,073 | 1.78 | 45,000 | 0.97 | ||||||||
| Other short-term borrowings |
201,622 | 2.10 | 1,152,947 | 1.44 | ||||||||
| Total |
$ | 9,637,019 | $ | 7,796,613 | ||||||||
Interest-Bearing Deposits
As of December 31, 2004, the Company had $25.6 billion in interest-bearing deposits of which $12.2 billion represents large denomination certificates of $100 thousand or more, with original maturities of up to ten years.
Senior Notes
Bank Notes
Senior and Subordinated Global Bank Note Program
The Senior and Subordinated Global Bank Note Program gives the Bank the ability to issue securities to both U.S. and non-U.S. lenders and to raise funds in U.S. and foreign currencies. The Senior and Subordinated Global Bank Note Program had $4.9 billion and $4.7 billion outstanding at December 31, 2004 and 2003, respectively. In January 2003, the Bank increased its capacity under the Senior and Subordinated Global Bank Note Program to $8.0 billion and in April 2004 updated this Program. Prior to the establishment of the Senior and Subordinated Global Bank Note Program, the Bank issued senior unsecured debt through its $8.0 billion Senior Domestic Bank Note Program, of which $231.6 million and $526.5 million was outstanding at December 31, 2004 and 2003, respectively. The Bank did not renew the Senior Domestic Bank Note Program for future issuances following the establishment of the Senior and Subordinated Global Bank Note Program.
During 2004, the Company issued $500.0 million of ten-year 5.125% fixed rate senior bank notes and $500.0 million of five-year 5.00% fixed rate senior bank notes under the Senior and Subordinated Global Bank Note Program.
In 2004, the Company repurchased senior bank notes in the amount of $124.5 million, which resulted in a pre-tax loss of $4.3 million.
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During 2003, the Company issued $600.0 million of five-year 4.875% fixed rate senior bank notes, $500.0 million of ten-year 6.5% fixed rate subordinate bank notes, $600.0 million of seven-year 5.75% fixed rate senior bank notes, and $500.0 million of five-year 4.25% fixed rate senior bank notes under the Senior and Subordinated Global Bank Note Program.
Mandatory Convertible Securities
In April 2002, the Company completed a public offering of mandatory convertible debt securities (the “Upper Decs®”), that resulted in net proceeds of approximately $725.1 million. The net proceeds were used for general corporate purposes. Each Upper Dec® initially consists of and represents (i) a senior note due May 17, 2007 with a principal amount of $50, on which the Company will pay interest quarterly at the initial annual rate of 6.25%, and (ii) a forward purchase contract pursuant to which the holder has agreed to purchase, for $50, shares of the Company’s common stock on May 17, 2005 (or earlier under certain conditions), with such number of shares to be determined based upon the average closing price per share of the Company’s common stock for 20 consecutive trading days ending on the third trading day immediately preceding the stock purchase date at a minimum per share price of $63.91 and a maximum per share price of $78.61. The minimum and maximum amount of shares to be issued by the Company is 9.5 million and 11.7 million shares, respectively.
The senior notes will initially be pledged to secure the holder’s obligations under the forward purchase contracts. Each holder of an Upper Dec® may elect to withdraw the pledged senior notes or treasury securities underlying the Upper Decs® by substituting, as pledged securities, specifically identified treasury securities that will pay $50 on the relevant stock purchase date, which is the amount due on that date under each forward purchase contract. In February 2005, the Company completed the remarketing of the senior notes. See Footnote 24, Subsequent events, for additional information related to this transaction.
Corporation Shelf Registration Statement
As of December 31, 2004, the Corporation has an effective shelf registration statement under which the Corporation from time to 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 $1.9 billion available at December 31, 2004.
In November 2003, the Company issued $300.0 million ten-year 6.25% fixed rate senior notes through its shelf registration.
Other Borrowings
Secured Borrowings
COAF, a subsidiary of the Company, maintained fourteen agreements to transfer pools of consumer loans accounted for as secured borrowings at December 31, 2004. The agreements were entered into between 2001 and 2004, relating to the transfers of pools of consumer loans totaling $14.8 billion. Principal payments on the borrowings are based on principal collections, net of losses, on the transferred consumer loans. The secured borrowings accrue interest predominantly at fixed rates and mature between June 2006 and December 2009, or earlier depending upon the repayment of the underlying consumer loans. At December 31, 2004 and 2003, $8.2 billion and $6.4 billion, respectively, of the secured borrowings were outstanding.
Facility Financing
During 2003, the Company consolidated certain variable interest entities related to structured operating leases for several office facilities, bringing the premises and related facility financing on-balance sheet. During 2004, the Company terminated the structured operating lease and extinguished the related facility financing. The Company had $83.8 million in facility financing on the consolidated balance sheet at December 31, 2003, and had no debt outstanding at December 31, 2004.
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Junior Subordinated Capital Income Securities
In January 1997, Capital One Capital I, a subsidiary of the Bank created as a Delaware statutory business trust, issued $100.0 million aggregate amount of Floating Rate Junior Subordinated Capital Income Securities that mature on February 1, 2027. The securities represent a preferred beneficial interest in the assets of the trust.
Other Short-Term Borrowings
Revolving Credit Facility
In June 2004, the Company terminated its Domestic Revolving and Multicurrency Credit Facilities and replaced them with a new revolving credit facility (“Credit Facility”) providing for an aggregate of $750.0 million in unsecured borrowings from various lending institutions to be used for general corporate purposes. The Credit Facility is available to the Corporation, the Bank, the Savings Bank, and Capital One Bank, plc. The Corporation’s availability has been increased to $500.0 million under the Credit Facility. All borrowings under the Credit Facility are based upon varying terms of London Interbank Offering Rate (“LIBOR”).
Collateralized Revolving Credit Facility
In April 2002, COAF entered into a revolving warehouse credit facility collateralized by a security interest in certain auto loan assets (the “Collateralized Revolving Credit Facility”). As of December 31, 2004, the Collateralized Revolving Credit Facility had the capacity to issue up to $4.4 billion in secured notes. The Collateralized Revolving Credit Facility has multiple participants, each with a separate renewal date. The facility does not have a final maturity date. Instead, each participant may elect to renew the commitment for another set period of time. Interest on the facility is based on commercial paper rates. At December 31, 2004 and 2003, $197.5 million and $1.2 billion, respectively, were outstanding under the facility.
Interest-bearing deposits, senior notes and other borrowings as of December 31, 2004, mature as follows:
| |
Interest- Bearing Deposits |
|
Senior Notes |
|
Other Borrowings |
Total | ||||||
| 2005 |
$ | 7,682,475 | $ | 1,456,523 | $ | 4,837,008 | $ | 13,976,006 | ||||
| 2006 |
5,066,053 | 1,225,275 | 2,587,405 | 8,878,733 | ||||||||
| 2007 |
4,065,988 | 299,900 | 1,359,217 | 5,725,105 | ||||||||
| 2008 |
2,416,812 | 1,497,359 | 652,839 | 4,567,010 | ||||||||
| 2009 |
5,174,280 | 498,850 | 200,550 | 5,873,680 | ||||||||
| Thereafter |
1,231,194 | 1,896,883 | — | 3,128,077 | ||||||||
| Total |
$ | 25,636,802 | $ | 6,874,790 | $ | 9,637,019 | $ | 42,148,611 |
Note 7
Stock Plans
The Company has two stock-based compensation plans: one employee plan and one non-employee director plan. Under the plans, the Company reserves common shares for issuance in various forms including incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units and incentive stock awards. The form of stock compensation is specific to each plan. Generally the exercise price of each stock option will equal or exceed the market price of the Company’s stock on the date of grant, the maximum term will be ten years, and vesting is determined at the time of grant. Typically, the vesting for options is 33 1/3 percent per year beginning with the first anniversary of the grant date unless the grant contains accelerated vesting provisions, as described below. For restricted stock, the vesting is typically 25 percent on the first and second anniversary of the grant date and 50 percent on the third anniversary date or three years from the time of grant.
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The following table provides the number of reserved common shares and the number of common shares available for future issuance for each of the Company’s stock-based compensation plans as of December 31, 2004, 2003 and 2002:
| Available For Issuance | ||||||||
| Plan Name |
Shares Reserved |
2004 | 2003 | 2002 | ||||
| 2004 Stock Incentive Plan(1) |
8,000,000 | 7,068,515 | — | — | ||||
| 2002 Non-Executive Officer Stock Incentive Plan(2) |
8,500,000 | — | 1,464,227 | 2,167,450 | ||||
| 1999 Stock Incentive Plan(2) |
600,000 | — | 338,800 | 322,300 | ||||
| 1994 Stock Incentive Plan(2) |
67,112,640 | — | 1,423,352 | 2,186,615 | ||||
| 1999 Non-Employee Directors Stock Incentive Plan |
825,000 | 193,430 | 195,920 | 220,000 | ||||
| 1995 Non-Employee Directors Stock Incentive Plan(3) |
600,000 | — | — | — | ||||
| (1) | Available for issuance includes the CEO restricted stock units at their maximum amount. |
| (2) | The ability to issue grants out of these plans was terminated in 2004. There are currently 3,095,553 options outstanding under the 2002 Non-Executive Officer Stock Incentive Plan, 96,025 options outstanding under the 1999 Stock Incentive Plan and 27,378,251 under the 1994 Stock Incentive Plan. |
| (3) | The ability to issue grants out of this plan was terminated in 1999. There are currently 252,000 options outstanding under the plan |
A summary of the status of the Company’s options as of December 31, 2004, 2003 and 2002, and changes for the years then ended is presented below:
| 2004 | 2003 | 2002 | ||||||||||||||||
| Options (000s) |
|
|
Weighted- Average Exercise Price Per Share |
Options (000s) |
|
|
Weighted- Average Exercise Price Per Share |
Options (000s) |
|
|
Weighted- Average Exercise Price Per Share | |||||||
| Outstanding at beginning of year |
44,654 | $ | 42.00 | 52,108 | $ | 40.06 | 49,180 | $ | 40.74 | |||||||||
| Granted |
801 | 79.47 | 1,930 | 55.42 | 6,631 | 36.52 | ||||||||||||
| Exercised |
(12,370 | ) | 41.97 | (5,737 | ) | 23.99 | (1,623 | ) | 27.19 | |||||||||
| Cancelled |
(998 | ) | 47.58 | (3,647 | ) | 50.76 | (2,080 | ) | 53.31 | |||||||||
| Outstanding at end of year |
32,087 | $ | 42.77 | 44,654 | $ | 42.00 | 52,108 | $ | 40.06 | |||||||||
| Exercisable at end of year |
24,079 | $ | 39.06 | 23,923 | $ | 35.87 | 23,340 | $ | 30.20 | |||||||||
| Weighted-average fair value of options granted during the year |
$ | 42.29 | $ | 27.27 | $ | 16.53 | ||||||||||||
The fair value of the options granted during 2004, 2003 and 2002 was estimated at the date of grant using a Black-Scholes option-pricing model with the weighted average assumptions described below:
| For the Years Ended December 31 | |||||||||
| Assumptions |
2004 | 2003 | 2002 | ||||||
| Dividend yield |
.15 | % | .24 | % | .25 | % | |||
| Volatility factors of expected market price of stock |
55 | % | 54 | % | 55 | % | |||
| Risk-free interest rate |
3.57 | % | 3.25 | % | 3.15 | % | |||
| Expected option lives (in years) |
5.8 | 5.0 | 5.0 | ||||||
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The following table summarizes information about options outstanding as of December 31, 2004:
| Options Outstanding | Options Exercisable | |||||||||
| Range Of Exercise Prices | Number Outstanding (000s) |
Weighted Average Remaining Contractual Life (in years) |
Weighted Average Exercise Price |
Number Exercisable (000s) |
Weighted Average Exercise Price | |||||
| $6.42-$9.63 |
113 | 0.89 | $ 7.92 | 113 | $ 7.92 | |||||
| $9.64-$14.46 |
3,826 | 0.78 | $ 9.85 | 3,826 | $ 9.85 | |||||
| $14.47-$21.70 |
1,053 | 2.96 | $16.19 | 1,053 | $16.19 | |||||
| $21.71-$32.56 |
489 | 6.14 | $31.69 | 388 | $31.67 | |||||
| $32.57-$48.85 |
15,328 | 5.97 | $43.25 | 13,709 | $44.23 | |||||
| $48.86-$73.29 |
10,639 | 5.95 | $55.07 | 4,977 | $53.32 | |||||
| $73.30-$84.21 |
639 | 9.68 | $81.96 | 13 | $74.97 | |||||
The Company recognized $126.1 million, $29.4 million and $22.0 million of tax benefits from the exercise of stock options by its associates during 2004, 2003 and 2002, respectively.
During 2004, the Company changed its annual long term incentive grant date to associates from December to March resulting in a significant reduction in stock-based compensation issued during 2004. The Company granted 6.4 thousand and 3.1 million restricted stock awards with a weighted average grant date value of $67.68 and $56.07 per share for 2004 and 2003, respectively. Restrictions generally expire three years from the date of grant or 25 percent of the grant vests on the first and second anniversary of the grant date and 50 percent of the grant on the third anniversary date. The compensation cost recognized for the Company’s restricted stock awards was $87.4 million, $40.7 million and $27.7 million in 2004, 2003 and 2002, respectively.
2005 CEO Grant
In December 2004, the Company’s Board of Directors approved a compensation package for the Company’s Chief Executive Officer (CEO). This package included 566,000 stock options which were granted at the fair market value at the date of grant. These options will vest upon the fifth anniversary of the date of grant, upon his retirement or other departure from employment with Capital One. Compensation expense was recorded in accordance with SFAS 123.
2004 CEO Grant
In December 2003, the Company’s Board of Directors approved a compensation package for the Company’s CEO. This package was originally comprised of stock options and incentive stock. 360,000 options were granted at the fair market value at the date of grant and will vest in one-third increments over three years. Based on the original grant agreement, the CEO’s incentive stock was replaced with restricted stock units in May 2004 after shareholders approved the 2004 Stock Incentive Plan. The target amount for the restricted stock is 236,940 units but could vary from a minimum amount of zero to the maximum amount of 355,410 units. The amount of restricted stock units issued will be based on the Company’s three year cumulative earnings per share growth ending in December 2006 compared to the earnings per share growth of a peer group that includes thirty-three companies. The restricted stock units will vest and be paid in Capital One common stock upon his retirement or other departure from employment with Capital One. Compensation expense was recorded for the options and restricted stock units in accordance with SFAS 123.
Accelerated Vesting Option Grants
EntrepreneurGrant V
In October 2001, the Company’s Board of Directors approved a stock option grant to senior management (“EntrepreneurGrant V”). This grant was composed of 6,502,318 options to certain key managers (including 3,535,000 performance-based options to the Company’s Chief Executive Officer (“CEO”) and Chief Operating
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Officer (“COO”)) at the fair market value on the date of grant. The CEO and COO gave up their salaries, annual cash incentives, annual option grants and Senior Executive Retirement Plan contributions for the years 2002 and 2003 in exchange for their EntrepreneurGrant V options. Other members of senior management had the opportunity to forego up to 50 percent of their expected annual cash incentives for 2002 through 2004 in exchange for performance-based options. All performance based options vested during the second quarter of 2004 when the company achieved cumulative diluted earnings per share in excess of $5.03 for four consecutive quarters (second quarter of 2003 through first quarter of 2004). Options under this grant qualify as fixed as defined by APB 25; accordingly no compensation expense was recognized.
EntrepreneurGrant IV
In April 1999, the Company’s Board of Directors approved a stock option grant to senior management (“Entrepreneur Grant IV”). This grant was composed of 7,636,107 options to certain key managers (including 1,884,435 options to the Company’s CEO and COO) with an exercise price equal to the fair market value on the date of grant. The CEO and COO gave up their salaries for the year 2001 and their annual cash incentives, annual option grants and Senior Executive Retirement Plan contributions for the years 2000 and 2001 in exchange for their Entrepreneur Grant IV options. Other members of senior management had the opportunity to give up all potential annual stock option grants for 1999 and 2000 in exchange for this one-time grant. All performance-based option accelerated vesting provisions lapsed during 2004; as such the options will now vest in accordance with the ultimate vesting provisions. 50% of the stock options held by middle management will vest on April 29, 2005 and the remainder, including options held by senior management, will vest on April 29, 2008, or upon a change in control of the Company. Options under this grant qualify as fixed as defined by APB 25; accordingly no compensation expense was recognized.
Director Accelerated Vesting Option Grants
In October 2001, the Company granted 305,000 options to the non-executive members of the Board of Directors for director compensation for the years 2002, 2003 and 2004. These options were granted at the fair market value on the date of grant. All options under this grant vested in the second quarter of 2004 when the company achieved cumulative earnings per share in excess of $5.03 for four consecutive quarters (second quarter 2003 through first quarter 2004). Options under this grant qualify as fixed, as defined by APB 25; accordingly no compensation expense was recognized.
Associate Stock Purchase Plan
The Company maintains an Associate Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan is a compensatory plan under SFAS 123; accordingly the Company recognized $4.4 million and $3.9 million in compensation expense for the years ended December 31, 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 amounts deducted are applied to the purchase of unissued common or treasury stock of the Company at 85% of the current market price. Shares may also be acquired on the market. An aggregate of 3.0 million common shares has been authorized for issuance under the 2002 Associate Stock Purchase Plan, of which 1.6 million shares were available for issuance as of December 31, 2004.
Dividend Reinvestment and Stock Purchase Plan
In 1997, the Company implemented its dividend reinvestment and stock purchase plan (“1997 DRP”), which allows participating stockholders to purchase additional shares of the Company’s common stock through automatic reinvestment of dividends or optional cash investments. The Company has 3.6 million shares available under the 1997 DRP. The Company also instituted an additional dividend reinvestment in 2002 (“2002 DRP”) with an additional 7.5 million shares reserved, all of which were available for issuance at December 31, 2004.
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Note 8
Cumulative Participating Junior Preferred Stock
On November 16, 1995, the Board of Directors of the Company declared a dividend distribution of one Right for each outstanding share of common stock. As amended, each Right entitles a registered holder to purchase from the Company 1/300th of a share of the Company’s authorized Cumulative Participating Junior Preferred Stock (the “Junior Preferred Shares”) at a price of $200 per 1/300th of a share, subject to adjustment. The Company has reserved one million shares of its authorized preferred stock for the Junior Preferred Shares. Because of the nature of the Junior Preferred Shares’ dividend and liquidation rights, the value of the 1/300th interest in a Junior Preferred Share purchasable upon exercise of each Right should approximate the value of one share of common stock. Initially, the Rights are not exercisable and trade automatically with the common stock. However, the Rights generally become exercisable and separate certificates representing the Rights will be distributed, if any person or group acquires 15% or more of the Company’s outstanding common stock or a tender offer or exchange offer is announced for the Company’s common stock. Upon such event, provisions would also be made so that each holder of a Right, other than the acquiring person or group, may exercise the Right and buy common stock with a market value of twice the $200 exercise price. The Rights expire on November 29, 2005, unless earlier redeemed by the Company at $0.01 per Right prior to the time any person or group acquires 15% of the outstanding common stock. Until the Rights become exercisable, the Rights have no dilutive effect on earnings per share.
Note 9
Retirement Plans
Associate Savings Plan
The Company sponsors a contributory Associate Savings Plan in which substantially all full-time and certain part-time associates are eligible to participate. The Company makes contributions to each eligible employee’s account, matches a portion of associate contributions and makes discretionary contributions based upon the Company meeting a certain earnings per share target. The Company’s contributions to this plan amounted to $71.7 million, $71.1 million and $62.7 million for the years ended December 31, 2004, 2003 and 2002, respectively.
Other Postretirement Benefits
The Company sponsors postretirement benefit plans to provide health care and life insurance to retired employees. Net periodic postretirement benefit expense was $6.7 million, $9.4 million and $6.8 million in 2004, 2003 and 2002, respectively. The liabilities recognized on the Consolidated Balance Sheets for the Company’s defined postretirement benefit plan at December 31, 2004 and 2003 were $33.5 million and $26.8 million, respectively.
Note 10
Other Non-Interest Expense
| Year Ended December 31 | |||||||||
| 2004 | 2003 | 2002 | |||||||
| Professional services |
$ | 415,169 | $ | 373,404 | $ | 308,593 | |||
| Collections |
530,909 | 493,057 | 360,437 | ||||||
| Fraud losses |
55,981 | 49,176 | 78,733 | ||||||
| Bankcard association assessments |
122,934 | 107,493 | 107,185 | ||||||
| Other |
184,836 | 167,418 | 132,567 | ||||||
| Total |
$ | 1,309,829 | $ | 1,190,548 | $ | 987,515 | |||
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Note 11
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2004 and 2003 were as follows:
| December 31 | ||||||||
| 2004 | 2003 | |||||||
| Deferred tax assets: |
||||||||
| Allowance for loan losses |
$ | 324,308 | $ | 337,715 | ||||
| Unearned income |
161,682 | 260,324 | ||||||
| Stock incentive plan |
64,493 | 64,585 | ||||||
| Foreign |
6,013 | 25,890 | ||||||
| Net operating losses |
11,258 | 15,212 | ||||||
| State taxes, net of federal benefit |
35,134 | 42,140 | ||||||
| Derivative instruments |
168 | 32,228 | ||||||
| Other |
271,982 | 204,505 | ||||||
| Subtotal |
875,038 | 982,599 | ||||||
| Valuation allowance |
(29,125 | ) | (52,083 | ) | ||||
| Total deferred tax assets |
845,913 | 930,516 | ||||||
| Deferred tax liabilities: |
||||||||
| Securitizations |
21,851 | 27,042 | ||||||
| Deferred revenue |
686,579 | 760,021 | ||||||
| Securities available for sale |
(8,536 | ) | 20,511 | |||||
| Other |
107,688 | 73,756 | ||||||
| Total deferred tax liabilities |
807,582 | 881,330 | ||||||
| Net deferred tax (liabilities) assets |
$ | 38,331 | $ | 49,186 | ||||
During 2004, the valuation allowance for certain loss and tax credit carryforwards decreased by a net $23.0 million. The valuation allowance decreased because of a $30.2 million reduction associated with the reversal of timing differences for state purposes and a $9.0 million reduction associated with international loss carryforwards utilized during the year. The valuation allowance increased because of the establishment of a $16.2 million allowance for capital loss and tax credit carryforwards.
At December 31, 2004, the Company had net operating losses available for federal income taxes purposes of $32.4 million which are subject to certain annual limitations under the Internal Revenue Code, and expire on various dates from 2018 to 2020. Also, foreign net operating losses of $1.8 million are available and expire in 2012. The Company also had capital loss carryovers in the amount of $54.2 million, which expire on various dates from 2006 to 2008 and foreign tax credit carryovers in the amount of $9.6 million which expire in 2014.
The Company provides income taxes on the undistributed earnings of non-U.S. subsidiaries except to the extent that such earnings are indefinitely invested outside the United States. At December 31, 2004, all of the accumulated undistributed earnings of non-U.S. subsidiaries were insignificant and have been indefinitely invested. In addition, the Company has evaluated the effect of the Foreign Earnings Repatriation Provision of the American Jobs Creation Act of 2004. Based upon this evaluation, the Company has determined that there is no effect on income tax expense or benefit.
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Significant components of the provision for income taxes attributable to continuing operations were as follows:
| Year Ended December 31 | |||||||||||
| 2004 | 2003 | 2002 | |||||||||
| Federal taxes |
$ | 749,800 | $ | 614,730 | $ | 726,626 | |||||
| State taxes |
33,849 | 8,346 | 5,485 | ||||||||
| International taxes |
35,107 | 5,914 | 2,654 | ||||||||
| Deferred income taxes |
(2,174 | ) | 38,092 | (183,370 | ) | ||||||
| Income taxes |
$ | 816,582 | $ | 667,082 | $ | 551,395 | |||||
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 | |||||||||
| 2004 | 2003 | 2002 | |||||||
| Income tax at statutory federal tax rate |
35.00 | % | 35.00 | % | 35.00 | % | |||
| Other, including international & state taxes |
(.40 | ) | 2.00 | 3.00 | |||||
| Income taxes |
34.60 | % | 37.00 | % | 38.00 | % | |||
Note 12
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
| Year Ended December 31 | ||||||||||
| (Shares in Thousands) | 2004 | 2003 | 2002 | |||||||
| Numerator: |
||||||||||
| Income before change in accounting principle |
$ | 1,543,482 | $ | 1,150,879 | $ | 899,644 | ||||
| Cumulative effect of accounting change |
— | (15,037 | ) | — | ||||||
| Net income |
$ | 1,543,482 | $ | 1,135,842 | $ | 899,644 | ||||
| Denominator: |
||||||||||
| Denominator for basic earnings per share- |
||||||||||
| Weighted-average shares |
235,613 | 224,832 | 219,984 | |||||||
| Effect of dilutive securities: |
||||||||||
| Stock options |
10,594 | 8,471 | 8,224 | |||||||
| Restricted stock and units |
2,560 | 800 | 37 | |||||||
| Contingently issuable shares |
— | — | 499 | |||||||
| Dilutive potential common shares |
13,154 | 9,271 | 8,760 | |||||||
| Denominator for diluted earnings per share- |
||||||||||
| Adjusted weighted-average shares |
248,767 | 234,103 | 228,744 | |||||||
| Basic earnings per share |
||||||||||
| Before cumulative effect of accounting change |
$ | 6.55 | $ | 5.12 | $ | 4.09 | ||||
| Cumulative effect of accounting change |
— | (0.07 | ) | — | ||||||
| After cumulative effect of accounting change |
$ | 6.55 | $ | 5.05 | $ | 4.09 | ||||
| Diluted earnings per share |
||||||||||
| Before cumulative effect of accounting change |
$ | 6.21 | $ | 4.92 | $ | 3.93 | ||||
| Cumulative effect of accounting change |
— | (0.07 | ) | — | ||||||
| After cumulative effect of accounting change |
$ | 6.21 | $ | 4.85 | $ | 3.93 | ||||
Securities of approximately 218,000, 20,755,000 and 23,000,000 during 2004, 2003 and 2002, respectively, were not included in the computation of diluted earnings per share because their inclusion would be antidilutive.
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Note 13
Cumulative Other Comprehensive Income
The following table presents the cumulative balances of the components of other comprehensive income, net of tax, of $8.7 million, $11.7 million and $27.8 million as of December 31, 2004, 2003, and 2002, respectively:
| As of December 31 | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| Unrealized (losses) gains on securities |
$ | (16,377 | ) | $ | 34,735 | $ | 55,588 | |||||
| Foreign currency translation adjustments |
158,882 | 93,640 | 22,350 | |||||||||
| Unrealized gains (losses) on cash flow hedging instruments |
2,254 | (45,217 | ) | (93,504 | ) | |||||||
| Total cumulative other comprehensive income (loss) |
$ | 144,759 | $ | 83,158 | $ | (15,566 | ) | |||||
During 2004, 2003 and 2002, the Company reclassified $118.0 million, $110.5 million and $101.5 million, respectively of net losses, after tax, on derivative instruments from cumulative other comprehensive income into earnings.
During 2004, 2003 and 2002, the Company reclassified $2.6 million, $8.3 million and $4.2 million, respectively of net gains on sales of securities, after tax, from cumulative other comprehensive income into earnings.
Note 14
Goodwill
The following table provides a summary of goodwill.
| Auto Finance |
Global Financial Services |
Total | |||||||||
| Balance at December 31, 2003 |
$ | 218,957 | $ | 136,978 | $ | 355,935 | |||||
| Impairment Loss |
— | (3,848 | ) | (3,848 | ) | ||||||
| Foreign Currency Translation |
— | 70 | 70 | ||||||||
| Balance at December 31, 2004 |
$ | 218,957 | $ | 133,200 | $ | 352,157 | |||||
In March 2004, the company recognized a $3.8 million impairment loss on goodwill related to certain international operations. This impairment was recorded in other non-interest expense in the consolidated income statement.
Note 15
Regulatory Matters
Effective October 1, 2004, the Corporation registered as a bank holding company (“BHC”) with the Federal Reserve Bank of Richmond and became subject to the requirements of the Bank Holding Company Act of 1956, as amended. As a result of becoming a BHC, the Bank has amended its Virginia charter which removes restrictions on its activities and therefore permits the Bank to engage in a full range of lending, deposit-taking and other activities permissible under Virginia and federal banking laws and regulations. The Corporation also filed a notice with the Federal Reserve Bank of Richmond to retain its non-banking subsidiaries, including the Savings Bank and COAF, upon its conversion to a BHC.
The Company and the Bank are subject to capital adequacy guidelines adopted by the Federal Reserve Board (the “Federal Reserve”) while and the Savings Bank is subject to capital adequacy guidelines adopted by the Office of Thrift Supervision (the “OTS”) (collectively, the “regulators”). The capital adequacy guidelines require the Company, the Bank and the Savings Bank to maintain specific capital levels based upon quantitative measures of their assets, liabilities and off-balance sheet items. In addition, the Bank and Savings Bank must also adhere to the regulatory framework for prompt corrective action.
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The most recent notifications received from the regulators categorized the Bank and the Savings Bank as “well-capitalized.” As of December 31, 2004, the Company’s, the Bank’s and the Savings Bank’s capital exceeded all minimum regulatory requirements to which they were subject, and there were no conditions or events since the notifications discussed above that management believes would have changed either the Company, the Bank or the Savings Bank’s capital category.
| Regulatory Basis Ratios |
Applying Guidance Ratios |
Minimum for Capital Adequacy Purposes |
To Be “Well Capitalized” Prompt Corrective Action Provisions |
|||||||||
| December 31, 2004 |
||||||||||||
| Capital One Financial Corp. (1) |
||||||||||||
| Tier 1 Capital |
16.85 | % | 14.33 | % | 4.00 | % | N/A | |||||
| Total Capital |
19.35 | 16.62 | 8.00 | N/A | ||||||||
| Tier 1 Leverage |
15.38 | 15.38 | 4.00 | N/A | ||||||||
| Capital One Bank |
||||||||||||
| Tier 1 Capital |
13.24 | % | 10.63 | % | 4.00 | % | 6.00 | % | ||||
| Total Capital |
17.09 | 13.92 | 8.00 | 10.00 | ||||||||
| Tier 1 Leverage |
11.33 | 11.33 | 4.00 | 5.00 | ||||||||
| Capital One, F.S.B. |
||||||||||||
| Tier 1 Capital |
15.61 | % | 12.93 | % | 4.00 | % | 6.00 | % | ||||
| Total Capital |
16.91 | 14.21 | 8.00 | 10.00 | ||||||||
| Tier 1 Leverage |
14.47 | 14.47 | 4.00 | 5.00 | ||||||||
| December 31, 2003 |
||||||||||||
| Capital One Bank |
||||||||||||
| Tier 1 Capital |
14.14 | % | 11.54 | % | 4.00 | % | 6.00 | % | ||||
| Total Capital |
18.34 | 15.15 | 8.00 | 10.00 | ||||||||
| Tier 1 Leverage |
13.17 | 13.17 | 4.00 | 5.00 | ||||||||
| Capital One, F.S.B. |
||||||||||||
| Tier 1 Capital |
14.79 | % | 11.59 | % | 4.00 | % | 6.00 | % | ||||
| Total Capital |
16.10 | 12.88 | 8.00 | 10.00 | ||||||||
| Tier 1 Leverage |
14.00 | 14.00 | 4.00 | 5.00 | ||||||||
(1) The regulatory framework for prompt corrective action is not applicable for bank holding companies.
The Company, the Bank and Savings Bank treat a portion of their loans as “subprime” under the “Expanded Guidance for Subprime Lending Programs” (the “Subprime Guidelines”) issued by the four federal banking agencies and have assessed their capital and allowance for loan losses accordingly. Under the Subprime Guidelines, the Company, the Bank and the Savings Bank exceed the minimum capital adequacy guidelines as of December 31, 2004. Failure to meet minimum capital requirements can result in mandatory and possible additional discretionary actions by the regulators that, if undertaken, could have a material effect on the Company’s consolidated financial statements.
For purposes of the Subprime Guidelines, the Company has treated as subprime all loans in the Bank’s and Savings Bank’s targeted subprime programs to customers either with a FICO score of 660 or below or with no FICO score. The Bank and Savings Bank hold on average 200% of the total risk-based capital requirement that would otherwise apply to such assets. This results in higher levels of required regulatory capital at the Bank and the Savings Bank. As of December 31, 2004, approximately $5.3 billion or 18.3% of the Bank’s, and $2.3 billion or 16.6% of the Savings Bank’s, on-balance sheet assets were treated as subprime for purposes of the Subprime Guidelines.
Additionally, certain regulatory restrictions exist that limit the ability of the Bank and the Savings Bank to transfer funds to the Corporation. As of December 31, 2004, retained earnings of the Bank and the Savings Bank of $715.9 million and $633.3 million, respectively, were available for payment of dividends to the Corporation without prior approval by the regulators.
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Note 16
Commitments, Contingencies and Guarantees Commitments
Line of Credit Commitments
As of December 31, 2004, the Company had outstanding lines of credit of approximately $216.2 billion committed to its customers. Of that total commitment, approximately $135.6 billion was unused. While this amount represented the total available lines of credit to customers, 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, reduce, cancel, alter or amend the terms of these available lines of credit at any time.
Lease Commitments
Certain premises and equipment are leased under agreements that expire at various dates through 2012, without taking into consideration available renewal options. Many of these leases provide for payment by the lessee of property taxes, insurance premiums, cost of maintenance and other costs. In some cases, rentals are subject to increases in relation to a cost of living index. Total rent expenses amounted to approximately $38.5 million, $63.7 million, and $63.2 million for the years ended December 31, 2004, 2003 and 2002, respectively.
Future minimum rental commitments as of December 31, 2004, for all non-cancelable operating leases with initial or remaining terms of one year or more are as follows:
| 2005 |
$ | 41,275 | |
| 2006 |
35,486 | ||
| 2007 |
34,696 | ||
| 2008 |
34,916 | ||
| 2009 |
33,837 | ||
| Thereafter |
34,513 | ||
| Total |
$ | 214,723 |
Minimum sublease rental income of $26.6 million, due in future years under noncancelable leases, has not been included in the table above as a reduction to minimum lease payments.
Synthetic Fuel Commitments
In June 2004, the Company established and consolidated Capital One Appalachian LLC (“COAL”) which qualifies as a variable interest entity under the requirements of FIN 46. COAL purchased a limited interest in a partnership from a third party that operates a facility which produces a coal-based synthetic fuel that qualifies for tax credits pursuant to Section 29 of the Internal Revenue Code. COAL paid $2.1 million in cash and agreed to a fixed note payable of $26.4 million and additional quarterly variable payments based on the amount of tax credits generated by the partnership from June 2004 through the end of 2007. COAL has an ongoing commitment to fund the losses of the partnership to maintain its 24.9% minority ownership interest, and make fixed and variable payments to the third party. The Corporation has guaranteed COAL’s commitments to both the partnership and the third party. COAL’s equity investment in the partnership was included in Other Assets at December 31, 2004. As of December 31, 2004, the Company had an estimated remaining commitment for the fixed note payments, variable payments and the funding of its 24.9% share of the operating losses of the partnership of $100.2 million.
Guarantees
Residual Value Guarantees
The Company has entered into synthetic lease transactions to finance several facilities. A synthetic lease structure involves establishing a special purpose vehicle (“SPV”) that owns the properties to be leased. The SPV is funded
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and its equity is held by outside investors. In accordance with the FIN 46, these entities are evaluated to determine whether they are variable interest entities and, if so, whether the Company is the primary beneficiary. Variable interest entities for which the Company is the primary beneficiary are required to be consolidated. Entities which are not determined to be variable interest and/or for which the Company is not deemed to be the primary beneficiary are not required to be consolidated. Synthetic lease transactions, where the SPV is not required to be consolidated, are treated as operating leases in accordance with SFAS No. 13, Accounting for Leases.
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 completion, which occurred in the first quarter of 2003, and is based on LIBOR rates applied to the cost of the building funded. If, at the end of the lease term, the Company does not purchase the property, the Company guarantees a maximum residual value of up to $114.8 million representing approximately 72% of the $159.5 million cost of the building. This agreement, made with a multi-purpose entity that is a wholly-owned subsidiary of one of the Company’s lenders, provides that in the event of a sale of the property, the Company’s obligation would be equal to the sum of all amounts owed by the Company under a note issuance made in connection with the lease inception. As of December 31, 2004, the value of the building was estimated to be above the maximum residual value that the Company guarantees; thus, no deficiency existed and no liability was recorded relative to this property.
Other Guarantees
In connection with certain installment loan securitization transactions, the transferee (off-balance sheet special purpose entity receiving the installment loans) entered into interest rate hedge agreements (the “swaps”) with a counterparty to reduce interest rate risk associated with the transaction. In connection with the swaps, the Corporation entered into letter agreements guaranteeing the performance of the transferee under the swaps. If at anytime the Class A invested amount equals zero and the notional amount of the swap is greater than zero resulting in an “Early Termination Date” (as defined in the securitization transaction’s Master Agreement), then (a) to the extent that, in connection with the occurrence of such Early Termination Date, the transferee is obligated to make any payments to the counterparty pursuant to the Master Agreement, the Corporation shall reimburse the transferee for the full amount of such payment and (b) to the extent that, in connection with the occurrence of an Early Termination Date, the transferee is entitled to receive any payment from the counterparty pursuant to the Master Agreement, the transferee will pay to the Corporation the amount of such payment. At December 31, 2004, the maximum exposure to the Corporation under the letter agreements was approximately $6.1 million.
Securities Litigation
Beginning in July 2002, the Corporation was named as a defendant in twelve putative class action securities cases. All twelve actions were filed in the United States District Court for the Eastern District of Virginia. Each complaint also named as “Individual Defendants” several of the Corporation’s executive officers.
On October 1, 2002, the Court consolidated these twelve cases. Pursuant to the Court’s order, Plaintiffs filed an amended complaint on October 17, 2002, which alleged that the Corporation and the Individual Defendants violated Section 10(b) of the Exchange Act, Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. The amended complaint asserted a class period of January 16, 2001, through July 16, 2002, inclusive. The amended complaint alleged generally that, during the asserted class period, the Corporation misrepresented the adequacy of its capital levels and loan loss allowance relating to higher risk assets. In addition, the amended complaint alleged generally that the Corporation failed to disclose that it was experiencing serious infrastructure deficiencies and systemic computer problems as a result of its growth.
On December 4, 2002, the Court granted defendants’ motion to dismiss plaintiffs’ amended complaint with leave to amend. Pursuant to that order, plaintiffs filed a second amended complaint on December 23, 2002, which
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asserted the same class period and alleged violations of the same statutes and rule. The second amended complaint also added a new Individual Defendant and asserted violations of GAAP. Defendants moved to dismiss the second amended complaint on January 8, 2003, and plaintiffs filed a motion on March 6, 2003, seeking leave to amend their complaint. On April 10, 2003, the Court granted defendants’ motion to dismiss plaintiffs’ second amended complaint, denied plaintiffs’ motion for leave to amend, and dismissed the consolidated action with prejudice. Plaintiffs appealed the Court’s order, opinion, and judgment to the United States Court of Appeals for the Fourth Circuit on May 8, 2003, and briefing on the appeal concluded in September 2003. Oral argument was held on February 25, 2004. On December 2, 2004, the Fourth Circuit Court of Appeals entered an opinion affirming the trial court and, in early 2005, plaintiffs waived their right to appeal or challenge the Fourth Circuit’s decision, ending the case.
Litigation relating to MasterCard and Visa
Over the past several years, MasterCard and Visa, as well as several of their member banks, have been involved in several different lawsuits challenging various practices of MasterCard and Visa.
In 1998, the United States Department of Justice filed an antitrust lawsuit against the associations, 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). In 2001, a New York district court entered judgment in favor of the Department of Justice and ordered the associations, among other things, to repeal these policies. The United States Second Court of Appeals affirmed the district court and, on October 4, 2004, the United States Supreme Court denied certiorari in the case.
After the Supreme Court denied certiorari, American Express Travel Related Services Company, Inc., on November 15, 2004, filed a lawsuit against the associations and several member banks under United States federal antitrust law. The lawsuit alleges, among other things, that the associations and member banks implemented and enforced illegal exclusionary agreements that prevented member banks from issuing American Express and Discover cards. The complaint, among other things, requests civil monetary damages, which could be trebled. Capital One Bank; Capital One, F.S.B.; and Capital One Financial Corp. are named defendants. The Bank defendants, including the Capital One defendants, moved to dismiss portions of the complaint on February 18, 2005.
The Company believes that it has meritorious defenses with respect to this case and intends to defend the case vigorously. At the present time, management is not in a position to determine whether the resolution of this case will have a material adverse effect on either the consolidated financial position of the Company or the Company’s results of operations in any future reporting period.
Other Pending and Threatened Litigation
In addition, the Company is also commonly subject to various pending and threatened legal actions relating to the conduct of its normal business activities. In the opinion of management, the ultimate aggregate liability, if any, arising out of any such pending or threatened legal actions will not be material to the consolidated financial position or results of operations of the Company.
Note 17
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 Company’s policy, such loans are issued on the same terms as those prevailing at the time for comparable loans to unrelated persons and do not involve more than the normal risk of collectibility.
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Note 18
Off-Balance Sheet Securitizations
Off-balance sheet securitizations involve the transfer of pools of consumer loan receivables by the Company to one or more third-party trusts or qualified special purpose entities in transactions that are accounted for as sales in accordance with SFAS 140. Certain undivided interests in the pool of consumer loan receivables are sold to investors as asset-backed securities in public underwritten offerings or private placement transactions. The proceeds from off-balance sheet securitizations are distributed by the trusts to the Company as consideration for the consumer loan receivables transferred. Each new off-balance sheet securitization results in the removal of consumer loan principal receivables equal to the sold undivided interests in the pool from the Company’s consolidated balance sheet (“off-balance sheet loans”), the recognition of certain retained residual interests and a gain on the sale. The remaining undivided interests in principal receivables of the pool, as well as the unpaid billed finance charge and fee receivables related to the Company’s undivided interest in the principal receivables are retained by the Company and recorded as consumer loans on the Consolidated Balance Sheet. The amounts of the remaining undivided interests fluctuate as the accountholders make principal payments and incur new charges on the selected accounts. The amount of retained consumer loan receivables was $10.3 billion and $8.3 billion as of December 31, 2004 and 2003, respectively.
The following table presents the year-end and average balances, as well as the delinquent and net charge-off amounts of the reported, off-balance sheet and managed consumer loan portfolios.
Supplemental Loan Information
| Year Ended December 31 | ||||||||||||||||
| 2004 | 2003 | |||||||||||||||
| |
Loans Outstanding |
|
|
Loans Delinquent |
|
|
Loans Outstanding |
|
|
Loans Delinquent |
| |||||
| Managed loans |
$ | 79,861,299 | $ | 3,054,078 | $ | 71,244,796 | $ | 3,177,929 | ||||||||
| Securitization adjustments |
(41,645,708 | ) | (1,581,884 | ) | (38,394,527 | ) | (1,604,470 | ) | ||||||||
| Reported consumer loans |
$ | 38,215,591 | $ | 1,472,194 | $ | 32,850,269 | $ | 1,573,459 | ||||||||
| |
Average Loans |
|
|
Net Charge- Offs |
|
|
Average Loans |
|
|
Net Charge- Offs |
| |||||
| Managed loans |
$ | 73,711,673 | $ | 3,251,761 | $ | 62,911,953 | $ | 3,683,887 | ||||||||
| Securitization adjustments |
(39,446,005 | ) | (1,956,193 | ) | (34,234,337 | ) | (2,037,527 | ) | ||||||||
| Reported consumer loans |
$ | 34,265,668 | $ | 1,295,568 | $ | 28,677,616 | $ | 1,646,360 | ||||||||
The Company’s retained residual interests in the off-balance sheet securitizations are recorded in accounts receivable from securitizations and are comprised of interest-only strips, retained subordinated undivided interests in the transferred receivables, cash collateral accounts, cash reserve accounts and unpaid interest and fees on the investors’ portion of the transferred principal receivables. The interest-only strip is recorded at fair value, while the other residual interests are carried at cost, which approximates fair value. Retained residual interests totaled $2.1 billion and $2.2 billion at December 31, 2004 and 2003, respectively. The Company’s retained residual interests are generally restricted or subordinated to investors’ interests and their value is subject to substantial credit, repayment and interest rate risks on the transferred financial assets. The investors and the trusts have no recourse to the Company’s assets, other than the retained residual interests, if the off-balance sheet loans are not paid when due.
The gain on sale recorded from off-balance sheet securitizations is based on the estimated fair value of the assets sold and retained and liabilities incurred, and is recorded at the time of sale, net of transaction costs, in servicing and securitizations income on the Consolidated Statements of Income. 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
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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. The Company recognizes all changes in the fair value of the interest-only strip immediately in servicing and securitizations income on the consolidated statements of income in accordance with the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. In accordance with Emerging Issues Task Force 99-20 (“EITF 99-20”), Recognition of Interest Income and Impairment of Purchased and Retained Beneficial Interests in Securitized Financial Assets, the interest component of cash flows attributable to retained interests in securitizations is recorded in other interest income.
The key assumptions used in determining the fair value of the interest-only strips resulting from securitizations of consumer loan receivables completed during the period included the weighted average ranges for charge-off rates, principal repayment rates, lives of receivables and discount rates included in the following table. The charge-off rates are determined using forecasted net charge-offs expected for the trust calculated consistently with other company charge-off forecasts. The principal repayment rate assumptions are determined using actual and forecasted trust principal repayment rates based on the collateral. The lives of receivables are determined as the number of months necessary to pay off the investors given the principal repayment rate assumptions. The discount rates are determined using primarily trust specific statistics and forward rate curves, and are reflective of what market participants would use in a similar valuation.
Securitization Key Assumptions
| Year Ended December 31 |
2004 | 2003 | ||||
| Weighted average life for receivables (months) |
8 to 9 | 9 to 10 | ||||
| Principal repayment rate (weighted average rate) |
13% to 15 | % | 14% to 15 | % | ||
| Charge-off rate (weighted average rate) |
4% to 5 | % | 5% to 6 | % | ||
| Discount rate (weighted average rate) |
8% to 10 | % | 8% to 9 | % |
If these assumptions are not met, or if they change, the interest-only strip and related servicing and securitizations income would be affected. The following adverse changes to the key assumptions and estimates, presented in accordance with SFAS 140, are hypothetical and should be used with caution. As the figures indicate, any change in fair value based on a 10% or 20% variation in assumptions cannot be extrapolated because the relationship of a change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the interest-only strip is calculated independently from any change in another assumption. However, changes in one factor may result in changes in other factors, which might magnify or counteract the sensitivities.
Securitization Key Assumptions and Sensitivities
| As of December 31 |
2004 | 2003 | ||||||
| Interest-only strip |
$ | 344,119 | $ | 304,227 | ||||
| Weighted average life for receivables (months) |
9 | 9 | ||||||
| Principal repayment rate (weighted average rate) |
14 | % | 14 | % | ||||
| Impact on fair value of 10% adverse change |
$ | (16,280 | ) | $ | (15,480 | ) | ||
| Impact on fair value of 20% adverse change |
(28,621 | ) | (27,898 | ) | ||||
| Charge-off rate (weighted average rate) |
5 | % | 5 | % | ||||
| Impact on fair value of 10% adverse change |
$ | (66,014 | ) | $ | (60,261 | ) | ||
| Impact on fair value of 20% adverse change |
(131,938 | ) | (119,014 | ) | ||||
| Discount rate (weighted average rate) |
9 | % | 9 | % | ||||
| Impact on fair value of 10% adverse change |
$ | (1,788 | ) | $ | (1,326 | ) | ||
| Impact on fair value of 20% adverse change |
(3,551 | ) | (3,226 | ) |
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Static pool credit losses are calculated by summing the actual and projected future credit losses and dividing them by the original balance of each pool of assets. Due to the short-term revolving nature of the 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 of between 0.50% and 6% of the investor principal outstanding, based upon the type 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 |
2004 | 2003 | ||||
| Proceeds from new securitizations |
$ | 10,854,927 | $ | 11,466,122 | ||
| Collections reinvested in revolving-period securitizations |
63,050,917 | 59,574,458 | ||||
| Repurchases of accounts from the trust |
— | — | ||||
| Servicing fees received |
766,883 | 693,166 | ||||
| Cash flows received on retained interests(1) |
3,668,344 | 2,901,126 |
| (1) | Includes all cash receipts of excess spread and other payments (excluding servicing fees) from the Trust to the Company. |
For the year ended December 31, 2004, the Company recognized gross gains of $55.8 million on the sale of $10.9 billion of consumer loan principal receivables compared to gross gains of $62.0 million on the sale of $11.5 billion of consumer loan principal receivables for the year ended December 31, 2003 and gross gains of $73.6 million on the sale of $12.5 billion of consumer loans in 2002. These gross gains are included in servicing and securitization income. In addition, the Company recognized, as a reduction to servicing and securitization income, upfront securitization transaction costs and recurring credit facility commitment fees of $69.0 million, $88.6 million and $43.5 million for the years ended December 31, 2004, 2003 and 2002, respectively. The remainder of servicing and securitizations income represents servicing income and excess interest and non-interest income generated by the transferred receivables, less the related net losses on the transferred receivables and interest expense related to the securitization debt.
Note 19
Derivative Instruments and Hedging Activities
The Company maintains a risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings caused by interest rate and foreign exchange rate volatility. The Company’s goal is to manage sensitivity to changes in rates by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities, thereby limiting the impact on earnings. By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the fair value gain in a derivative. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes the Company, and, therefore, creates a repayment risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty, and therefore, has no repayment risk. The Company minimizes the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by the Company’s Asset and Liability Committee, a committee of Senior Management. The Company also maintains a policy of requiring that all derivative contracts be governed by an International Swaps and Derivatives Association Master Agreement; depending on the nature of the derivative transaction, bilateral collateral agreements may be required as well.
Market risk is the adverse effect that a change in interest rates, currency, or implied volatility rates has on the value of a financial instrument. 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.
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The Company periodically uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date. As a result of interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in market value. To the extent that there is a high degree of correlation between the hedged asset or liability and the derivative instrument, the income or loss generated will generally offset the effect of this unrealized appreciation or depreciation.
The Company’s foreign currency denominated assets and liabilities expose it to foreign currency exchange risk. The Company enters into various foreign exchange derivative contracts for managing foreign currency exchange risk. Changes in the fair value of the derivative instrument effectively offset the related foreign exchange gains or losses on the items to which they are designated.
The Company has non-trading derivatives that do not qualify as hedges. These derivatives are carried at fair value and changes in value are included in current earnings.
The Asset and Liability Management Committee, as part of that committee’s oversight of the Company’s asset/liability and treasury functions, monitors the Company’s derivative activities. In accordance with the Company’s asset/liability management 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 Hedges
The Company has entered into forward exchange contracts to hedge foreign currency denominated investments against fluctuations in exchange rates. The purpose of the Company’s foreign currency hedging activities is to protect the Company from the risk of adverse affects from movements in exchange rates.
During the years ended December 31, 2004 and 2003, the Company recognized substantially no net gains or losses related to the ineffective portions of its fair value hedging instruments.
Cash Flow Hedges
The Company has entered into interest rate swap agreements for the management of its interest rate risk exposure. The interest rate swap agreements utilized by the Company effectively modify the Company’s exposure to interest rate risk by converting floating rate debt to a fixed rate over the next seven years. The agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreement without an exchange of underlying principal amounts. The Company had entered into interest rate swaps and amortizing notional interest rate swaps to effectively reduce the interest rate sensitivity of anticipated net cash flows of its interest-only strip from securitization transactions over the next two years. During the year ended December 31, 2002, the Company terminated the interest rate swaps and amortizing interest rate swaps that effectively reduced the interest rate sensitivity of anticipated net cash flows of its interest-only strip from securitization transactions. These derivative fair values, net of taxes, were included in cumulative other comprehensive income and will be amortized into interest or servicing and securitizations income over the previous lives of the terminated swaps.
The Company has also entered into currency swaps that effectively convert fixed rate foreign currency denominated interest receipts to fixed dollar interest receipts on foreign currency denominated assets. The purpose of these hedges is to protect against adverse movements in exchange rates over the next two years.
The Company has entered into forward exchange contracts to reduce the Company’s sensitivity to foreign currency exchange rate changes on its foreign currency denominated loans. The forward rate agreements allow the Company to “lock-in” functional currency equivalent cash flows associated with the foreign currency denominated loans.
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During the years ended December 31, 2004 and 2003, the Company recognized no net gains or losses related to the ineffective portions of its cash flow hedging instruments. The Company recognized no net gains or losses during the years ended December 31, 2004 and December 31, 2003 for cash flow hedges that have been discontinued because the forecasted transaction was no longer probable of occurring.
At December 31, 2004, the Company expects to reclassify $19.2 million of net losses, after tax, on derivative instruments from cumulative other comprehensive income to earnings during the next 12 months as terminated swaps are amortized and as interest payments and receipts on derivative instruments occur.
Hedge of Net Investment in Foreign Operations
The Company uses cross-currency swaps and forward exchange contracts to protect the value of its investment in its foreign subsidiaries. Realized and unrealized foreign currency gains and losses from these hedges are not included in the income statement, but are shown in the translation adjustments in other comprehensive income. The purpose of these hedges is to protect against adverse movements in exchange rates.
For the years ended December 31, 2004 and 2003, net losses of $9.1 million and $6.0 million related to these derivatives were included in the cumulative translation adjustment.
Non-Trading Derivatives
The Company uses interest rate swaps to manage interest rate sensitivity related to loan securitizations. The Company enters into interest rate swaps with its securitization trust and essentially offsets the derivative with separate interest rate swaps with third parties.
The Company uses interest rate swaps in conjunction with its auto securitizations that are not designated hedges. These swaps have zero balance notional amounts unless the paydown of auto securitizations differs from its scheduled amortization.
These derivatives do not qualify as hedges and are recorded on the balance sheet at fair value with changes in value included in current earnings. During the years ended December 31, 2004 and 2003, the Company had net gains of $4.0 million and net losses of $2.2 million, respectively. The Company recognized net losses of $2.0 million during the year ended December 31, 2003, for non-trading derivatives that were terminated.
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Note 20
Significant Concentration of Credit Risk
The Company is active in originating consumer loans, primarily in the United States. The Company reviews each potential customer’s credit application and evaluates the applicant’s financial history and ability and willingness to repay. Loans are made primarily on an unsecured basis; however, certain loans require collateral in the form of cash deposits and automobiles and other motor vehicles serve as collateral for auto loans. International consumer loans are originated primarily in Canada and the United Kingdom. The geographic distribution of the Company’s consumer loans was as follows:
| December 31 | ||||||||||||||
| 2004 | 2003 | |||||||||||||
| Loans | Percentage of Total |
Loans | Percentage of Total |
|||||||||||
| Geographic Region: |
||||||||||||||
| Domestic |
||||||||||||||
| South |
$ | 25,034,582 | 31.34 | % | $ | 23,262,643 | 32.65 | % | ||||||
| West |
15,873,159 | 19.88 | 14,662,193 | 20.58 | ||||||||||
| Midwest |
15,220,162 | 19.06 | 13,643,202 | 19.15 | ||||||||||
| Northeast |
13,198,619 | 16.53 | 12,029,894 | 16.89 | ||||||||||
| Total Domestic |
69,326,522 | 86.81 | % | 63,597,932 | 89.27 | % | ||||||||
| International |
||||||||||||||
| U.K. |
8,163,109 | 10.22 | % | 5,546,644 | 7.78 | % | ||||||||
| Canada |
2,360,297 | 2.96 | 1,935,396 | 2.72 | ||||||||||
| Other |
11,371 | .01 | 164,824 | 0.23 | ||||||||||
| Total International |
10,534,777 | 13.19 | % | 7,646,864 | 10.73 | % | ||||||||
| 79,861,299 | 100.00 | % | 71,244,796 | 100.00 | % | |||||||||
| Less securitization adjustments |
(41,645,708 | ) | (38,394,527 | ) | ||||||||||
| Total |
$ | 38,215,591 | $ | 32,850,269 | ||||||||||
Note 21
Disclosures About Fair Value of Financial Instruments
The following discloses the fair value of financial instruments whether or not recognized in the balance sheets as of December 31, 2004 and 2003. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. As required under GAAP, these disclosures exclude certain financial instruments and all non-financial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The Company, in estimating the fair value of its financial instruments as of December 31, 2004 and 2003, used the following methods and assumptions:
Financial Assets
Cash and cash equivalents
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 3 for fair values by type of security.
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Consumer loans
The net carrying amount of consumer loans other than auto loans and installment loans approximates fair value due to the relatively short average life and variable interest rates on a substantial number of these loans. This amount excluded any value related to account relationships.
The fair value of auto loans and installment loans was estimated by discounting future cash flows using a rate at which similar portfolios of loans would be made under current conditions.
Interest receivable
The carrying amount approximates the fair value of this asset due to its relatively short-term nature.
Accounts receivable from securitizations
The carrying amount approximates fair value.
Derivatives
The carrying amount of derivatives approximates fair value and was represented by the estimated unrealized gains as determined by quoted market prices. This value generally reflects the estimated amounts that the Corporation would have received to terminate the interest rate swaps, currency swaps and forward foreign currency exchange (“f/x”) contracts at the respective dates, taking into account the forward yield curve on the swaps and the forward rates on the currency swaps and f/x contracts. These derivatives are included in other assets on the balance sheet.
Financial Liabilities
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 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 and assumed maturities when no stated final maturity was available. The fair value of the junior subordinated capital income securities was determined based on quoted market prices.
Senior notes
The fair value of senior notes was determined based on quoted market prices.
Interest payable
The carrying amount approximates the fair value of this asset due to its relatively short-term nature.
Derivatives
The carrying amount of derivatives approximates fair value and was represented by the estimated unrealized losses as determined by quoted market prices. This value generally reflects the estimated amounts that the Company would have paid to terminate the interest rate swaps, currency swaps and f/x contracts at the
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respective dates, taking into account the forward yield curve on the swaps and the forward rates on the currency swaps and f/x contracts. These derivatives are included in other liabilities on the balance sheet.
| 2004 | 2003 | |||||||||||
| Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value | |||||||||
| Financial Assets |
||||||||||||
| Cash and cash equivalents |
$ | 1,411,211 | $ | 1,411,211 | $ | 1,980,282 | $ | 1,980,282 | ||||
| Securities available for sale |
9,300,454 | 9,300,454 | 5,866,628 | 5,866,628 | ||||||||
| Net loans |
36,710,591 | 37,010,417 | 31,255,269 | 31,571,269 | ||||||||
| Interest receivable |
252,857 | 252,857 | 214,295 | 214,295 | ||||||||
| Accounts receivable from securitization |
4,081,271 | 4,081,271 | 4,748,962 | 4,748,962 | ||||||||
| Derivatives |
243,594 | 243,594 | 338,549 | 338,549 | ||||||||
| Financial Liabilities |
||||||||||||
| Interest-bearing deposits |
$ | 25,636,802 | $ | 25,882,189 | $ | 22,416,332 | $ | 23,138,228 | ||||
| Senior and subordinated notes |
6,874,790 | 7,199,186 | 7,016,020 | 7,423,326 | ||||||||
| Other borrowings |
9,637,019 | 9,621,173 | 7,796,613 | 7,793,758 | ||||||||
| Interest payable |
237,227 | 237,227 | 256,015 | 256,015 | ||||||||
| Derivatives |
427,012 | 427,012 | 481,228 | 481,228 | ||||||||
Note 22
International Activities
The Company’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 Bank—Canada Branch, a foreign branch office of the Bank that provides consumer lending products in Canada. The total assets, revenue, income before income taxes and net income of the international operations are summarized below.
| 2004 | 2003 | 2002 | |||||||
| Domestic |
|||||||||
| Total Assets |
$ | 48,117,413 | $ | 42,230,859 | $ | 34,420,099 | |||
| Revenue(1) |
7,873,218 | 7,461,825 | 7,604,075 | ||||||
| Income before income taxes and cumulative accounting change |
2,118,067 | 1,736,362 | 1,436,706 | ||||||
| Net Income |
1,369,082 | 1,090,296 | 899,429 | ||||||
| International |
|||||||||
| Total Assets |
5,629,842 | 4,052,847 | 2,962,281 | ||||||
| Revenue(1) |
1,029,917 | 739,188 | 581,873 | ||||||
| Income before income taxes and cumulative accounting change |
241,997 | 90,431 | 14,333 | ||||||
| Net Income |
174,400 | 45,546 | 215 | ||||||
| Total Company |
|||||||||
| Total Assets |
$ | 53,747,255 | $ | 46,283,706 | $ | 37,382,380 | |||
| Revenue(1) |
8,903,135 | 8,201,013 | 8,185,948 | ||||||
| Income before income taxes and cumulative accounting change |
2,360,064 | 1,826,793 | 1,451,039 | ||||||
| Net Income |
1,543,482 | 1,135,842 | 899,644 | ||||||
| (1) | Revenue equals net interest income plus non-interest income. |
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The Company maintains its books and records on a legal entity basis for the preparation of financial statements in conformity with GAAP. Because certain international operations are integrated with many of the Company’s domestic operations, estimates and assumptions have been made to assign certain expense items between domestic and foreign operations.
Note 23
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 all issuers or guarantors of registered securities to include separate annual financial statements.
| December 31 | ||||||
| Balance Sheets | 2004 | 2003 | ||||
| Assets: |
||||||
| Cash and cash equivalents |
$ | 16,858 | $ | 33,873 | ||
| Investment in subsidiaries |
6,714,847 | 6,000,005 | ||||
| Loans to subsidiaries(1) |
3,723,739 | 1,748,608 | ||||
| Other |
184,568 | 134,360 | ||||
| Total assets |
$ | 10,640,012 | $ | 7,916,846 | ||
| Liabilities: |
||||||
| Senior notes |
$ | 1,766,185 | $ | 1,753,514 | ||
| Borrowings from subsidiaries |
456,385 | 75,180 | ||||
| Other |
29,253 | 36,341 | ||||
| Total liabilities |
2,251,823 | 1,865,035 | ||||
| Stockholders’ equity |
8,388,189 | 6,051,811 | ||||
| Total liabilities and stockholders’ equity |
$ | 10,640,012 | $ | 7,916,846 | ||
| (1) | As of December 31, 2004 and 2003, includes $1.9 billion and $576.6 million, respectively, of cash invested at the Bank instead of the open market. |
| Year Ended December 31 | ||||||||||||
| Statements of Income | 2004 | 2003 | 2002 | |||||||||
| Interest from temporary investments |
$ | 84,982 | $ | 50,808 | $ | 44,220 | ||||||
| Interest expense |
(152,656 | ) | (146,940 | ) | (124,097 | ) | ||||||
| Dividends, principally from bank subsidiaries |
1,000,013 | 776,019 | 880,069 | |||||||||
| Non-interest income |
11,929 | 6,410 | 1,154 | |||||||||
| Non-interest expense |
(12,891 | ) | (3,119 | ) | (1,852 | ) | ||||||
| Income before income taxes and equity in undistributed earnings of subsidiaries |
931,377 | 683,178 | 799,494 | |||||||||
| Income tax benefit |
37,971 | 47,786 | 30,619 | |||||||||
| Equity in undistributed earnings of subsidiaries |
574,134 | 404,878 | 69,531 | |||||||||
| Net income |
$ | 1,543,482 | $ | 1,135,842 | $ | 899,644 | ||||||
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| Year Ended December 31 | ||||||||||||
| Statements of Cash Flows | 2004 | 2003 | 2002 | |||||||||
| Operating Activities: |
||||||||||||
| Net income |
$ | 1,543,482 | $ | 1,135,842 | $ | 899,644 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
| Equity in undistributed earnings of subsidiaries |
(574,134 | ) | (404,878 | ) | (69,531 | ) | ||||||
| Amortization of discount of senior notes |
12,671 | 12,518 | — | |||||||||
| Stock plan compensation expense |
127,174 | 49,449 | 27,749 | |||||||||
| Decrease in other assets |
77,122 | 53,197 | 50,788 | |||||||||
| (Decrease) increase in other liabilities |
(7,088 | ) | 4,135 | (33,328 | ) | |||||||
| Net cash provided by operating activities |
1,179,227 | 850,263 | 875,322 | |||||||||
| Investing Activities: |
||||||||||||
| Increase in investment in subsidiaries |
(80,379 | ) | (350,000 | ) | (1,210,000 | ) | ||||||
| Increase in loans to subsidiaries |
(1,975,131 | ) | (643,603 | ) | (559,774 | ) | ||||||
| Net cash used in investing activities |
(2,055,510 | ) | (993,603 | ) | (1,769,774 | ) | ||||||
| Financing Activities: |
||||||||||||
| Increase (decrease) in borrowings from subsidiaries |
381,205 | (117,698 | ) | (376,598 | ) | |||||||
| Issuance of senior notes |
— | 298,581 | 300,000 | |||||||||
| Issuance of mandatory convertible securities |
— | — | 725,075 | |||||||||
| Maturities of senior notes |
— | (125,000 | ) | — | ||||||||
| Dividends paid |
(25,618 | ) | (24,282 | ) | (23,457 | ) | ||||||
| Purchases of treasury stock |
(17,232 | ) | (4,069 | ) | — | |||||||
| Net proceeds from issuances of common stock |
23,910 | 25,147 | 232,321 | |||||||||
| Proceeds from exercise of stock options |
497,003 | 118,149 | 33,649 | |||||||||
| Net cash provided by financing activities |
859,268 | 170,828 | 890,990 | |||||||||
| (Decrease) increase in cash and cash equivalents |
(17,015 | ) | 27,488 | (3,462 | ) | |||||||
| Cash and cash equivalents at beginning of year |
33,873 | 6,385 | 9,847 | |||||||||
| Cash and cash equivalents at end of year |
$ | 16,858 | $ | 33,873 | $ | 6,385 | ||||||
Note 24
Subsequent Events
Business Combinations
During the first quarter of 2005, the Company closed the acquisitions of Onyx Acceptance Corporation, a specialty auto loan originator; Hfs Group, a United Kingdom based home equity and mortgage loan originator; InsLogic, an internet auto insurance broker, and eSmartloan, a U.S. based online originator of home equity loans and mortgages, for approximately $440.5 million in the aggregate, exclusive of related transaction costs, in all cash transactions. These acquisitions are not expected to have a material impact on the 2005 consolidated earnings or financial position of the Company.
During March 2005, the Company entered into a definitive agreement to acquire Hibernia Corporation, a financial holding company that provides a wide array of financial products through its bank and non-bank subsidiaries, in a stock and cash transaction valued at approximately $5.3 billion.
Borrowings
In February 2005, the Company completed a remarketing of approximately $704.5 million aggregate principal amount of its 6.25% senior notes due May 17, 2007. As a result of the remarketing, the annual interest rate on the senior notes was reset to 4.738%. The remarketing was conducted pursuant to the original terms of the Upper Decs issued in April of 2002.
Also in February 2005, the Company extinguished the remarketed senior notes held with two investors and issued new, $300.0 million of seven year 4.80% fixed rate senior notes and $300.0 million of twelve year 5.25% fixed rate senior notes.
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Capital One Financial Corporation (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC, internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial officers, and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.
The Company’s internal control over financial reporting is supported by written policies and procedures, that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management of the Company conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO Framework”).
Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2004.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 had been audited by Ernst and Young LLP, the independent registered public accounting firm that audited the Company’s financial statements, as stated in their report, a copy of which is included in this annual report on Form 10-K.
| /s/ RICHARD D. FAIRBANK | /s/ GARY L. PERLIN | |||
| Chairman and Chief Executive Officer | Executive Vice President and Chief Financial Officer | |||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Capital One Financial Corporation
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Capital One Financial Corporation maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Capital One Financial Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Capital One Financial Corporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Capital One Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Capital One Financial Corporation as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004 of Capital One Financial Corporation and our report dated February 11, 2005, except for Note 24 as to which date is March 7, 2005, expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
McLean, Virginia
February 11, 2005
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Capital One Financial Corporation
We have audited the accompanying consolidated balance sheets of Capital One Financial Corporation as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capital One Financial Corporation at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 2003 the Company changed its method of accounting for variable interest entities and accounting for stock based compensation.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Capital One Financial Corporation’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 11, 2005, expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
McLean, Virginia
February 11, 2005, except for Note 24,
as to which the date is March 7, 2005
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Selected Quarterly Financial Data
| 2004 | 2003 | |||||||||||||||||||||||||||||||
| (Unaudited) | Fourth Quarter |
Third Quarter |
Second Quarter |
First Quarter |
Fourth Quarter |
Third Quarter |
Second Quarter |
First Quarter |
||||||||||||||||||||||||
| Summary of Operations: |
||||||||||||||||||||||||||||||||
| (In Thousands) |
||||||||||||||||||||||||||||||||
| Interest income |
$ | 1,249,330 | $ | 1,228,413 | $ | 1,151,946 | $ | 1,164,731 | $ | 1,087,783 | $ | 1,103,025 | $ | 1,070,280 | $ | 1,106,566 | ||||||||||||||||
| Interest expense |
464,766 | 453,038 | 440,929 | 432,709 | 423,682 | 399,104 | 388,017 | 371,762 | ||||||||||||||||||||||||
| Net interest income |
784,564 | 775,375 | 711,017 | 732,022 | 664,101 | 703,921 | 682,263 | 734,804 | ||||||||||||||||||||||||
| Provision for loan losses |
467,133 | 267,795 | 242,256 | 243,668 | 390,405 | 364,144 | 387,097 | 375,851 | ||||||||||||||||||||||||
| Net interest income after provision for loan losses |
317,431 | 507,580 | 468,761 | 488,354 | 273,696 | 339,777 | 295,166 | 358,953 | ||||||||||||||||||||||||
| Non-interest income |
1,521,575 | 1,539,384 | 1,396,064 | 1,443,134 | 1,437,491 | 1,363,208 | 1,310,622 | 1,304,603 | ||||||||||||||||||||||||
| Non-interest expense |
1,556,527 | 1,311,984 | 1,228,812 | 1,224,896 | 1,289,472 | 1,241,763 | 1,151,556 | 1,173,932 | ||||||||||||||||||||||||
| Income before income taxes and cumulative effect of accounting change |
282,479 | 734,980 | 636,013 | 706,592 | 421,715 | 461,222 | 454,232 | 489,624 | ||||||||||||||||||||||||
| Income taxes |
87,351 | 244,819 | 228,626 | 255,786 | 156,034 | 170,653 | 168,066 | 181,161 | ||||||||||||||||||||||||
| Income before cumulative effect of accounting change |
195,128 | 490,161 | 407,387 | 450,806 | 265,681 | 290,569 | 286,166 | 308,463 | ||||||||||||||||||||||||
| Cumulative effect of accounting change, net of taxes of $8,832 |
— | — | — | — | — | 15,037 | — | — | ||||||||||||||||||||||||
| Net income |
$ | 195,128 | $ | 490,161 | $ | 407,387 | $ | 450,806 | $ | 265,681 | $ | 275,532 | $ | 286,166 | $ | 308,463 | ||||||||||||||||
| Per Common Share: |
||||||||||||||||||||||||||||||||
| Basic earnings per share |
$ | 0.82 | $ | 2.07 | $ | 1.74 | 1.94 | $ | 1.16 | $ | 1.23 | $ | 1.28 | 1.38 | ||||||||||||||||||
| Diluted earnings per share |
0.77 | 1.97 | 1.65 | 1.84 | 1.11 | 1.17 | 1.23 | 1.35 | ||||||||||||||||||||||||
| Dividends |
0.03 | 0.03 | 0.03 | 0.03 | 0.03 | 0.03 | 0.03 | 0.03 | ||||||||||||||||||||||||
| Market prices |
||||||||||||||||||||||||||||||||
| High |
84.75 | 75.49 | 77.65 | 76.66 | 64.25 | 62.02 | 54.99 | 39.70 | ||||||||||||||||||||||||
| Low |
67.62 | 64.93 | 61.15 | 60.04 | 55.15 | 44.51 | 30.05 | 24.91 | ||||||||||||||||||||||||
| Average common shares (000s) |
239,247 | 236,405 | 234,732 | 232,021 | 228,110 | 224,615 | 223,691 | 222,951 | ||||||||||||||||||||||||
| Average common shares and common equivalent shares (000s) |
253,008 | 249,007 | 247,591 | 245,413 | 239,206 | 236,270 | 232,553 | 228,422 | ||||||||||||||||||||||||
| Average Balance Sheet Data: |
||||||||||||||||||||||||||||||||
| (In Millions) |
||||||||||||||||||||||||||||||||
| Consumer loans |
$ | 36,096 | $ | 34,772 | $ | 33,290 | $ | 32,878 | $ | 31,297 | $ | 28,949 | $ | 27,101 | $ | 27,316 | ||||||||||||||||
| Allowance for loan losses |
(1,381 | ) | (1,425 | ) | (1,494 | ) | (1,594 | ) | (1,567 | ) | (1,590 | ) | (1,635 | ) | (1,719 | ) | ||||||||||||||||
| Securities |
11,531 | 10,646 | 10,578 | 9,347 | 7,598 | 7,331 | 7,535 | 5,352 | ||||||||||||||||||||||||
| Other assets |
7,093 | 7,503 | 7,646 | 7,068 | 7,674 | 7,014 | 6,677 | 7,369 | ||||||||||||||||||||||||
| Total assets |
$ | 53,339 | $ | 51,496 | $ | 50,020 | $ | 47,699 | $ | 45,002 | $ | 41,704 | $ | 39,678 | $ | 38,318 | ||||||||||||||||
| Interest-bearing deposits |
$ | 25,580 | $ | 24,714 | $ | 23,948 | $ | 22,993 | $ | 21,605 | $ | 20,303 | $ | 19,178 | $ | 17,940 | ||||||||||||||||
| Other borrowings |
9,077 | 8,675 | 8,488 | 7,834 | 7,661 | 6,892 | 6,683 | 7,010 | ||||||||||||||||||||||||
| Senior and deposit notes |
6,946 | 7,219 | 7,381 | 7,271 | 6,735 | 6,066 | 5,534 | 5,310 | ||||||||||||||||||||||||
| Other liabilities |
3,515 | 3,327 | 3,260 | 3,158 | 3,114 | 3,019 | 3,135 | 3,235 | ||||||||||||||||||||||||
| Stockholder’s equity |
8,221 | 7,561 | 6,943 | 6,443 | 5,887 | 5,424 | 5,148 | 4,823 | ||||||||||||||||||||||||
| Total liabilities and stockholders’ equity |
$ | 53,339 | $ | 51,496 | $ | 50,020 | $ | 47,699 | $ | 45,002 | $ | 41,704 | $ | 39,678 | $ | 38,318 | ||||||||||||||||
The above schedule is a tabulation of the Company’s unaudited quarterly results for the years ended December 31, 2004 and 2003. 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 9,721 and 10,227 common stockholders of record as of December 31, 2004 and 2003, respectively.
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| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
Not applicable.
| Item 9A. | Controls and Procedures. |
(a) Disclosure Controls and Procedures.
The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, of the effectiveness of the design and operation of the Corporation’s disclosure controls and internal controls and procedures as of December 31, 2004 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 and procedures are effective in alerting them in a timely manner to material information relating to the Corporation (including consolidated subsidiaries) required to be included in the Corporation’s periodic filings with the Securities and Exchange Commission. The Corporation has established a Disclosure Committee consisting of members of senior management to assist in this evaluation.
(b) Internal Controls over Financial Reporting.
Management’s Report on Internal Control over Financial Reporting is included in Item 8 on page 97 and is incorporated by reference herein.
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PART III
| Item 10. | Directors and Executive Officers of the Corporation. |
The information required by Item 10 will be included in the Corporation’s 2005 Proxy Statement (the “Proxy Statement”) under the heading “Information About Our Directors and Executive Officers” and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the end of the Corporation’s 2004 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 “Report of the Compensation Committee on Executive Compensation,” and is incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by Item 12 will be included in the Proxy Statement under the heading “Equity Compensation Plan Information,” and is incorporated herein by reference.
| Item 13. | Certain Relationships and Related Transactions. |
The information required by Item 13 will be included in the Proxy Statement under the heading “Information About Our Directors and Executive Officers—Related Party Transactions,” and is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services. |
The information required by Item 14 will be included in the Proxy Statement under the heading “Ratification of Selection of Independent Auditors” and is incorporated by reference herein.
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PART IV
| Item 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K. |
| a) (1) | The following consolidated financial statements of Capital One Financial Corporation, included in Item 8, “Financial Statements and Supplementary Data”, are incorporated by reference hereto: |
Consolidated Balance Sheets—as of December 31, 2004 and 2003
Consolidated Statements of Income—Years ended December 31, 2004, 2003 and 2002
Consolidated Statements of Changes in Stockholders’ Equity—Years ended December 2004, 2003 and 2002
Consolidated Statements of Cash Flows—Years ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm, Ernst & Young LLP
Selected Quarterly and Financial Data (unaudited)—as of and for the years ended December 31, 2004 and 2003
| (2) | All schedules are omitted since the required information is either not applicable, not deemed material, or is shown in the respective financial statements or in notes thereto. |
| (3) | Exhibits: |
A list of the exhibits to this Form 10-K is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference.
| b) | Reports on Form 8-K |
On October 20, 2004, the Company filed under Item 2.02—“Results of Operations and Financial Condition”, Item 7.01—“Regulation FD Disclosure”, Item 8.01—“Other Events”, and Item 9.01—“Financial Statements, Pro Forma Financial Information and Exhibits” of Form 8-K, on Exhibit 99.1, a copy of its earnings press release for the third quarter 2004 that was issued October 20, 2004. This release, which is required under Item 2.02, “Results of Operations and Financial Condition,” has been included under Item 7.01 pursuant to interim reporting guidance provided by the SEC. Additionally, the Company furnished the information in Exhibit 99.2, Third Quarter Earnings Presentation for the quarter ended September 30, 2004.
On October 20, 2004, the Company furnished under Item 7.01—“Regulation FD Disclosure” and Item 9.01 – “Financial Statements, Pro Forma Financial Information and Exhibits” of Form 8-K on Exhibit 99.1 the Monthly Charge-off and Delinquency Statistics—September 2004 for the month ended September 30, 2004.
On October 29, 2004, the Company furnished under Item 5.02—“Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers”, Item 7.01—“Regulation FD Disclosure” and Item 9.01—“Financial Statements and Exhibits” of Form 8-K on Exhibit 99.1 its press release dated October 28, 2004.
On November 4, 2004, the Company furnished under Item 7.01—“Regulation FD Disclosure” and Item 9.01—“Financial Statements, Pro Forma Financial Information and Exhibits” of Form 8-K on Exhibit 99.1 and 99.2 the 2004 Debt and Equity Conference Business Outlook Presentation and 2004 Debt & Equity Conference Financial Foundations Presentation.
On November 9, 2004, the Company furnished under Item 7.01—“Regulation FD Disclosure” and Item 9.01—“Financial Statements, Pro Forma Financial Information and Exhibits” of Form 8-K on Exhibit
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99.1 the Monthly Charge-off and Delinquency Statistics—October 2004 for the month ended October 31, 2004.
On November 15, 2004, the Company furnished under Item 1.01—“Entry into a Material Definitive Agreement”, Item 7.01—“Regulation FD Disclosure” and Item 9.01—“Financial Statements and Exhibits” of Form 8-K, on Exhibit 99.1, a copy of its press release dated November 9, 2004.
On November 15, 2004, the Company furnished under Item 7.01—“Regulation FD Disclosure” and Item 9.01—“Financial Statements and Exhibits” of Form 8-K, on Exhibit 99.1, a copy of its press release dated November 15, 2004.
On December 10, 2004, The Company furnished under 7.01—“Regulation FD Disclosure” and Item 9.01 – “Financial Statements, Pro Forma Financial Information and Exhibits” of Form 8-K on Exhibit 99.1 the Monthly Charge-off and Delinquency Statistics—November 2004 for the month ended November 30, 2004.
On December 23, 2004, the Company furnished under Item 1.01—“Entry into a Material Definitive Agreement”, Item 7.01—“Regulation FD Disclosure”, and Item 9.01—“Financial Statements and Exhibits” of Form 8-K on Exhibit 99.1 the Form of Nonstatutory Stock Option Agreement between Capital One Financial Corporation and Richard D. Fairbank pursuant to the Company’s Stock Incentive Plan.
*Information in this furnished herewith shall not be deemed to be “filed” for the purposes of Section 18 of the 1934 Act or otherwise subject to the 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 as reasonably practicable after such material is filed with, or furnished to, the SEC electronically.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf 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 following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature |
Title |
Date | ||
| /s/ RICHARD D. FAIRBANK Richard D. Fairbank |
Director, Chairman, Chief Executive Officer and President (Principal Executive Officer) | March 9, 2005 | ||
| /s/ GARY L. PERLIN Gary L. Perlin |
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | March 9, 2005 | ||
| /s/ W. RONALD DIETZ W. Ronald Dietz |
Director | March 9, 2005 | ||
| /s/ JAMES A. FLICK, JR. James A. Flick, Jr. |
Director | March 9, 2005 | ||
| /s/ PATRICK W. GROSS Patrick W. Gross |
Director | March 9, 2005 | ||
| /s/ ANN F. HACKETT Ann F. Hackett |
Director | March 9, 2005 | ||
| /s/ LEWIS HAY, III Lewis Hay, III |
Director | March 9, 2005 | ||
| /s/ JAMES V. KIMSEY James V. Kimsey |
Director | March 9, 2005 | ||
| /s/ MAYO A. SHATTUCK, III Mayo A. Shattuck, III |
Director | March 9, 2005 | ||
| /s/ STANLEY WESTREICH Stanley Westreich |
Director | March 9, 2005 | ||
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EXHIBIT INDEX
CAPITAL ONE FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
DATED DECEMBER 31, 2004
Commission File No. 1-13300
The following exhibits are incorporated by reference or filed herewith. References to (i) the “1999 Form 10-K/A” are to the Corporation’s Annual Report on Form 10-K, as amended, for the year ended December 31, 1999, filed March 23, 2000; (ii) the “2000 Form 10-K” are to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2000, filed March 29, 2001; (iii) the “2001 Form 10-K” are to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2001, filed March 22, 2002, as amended on August 14, 2002; (iv) the “2002 Form 10-K” are to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2002, filed March 17, 2003; (v) the “2003 Form 10-K” are to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004, filed March 5, 2004.
| Exhibit Number |
Description | |
| 3.1 | Restated Certificate of Incorporation of Capital One Financial Corporation and Certificate of Amendment to Restated Certificate of Incorporation of Capital One Financial Corporation (incorporated by reference to Exhibit 3.1.2 of the Corporation’s Report on Form 8-K, filed January 16, 2001). | |
| 3.2 | Amended and Restated Bylaws of Capital One Financial Corporation (as amended November 18, 1999) (incorporated by reference to Exhibit 3.2 of the 1999 Form 10-K/A). | |
| 4.1 | Specimen certificate representing the Common Stock (incorporated by reference to Exhibit 4.1 of the 2003 Form 10-K) | |
| 4.2.1 | Rights Agreement dated as of November 16, 1995 between Capital One Financial Corporation and Mellon Bank, N.A. (incorporated by reference to Exhibit 4.2.1 of the 2002 Form 10-K). | |
| 4.2.2 | Amendment to Rights Agreement dated as of April 29, 1999 between Capital One Financial Corporation and First Chicago Trust Company of New York, as successor to Mellon Bank, N.A. (incorporated by reference to Exhibit 4.2.2 of the 1999 Form 10-K/A). | |
| 4.2.3 | Amendment Number 2 to Rights Agreement dated as of October 18, 2001 between Capital One Financial Corporation and EquiServe Trust Company, N.A. (as successor to First Trust Company of New York) as Rights Agent (incorporated by reference to Exhibit 99.1 of the Corporation’s Report on Form 8-K, filed November 2, 2001). | |
| 4.3 | Amended and Restated Issuing and Paying Agency Agreement dated as of April 30, 1996 between Capital One Bank and Chemical Bank (including exhibits A-1, A-2, A-3 and A-4 thereto) (incorporated by reference to Exhibit 4.3 of the 2002 Form 10-K). | |
| 4.4.1 | Distribution Agreement dated May 8, 2003 among Capital One Bank, J.P. Morgan Securities, Inc. and the agents named therein (incorporated by reference to the Corporation’s quarterly report on Form 10-Q for the period ending June 30, 2003). | |
| 4.4.2 | Copy of 6.50% Notes, due 2004, of Capital One Bank (incorporated by reference to Exhibit 4.4.5 of the 2001 Form 10-K). | |
| 4.4.3 | Copy of 6.875% Notes due 2006, of Capital One Bank (incorporated by reference to Exhibit 4.4.6 of the 2001 Form 10-K). | |
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| Exhibit Number |
Description | |
| 4.4.4 | Copy of 4.25% Notes, due 2008, of Capital One Bank (incorporated by reference to Exhibit 4.4.4 of the 2003 Form 10-K). | |
| 4.4.5 | Copy of 5.75% Notes, due 2010, of Capital One Bank (incorporated by reference to Exhibit 4.4.5 of the 2003 Form 10-K). | |
| 4.4.6 | Copy of 6.50% Notes, due 2013, of Capital One Bank (incorporated by reference to Exhibit 4.4.6 of the 2003 Form 10-K). | |
| 4.4.7 | Copy of 4.875% Notes, due 2008, of Capital One Bank (incorporated by reference to Exhibit 4.4.7 of the 2003 Form 10-K). | |
| 4.4.8 | Copy of 8.25% Notes, due 2005, of Capital One Bank (incorporated by reference to Exhibit 4.4.4 of the 2000 Form 10-K). | |
| 4.5.1 | Senior Indenture and Form T-1 dated as of November 1, 1996 among Capital One Financial Corporation and Harris Trust and Savings Bank (incorporated by reference to Exhibit 4.5.1 of the 2002 Form 10-K). | |
| 4.5.2 | Copy of 8.75% Notes, due 2007, of Capital One Financial Corporation (incorporated by reference to Exhibit 4.5.5 of the 2001 Form 10-K). | |
| 4.5.3 | Copy of 7.125% Notes, due 2008, of Capital One Financial Corporation (incorporated by reference to Exhibit 4.8 of the 1998 Form 10-K). | |
| 4.5.4 | Copy of 7.25% Notes, due 2006, of the Capital One Financial Corporation (incorporated by reference to Exhibit 4.10 of the 1999 Form 10-K/A). | |
| 4.5.5 | Copy of 6.25% Notes, due 2013, of Capital One Financial Corporation (incorporated by reference to Exhibit 4.5.5 of the 2003 Form 10-K). | |
| 4.5.6* | Copy of 5.25% Notes, due 2017, of Capital One Financial Corporation. | |
| 4.5.7* | Copy of 4.80% Notes, due 2012, of Capital One Financial Corporation. | |
| 4.6.1 | Declaration of Trust, dated as of January 28, 1997, between Capital One Bank and The First National Bank of Chicago, as trustee (including the Certificate of Trust executed by First Chicago Delaware Inc., as Delaware trustee) (incorporated by reference to Exhibit 4.6.1 of the 2002 Form 10-K). | |
| 4.6.2 | Copies of Certificates Evidencing Capital Securities (incorporated by reference to Exhibit 4.6.2 of the 2002 Form 10-K). | |
| 4.6.3 | Amended and Restated Declaration of Trust, dated as of January 31, 1997, by and among Capital 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). | |
| 4.7 | 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 the Paying Agents named therein (incorporated by reference to Exhibit 4.9 of the 1998 Form 10-K). | |
| 4.8 | Upper DECs® form of certificate (incorporated by reference to Exhibit 4.9 of the Corporation’s Report on Form 8-K, filed on April 23, 2002). | |
| 10.1.1 | 1995 Associate Stock Purchase Plan (incorporated by reference to Exhibit 10.1.1 of the 2002 Form 10-K). | |
| 10.1.2 | 2002 Associate Stock Purchase Plan (incorporated by reference to Exhibit 4.1 of the Corporation’s Form S-8 filed with the Securities and Exchange Commission on October 10, 2002). | |
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| Exhibit Number |
Description | |
| 10.2.1 | Lease Agreement, dated as of December 5, 2000, among First Union Development Corporation, as Lessor, and Capital One F.S.B. and Capital One Bank, jointly and severally, as Lessees (incorporated by reference to Exhibit 10.2.1 of the 2000 Form 10-K). | |
| 10.2.2 | Participation Agreement, dated as of December 5, 2000, among Capital One F.S.B. and Capital One Bank as construction agents and lessees, Capital One Financial Corporation as guarantor, First Union Development Corporation as Lessor, the various financing parties named therein, and First Union National Bank as Agent (incorporated by reference to Exhibit 10.2.2 of the 2000 Form 10-K). | |
| 10.2.3 | Guaranty, dated as of December 5, 2000, from Capital One Financial Corporation in favor of First Union Development Corporation and the various other parties to the Participation Agreement, dated as of December 5, 2000 (incorporated by reference to Exhibit 10.2.3 of the 2000 Form 10-K). | |
| 10.3 | Form of Change of Control Employment Agreement dated as of January 25, 2000 between Capital One Financial Corporation and each of Richard D. Fairbank and John G. Finneran Jr. (incorporated by reference to Exhibit 10.3 of the 1999 Form 10-K/A). | |
| 10.4 | Capital One Financial Corporation 1999 Non-Employee Directors Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.4 of the 2002 Form 10-K). | |
| 10.4.1 | Form of 1999 Non-Employee Directors Stock Incentive Plan Nonstatutory Stock Option Agreement between Capital One Financial Corporation and certain of its Directors (incorporated by reference to Exhibit 10.2 of the Corporation’s quarterly report on Form 10-Q for the period ending September 30, 2004). | |
| 10.4.2 | Form of 1999 Non-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). | |
| 10.5.1 | Employment Agreement between David R. Lawson and Summit Acceptance Corporation, dated July 13, 1998, as amended (incorporated by reference to Exhibit 10.5 of the 2002 Form 10-K). | |
| 10.5.2 | Employment Agreement between Nigel W. Morris and Capital One Financial Corporation, dated July 18, 2003 (incorporated by reference to Exhibit 10.2 of the Corporation’s quarterly report on Form 10-Q for the period ending June 30, 2003). | |
| 10.5.3 | Separation Agreement between David M. Willey and Capital One Financial Corporation, dated July 8, 2003, (incorporated by reference to Exhibit 10.3 of the Corporation’s quarterly report on Form 10-Q for the period ending June 30, 2003). | |
| 10.6 | Capital One Financial Corporation 1999 Stock Incentive Plan (incorporated by reference to Exhibit 4 of the Corporation’s Registration Statement on Form S-8, Commission File No. 333-78609, filed May 17, 1999). | |
| 10.7 | Capital One Financial Corporation 1994 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.7 of the 2002 Form 10-K). | |
| 10.7.1 | Restricted Stock Unit Award Agreement, dated May 17, 2004, by and between Capital One Financial Corporation and Richard D. Fairbank. (incorporated by reference to Exhibit 10.10.1 of the Corporation’s quarterly report on Form 10-Q for the period ending September 30, 2004). | |
| 10.8* | Services Agreement, dated November 8, 2004, between Capital One Financial Corporation, acting through its subsidiary Capital One Services, Inc. and First Data Corporation, acting through its subsidiary, First Data Resources, Inc. (confidential treatment has been requested for portions of this document). | |
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| Exhibit Number |
Description | |
| 10.10 | Form of Amended and Restated Change of Control Employment Agreement between Capital One Financial Corporation and certain of its senior executives (incorporated by reference to Exhibit 10.10 of the 2002 Form 10-K). | |
| 10.10.1 | Revised Schedule of Counterparts 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). | |
| 10.11 | Capital One Financial Corporation Excess Savings Plan, as amended (incorporated by reference to Exhibit 10.11 of the 2002 Form 10-K). | |
| 10.12 | Capital One Financial Corporation Excess Benefit Cash Balance Plan, as amended (incorporated by reference to Exhibit 10.12 of the 2002 Form 10-K). | |
| 10.13.1 | Capital One Financial Corporation 1994 Deferred Compensation Plan, as amended (incorporated by reference to Exhibit 10.13 of the 2002 Form 10-K). | |
| 10.13.2 | Capital One Financial Corporation, Voluntary Non-Qualified Deferred Compensation Plan, dated May 28, 2004 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the period ending June 30, 2004). | |
| 10.14 | 1995 Non-Employee Directors Stock Incentive Plan (incorporated by reference to the Corporation’s Registration Statement on Form S-8, Commission File No. 33-91790, filed May 1, 1995). | |
| 10.15 | Consulting Agreement dated as of April 5, 1995, by and between Capital One Financial Corporation and American Management Systems, Inc. (incorporated by reference to Exhibit 10.16 of the 2002 Form 10-K). | |
| 10.16.1 | Amended and Restated Lease Agreement dated as of October 14, 1998 between First Security Bank of Utah, N.A., as owner trustee for the COB Real Estate Trust 1995-1, as Lessor and Capital One Realty, Inc., as lessee (incorporated by reference to Exhibit 10.17.1 of the 1998 Form 10-K). | |
| 10.16.1.1* | Supplement to Amended and Restated Lease Agreement dated as of March 1, 2004, to that certain Amended and Restated Lease Agreement dated as of October 14, 1998 between Wells Fargo Bank, Northwest, National Association (formerly First Security Bank, N.A., the correct name of which was First Security Bank, National Association), a national banking association, and Val T. Orton, not individually, but solely in their capacities as Owner Trustee, as lessor, and Capital One Realty, Inc., as lessee. | |
| 10.16.2 | Guaranty dated as of October 14, 1998 from Capital One Bank in favor of First Security Bank, N.A., as owner trustee for the COB Real Estate Trust 1995-1, First Union National Bank, as indenture trustee, Lawyers Title Realty Services, Inc., as deed of trust trustee, and the Note Purchasers, Registered Owners and LC Issuer referred to therein (incorporated by reference to Exhibit 10.17.2 of the 1998 Form 10-K). | |
| 10.16.2.2* | Reaffirmation of Guaranty dated as of March 1, 2004, from Capital One Bank, for the benefit of (i) Wells Fargo Bank Northwest, National Association (formerly, First Security Bank, N.A., the correct name of which was First Security Bank, National Association), and Val T. Orton, not individually, but solely in their capacities as Owner Trustee of the COB Real Estate Trust 1995-1, collectively as lessor, (ii) Wachovia Bank, National Association (formerly, First Union National Bank), not individually, but solely in its capacity as Indenture Trustee and Lawyers Title Realty Services, Inc., in its capacity as deed of trust trustee under the Indenture, (iii) the Note Purchasers, (iv) the Registered Owners and (v) BTM Capital Corporation. | |
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| Exhibit Number |
Description | |
| 10.17 | Revolving Credit Facility Agreement, dated May 5, 2003 by and between Capital One Financial Corporation, Capital One Bank, Capital One, F.S.B. and Capital One Bank (Europe), plc, as borrowers and JP Morgan Chase Bank (incorporated by reference to Exhibit 10.1 of the Corporation’s quarterly report on Form 10-Q for the period ending June 30, 2003). | |
| 10.17.1 | Commitment Increase Letter to Revolving Credit Facility Agreement (filed as Exhibit 10.1 of the Corporation’s quarterly report on Form 10-Q for the period ending June 30, 2003), dated January 6, 2004 by Morgan Stanley Senior Funding, Inc (incorporated by reference to Exhibit 10.1 of the Corporation’s quarterly report on Form 10-Q for the period ending March 31, 2004). | |
| 10.17.2 | Revolving Credit Facility Agreement, dated June 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 JPMorgan Chase Bank, an Administrative Agent (incorporated by reference to Exhibit 10.1 of the Corporation’s quarterly report on Form 10-Q for the period ending June 30, 2004). | |
| 10.18 | Form of Intellectual Property Protection Agreement dated as of April 29,1999 by and among Capital One Financial Corporation and certain of its senior executives (incorporated by reference to Exhibit 10.20 of the 1999 Form 10-K/A). | |
| 10.19 | 2002 Non-Executive Officer Stock Incentive Plan (incorporated herein by reference to the Corporation’s Registration Statement on Form S-8, Commission File No. 333-97123, filed July 25, 2002). | |
| 10.20 | Capital One Financial Corporation, 2004 Stock Incentive Plan (incorporated herein by reference to the Corporation’s Registration Statement on Form S-8, Commission File No. 333-117920, filed August 4, 2004). | |
| 10.20.1 | Form of Nonstatutory Stock Option Agreement between Capital One Financial Corporation and Richard D. Fairbank pursuant to the Company’s 2004 Stock Incentive Plan (incorporated by reference to Exhibit 99.1 of the Corporation’s Report on Form 8-K, filed December 23, 2004). | |
| 10.20.2* | Form of Restricted Stock Award Agreement between Capital One Financial Corporation and certain of its executives or associates pursuant to the Company’s 2004 Stock Incentive Plan. | |
| 10.20.3* | Form of Nonstatutory Stock Option Agreement between Capital One Financial Corporation and certain of its executives pursuant to the Company’s 2004 Stock Incentive Plan. | |
| 12* | Computation of Ratio of Earnings to Combined Fixed Charges. | |
| 21* | Subsidiaries of the Company. | |
| 23* | Consent of Ernst & Young LLP. | |
| 31.1* | Certification of Richard D. Fairbank | |
| 31.2* | Certification of Gary L. Perlin | |
| 32.1* | Certification** of Richard D. Fairbank | |
| 32.2* | Certification** of Gary L. Perlin | |
| * | Indicates a document being filed with this Form 10-K. |
| ** | Information in this 10-K furnished herewith shall not be deemed to be “filed” for the purposes of Section 18 of the 1934 Act or otherwise subject to the liabilities of that section |
5
Exhibit 4.5.6
THIS IS A SECURITY IN GLOBAL FORM WITHIN THE MEANING OF THE SENIOR INDENTURE REFERRED TO HEREINAFTER.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (THE “DEPOSITARY”) TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY, AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF THE DEPOSITARY OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR’S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE SENIOR INDENTURE REFERRED TO ON THE REVERSE HEREOF.
| CUSIP No. 14040HAL9 |
|||
| ISIN No. US14040HAL96 |
|||
| No. R-1 |
Principal Amount $ | 300,000,000 |
CAPITAL ONE FINANCIAL CORPORATION
5.25% SENIOR NOTES DUE FEBRUARY 21, 2017
Capital One Financial Corporation, a Delaware corporation (the “Company”), for value received, hereby promises to pay to Cede & Co. or registered assigns the principal sum of THREE HUNDRED MILLION United States Dollars, at the Company’s office or agency for said purposes, on February 21, 2017.
Interest Payment Dates: February 21 and August 21
Regular Record Dates: February 6 and August 6
Reference is made to the further provisions set forth on the reverse hereof, including the definitions of certain capitalized terms. Such further provisions shall for all purposes have the same effect as though fully set forth at this place.
This Security shall not be valid or obligatory until the certificate of authentication hereon shall have been duly signed by the Trustee acting under the Senior Indenture.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.
Dated: February 18, 2005
| CAPITAL ONE FINANCIAL CORPORATION | ||
| By: | /s/ Stephen Linehan | |
| Name: Stephen Linehan Title: Senior Vice President and Treasurer | ||
| Attest | By: | /s/ Jean Traub | ||
| Name: Jean Traub Title: Assistant Secretary | ||||
2
TRUSTEE’S CERTIFICATE OF AUTHENTICATION
This is one of the Securities issued under the within-mentioned Senior Indenture.
Dated: February 18, 2005
| BNY MIDWEST TRUST COMPANY, as Trustee | ||
| By: | /s/ Daniel G. Donovan | |
| Vice President BNY Midwest Trust Company Authorized Signatory | ||
3
[Reverse of Note]
Capital One Financial Corporation
5.25% Senior Notes Due February 21, 2017
This Security is one of a duly authorized issue of debt securities of the Company, of the series hereinafter specified, all issued or to be issued under a Senior Indenture, dated as of November 1, 1996 (the “Senior Indenture”), and duly executed and delivered by the Company to BNY Midwest Trust Company, as successor to Harris Trust and Savings Bank, as trustee (hereinafter, the “Trustee”). Reference to the Senior Indenture and the Officer’s Certificate thereunder establishing the terms of the Notes is hereby made for a description of the respective rights and duties thereunder of the Trustee, the Company and the Holders of the Securities. This Security is one of a series designated as the “5.25% Senior Notes Due February 21, 2017” of the Company (hereinafter called the “Notes”), issued under the Senior Indenture. Each Holder by accepting a Note, agrees to be bound by all terms and provisions of the Senior Indenture, as amended from time to time, applicable to the Notes.
Neither the Senior Indenture nor the Notes limit or otherwise restrict the amount of indebtedness which may be incurred or other securities which may be issued by the Company. The Notes issued under the Senior Indenture are direct, unsecured obligations of the Company and will mature on February 21, 2017. The Notes rank on parity with all other unsecured, unsubordinated indebtedness of the Company.
The Company promises to pay interest on the principal amount of this Note at the rate per annum shown above. The Company will pay interest semi-annually in arrears on February 21 and August 21 of each year (each an “interest payment date”), commencing on August 21, 2005. Interest on the Note will accrue from February 18, 2005 or from the most recent February 21 or August 21, as the case may be, to which interest on the Notes has been paid or duly provided for, until payment of said principal sum has been made or duly provided for. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company will pay interest to the Person in whose name this Note is registered at the close of business on February 6 or August 6, as the case may be, next preceding the applicable interest payment date, except that the Company will pay interest payable at the maturity date of this Note to the Person or Persons to whom principal is payable. The Company will pay interest in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. The Company will make payments in respect of Notes in global form (including principal and interest) to the Holder thereof or a nominee of the Holder, by wire transfer of immediately available funds as of the close of business on the date such payments are due.
If the Company defaults in the payment of interest due on any interest payment date after taking into account any applicable grace period, such defaulted interest shall be paid as set forth in the Senior Indenture.
The Notes are not redeemable prior to maturity.
The Notes are not entitled to any sinking fund.
The Notes are subject to defeasance pursuant to Section 402 of the Senior Indenture.
The provisions in Section 305 of the Senior Indenture are applicable to the Notes.
The Notes are not convertible into common stock of the Company.
In case an Event of Default shall have occurred and be continuing with respect to the Notes, the principal hereof may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Senior Indenture. The Senior Indenture provides that in certain circumstances such declaration and its consequences may be waived by the Holders of not less than a majority in aggregate principal amount of the Notes then Outstanding. However, any such consent or waiver by the Holder shall not affect any subsequent default or impair any right consequent thereon.
The Senior Indenture permits the Company and the Trustee, without the consent of the Holders of the Notes for certain situations and with the consent of not less than two-thirds of the Holders in aggregate principal amount of the Outstanding Notes of each series affected by such supplemental indenture in other situations, to execute supplemental indentures adding to, modifying, or changing various provisions of, the Senior Indenture; provided that no such supplemental indenture, without the consent of the Holder of each Outstanding Note affected thereby, shall (i) change the Stated Maturity of the principal of, or any installment of interest on, the Notes, or reduce the principal amount thereof or the rate of interest thereon, or change the place or currency of payment of principal of, or interest on, the Notes, or impair the right to institute suit for the enforcement of any payment on or after the Stated Maturity thereof; (ii) reduce the percentage in principal amount of the Outstanding Notes, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of the Senior Indenture or certain defaults thereunder and their consequences) provided for in the Senior Indenture, or reduce the requirements of Section 1504 for quorum or voting; or (iii) modify any of the provisions of Sections 902, 513 or 1008 of the Senior Indenture, except to increase any such percentage or provide that certain other provisions of the Senior Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Note affected thereby.
The Company may omit in any particular instance to comply with any term, provision or condition set forth in Section 1005, 1006 or 1007 of the Senior Indenture, if before the time it would have to comply, the Holders of at least a majority in principal amount of the Outstanding Notes, by act of such Holders, either shall waive such compliance in such instance or generally shall have waived compliance with such
2
term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect.
No reference herein to the Senior Indenture and no provision of this Note or of the Senior Indenture shall alter or impair the obligations of the Company, which are absolute and unconditional, to pay the principal of, premium, if any, and interest on this Note at the respective times and at the rate herein prescribed.
The Notes are issuable in registered form without coupons in minimum denominations of $1,000 and any multiple thereof. A Holder may exchange the Notes for a like aggregate principal amount of Notes of other authorized denominations in the manner and subject to the limitations provided in the Senior Indenture.
Upon due presentment for registration of transfer of the Notes at the office or agency for said purpose of the Company, a new Note or Notes of authorized denominations, for a like aggregate principal amount, will be issued to the transferee as provided in the Senior Indenture. No service charge shall be made for any such transfer, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto.
Prior to due presentation of this Note for registration of transfer, the Company, the Trustee, and any authorized agent of the Company or the Trustee, may deem and treat the Holder hereof as the owner of the Note (whether or not any payment with respect to this Note shall be overdue), for the purpose of receiving payment of, or on account of, the principal hereof and, subject to the provisions herein, interest hereon and for all other purposes, and neither the Company nor the Trustee nor any authorized agent of the Company or the Trustee shall be affected by any notice to the contrary.
No recourse shall be had for the payment of the principal of, or interest on, this Note, for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Senior Indenture or any indenture supplemental thereto, against any incorporator, shareholder, officer or director, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
All terms used in this Note (and not otherwise defined in this Note) that are defined in the Senior Indenture shall have the meanings assigned to them in the Senior Indenture.
3
Exhibit 4.5.7
THIS IS A SECURITY IN GLOBAL FORM WITHIN THE MEANING OF THE SENIOR INDENTURE REFERRED TO HEREINAFTER.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (THE “DEPOSITARY”) TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY, AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF THE DEPOSITARY OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR’S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE SENIOR INDENTURE REFERRED TO ON THE REVERSE HEREOF.
| CUSIP No. 14040HAK1 |
||
| ISIN No. US14040HAK14 |
||
| No. R-1 |
Principal Amount $300,000,000 |
CAPITAL ONE FINANCIAL CORPORATION
4.80% SENIOR NOTES DUE FEBRUARY 21, 2012
Capital One Financial Corporation, a Delaware corporation (the “Company”), for value received, hereby promises to pay to Cede & Co. or registered assigns the principal sum of THREE HUNDRED MILLION United States Dollars, at the Company’s office or agency for said purposes, on February 21, 2012.
Interest Payment Dates: February 21 and August 21
Regular Record Dates: February 6 and August 6
Reference is made to the further provisions set forth on the reverse hereof, including the definitions of certain capitalized terms. Such further provisions shall for all purposes have the same effect as though fully set forth at this place.
This Security shall not be valid or obligatory until the certificate of authentication hereon shall have been duly signed by the Trustee acting under the Senior Indenture.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.
Dated: February 18, 2005
| CAPITAL ONE FINANCIAL CORPORATION | ||
| By: |
/s/ Stephen Linehan | |
| Name: Stephen Linehan Title: Senior Vice President and Treasurer | ||
| Attest | By: | /s/ Jean Traub | ||
| Name: Jean Traub Title: Assistant Secretary | ||||
2
TRUSTEE’S CERTIFICATE OF AUTHENTICATION
This is one of the Securities issued under the within-mentioned Senior Indenture.
Dated: February 18, 2005
| BNY MIDWEST TRUST COMPANY, as Trustee | ||
| By: | /s/ Daniel G. Donovan | |
| Vice President BNY Midwest Trust Company Authorized Signatory | ||
3
[Reverse of Note]
Capital One Financial Corporation
4.80% Senior Notes Due February 21, 2012
This Security is one of a duly authorized issue of debt securities of the Company, of the series hereinafter specified, all issued or to be issued under a Senior Indenture, dated as of November 1, 1996 (the “Senior Indenture”), and duly executed and delivered by the Company to BNY Midwest Trust Company, as successor to Harris Trust and Savings Bank, as trustee (hereinafter, the “Trustee”). Reference to the Senior Indenture and the Officer’s Certificate thereunder establishing the terms of the Notes is hereby made for a description of the respective rights and duties thereunder of the Trustee, the Company and the Holders of the Securities. This Security is one of a series designated as the “4.80% Senior Notes Due February 21, 2012” of the Company (hereinafter called the “Notes”), issued under the Senior Indenture. Each Holder by accepting a Note, agrees to be bound by all terms and provisions of the Senior Indenture, as amended from time to time, applicable to the Notes.
Neither the Senior Indenture nor the Notes limit or otherwise restrict the amount of indebtedness which may be incurred or other securities which may be issued by the Company. The Notes issued under the Senior Indenture are direct, unsecured obligations of the Company and will mature on February 21, 2012. The Notes rank on parity with all other unsecured, unsubordinated indebtedness of the Company.
The Company promises to pay interest on the principal amount of this Note at the rate per annum shown above. The Company will pay interest semi-annually in arrears on February 21 and August 21 of each year (each an “interest payment date”), commencing on August 21, 2005. Interest on the Note will accrue from February 18, 2005 or from the most recent February 21 or August 21, as the case may be, to which interest on the Notes has been paid or duly provided for, until payment of said principal sum has been made or duly provided for. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company will pay interest to the Person in whose name this Note is registered at the close of business on February 6 or August 6, as the case may be, next preceding the applicable interest payment date, except that the Company will pay interest payable at the maturity date of this Note to the Person or Persons to whom principal is payable. The Company will pay interest in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. The Company will make payments in respect of Notes in global form (including principal and interest) to the Holder thereof or a nominee of the Holder, by wire transfer of immediately available funds as of the close of business on the date such payments are due.
If the Company defaults in the payment of interest due on any interest payment date after taking into account any applicable grace period, such defaulted interest shall be paid as set forth in the Senior Indenture.
The Notes are not redeemable prior to maturity.
The Notes are not entitled to any sinking fund.
The Notes are subject to defeasance pursuant to Section 402 of the Senior Indenture.
The provisions in Section 305 of the Senior Indenture are applicable to the Notes.
The Notes are not convertible into common stock of the Company.
In case an Event of Default shall have occurred and be continuing with respect to the Notes, the principal hereof may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Senior Indenture. The Senior Indenture provides that in certain circumstances such declaration and its consequences may be waived by the Holders of not less than a majority in aggregate principal amount of the Notes then Outstanding. However, any such consent or waiver by the Holder shall not affect any subsequent default or impair any right consequent thereon.
The Senior Indenture permits the Company and the Trustee, without the consent of the Holders of the Notes for certain situations and with the consent of not less than two-thirds of the Holders in aggregate principal amount of the Outstanding Notes of each series affected by such supplemental indenture in other situations, to execute supplemental indentures adding to, modifying, or changing various provisions of, the Senior Indenture; provided that no such supplemental indenture, without the consent of the Holder of each Outstanding Note affected thereby, shall (i) change the Stated Maturity of the principal of, or any installment of interest on, the Notes, or reduce the principal amount thereof or the rate of interest thereon, or change the place or currency of payment of principal of, or interest on, the Notes, or impair the right to institute suit for the enforcement of any payment on or after the Stated Maturity thereof; (ii) reduce the percentage in principal amount of the Outstanding Notes, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of the Senior Indenture or certain defaults thereunder and their consequences) provided for in the Senior Indenture, or reduce the requirements of Section 1504 for quorum or voting; or (iii) modify any of the provisions of Sections 902, 513 or 1008 of the Senior Indenture, except to increase any such percentage or provide that certain other provisions of the Senior Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Note affected thereby.
The Company may omit in any particular instance to comply with any term, provision or condition set forth in Section 1005, 1006 or 1007 of the Senior Indenture, if before the time it would have to comply, the Holders of at least a majority in principal amount of the Outstanding Notes, by act of such Holders, either shall waive such compliance in such instance or generally shall have waived compliance with such
2
term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect.
No reference herein to the Senior Indenture and no provision of this Note or of the Senior Indenture shall alter or impair the obligations of the Company, which are absolute and unconditional, to pay the principal of, premium, if any, and interest on this Note at the respective times and at the rate herein prescribed.
The Notes are issuable in registered form without coupons in minimum denominations of $1,000 and any multiple thereof. A Holder may exchange the Notes for a like aggregate principal amount of Notes of other authorized denominations in the manner and subject to the limitations provided in the Senior Indenture.
Upon due presentment for registration of transfer of the Notes at the office or agency for said purpose of the Company, a new Note or Notes of authorized denominations, for a like aggregate principal amount, will be issued to the transferee as provided in the Senior Indenture. No service charge shall be made for any such transfer, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto.
Prior to due presentation of this Note for registration of transfer, the Company, the Trustee, and any authorized agent of the Company or the Trustee, may deem and treat the Holder hereof as the owner of the Note (whether or not any payment with respect to this Note shall be overdue), for the purpose of receiving payment of, or on account of, the principal hereof and, subject to the provisions herein, interest hereon and for all other purposes, and neither the Company nor the Trustee nor any authorized agent of the Company or the Trustee shall be affected by any notice to the contrary.
No recourse shall be had for the payment of the principal of, or interest on, this Note, for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Senior Indenture or any indenture supplemental thereto, against any incorporator, shareholder, officer or director, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
All terms used in this Note (and not otherwise defined in this Note) that are defined in the Senior Indenture shall have the meanings assigned to them in the Senior Indenture.
3
Exhibit 10.8
EXECUTION COPY
Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission
SERVICES AGREEMENT
between
CAPITAL ONE SERVICES, INC.
and
FIRST DATA RESOURCES, INC.
dated
November 8, 2004
EXECUTION COPY
TABLE OF CONTENTS
| Page | ||||||
| 1. | BACKGROUND | 1 | ||||
| 2. | DEFINITIONS | 1 | ||||
| 2.1 | Certain Definitions |
1 | ||||
| 2.2 | Inclusion of Affiliates in Definition of Capital One and First Data; Meaning of “party” |
9 | ||||
| 2.3 | Rules of Interpretation |
9 | ||||
| 3. | SERVICES | 10 | ||||
| 3.1 | Provision of Services |
10 | ||||
| 3.2 | Overview of Services |
11 | ||||
| 3.3 | Permitted Users of the Services |
12 | ||||
| 3.4 | Facilities and Other Resources |
12 | ||||
| 4. | TERM | 12 | ||||
| 4.1 | Term |
12 | ||||
| 4.2 | Extension |
12 | ||||
| 5. | FIRST DATA PERSONNEL | 13 | ||||
| 5.1 | Key First Data Positions |
13 | ||||
| 5.2 | Transitioned Personnel |
14 | ||||
| 5.3 | Qualifications, Retention and Replacement of First Data Personnel |
14 | ||||
| 5.4 | Oversight Controls |
15 | ||||
| 6. | INTELLECTUAL PROPERTY RIGHTS | 15 | ||||
| 6.1 | Developed Works and First Data Works |
15 | ||||
| 6.2 | Capital One Works |
17 | ||||
| 6.3 | Third Party Works |
18 | ||||
| 6.4 | Patentable Inventions |
19 | ||||
| 6.5 | Residual Knowledge |
19 | ||||
| 6.6 | [* * *] Subcontracting |
20 | ||||
| 6.7 | No Implied Grant |
20 | ||||
| 6.8 | Export |
20 | ||||
| 7. | PERFORMANCE STANDARDS | 20 | ||||
| 7.1 | General |
20 | ||||
| 7.2 | Failure to Perform |
21 | ||||
| 7.3 | User Satisfaction |
21 | ||||
| 7.4 | Periodic Reviews |
21 | ||||
| 7.5 | Measurement and Monitoring Tools |
22 | ||||
| 8. | PROJECT AND CONTRACT MANAGEMENT | 22 | ||||
| 8.1 | Steering Committee |
22 | ||||
| 8.2 | Reports and Meetings |
22 | ||||
| 8.3 | Procedures Manual |
24 | ||||
| 8.4 | Change Control |
25 | ||||
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EXECUTION COPY
| 8.5 | Use of Subcontractors and Other Support |
25 | ||||
| 8.6 | Technology Plan |
27 | ||||
| 8.7 | Innovation Performance and Measurement |
27 | ||||
| 8.8 | Quality Assurance and Improvement Programs |
28 | ||||
| 9. | AUDITS; RECORDS RETENTION | 28 | ||||
| 9.1 | Audit Rights |
28 | ||||
| 9.2 | Audit Follow-up |
29 | ||||
| 9.3 | Records Retention |
30 | ||||
| 9.4 | Overcharges |
30 | ||||
| 10. | CAPITAL ONE RESPONSIBILITIES | 31 | ||||
| 10.1 | Capital One Responsibilities |
31 | ||||
| 10.2 | Savings Clause |
31 | ||||
| 11. | CHARGES | 32 | ||||
| 11.1 | General |
32 | ||||
| 11.2 | Pass-Through Expenses |
32 | ||||
| 11.3 | Incidental Expenses |
33 | ||||
| 11.4 | Taxes |
33 | ||||
| 12. | INVOICING AND PAYMENT | 34 | ||||
| 12.1 | Invoicing |
34 | ||||
| 12.2 | Payment Due |
35 | ||||
| 12.3 | Accountability |
35 | ||||
| 12.4 | Proration |
35 | ||||
| 13. | SAFEGUARDING OF DATA; CONFIDENTIALITY | 36 | ||||
| 13.1 | Capital One Information |
36 | ||||
| 13.2 | Safeguarding Capital One Data |
36 | ||||
| 13.3 | GLB Compliance |
37 | ||||
| 13.4 | Confidentiality |
38 | ||||
| 13.5 | Tax Disclosure Authorization |
41 | ||||
| 14. | REPRESENTATIONS AND WARRANTIES | 42 | ||||
| 14.1 | Work Standards |
42 | ||||
| 14.2 | Maintenance |
42 | ||||
| 14.3 | Efficiency and Cost Effectiveness |
42 | ||||
| 14.4 | Technology |
42 | ||||
| 14.5 | Non-Infringement |
42 | ||||
| 14.6 | Software Ownership or Use |
43 | ||||
| 14.7 | No Pending Matters |
43 | ||||
| 14.8 | Authorization and Other Contracts |
43 | ||||
| 14.9 | Inducements |
44 | ||||
| 14.10 | Viruses |
44 | ||||
| 14.11 | Disabling Code |
44 | ||||
| 14.12 | Disclaimers |
44 | ||||
- ii -
EXECUTION COPY
| 15. | INSURANCE | 45 | ||||
| 15.1 | Insurance Coverage |
45 | ||||
| 15.2 | Insurance Provisions |
46 | ||||
| 15.3 | Risk of Loss |
47 | ||||
| 16. | INDEMNITIES | 47 | ||||
| 16.1 | Indemnity by First Data |
47 | ||||
| 16.2 | Indemnity by Capital One |
48 | ||||
| 16.3 | Additional Indemnities |
49 | ||||
| 16.4 | Infringement |
49 | ||||
| 16.5 | Indemnification Procedures |
50 | ||||
| 16.6 | Subrogation |
51 | ||||
| 17. | LIABILITY | 51 | ||||
| 17.1 | General Intent |
51 | ||||
| 17.2 | Liability Restrictions |
51 | ||||
| 17.3 | Force Majeure |
53 | ||||
| 18. | DISPUTE RESOLUTION | 53 | ||||
| 18.1 | Informal Dispute Resolution |
53 | ||||
| 18.2 | Litigation |
54 | ||||
| 18.3 | Continued Performance |
55 | ||||
| 18.4 | Injunctive Relief; Specific Performance |
55 | ||||
| 18.5 | Governing Law |
55 | ||||
| 18.6 | Waiver of Right To Jury Trial |
56 | ||||
| 19. | TERMINATION | 56 | ||||
| 19.1 | Termination for Cause |
56 | ||||
| 19.2 | Termination for Convenience |
57 | ||||
| 19.3 | Termination Upon Change of Control |
57 | ||||
| 19.4 | Termination Due To First Data’s Financial Inability To Perform |
57 | ||||
| 19.5 | No Damages From Termination |
58 | ||||
| 19.6 | Termination/Expiration Assistance |
58 | ||||
| 19.7 | Equitable Remedies |
58 | ||||
| 20. | COMPLIANCE WITH LAWS | 58 | ||||
| 20.1 | Compliance with Laws and Regulations Generally |
58 | ||||
| 20.2 | Legal Requirements |
59 | ||||
| 20.3 | Compliance with Certain Applicable Laws and Policies |
59 | ||||
| 21. | GENERAL | 61 | ||||
| 21.1 | Binding Nature and Assignment |
61 | ||||
| 21.2 | Mutually Negotiated |
62 | ||||
| 21.3 | Notices |
62 | ||||
| 21.4 | Counterparts |
63 | ||||
| 21.5 | Headings |
63 | ||||
| 21.6 | Relationship of parties |
63 | ||||
| 21.7 | Non-Exclusivity |
63 | ||||
| 21.8 | Severability |
64 | ||||
| 21.9 | Consents and Approval |
64 | ||||
- iii -
EXECUTION COPY
| 21.10 | Waiver of Default; Cumulative Remedies |
64 | ||||
| 21.11 | Survival |
64 | ||||
| 21.12 | Public Disclosures |
65 | ||||
| 21.13 | Service Marks |
65 | ||||
| 21.14 | Third Party Beneficiaries |
65 | ||||
| 21.15 | Covenant of Good Faith and Fair Dealing |
65 | ||||
| 21.16 | Entire Agreement; Amendment |
65 |
- iv -
EXECUTION COPY
| TABLE OF SCHEDULES | ||
| Schedule A: |
Services | |
| Schedule B: |
Service Levels | |
| Schedule C: |
Charges | |
| Schedule D: |
Key First Data Positions | |
| Schedule E: |
Employment Terms | |
| Schedule F: |
Record Retention | |
| Schedule G: |
Services Locations | |
| Schedule H: |
Reserved | |
| Schedule I: |
Termination/Expiration Assistance | |
| Schedule J: |
Reports | |
| Schedule K: |
Approved Subcontractors | |
5
EXECUTION COPY
SERVICES AGREEMENT (the “Agreement”), made and effective as of November 8, 2004 (the “Effective Date”), by and between Capital One Services, Inc. (“Capital One”), a Delaware corporation having offices at 1680 Capital One Drive, McLean, Virginia, 22102, and First Data Resources Inc. (“First Data”), a Delaware corporation having offices at 6902 Pine Street, Omaha, Nebraska, 68106.
| 1. | BACKGROUND |
WHEREAS, Capital One is engaged in providing various credit, secured and other similar financial services to consumers and businesses; and
WHEREAS, First Data represents that it has experience in and is engaged in the business of providing plastics, statement, letter, remittance processing and related card production services; and
WHEREAS, Capital One desires that First Data provide certain plastics, statement, letter, remittance and related card production processing services for Capital One; and
WHEREAS, First Data desires to provide such services on the terms and conditions hereinafter provided.
NOW, THEREFORE, in consideration of the foregoing recitals and other good and valuable consideration, the adequacy of which the parties hereby acknowledge, the parties agree as follows:
| 2. | DEFINITIONS |
| 2.1 | Certain Definitions. |
As used in this Agreement with initial capitalization:
(a) “Acquired Services” shall have the meaning provided in Section [* * * ].
(b) “Affiliate” shall mean, with respect to any entity, any other entity Controlling, Controlled by, or under common Control with, such entity at the time in question. At Capital One’s option:
(i) any divested former Affiliate shall be deemed to remain an Affiliate of Capital One for [* * * ] after the date it ceases to Control, be Controlled by, or be under common Control with, Capital One; and
(ii) the purchaser of all or substantially all the assets of any line of business of Capital One or its Affiliates which at the time of sale was receiving a portion of the Services shall be deemed to be an Affiliate of Capital One for [* * * ] after the date of purchase, but only with respect to the business(es) acquired.
- 1 -
EXECUTION COPY
(c) “Agreement” shall mean the Terms and Conditions and the schedules, exhibits, attachments and appendices thereto, as the same may be amended by the parties from time to time in accordance with Section 21.16.
(d) “Applicable Laws” means any applicable laws, statutes, regulations, ordinances, codes or subordinate legislation in force from time to time to which a party is subject, including:
(i) The common law as applicable to the parties from time to time;
(ii) Any binding court order, judgment or decree; and
(iii) Any applicable directive, policy, rule or order that is binding on a party and that is made or given by any government, an agency thereof, or any regulatory body,
of any country, the European Union, or other national, federal, commonwealth, state, provincial or local jurisdiction and of any exchange or association (including the New York Stock Exchange and the National Association of Securities Dealers) whose regulations are binding on either party pursuant to a self-regulating mechanism approved by a governmental entity.
(e) “Approved Subcontractors” shall mean the following subcontractors of First Data:
(i) First Data’s Affiliates;
(ii) Subcontractors identified in Schedule K;
(iii) Subcontractors for whom approval by Capital One is not required in accordance with Section 8.5(a); and
(iv) Any other subcontractor(s) approved by Capital One in accordance with Section 8.5(b);
unless and until (in each case of (i), (ii), (iii) and (iv)) approval of such subcontractor is rescinded in accordance with Section 8.5(b)(vii).
(f) “Associations” shall mean Visa, MasterCard and any other interchange or similar card association.
(g) “Business Day” shall mean every day Monday through Friday other than Holidays. References in this Agreement to “days” that do not specifically refer to Business Days are references to calendar days and, unless otherwise provided, a period of more than seven (7) days that expires on a day other than a Business Day shall be automatically extended to the next following Business Day.
(h) “Capital One Competitive Works and Inventions” shall mean those Capital One Works and inventions that Capital One believes provide Capital One with a competitive advantage. As of the Effective Date, these include [* * *], [* * * ] and [* * * ] . For the avoidance of doubt, Capital One Competitive Works and Inventions do not include Developed Works.
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(i) “Capital One Confidential Information” shall have the meaning provided in Section 13.4(a).
(j) “Capital One Contract Executive” shall have the meaning provided in Section 10.1(a).
(k) “Capital One Data” shall mean all information, whether or not Confidential Information, entered in or otherwise transferred to Software or Equipment by or on behalf of Capital One and information derived from such information, including as stored in or processed through the Equipment or Software.
(l) “Capital One Information” shall mean all information, including Capital One Data, in any form, furnished or made available directly or indirectly to First Data by Capital One or otherwise obtained by First Data from Capital One.
(m) “Capital One Retained Inventory” shall mean those items in inventory at Capital One’s Seattle Production Facility and Richmond Production Facilities, as applicable, as of the Commencement Date that are items otherwise identified in Schedule C as being provided by First Data on a Pass-Through Expenses basis. The ownership of such items will not be transferred to First Data but will be held by First Data as bailment.
(n) “Capital One Software” shall mean Software owned by Capital One or its Affiliates.
(o) “Capital One Works” means those Works, and all derivative works thereof, created, produced, generated or otherwise developed, at any time, (i) by or on behalf of Capital One (alone or with third parties, except by First Data hereunder), whether pursuant to this Agreement or otherwise, and (ii) in the case of Capital One Competitive Works and Inventions, by or on behalf of Capital One (alone or with third parties, except by First Data), whether pursuant to this Agreement or otherwise. Capital One Works shall not include Developed Works or First Data Works.
(p) [* * * ] shall mean Capital One’s proprietary quality management methodology and score card, which weights production errors by customer impacts, as collected through customer surveys and interviews.
(q) “Change Control Procedure” shall have the meaning provided in Section 8.4(c).
(r) “Charges” shall have the meaning provided in Section 1.1(a) of Schedule C plus the amounts payable for any New Capabilities that are chargeable pursuant to Schedule C but without deduction for any [* * * ], [* * * ] or [* * * ]. The term “Charges” does not include (i) Pass-Through Expenses, (ii) Out-of-Pocket Expenses or (iii) taxes.
(s) “Commercially Reasonable Efforts” shall mean taking such steps and performing in such a manner as a well managed business would undertake where such business was acting in a determined, prudent and reasonable manner to achieve a particular desired result for its own benefit.
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(t) “Commencement Date” shall mean the first date of the first full month following the day as of which Capital One ceased performing all services that are the Production Services at each of the Capital One facilities identified in Attachment C-1 to Schedule C.
(u) “Confidential Information” shall have the meaning provided in Section 13.4(a).
(v) “Control” and its derivatives mean with regard to any entity the legal, beneficial or equitable ownership, directly or indirectly, of fifty percent (50%) or more of the capital stock (or other ownership interest if not a stock corporation) of such entity ordinarily having voting rights.
(w) [* * * ] shall have the meaning provided in Section 7.2(b).
(x) “Customer Data” shall have the meaning provided in Section 13.3(a)(i).
(y) “Developed Works” means those Works created, produced, generated or otherwise developed for or delivered to Capital One by or on behalf of First Data (alone or with Capital One or third parties) in the course of First Data’s performance of Services under this Agreement and any and all derivative works thereof. Developed Works include derivative works of Capital One Works (except as excluded below), First Data Works and Third Party Works provided by First Data only to the extent created, produced, generated or otherwise developed for or delivered to Capital One by or on behalf of First Data (alone or with Capital One or third parties) in the course of First Data’s performance of Services under this Agreement. Developed Works do not include derivative works of Capital One Competitive Works and Inventions or Third Party Works provided by Capital One.
(z) “Dispute Date” shall have the meaning provided in Section 18.1(a)(i).
(aa) “Divested Business” shall have the meaning provided in Section [* * *].
(bb) “Effective Date” shall have the meaning provided in the preamble to this Agreement.
(cc) “End Users” shall mean users of the Services.
(dd) “Equipment” shall mean the Production Services, computer and telecommunications equipment (without regard to which entity owns or leases such equipment) used by First Data and its Approved Subcontractors and to provide the Services. Equipment includes the following:
(i) Production Services equipment, including embossing machines, printers, sorters, letter openers, imaging and character recognition machines, and remittance extraction machines.
(ii) Computer equipment, including associated attachments, features, accessories, peripheral devices, front end devices, and other computer equipment;
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(iii) Telecommunications equipment, including private branch exchanges, multiplexors, modems, CSUs/DSUs, hubs, bridges, routers, switches and other telecommunications equipment; and
(iv) Related services (e.g., maintenance and support services, upgrades, subscription services) provided by third parties (e.g., manufacturer and lessor) in the same or related agreement covering the provision of such Equipment.
(ee)“Fair Market Value” shall have the meaning provided in ordinary parlance, i.e., what a willing buyer would pay a willing seller, neither being under any compulsion or financial distress.
(ff) “First Data Inventions” shall have the meaning provided in Section 6.4(a).
(gg) “First Data Personnel” shall mean employees of First Data and its Approved Subcontractors assigned to perform the Services pursuant to this Agreement.
(hh) “First Data Project Executive” shall have the meaning provided in Section 5.1(a)(ii).
(ii) “First Data Software” shall mean the Software that is owned by First Data or its Affiliates.
(jj) “First Data System” shall mean the Software and Equipment owned or otherwise provided by First Data and used by First Data to perform the Services. The First Data System does not include Capital One Software or Equipment owned or leased by Capital One.
(kk) “First Data Works” means those Works, and all derivative works thereof, that First Data can show were created, produced, generated or otherwise developed by or on behalf of First Data (alone or with third parties) either (i) prior to the Effective Date or (ii) after the Effective Date at the direction of an entity other than Capital One or its agents on a matter unrelated to both this Agreement and to the Services. First Data Works shall not include Developed Works or Capital One Works.
(ll) “Former Affiliate” shall mean the entities who are deemed to be Affiliates pursuant to the second sentence of the definition of “Affiliate”.
(mm) “GLB Act” shall mean the Gramm-Leach-Bliley Act, 15 USC §6801 et. seq., and the implementing regulations and regulatory interpretations thereto, as amended from time to time.
(nn) “Holiday” shall mean those holidays on which Capital One’s corporate headquarters office is scheduled to be closed.
(oo) “Initial Migration” shall have the meaning provided in Schedule A.
(oo) “Initial Migration Plan” shall have the meaning provided in Schedule A.
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(pp) “Initial Term” shall have the meaning provided in Section 4.1.
(qq) “Intellectual Property Rights” shall mean, collectively, Patent Rights and Non-Patent IP Rights.
(rr) [* * * ] shall mean Capital One’s proprietary Software application, processes and prioritization algorithms to expedite [* * * ].
(ss) “IT Direction” shall have the meaning provided in Section 8.4(a).
(tt) “Key First Data Positions” shall have the meaning provided in Section 5.1(a).
(uu) “Legal Requirements” shall have the meaning provided in Section 20.2(a).
(vv) “Licensed Developed Works” shall have the meaning provided in Section 6.1(b).
(ww) “Losses” shall mean all losses, liabilities, damages and claims, and all related costs and expenses (including reasonable legal fees and disbursements and costs of investigation, litigation, settlement, judgment, interest and penalties).
(xx) “[* * * ] Charges” shall mean the Charges payable with respect to Services provided in a particular [* * * ], without regard to when such Charges are billed and without reduction for any [* * *], [* * * ] or [* * * ].
(yy) “Monthly Performance Report” shall have the meaning provided in Section 8.2(a).
(zz) “New Capabilities” shall have the meaning provided in Schedule C.
(aaa) [* * * ] shall have the meaning provided in Section 7.2(b).
(bbb) “Non-Patent IP Rights” shall mean, on a worldwide basis, any and all:
(i) rights associated with works of authorship and literary property, including copyrights, moral rights of an author of a copyrightable work (including any right to be identified as the author of the work or to object to derogatory treatment of the work), and mask-work rights;
(ii) rights relating to know-how or trade secrets, including ideas, concepts, methods, techniques, inventions (whether or not developed or reduced to practice);
(iii) rights in domain names, universal resource locator addresses, telephone numbers (including toll free numbers), and similar identifiers; and
(iv) trade marks, trade dress, service marks and other similar types of indicia of origin and the goodwill associated therewith;
(v) other intellectual property rights of every kind and nature, however designated, whether arising by operation of law, contract, license or otherwise; and
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(vi) registrations, initial applications (including intent to use applications), renewals, extensions, continuations, divisions, or reissues thereof now or hereafter in force (including any rights in any of the foregoing); provided, however, that “Non-Patent IP Rights” shall not include Patent Rights.
(ccc) “Out-of-Pocket Expenses” shall mean reasonable, demonstrable and actual out-of-pocket expenses incurred by First Data for equipment, materials, supplies or services provided to or for Capital One or its Affiliates as identified in this Agreement, but not including First Data’s [* * * ]. Out-of-Pocket Expenses shall be calculated at First Data’s [* * * ] directly related to the Services (i.e., not to include amounts allocable to other First Data customers) and do not include Charges and Pass-Through Expenses. Before First Data charges Capital One for any Out-of-Pocket Expense from an Affiliate of First Data that is not an expense incurred by the Affiliate with a third party, Capital One’s approval [* * * ] shall be obtained and the amount charged shall be no greater than would have been incurred in an arm’s length transaction between unaffiliated companies.
(ddd) “Pass-Through Expenses” shall have the meaning provided in Section 11.2(a).
(eee) “Patent Rights” means patents, designs, algorithms and other industrial property rights and registrations, initial applications (including intent to use applications), renewals, extensions, continuations, divisions, or reissues thereof now or hereafter in force (including any rights in any of the foregoing).
(fff) “Performance Standards” shall mean, individually and collectively, the quantitative and qualitative performance standards and commitments for the Services contained in this Agreement, including Service Levels.
(ggg) “Permitted Licenses” shall have the meaning provided in Section 6.1(b).
(hhh) “Personally Identifiable Information” shall mean any information that (i) is defined as “personal information” under the GLB Act or (ii), alone or in combination with other information, relates to a specific, identifiable individual person. Personally Identifiable Information includes individual names, social security numbers, telephone numbers, home address, driver’s license number, account number, email address, and vehicle registration number. Any information that can be associated with Personally Identifiable Information shall also be Personally Identifiable Information. For example, an individual’s age alone is not Personally Identifiable Information, but if such age were capable of being associated with one or more specific, identifiable, individuals then such age would be deemed Personally Identifiable Information.
(iii) “Pre-Existing Agreement(s)” shall have the meaning provided in Section 21.16.
(jjj) “Procedures Manual” shall mean the standards and procedures manual described in Section 8.3.
(kkk) “Processing Year” shall have the meaning provided in Section 4.1.
(lll) “Renewal Term” shall have the meaning provided in Section 4.2.
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(mmm) “Required Consents” shall mean such consents as may be required or desirable for the assignment to First Data, or the grant to First Data of rights of use, of resources otherwise provided for in this Agreement.
(nnn) [* * * ] shall mean Capital One’s proprietary systems and processes to [* * * ].
(ooo) “Services” shall have the meaning provided in Section 3.1(a).
(ppp) “Service Levels” shall have the meaning provided in Section 7.1.
(qqq) [* * * ] shall have the meaning provided in Section 7.2(b).
(rrr) “Software” shall (unless a more specific reference is provided) mean software programs and programming (including the supporting documentation, media, on-line help facilities and tutorials) as those terms are generally understood in the IT industry.
(sss) “Steering Committee” shall have the meaning provided in Section 8.1.
(ttt) “Term” shall have the meaning provided in Section 4.2.
(uuu) “Termination/Expiration Assistance” shall have the meaning provided in Section 19.6(a).
(vvv) “Terms and Conditions” shall mean Articles 1 through 21 of this document.
(www) “Third Party Works” are all Works that are not Capital One Works, First Data Works or Developed Works.
(xxx) “Transitioned Employees” shall mean Affected Employees who accept First Data’s offers of employment in the manner and within the time frame reasonably specified by First Data in such offers.
(yyy) “Turnover” shall have the meaning provided in Section 5.3(b).
(zzz) “Use” shall mean, in the context of Software, to use, copy, maintain, modify, enhance, distribute to Capital One End Users, or create derivative works.
(aaaa) “Virus” shall have the meaning provided in Section 14.10.
(bbbb) “Work” means any work of authorship, including test results, research, specifications, documents, materials, writing, design, model, drawing, photograph, report, flow chart, diagram, pattern, compilation, database, software (including source code and object code) or other expression of a technique, process, concept or idea, whether or not protectable under U.S. copyright laws.
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| 2.2 | Inclusion of Affiliates in Definition of Capital One and First Data; Meaning of “party”. |
(a) As used in this Agreement, references to “Capital One” include Affiliates of Capital One in accordance with the following:
(i) A reference includes Affiliates of Capital One where expressly so provided;
(ii) References to Capital One in the following definitions include Affiliates of Capital One (unless expressly provided to the contrary): Capital One Data, Capital One Information, Capital One Software, and Capital One Works;
(iii) References to sale, assignment, grant or the like by Capital One means Capital One will perform the act for itself or cause Affiliates of Capital One to perform the act themselves; references to assets being in the name of Capital One include Affiliates of Capital One; and
(iv) References to the business, operations, policies, procedures and the like of Capital One include Affiliates of Capital One to the extent Affiliates are receiving the Services.
Subject to the foregoing, references to Capital One shall include Affiliates of Capital One as Capital One reasonably designates.
(b) As used in this Agreement, references to “First Data” include Affiliates of First Data in accordance with the following:
(i) A reference includes Affiliates of First Data where expressly so provided;
(ii) References to First Data in the following definitions include Affiliates of First Data (unless expressly provided to the contrary): First Data Inventions, First Data Works, and the Confidential Information of First Data; and
(iii) Where Services are to be provided outside of the United States and First Data operates in the relevant country through an Affiliate, with respect to the provision of Service in that country references to First Data include such Affiliate.
(c) References to a “party” means Capital One, on the one hand, and First Data, on the other hand. References to the “parties” means Capital One and First Data. References to third parties means individuals or entities other than Capital One, First Data, and either of their Affiliates.
| 2.3 | Rules of Interpretation. |
(a) Terms other than those defined within this Agreement shall be given their plain English meaning, and those terms, acronyms and phrases known in the bank card and card processing industries shall be interpreted in accordance with their generally known meanings. Unless the context otherwise requires, words importing the singular include the plural and vice-versa, and
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words importing gender include both genders. Unless the context otherwise requires, references to “persons” includes individual natural persons and juridical legal entities.
(b) References to articles, sections, and paragraphs shall be references to articles, sections and paragraphs of this Agreement, unless otherwise specifically stated.
(c) The section headings in this Agreement are intended to be for reference purposes only and shall not be construed to modify or restrict any of the terms or provisions of this Agreement.
(d) Where there is similar, but not identical, construction of phrases, sentences, or clauses of this Agreement no implication is made that a “negative pregnant” is intended and they shall each be construed separately, in accordance with their plain meaning.
(e) The words “include”, “includes”, “including”, and “e.g.” when following a general statement or term, are not to be construed as limiting the general statement or term to any specific item or matter set forth or to similar items or matters, but rather as permitting the general statement or term to refer also to all other items or matters that could reasonably fall within its broadest scope.
(f) The word “may” shall be construed as meaning “shall have the right, but not the obligation, to”.
| 3. | SERVICES |
| 3.1 | Provision of Services. |
(a) In General. Commencing on or after the Effective Date in accordance with the Initial Migration Plan, First Data will provide the following services, functions and responsibilities, as they may evolve during the Term and as they may be supplemented, enhanced, modified or replaced (“Services”). The Services will include the services, functions and responsibilities set forth in Section 3.2 and described in more detail in Schedule A.
(b) Implied Services. If any services, functions, or responsibilities are required for the proper performance and provision of the Services, regardless of whether they are specifically described herein, they shall be deemed to be implied by and included within the scope of the Services to be provided by First Data to the same extent and in the same manner as if specifically described in this Agreement.
(c) Services Variable In Scope and Volume. The Services are variable in scope and volume. Such variations are provided for in the pricing mechanisms set forth in Schedule C. First Data shall be responsible for adjusting the resources used to provide the Services to accommodate variations in scope and volume (including variations resulting from Capital One’s exercise of its rights under Section 3.1(d)) in such a manner as to comply with all Performance Standards. First Data shall not be entitled to receive an adjustment to the Charges resulting from such variations in scope and volume, except as set forth in Schedule C.
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(d) Services Performed by Capital One or Third Party.
(i) Capital One has the right [* * * ] any of the Services. Capital One will use Commercially Reasonable Efforts to [* * * ]. If Capital One [* * * ] or [* * * ] to do so, [* * * ] with Capital One or such [* * * ]. Subject to paragraph (ii) below, such cooperation shall include [* * * ].
(ii) Third parties retained by Capital One to perform the Services shall comply with First Data’s reasonable security and confidentiality requirements, as have been provided by First Data. If First Data is aware of an act or omission of such a third party that could reasonably be expected to cause a problem or delay in First Data’s provision of the Services, then First Data shall promptly notify Capital One and shall work with Capital One to prevent or circumvent such problem or delay.
(e) [* * * ]If Capital One [* * * ] or [* * * ], Capital One [* * * ] of this Agreement and [* * * ] provided that [* * * ] % [* * * ]Capital One [* * * ] (i) [* * * ]and (ii) [* * * ].
| 3.2 | Overview of Services. |
On and after the Effective Date, and commencing in accordance with the Initial Migration Plan, First Data shall perform, as part of the Services, the services, functions, and responsibilities described generally below (and more fully described in Schedule A):
(a) Plastics Services;
(b) Statement Services;
(c) Letter Services;
(d) Outbound Mailing Services;
(e) Remittance Processing Services;
(f) Inventory Services;
(g) Data Transmission;
(h) Problem Management Services
(i) Physical and Logical Security;
(j) Disaster Recovery and Business Continuity;
(k) Migrations;
(l) Transfer and Start-Up Services;
(m) Acquisition Support Services;
(n) [* * * ]
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(o) Application Development and Application Maintenance; and
(p) Training Services.
| 3.3 | Permitted Users of the Services. |
The Services may be used by Capital One and, as directed by Capital One, its Affiliates. First Data acknowledges that such access is on-going as of the Effective Date. Services provided to such entities shall be deemed to be Services provided to Capital One. Capital One shall be responsible to First Data for any breach of this Agreement caused by a party permitted by Capital One to use the Services hereunder.
| 3.4 | Facilities and Other Resources. |
(a) Except to the extent specifically provided elsewhere in this Agreement, First Data shall be responsible for providing all resources (including facilities, personnel, Equipment and Software) necessary or desirable to provide the Services and will only recover such costs through the corresponding Charges provided in Schedule C.
(b) Subject to reasonable advance notice and to Capital One’s approval, First Data may perform the Services employing any First Data facility; provided however, that Capital One may withhold its approval in its sole discretion with respect to any First Data facility outside the continental United States. The First Data facilities that Capital One has approved as of the Effective Date and the division of remittance work performed at each First Data facility are set forth in Schedule G (Services Locations). Proposed changes to the remittance volume distribution shall be subject to the non-proposing party’s approval.
| 4. | TERM |
| 4.1 | Term. |
The initial term of this Agreement (the “Initial Term”) shall commence on the Effective Date and shall continue for five (5) Processing Years unless terminated earlier in accordance with this Agreement. “Processing Years” shall mean the twelve (12) month periods beginning on the Commencement Date and each anniversary of the Commencement Date thereafter.
| 4.2 | Extension. |
Upon giving written notice to First Data not less than [* * * ] prior to the then existing expiration date, Capital One shall have the right to extend the Term of this Agreement for up to [* * * ] on the terms and conditions then in effect. Capital One shall have [* * * ] such extension [* * * ] .
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| 5. | FIRST DATA PERSONNEL |
| 5.1 | Key First Data Positions. |
(a) “Key First Data Positions” shall be the positions set forth as such in Schedule D. First Data shall cause each of the First Data Personnel filling the Key First Data Positions to devote substantially full time and effort to the provision of the Services to Capital One. First Data shall ensure that each of these individuals remain on the Capital One account for at least twelve (12) months from the time they initially assume a Key First Data Position. First Data Personnel approved as of the Effective Date to fill the Key First Data Positions are listed in Schedule D.
(i) Capital One may from time to time change the positions that are designated as Key First Data Positions; provided however, that the number of Key First Data Positions shall not exceed ten (10) without First Data’s consent.
(ii) First Data shall designate an individual to serve as “First Data Project Executive”. The First Data Project Executive shall (A) be one of the Key First Data Positions; (B) be a member of the Steering Committee; (C) serve as the single point of accountability for First Data for the Services; and (D) have day-to-day authority for undertaking to ensure the provision of the Services to Capital One’s satisfaction.
(b) Before assigning an individual to a Key First Data Position, whether as an initial assignment or a subsequent assignment, First Data shall:
(i) Notify Capital One of the proposed assignment;
(ii) Introduce the individual to appropriate Capital One representatives;
(iii) Upon request, provide such representatives with the opportunity to interview the individual; and
(iv) Provide Capital One with a resume and other information about the individual reasonably requested by Capital One.
If Capital One objects in good faith to the proposed assignment of an individual to a Key First Data Position, the parties shall attempt to resolve Capital One’s concerns on a mutually agreeable basis. If the parties have not been able to resolve Capital One’s concerns within five (5) Business Days, First Data shall not assign the individual to that position and shall propose to Capital One the assignment of a different individual of suitable ability and qualifications.
(c) Except with Capital One’s consent individuals filling Key First Data Positions may not be transferred or re-assigned to other positions with First Data or its Affiliates until a suitable replacement has been approved by Capital One, and no such transfer shall occur at a time or in a manner that would have an adverse impact on delivery of the Services. First Data and Capital One may mutually agree upon a timeframe for identifying and positioning a replacement in the event Capital One approves a transfer or re-assignment of an individual filling a Key First Data Position prior to approving a replacement. Notwithstanding Section 5.3(d), Capital One may, in
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its sole discretion, require First Data to remove and replace any individuals filling Key First Data Positions at any time.
| 5.2 | Transitioned Personnel. |
(a) Subject to subsection (b) below, First Data shall make offers of employment to all non-exempt Capital One employees performing Production Services-related functions as of the Effective Date and who are located at the Capital One facilities set forth in Attachment C-1 to Schedule C and at Capital One’s West Creek campus in Glen Allen, Virginia. The terms of such employment offers shall be consistent with the requirements set forth in Schedule E (Employment Terms) but shall otherwise be within First Data’s discretion. Capital One will provide First Data such reasonable assistance as may be necessary for First Data to make such offers and the parties shall coordinate such offers through the Capital One career center.
(b) Transitioned Employees will be subject to First Data’s generally applicable employment standards with respect to background checks and drug screens (at First Data’s expense). First Data shall not be obligated to offer employment with First Data to any Affected Employee who does not satisfy such standards. Any Transitioned Employee who does not satisfy such standards may be terminated by First Data in accordance with First Data’s then applicable policies.
| 5.3 | Qualifications, Retention and Replacement of First Data Personnel. |
(a) First Data shall assign an adequate number of First Data Personnel to perform the Services. First Data shall ensure that all First Data Personnel have initially satisfied, and are in continued compliance with, Capital One’s background screening (including those related to compliance with the Office of Foreign Assets Control regulations), drug testing policies, and other similar requirements, as they may change from time to time. First Data Personnel shall be properly educated, trained, and fully qualified for the Services they are to perform. If any portion of the Services of First Data Personnel are [* * * ] First Data [* * * ] First Data Personnel to become familiar with Capital One’s account, business or requirements.
(b) The parties agree that it is in their best interests to keep the turnover rate of Key First Data Positions (the “Turnover”) to a reasonably low level. Accordingly, if Capital One believes that the Turnover may be excessive and so notifies First Data, First Data shall provide data concerning its Turnover and meet with Capital One to discuss the reasons for, and impact of, the Turnover. If appropriate, First Data shall submit to Capital One its proposals for reducing the Turnover, and the parties shall mutually agree on a program to bring the Turnover down to an acceptable level. In any event, First Data shall use Commercially Reasonable Efforts to keep the Turnover to a reasonably low level. Notwithstanding transfer or turnover of Key First Data Positions or First Data Personnel in other positions, First Data remains obligated to perform the Services without degradation and in accordance with this Agreement.
(c) While at Capital One’s premises (or the premises of others receiving the Services hereunder), First Data Personnel shall (i) comply with Capital One’s requests, rules, and regulations regarding personal and professional conduct (including the wearing of an identification
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badge and adhering to regulations and general safety, dress, behavior, and security practices or procedures) generally applicable to such premises and (ii) otherwise conduct themselves in a businesslike and professional manner.
(d) If Capital One determines in good faith that the continued assignment to Capital One’s account of one or more of the First Data Personnel is not in the best interests of Capital One, then Capital One may give First Data notice to that effect. After receipt of such notice, First Data shall have a reasonable period of time in which to investigate the matters stated in such notice, discuss its findings with Capital One and resolve the problems with such person. If, following such period, Capital One requests replacement of such person, First Data shall replace that person with another person of suitable ability and qualifications. However, where Capital One notifies First Data that Capital One has determined that the nature of the concern is of such a nature that such First Data Personnel should be removed immediately (albeit temporarily) from Capital One’s account, First Data shall immediately remove such individual(s) from Capital One’s account. In any event, any request by Capital One to remove an individual from Capital One’s account shall not be deemed to constitute a termination of such individual’s employment by First Data, and in no event shall Capital One be deemed an employer of any such person. This provision shall not operate or be construed to limit First Data’s responsibility for the acts or omissions of First Data Personnel, and First Data retains the right to discipline or terminate First Data Personnel in its sole discretion.
| 5.4 | Oversight Controls. |
First Data shall implement oversight and monitoring procedures reasonably designed to detect, prevent, investigate, and report to Capital One any misuse or misappropriation of Capital One assets, systems, funds, or information by First Data Personnel or subcontractors. First Data shall promptly report any such misuse or misappropriation to Capital One.
| 6. | INTELLECTUAL PROPERTY RIGHTS |
| 6.1 | Developed Works and First Data Works. |
(a) Subject to Sections 6.2 (Capital One Works), 6.3 (Third Party Works), and 6.4 (Patentable Inventions), as between First Data and Capital One, First Data shall own all Developed Works and First Data Works and all Non-Patent IP Rights therein. Capital One hereby grants and assigns to First Data all right, title, and interest in and to the Developed Works and First Data Works.
(b) First Data hereby grants Capital One, Affiliates of Capital One [* * *] (as used in this Article 6, collectively, the “Permitted Licensees”) [* * *], worldwide right to use, modify, maintain, create derivative works of, execute, reproduce, display, publish, perform and distribute all Developed Works (including any First Data Works included therein) that are physically delivered to Capital One as final work product for use by Capital One during the Term (i.e., and not merely provided for Capital One’s review, comment or approval) and as further described in subsections (i) and (ii) below; and derivative works of Capital One Works and Third Party Works provided by Capital One regardless of whether delivered to Capital One during the Term, for the
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internal business purposes of Capital One and the Permitted Licensees, without any obligation to account to First Data or any third party (the “Licensed Developed Works”). For the avoidance of doubt, Licensed Developed Works:
(i) shall consist of the following types of deliverables:
(A) derivative works of Capital One Works and Third Party Works provided by Capital One;
(B) report formats;
(C) statement compositions;
(D) letter compositions;
(E) plastics formats;
(F) business and user requirements;
(G) file formats;
(H) procedures manuals;
(I) meeting summaries;
(J) [* * *] and
(K) correspondence.
(ii) shall not consist of the following types of deliverables:
(A) Software (other than derivative works of Capital One Works and Third Party Works provided by Capital One and regardless of whether delivered to Capital One during the Term);
(B) derivative works of First Data Works to the extent that such works have not been customized for Capital One in a material respect (e.g., First Data template system user manuals where the changes consist merely of substituting “Capital One” for “customer” and other similar types of non-substantive modifications); and
(C) quotes, bids and proposals for additional in-scope Services and New Capabilities.
If a particular deliverable is not addressed by the lists set forth in paragraphs (i) and (ii) above, the parties shall use such lists to work in good faith to determine whether or not such deliverable shall be deemed a Licensed Developed Work. As used in this Section, “internal business purpose,” whether or not capitalized, means any legitimate business purpose of a Permitted Licensee (other than the [* * *] to have access to and use of the Licensed Developed Work for the sole purpose
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of providing services to a Permitted Licensee or, in the case of a customer, in connection with bona fide business relationship with a Permitted Licensee (e.g., a customer shall have the right to make copies of his statements notwithstanding that First Data may own the copyright in such statement). First Data shall provide to Capital One electronic copies of derivative works of Capital One Works, including object code or source code or both, as applicable, for Works that are Software, as requested by Capital One.
(c) Notwithstanding the foregoing, the license grant in Section 6.1(b) shall not apply with respect to any particular Developed Work and it shall not be deemed a “Licensed Developed Work,” if: (i) First Data provides Capital One a written request that such license not apply with respect to that Developed Work; (ii) such request is provided in advance of First Data charging Capital One for work on such Developed Work and specifically cites the default license grant above; and (iii) [* * *].
(d) If Capital One requests that First Data create any [* * *] (as defined in Section 5.1 of Schedule C), whether or not a Licensed Developed Work, that Capital One believes [* * *] and Capital One notifies First Data of such belief prior to First Data’s commencement of work on such [* * *].
| 6.2 | Capital One Works. |
(a) Except for the licenses provided hereunder, as between First Data and Capital One, First Data has no rights in and Capital One shall be the sole and exclusive owner of the Capital One Works and all Non-Patent IP Rights therein.
(b) Subject to Section 6.2(c), Capital One grants First Data a non-exclusive, non-transferable, non-sub-licensable, royalty-free, fully paid-up license to use, modify, maintain, create derivative works of, execute, and reproduce the Capital One Works provided to First Data during the Term for the purpose of performing the Production Services solely (i) to the extent necessary for performing the Services, and (ii) subject to Section 6.2(c), for the benefit of First Data and its other customers to the extent that a Capital One Work is included in a Developed Work, both during the Term and following expiration or termination of this Agreement in perpetuity; provided, however, that the foregoing license shall be rescinded if this Agreement is terminated prior to the Commencement Date. For the avoidance of doubt, the foregoing license grant shall not apply to those Capital One Works made available to First Data for purposes other than performing the Production Services. Capital One Works will be made available to First Data in such form and on such media as exists on the Effective Date or as is later obtained by Capital One, together with available documentation and any other related materials. First Data shall install, operate, use and support, as applicable, and otherwise treat in the same manner as Capital One Works existing as of the Effective Date, additional Capital One Works that Capital One may designate from time to time during the Term.
(c) To the extent that Capital One discloses to First Data (either prior to the Effective Date or during the Term) Capital One Competitive Works and Inventions, such Capital One Competitive Works and Inventions shall be deemed Capital One Confidential Information and subject to the provisions of Section 13.4. In addition to its obligations of non-disclosure under
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Section 13.4, First Data will not use Capital One Competitive Works and Inventions (other than First Data Works and First Data Inventions that are incorporated therein) that are Capital One Confidential Information other than for purposes of providing the Services without Capital One’s prior written consent, which Capital One may withhold in its sole discretion; provided, however, that the foregoing restriction shall not apply to the extent that Capital One Competitive Works and Inventions fall into one of the categories set forth in Section 13.4(c)(i). First Data may retain copies of the Capital One Competitive Works and Inventions (and any embodiments thereof) only until such time as the copies or embodiments are no longer needed to perform the Services or the end of the Term, whichever occurs first. At such time First Data shall either return or destroy all such copies or embodiments, as Capital One elects. For the avoidance of doubt, except as provided in Section 6.2(b)(i) above, Capital One has not granted to First Data any right, title or interest in or to any Capital One Confidential Information, including any Capital One Competitive Works and Inventions, regardless of whether contained in any Capital One Works or Developed Works.
| 6.3 | Third Party Works. |
(a) Third Party Works Provided by First Data.
(i) First Data will provide Capital One [* * *] of any Third Party Works that: (i) First Data [* * *] in the Licensed Developed Works; or (ii) that are [* * *] for Capital One’s [* * *] of the Licensed Developed Works.
(ii) First Data may not [* * *] Third Party Works as provided in Section 6.3(a)(i) [* * *] If Capital One [* * *] for any such Third Party Work, then First Data [* * *].
(b) Third Party Works Provided by Capital One.
(i) With respect to the Third Party Works licensed by Capital One, subject to First Data having obtained any Required Consents, Capital One grants to First Data solely to the extent necessary for performing the Services, the rights of use of such Third Party Works that Capital One has as of the Effective Date of this Agreement or that Capital One later obtains with respect to such Third Party Works. First Data shall comply with the obligations, including use restrictions and those of nondisclosure, imposed on Capital One by the licenses for such Third Party Works to the extent made available to First Data, and First Data shall not seek to modify or otherwise revoke such terms. Except as otherwise requested or approved by Capital One, First Data shall cease all use of such Third Party Works upon expiration or termination of this Agreement.
(ii) Notwithstanding anything else to the contrary in this Agreement, other than the limited license grant in Section 6.3(b)(i), no terms of this Agreement or subsequent disclosures or actions of Capital One shall be construed as granting to or conferring on First Data, expressly or impliedly any right, title or interest in or to (including any Intellectual Property Rights), or license to:
(A) the Third Party Works licensed by Capital One and made available to First Data; or
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(B) any derivative works of the Third Party Works licensed by Capital One and made available to First Data; or
(C) any patentable inventions embodied in the Third Party Works described in subsections (A) and (B) above or any improvements thereto.
| 6.4 | Patentable Inventions. |
(a) As between Capital One and First Data, First Data shall have exclusive ownership of Patent Rights in patentable inventions, and all patentable improvements to such inventions, to the extent that such inventions or improvements were conceived and reduced to practice by one or more employees of First Data (collectively the “First Data Inventions”).
(b) To the extent, if any, that any First Data Inventions are or may become [* * *] First Data hereby [* * *] (except to the extent otherwise permitted under this Agreement), [* * *] products and services [* * *], for the internal business purposes of the Permitted Licensees, [* * *].
(c) If:
(i) Capital One requests that First Data create a [* * *] under this Agreement, and
(ii) in creating such [* * *] and
(iii) Capital One [* * *] on the [* * *] embodying such First Data Invention, then Capital One shall have [* * *]
(d) To the extent, if any, that any First Data Inventions [* * *] are being used by Capital One after the effective date of termination or expiration of this Agreement in violation of Patent Rights of First Data or its Affiliates, then First Data [* * *] Capital One [* * *] using such First Data Invention. First Data (on its own behalf and on behalf of its Affiliates) [* * *] Capital One or any of the Permitted Licensees [* * *] such Patent Rights [* * *].
| 6.5 | Residual Knowledge. |
Nothing contained in this agreement shall restrict a party from the use of any general ideas, concepts, know-how, methodologies, processes, technologies, algorithms or techniques retained in the unaided mental impressions of such party’s personnel relating to the Services that either party, individually or jointly, develops or discloses under this Agreement, provided that in doing so such party does not (a) breach its obligations with respect to the confidential information of the other party or (b) infringe the Intellectual Property Rights of the other party or of third parties that have licensed or provided materials to the other party. Except for the express license
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rights contained herein, neither this Agreement nor any disclosure made hereunder grants any license to either party under Intellectual Property Rights of the other party. This Section 6.5 shall survive termination/expiration of this Agreement.
| 6.6 | [* * *] Subcontracting. |
First Data shall [* * *] Capital One, and shall cause its Affiliates, employees, independent contractors, subcontractors and other agents to [* * *] any documents (including applications and assignments) as may reasonably be necessary, or as Capital One may reasonably request, [* * *] Capital One [* * *] provided in this Article 6 or [* * *] Capital One’s Intellectual Property Rights in any derivative works of Capital One Competitive Works and Inventions, without additional consideration and regardless of whether during or after the Term. First Data shall otherwise cooperate fully, and cause its Affiliates, employees, independent contractors and other agents to cooperate fully, with Capital One, at the expense of Capital One, in the preparation, prosecution, and protection of [* * *] and Intellectual Property Rights and shall cooperate fully with Capital One at Capital One’s expense, in any claims, legal actions and proceedings concerning [* * *] Intellectual Property Rights.
| 6.7 | No Implied Grant. |
Except for the license rights contained in this Article 6, neither this Agreement nor any disclosure made hereunder shall be deemed to grant to either party a license to the Intellectual Property Rights of the other party.
| 6.8 | Export. |
The parties acknowledge that certain Software and technical data to be provided hereunder and certain transactions hereunder may be subject to export controls under Applicable Laws, including the U.S. Commerce Department’s Export Administration Regulations. Neither party shall export or re-export any such items or any direct product thereof or undertake any transaction in violation of any such Applicable Laws. To the extent within First Data’s control, First Data shall be responsible for, and shall coordinate and oversee, compliance with such Applicable Laws, and any Capital One’s policies, standards and procedures related to such laws, in respect of such items exported or imported hereunder.
| 7. | PERFORMANCE STANDARDS |
| 7.1 | General. |
First Data shall perform the Services at least at the same level and with at least the same degree of accuracy, quality, completeness, timeliness, responsiveness and efficiency as was provided prior to the Effective Date by or for Capital One. Quantitative performance standards for certain of the Services (“Service Levels”) are set forth in Schedule B. At all times First Data’s level of performance shall be at least equal to the Service Levels and to standards satisfied by well-managed, world-class production facilities.
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| 7.2 | Failure to Perform. |
(a) If First Data fails to meet any Service Level, or if there is an indication that First Data will likely fail to meet any Service Level, First Data shall promptly (taking into consideration the severity of the failure):
(i) Investigate, assemble, and preserve pertinent information with respect to, and report on the causes of, the problem(s), including performing a root cause analysis of the problem(s);
(ii) Advise Capital One, as and to the extent requested by Capital One, of the status of remedial efforts being undertaken with respect to such problem(s);
(iii) Minimize the impact of and correct the problem(s) and begin meeting the Performance Standards; and
(iv) Take appropriate preventive measures so that the problem does not recur.
(b) First Data recognizes that its failure to meet those Service Levels identified in Schedule B as [* * *] may have a material adverse impact on the business and operations of Capital One and that the damage from First Data’s failure to meet [* * *] is not susceptible of precise determination. Accordingly, if First Data fails to meet [* * *] and such failure is not excused pursuant to Schedule B, then in addition to any non-monetary remedies available to Capital One under this Agreement, at law, or in equity, Capital One may elect, in [* * *] This provision will not limit Capital One’s rights with respect to the events upon which Capital One may rely as a basis for Capital One’s termination of this Agreement for cause, which are in addition to, and not a substitution for, such provisions.
| 7.3 | User Satisfaction. |
First Data and Capital One will conduct a survey at agreed-to intervals (not less than annually) of an agreed upon percentage of Capital One’s user community. The surveys shall be designed to determine the level of user satisfaction and areas where user satisfaction can be improved. Such surveys shall include representative samples of each major category of user within Capital One and an agreed upon number of in-depth face-to-face or telephone interviews. First Data and Capital One will mutually agree on the form and content of the surveys, which shall be no less thorough than First Data’s customary user satisfaction program. The parties will jointly review the results of the surveys, and First Data will develop and implement a plan to improve user satisfaction in areas where user satisfaction is low. [* * *] shall be an element of First Data [* * *]. Such factors shall comprise a [* * *].
| 7.4 | Periodic Reviews. |
Within twelve (12) months after the Commencement Date and at least annually thereafter, Capital One and First Data shall review the Service Levels and, as more fully described in Schedule B, shall make adjustments to them as appropriate, including to reflect New Capabilities. The parties expect and understand that the Service Levels will be improved over time.
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| 7.5 | Measurement and Monitoring Tools. |
First Data shall utilize the necessary measurement and monitoring tools and procedures required to measure and report First Data’s performance of the Services against the applicable Service Levels. First Data shall describe its proposed measurement and monitoring tools. First Data shall also provide Capital One with on-line, real-time access to reports (both management and operational) and the monitoring and performance management data and tools that First Data will use to manage the Services and measure performance against the Service Levels. Underlying data will be made available by First Data in real time (or near real-time), not held until the end of a reporting period.
| 8. | PROJECT AND CONTRACT MANAGEMENT |
| 8.1 | Steering Committee. |
The parties shall form a steering committee to facilitate communications between them (the “Steering Committee”). The Steering Committee shall be initially composed of the individuals filling the following positions: Capital One’s Director [* * *] (as of the Effective Date, [* * *] Capital One’s Director [* * *] (as of the Effective Date, [* * *] First Data’s Vice President, [* * *] (as of the Effective Date, [* * *] a First Data Corporation Senior Vice President [* * *] (as of the Effective Date, [* * *] and such other positions as may be mutually agreed by the parties. The Steering Committee shall always have equal numbers of representatives from Capital One and First Data. The parties agree that it is in their mutual best interests to keep turnover on the Steering Committee low. Accordingly, a party may substitute other individuals to serve on the Steering Committee, either temporarily due to the unavailability of a designated individual or permanently, only (a) with the consent of the other party or (b) if the person has been permanently appointed to one of the positions then-currently designated as on the Steering Committee (e.g., as of the Effective Date, Capital One’s Director [* * *]).
| 8.2 | Reports and Meetings. |
(a) Reports. First Data shall provide to Capital One the types of reports indicated in Schedule J and as specified elsewhere in this Agreement. Such reports shall (i) be no less comprehensive than the internal reporting of Capital One prior to the Effective Date; and (ii) be issued at the frequency reasonably requested by Capital One. First Data shall provide Capital One with suggested formats for such reports for Capital One’s review and approval. As one such report, First Data shall provide a monthly performance report, which shall be delivered to Capital One within fifteen (15) days after the end of each month, describing First Data’s performance of the Services in the preceding month (the “Monthly Performance Report”). The Monthly Performance Report shall:
(i) Separately address First Data’s performance in each area of the Services, including the Plastics Services, Statement Services and Remittance Processing Services, Letter Services and DRBC Services (each as defined in Schedule A);
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(ii) Assess the degree to which First Data has attained or failed to attain the pertinent objectives for each area of the Services, including with respect to the Performance Standards;
(iii) Explain deviations from the Performance Standards and include a plan for corrective action where appropriate;
(iv) Describe the status of problem resolution efforts, ongoing projects, and other initiatives;
(v) Set forth a record of the material Equipment, Software and personnel changes that pertain to the Services and describe planned changes during the upcoming month that may affect the Services;
(vi) Set forth the utilization of Resource Units for the month (as defined in Schedule C) and report on utilization trends and statistics; and
(vii) Include such documentation and other information as Capital One may reasonably request to verify compliance with, and meeting the objectives of, this Agreement.
(b) Meetings. Within thirty (30) days after the Effective Date, the parties shall determine an appropriate set of periodic meetings to be held between representatives of Capital One and First Data during the Term of this Agreement, which will include, at a minimum, the following meetings:
(i) A weekly meeting of the Capital One Contract Executive and the First Data Project Executive to discuss day-to-day operations and such other matters as appropriate;
(ii) A monthly meeting among operational personnel representing Capital One and First Data to discuss the Monthly Performance Report, daily performance, planned or anticipated activities and changes that might adversely affect performance, and otherwise to address, review and discuss matters specific to Capital One;
(iii) A quarterly management meeting of the Steering Committee to review the reports for the quarter, review First Data’s overall performance under this Agreement, review progress on the resolution of issues, provide a strategic outlook for Capital One’s IT requirements, and discuss such other matters as appropriate; and
(iv) Such other meetings between Capital One’s representatives and First Data Personnel reasonably requested by either party as necessary to address performance of the Services.
First Data shall prepare and circulate an agenda sufficiently in advance of each such meeting to give participants an opportunity to prepare for the meeting. First Data shall incorporate into such agenda items that Capital One desires to discuss.
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| 8.3 | Procedures Manual. |
(a) First Data shall develop, establish, maintain, and comply with a procedure manual (the “Procedures Manual”) for the Services. The Procedures Manual shall be suitable for use by Capital One to understand the Services and shall describe:
(i) How First Data shall perform and deliver the Services under this Agreement (including the specific processes specified, or approved, by Capital One for handling interactions with Capital One’s customers);
(ii) The Equipment and Software being used, and the documentation (e.g., operations manuals, user guides, specifications) that provides further details of such activities;
(iii) The activities First Data proposes to undertake in order to provide the Services, including those direction, supervision, monitoring, staffing, reporting, planning and oversight activities normally undertaken to provide services of the type First Data is to provide under this Agreement;
(iv) Descriptions of the acceptance testing and quality assurance procedures approved by Capital One;
(v) First Data’s problem management and escalation procedures, and the other standards and procedures of First Data pertinent to Capital One’s interaction with First Data in obtaining the Services;
(vi) The procedures that First Data proposes to undertake to comply with Applicable Law;
(vii) The procedures that First Data proposes to undertake to comply with Capital One’s internal policies, standards and procedures applicable to the Services (including [* * *] that Capital One makes available to First Data from time to time; First Data shall have a reasonable period of time to achieve compliance with such policies, standards and procedures made available by Capital One;
(viii) The procedures that First Data proposes to undertake to comply with Capital One’s internal records retention policies; and
(ix) Any other standards and procedures of First Data pertinent to Capital One’s interaction with First Data in receiving the Services.
(b) Within one hundred twenty (120) days after the Effective Date, First Data shall deliver a draft Procedures Manual to Capital One, for Capital One’s review and comments. First Data shall incorporate reasonable comments or suggestions of Capital One and shall finalize the Procedures Manual within a reasonable time after receiving Capital One’s comments. The final Procedures Manual shall be subject to the approval of Capital One, only to the extent that such Capital One internal policies, standards and procedures are made available to First Data. First Data shall periodically update the Procedures Manual to reflect changes in the operations or
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procedures described therein. Updates of the Procedures Manual shall be provided to Capital One for review, comment and approval. First Data shall perform the Services in accordance with the Procedures Manual. The Procedures Manual shall not be used to amend this Agreement. If there is a conflict between the provisions of this Agreement and the Procedures Manual, the provisions of this Agreement shall control.
| 8.4 | Change Control. |
(a) First Data shall provide Capital One its IT architecture and IT standards (the “IT Direction”) within ninety (90) days of the Effective Date. Material changes to the IT Direction shall be presented to the Technology Subcommittee of the Steering Committee. First Data, in performing the Services, shall conform to and shall support such IT Direction.
(b) First Data shall be responsible for making all changes to the First Data System and the Services, including changes to programs, manual procedures, parameters and schedules, in compliance with the following change control requirements:
(i) Prior to using any new Software or new Equipment to provide the Services, First Data shall have verified that the item has been properly installed, is operating in accordance with its specifications and is performing its intended functions in a reliable manner.
(ii) As a result of implementing a change in technology, First Data shall not (A) increase [* * *] without in each case first obtaining Capital One’s approval, which approval Capital One may withhold in its discretion. For the avoidance of doubt, the foregoing restrictions shall not apply with respect to the implementation of New Capabilities that have been elected by Capital One.
(iii) First Data shall move programs from development and test environments to production environments in a controlled and documented manner.
(c) Within sixty (60) days after the Effective Date, First Data shall prepare and provide to Capital One for its review and approval a change control procedure (the “Change Control Procedure”) detailing how First Data will comply with the requirements set forth in this Section 8.4 and otherwise control changes to Capital One’s IT environment pertaining to the Services. First Data shall incorporate reasonable comments or suggestions of Capital One and shall finalize the Change Control Procedure within thirty (30) days after receiving Capital One’s comments. The final Change Control Procedure shall be subject to Capital One’s approval. The Change Control Procedure shall not be used to amend this Agreement. If there is a conflict between the provisions of this Agreement and the Change Control Procedure, the provisions of this Agreement shall control.
| 8.5 | Use of Subcontractors and Other Support. |
(a) Except as provided in Section 8.5(b), First Data may, in the ordinary course of business, subcontract with third parties for services or products related to the Services. If Capital One expresses concerns to First Data about a proposed or existing subcontract covered by this
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Section 8.5(a), First Data shall discuss such concerns with Capital One and work in good faith to resolve Capital One’s concerns on a mutually acceptable basis.
(b) Except as and to the extent that Capital One may agree otherwise in writing, prior to First Data subcontracting (to new or existing suppliers) its obligations under this Agreement:
(i) for services or products that are dedicated to Capital One, or
(ii) that are material to a particular function constituting a part of the Services, or
(iii) that will result in a material change in the way First Data conducts its business or will materially adversely affect Capital One, whether in performance of, or Charges for, the Services or otherwise, or
(iv) to an entity that is not a United States-based company, or
(v) for services to be performed outside of the United States, or
(vi) where such subcontract contemplates that such third party subcontractor will have access to Customer Data or information otherwise subject to the GLB Act,
then First Data shall give Capital One reasonable prior notice specifying the components of the Services affected, the scope of the proposed subcontract, and the identity and qualifications of the proposed subcontractor. At Capital One’s request, First Data shall forward to Capital One a description of the scope, privacy and confidentiality terms of the subcontract or proposed subcontract. Capital One may approve or disapprove of any such proposed subcontractor in its discretion. The subcontractors listed on Schedule K are hereby approved for the scope of Services and duration therein described.
(vii) Capital One may revoke its approval of an Approved Subcontractor and direct First Data to replace such Approved Subcontractor if the Approved Subcontractor’s performance is materially deficient; good faith doubts exist concerning the Approved Subcontractor’ ability to render future performance because of changes in the Approved Subcontractor’s ownership, management, financial condition, or otherwise; or there have been material misrepresentations by or concerning the Approved Subcontractor. If an Approved Subcontractor ceases to be an Affiliate of First Data, First Data shall promptly notify Capital One and First Data’s continued use of such subcontractor shall be subject to approval by Capital One if the subcontract is one for which approval is otherwise required under Section 8.5(b).
(c) First Data shall remain responsible for obligations, services, and functions performed by subcontractors to the same extent as if such obligations, services and functions were performed by First Data’s employees. First Data shall be Capital One’s sole point of contact regarding the Services, including with respect to payment. First Data shall not disclose Capital One Confidential Information to a subcontractor unless and until such subcontractor has agreed in writing to protect the confidentiality of such Confidential Information in a manner substantially equivalent to that required of First Data under this Agreement.
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(d) To the extent subcontractors, agents, representatives and other entities perform, or otherwise provide support to First Data related to, the Services, First Data shall cause such entities to comply with the obligations and restrictions applicable to First Data under this Agreement.
| 8.6 | Technology Plan. |
(a) The parties will designate members of the Steering Committee to serve on a Technology Subcommittee to meet to review and assess the then-current IT systems, including an assessment of the appropriate direction for such systems and services in light of Capital One’s business priorities and strategies and competitive market forces, including (i) the identification of proposed Equipment and Software strategies and direction; (ii) a description of the types of personnel skills and abilities needed to respond to any recommended changes or upgrades in technology; (iii) a general plan and a projected time schedule for developing and achieving the recommended elements; and (iv) references to appropriate information services operations platforms that support Service Level requirements, exploit industry trends in production capabilities and provide potential price performance improvement opportunities.
(b) The Technology Subcommittee of the Steering Committee shall meet at such times and frequency as determined by the Steering Committee to support Capital One’s annual business planning cycle and to reflect changes in the business of Capital One that materially impact the then-current IT systems.
| 8.7 | Innovation Performance and Measurement. |
(a) All Capital One requests for [* * *] from First Data shall be assigned one (1) of the following three (3) designations by Capital One (provided that if First Data objects to any such designation, the Steering Committee will review and determined the designation): (i) [* * *] ; (ii) [* * *] ; or (iii) [* * *] For the avoidance of doubt, if such New Capability (x) is at the time in general use within the production processing industry or (y) is documented by Capital One to First Data as capable of producing material economic benefit to Capital One, including through increased revenue, responses, or payments, then the request shall be deemed [* * *] .
(b) If First Data and the project management organizations and other third parties acting on First Data’s behalf collectively do not implement into production for Capital One [* * *] of the subset of Capital One’s [* * *] requests for a Processing Year which: (i) are designated by the Steering Committee as [* * *] or otherwise meet the definition of [* * *] set forth herein; and (ii) Capital One determines will be implemented into production for Capital One (Capital One shall promptly communicate any such determination to First Data in writing); and (iii) are implemented into production for Capital One by either Capital One itself, First Data, or third parties (regardless of whether acting on behalf of Capital One or First Data); and (iv) are for [* * *] and (v) are not [* * *]; and (vi) are requests as to which Capital One has afforded First Data opportunities [* * *] to Capital One that are at least as great, and are on terms at least as favorable as, the opportunities regarding the [* * *] by Capital One, then Capital One shall have the [* * *] provided, however, that [* * *] within a reasonable period of time after the [* * *] shall be Capital One’s [* * *].
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(c) For purposes of making the determinations set forth in subsection (b) above, an implementation of a [* * *] on a pilot basis shall be considered an implementation into production.
(d) On a regular basis, the Steering Committee shall review and evaluate First Data’s performance relative to this Section. Without limiting the generality of the foregoing, no less frequently than on a calendar quarterly basis the Steering Committee shall issue a report updating Capital One and First Data on the status of all Capital One [* * *] requests. All such reports shall at a minimum include a then-current listing of the subset of Capital One [* * *] requests which are designated as [* * *] and have been implemented into production for Capital One by third parties.
| 8.8 | Quality Assurance and Improvement Programs. |
As part of its total quality management process, First Data shall provide continuous quality assurance and quality improvement through (a) the identification and application of proven techniques and tools from other installations within its operations (i.e., “Best Practices”), and (b) the implementation of concrete programs, practices and measures designed to improve Performance Standards. Such procedures shall include checkpoint reviews, testing, acceptance, and other procedures for Capital One to confirm the quality of First Data’s performance, and shall be included in the Procedures Manual. First Data shall utilize project management tools, including productivity aids and project management systems, as appropriate in performing the Services.
| 9. | AUDITS; RECORDS RETENTION |
| 9.1 | Audit Rights. |
(a) First Data shall maintain a complete audit trail of all financial and non-financial transactions resulting from this Agreement. First Data shall provide to Capital One, its auditors (including internal audit staff and external auditors), inspectors, regulators and other representatives as Capital One may from time to time designate in writing, access at all reasonable times and upon reasonable advance notice (and in the case of regulators at any time required by such regulators regardless of notice) to any facility or part of a facility at which either First Data or any of its subcontractors is providing the Services, First Data Personnel, and to data and records relating to the Services for the purpose of performing audits and inspections of either First Data or any of its subcontractors during the Term and for the period First Data is required to maintain records hereunder to:
(i) Verify the accuracy of Charges and invoices;
(ii) Verify the integrity of Capital One Data and examine the systems that process, store, support and transmit that data; and
(iii) Examine First Data’s performance of the Services and conformance to the terms of this Agreement including, to the extent applicable to the Services and to the Charges therefor.
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(b) Accordingly, Capital One’s rights herein shall include the right to perform audits (i) of practices and procedures; (ii) of systems, Equipment and Software that process, store, support and transmit Capital One Data; (iii) of supporting information and calculations regarding compliance with Performance Standards; (iv) of general controls and security practices and procedures; (v) of disaster recovery and back-up procedures; and (vi) as necessary to enable Capital One to meet, or to confirm that First Data is meeting, applicable regulatory and other legal requirements. Notwithstanding the foregoing, except for regulatory audits, Capital One shall not perform more than one (1) comprehensive audit per year of each major functional area of the Services. Each such comprehensive audit of each major functional area of the Services by Capital One shall be limited to ten (10) days on-site at First Data and to a three (3) year look-back period, unless an audit uncovers breaches of this Agreement, overcharges, non-compliance with Applicable Laws or other irregularities, in which case Capital One may extend the on-site audit period and may audit as far back as reasonably required to determine the extent of such breach, overcharge, non-compliances or other irregularity, as applicable.
(c) Capital One and its auditors (including internal audit staff and external auditors), inspectors, and other representatives (other than regulators) shall comply with First Data’s reasonable security requirements as provided in writing to such auditors, inspectors, regulators and other representatives.
(d) First Data shall provide to such auditors, inspectors, regulators, and other representatives such assistance as they request without additional charge, including installing and operating audit software, provided that such software needs to conform to First Data’s reasonable technical, security, compliance and operational requirements. If such audit software is installed and operated by Capital One’s internal or external auditors (other than regulatory auditors or inspectors), Capital One shall work with First Data to avoid a material adverse impact on First Data’s systems or operations and shall coordinate the use of such software with non-peak hours or maintenance windows. First Data shall cooperate fully with Capital One or its designees in connection with audit functions and with regard to examinations by regulatory authorities.
(e) First Data shall conduct audits of or pertaining to the Services in such manner and at such times as is consistent with the audit practices of world-class, well managed operations performing services similar to the Services. First Data shall perform a security audit at least annually.
| 9.2 | Audit Follow-up. |
(a) Following an audit or examination, Capital One may conduct (in the case of an internal audit), or request its external auditors or examiners to conduct, an exit conference with First Data to obtain factual concurrence with issues identified in the review. First Data shall make available promptly to Capital One First Data’s Type II SAS-70 report; provided however, that First Data may redact its Type II SAS-70 as necessary to protect confidential information of First Data’s other customers. In addition, First Data shall promptly notify Capital One if any other audit conducted by First Data or its Affiliates (including by internal audit staff or external auditors), or by inspectors, regulators or other representatives (including internal and external auditors) or by other customers, identifies deficiencies that are reasonably likely to materially adversely impact
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the Services; provided, however, that First Data shall not be obligated to provided Capital One the actual audit reports that are the basis for such notice.
(b) First Data and Capital One shall promptly meet to review each audit report after its issuance, and First Data shall promptly remedy any deficiencies discovered by the audit unless Capital One agrees to an alternative resolution of the deficiency. Capital One and First Data agree to develop operating procedures for the sharing of audit and regulatory findings and reports related to First Data’s operating practices and procedures produced by auditors or regulators of either party.
| 9.3 | Records Retention. |
Until the latest of:
(a) The earlier of three (3) years after creation of the record and the time period for such record specified in Schedule F (Records Retention);
(b) All pending matters relating to this Agreement (e.g., disputes) are closed;
(c) The information is no longer required to meet Capital One’s records retention policy as disclosed by Capital One to First Data and as such policy may be adjusted from time to time; or
(d) The information is no longer required for either party to comply with Applicable Laws,
First Data shall maintain and provide access upon request to the records, documents and other information required to meet Capital One’s audit rights under this Agreement. Before destroying or otherwise disposing of such information, First Data shall provide Capital One with sixty (60) days prior notice and offer Capital One the opportunity to recover such information or to request First Data to deliver such information to Capital One, with Capital One paying First Data’s Out-of-Pocket Expenses.
| 9.4 | Overcharges. |
(a) If as a result of an audit or otherwise it is determined that First Data has overcharged Capital One, at Capital One’s option, First Data shall either (i) credit Capital One’s account, or (ii) pay Capital One directly, an amount equal to the [* * *]
(b) If the audit discloses that First Data’s overcharges exceeded [* * *] of the charges (including Pass-Through Expenses) during the period audited, then First Data shall also reimburse Capital One for the reasonable cost of the audit.
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| 10. | CAPITAL ONE RESPONSIBILITIES |
| 10.1 | Capital One Responsibilities. |
Capital One’s responsibilities will be limited to those expressly set forth in this Agreement. In addition to Capital One’s responsibilities expressly set forth elsewhere in this Agreement, Capital One shall be responsible for the following:
(a) Capital One shall designate one (1) individual to whom First Data may address operational communications concerning this Agreement (the “Capital One Contract Executive”).
(b) Capital One shall cooperate with First Data, including by making available management decisions, information, approvals and acceptances, as reasonably requested by First Data so that First Data may accomplish its obligations and responsibilities hereunder. The Capital One Contract Executive, or such person’s designee, will be the principal point of contact for obtaining such decisions, information, approvals, and acceptances. Only personnel as expressly so designated by the Capital One Contract Executive will be authorized to make commitments on the part of Capital One that amend this Agreement. To the extent First Data relies on the apparent authority of other Capital One employees or representatives, it does so at its own risk and without obligation on Capital One’s part.
(c) While at First Data’s premises, Capital One employees shall (i) comply with First Data’s requests, rules, and regulations regarding personal and professional conduct (including the wearing of an identification badge and adhering to regulations and general safety, dress, behavior, and security practices or procedures) generally applicable to such premises and (ii) otherwise conduct themselves in a businesslike and professional manner.
(d) Capital One shall be responsible for the acts and omissions of its other service providers to the same extent as if such acts and omissions were performed by Capital One’s employees.
| 10.2 | Savings Clause. |
(a) Due to the material adverse impact termination of this Agreement or suspension of performance of the Services would have on Capital One’s business, [* * *]
(b) First Data acknowledges that Capital One would not be willing to enter into this Agreement without assurance that this Agreement [* * *] and that First Data [* * *], and only to the extent, explicitly provided herein.
(c) First Data’s nonperformance of its obligations under this Agreement [* * *] the extent (i) [* * *] and (ii) First Data provides Capital One with [* * *] and (if requested by Capital One) uses [* * *] (with Capital One being responsible to [* * *].
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| 11. | CHARGES |
| 11.1 | General. |
All amounts First Data may charge for the Services are set forth in this Agreement and in Schedule C. First Data shall not have the right to charge, and Capital One shall not be required to pay to First Data, any amounts for the Services other than or in addition to those payable to First Data under this Agreement or Schedule C, including that Capital One is not obligated to pay any separate charges for [* * *] First Data or for [* * *]. In no event will information or changes in circumstances discovered after the Effective Date regarding Capital One’s operations of any kind serve as the basis for First Data to adjust the charges or terms of this Agreement or any of the Schedules.
| 11.2 | Pass-Through Expenses. |
(a) “Pass-Through Expenses” shall mean third party charges that are to be administered by First Data and either (i) paid directly by Capital One, or (ii) paid by First Data and reimbursed by Capital One. All Pass-Through Expenses are identified in Schedule C. All Pass-Through Expenses shall be [* * *].
(b) First Data shall use Commercially Reasonable Efforts to minimize the amount of Pass-Through Expenses. With respect to services or materials paid for on a Pass-Through Expenses basis, Capital One reserves the right to:
(i) Obtain such services or materials directly from one or more third parties;
(ii) Designate the third party source for such services or materials;
(iii) Designate the particular services or materials (e.g., equipment make and model) First Data shall obtain; provided however, if First Data demonstrates to Capital One that such designation will have an adverse impact on First Data’s ability to meet the Service Levels or otherwise perform a material part of the Services, such designation shall be subject to First Data’s approval;
(iv) Designate the terms for obtaining such services or materials (e.g., purchase or lease and lump sum payment or payment over time);
(v) Require First Data to identify and consider multiple sources for such services or materials or to conduct a competitive procurement; and
(vi) Review and approve the applicable Pass-Through Expenses before entering into a contract for particular services or materials.
(c) [* * *]
(d) First Data shall arrange for delivery by third parties to First Data of invoices for all Pass-Through Expenses, and First Data shall promptly review such invoices and provide Capital
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One with a statement identifying which charges are proper and valid and should be paid by Capital One, together with back-up documentation to support such charges, which may include a copy of the original invoice or any rebates or discounts from the supplier, provided that First Data may redact those portions of such invoices unrelated to the Services.
| 11.3 | Incidental Expenses. |
Except as may be otherwise provided in this Agreement, expenses that First Data incurs in performing the Services (including travel and lodging, document reproduction and shipping, and long-distance telephone) are included in First Data’s charges and rates set forth in this Agreement. Accordingly, such First Data expenses are not separately reimbursable by Capital One unless, on a case-by-case basis for unusual expenses, Capital One has agreed in advance and in writing to reimburse First Data for the expense.
| 11.4 | Taxes. |
The parties’ respective responsibilities for taxes arising under or in connection with this Agreement shall be as follows:
(a) Each party shall be responsible for:
(i) Any real or personal property taxes on property it uses, regardless of whether such property is owned or leased;
(ii) Franchise and privilege taxes on its business, and
(iii) Taxes based on its net income or gross receipts.
(b) Capital One shall be responsible for any sales, use, excise, value-added, services, consumption or other tax levied on the Services provided by First Data to Capital One.
(c) If a sales, use, excise, value added, services, consumption, or other tax is assessed on the provision of any portion of the Services, the parties shall work together to segregate the payments under this Agreement into three (3) payment streams:
(i) Those for taxable Services;
(ii) Those for which First Data functions merely as a payment agent for Capital One in receiving goods, supplies, or services (including leasing and licensing arrangements) that otherwise are non-taxable or have previously been subject to tax; and
(iii) Those for other nontaxable Services.
(d) The parties shall cooperate with each other to enable each to more accurately determine its own tax liability and to minimize such liability to the maximum extent legally permissible. Unless Capital One has provided First Data with tax-exemption, direct pay, or resale certificates, First Data’s invoices shall separately state the amounts of any taxes First Data is
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collecting from Capital One, and First Data shall remit such taxes to the appropriate authorities. Each party shall provide and make available to the other any direct pay or resale certificates, information regarding out-of-state or out-of-country sales or use of equipment, materials, or services, and other exemption certificates or information reasonably requested by the other party.
(e) First Data shall promptly notify Capital One of, and coordinate with Capital One the response to and settlement of, any claim for taxes asserted by applicable taxing authorities for which Capital One is responsible hereunder, it being understood that with respect to any claim arising out of a form or return signed by a party to this Agreement, such party may elect to control the response to and settlement of the claim, but the other party shall have all rights to participate in the responses and settlements that are appropriate to its potential responsibilities or liabilities. Capital One shall be responsible for any additional taxes (and interest and penalties thereon) ultimately determined to be due for which Capital One is responsible hereunder; provided, however, that First Data shall be responsible for such interest and penalties to the extent arising from First Data’s failure to notify Capital One of the potential underlying taxes as provided in this Section 11.4. If Capital One requests First Data to challenge the imposition of any tax, First Data shall do so in a timely manner and Capital One shall reimburse First Data for the reasonable legal fees and expenses it incurs. Capital One shall be entitled to any tax refunds or rebates granted to the extent such refunds or rebates are of taxes that were paid by Capital One.
| 12. | INVOICING AND PAYMENT |
| 12.1 | Invoicing. |
(a) First Data shall render a single consolidated invoice to Capital One for all amounts due under this Agreement on a [* * * ] basis in [* * * ]
(i) [* * * ] specified by Capital One, including as necessary to satisfy Capital One’s internal accounting and [* * * ]
(ii) Separately identify Pass-Through Expense for the month, amounts prepaid by Capital One, [* * * ] and the amount of taxes First Data incurred in connection with the Services and is proposing to collect; and
(iii) State for each item charged the calculations utilized to establish the charges in sufficient detail to enable Capital One to confirm the accuracy thereof. At Capital One’s request, First Data will identify the clause in the Agreement authorizing First Data to charge a particular fee.
(b) Each [* * * ] invoice shall be complete as to the charges for such [* * * ] . First Data may not charge Capital One any additional amounts for a [* * * ] for which an invoice has been rendered, except where a particular [* * * ] invoice indicates that certain charges are incapable of being determined as of the date of such invoice and that such charges may be billed on a later invoice, although in no event shall they be billed more than [* * * ] after the end of the [* * * ] in which incurred (except with respect to Services provided by third parties and other items treated on a Pass-Through Expense basis, which will in no event be billed more than
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[* * * ] after the end of the [* * * ] in which incurred and which will include both debits and credits to the invoice).
(c) If a credit is due Capital One pursuant to this Agreement, First Data shall provide Capital One with an appropriate credit against amounts then due and owing; if no further payments are due to First Data, First Data shall pay such amounts to Capital One within [* * * ].
| 12.2 | Payment Due. |
(a) Subject to the other provisions of this Article 12, invoices provided for under Section 12.1 and properly submitted to Capital One pursuant to this Agreement shall be due and payable by Capital One within [* * * ] after receipt thereof. Capital One shall remit the applicable undisputed amount to First Data via an ACH funds transfer. Notwithstanding the foregoing, to facilitate the [* * * ]. The detailed records of the amounts drawn on the account of Capital One, and the underlying data supporting such payments, will be provided by First Data to Capital One on a daily basis. For the avoidance of doubt, the foregoing method of [* * * ].
(b) With respect to any amount to be paid by Capital One hereunder, Capital One may:
(i) Deduct from such amount any amounts that First Data is obligated to pay Capital One hereunder; and
(ii) Withhold from such amount payment of particular charges that Capital One disputes in good faith.
(c) First Data may [* * * ].
| 12.3 | Accountability. |
First Data shall maintain complete and accurate records of and supporting documentation for the amounts billable to and payments made by Capital One hereunder in accordance with generally accepted accounting principles applied on a consistent basis. First Data agrees to provide Capital One with documentation and other information with respect to each invoice as may be reasonably requested by Capital One to verify accuracy and compliance with the provisions of this Agreement.
| 12.4 | Proration. |
Except as may be otherwise provided in this Agreement, periodic charges under this Agreement are to be computed on a [* * * ] basis, and shall be prorated for any [* * *].
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| 13. | SAFEGUARDING OF DATA; CONFIDENTIALITY |
| 13.1 | Capital One Information. |
(a) Capital One Information shall be and remain, as between the parties, the property of Capital One. First Data shall not possess or assert any lien or other right against or to Capital One Information. No Capital One Information, or any part thereof, shall be:
(i) Used by First Data for any purpose other than in connection with providing the Services;
(ii) Sold, assigned, leased or otherwise disposed of to third parties by First Data; or
(iii) Commercially exploited by or on behalf of First Data.
(b) Upon Capital One’s request, the termination or expiration of this Agreement for any reason (including termination for cause) or, if feasible with respect to any particular Capital One Information, on such earlier date that the same shall be no longer required by First Data in order to render the Services hereunder, Capital One Information (including copies thereof) shall be promptly returned to Capital One by First Data in a form reasonably requested by Capital One or, if Capital One so elects, shall be destroyed by First Data.
| 13.2 | Safeguarding Capital One Data. |
(a) Capital One shall establish and maintain safeguards against the destruction, loss or alteration of Capital One Data in the possession or control of First Data that are no less rigorous than (i) those maintained by Capital One as of the Effective Date and (ii) those maintained by First Data for its other customers’ information of a similar nature. Capital One may establish backup security for Capital One Data and to keep backup Capital One Data and Capital One Data files in its possession if it chooses.
(b) Without limiting the generality of Section 13.2(a):
(i) First Data Personnel shall not attempt to access, or allow access to, any Capital One Data that they are not permitted to access under this Agreement. If such access is attained (or is reasonably suspected), First Data shall promptly report such incident to Capital One, describe in detail the accessed Capital One Data, and if applicable return to Capital One any copied or removed Capital One Data.
(ii) First Data shall implement and maintain security systems and procedures, including systems security measures no less thorough than the systems security measures First Data uses to guard the information and software of First Data and its other customers, to guard against the unauthorized access, alteration, or destruction of Software and Capital One Data. Such measures shall include the use of Software that: (A) requires all users to enter a user identification and password prior to gaining access to the information systems; (B) controls and
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tracks the addition and deletion of users; and (C) controls and tracks user access to areas and features of the information systems.
| 13.3 | GLB Compliance. |
(a) First Data acknowledges that Capital One is subject to Title V of the GLB Act, pursuant to which Capital One is required to obtain certain undertakings from First Data with regard to the privacy, use and protection of Personally Identifiable Information of Capital One’s customers or prospective customers. Therefore, notwithstanding anything to the contrary contained in this Agreement and in addition to (and not in substitution for) First Data’s other obligations hereunder:
(i) First Data shall protect and keep confidential all Personally Identifiable Information about or pertaining to Capital One’s customers, prospective customers or other individuals about whom Capital One has collected Personally Identifiable Information that is disclosed by Capital One or otherwise obtained by First Data in the performance of its duties under this Agreement (collectively, the “Customer Data”). For the avoidance of doubt, Customer Data shall have the same meaning as the term “nonpublic personal information,” which is defined in Title V of the GLB Act and applicable regulations promulgated thereunder, and does not include (A) information collected from Capital One employees (in their capacity as employees, and not as Capital One’s customers) by First Data for the purpose of administering and providing the Services, and (B) nonpublic information collected from a source other than Capital One that has been obtained on a non-confidential basis and that is not subject to the GLB Act. During the Term, First Data shall collect and use Customer Data only to the extent necessary to exercise its rights or perform its obligations under this Agreement for which such Customer Data was disclosed to First Data or as otherwise directed by Capital One.
(ii) First Data shall ensure that First Data Personnel shall not attempt to access, or allow access to, any Customer Data that they are not permitted to access under this Agreement.
(iii) First Data represents and warrants that it has, and covenants that for so long as it retains Customer Data it will continue to have, adequate administrative, technical, and physical safeguards to (A) ensure the security and confidentiality of such Customer Data; (B) protect against any anticipated threats or hazards to the security or integrity of such Customer Data; (C) protect against unauthorized access to or use of such Customer Data; and (D) without limiting the generality of items (A) through (C) preceding, to meet the objectives of the requirements contained in Section 501(b) of the GLB Act and the Interagency Guidelines Establishing Standards for Safeguarding Capital One Information adopted by federal bank regulatory agencies, including the OTS and Board of Governors of the Federal Reserve System. To the extent technologically feasible, such safeguards shall include using software that: (A) requires all users to enter a user identification and password prior to gaining access to Customer Data; (B) controls and tracks the addition and deletion of users authorized to access Customer Data; and (C) controls and tracks user access to Customer Data. First Data shall develop, implement and maintain, at First Data’s own expense, a proven system or methodology
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to audit for compliance with the requirements of this Section 13.3(a)(iii) and appropriate mitigation strategies to address issues identified as a result of these audits.
(iv) First Data shall promptly notify Capital One if First Data discovers there has been a material breach of, or a serious attempt to breach, its security safeguards required by this Section 13.3, or if the security of Customer Data has been or may be compromised for any reason (including unauthorized access to and unauthorized attempts to access Customer Data). First Data must take appropriate actions to address incidents of unauthorized access to or use of Customer Data. Capital One may take all reasonable and appropriate steps to protect Customer Data in such event, including auditing First Data’s security safeguards required under this Section 13.3. First Data shall have a business continuity plan that enables First Data to take appropriate actions to address incidents of unauthorized access to or misuse of Customer Data. Such plan shall also enable Capital One to expeditiously implement its own response program.
(v) First Data shall not retain Customer Data unless First Data has a specific business purpose to retain it, which purpose is set forth in this Agreement. First Data shall destroy such Customer Data or return it to Capital One, at Capital One’s option: (i) during the Term promptly following the time at which such Customer Data is no longer needed to provide the Services, or (ii) within sixty (60) days after termination or expiration of this Agreement.
(b) The obligations set forth in this Section 13.3 shall survive termination of this Agreement.
| 13.4 | Confidentiality. |
(a) Confidential Information. First Data and Capital One each acknowledge that they may be furnished with, receive or otherwise have access to information of or concerning the other party that such party considers to be confidential, a trade secret or otherwise restricted. “Confidential Information” shall mean all information, in any form, furnished or made available directly or indirectly by one party to the other, or that a party gains knowledge of or access to in connection with this Agreement, that is (i) marked confidential, proprietary, restricted, or with a similar designation, (ii) otherwise disclosed in a manner consistent with information that is confidential or proprietary nature, or (iii) information of a third party that the recipient knows, or reasonably should know, that the furnishing party is obligated to keep confidential. Confidential Information includes the following types of information, whether or not reduced to writing: operating procedures, marketing lists and other customer information, fees, pricing, pricing policies and other financial information. The terms and conditions of this Agreement shall be deemed Confidential Information of each party. In the case of Capital One, Confidential Information also shall include: (A) Capital One Data; (B) Capital One Works; (C) Customer Data; (D) all information concerning the operations, affairs and businesses of Capital One, the financial affairs of Capital One, and the relations of Capital One with its customers, employees and service providers (including scripts provided by Capital One for use by First Data in providing the Services, customer lists, customer information, account information and consumer markets); (E) information about Designated Accounts; and (F) other information or data stored on magnetic media or otherwise or communicated orally, and obtained, received, transmitted, processed, stored, archived or maintained by First Data under this Agreement (collectively, the “Capital One
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Confidential Information”). In the case of First Data, Confidential Information also shall include (1) First Data Software; (2) the First Data System; (3) all other Equipment and Software provided or used by First Data (other than those made available by Capital One), in each case, whether owned, licensed or otherwise provided or used by First Data (collectively, the “First Data Confidential Information”).
(b) Obligations.
(i) Each party shall use at least the same degree of care as it employs to avoid unauthorized disclosure of its own information, but in any event no less than Commercially Reasonable Efforts, to prevent disclosing to unauthorized parties the Confidential Information of the other party.
(ii) As requested by the furnishing party during the Term or upon expiration or any termination of this Agreement, the receiving party shall return or destroy, as the furnishing party may direct, all material in any medium that contains, refers to, or relates to the Confidential Information of the furnishing party, and retain no copies except to the extent for the duration that the receiving party has a license to continue to use such material under this Agreement; provided, however, that, subject to First Data’s record retention obligations hereunder, information for a particular Designated Account shall be returned to Capital One upon the earlier to occur of (A) Capital One’s withdrawal of such Designated Account from First Data’s Services; (B) completion of the Services with respect to such Designated Account; and (C) termination of this Agreement. Such Designated Account information shall be returned to Capital One in the form and on the media as may be reasonably requested by Capital One.
(iii) In the event of any actual or suspected misuse, disclosure or loss of, or inability to account for, any Confidential Information of the furnishing party, the receiving party promptly shall: (A) notify the furnishing party upon becoming aware thereof; (B) promptly furnish to the other party full details of the unauthorized possession, use, or knowledge, or attempt thereof, and use Commercially Reasonable Efforts to assist the other party in investigating or preventing the reoccurrence of any unauthorized possession, use, or knowledge, or attempt thereof, of Confidential Information; (C) take such actions as may be necessary or reasonably requested by the furnishing party to minimize the violation; and (D) cooperate in all reasonable respects with the furnishing party to minimize the violation and any damage resulting therefrom.
(iv) Neither party shall commence any legal action or proceeding against a third party with respect to any unauthorized possession, use, or knowledge, or attempt thereof, of Confidential Information by any person or entity which action or proceeding identifies the other party or its Confidential Information without such party’s consent.
(v) With respect to Confidential Information that is Customer Data, the terms of this Section 13.4(b) shall not supersede any different, or similar but more protective, rights or obligations set forth in Section 13.3.
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(vi) The parties’ obligations respecting Confidential Information (including all Customer Data) shall survive expiration or termination of this Agreement in perpetuity, without limitation.
(c) Exclusions.
(i) Section 13.4(b) shall not apply to any particular information (other than Customer Data) which First Data or Capital One can demonstrate: (A) was, at the time of disclosure to it, in the public domain; (B) after disclosure to it, is published or otherwise becomes part of the public domain through no fault of the receiving party; (C) was lawfully in the possession of the receiving party at the time of disclosure to it without obligation of confidentiality; (D) was received after disclosure to it from a third party who had a lawful right to disclose such information to it without any obligation to restrict its further use or disclosure; or (E) was independently developed by the receiving party without reference to Confidential Information of the furnishing party.
(ii) In addition, a party shall not be considered to have breached its obligations by disclosing Confidential Information of the other party as required to satisfy any legal requirement or written request of a competent government body (including a regulatory authority) provided that, promptly upon becoming aware of such legal requirement or receiving any such request and to the extent that it may legally do so, such party advises the other party of the requirement or request prior to making such disclosure in order that the other party may interpose an objection to such disclosure, take action to assure confidential handling of the Confidential Information, or take such other action as it deems appropriate to protect the Confidential Information.
(iii) First Data may disclose Capital One Confidential Information (including Customer Data) to Affiliates of Capital One and Affiliates of First Data; provided, however, that such disclosure is only to the extent and for the duration necessary for First Data to perform its obligations under this Agreement.
(iv) First Data may disclose Capital One Confidential Information (including Customer Data) to Approved Subcontractors; provided, however, that: (A) such disclosure is only to the extent and for the duration necessary for First Data to perform its obligations under this Agreement; and (B) prior to any such disclosure the Approved Subcontractor agrees in writing (1) to use and disclose such Confidential Information only to the extent necessary to carry out the specific purposes for which such Confidential Information was disclosed to First Data; and (2) to comply with the same obligations to which First Data is subject under this Agreement with respect to Confidential Information (including as provided in this Article 13). In no event, however, shall an Approved Subcontractor be permitted to make disclosures of Confidential Information to its subcontractors without Capital One’s prior written consent. If First Data uses Approved Subcontractors to perform its obligations under this Agreement, First Data shall have appropriate controls in place to ensure that any such Approved Subcontractor meets the requirements of this Article 13 and shall exercise oversight over each such Approved Subcontractor to ensure ongoing compliance with the requirements of this Article 13.
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(v) Capital One may disclose First Data Confidential Information to Affiliates of Capital One if and to the extent necessary for Capital One and its Affiliates to exercise their respective rights or to comply with their respective obligations under this Agreement. Capital One may disclose First Data Confidential Information that is of a technical or operational nature (i.e., not financial) to third party service providers of Capital One and its Affiliates if, and only to the extent, necessary for Capital One and its Affiliates to exercise their respective rights or to comply with their respective obligations under this Agreement and provided that such third party service providers have written agreements with Capital One or its Affiliates that impose non-disclosure obligations on such provider that are materially similar to the non-disclosure obligations of Capital One under this Agreement; provided further, however, that Capital One may not disclose any First Data Confidential Information to any third party that is a competitor of First Data.
(vi) Either party may disclose the terms and conditions of this Agreement to third parties that (A) have expressed a bona fide interest in consummating a significant financing, merger or acquisition transaction between such third parties and the disclosing party; (B) have a reasonable ability (financial and otherwise) to consummate such transaction; and (C) have executed a nondisclosure agreement that: (1) includes within its scope the terms and conditions of Section 13.4(b); (2) limits distribution to those with a need to know in connection with such transaction; and (3) allows use only in connection with the transaction; provided however, that no such disclosure may be made to a competitor of Capital One. Each party shall endeavor to delay the disclosure of the terms and conditions of this Agreement until the status of discussions concerning such transaction warrants such disclosure.
(d) Each party’s Confidential Information shall remain the property of that party. Nothing contained in this Section 13.4 shall be construed as obligating a party to disclose its Confidential Information to the other party, or as granting to or conferring on a party, expressly or impliedly, any rights or license to the Confidential Information of the other party, and any such obligation or grant shall only be as provided by other provisions of this Agreement.
| 13.5 | Tax Disclosure Authorization. |
Notwithstanding anything to the contrary herein, the parties agree that except to the extent necessary to comply with any applicable federal or state securities laws each party (and each employee, representative, and other agent of such party) may disclose to any and all persons the transaction’s tax treatment or tax structure (as such terms are used in Internal Revenue Code §§6011 and 6112 and regulations promulgated thereunder) contemplated by this Agreement and all materials of any kind (including opinions or other tax analyses) provided to such party relating to such tax treatment and tax structure. This authorization is not intended to permit disclosure of any other information, including:
(a) Any portion of any materials to the extent not related to the transaction’s tax treatment or tax structure;
(b) The identities of participants or potential participants;
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(c) Any pricing or financial information (except to the extent such pricing or financial information is related to the transaction’s tax treatment or tax structure); or
(d) Any other term or detail not relevant to the transaction’s tax treatment or the tax structure.
| 14. | REPRESENTATIONS AND WARRANTIES |
| 14.1 | Work Standards. |
First Data represents and warrants that the Services shall be rendered with promptness and diligence and shall be executed in a workmanlike manner, in accordance with the practices and high professional standards used in well-managed operations performing services similar to the Services. First Data represents and warrants that it shall use adequate numbers of qualified individuals with suitable training, education, experience, and skill to perform the Services.
| 14.2 | Maintenance. |
First Data represents and warrants that it shall maintain the Equipment and Software so that they operate in accordance with their specifications, including (a) maintaining Equipment in good operating condition, subject to normal wear and tear; (b) undertaking repairs and preventive maintenance on Equipment in accordance with the applicable Equipment manufacturer’s recommendations; and (c) performing Software maintenance in accordance with the applicable Software vendor’s documentation and recommendations.
| 14.3 | Efficiency and Cost Effectiveness. |
First Data represents and warrants that it shall use Commercially Reasonable Efforts to use efficiently the resources or services necessary to provide the Services. First Data represents and warrants that with respect to Pass-Through Expenses and Services chargeable on a non-Resource Units basis it shall use Commercially Reasonable Efforts to perform the Services in the most cost-effective manner consistent with the required level of quality and performance.
| 14.4 | Technology. |
First Data represents and warrants that it shall provide the Services using [* * * ] (consistent with the Change Control Procedure) that will enable Capital One to [* * * ] in its industry and support Capital One’s efforts to maintain competitiveness in the markets in which it competes.
| 14.5 | Non-Infringement. |
Each party represents and warrants that it shall perform its responsibilities under this Agreement in a manner that does not infringe, or constitute an infringement or misappropriation of, any Intellectual Property Rights of any third party. First Data represents and warrants that there are no current claims that any portion of the Services infringes upon any third party
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Intellectual Property Rights (regardless of First Data’s view of the merits of such claim) and First Data will promptly inform Capital One of any claims that are hereinafter brought.
| 14.6 | Software Ownership or Use. |
First Data represents and warrants that it is either the owner of, or authorized to Use, and in compliance with any licenses for, all of the Works (including Software and related materials, including First Data Software), used and to be used in connection with the Services, which is not otherwise owned by Capital One.
| 14.7 | No Pending Matters. |
First Data represents and warrants that there is no claim, or any litigation, proceeding, arbitration, investigation or material controversy pending to which First Data or any of First Data’s Affiliates, agents, or representatives is a party, relating to the provision of the Services offered by First Data, or which would have a material adverse effect on First Data’s ability to enter into this Agreement and perform its obligations hereunder and, to the best of First Data’s knowledge, no such claim, litigation, proceeding, arbitration, investigation or material controversy has been threatened or is contemplated.
| 14.8 | Authorization and Other Contracts. |
Each party represents and warrants to the other that:
(a) It is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized;
(b) It has the requisite corporate power and authority to enter into this Agreement and to carry out the transactions contemplated by this Agreement;
(c) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by the requisite corporate action on the part of such party and will not constitute a violation of (i) the charter, by-laws or any other equivalent organizational documents of such party, or (ii) any judgment, order or decree;
(d) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated by this Agreement will not constitute a material default under any material contract by which it or any of its material assets are bound, or an event that would, with notice or lapse of time or both, constitute such a default; and
(e) There is no pending or, to the knowledge of the party, threatened claim, litigation, proceeding, arbitration, or investigation or controversy before any governmental agency to which such party is a party or by which such party is bound that challenges or may have a material adverse affect on this Agreement or the transactions contemplated by this Agreement.
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| 14.9 | Inducements. |
First Data represents and warrants to Capital One that it has not violated any Applicable Laws regarding the offering of unlawful inducements in connection with this Agreement. If at any time during the Term, Capital One determines that the foregoing warranty is inaccurate, then, in addition to any other rights Capital One may have at law or in equity, Capital One may terminate this Agreement for cause without affording First Data an opportunity to cure.
| 14.10 Viruses. |
First Data represents and warrants that it shall use Commercially Reasonable Efforts so that no Viruses are coded or introduced into the First Data System or other systems used by First Data to provide the Services. In the event a Virus is found to have been introduced into the First Data System or other systems used by First Data to provide the Services, First Data shall use Commercially Reasonable Efforts at no additional charge to assist Capital One in reducing the effects of the Virus and, if the Virus causes a loss of operational efficiency or loss of data, to assist Capital One to the same extent to mitigate and restore such losses. “Virus” shall mean (i) program code or programming instruction or set of instructions intentionally designed to disrupt, disable, harm, interfere with or otherwise adversely affect computer programs, data files or operations; or (ii) other code typically described as a virus or by similar terms, including Trojan horse, worm or backdoor.
| 14.11 Disabling | Code. |
First Data represents and warrants that, without the prior consent of Capital One (which may be arbitrarily withheld), First Data shall not insert into the Software any code that would have the effect of disabling or otherwise shutting down all or any portion of the Services. First Data further represents and warrants that, with respect to any disabling code that may be part of the Software, First Data shall not invoke such disabling code at any time, including upon expiration or termination of this Agreement for any reason, without Capital One’s prior consent.
| 14.12 | Disclaimers. |
(a) Prior to the execution of this Agreement, First Data has been afforded the opportunity to conduct to its satisfaction a complete due diligence on any Equipment and Software that First Data wishes to purchase. There will be no due diligence following the Effective Date and in no event will after discovered information or changes in circumstances of any kind serve as the basis for First Data to have the right to adjust the pricing or terms of this Agreement.
(b) THE WARRANTEES SET FORTH IN THIS AGREEMENT ARE EXCLUSIVE. THERE ARE NO EXPRESS WARRANTIES OTHER THAN AS PROVIDED IN THIS AGREEMENT, AND THERE ARE NO IMPLIED WARRANTIES, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, AND EACH PARTY SPECIFICALLY DISCLAIMS THE SAME.
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| 15. | INSURANCE |
| 15.1 | Insurance Coverage. |
First Data represents that as of the Effective Date it has, and that REMITCO has, and agrees that it shall maintain in force, and shall cause REMITCO to maintain in force, during the Term, at least the following insurance coverages:
(a) Worker’s Compensation Insurance and other similar social insurance in accordance with the laws of the country, state or territory exercising jurisdiction over the employee with minimum limits required by law.
(b) Employer’s Liability Insurance, including coverage for occupational injury, illness and disease, with minimum limits per employee and per event of $[* * * ].
(c) Commercial General Liability Insurance, including Products Liability, Completed Operations, Premises Operations, Personal Injury, and Contractual and Broad Form Property Damage Liability coverages, on an occurrence basis, with a minimum per occurrence combined single limit of $[* * * ] and a minimum aggregate combined single limit of $[* * * ]. This coverage shall be endorsed to name Capital One and its Affiliates as additional insureds.
(d) Comprehensive Automotive Liability Insurance covering use of all owned, non-owned and hired automobiles used to perform the Services or on Capital One’s property for purposes related to the Services for bodily injury, property damage, uninsured motorist and underinsured motorist liability with a minimum combined single limit per accident of $[* * * ] or the minimum limit required by law, whichever limit is greater. This coverage shall be endorsed to name Capital One and its Affiliates as additional insureds.
(e) Commercial Crime Insurance, including blanket coverage for Employee Dishonesty and Computer Fraud, for loss or damage arising out of or in connection with any fraudulent or dishonest acts, including wrongful conversion of (i) Capital One’s, or any of its Affiliates or Users’, property, (ii) the property of any customers or patrons of such persons or (iii) the property of others in First Data’s possession, care, custody or control, committed by First Data’s employees, agents or subcontractors, acting alone or in collusion with others, with a minimum limit per event of $[* * * ] This coverage shall be endorsed to name Capital One and its Affiliates as Loss Payees.
(f) Professional Liability Insurance for Errors and Omissions covering liability for loss or damage due to an act, error, omission, or negligence, with a minimum limit per event of $[* * * ].
(g) Electronic Data Processing Insurance providing coverage for all risks of loss or damage to equipment, data, media and valuable papers that are in the possession, care, custody or control of First Data pursuant to this Agreement. Such insurance shall include Extra Expense and Business Income coverage and shall have a minimum limit adequate to cover such risks on a replacement costs basis.
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(h) Property Insurance, including Extra Expense and Business Income coverage, for all risks of physical loss of or damage to buildings, business personal property or other property that is in the possession, care, custody or control of First Data pursuant to this Agreement. Such insurance shall have a minimum limit adequate to cover risks on a replacement costs basis.
(i) Excess or Umbrella Liability Insurance with a minimum limit of $[* * * ] in excess of the insurance coverage described in Sections 15.1(b), 15.1(c), and 15.1(d) above.
| 15.2 | Insurance Provisions. |
(a) First Data shall cause its insurers to waive all rights of subrogation against Capital One, and its officers, directors and employees and any insured-versus-insured exclusion regarding Capital One.
(b) The amounts of insurance required above may be satisfied by First Data purchasing primary coverage in the amounts specified or by First Data buying a separate excess umbrella liability policy together with lower limit primary underlying coverage. The structure of the coverage is at First Data’s option, so long as the total amount of insurance meets the Company’s requirements.
(c) The insurance coverages under Sections 15.1(a) through 15.1(i) shall be primary, and all coverage shall be non-contributing with respect to any other insurance or self-insurance that may be maintained by Capital One. The insurance coverage under Sections 15.1(a), 15.1(b), 15.1(c), 15.1(d) and 15.1(i) shall be written on an occurrence form basis. If any other coverage is written on a claims-made basis, it shall have a retroactive date no earlier than the Effective Date and, notwithstanding the termination of this Agreement, either directly or through ‘tail’ coverage shall be maintained for a period of at least two (2) years following completion of the Term, or it shall allow for reporting of claims until the later of two (2) years after the Term or the period of the applicable limitations of actions has expired.
(d) First Data shall cause its insurers to name Capital One Financial Corporation, Capital One Financial Corporation’s Affiliates and their respective directors, officers, employees, agents, successors, and permitted assigns, as additional insureds on the insurance coverages under Sections 15.1(b), 15.1(c), 15.1(d) and 15.1(i).
(e) First Data shall cause its insurers to issue certificates of insurance evidencing that the coverages and policy endorsements required under this Agreement are maintained in force. First Data shall require its insurers to provide Capital One not less than thirty (30) days’ written notice prior to any adverse modification, cancellation, or non-renewal of the policies. The insurers selected by First Data shall be of good standing and authorized to conduct business in the jurisdictions in which Services are to be performed. When the policy is issued each such insurer shall have at least an A.M. Best rating of A- IX and replacement coverage shall be sought if the insurer’s rating goes below A- VIII.
(f) Except to the extent that First Data proposes a change in the applicable coverage for a particular subcontractor, and Capital One agrees to such change, First Data shall assure that all
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Approved Subcontractors maintain the following insurance coverages, naming First Data or the Capital One Financial Corporation as an additional insured or loss payee, where relevant:
(i) such insurance provided in Section 15.1(b) with minimum limits of $[* * * ];
(ii) such insurance provided in Section 15.1(a);
(iii) such insurance provided in Section 15.1(c) with minimum limits of $[* * * ], which coverage shall be endorsed to name First Data as additional insured;
(iv) such insurance provided in Section 15.1(d) with minimum limits of $[* * * ] per person and $[* * * ] per occurrence, which coverage shall be endorsed to name First Data as additional insured;
(v) such insurance provided in Section 15.1(f), with minimum limits of $[* * * ];
(vi) such insurance provided in Section 15.1(i), with minimum limits of $[* * * ].
(g) In the case of loss or damage or other event that requires notice or other action under the terms of any insurance coverage specified in this Article 17, First Data shall be solely responsible to take such action. First Data shall provide Capital One with contemporaneous notice and with such other information as Capital One may request regarding the event.
(h) First Data’s obligation to maintain insurance coverage shall be in addition to, and not in substitution for, First Data’s other obligations hereunder and First Data’s liability to Capital One for any breach of an obligation under this Agreement which is subject to insurance hereunder shall not be limited to the amount of coverage required hereunder.
| 15.3 | Risk of Loss. |
Each party shall be responsible for risk of loss of, and damage to, any Equipment, Software or other materials in its possession or under its control.
16. INDEMNITIES
| 16.1 | Indemnity by First Data. |
First Data shall indemnify, defend and hold harmless Capital One and its Affiliates and their respective officers, directors, employees, agents, successors and assigns from and against any and all Losses and threatened Losses arising from, in connection with, or based on allegations whenever made of, any of the following:
(a) Any claims of infringement or misappropriation of any Intellectual Property Rights alleged to have occurred because of Works or other resources provided by First Data to Capital
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One, or based upon performance of the Services by First Data, except to the extent that such claims (i) are caused by, relate to or arises out of Capital One’s use of the Services in breach of the Agreement or (ii) arise from technical specifications or Software coding provided by Capital One that could not reasonably have been implemented in a non-infringing manner. If Capital One provides First Data requirements for the creation of a Developed Work, and First Data reasonably believes that it cannot implement such requirements without infringing or misappropriating the Intellectual Property Rights of a third party, then First Data shall so notify Capital One and the parties shall agree on an alternative approach;
(b) Any claim or action by, on behalf of, or related to, any employee of First Data, its Affiliates or any subcontractor, including claims arising under occupational health and safety, worker’s compensation, ERISA or other applicable federal, state, or local laws or regulations, arising on or after the Effective Date (or which, if made by a Transitioned Employee, arises after the effective date of such employee’s severance from Capital One or arises directly out of actions by First Data, its Affiliates or their subcontractors);
(c) Any claim for which First Data is required to have insurance coverage under Article 15 of this Agreement;
(d) Any claim arising out of or related to First Data’s fraudulent actions or inactions, gross negligence or willful misconduct;
(e) Any claim arising out of or related to First Data’s breach of its obligations under Article 13 of this Agreement; and
(f) Any claim arising out of or related to First Data’s interview, screening, selection, offer and acceptance process for Affected Employees; provided however, that First Data is not required to indemnify Capital One for any decisions made or actions taken by Capital One with respect to the Affected Employees.
| 16.2 | Indemnity by Capital One. |
Capital One agrees to indemnify, defend and hold harmless First Data and its Affiliates and their respective officers, directors, employees, agents, successors and assigns from any and all Losses and threatened Losses arising from, in connection with, or based on allegations whenever made of, any of the following:
(a) Any claims of infringement or misappropriation of any Intellectual Property Rights alleged to have occurred because of Works or other resources provided to First Data by Capital One, except to the extent that such claims are caused by, relate to or arise out of First Data’s use of such Works or resources in breach of this Agreement; and
(b) Any claim or action by, on behalf of, or related to, an Affected Employee arising solely on or prior to the effective date of such employee’s severance from Capital One, including claims arising under the occupational health and safety, worker’s compensation, ERISA or other applicable federal, state or local laws or regulations, except where such claim arises out of actions of First Data or its Affiliates or their subcontractors.
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| 16.3 | Additional Indemnities. |
Each party (indemnitor) agrees to indemnify, defend and hold harmless the other, and its Affiliates, officers, directors, employees, agents, successors, and assigns (collectively, the indemnitee), from any and all Losses and threatened Losses arising from, in connection with, or based on allegations whenever made of, any of the following:
(a) The death or bodily injury of any agent, employee (other than an employee of the indemnitor), customer, business invitee, or business visitor or other person caused by the tortious conduct of the indemnitor (except to the extent that the indemnitor is considered a “special employer” under applicable workers compensation laws);
(b) The damage, loss or destruction of any real or tangible personal property caused by the tortious conduct of the indemnitor; and
(c) Any claim, demand, charge, action, cause of action, or other proceeding asserted against the indemnitee but resulting from an act or omission of the indemnitor in its capacity as an employer of a person.
| 16.4 | Infringement. |
(a) Subject to Section 16.4(b), if any item used by First Data to provide the Services becomes the subject of an infringement or misappropriation claim or proceeding, in addition to indemnifying Capital One as provided in this Article 16 and to the other rights Capital One may have under this Agreement, First Data shall:
(i) Promptly secure the right at First Data’s expense to continue using the item; or
(ii) If (i) above cannot be accomplished by First Data with Commercially Reasonable Efforts, then at First Data’s expense, replace or modify the item to make it non-infringing or without misappropriation, provided that any such replacement or modification will not degrade the performance or quality of the affected component of the Services; or
(iii) If neither (i) or (ii) above can be accomplished by First Data with Commercially Reasonable Efforts, and only in such event, then remove the item from the Services.
In the event that First Data performs the remedy in (iii) above, the Charges shall be equitably adjusted to reflect such removal and such adjustment shall take into account the reduced value of the Services to Capital One and any increased costs associated with using another vendor to provide some or all of the Services removed. If in Capital One’s reasonable opinion such removal is material to all or any portion of the remaining Services, then Capital One may terminate such portion of the affected Services or the entire Agreement, as the case may be, without any charge or other payment to First Data. Additionally, if the claim of infringement was not disclosed to Capital One in accordance with the terms hereof or the infringement was knowing or willful, First
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Data will be liable to indemnify Capital One and its Affiliates for all Losses suffered as a result thereof.
(b) If any item provided by Capital One in connection with the Services becomes the subject of an infringement or misappropriation claim or proceeding, First Data shall promptly cease using such item except as otherwise directed by Capital One and will be excused from performing the affected Services to the extent provided in Section 10.2.
| 16.5 | Indemnification Procedures. |
With respect to third-party claims the following procedures shall apply:
(a) Notice of Claims. The parties agree that in the event any claim is made or asserted, or any suit or action is commenced, that would give rise to a right of indemnification pursuant to Sections 16.1 through 16.3, or an officer of either party has actual knowledge of facts which, if not corrected, would give rise to a right of indemnification pursuant to Sections 16.1 through 16.3 (each, a “Claim”), the indemnitee, or the indemnitor if the indemnitor has knowledge of such facts, will give notice (via facsimile with a copy sent by standard overnight carrier) to the other party, which notice will contain, in reasonable detail, the facts giving rise to such Claim, as promptly as practicable, but in no event later than twenty (20) days after the receipt by the notifying party of such notice or knowledge of such Claim. No failure of the indemnitee to so notify the indemnitor shall relieve the indemnitor of its obligations under this Agreement except to the extent that the indemnitor can demonstrate damages attributable to such failure.
(b) Assumption of Defense and Selection of Counsel by the Indemnitee. The indemnitee may assume the defense of a Claim if (i) the indemnitee promptly notifies the indemnitor of its desire to assume the defense of such Claim and the indemnitor consents to such assumption of the defense by the indemnitee, or (ii) the indemnitor does not assume the defense of a Claim pursuant to Section 16.5(c), in which case the indemnitee will have the right to assume the defense at the cost, expense, and risk of the indemnitor, including payment of any judgment or award and the costs of settlement or compromise of the claim. If it is determined that the indemnitor failed to defend a claim for which it was liable, the indemnitor shall not be entitled to challenge the amount of any settlement or compromise paid by the indemnitee.
(c) Assumption of Defense and Selection of Counsel by the Indemnitor. Except as otherwise provided herein, the indemnitor has the right to assume the defense of a Claim with respect to which it has received a notice pursuant to Section 16.5(a) and may select counsel reasonably satisfactory to the indemnitee in connection with such defense. If the indemnitor assumes the defense of such Claim, the indemnitee will not thereafter have the right to employ its own counsel with the fees and expenses of such counsel at the indemnitor’s expense, unless (i) the employment of such counsel is authorized in writing by the indemnitor, (ii) the indemnitor has not employed counsel to take charge of the defense of such action within a reasonable period of time after electing to assume the defense thereof or (iii) the indemnitee has reasonably concluded that there may be defenses available to it which are different from or additional to those available to the indemnitor (in which case the indemnitor will not have the right to direct the defense of such action on behalf of the indemnitee), in any of which events such reasonable fees and expenses of
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the defense of such Claim will be borne by the indemnitor. The party defending any Claim will institute and maintain any such defense diligently and will keep the other party fully advised of the status thereof.
(d) Cooperation. The indemnitee will make available to the indemnitor and its counsel, accountants and other consultants during normal business hours all books and records of the indemnitee relating to any Claim. Each party will render to the other party such reasonable assistance as may be requested by the other party (at the expense of the party requesting assistance) in order to provide prompt and adequate evaluation of the Claim, defense of any Claim and any settlement or compromise under this Article 16.
(e) Settlement of Claims. The indemnitor will have the right to defend, compromise and settle any Claim in the name of the indemnitee to the extent that the indemnitor may be liable to the indemnitee under this Article 16; provided however, that the indemnitor will not compromise or settle a Claim without the consent of the indemnitee:
(i) unless the indemnitor assumes the obligation to indemnify for all Losses arising out of or relating thereto;
(ii) if such settlement or compromise would grant any non-monetary relief; or
(iii) unless there is an unqualified release of the indemnitee.
(f) Indemnification Payments. All amounts owed under this Article 16, including all costs and expenses (which include payment of any judgment or award and the costs of settlement or compromise of the claim) owed under Section 16.5(b), will be paid promptly when due.
| 16.6 | Subrogation. |
The indemnitor will be subrogated to any claims or rights of the indemnitee against any other persons with respect to any amount paid by the indemnitor under this Article 16. The indemnitee will cooperate with the indemnitor, at the indemnitor’s expense, in the assertion by the indemnitor of any such claim against such other Persons.
| 17. | LIABILITY |
| 17.1 | General Intent. |
Subject to the specific provisions of this Article 17, it is the intent of the parties that each party shall be liable to the other party for any actual damages incurred by the non-breaching party as a result of the breaching party’s failure to perform its obligations in the manner required by this Agreement.
| 17.2 | Liability Restrictions. |
(a) IN NO EVENT, WHETHER IN CONTRACT, IN TORT (INCLUDING BREACH OF WARRANTY, NEGLIGENCE AND STRICT LIABILITY IN TORT), OR OTHERWISE,
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SHALL A PARTY BE LIABLE TO THE OTHER PARTY (OR ANYONE CLAIMING UNDER OR THROUGH THE OTHER PARTY) FOR INDIRECT OR CONSEQUENTIAL, EXEMPLARY, PUNITIVE OR SPECIAL DAMAGES ARISING OUT OF, RESULTING FROM, ON IN ANY WAY CONNECTED WITH THE PERFORMANCE OR BREACH OF THIS AGREEMENT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES IN ADVANCE. The foregoing shall not apply to [* * * ].
(b) Subject to Sections 17.2(c) and 17.2(d), each party’s total liability to the other for any event giving rise to liability, whether in contract, in tort (including breach of warranty, negligence and strict liability in tort), or otherwise arising out of, resulting from, or in any way connected with, the performance or breach of this Agreement, shall be limited to an amount equal to:
(i) Prior to [* * * ] $[* * * ]
(ii) Beginning at the [* * * ] $[* * * ]
(iii) After the [* * * ] [* * * ]%
[* * * ] do not count against and do not reduce the amounts available under the foregoing limitations.
(c) The limitations set forth in 17.2(b) shall not apply with respect to:
(i) Claims that are the subject of indemnification pursuant to Sections 16.1(a), 16.1(d), 16.1(e), 16.2(a) and the last sentence of Section 16.4(a); and
(ii) Damages occasioned by a party’s breach of its obligations with respect to Confidential Information;
(d) The limitations set forth in 17.2(b) shall not apply and each party’s total liability to the other, whether in contract, in tort (including breach of warranty, negligence and strict liability in tort), or otherwise for damages occasioned by a party’s breach of [* * * ] of this Agreement shall be limited to:
(i) Prior to the [* * * ] $[* * * ]
(ii) Beginning at the [* * * ] $[* * * ]
(iii) After the [* * * ] $[* * * ]
[* * * ] do not count against and do not reduce the amounts available under the foregoing limitations.
(e) The following shall be [* * * ] the extent they result from a party’s failure to fulfill its obligations in accordance with this Agreement:
(i) [* * * ] necessitated by failure to comply with Applicable Laws and Capital One’s requirements, including the Production Specifications (as defined in Schedule A);
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(ii) Capital One’s incremental expenses incurred in resolving [* * * ] (as defined in Schedule A) and other problems caused by First Data (e.g., [* * * ]); and
(iii) More than a reasonable amount of [* * * ] provided on a Pass-Through Expense basis.
(f) Each party shall have a duty to mitigate damages for which the other party is responsible.
| 17.3 | Force Majeure. |
Upon the occurrence of a force majeure event that adversely impacts the Services, First Data shall be responsible for performing Disaster Recovery and Business Continuity Services with respect to such Services as provided in Schedule A.
| 18. | DISPUTE RESOLUTION |
Any dispute between the parties arising out of or relating to this Agreement, including with respect to the interpretation of any provision of this Agreement and with respect to the performance by First Data or Capital One, shall be resolved as provided in this Article 18.
| 18.1 | Informal Dispute Resolution. |
(a) Subject to Sections 18.1(b) and 18.1(c), the parties initially shall attempt to resolve their dispute informally, in accordance with the following:
(i) Upon the notice by a party to the other party of a dispute (“Dispute Date”), each party shall appoint a designated representative who does not devote substantially all of his or her time to performance under this Agreement, whose task it will be to meet for the purpose of endeavoring to resolve such dispute.
(ii) The designated representatives shall meet as often as the parties reasonably deem necessary in order to gather and furnish to the other all information with respect to the matter in issue which the parties believe to be appropriate and germane in connection with its resolution. The representatives shall discuss the problem and attempt to resolve the dispute without the necessity of any formal proceeding.
(iii) During the course of discussion, all reasonable requests made by a party to the other for non-legally privileged information reasonably related to this Agreement shall be honored in order that a party may be fully advised of the other’s position.
(iv) The specific format for the discussions shall be left to the discretion of the designated representatives.
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(b) After twenty-five (25) days following the Dispute Date and prior to commencement of any litigation as permitted under Section 18.1(c), either party may initiate mediation of the dispute by submitting to JAMS® (the dispute mediation entity, “DM”) and to the other party a written request for mediation, setting forth the subject of the dispute and the relief requested. The parties shall cooperate with DM and each other in the mediation process. The mediation shall be conducted in accordance with the applicable practices and procedures of DM. Upon commencement of litigation as permitted under Section 18.1(c), either party, upon notice to DM and to the other party, may terminate the mediation process. Each party shall bear its own expenses in the mediation process and shall share equally the charges of DM.
(c) Litigation of a dispute may be commenced by either party upon the earlier to occur of any of the following:
(i) The designated representatives mutually conclude that amicable resolution through continued negotiation of the matter does not appear likely;
(ii) Thirty-five (35) days have elapsed from the Dispute Date if neither party has requested mediation under Section 18.1(b), or sixty (60) days have elapsed from the Dispute Date if either party has requested mediation within thirty (30) days after the Dispute Date (these periods shall be deemed to run notwithstanding any claim that the process described in this Section 18.1 was not followed or completed); or
(iii) Commencement of litigation is deemed appropriate by a party to avoid the expiration of an applicable limitations period or to preserve a superior position with respect to other creditors, or a party makes a good faith determination, including as provided in Section 19.7 respecting Capital One, that a breach of this Agreement by the other party is such that a temporary restraining order or other injunctive relief is necessary.
| 18.2 | Litigation. |
Except as set forth in Section 18.4, for all litigation which may arise with respect this Agreement, the parties irrevocably and unconditionally submit (i) to the exclusive jurisdiction and venue (and waive any claim of forum non conveniens and any objections as to laying of venue) of the United States District Court for the Southern District of New York or (ii) if such court does not have subject matter jurisdiction, to the state courts of New York located in New York City, in connection with any action, suit or proceeding arising out of or relating to this Agreement. The parties further consent to the jurisdiction and venue of any state court located within a district that encompasses assets of a party against which a judgment has been rendered for the enforcement of such judgment or award against the assets of such party. Each party waives personal service of any summons, complaint or other process and agrees that the service thereof may be made by certified or registered mail directed to such party at such party’s address provided for purposes of notices hereunder. Service of process in any suit must be effectuated within thirty (30) days after commencement of such suit.
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| 18.3 | Continued Performance. |
Except as otherwise directed by the other party with respect to the subject matter of the dispute, each party shall continue performing its obligations under this Agreement while a dispute is being resolved except (and then only) to the extent the issue in dispute precludes performance (dispute over payment shall not be deemed to preclude performance) and without limiting either party’s right to terminate this Agreement as provided in Article 19.
| 18.4 | Injunctive Relief; Specific Performance. |
(a) Each of the parties acknowledges that the non-breaching party would be irreparably harmed and the total amount of monetary damages for any injury to such party will be impossible to calculate and therefore an inadequate remedy, and accordingly, the non-breaching party shall be entitled to seek temporary and permanent injunctive relief without posting bond or proving damages, against the breaching party and its employees, officers, directors, agents, representatives or independent contractors and to enforce specifically this Agreement and the terms and provisions thereof, if:
(i) any of the provisions of Articles 9 and 13 were not performed in accordance with their specific terms or were otherwise breached; or
(ii) a party did not [* * * ]
(iii) [* * * ]
(b) In such a circumstance, the non-breaching party may without delay institute an action in any court of the United States or any state or jurisdiction having subject matter jurisdiction, in addition to any remedy to which such party may be entitled, at law or in equity. If such court should find that one of the events set forth in paragraphs (i) through (iii) has occurred, the breaching party agrees that, without any additional findings of irreparable injury or other conditions to injunctive relief (including the posting of bond), it shall not oppose the entry of an appropriate order compelling performance by the breaching party and restraining it from any further breaches.
| 18.5 | Governing Law. |
(a) This Agreement and performance under it shall be governed by and construed in accordance with the law of the State of New York without regard to any portion of its choice of law principles that might provide for application of a different jurisdiction’s law.
(b) To the maximum extent permitted under applicable law, none of this Agreement will be subject to the Uniform Computer Information Transactions Act (“UCITA”) or Article 2 of the Uniform Commercial Code (each prepared by the National Conference of Commissioners on Uniform State Laws) as currently enacted or as may be codified or amended from time to time by any jurisdiction. To the extent that any aspect of this Agreement or any license granted under this Agreement is unclear or disputed by the parties and UCITA, if applied, would clarify the license or resolve the dispute, the parties agree to clarify the license
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or resolve the dispute independently of UCITA by applying the intent of the parties at the time they entered into this Agreement.
| 18.6 | Waiver of Right To Jury Trial. |
THE PARTIES HEREBY UNCONDITIONALLY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING DIRECTLY OR INDIRECTLY OUT OF, RELATED TO, OR IN ANY WAY CONNECTED WITH, THE PERFORMANCE OR BREACH OF THIS AGREEMENT, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED AMONG THEM. The scope of this waiver is intended to be all encompassing of any and all disputes that may be filed in any court or other tribunal (including, without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims). THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, AND RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. In the event of litigation, this Agreement may be filed as a consent to a trial by the court.
| 19. | TERMINATION |
| 19.1 | Termination for Cause. |
(a) If First Data:
(i) [* * * ] of this Agreement which is capable of being cured within [* * * ] after notice of breach from Capital One to First Data, and is not cured in such [* * * ]
(ii) Commits a [* * * ] of this Agreement that is not subject to cure with due [* * * ] after notice of breach from Capital One to First Data;
(iii) Commits numerous [* * * ] of its duties or obligations (whether or not [* * * ] which [* * * ] of this Agreement and are not cured within a [* * * ] after notice of [* * * ] from Capital One to First Data;
(iv) Without limitation of (i), (ii) or (iii) above, has incurred [* * * ] that are equal to [* * * ] % [* * * ] excluding [* * * ] (if calculated without regard to [* * * ] ), or
(v) Without limitation of (i), (ii) or (iii) above, is temporarily or permanently prevented or restricted from performing the Services as a result of an action [* * * ],
then Capital One may, by giving notice to First Data, [* * * ] as of a date specified in the notice of [* * * ]. Any [* * * ] by Capital One for [* * * ] shall not constitute an [* * * ] and shall be [* * * ] as to Capital One’s other rights resulting therefrom. If Capital One chooses to [* * * ] this Agreement in part (pursuant to (i), (ii), (iii) or (iv) above), [* * * ] under this Agreement will
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be equitably reduced [* * * ], and the [* * * ] (as described in Schedule C) will be adjusted appropriately.
(b) If, and only if, Capital One [* * *] and fails to make such payment within thirty (30) days after written notice from First Data of the failure to make [* * *], First Data may by giving written notice to Capital One [* * *] specified in the written notice of termination which is at least [* * *].
| 19.2 | Termination for Convenience. |
Capital One may terminate this Agreement for convenience and without cause at any time by giving First Data [* * * ]. In such event, Capital One shall be [* * *] as provided in Schedule C, [* * * ]. If a purported [* * *] by Capital One under Section 19.1 is ultimately determined not to have been [* * * ].
| 19.3 | Termination Upon Change of Control. |
If (i) Capital One undergoes [* * * ] or (ii) First Data [* * * ] and the new Controlling entity is a [* * * ] then, at any time within [* * * ] after the completion of such Change of Control Event, Capital One may [* * * ] (x) giving First Data at [* * * ] and designating a date upon which such [* * * ] shall be effective, and (y) in the case of a termination [* * * ]. A “Change of Control Event” shall mean, with respect to a party, (i) any event or series of events by which another entity that is not at the time an Affiliate of such party, directly or indirectly, whether singly or in concert with one or more persons (A) beneficially owns, acquires or has acquired either Control of such party or all or substantially all of the assets of such party, or (B) has, acquires, or has acquired the power to direct or cause the direction of the management and policies of such party; or (ii) a merger with or into another entity which at the time is not an Affiliate of such party. As used herein a “Capital One Competitor” means, at the time of the Change of Control Event, an entity [* * * ]
| 19.4 | Termination Due To First Data’s Financial Inability To Perform. |
Capital One may by giving notice to First Data terminate this Agreement for default as of the date specified in such notice of termination if:
(a) First Data files a petition in bankruptcy,
(b) First Data has an involuntary petition in bankruptcy filed against it which is not challenged within twenty (20) days and dismissed within sixty (60) days,
(c) First Data becomes insolvent,
(d) First Data makes a general assignment for the benefit of creditors,
(e) First Data admits in writing its inability to pay its debts as they mature,
(f) First Data has a receiver appointed for its assets, or
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(g) First Data has any significant portion of its assets attached.
| 19.5 | No Damages From Termination. |
Neither party shall be liable to the other for any damages arising from proper termination of this Agreement, although each party shall remain liable for any damages suffered as a result of any underlying breach.
| 19.6 | Termination/Expiration Assistance. |
(a) Beginning [* * * ] on such earlier date as Capital One may request, or commencing upon a [* * * ] of this Agreement or cessation of any of the Services, and continuing through the effective date of expiration or, if applicable, of [* * * ] of this Agreement, First Data shall provide to Capital One, or at Capital One’s request to Capital One’s designee, [* * * ] requested by Capital One to [* * * ]. Capital One’s request may be in the context of [* * * ] shall include the assistance described in Schedule I.
(b) For [* * * ] following the effective date of termination/expiration under other provisions of this Agreement, or cessation of any Services, at Capital One’s request, and subject to Capital One providing First Data a plan for migrating the affected volumes and work during such time period, First Data shall continue to [* * * ] Actions by First Data under this Section 19.6(b) shall be subject to the other provisions of this Agreement. Charges for such activities by First Data shall be as specified in Schedule C, except that the [* * * ] during such period.
(c) As part of evaluating whether to undertake or allow termination/expiration or renewal of this Agreement, Capital One may consider obtaining, or determine to obtain, [* * * ] of this Agreement. As and when reasonably requested by Capital One for use in such a process, First Data shall provide to Capital One such information and other cooperation regarding performance of the Services as would be reasonably necessary for [* * * ] and for a [* * * ].
| 19.7 | Equitable Remedies. |
First Data’s [* * * ] its obligation to provide [* * * ] shall be subject to injunctive relief and/or specific performance as provided in Section 18.4.
| 20. | COMPLIANCE WITH LAWS |
| 20.1 | Compliance with Laws and Regulations Generally. |
(a) Each party shall perform its obligations (including maintaining production facilities) in a manner that complies with all Applicable Laws and with Capital One’s policies, standards and procedures related to such laws, including identifying and procuring required permits, certificates, approvals and inspections.
(b) If a charge of non-compliance with any Applicable Laws occurs, the party so charged shall promptly notify the other party of such charges in writing. First Data will undertake
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concerted efforts appropriate for the nature of any non-compliance by First Data to cure such non-compliance. First Data shall reasonably cooperate with Capital One with respect to Capital One’s efforts to comply with Applicable Laws and Capital One’s policies, standards and procedures related to such laws, including implementing such measures as Capital One deems necessary to effect such compliance; provided however, that Capital One shall reimburse First Data for its reasonable Out-Of-Pocket Expenses incurred in implementing such measures to the extent that such measures are not required by any of First Data’s other customers, unless Capital One is the only customer for whom First Data is performing the services to which the non-compliance relates.
| 20.2 | Legal Requirements. |
(a) Capital One is solely responsible for monitoring and interpreting the Applicable Laws pertaining to equal credit opportunity, truth in lending, fair credit billing, fair debt collection practices, Title V of the GLB Act, the Bank Secrecy Act, the FCRA and general consumer protection (the “Legal Requirements”) in connection with the Services provided by First Data to Capital One.
(b) First Data shall maintain its systems so that the systems (including the Services provided thereunder) contain functionality enabling Capital One to comply with the Legal Requirements in a cost-effective manner (e.g., enabling Capital One to provide required information to cardholders through statement messages rather than letters). Capital One is responsible for selecting available parameter settings and programming features and options within the Services that apply to Capital One’s use of the Services in compliance with the Legal Requirements and for determining that such selections are consistent with the Legal Requirements. In making such determinations, Capital One may rely on the descriptions of such settings, features and options provided by First Data. First Data shall review with and explain to Capital One such settings, features and options and shall provide clarification on the operation of such features as requested by Capital One.
(c) If in Capital One’s determination, the parameter settings and programming features available within the Services do not permit compliance with Applicable Laws, First Data and Capital One will work together to identify an appropriate response (whether through system enhancements, work-around solutions or otherwise) to each Legal Requirement identified in the Capital One notice. First Data will use Commercially Reasonable Efforts to develop enhancements to the First Data System or to the Services to accommodate the response desired by Capital One and all such enhancements will be deemed Category I New Capabilities (as defined in Schedule C). Commercial reasonableness for this purpose will consider whether the enhancement would require substantial rearchitecture of the First Data System.
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| 20.3 | Compliance with Certain Applicable Laws and Policies. |
Without limiting the generality of Sections 20.1 or 20.2:
(a) First Data will perform all work under this Agreement in full compliance with the provisions of the Federal Occupational Safety and Health Act of 1970, and with any rules and regulations promulgated pursuant to the Act and any similar state or local laws.
(b) First Data shall comply with all applicable provisions of Sections 6, 7, and 12 of the Fair Labor Standards Act, 29 USC §§201 - 219, as amended, and agrees that there will be no violations by First Data of the ‘hot goods’ or ‘hot cargo’ provisions of such Act involving restrictions on use of underage individuals by First Data.
(c) To the extent applicable to the Services or to First Data as a provider of the Services, First Data is knowledgeable about the economic and trade sanctions administered by the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury, including all Executive Orders and implementing regulations, and First Data will perform the Services under this Agreement in compliance with such laws, Executive Orders and regulations rendered hereunder, including not assigning to perform the Services or retaining on Capital One programs any persons identified to First Data by Capital One as being on OFAC’s SDN and Blocked Persons List. First Data shall first have identified to Capital One the names, addresses and other identifying information of all its employees it intends to assign to perform the Services or to Capital One programs in a timely manner, prior to assignment to a Capital One program, so as to facilitate possible OFAC checks performed by Capital One.
(d) To the extent applicable to the Services or to First Data as a provider of the Services, First Data is and shall continue to be knowledgeable about the anti-money laundering requirements and legal obligations toward combating terrorist financing as required by Federal law, including those requirements contained in the Bank Secrecy Act as amended by the USA PATRIOT Act of 2001 and all implementing regulations, and shall perform the Services under this Agreement in compliance with such laws. First Data will ensure all appropriate personnel are adequately trained on their anti-money laundering procedures, with refresher training provided no less than annually.
(e) To the extent applicable to the Services or to First Data as a provider of the Services, First Data shall comply with all Applicable Laws protecting the confidential material and privacy rights of Capital One, its Affiliates, and/or their customers and consumers including Title V, Subtitle A of the GLB Act, the Bank Secrecy Act, and the Economic Espionage Act, 18 U.S.C. §1831 et. seq.).
(f) To the extent applicable to the Services or to First Data as a provider of the Services, First Data is and shall continue to be knowledgeable about, and shall perform the Services under this Agreement in compliance with, Applicable Laws governing collection of debt and consumer credit reporting, including the Fair Debt Collection Practices Act (FDCPA) (16 USC §1601 et. seq.), the Fair Credit Reporting Act (FCRA) (15 U.S.C. §1681 et. seq.), the FACT Act, the Equal Credit Opportunity Act (16 U.S.C. §1691 et. seq.), the Telephone Consumer Protection Act, 47 U.S.C. § 227 et seq. administered by the Federal Communication Commission, the Telephone Sales Rule, 16 C.F.R. §310.1 et seq. and any state or local equivalents of the foregoing.
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(g) First Data, in providing Services, shall:
(i) Employ workers on the basis of their ability to do the job, not on the basis of their personal characteristics. First Data shall not discriminate against their employees in hiring practices or any other terms or conditions of work on the basis of race, color, nationality, age, religion, maternity or marital status, disability, sexual orientation or political opinion;
(ii) Furnish employees with safe and healthy working conditions, adequate medical facilities, fire exits and safety equipment, well-lit and comfortable workstations and clean restrooms. First Data shall comply with all Applicable Laws governing occupational health and safety and, in addition to any such legal requirements, shall adequately train its employees to perform their jobs safely;
(iii) Not use child labor. As used in this clause “child” means an individual that is younger than either: (A) 15 years of age or (B) the minimum legal age requirement to work in the applicable location;
(iv) Only employ individuals whose presence is voluntary and not use forced, indentured, involuntary, prison, or uncompensated labor under any circumstances; and
(v) Not use corporal punishment, or other forms of physical coercion, or mental coercion as a form of discipline of employees.
(h) To the extent applicable to the Services or to First Data as a provider of the Services, First Data shall comply with Association rules and requirements and Capital One’s policies, standards and procedures related to such Association requirements.
| 21. | GENERAL |
| 21.1 | Binding Nature and Assignment. |
This Agreement shall be binding on the parties hereto and their respective successors and assigns. Neither party may, or shall have the power to, assign this Agreement without the prior consent of the other, except that Capital One may assign its rights and obligations under this Agreement without the approval of First Data to:
(a) An entity which acquires all or substantially all of the assets of Capital One;
(b) To any Capital One Affiliate, or
(c) To the successor in a merger or acquisition of Capital One; provided that in no event shall such assignment relieve Capital One of its obligations under this Agreement.
Within thirty (30) days of request by First Data, any such successor or other permitted assign shall confirm in writing its intent to be bound by and assume Capital One’s rights and obligations under this Agreement. Subject to the foregoing, any assignment by operation of law, order of any court, or pursuant to any plan of merger, consolidation or liquidation, shall be deemed an assignment for which prior consent is required and any assignment made without any such consent shall be void and of no effect as between the parties.
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| 21.2 | Mutually Negotiated. |
Each party acknowledges that the limitations and exclusions contained in this Agreement have been the subject of active and complete negotiation between the parties and represent the parties’ agreement based upon the level of risk to Capital One and First Data associated with their respective obligations under this Agreement and the payments to be made to First Data and credits to be issued to Capital One pursuant to this Agreement. The terms and conditions of this Agreement (including any perceived ambiguity herein) shall not be construed in favor of, or against, either party by reason of the extent to which any party or its professional advisors participated in the preparation of the original or any further drafts of this Agreement as each party is a sophisticated business entity and has fully negotiated this Agreement with the full participation of counsel and it represents their mutual efforts and it represents their mutual intent.
| 21.3 | Notices. |
All notices, requests, demands and determinations under this Agreement (other than routine operational communications), shall be in writing and shall be deemed duly given:
(i) When delivered personally (against a signed receipt);
(ii) On the designated day of delivery (other than a non-Business Day) after being timely given to an express overnight courier with a reliable system for tracking delivery;
(iii) On the next Business Day when sent by confirmed facsimile with a copy sent by another means specified in this Section 21.3; or
(iv) Four (4) Business Days after the day of mailing, when mailed by United States mail, registered or certified mail, return receipt requested and postage prepaid and addressed as follows:
| In the case of Capital One: Capital One Services, Inc. 15000 Capital One Drive Building 6 Richmond, Virginia 23238 Attn: Jim Evans, Director of Production Services |
with copies to: Capital One Services, Inc. 1680 Capital One Drive McLean, VA 22102 Attn: Frank Borchert, Deputy General Counsel | |
| and, in the case of notices of renewal, default, or termination: | ||
| Shaw Pittman LLP 2300 “N” Street, NW Washington, DC 20037 Attn: James L. Alberg | ||
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| In the case of First Data: | with copies to: | |
| First Data Resources Inc. 6902 Pine Street Omaha, Nebraska 68106 Attn: President Telecopy Number: 402-222-7334 |
First Data Resources Inc. 6902 Pine Street Omaha, Nebraska 68106 Attn: General Counsel Telecopy Number: 402-222-7700 |
Either party may from time to time change its address or designee for notification purposes by giving the other prior notice of the new address or designee and the date upon which it will become effective. Because facsimile numbers and email addresses change over time and facsimile transmissions and emails may not be treated with the same degree of seriousness as more formal communications, notices given by facsimile or email shall only be deemed effective if responded to by the intended recipient (or his or her successor).
| 21.4 | Counterparts. |
This Agreement may be executed in several counterparts, each of which shall be considered an original but all of which taken together shall constitute but one and the same agreement.
| 21.5 | Headings. |
The Article and Section headings and the Table of Contents used in this Agreement are for reference and convenience only and shall not enter into the interpretation of this Agreement.
| 21.6 | Relationship of parties. |
In furnishing the Services First Data is acting as an independent contractor, and First Data has the sole right and obligation to supervise, manage, contract, direct, procure, perform or cause to be performed, all work to be performed by First Data under this Agreement. No contract of agency and no joint venture is intended to be created hereby. First Data is not an agent of Capital One and has no authority to represent Capital One as to any matters, except as expressly authorized in this Agreement. None of First Data’s employees shall be deemed employees of Capital One and First Data shall be responsible for reporting and payment of all wages, unemployment, social security and other payroll taxes, including contributions from them when required by law. Capital One does not and shall not have actual, potential, or any other control over First Data or its employees.
| 21.7 | Non-Exclusivity. |
This Agreement is non-exclusive and shall not be deemed to be a requirements contract. Except to the extent provided in Section 3.1(d) of this Agreement and Section 5.2 of Schedule C, Capital One shall be free without obligation to First Data to acquire from third parties services similar or identical to the Services provided hereunder.
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| 21.8 | Severability. |
If any provision of this Agreement conflicts with the law under which this Agreement is to be construed or if any such provision is held invalid by a competent authority, such provision shall be deemed to be restated to reflect as nearly as possible the original intentions of the parties in accordance with applicable law. The remainder of this Agreement shall remain in full force and effect.
| 21.9 | Consents and Approval. |
Where approval, acceptance, consent, agreement or similar action by either party is required under this Agreement, such action must be provided in writing and shall not be unreasonably delayed or withheld, except where expressly provided as being in the discretion of a party. An approval or consent given by a party under this Agreement shall not relieve the other party from responsibility for complying with the requirements of this Agreement, nor shall it be construed as a waiver of any rights under this Agreement, except as and to the extent otherwise expressly provided in such approval or consent. Capital One’s and First Data’s representatives may not be fully familiar with, or necessarily insist at all times on the full and complete performance with, the terms of this Agreement. A party’s failure to insist in any one or more instances upon strict performance of any provision of this Agreement, or failure or delay to take advantage of any of its rights or remedies hereunder, or failure to notify the other party of any breach, violation, or default, shall not be construed as a waiver or construction by either party of any such performance, provision, rights, breach, violation, or default either then or in the future or the relinquishment of any of its rights and remedies. Each party shall, at the request of the other party, perform those actions, including executing additional documents and instruments, reasonably necessary to give full effect to the terms of this Agreement.
| 21.10 | Waiver of Default; Cumulative Remedies. |
(a) A delay or omission by either party to exercise any right or power under this Agreement shall not be construed to be a waiver thereof. A waiver by either of the parties of any of the covenants to be performed by the other or any breach thereof shall not be construed to be a waiver of any succeeding breach thereof or of any other covenant herein contained.
(b) Except as otherwise expressly provided herein, all remedies provided for in this Agreement shall be cumulative and in addition to and not in lieu of any other remedies available to either party at law or in equity.
| 21.11 | Survival. |
Any provision of this Agreement that contemplates performance or observance subsequent to termination or expiration of this Agreement shall survive termination or expiration of this Agreement and continue in full force and effect.
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| 21.12 | Public Disclosures. |
(a) All media releases, public announcements and public disclosures by either party relating to this Agreement or the subject matter of this Agreement, including promotional or marketing material, but not including announcements intended solely for internal distribution or disclosures to the extent required to meet legal or regulatory requirements beyond the reasonable control of the disclosing party, shall be coordinated with and approved by the other party prior to release.
(b) If a party determines that disclosure is required to meet legal or regulatory requirements it shall promptly inform the other party and coordinate such disclosure with the other party. The disclosing party shall limit disclosure to that which is necessary and shall give due consideration to comments the other party and its counsel provide regarding the nature of the disclosure.
(c) Notwithstanding the foregoing, in proposals and other marketing materials First Data may list Capital One as a customer and describe in general terms the services provided by First Data under this Agreement.
| 21.13 | Service Marks. |
Without Capital One’s prior consent (which may be arbitrarily withheld and if granted revoked), First Data shall not use the name, service marks, or trademarks of Capital One.
| 21.14 | Third Party Beneficiaries. |
Except as provided in Article 16, this Agreement is entered into solely between, and may be enforced only by, Capital One and First Data, and this Agreement shall not be deemed to create any rights in third parties, including suppliers and customers of a party, or to create any obligations of a party to any such third parties.
| 21.15 | Covenant of Good Faith and Fair Dealing. |
Each party, in its respective dealings with the other party under or in connection with this Agreement, shall act in good faith and with fair dealing.
| 21.16 | Entire Agreement; Amendment. |
(a) This Agreement, including any Schedules and Exhibits referred to herein and attached hereto, each of which is incorporated herein for all purposes, constitutes the entire agreement between the parties with respect to the subject matter contained in this Agreement and supersedes all prior correspondence, discussions, agreements, and understandings entered into between the parties, whether written or oral, with respect to such subject matter (the “Pre-Existing Agreement(s)”); provided, however, that through November 30, 2004 the fees and charges for services set forth in the Pre-Existing Agreements for services provided under those agreement as of the Effective Date shall continue to apply to such services only to the extent provided pursuant to this Agreement after the Effective Date and through November 30, 2004. Confidential
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Information (as defined in the Pre-Existing Agreement) disclosed by one party to the other prior to the Effective Date that was protected under the terms of the Pre-Existing Agreement at the time of such disclosure shall be deemed the Confidential Information of the disclosing party under this Agreement.
(b) Except to the extent provided otherwise in Section 21.16(a), as of the Effective Date, the following Pre-Existing Agreements, including as amended after the respective effective dates, shall be superceded in their entirety:
(i) The embossing and lettershop processing services agreement effective as of the 3rd day of December 2001, made by and between Capital One Services, Inc. and First Data Resources, Inc.
(ii) The statement and letter production and disaster recovery services agreement effective as of 1 February 2003, made by and between First Data Resources, Inc. and Capital One Services, Inc.
(iii) The remittance processing services agreement effective as of the 1st day of August 2001, made by and between Capital One Services, Inc., Capital One Bank and Capital One FSB and Integrated Payment Systems, Inc., a Delaware corporation with an office at 6200 South Quebec Street, Englewood, Colorado 80111 and which is the subject of the separate letter agreement for termination attached as Schedule H hereto.
(c) Except to the extent provided otherwise in Section 21.16(a), the rights and responsibilities of the parties, and any claims arising, on and after the Effective Date shall be defined solely by this Agreement; the rights and responsibilities of the parties and any claims arising prior to the Effective Date shall be defined solely by the Pre-Existing Agreement(s).
(d) Neither the course of dealings between the parties nor trade practices shall act to modify, vary, supplement, explain, or amend this Agreement. If either party issues any purchase order, terms or conditions, or other form, it shall be deemed solely for the administrative convenience of that party and not binding on the other party, even if acknowledged or acted upon. No change, waiver, or discharge hereof shall be valid unless in writing and signed by an authorized representative of the party against which such change, waiver or discharge is sought to be enforced. There are no promises, representations, warrantees, or other commitments relied upon by either party that is not expressly set forth herein.
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IN WITNESS WHEREOF, the parties have each caused this Agreement to be signed and delivered by its duly authorized officer, all as of the Effective Date.
| FIRST DATA RESOURCES, INC. |
CAPITAL ONE SERVICES, INC. | |||||||
| By: | /s/ Kimberly Bishop | By: | /s/ Catherine West | |||||
| Name: |
Kimberly Bishop | Name: |
Catherine West | |||||
| Title: |
Executive Vice President | Title: |
Executive Vice President | |||||
| President, US Card | ||||||||
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Exhibit 10.16.1.1
LEASE SUPPLEMENT
This Supplement to Amended and Restated Lease Agreement (this “Supplement”), dated as of March 1, 2004, is a supplement to that certain Amended and Restated Lease Agreement dated as of October 14, 1998 (as amended, modified or supplemented to date, except by this Supplement, the “Original Lease” and the Original Lease, as amended by this Supplement, the “Lease”), between Wells Fargo Bank Northwest, National Association (formerly First Security Bank, N.A., the correct name of which was First Security Bank, National Association), a national banking association, and Val T. Orton, not individually, but solely in their capacities as Owner Trustee, as lessor, and Capital One Realty, Inc., as lessee. Capitalized terms used but not defined herein shall have the meanings assigned in the Lease, as modified by the First Modification (as hereinafter defined). This Supplement is being executed and delivered on the date hereof in connection with the substitution of Leased Properties pursuant to Section 38(a) of the Lease.
NOW, THEREFORE, intending to be legally bound, the parties to the Lease hereby agree as follows:
| 1. | Schedules A, D, G and J to the Original Lease are hereby deleted and replaced by their respective counterparts as attached hereto. |
| 2. | Except for those provisions specifically amended hereby and in that First Modification to Amended and Restated Lease Agreement and Memorandum of Amended and Restated Lease Agreement dated of even date herewith (the “First Modification”), the Lease shall remain in full force and effect. |
| 3. | In accordance with Paragraph 10 of the First Modification, the Lessee agrees to obtain evidence that Renaissance Business Park Phase III, Renaissance Business Park Phase IV and the Parking Garage Property are assessed for real estate tax purposes separately from Ren 1, Ren 2 and the Community Center not later than December 1, 2004, provided that such date shall be extended to March 1, 2005 so long as the Lessee is diligently pursuing such evidence; provided further that an immediate Event of Default shall exist for failure to cause the foregoing to be completed by March 1, 2005. The Lessee agrees to provide a quarterly report signed by an authorized officer of the Lessee within ten (10) business days of such quarter end to the Lessor and the Indenture Trustee as to the status of the Lessee’s efforts to obtain such evidence until the Lessee has obtained the same. |
[SIGNATURE PAGES FOLLOW]
IN WITNESS WHEREOF, the parties hereto have caused this Supplement to be executed under seal as of the day and year first above written.
| WITNESSES: | LESSOR: | |||||||
| WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION (formerly First | ||||||||
| By: | /s/ Joshua Elsmore | Security Bank, N.A., the correct name of which was | ||||||
| Name: | Joshua Elsmore | First Security Bank, National Association), a | ||||||
| [Print or Type Name] | national banking association, not individually, but solely as Owner Trustee under that certain | |||||||
| By: | /s/ Necia Stevens | Amended and Restated Trust Agreement dated as of | ||||||
| Name: | Necia Stevens – Trust Officer | October 14, 1998 | ||||||
| [Print or Type Name] | ||||||||
| By: | /s/ Val T. Orton | |||||||
| Name: | Val T. Orton | |||||||
| Title: | Vice President | |||||||
| WITNESSES | ||||||||
| By: | /s/ Joshua Elsmore | |||||||
| Name: | Joshua Elsmore | /s/ Val T. Orton | ||||||
| [Print or Type Name] | Val T. Orton, not individually, but solely as Owner Trustee under that certain Amended | |||||||
| By: | /s/ Necia Stevens | and Restated Trust Agreement dated as of | ||||||
| Name: | Necia Stevens & Trust Officer | October 14, 1998 | ||||||
| [Print or Type Name] | ||||||||
S-1
| WITNESSES: |
LESSEE: | |||||||
| CAPITAL ONE REALTY, INC., a Delaware corporation | ||||||||
| By: | /s/ Sean Campbell | By: | /s/ Larry P. Ebert | |||||
| Name: | Sean Campbell | Name: | Larry P. Ebert | |||||
| [Print or Type Name] | Title: |
Vice President, Corporate Real Estate | ||||||
| By: | /s/ Leah V. Mills | |||||||
| Name: | Leah V. Mills | |||||||
| [Print or Type Name] | ||||||||
S-2
SCHEDULE A
Legal Descriptions of Leased Properties
RENAISSANCE BUILDINGS III AND IV
AND PARKING GARAGE
DESCRIPTION
ALL THOSE CERTAIN LOTS, PIECES OR PARCELS OF LAND WITH ALL IMPROVEMENTS THEREON AND APPURTENANCES THEREUNTO BELONGING, LYING AND BEING IN HILLSBOROUGH COUNTY, FLORIDA AS MORE PARTICULARLY SHOWN ON PLAT OF SURVEY PREPARED BY KING ENGINEERING ASSOCIATES, INC., DATED FEBRUARY 12, 2004, ENTITLED “ALTA-ASCM LAND TITLE SURVEY PARCELS I, II, III, IV, V, VI AND VII,” AND MORE PARTICULARLY DESCRIBED AS FOLLOWS:
PARCEL I
BUILDING III
A PARCEL OF LAND LYING IN SECTION 19, TOWNSHIP 28 SOUTH, RANGE 18 EAST, HILLSBOROUGH COUNTY, FLORIDA, BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:
COMMENCE AT THE SOUTHWEST CORNER OF SAID SECTION 19; THENCE WITH THE WESTERLY BOUNDARY LINE OF SAID SECTION 19, N 00° 03’ 24” W, A DISTANCE OF 1193.04 FEET; THENCE N 89° 56’ 36” E, A DISTANCE OF 62 FEET TO THE EAST RIGHT-OF-WAY LINE OF HENDERSON ROAD; THENCE RUNNING ALONG SAID EAST RIGHT-OF-WAY LINE N 00° 03’ 24” W, A DISTANCE OF 795.65 FEET; THENCE DEPARTING SAID EAST RIGHT-OF-WAY LINE, N 89° 56’ 36” E, A DISTANCE OF 580.82 FEET TO THE POINT OF BEGINNING; THENCE N 30° 03’ 10” E, A DISTANCE OF 82.87 FEET; THENCE S 79° 56’ 50” E, A DISTANCE OF 182.07 FEET; THENCE N 55° 03’ 10” E, A DISTANCE OF 165.68 FEET; THENCE S 34° 56’ 50” E, A DISTANCE OF 107.38 FEET; THENCE S 55° 03’ 10” W, A DISTANCE OF 88.93 FEET; THENCE S 34° 56’ 50” E, A DISTANCE OF 29.99 FEET; THENCE S 55° 03’ 10” W, A DISTANCE OF 49.57 FEET TO THE BEGINNING OF A CURVE; THENCE 159.44 FEET ALONG THE ARC OF SAID CURVE, CONCAVE NORTHERLY, HAVING A RADIUS OF 203.00 FEET, A CENTRAL ANGLE OF 45° 00’ 00”, A CHORD BEARING OF S 77° 33’ 10” W, A CHORD DISTANCE OF 155.37 FEET TO THE CURVE’S END; THENCE N 79° 56’ 50” W, A DISTANCE OF 31.75 FEET; THENCE N 10° 03’ 10” E, A DISTANCE OF 29.99 FEET; THENCE N 79° 56’ 50” W, A DISTANCE OF 101.75 FEET; THENCE N 10° 03’ 10” E, A DISTANCE OF 11.40 FEET; THENCE N 59° 56’ 50” W, A DISTANCE OF 52.92 FEET TO THE POINT OF BEGINNING.
PARCEL II
BUILDING IV
A PARCEL OF LAND LYING WITHIN SECTION 19, TOWNSHIP 28 SOUTH, RANGE 18 EAST, HILLSBOROUGH COUNTY, FLORIDA AND BEING FURTHER DESCRIBED AS FOLLOWS:
COMMENCE AT THE SOUTHWEST CORNER OF SAID SECTION 19; THENCE ALONG THE WESTERLY BOUNDARY LINE OF SAID SECTION, N 00° 03’ 24” W, 1,193.04 FEET; THENCE DEPARTING SAID LINE, N 89° 56’ 36” E, 62.00 FEET TO A POINT ON THE EASTERLY RIGHT-OF-WAY LINE OF HENDERSON ROAD; THENCE ALONG SAID LINE; N 00° 03’ 24” W, 1,141.17 FEET; THENCE DEPARTING SAID EASTERLY RIGHT OF WAY, N 89° 56’ 36” E, 273.27 FEET TO THE POINT OF BEGINNING; THENCE N 89° 56’ 36” E, 30.00 FEET; THENCE N 00° 03’ 24” W, 88.94 FEET; THENCE N 89° 56’ 36” E, 107.42 FEET; THENCE S 00° 03’ 24” E, 165.75 FEET; THENCE S 45° 03’ 24” E, 206.65 FEET; THENCE S 24° 56’ 36” W, 84.58 FEET; THENCE N 65° 03’ 24” W, 70.74 FEET; THENCE S 44° 56’ 36” W, 3.74 FEET; THENCE N 45° 03’ 24” W, 110.29 FEET; THENCE S 44° 56’ 36” W, 30.00 FEET; THENCE N 45° 03’ 24” W, 31.64 FEET TO A POINT OF CURVATURE; THENCE 159.44 FEET NORTHWESTERLY ALONG THE ARC OF A CURVE TO THE RIGHT, HAVING A RADIUS OF 203.00 FEET AND A CENTRAL ANGLE OF 45° 00’ 00”, A CHORD BEARING AND DISTANCE OF N 22° 33’ 24” W, 155.37 FEET; THENCE N 00° 03’ 24” W, 49.65 FEET TO THE POINT OF BEGINNING.
PARCEL III
PARKING GARAGE:
TOGETHER WITH AN UNDIVIDED FIFTY PERCENT (50%) INTEREST IN THE FOLLOWING:
A PARCEL OF LAND LYING IN SECTION 19, TOWNSHIP 28 SOUTH, RANGE 18 EAST, HILLSBOROUGH COUNTY, FLORIDA, BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:
COMMENCE AT THE SOUTHWEST CORNER OF SAID SECTION 19; THENCE ALONG THE WESTERLY BOUNDARY LINE OF SAID SECTION 19, N 00° 03’ 24” W, A DISTANCE OF 1, 193.04 FEET; THENCE DEPARTING SAID LINE N 89° 56’ 36” E, 62.00 FEET TO A POINT ON THE EASTERLY RIGHT-OF-WAY LINE OF HENDERSON ROAD; THENCE ALONG SAID LINE N 00° 03’ 24” W, 455.12 FEET; THENCE DEPARTING SAID EASTERLY RIGHT-OF-WAY LINE, N 89° 56’ 36” E. A DISTANCE OF 103.98 FEET TO THE POINT OF BEGINNING; THENCE N 37° 39’ 15” E, 497.81 FEET; THENCE S 52° 20’ 45” E 267.46 FEET; THENCE S 37° 39’ 15” W, 497.81 FEET; THENCE N 52° 20’ 45” W, 267.46 FEET, TO THE POINT OF BEGINNING.
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PARCEL IV - EASEMENTS
TOGETHER WITH EASEMENTS AS SET FORTH IN SHORT FORM GROUND LEASE AND GRANT OF EASEMENT AGREEMENT BY AND BETWEEN CAPITAL ONE SERVICES, INC., A DELAWARE CORPORATION, LESSOR, AND FIRST SECURITY BANK, NATIONAL ASSOCIATION, A NATIONAL BANKING ASSOCIATION, DATED SEPTEMBER 3, 1999 AND RECORDED IN O. R. BOOK 9811, PAGE 1229, AS AFFECTED BY AMENDMENT TO GROUND LEASE, SHORT FORM GROUND LEASE AND GRANT OF EASEMENT AGREEMENT, RECORDED IN O.R. BOOK 10323, PAGE 1148, AND AS AFFECTED BY ASSIGNMENT OF GROUND LEASE DATED SEPTEMBER 3, 2003 AND FILED DECEMBER 9, 2003 IN O. R. BOOK 13378, PAGE 1831; BY ASSIGNMENT OF GROUND LEASE BETWEEN CAPITAL ONE REALTY, INC., A DELAWARE CORPORATION AND WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION (FORMERLY FIRST SECURITY BANK, N.A.), A NATIONAL BANKING ASSOCIATION, AND VAL T. ORTON, NOT INDIVIDUALLY, BUT SOLELY IN THEIR CAPACITIES AS OWNER TRUSTEE UNDER THAT CERTAIN AMENDED AND RESTATED TRUST AGREEMENT DATED AS OF OCTOBER 14, 1998, THE TRUST THEREUNDER BEING REFERRED TO AS THE COB REAL ESTATE TRUST 1995-1, A COPY OF WHICH IS TO BE RECORDED IN THE PUBLIC RECORDS OF HILLSBOROUGH COUNTY, FLORIDA; AND BY SECOND AMENDMENT TO GROUND LEASE, SHORT FORM GROUND LEASE AND GRANT OF EASEMENT AGREEMENT AND CONSENT TO ASSIGNMENT OF GROUND LEASE, BY AND BETWEEN CAPITAL ONE SERVICES, INC., A DELAWARE CORPORATION AND WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION (FORMERLY FIRST SECURITY BANK, N.A., THE CORRECT NAME OF WHICH WAS FIRST SECURITY BANK, NATIONAL ASSOCIATION), A NATIONAL BANKING ASSOCIATION, AND VAL T. ORTON, NOT INDIVIDUALLY, BUT SOLELY IN THEIR CAPACITIES AS OWNER TRUSTEE UNDER THE COB REAL ESTATE TRUST 1995-1, A COPY OF WHICH IS TO BE RECORDED IN THE PUBLIC RECORDS OF HILLSBOROUGH COUNTY, FLORIDA, WHICH EASEMENTS ARE MORE PARTICULARLY DESCRIBED AS FOLLOWS:
A. INGRESS\EGRESS AND UTILITY EASEMENT (Ring Road)
A PARCEL OF LAND LYING IN SECTION 19. TOWNSHIP 28 SOUTH, RANGE 18 EAST, HILLSBOROUGH COUNTY, FLORIDA, BEING FURTHER DESCRIBED AS FOLLOWS:
COMMENCE AT THE SOUTHWEST CORNER OF THE NORTHWEST 1/4 OF SAID SECTION 19, THENCE N89º56’45”E, A DISTANCE OF 62.00 FEET TO THE
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EASTERLY RIGHT-OF-WAY LINE OF HENDERSON ROAD; THENCE RUNNING ALONG SAID EASTERLY RIGHT-OF-WAY LINE N00º03’06”W, A DISTANCE OF 477.55 FEET TO THE POINT OF BEGINNING; THENCE DEPARTING SAME N00º03’06”W, A DISTANCE OF 138.95 FEET TO THE AFORESAID EASTERLY RIGHT-OF-WAY LINE; THENCE WITH SAME N34º51’36”E, A DISTANCE OF 8.36 FEET; THENCE N06º02’52”W, A DISTANCE OF 28.00 FEET; THENCE N48º10’12”W, A DISTANCE OF 2.50 FEET; THENCE DEPARTING SAME N00º03’06”W, A DISTANCE OF 25.48 FEET; THENCE N89º56’54”E, A DISTANCE OF 60.40 FEET; THENCE S25º03’24”E, A DISTANCE OF 445.08 FEET; THENCE S78º21’32”E, A DISTANCE OF 13.22 FEET; THENCE N64º56’36”E, A DISTANCE OF 297.63 FEET; THENCE S62º09’28”E, A DISTANCE OF 131.90 FEET; THENCE S83º16’47”E, A DISTANCE OF 128.94 FEET; THENCE S54º03’29”E, A DISTANCE OF 104.59 FEET; THENCE S36º27’15”E, A DISTANCE OF 126.13 FEET; THENCE S55º20’32”E, A DISTANCE OF 81.34 FEET; THENCE S66º03’49”W, A DISTANCE OF 130.16 FEET; THENCE N42º19’29”W, A DISTANCE OF 89.10 FEET; THENCE N47º40’38”E, A DISTANCE OF 27.25 FEET; THENCE N42º19’10”W, A DISTANCE OF 59.38 FEET TO THE BEGINNING OF A CURVE; THENCE 157.28 FEET ALONG THE ARC OF SAID CURVE, CONCAVE SOUTHWESTERLY, HAVING A RADIUS OF 200.25 FEET, A CENTRAL ANGLE OF 45º00’00”, A CHORD BEARING OF N64º49’10”W AND A CHORD DISTANCE OF 153.26 FEET TO THE CURVE’S END; THENCE N87º19’10”W, A DISTANCE OF 31.55 FEET; THENCE S02º40’38”W, A DISTANCE OF 27.25 FEET; THENCE N87º19’29”W, A DISTANCE OF 101.97 FEET; THENCE S02º40’38”W, A DISTANCE OF 11.40 FEET; THENCE S72º40’38”W, A DISTANCE OF 52.92 FEET; THENCE S58º22’24”W, A DISTANCE OF 80.41 FEET; THENCE S64º56’36”W, A DISTANCE OF 52.92 FEET; THENCE N45º03’24”W, A DISTANCE OF 11.40 FEET; THENCE S44º56’36”W, A DISTANCE OF 101.75 FEET; THENCE N45º03’24”W, A DISTANCE OF 29.99 FEET; THENCE S44º56’36”W, A DISTANCE OF 31.75 FEET TO THE BEGINNING OF A CURVE; THENCE 159.44 FEET ALONG THE ARC OF SAID CURVE, CONCAVE EASTERLY, HAVING A RADIUS OF 203.00 FEET, A CENTRAL ANGLE OF 45º00’00”, A CHORD BEARING OF S22º26’36”W AND A CHORD DISTANCE OF 155.37 FEET TO THE CURVE’S END; THENCE S00º03’24”E, A DISTANCE OF 49.57 FEET; THENCE N89º56’36”E, A DISTANCE OF 29.99 FEET; THENCE S00º03’24”E, A DISTANCE OF 182.43 FEET; THENCE S09º16’06”E, A DISTANCE OF 249.62 FEET; THENCE S01º06’27’E, A DISTANCE OF 89.12 FEET; THENCE S57º55’46”W, A DISTANCE OF 149.05 FEET; THENCE S74º44’04”W, A DISTANCE OF 136.16 FEET TO THE AFORE SAID EASTERLY RIGHT-OF-WAY LINE; THENCE WITH SAME N00º03’24”W, A DISTANCE OF 123.42 FEET; THENCE DEPARTING SAME S74º59’51”E, A DISTANCE OF 52.06 FEET TO A POINT ON THE ARC OF A CURVE; THENCE 174.59 FEET ALONG THE ARC OF SAID CURVE, CONCAVE NORTHWESTERLY, HAVING A RADIUS OF 112.00 FEET, A CENTRAL ANGLE OF 89º18’52”, A CHORD BEARING OF N45º09’05”E AND A CHORD DISTANCE OF 157.44 FEET TO THE CURVE’S END; THENCE N00º29’39”E, A DISTANCE OF 93.87 FEET; THENCE N22º26’36”W, A DISTANCE OF 206.02 FEET; THENCE N00º03’24”W, A DISTANCE OF 346.87 FEET; THENCE N25’18’35’E, A DISTANCE OF 121.22 FEET; THENCE N43º55’21”E, A DISTANCE OF 96.50 FEET; THENCE N25º04’18”W, A
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DISTANCE OF 381.10 FEET; THENCE S89º56’54”W, A DISTANCE OF 27.18 FEET; THENCE S00º03’06”E, A DISTANCE OF 140.76 FEET; THENCE S89º56’54”W, A DISTANCE OF 15.00 FEET, TO THE POINT OF BEGINNING;
B. INGRESS/EGRESS & UTILITY EASEMENT (Ring Road)
A PARCEL OF LAND LYING IN SECTION 19, TOWNSHIP 28 SOUTH, RANGE 18 EAST, HILLSBOROUGH COUNTY, FLORIDA, BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:
COMMENCE AT THE SOUTHWEST CORNER OF SAID SECTION 19; THENCE WITH THE WESTERLY BOUNDARY LINE OF SAID SECTION 19, N00°03’24”W, A DISTANCE OF 1193.04 FEET; THENCE DEPARTING SAID LINE, N89°56’36”E, A DISTANCE OF 62.00 FEET TO A POINT ON THE EASTERLY RIGHT-OF-WAY LINE OF HENDERSON ROAD; THENCE WITH SAME, N00°03’24”W, A DISTANCE OF 465.85 FEET; THENCE S72°28’39”E, A DISTANCE OF 14.70 FEET; THENCE N89°56’36”E, A DISTANCE OF 32.75 FEET; THENCE N73°09’04”E, A DISTANCE OF 11.17 FEET THENCE N37°44’08”E, A DISTANCE OF 413.49 FEET TO THE POINT OF BEGINNING; THENCE N52°20’45”W, A DISTANCE OF 84.42 FEET TO A POINT ON THE SOUTHERLY BOUNDARY OF AN INGRESS/EGRESS AND UTILITY EASEMENT, AS RECORDED IN O.R. BOOK 8901, PAGE 1887 OF THE PUBLIC RECORDS OF HILLSBOROUGH COUNTY, FLORIDA; THENCE WITH SAME THE FOLLOWING FOUR (4) COURSES; (1) N57°55’46”E, A DISTANCE OF 16.19 FEET; (2) N01°06’27”W, A DISTANCE OF 89.12 FEET; (3) N09°16’06”W, A DISTANCE OF 249.62 FEET; (4) N00°03’24”W, A DISTANCE OF 40.53 FEET; THENCE DEPARTING SAID SOUTHERLY BOUNDARY, N89º56’36”E, A DISTANCE OF 87.63 FEET; THENCE S00°03’24”E, A DISTANCE OF 88.93 FEET; THENCE S89°56’36”W, A DISTANCE OF 29.99 FEET; THENCE S00°03’24”E, A DISTANCE OF 49.57 FEET TO A POINT OF CURVATURE; THENCE 159.44 FEET ALONG THE ARC OF A CURVE, CONCAVE EASTERLY, HAVING A RADIUS OF 203.00 FEET, A CENTRAL ANGLE OF 45°00’00”, A TANGENT DISTANCE OF 84.09 FEET, A CHORD BEARING OF S22°33’24”E AND A CHORD DISTANCE OF 155.37 FEET TO THE END OF SAID CURVE; THENCE S45°03’24”E, A DISTANCE OF 31.75 FEET; THENCE N44°56’36”E, A DISTANCE OF 29.99 FEET; THENCE S45°03’24”E, A DISTANCE OF 101.75 FEET; THENCE N44°56’36”E, A DISTANCE OF 11.40 FEET; THENCE S65°03’24”E, A DISTANCE OF 52.92 FEET; THENCE N24°56’36”E, A DISTANCE OF 38.33 FEET; THENCE S60°15’58’E, A DISTANCE OF 95.91 FEET; THENCE S30°03’10”W, A DISTANCE OF 46.88 FEET; THENCE S59°56’50”E, A DISTANCE OF 52.92 FEET; THENCE S10°03’10”W, A DISTANCE OF 11.40 FEET; THENCE S79°56’50”E, A DISTANCE OF 101.75 FEET; THENCE S10°03’10”W, A DISTANCE OF 29.99 FEET; THENCE S79°56’50”E, A DISTANCE OF 31.75 FEET TO A POINT OF CURVATURE; THENCE 159.44 FEET ALONG THE ARC OF A CURVE, CONCAVE NORTHERLY, HAVING A RADIUS OF 203.00 FEET, A CENTRAL ANGLE OF 45°00’00”, A TANGENT DISTANCE OF 84.09 FEET, A CHORD BEARING OF N77°33’10”E AND A CHORD DISTANCE OF
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155.37 FEET TO THE END OF SAID CURVE; THENCE N55°03’10”E, A DISTANCE OF 49.57 FEET; THENCE N34°56’50”W, A DISTANCE OF 29.99 FEET; THENCE N55°03’10”E, A DISTANCE OF 88.93 FEET; THENCE S60°00’00”E, A DISTANCE OF 30.23 FEET; THENCE N30°18’48”E, A DISTANCE OF 91.16 FEET TO A POINT OF CURVATURE; THENCE 49.33 FEET ALONG THE ARC OF A CURVE, CONCAVE NORTHWESTERLY, HAVING A RADIUS OF 326.50 FEET, A CENTRAL ANGLE OF 8°39’23”, A TANGENT DISTANCE OF 24.71 FEET, A CHORD BEARING OF N25°59’06”E AND A CHORD DISTANCE OF 49.28 FEET TO THE END OF SAID CURVE; THENCE N21°39’25”E, A DISTANCE OF 6.81 FEET TO A POINT OF CURVATURE; THENCE 107.14 FEET ALONG THE ARC OF A CURVE, CONCAVE WESTERLY, HAVING A RADIUS OF 372.25 FEET, A CENTRAL ANGLE OF 16°29’25”, A TANGENT DISTANCE OF 53.94 FEET, A CHORD BEARING OF N13°24’42”E AND A CHORD DISTANCE OF 106.77 FEET TO THE END OF SAID CURVE; THENCE ON A RADIAL LINE, N84°50’00”W, A DISTANCE OF 21.16 FEET; THENCE N03°34’49”E, A DISTANCE OF 19.44 FEET; THENCE N74°49’14”E, A DISTANCE OF 22.09 FEET; THENCE N00°59’24”E, A DISTANCE OF 76.94 FEET TO A POINT OF CURVATURE; THENCE 104.84 FEET ALONG THE ARC OF A CURVE, CONCAVE WESTERLY, HAVING A RADIUS OF 377.33 FEET, A CENTRAL ANGLE OF 15°55’12”, A TANGENT DISTANCE OF 52.76 FEET, A CHORD BEARING OF N06°58’12W AND A CHORD DISTANCE OF 104.51 FEET TO THE END OF SAID CURVE; THENCE N14°55’48”W, A DISTANCE OF 121.89 FEET TO A POINT OF CURVATURE; THENCE 82.05 FEET ALONG THE ARC OF A CURVE, CONCAVE SOUTHWESTERLY, HAVING A RADIUS OF 177.33 FEET, A CENTRAL ANGLE OF 26°30’43”, A TANGENT DISTANCE OF 41.78 FEET, A CHORD BEARING OF N28°11’09”W AND A CHORD DISTANCE OF 81.32 FEET TO THE END OF SAID CURVE; THENCE N41º26’31”‘W, A DISTANCE OF 26.84 FEET; THENCE S50°04’12”W, A DISTANCE OF 5.38 FEET; THENCE N39°55’48’W, A DISTANCE OF 124.82 FEET TO A POINT ON THE SOUTHERLY BOUNDARY OF AN INGRESS/EGRESS AND UTILITY EASEMENT, AS RECORDED IN O.R. BOOK 8901, PAGE 1887 OF THE PUBLIC RECORDS OF HILLSBOROUGH COUNTY, FLORIDA; THENCE WITH SAME N66°03’49”E, A DISTANCE OF 69.06 FEET TO THE EASTERLY-MOST POINT OF SAID BOUNDARY; THENCE DEPARTING SAID BOUNDARY, S40°06’08”E, A DISTANCE OF 96.46 FEET; THENCE S39°55’48”E, A DISTANCE OF 9.33 FEET; THENCE S50°04’12”W, A DISTANCE OF 9.17 FEET; THENCE S39°55’48”E, A DISTANCE OF 72.67 FEET; THENCE S28°01’26”E, A DISTANCE OF 40.51 FEET; THENCE S10º51’33”E, A DISTANCE OF 172.21 FEET TO A POINT OF CURVATURE; THENCE 227.32 FEET ALONG THE ARC OF A CURVE, CONCAVE WESTERLY, HAVING A RADIUS OF 420.25 FEET, A CENTRAL ANGLE OF 30°59’30”, A TANGENT DISTANCE OF 116.51 FEET, A CHORD BEARING OF S14°30’15”W AND A CHORD DISTANCE OF 224.56 FEET TO THE END OF SAID CURVE; THENCE S30°00’00”W, A DISTANCE OF 148.62 FEET TO A POINT OF CURVATURE; THENCE 315.31 FEET ALONG THE ARC OF A CURVE, CONCAVE NORTHWESTERLY, HAVING A RADIUS OF 274.00 FEET, A CENTRAL ANGLE OF 65º56’00”, A TANGENT DISTANCE OF 177.71 FEET, A CHORD BEARING OF S62°58’00”W AND A CHORD DISTANCE OF 298.19 FEET TO THE END OF SAID
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CURVE; THENCE N84°04’00”W, A DISTANCE OF 51.88 FEET TO A POINT OF CURVATURE; THENCE 23.34 FEET ALONG THE ARC OF A CURVE, CONCAVE SOUTHEASTERLY, HAVING A RADIUS OF 28.12 FEET, A CENTRAL ANGLE OF 47°33’20”, A TANGENT DISTANCE OF 12.39 FEET, A CHORD BEARING OF S72°09’20”W AND A CHORD DISTANCE OF 22.68 FEET TO THE END OF SAID CURVE; THENCE S48°22’40”W, A DISTANCE OF 15.95 FEET; THENCE S61°46’46”W, A DISTANCE OF 42.65 FEET; THENCE S88°34’58’W, A DISTANCE OF 42.65 FEET; THENCE N52°20’45”W, A DISTANCE OF 307.01 FEET; THENCE S82°39’15”W, A DISTANCE OF 15.95 FEET; THENCE N52°20’45”W, A DISTANCE OF 36.52 FEET; THENCE S37°44’08”W, A DISTANCE OF 15.18 FEET TO THE POINT OF BEGINNING.
C. INGRESS/EGRESS & UTILITY EASEMENT (Road adjacent to Buildings 3, 4 & Garage)
A PARCEL OF LAND LYING IN SECTION 19, TOWNSHIP 28 SOUTH, RANGE 18 EAST, HILLSBOROUGH COUNTY, FLORIDA, BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:
COMMENCE AT THE SOUTHWEST CORNER OF SAID SECTION 19; THENCE WITH THE WESTERLY BOUNDARY LINE OF SAID SECTION 19, N00°03’24”W, A DISTANCE OF 1193.04 FEET; THENCE DEPARTING SAID LINE, N89°56’36”E, A DISTANCE OF 62.00 FEET TO A POINT ON THE EASTERLY RIGHT-OF-WAY LINE OF HENDERSON ROAD; THENCE WITH SAME, N00°03’24”W, A DISTANCE OF 465.85 FEET TO THE POINT OF BEGINNING; THENCE S72°28’39”E, A DISTANCE OF 14.70 FEET; THENCE N89°56’36”E, A DISTANCE OF 32.75 FEET; THENCE N73°09’04”E, A DISTANCE OF 11.17 FEET; THENCE N37º44’08”E, A DISTANCE OF 428.67 FEET; THENCE S52°20’45”E, A DISTANCE OF 36.52 FEET; THENCE S37°39’15’W, A DISTANCE OF 398.71 FEET; THENCE S7°20’44”E, A DISTANCE OF 26.25 FEET; THENCE S52º20’45”E, A DISTANCE OF 204.60 FEET; THENCE N88°13’17”E, A DISTANCE OF 37.26 FEET; THENCE N48°47’20”E, A DISTANCE OF 45.55 FEET; THENCE N43°13’17”E, A DISTANCE OF 69.22 FEET; THENCE N37°39’15”E, A DISTANCE OF 291.31 FEET; THENCE S52°20’45”E, A DISTANCE OF 50.84 FEET; THENCE S88°34’58”W, A DISTANCE OF 21.47 FEET; THENCE S37°39’15”W, A DISTANCE OF’ 321.96 FEET; THENCE S48°47’20”W, A DISTANCE OF 77.69 FEET TO A POINT OF CURVATURE; THENCE 89.02 FEET ALONG THE ARC OF A CURVE, CONCAVE NORTHERLY, HAVING A RADIUS OF 64.67 FEET, A CENTRAL ANGLE OF 78°51’56”, A TANGENT DISTANCE OF 53.18 FEET, A CHORD BEARING OF S88°13’17”W AND A CHORD DISTANCE OF 82.15 FEET TO THE POINT OF TANGENCY; THENCE N52°20’45”W, A DISTANCE OF 194.60 FEET TO A POINT OF CURVATURE; THENCE 46.07 FEET ALONG THE ARC OF A CURVE, CONCAVE SOUTHERLY, HAVING A RADIUS OF 29.33 FEET, A CENTRAL ANGLE OF 90°00’00”, A TANGENT DISTANCE OF 29.33 FEET, A CHORD BEARING OF S82°39’15”W AND A CHORD DISTANCE OF 41.48 FEET TO THE POINT OF TANGENCY; THENCE S37°39’15”W, A DISTANCE OF 87.68 FEET TO A POINT ON THE EASTERLY
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RIGHT-OF-WAY OF HENDERSON ROAD; THENCE WITH SAME, N00°03’24”W, A DISTANCE OF 44.65 FEET; THENCE DEPARTING SAID RIGHT-OF-WAY N38°28’49”E, A DISTANCE OF 67.19 FEET; THENCE N21º31’04”W, A DISTANCE OF 7.50 FEET; THENCE S89°56’36”W, A DISTANCE OF 39.12 FEET TO A POINT ON THE EASTERLY RIGHT-OF-WAY OF HENDERSON ROAD; THENCE WITH SAME, N00°03’24”W, A DISTANCE OF 30.78 FEET TO THE POINT OF BEGINNING.
D. UTILITY EASEMENT (Sanitary Easement Outside of Ring Road Easement)
A PARCEL OF LAND LYING IN SECTION 19, TOWNSHIP 28 SOUTH, RANGE 18 EAST, HILLSBOROUGH COUNTY, FLORIDA, BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:
COMMENCE AT THE SOUTHWEST CORNER OF SAID SECTION 19, THENCE N00°03’24”W, A DISTANCE OF 1193.04 FEET, THENCE N89°56’36”E, A DISTANCE OF 62.00 FEET TO THE EAST RIGHT-OF-WAY LINE OF HENDERSON ROAD; THENCE RUNNING ALONG SAID EAST RIGHT-OF-WAY LINE N00°03’24”W, A DISTANCE OF 842.08 FEET, THENCE DEPARTING SAID EAST RIGHT-OF-WAY LINE N89º56’36”E, A DISTANCE OF 998.97 FEET TO THE POINT OF BEGINNING; THENCE N10º11’41”W, A DISTANCE OF 25.77 FEET; THENCE N41°18”15”E, A DISTANCE OF 173.61 FEET TO A POINT ON A NON-TANGENT CURVE; THENCE 43.45 FEET ALONG THE ARC OF SAID CURVE, CONCAVE WESTERLY, HAVING A RADIUS OF 372.25 FEET, A CENTRAL ANGLE OF 06°41’16”, A CHORD BEARING OF S18°15’31”W AND A CHORD DISTANCE OF 43.43 FEET; THENCE S41°18’15”W, A DISTANCE OF 126.60 FEET; THENCE S10°11’41”E A DISTANCE OF 30.45 FEET; THENCE N60°00’00”W, A DISTANCE OF 21.07 FEET TO THE POINT OF BEGINNING.
E. SANITARY EASEMENT
A 10.00 FOOT WIDE EASEMENT BEING 5.00 FEET ON EACH SIDE OF THE FOLLOWING DESCRIBED CENTERLINE LYING WITHIN IN SECTION 19, TOWNSHIP 28 SOUTH, RANGE 18 EAST, HILLSBOROUGH COUNTY, FLORIDA.
COMMENCE AT THE SOUTHWEST CORNER OF THE NORTHWEST 1/4 OF SAID SECTION 19, THENCE, RUNNING ALONG THE WESTERLY BOUNDARY LINE OF SAID SECTION 19, S00º03’24”E, A DISTANCE OF 1402.50 FEET; THENCE DEPARTING SAID BOUNDARY LINE N89º56’36”E, A DISTANCE OF 62.00 FEET TO A POINT ON THE EASTERLY RIGHT-OF-WAY LINE OF HENDERSON ROAD, SAID POINT ALSO BEING THE POINT OF BEGINNING; THENCE DEPARTING SAID RIGHT-OF-WAY LINE N89º56’36”E, A DISTANCE OF 33.45 FEET TO A POINT HEREBY KNOWN AS REFERENCE POINT “A” HEREON; THENCE CONTINUE N89º56’36”E, A DISTANCE OF 21.55 FEET; THENCE S00º03’24”E, A DISTANCE OF 60.00 FEET; THENCE S89º56’36”W, A DISTANCE OF 55.00 FEET TO THE AFORESAID EASTERLY RIGHT-OF-WAY LINE OF HENDERSON ROAD; THENCE WITH SAME N00º03’24”W, A DISTANCE OF 60.00 FEET, TO THE POINT OF BEGINNING.
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TOGETHER WITH:
BEGIN AT THE AFORESAID REFERENCE POINT “A” THENCE N00º30’27”W, A DISTANCE OF 330.43 FEET; THENCE N38º13’15”E, A DISTANCE OF 190.10 FEET; THENCE N37º29’54”E, A DISTANCE OF 349.01 FEET TO A POINT HEREBY KNOWN AS REFERENCE POINT “B” HEREON; THENCE CONTINUE S52º30’55”E, A DISTANCE OF 323.57 FEET; THENCE N89º53’19”E, A DISTANCE OF 158.42 FEET; THENCE N77º24’44”E, A DISTANCE OF 158.17 FEET; THENCE N33º11’48”E, A DISTANCE OF 122.06 FEET; THENCE N33º40’18”E, A DISTANCE OF 209.35 FEET; THENCE N04º02’01”E, A DISTANCE OF 277.19 FEET; THENCE N16º32’40”W, A DISTANCE OF 271.16 FEET; THENCE N38º31’41”W, A DISTANCE OF 116.35 FEET; THENCE S83º10’09”W, A DISTANCE OF 27.92 FEET TO THE POINT OF TERMINATION.
TOGETHER WITH:
BEGIN AT THE AFORESAID REFERENCE POINT “B” THENCE N40º05’21”W, A DISTANCE OF 173.94 FEET, TO THE POINT OF TERMINATION.
ALSO TOGETHER WITH THE FOLLOWING NON-EXCLUSIVE EASEMENTS:
PARCEL V
A NON-EXCLUSIVE FORCE MAIN EASEMENT FOR THE BENEFIT OF PARCELS I, II AND III, CREATED IN FORCE MAIN EASEMENT BETWEEN DAYTON HUDSON CORPORATION AND CAPITAL ONE SERVICES, INC., RECORDED IN OFFICIAL RECORDS BOOK 8383, PAGE 2012.
PARCEL VI
A NON-EXCLUSIVE EASEMENT FOR THE BENEFIT OF PARCELS I, II AND III, CREATED IN RECIPROCAL STORMWATER AND DRAINAGE EASEMENT BETWEEN DAYTON HUDSON CORPORATION, WATERS AVENUE LAND PARTNERS, LTD. AND CAPITAL ONE SERVICES, INC., RECORDED IN OFFICIAL RECORDS BOOOK 8383, PAGE 1992; AS AMENDED BY FIRST AMENDMENT TO RECIPROCAL STORMWATER AND DRAINAGE EASEMENT BY AND AMONG DAYTON-HUDSON CORPORATION, A MINNESOTA CORPORATION, WATER AVENUE LAND PARTNERS, LTD., A FLORIDA LIMITED PARTNERSHIP AND CAPITAL ONE SERVICES, INC., A DELAWARE CORPORATION, DATED AS OF JANUARY 29, 1997, RECORDED JANUARY 31, 1997 IN O.R. BOOK 8442, PAGE 798.
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PARCEL VII
EASEMENTS FOR THE BENEFIT OF PARCELS I, II AND III AS SET FORTH IN GROUND LEASE, AMONG CAPITAL ONE SERVICES, INC., A DELAWARE CORPORATION AND WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION, A NATIONAL BANKING ASSOCIATION (FORMERLY FIRST SECURITY BANK, N.A.), A NATIONAL BANKING ASSOCIATION, AND VAL T. ORTON, NOT INDIVIDUALLY, BUT SOLELY IN THEIR CAPACITIES AS OWNER TRUSTEE UNDER THAT CERTAIN AMENDED AND RESTATED TRUST AGREEMENT DATED AS OF OCTOBER 14, 1998, THE TRUST THEREUNDER BEING REFERRED TO AS THE COB REAL ESTATE TRUST 1995-1, AS EVIDENCED BY SHORT FORM OF LEASE AND GRANT OF EASEMENT AGREEMENT TO BE RECORDED IN THE PUBLIC RECORDS OF HILLSBOROUGH COUNTY, FLORIDA, AND MORE PARTICULARLY DESCRIBED THEREIN AS FOLLOWS:
A. INGRESS\EGRESS AND UTILITY EASEMENT (Ring Road)
A PARCEL OF LAND LYING IN SECTION 19. TOWNSHIP 28 SOUTH, RANGE 18 EAST, HILLSBOROUGH COUNTY, FLORIDA, BEING FURTHER DESCRIBED AS FOLLOWS:
COMMENCE AT THE SOUTHWEST CORNER OF THE NORTHWEST 1/4 OF SAID SECTION 19, THENCE N89º56’45”E, A DISTANCE OF 62.00 FEET TO THE EASTERLY RIGHT-OF-WAY LINE OF HENDERSON ROAD; THENCE RUNNING ALONG SAID EASTERLY RIGHT-OF-WAY LINE N00º03’06”W, A DISTANCE OF 477.55 FEET TO THE POINT OF BEGINNING; THENCE DEPARTING SAME N00º03’06”W, A DISTANCE OF 138.95 FEET TO THE AFORESAID EASTERLY RIGHT-OF-WAY LINE; THENCE WITH SAME N34º51’36”E, A DISTANCE OF 8.36 FEET; THENCE N06º02’52”W, A DISTANCE OF 28.00 FEET; THENCE N48º10’12”W, A DISTANCE OF 2.50 FEET; THENCE DEPARTING SAME N00º03’06”W, A DISTANCE OF 25.48 FEET; THENCE N89º56’54”E, A DISTANCE OF 60.40 FEET; THENCE S25º03’24”E, A DISTANCE OF 445.08 FEET; THENCE S78º21’32”E, A DISTANCE OF 13.22 FEET; THENCE N64º56’36”E, A DISTANCE OF 297.63 FEET; THENCE S62º09’28”E, A DISTANCE OF 131.90 FEET; THENCE S83º16’47”E, A DISTANCE OF 128.94 FEET; THENCE S54º03’29”E, A DISTANCE OF 104.59 FEET; THENCE S36º27’15”E, A DISTANCE OF 126.13 FEET; THENCE S55º20’32”E, A DISTANCE OF 81.34 FEET; THENCE S66º03’49”W, A DISTANCE OF 130.16 FEET; THENCE N42º19’29”W, A DISTANCE OF 89.10 FEET; THENCE N47º40’38”E, A DISTANCE OF 27.25 FEET; THENCE N42º19’10”W, A DISTANCE OF 59.38 FEET TO THE BEGINNING OF A CURVE; THENCE 157.28 FEET ALONG THE ARC OF SAID CURVE, CONCAVE SOUTHWESTERLY, HAVING A RADIUS OF 200.25 FEET, A CENTRAL ANGLE OF 45º00’00”, A CHORD BEARING OF
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N64º49’10”W AND A CHORD DISTANCE OF 153.26 FEET TO THE CURVE’S END; THENCE N87º19’10”W, A DISTANCE OF 31.55 FEET; THENCE S02º40’38”W, A DISTANCE OF 27.25 FEET; THENCE N87º19’29”W, A DISTANCE OF 101.97 FEET; THENCE S02º40’38”W, A DISTANCE OF 11.40 FEET; THENCE S72º40’38”W, A DISTANCE OF 52.92 FEET; THENCE S58º22’24”W, A DISTANCE OF 80.41 FEET; THENCE S64º56’36”W, A DISTANCE OF 52.92 FEET; THENCE N45º03’24”W, A DISTANCE OF 11.40 FEET; THENCE S44º56’36”W, A DISTANCE OF 101.75 FEET; THENCE N45º03’24”W, A DISTANCE OF 29.99 FEET; THENCE S44º56’36”W, A DISTANCE OF 31.75 FEET TO THE BEGINNING OF A CURVE; THENCE 159.44 FEET ALONG THE ARC OF SAID CURVE, CONCAVE EASTERLY, HAVING A RADIUS OF 203.00 FEET, A CENTRAL ANGLE OF 45º00’00”, A CHORD BEARING OF S22º26’36”W AND A CHORD DISTANCE OF 155.37 FEET TO THE CURVE’S END; THENCE S00º03’24”E, A DISTANCE OF 49.57 FEET; THENCE N89º56’36”E, A DISTANCE OF 29.99 FEET; THENCE S00º03’24”E, A DISTANCE OF 182.43 FEET; THENCE S09º16’06”E, A DISTANCE OF 249.62 FEET; THENCE S01º06’27’E, A DISTANCE OF 89.12 FEET; THENCE S57º55’46”W, A DISTANCE OF 149.05 FEET; THENCE S74º44’04”W, A DISTANCE OF 136.16 FEET TO THE AFORE SAID EASTERLY RIGHT-OF-WAY LINE; THENCE WITH SAME N00º03’24”W, A DISTANCE OF 123.42 FEET; THENCE DEPARTING SAME S74º59’51”E, A DISTANCE OF 52.06 FEET TO A POINT ON THE ARC OF A CURVE; THENCE 174.59 FEET ALONG THE ARC OF SAID CURVE, CONCAVE NORTHWESTERLY, HAVING A RADIUS OF 112.00 FEET, A CENTRAL ANGLE OF 89º18’52”, A CHORD BEARING OF N45º09’05”E AND A CHORD DISTANCE OF 157.44 FEET TO THE CURVE’S END; THENCE N00º29’39”E, A DISTANCE OF 93.87 FEET; THENCE N22º26’36”W, A DISTANCE OF 206.02 FEET; THENCE N00º03’24”W, A DISTANCE OF 346.87 FEET; THENCE N25’18’35’E, A DISTANCE OF 121.22 FEET; THENCE N43º55’21”E, A DISTANCE OF 96.50 FEET; THENCE N25º04’18”W, A DISTANCE OF 381.10 FEET; THENCE S89º56’54”W, A DISTANCE OF 27.18 FEET; THENCE S00º03’06”E, A DISTANCE OF 140.76 FEET; THENCE S89º56’54”W, A DISTANCE OF 15.00 FEET, TO THE POINT OF BEGINNING;
B. INGRESS/EGRESS & UTILITY EASEMENT (Ring Road)
A PARCEL OF LAND LYING IN SECTION 19, TOWNSHIP 28 SOUTH, RANGE 18 EAST, HILLSBOROUGH COUNTY, FLORIDA, BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:
COMMENCE AT THE SOUTHWEST CORNER OF SAID SECTION 19; THENCE WITH THE WESTERLY BOUNDARY LINE OF SAID SECTION 19, N00°03’24”W, A DISTANCE OF 1193.04 FEET; THENCE DEPARTING SAID LINE, N89°56’36”E, A DISTANCE OF 62.00 FEET TO A POINT ON THE EASTERLY RIGHT-OF-WAY LINE OF HENDERSON ROAD; THENCE WITH SAME, N00°03’24”W, A DISTANCE OF 465.85 FEET; THENCE S72°28’39”E, A DISTANCE OF 14.70 FEET; THENCE N89°56’36”E, A DISTANCE OF 32.75 FEET; THENCE N73°09’04”E, A DISTANCE OF 11.17 FEET THENCE N37°44’08”E, A DISTANCE OF 413.49 FEET TO THE POINT OF BEGINNING; THENCE N52°20’45”W, A DISTANCE OF 84.42
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FEET TO A POINT ON THE SOUTHERLY BOUNDARY OF AN INGRESS/EGRESS AND UTILITY EASEMENT, AS RECORDED IN O.R. BOOK 8901, PAGE 1887 OF THE PUBLIC RECORDS OF HILLSBOROUGH COUNTY, FLORIDA; THENCE WITH SAME THE FOLLOWING FOUR (4) COURSES; (1) N57°55’46”E, A DISTANCE OF 16.19 FEET; (2) N01°06’27”W, A DISTANCE OF 89.12 FEET; (3) N09°16’06”W, A DISTANCE OF 249.62 FEET; (4) N00°03’24”W, A DISTANCE OF 40.53 FEET; THENCE DEPARTING SAID SOUTHERLY BOUNDARY, N89º56’36”E, A DISTANCE OF 87.63 FEET; THENCE S00°03’24”E, A DISTANCE OF 88.93 FEET; THENCE S89°56’36”W, A DISTANCE OF 29.99 FEET; THENCE S00°03’24”E, A DISTANCE OF 49.57 FEET TO A POINT OF CURVATURE; THENCE 159.44 FEET ALONG THE ARC OF A CURVE, CONCAVE EASTERLY, HAVING A RADIUS OF 203.00 FEET, A CENTRAL ANGLE OF 45°00’00”, A TANGENT DISTANCE OF 84.09 FEET, A CHORD BEARING OF S22°33’24”E AND A CHORD DISTANCE OF 155.37 FEET TO THE END OF SAID CURVE; THENCE S45°03’24”E, A DISTANCE OF 31.75 FEET; THENCE N44°56’36”E, A DISTANCE OF 29.99 FEET; THENCE S45°03’24”E, A DISTANCE OF 101.75 FEET; THENCE N44°56’36”E, A DISTANCE OF 11.40 FEET; THENCE S65°03’24”E, A DISTANCE OF 52.92 FEET; THENCE N24°56’36”E, A DISTANCE OF 38.33 FEET; THENCE S60°15’58’E, A DISTANCE OF 95.91 FEET; THENCE S30°03’10”W, A DISTANCE OF 46.88 FEET; THENCE S59°56’50”E, A DISTANCE OF 52.92 FEET; THENCE S10°03’10”W, A DISTANCE OF 11.40 FEET; THENCE S79°56’50”E, A DISTANCE OF 101.75 FEET; THENCE S10°03’10”W, A DISTANCE OF 29.99 FEET; THENCE S79°56’50”E, A DISTANCE OF 31.75 FEET TO A POINT OF CURVATURE; THENCE 159.44 FEET ALONG THE ARC OF A CURVE, CONCAVE NORTHERLY, HAVING A RADIUS OF 203.00 FEET, A CENTRAL ANGLE OF 45°00’00”, A TANGENT DISTANCE OF 84.09 FEET, A CHORD BEARING OF N77°33’10”E AND A CHORD DISTANCE OF 155.37 FEET TO THE END OF SAID CURVE; THENCE N55°03’10”E, A DISTANCE OF 49.57 FEET; THENCE N34°56’50”W, A DISTANCE OF 29.99 FEET; THENCE N55°03’10”E, A DISTANCE OF 88.93 FEET; THENCE S60°00’00”E, A DISTANCE OF 30.23 FEET; THENCE N30°18’48”E, A DISTANCE OF 91.16 FEET TO A POINT OF CURVATURE; THENCE 49.33 FEET ALONG THE ARC OF A CURVE, CONCAVE NORTHWESTERLY, HAVING A RADIUS OF 326.50 FEET, A CENTRAL ANGLE OF 8°39’23”, A TANGENT DISTANCE OF 24.71 FEET, A CHORD BEARING OF N25°59’06”E AND A CHORD DISTANCE OF 49.28 FEET TO THE END OF SAID CURVE; THENCE N21°39’25”E, A DISTANCE OF 6.81 FEET TO A POINT OF CURVATURE; THENCE 107.14 FEET ALONG THE ARC OF A CURVE, CONCAVE WESTERLY, HAVING A RADIUS OF 372.25 FEET, A CENTRAL ANGLE OF 16°29’25”, A TANGENT DISTANCE OF 53.94 FEET, A CHORD BEARING OF N13°24’42”E AND A CHORD DISTANCE OF 106.77 FEET TO THE END OF SAID CURVE; THENCE ON A RADIAL LINE, N84°50’00”W, A DISTANCE OF 21.16 FEET; THENCE N03°34’49”E, A DISTANCE OF 19.44 FEET; THENCE N74°49’14”E, A DISTANCE OF 22.09 FEET; THENCE N00°59’24”E, A DISTANCE OF 76.94 FEET TO A POINT OF CURVATURE; THENCE 104.84 FEET ALONG THE ARC OF A CURVE, CONCAVE WESTERLY, HAVING A RADIUS OF 377.33 FEET, A CENTRAL ANGLE OF 15°55’12”, A TANGENT DISTANCE OF 52.76 FEET, A CHORD BEARING OF N06°58’12W AND A CHORD DISTANCE OF
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104.51 FEET TO THE END OF SAID CURVE; THENCE N14°55’48”W, A DISTANCE OF 121.89 FEET TO A POINT OF CURVATURE; THENCE 82.05 FEET ALONG THE ARC OF A CURVE, CONCAVE SOUTHWESTERLY, HAVING A RADIUS OF 177.33 FEET, A CENTRAL ANGLE OF 26°30’43”, A TANGENT DISTANCE OF 41.78 FEET, A CHORD BEARING OF N28°11’09”W AND A CHORD DISTANCE OF 81.32 FEET TO THE END OF SAID CURVE; THENCE N41º26’31”‘W, A DISTANCE OF 26.84 FEET; THENCE S50°04’12”W, A DISTANCE OF 5.38 FEET; THENCE N39°55’48’W, A DISTANCE OF 124.82 FEET TO A POINT ON THE SOUTHERLY BOUNDARY OF AN INGRESS/EGRESS AND UTILITY EASEMENT, AS RECORDED IN O.R. BOOK 8901, PAGE 1887 OF THE PUBLIC RECORDS OF HILLSBOROUGH COUNTY, FLORIDA; THENCE WITH SAME N66°03’49”E, A DISTANCE OF 69.06 FEET TO THE EASTERLY-MOST POINT OF SAID BOUNDARY; THENCE DEPARTING SAID BOUNDARY, S40°06’08”E, A DISTANCE OF 96.46 FEET; THENCE S39°55’48”E, A DISTANCE OF 9.33 FEET; THENCE S50°04’12”W, A DISTANCE OF 9.17 FEET; THENCE S39°55’48”E, A DISTANCE OF 72.67 FEET; THENCE S28°01’26”E, A DISTANCE OF 40.51 FEET; THENCE S10º51’33”E, A DISTANCE OF 172.21 FEET TO A POINT OF CURVATURE; THENCE 227.32 FEET ALONG THE ARC OF A CURVE, CONCAVE WESTERLY, HAVING A RADIUS OF 420.25 FEET, A CENTRAL ANGLE OF 30°59’30”, A TANGENT DISTANCE OF 116.51 FEET, A CHORD BEARING OF S14°30’15”W AND A CHORD DISTANCE OF 224.56 FEET TO THE END OF SAID CURVE; THENCE S30°00’00”W, A DISTANCE OF 148.62 FEET TO A POINT OF CURVATURE; THENCE 315.31 FEET ALONG THE ARC OF A CURVE, CONCAVE NORTHWESTERLY, HAVING A RADIUS OF 274.00 FEET, A CENTRAL ANGLE OF 65º56’00”, A TANGENT DISTANCE OF 177.71 FEET, A CHORD BEARING OF S62°58’00”W AND A CHORD DISTANCE OF 298.19 FEET TO THE END OF SAID CURVE; THENCE N84°04’00”W, A DISTANCE OF 51.88 FEET TO A POINT OF CURVATURE; THENCE 23.34 FEET ALONG THE ARC OF A CURVE, CONCAVE SOUTHEASTERLY, HAVING A RADIUS OF 28.12 FEET, A CENTRAL ANGLE OF 47°33’20”, A TANGENT DISTANCE OF 12.39 FEET, A CHORD BEARING OF S72°09’20”W AND A CHORD DISTANCE OF 22.68 FEET TO THE END OF SAID CURVE; THENCE S48°22’40”W, A DISTANCE OF 15.95 FEET; THENCE S61°46’46”W, A DISTANCE OF 42.65 FEET; THENCE S88°34’58’W, A DISTANCE OF 42.65 FEET; THENCE N52°20’45”W, A DISTANCE OF 307.01 FEET; THENCE S82°39’15”W, A DISTANCE OF 15.95 FEET; THENCE N52°20’45”W, A DISTANCE OF 36.52 FEET; THENCE S37°44’08”W, A DISTANCE OF 15.18 FEET TO THE POINT OF BEGINNING.
C. INGRESS/EGRESS & UTILITY EASEMENT (Road adjacent to Buildings 3, 4 & Garage)
A PARCEL OF LAND LYING IN SECTION 19, TOWNSHIP 28 SOUTH, RANGE 18 EAST, HILLSBOROUGH COUNTY, FLORIDA, BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:
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COMMENCE AT THE SOUTHWEST CORNER OF SAID SECTION 19; THENCE WITH THE WESTERLY BOUNDARY LINE OF SAID SECTION 19, N00°03’24”W, A DISTANCE OF 1193.04 FEET; THENCE DEPARTING SAID LINE, N89°56’36”E, A DISTANCE OF 62.00 FEET TO A POINT ON THE EASTERLY RIGHT-OF-WAY LINE OF HENDERSON ROAD; THENCE WITH SAME, N00°03’24”W, A DISTANCE OF 465.85 FEET TO THE POINT OF BEGINNING; THENCE S72°28’39”E, A DISTANCE OF 14.70 FEET; THENCE N89°56’36”E, A DISTANCE OF 32.75 FEET; THENCE N73°09’04”E, A DISTANCE OF 11.17 FEET; THENCE N37º44’08”E, A DISTANCE OF 428.67 FEET; THENCE S52°20’45”E, A DISTANCE OF 36.52 FEET; THENCE S37°39’15’W, A DISTANCE OF 398.71 FEET; THENCE S7°20’44”E, A DISTANCE OF 26.25 FEET; THENCE S52º20’45”E, A DISTANCE OF 204.60 FEET; THENCE N88°13’17”E, A DISTANCE OF 37.26 FEET; THENCE N48°47’20”E, A DISTANCE OF 45.55 FEET; THENCE N43°13’17”E, A DISTANCE OF 69.22 FEET; THENCE N37°39’15”E, A DISTANCE OF 291.31 FEET; THENCE S52°20’45”E, A DISTANCE OF 50.84 FEET; THENCE S88°34’58”W, A DISTANCE OF 21.47 FEET; THENCE S37°39’15”W, A DISTANCE OF’ 321.96 FEET; THENCE S48°47’20”W, A DISTANCE OF 77.69 FEET TO A POINT OF CURVATURE; THENCE 89.02 FEET ALONG THE ARC OF A CURVE, CONCAVE NORTHERLY, HAVING A RADIUS OF 64.67 FEET, A CENTRAL ANGLE OF 78°51’56”, A TANGENT DISTANCE OF 53.18 FEET, A CHORD BEARING OF S88°13’17”W AND A CHORD DISTANCE OF 82.15 FEET TO THE POINT OF TANGENCY; THENCE N52°20’45”W, A DISTANCE OF 194.60 FEET TO A POINT OF CURVATURE; THENCE 46.07 FEET ALONG THE ARC OF A CURVE, CONCAVE SOUTHERLY, HAVING A RADIUS OF 29.33 FEET, A CENTRAL ANGLE OF 90°00’00”, A TANGENT DISTANCE OF 29.33 FEET, A CHORD BEARING OF S82°39’15”W AND A CHORD DISTANCE OF 41.48 FEET TO THE POINT OF TANGENCY; THENCE S37°39’15”W, A DISTANCE OF 87.68 FEET TO A POINT ON THE EASTERLY RIGHT-OF-WAY OF HENDERSON ROAD; THENCE WITH SAME, N00°03’24”W, A DISTANCE OF 44.65 FEET; THENCE DEPARTING SAID RIGHT-OF-WAY N38°28’49”E, A DISTANCE OF 67.19 FEET; THENCE N21º31’04”W, A DISTANCE OF 7.50 FEET; THENCE S89°56’36”W, A DISTANCE OF 39.12 FEET TO A POINT ON THE EASTERLY RIGHT-OF-WAY OF HENDERSON ROAD; THENCE WITH SAME, N00°03’24”W, A DISTANCE OF 30.78 FEET TO THE POINT OF BEGINNING.
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D. UTILITY EASEMENT (Sanitary Easement Outside of Ring Road Easement)
A PARCEL OF LAND LYING IN SECTION 19, TOWNSHIP 28 SOUTH, RANGE 18 EAST, HILLSBOROUGH COUNTY, FLORIDA, BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:
COMMENCE AT THE SOUTHWEST CORNER OF SAID SECTION 19, THENCE N00°03’24”W, A DISTANCE OF 1193.04 FEET, THENCE N89°56’36”E, A DISTANCE OF 62.00 FEET TO THE EAST RIGHT-OF-WAY LINE OF HENDERSON ROAD; THENCE RUNNING ALONG SAID EAST RIGHT-OF-WAY LINE N00°03’24”W, A DISTANCE OF 842.08 FEET, THENCE DEPARTING SAID EAST RIGHT-OF-WAY LINE N89º56’36”E, A DISTANCE OF 998.97 FEET TO THE POINT OF BEGINNING; THENCE N10º11’41”W, A DISTANCE OF 25.77 FEET; THENCE N41°18”15”E, A DISTANCE OF 173.61 FEET TO A POINT ON A NON-TANGENT CURVE; THENCE 43.45 FEET ALONG THE ARC OF SAID CURVE, CONCAVE WESTERLY, HAVING A RADIUS OF 372.25 FEET, A CENTRAL ANGLE OF 06°41’16”, A CHORD BEARING OF S18°15’31”W AND A CHORD DISTANCE OF 43.43 FEET; THENCE S41°18’15”W, A DISTANCE OF 126.60 FEET; THENCE S10°11’41”E A DISTANCE OF 30.45 FEET; THENCE N60°00’00”W, A DISTANCE OF 21.07 FEET TO THE POINT OF BEGINNING.
E. SANITARY EASEMENT
A 10.00 FOOT WIDE EASEMENT BEING 5.00 FEET ON EACH SIDE OF THE FOLLOWING DESCRIBED CENTERLINE LYING WITHIN IN SECTION 19, TOWNSHIP 28 SOUTH, RANGE 18 EAST, HILLSBOROUGH COUNTY, FLORIDA.
COMMENCE AT THE SOUTHWEST CORNER OF THE NORTHWEST 1/4 OF SAID SECTION 19, THENCE, RUNNING ALONG THE WESTERLY BOUNDARY LINE OF SAID SECTION 19, S00º03’24”E, A DISTANCE OF 1402.50 FEET; THENCE DEPARTING SAID BOUNDARY LINE N89º56’36”E, A DISTANCE OF 62.00 FEET TO A POINT ON THE EASTERLY RIGHT-OF-WAY LINE OF HENDERSON ROAD, SAID POINT ALSO BEING THE POINT OF BEGINNING; THENCE DEPARTING SAID RIGHT-OF-WAY LINE N89º56’36”E, A DISTANCE OF 33.45 FEET TO A POINT HEREBY KNOWN AS REFERENCE POINT “A” HEREON; THENCE CONTINUE N89º56’36”E, A DISTANCE OF 21.55 FEET; THENCE S00º03’24”E, A DISTANCE OF 60.00 FEET; THENCE S89º56’36”W, A DISTANCE OF 55.00 FEET TO THE AFORESAID EASTERLY RIGHT-OF-WAY LINE OF HENDERSON ROAD; THENCE WITH SAME N00º03’24”W, A DISTANCE OF 60.00 FEET, TO THE POINT OF BEGINNING.
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TOGETHER WITH:
BEGIN AT THE AFORESAID REFERENCE POINT “A” THENCE N00º30’27”W, A DISTANCE OF 330.43 FEET; THENCE N38º13’15”E, A DISTANCE OF 190.10 FEET; THENCE N37º29’54”E, A DISTANCE OF 349.01 FEET TO A POINT HEREBY KNOWN AS REFERENCE POINT “B” HEREON; THENCE CONTINUE S52º30’55”E, A DISTANCE OF 323.57 FEET; THENCE N89º53’19”E, A DISTANCE OF 158.42 FEET; THENCE N77º24’44”E, A DISTANCE OF 158.17 FEET; THENCE N33º11’48”E, A DISTANCE OF 122.06 FEET; THENCE N33º40’18”E, A DISTANCE OF 209.35 FEET; THENCE N04º02’01”E, A DISTANCE OF 277.19 FEET; THENCE N16º32’40”W, A DISTANCE OF 271.16 FEET; THENCE N38º31’41”W, A DISTANCE OF 116.35 FEET; THENCE S83º10’09”W, A DISTANCE OF 27.92 FEET TO THE POINT OF TERMINATION.
TOGETHER WITH:
BEGIN AT THE AFORESAID REFERENCE POINT “B” THENCE N40º05’21”W, A DISTANCE OF 173.94 FEET, TO THE POINT OF TERMINATION.
KNOLLS
CAPITAL ONE OPERATIONS CENTER
LEGAL DESCRIPTION
All that certain lot, piece or parcel of land, together with all improvements thereon and appurtenances thereunto belonging, situated, lying and being in the Three Chopt District, Henrico County, Virginia, more particularly described as follows:
BEGINNING at a 1/2” rod set, said 1/2” rod being North 74º 50’ 33” West 153.65 feet from the western line of Fort McHenry Parkway; thence North 74º 50’ 33” West 704.14 feet to a 1/2” rod set; thence North 07º 41’ 23” West 54.36 feet to a 1/2” rod set; thence North 22º 04’ 50” West 30.17 feet to a 1/2” rod set; thence North 14º 48’ 18” East 1060.88 feet to 5/8” rod found; thence North 84º 04’ 51” East 547.01 feet to a nail found; thence South 04º 57’ 26” West 1353.08 feet to the 1/2” rod set and point and place of beginning, containing 783, 452.2 square feet or 17.9856 acres.
TOGETHER WITH those certain easements as contained in Cross Easement and Access Road Agreement, by and between Liberty Property Limited Partnership, a Pennsylvania limited partnership and Capital One Bank, a Virginia corporation, dated July 21, 1995, recorded July 28, 1995 in the Henrico County, Virginia Circuit Court Clerk’s Office (the “Clerk’s Office”) in Deed Book 1595, Page 1570; as amended by that certain First Amendment to Cross Easement and Access Road Agreement, made as of October 14, 1998, by and among Val T. Orton, not individually, but solely in his capacity as owner trustee of the COB Real Estate Trust 1995-1, as amended by that certain Amended and Restated Trust Agreement dated as of October 14, 1998; Capital One Bank, a Virginia corporation; and Capital One Realty, Inc., a Delaware corporation, which was recorded in the aforesaid Clerk’s Office.
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KNOLLS TWO PHASE THREE
LEGAL DESCRIPTION
All those certain lots, pieces or parcels of land, together with all improvements thereon and appurtenances thereunto belonging, situated, lying and being in the Three Chopt District, Henrico County, Virginia, more particularly described as follows:
PARCEL “A”:
BEGINNING at a 1/2” rod set in the East line of Cox Road, which point is 455.69 feet north of the northeast intersection of Cox Road and North Park Drive; thence along said road along a curve to the left with a radius of 730.00 feet, an arc length of 166.04 feet, a chord bearing of North 31º 29’ 18” East, and a chord of 165.68 feet to a 1/2” rod set; thence leaving said road South 67º 13’ 29” East 105.83 feet to a 1/2” rod set; thence North 82º 18’ 18” East 268.63 feet to a 1/2” rod set; thence North 32º 00’ 21” East 120.34 feet to a 1/2” rod set; thence North 82º 18’ 18” East 195.14 feet to a 1/2” rod set; thence South 14º 48’ 18” West 74.12 feet to a point; thence South 74º 50’ 33” East 771.57 feet to a nail found; thence South 12º 30’ 00” West 226.36 feet to a 5/8” rod found; thence South 35º 00’ 00” West 314.35 feet to a 1/2” rod found; thence North 89º 06’ 16” West 643.34 feet to a 1/2” rod set; thence North 78º 18’ 03” West 285.63 feet to a 5/8” rod found; thence North 30º 25’ 12” West 319.78 feet to a 1/2” rod set; thence North 39º 39’ 15” West 186.65 feet to the point and place of beginning, containing 16.8499 acres, or 733981.2 sq. ft.
PARCEL “B”:
BEGINNING at a 1/2” rod set at the northeast corner of Parcel “A” as described above; thence South 22º 04’ 50” East 30.17 feet to a 1/2” rod set; thence South 07º 41’ 23” East 54.36 feet to a 1/2” rod set; thence North 74º 50’ 33” West 38.91 feet to a point; thence North 14º 48’ 18” East 74.12 feet to the point and place of beginning, containing 0.0378 acres, or 1645.7 sq. ft.
TOGETHER WITH those certain easements as contained in Cross Easement and Access Road Agreement, by and between Liberty Property Limited Partnership, a Pennsylvania limited partnership and Capital One Bank, a Virginia corporation, dated July 21, 1995, recorded July 28, 1995 in Deed Book 1595, Page 1570; as amended by that certain First Amendment to Cross Easement and Access Road Agreement, made as of October 14, 1998, by and among Val T. Orton, not individually, but solely in his capacity as owner trustee of the COB Real Estate Trust 1995-1, as amended by that certain Amended and Restated Trust Agreement dated as of October 14, 1998; Capital One Bank, a Virginia corporation; and Capital One Realty, Inc., a Delaware corporation, which was recorded in the aforesaid Clerk’s Office.
17
KNOLLS OFFICE BUILDING
LEGAL DESCRIPTION
All that certain lot, piece or parcel of land, together with all improvements thereon and appurtenances thereunto belonging, situated, lying and being in the Three Chopt District, Henrico County, Virginia, more particularly described as follows:
Situated, lying, and being in the Three Chopt District of Henrico County, Virginia, and being more particularly described as follows:
BEGINNING at a nail set on the east line of Cox Road, said point being 621.74 feet from the east line of North Park Drive;
Thence along a curve to the left having a radius of 730.00 feet and an arc length of 129.55 feet, being subtended by a chord of North 19º 53’ 21” East for a distance of 129.38 feet to a rod set;
Thence North 14º 48’ 18” East for a distance of 540.93 feet to a nail set;
Thence along a curve to the right having a radius of 40.00 feet and an arc length of 39.27 feet, being subtended by a chord of North 42º 55’ 50” East for a distance of 37.71 feet to a rod set;
Thence along a curve to the left having a radius of 50.00 feet and an arc length of 148.20 feet, being subtended by a chord of North 13º 51’ 31” West for a distance of 99.61 feet to a brick nail found;
Thence North 14º 48’ 18” East for a distance of 38.09 feet to a brick nail found;
Thence South 82º 00’ 00” East for a distance of 591.56 feet to a point;
Thence South 14º 48’ 18” West for a distance of 620.88 feet to a rod set;
Thence South 82º 18’ 18” West for a distance of 195.14 feet to a rod set;
Thence South 32º 00’ 21” West for a distance of 120.34 feet to a nail set;
Thence South 82º 18’ 18” West for a distance of 268.63 feet to a rod set;
Thence North 67º 13’ 29” West for a distance of 105.83 feet to a nail set; and being the point of beginning.
Said property contains 9.735 acres more or less.
TOGETHER WITH those certain easements as contained in Cross Easement and Access Road Agreement, by and between Liberty Property Limited Partnership, a Pennsylvania limited partnership and Capital One Bank, a Virginia corporation, dated July 21, 1995, recorded July 28, 1995 in Deed Book 1595, Page 1570; as amended by that certain First Amendment to Cross Easement and Access Road Agreement, made as of October 14, 1998, by and among Val T. Orton, not individually, but solely in his capacity as owner trustee of the COB Real Estate Trust 1995-1, as amended by that certain Amended and Restated Trust Agreement dated as of October 14, 1998; Capital One Bank, a Virginia corporation; and Capital One Realty, Inc., a Delaware corporation, which was recorded in the aforesaid Clerk’s Office.
18
SCHEDULE D
Environmental Matters
No exceptions applicable.
Schedule - D
Schedule G
SCHEDULE G
CAPITAL ONE OPERATIONS CENTER
PERMITTED ENCUMBRANCES
| 1. | Terms, conditions, obligations and provisions contained in that certain Cross. Easement and Access Road Agreement, by and between Liberty Property Limited Partnership, a Pennsylvania limited partnership and Capital One Bank, a Virginia corporation, dated July 21, 1995, recorded July 28, 1995 in Deed Book 2595, Page 1570; as amended by that certain First Amendment to Cross Easement and Access Road Agreement, made as of October 14, 1998, by and among Val T. Orton, not individually, but solely in his capacity as owner trustee of the COB Real Estate Trust 1995-1, as amended by that certain Amended and Restated Trust Agreement dated as of October 14, 1998; Capital One Bank, a Virginia corporation; and Capital One Realty, Inc., a Delaware corporation, recorded November , 1998 in Deed Book , page ; as located and shown on plat of survey made by Charles H. Fleet & Associates, P.C., Engineers, Land Surveyors, Planners, entitled “4871 COX ROAD HENRICO COUNTY, VIRGINIA”, dated November 4, 1998, last revised November , 1995. See instruments and plats for particulars. |
| 2. | Covenants, conditions, restrictions, obligations, easements, assessments, approval of plans recorded in Deed Book 2625, Page 1767, incorporating by reference the terms and provisions of prior Declaration, dated as of September 25, 1981, recorded in Deed Book 1841, Page 1106, as subsequently amended (the “Declaration”). |
| 3. | Right Of Way Agreement by and between First Security Bank of Utah, N.A., As Owner Trustee for COB Real Estate Trust 1995-1, a Virginia Trust created U-T-A dated 11-03-95, and Virginia Electric and Power Company, dated April 29, 1996, recorded May 27, 1996, in Deed Book 2651, Page 1806. Grants the perpetual right, privilege non-exclusive and easement over, under, through, upon and across the property 15-feet wide to lay, construct, operate and maintain for buried cables and appurtenances thereto along western lot line as shown on plat attached thereto; and as located and shown on plat of survey made by Charles H. Fleet & Associates, P.C., Engineers, Land Surveyors, Planners, entitled “4871 COX ROAD HENRICO COUNTY, VIRGINIA”, dated November 4, 1998, last revised November , 1998. See instrument and plats for particulars. |
| 4. | Deed of Easement by and between Capital One Bank, a Virginia banking corporation and County of Henrico, Virginia, dated August 28, 1996, recorded November 6, 1996, in Deed Book 2683, Page 670. Grants easement of right of way to construct, operate and maintain drainage & utility facilities across acreage, with the right of ingress, egress, as shown on plat attached thereto and retained in Plat Book 102, at Pages 252-253; and as located and shown on plat of survey made by Charles H. Fleet & Associates, P.C., Engineers, Land Surveyors, Planners, entitled “4871 COX ROAD HENRICO COUNTY, VIRGINIA”, dated November 4, 1998, last revised November , 1998. See instrument and plats for particulars. |
| 5. | Plat of survey made by Charles H. Fleet & Associates, P.C., Engineers, Land Surveyors, Planners, entitled “4871 COX ROAD HENRICO COUNTY, VIRGINIA”, dated November 4, 1998, last revised November , 1998, recorded November , 1998, in the Clerk’s office, Circuit Court, Henrico County, Virginia, in Plat Book , at Page , discloses the following matters adverse to the title herein insured: |
Schedule G
SCHEDULE G
CAPITAL ONE OPERATIONS CENTER
PERMITTED ENCUMBRANCES
| a) | Wood screen along portion of western side of lot. |
| b) | Setback lines as shown on plat, which have not been violated. |
| c) | Wetlands along portion of western side of property. |
NOTE: While such matters are excluded from the coverage of this policy, attention is directed to the fact that said plat shows that portions of the insured premises constitute Wetlands and are subject to the provisions of state and federal regulations.
| d) | Gate and appurtenances thereto crossing western side lot line. |
| e) | Light poles, water meters or valves, telephone manholes, manholes, drop inlets, transformers, fire hydrants, concrete walls, asphalt, bollards, and concrete block fire lane lie within portions of insured premises. |
| f) | Walkways with lights, curbing and paved parking merging with adjoining property. |
| g) | Reference is made to the Surveyor’s “Notes” as shown on plat. |
Schedule G
SCHEDULE G
CAPITAL ONE OPERATIONS CENTER
PERMITTED ENCUMBRANCES
SCHEDULE B - PART II:
In addition to the matters set forth in Part I of this Schedule, the title of the estate or interest in the land described or referred to in Schedule A is subject to the following matters, if any be shown, but the Company insures that such matters are subordinate to the lien or charge of the insured mortgage upon said estate or interest:
Schedule G
KNOLLS TWO PHASE THREE
PERMITTED ENCUMBRANCES
| 1. | Covenants, conditions, restrictions, obligations, easements, assessments, approval of plans recorded in Deed Book 1841, Page 1106; Deed Book 1929, Page 1565; Deed Book 1938, Page 923; Deed Book 1957, Page 1037; Deed Book 1959, Page 692; Deed Book 1961, Page 673; Deed Book 1979, Page 1774; Deed Book 2113, Page 608; Deed Book 2163, Page 2259; and in Deed Book 2143, Page 501. |
| 2. | Easement granted Virginia Electric and Power Company, dated August 8, 1949, recorded September 16, 1949, in Deed Book 482, Page 312. Grants pole line easement and appurtenances thereto, with the right of ingress, egress and clearage. No plat recorded therewith. See instrument for particulars. |
| 3. | Deed of Easement by and between Capital One Bank, a Virginia banking corporation and County Henrico, Virginia, dated February 3, 1997, recorded February 3, 1997, in Deed Book 2709, Page 929. Grants easement of right of way to construct, operate and maintain utility lines, including |
Schedule G
KNOLLS TWO PHASE THREE
PERMITTED ENCUMBRANCES
accessories and appurtenances thereto, over, under, through, and across acreage, with the right of ingress, egress, as shown on plat attached thereto and retained in Plat Book 104, at page 79; and also located as shown on that certain survey made by Charles H. Fleet & Associates, P.C., Engineers, Land Surveyors Planners, entitled “4851 COX ROAD HENRICO COUNTY, VIRGINIA”, dated November 5, 1998, last revised November , 1998. See instrument and plats for particulars.
| 4. | Deed of Easement by and between Capital One Bank, a Virginia banking corporation and County of Henrico, Virginia, dated August 28, 1996, recorded November 6, 1996, in Deed Book 2553, Page 670. Grants easement of right of way to construct, operate and maintain drainage & utility facilities across acreage, with the right of ingress, as shown on plat attached thereto and retained in Plat Book 102, at Pages 262-263; and also located as shown on that certain survey made by Charles H. Fleet & Associates, P.C., Engineers, Land Surveyors, Planners, entitled “4851 COX ROAD HENRICO COUNTY, VIRGINIA”, dated November 6, 1998, last revised November , 1998. See instrument and plats for particulars. |
| 5. | Counterpart Water and Sewer Agreement by and between Capital One Bank, a Virginia banking corporation and County of Henrico, Virginia, recorded August 2, 1996, in Deed Book 2665, Page 1892, with plat attached with instrument and retained in Plat Book 102, at Page 170. Provides for the construction, operation and maintenance of water distribution and sewerage disposal systems, incorporating by reference the terms and provisions of prior agreements. See instrument and plat for particulars. |
| 6. | Sewer Agreement with Henrico County, Virginia, dated August 4, 1980, recorded in Deed Book 1815, Page 1290. Provides for the construction, operation and maintenance of a sewerage disposal system to service premises; and also located as shown on that certain survey made by Charles H. Fleet & Associates, P.C., Engineers, Land Surveyors, Planners, entitled “4851 COX ROAD HENRICO COUNTY, VIRGINIA”, dated November 6, 1998, last revised November __, 1998. See instrument for particulars. |
NOTE: Amendment dated August 7, 1980, recorded September 30, 1980, in Deed Book 1815, Page 1269.
NOTE: Amendment dated October 24, 1984, recorded November 15, 1984, in Deed Book 1934, Page 1022.
NOTE: Amendment dated June 24, 1987, recorded July 21, 1987, in Deed Book 2086, Page 526.
NOTE: Amendment dated May 4, 1989, recorded July 13, 1989, in Deed Book 2188, Page 280.
| 7. | Water Agreement with Henrico County, Virginia, dated August 4, 1980, recorded in Deed Book 1815, Page 1272. Provides for the construction, operation and maintenance of a water distribution system to service premises. See instrument for particulars. |
| 8. | Easement: Innsbrook North Associates, a Virginia general partnership to the County of Henrico, Virginia, dated December 12, 1986, recorded January 21, 1987, in Deed Book 2048, Page 893. Grants easement for utilities and appurtenances thereto, with the right of ingress, egress and clearage. Plat recorded therewith shows easement. Shown on a plat of survey made by Foster & Miller, P.C., dated July 20, 1995, entitled “Plat of Two Parcel Totaling 26.585 Acres Located On The East Line of Cox Road, Three Chopt |
Schedule G
KNOLLS TWO PHASE THREE
PERMITTED ENCUMBRANCES
District, Henrico County, Virginia” and also located as shown on that certain survey made by Charles H. Fleet & Associates, P.C., Engineers, Land Surveyors, Planners, entitled “ 4851 COX ROAD HENRICO COUNTY, VIRGINIA”, dated November 6, 1998, last revised November , 1998. See instrument and plats for particulars.
| 9. | Terms, conditions, obligations and provisions contained in that certain Cross Easement and Access Road Agreement, by and between Liberty Property Limited Partnership, a Pennsylvania limited partnership and Capital One Bank, a Virginia corporation, dated July 21, 1995, recorded July 28, 1995 in Deed Book 2595, Page 1570; as amended by that certain First Amendment to Cross Easement and Access Road Agreement, made as of October 14, 1998, by and among Val T. Orton, not individually, but solely in his capacity as owner trustee of the COB Real Estate Trust 1995 - 1, as amended by that certain Amended and Restated Trust Agreement dated as of October 14, 1998; Capital One Bank, a Virginia corporation; and Capital One Realty, Inc., a Delaware corporation, recorded November , 1998 in Deed Book , Page . Located as shown on that certain survey made by Charles H. Fleet & Associates, P.C., Engineers, Land Surveyors, Planners, entitled “4851 COX ROAD HENRICO COUNTY, VIRGINIA”, dated November 6, 1998, last revised November , 1998. See instruments and plats for particulars. |
| 10. | Restrictions, covenants, conditions, easements, etc., by Capital One Bank, a Virginia banking corporation, dated December 2, 1995, recorded January 10, 1996, in Deed Book 2527, Page 1187 as shown on plat retained in Plat Book 102, at Page 6; and also located as shown on that certain survey made by Charles H. Fleet & Associates, P.C., Engineers, Land Surveyors, Planners, entitled “4851 COX ROAD HENRICO COUNTY, VIRGINIA”, dated November 6, 1998, last revised November , 1998. See instrument and plats for particulars. |
NOTE: Subject to the Exclusions from Coverage and the Provisions of the Conditions and Stipulations contained in the policy, the Company hereby insures the Insured against loss or damage which the Insured shall sustain by reason of the entry of any court order or judgment which constitutes a final determination and denies the right to maintain the existing improvements within the Wetlands designated area.
| 11. | Reservations as contained in Deed by and between Innsbrook North Associates, a Virginia general partnership and Capital One Bank, a Virginia Banking corporation, a Pennsylvania limited partnership, dated July 21, 1995, recorded July 28, 1995, recorded in Deed Book 2595, Page 1563; and located as shown on that certain survey made by Charles H. Fleet & Associates, P.C., Engineers, Land Surveyors, Planners, entitled “4851 COX ROAD HENRICO COUNTY, VIRGINIA”, dated November 6, 1998, last revised November , 1998. See instrument and plat for the particulars. |
| 12. | Agreement: Capital One Bank, a Virginia banking corporation and Liberty Property Development Corporation, a Pennsylvania corporation, dated July 21, 1995, recorded July 28, 1995, in Deed Book 2595, Page 1582. See instrument for particulars. |
| 13. | Plat of survey made by Charles H. Fleet & Associates, P.C., Engineers, Land Surveyors, Planners, entitled “ 4851 COX ROAD HENRICO COUNTY, VIRGINIA”, dated November 6, 1998, last revised November , 1998, a copy of plat is recorded November , 1998, in Plat Book , at Page , discloses the following matters adverse to the title herein insured: |
a) 20-foot wide temporary construction easement across the easterly portion of insured premises.
Schedule G
KNOLLS TWO PHASE THREE
PERMITTED ENCUMBRANCES
| b) | Variable width easement across the easterly portion of insured premises. |
| c) | 4.01 acres of Wetlands across the southern portion of insured premises. |
NOTE: While such matters are excluded from the coverage of this policy, attention is directed to the fact that said plat shows that portions of the insured premises constitute Wetlands and are subject to the provisions of state and federal regulations.
| d) | Sanitary manholes, light poles, drainage inlets, concrete curbing, concrete walks, gas valves, water vaults, water valves, and electric transformers lie within portions of insured premises. |
| e) | Zoning line crossing eastern portion of insured premises. |
| f) | 234” RCP crossing northwestern corner of property. Rights of others to the natural flow of water there through. |
| g) | Setback lines as shown on plat, which have not been violated. |
| h) | Walkways with lighting, curbing and paved parking merging with adjoining property. |
| i) | Reference is made to the Surveyor’s “Notes” as shown on plat. |
Schedule G
KNOLLS OFFICE BUILDING
PERMITTED ENCUMBRANCES
| 1. | Covenants, restrictions, obligations, easements, assessments, approval of plans and conditions recorded in Deed Book 1841, Page 1106: Deed Book 1929, Page 1565; Deed Book 1938, Page 923; Deed Book 1957, Page 1037; Deed Book 1959, Page 692; Deed Book 1961, Page 678; Deed Book 1979, Page 1774; Deed Book 2119, Page 608; Deed Book 2165, Page 1259; and in Deed Book 2143, Page 501. |
| 2. | Easement granted Virginia Electric and Power Company, dated August 8, 1949, recorded September 16, 1949, in Deed Book 482, Page 312. Grants easement for a pole line and appurtenances thereto, with the right of ingress, egress and clearage. No plat recorded therewith. See instrument for particulars. |
| 3. | Easement granted The Chesapeake and Potomac Telephone Company of Virginia, dated August 2, 1990, recorded August 23, 1990, in Deed Book 2257, Page 755. Grants easement for a communication system and appurtenances thereto, with the right of ingress, egress and clearage. Plat recorded therewith shows easement along the west and north lines of Cox Road. Also as shown on a plat of survey made by Foster & Miller, P.C., dated February 13, 1996, entitled “As Built Survey, 9.735 Acres Located On The East Line of Cox Road, Three Chopt District, Henrico County, Virginia” recorded in Plat Book 102, at Pages 24 and 25; and plat of survey made by Foster & Miller, P.C., Engineers, Surveyors, Planners, entitled “ALTA/ACSM LAND TITLE SURVEY 9.735 ACRES LOCATED ON THE EAST LINE OF COX ROAD, THREE CHOPT DISTRICT, HENRICO COUNTY, VIRGINIA”, dated November 9, 1998, last revised November , 1998. See instrument and plats for particulars. |
| 4. | Easement granted Virginia Electric and Power Company, dated October 2, 1995, recorded November 7, 1995, in Deed Book 2616, Page 1286. Grants easement for underground conduits and cables and appurtenances thereto, with the right of ingress, egress and clearage. Plat recorded therewith shows easement across the northerly portion of insured premises. Also as shown on a plat of survey made by Foster & Miller, P.C., dated February 13, 1996, entitled “As Built Survey, 9.735 Acres Located On The East Line of Cox Road, Three Chopt District, Henrico County, Virginia” recorded in Plat Book 102, at Pages 24 and 25; and plat of survey made by Foster & Miller, P.C., Engineers, Surveyors, Planners, entitled “ ALTA/ACSM LAND TITLE SURVEY 9.735 ACRES LOCATED ON THE EAST LINE OF COX ROAD, THREE CHOPT DISTRICT, HENRICO COUNTY, VIRGINIA”, dated November 9, 1998, last revised November , 1998. See instrument and plats for particulars. |
Schedule G
KNOLLS OFFICE BUILDING
PERMITTED ENCUMBRANCES
| 5. | Sewer Agreement with Henrico County, Virginia, dated August 4, 1980, recorded in Deed Book 1815, Page 1290. Provides for the construction, operation and maintenance of a sewerage disposal system to service premises. See instrument for particulars. |
NOTE: Amendment dated August 7, 1980, recorded September 30, 1980, in Deed Book 1815, Page 1269.
NOTE: Amendment dated October 24, 1984, recorded November 16, 1984, in Deed Book 1934, Page 1022.
NOTE: Amendment dated June 24, 1987, recorded July 21, 1987, in Deed Book 2086, Page 526.
NOTE: Amendment dated May 4, 1989, recorded July 13, 1989, in Deed Book 2188, Page 280.
| 6. | Water Agreement with Henrico County, Virginia, dated August 4, 1980, recorded in Deed Book 1815, Page 1272. Provides for the construction, operation and maintenance of a water distribution system to service premises. See instrument for particulars. |
| 7. | Deed of Easement by and between First Security Bank of Utah, N. A., as Owner Trustee for COB Real Estate 1995 -1, a Virginia Trust and County of Henrico, Virginia, dated August 28, 1996, recorded November 6, 1996, in Deed Book 2683, Page 666. Grants easement of right of way to construct, operate and maintain drainage facilities, including accessories and appurtenances thereto over, under, through and across property 20’ wide, with the right of ingress and egress, as shown on plat attached thereto; and located as shown on plat of survey made by Foster & Miller, P.C., Engineers, Surveyors, Planners, entitled “ ALTA/ACSM LAND TITLE SURVEY 9.735 ACRES LOCATED ON THE EAST LINE OF COX ROAD, THREE CHOPT DISTRICT, HENRICO COUNTY, VIRGINIA”, dated November 9, 1998, last revised November , 1998. See instrument and plats for particulars. |
| 8. | Common Easement and Access Road Agreement dated August 10, 1989, recorded August 17, 1989, in Deed Book 2202, Page 1892. Provides for access road 60’ in width, 30’ of which is located at the northeast corner of insured premises, as more fully shown on plat of survey attached thereto. Also as shown on a plat of survey made by Foster & Miller, P.C., dated February 13, 1996, entitled “As Built Survey, 9.735 Acres Located On The East Line of Cox Road, Three Chopt District, Henrico County, Virginia” recorded in Plat Book 102, at pages 24 and 25 ; and plat of survey made by Foster & Miller, P.C., Engineers, Surveyors, Planners, entitled “ALTA/ACSM LAND TITLE SURVEY 9.735 ACRES LOCATED ON THE EAST LINE OF COX ROAD, THREE CHOPT DISTRICT, HENRICO COUNTY, VIRGINIA”, dated November 9, 1998, last revised November , 1998. See instrument and plats for particulars. |
NOTE: Amended by instrument recorded December 11, 1989, in Deed Book 2220, Page 1472.
| 9. | Easement : Innsbrook North Assoc. to The City of Richmond, dated June 14, 1990, recorded July 6, 1990 in Deed Book 2250, Page 990. Grants easement for gas lines and appurtenances thereto, with the right of ingress, egress and clearage. Plat recorded therewith shows easement across the northeast portion of insured premises north of Cox Road .Also as shown on a plat of survey made by Foster & Miller, P.C., dated February 13, 1996, entitled “As Built Survey, 9.735 Acres Located On The East Line of Cox Road, Three Chopt District, Henrico County, Virginia” recorded in Plat Book 102, at Pages 24 and 25; and plat of survey made by Foster & Miller, P.C., |
Schedule G
KNOLLS OFFICE BUILDING
PERMITTED ENCUMBRANCES
Engineers, Surveyors, Planners, entitled “ALTA/ACSM LAND TITLE SURVEY 9.735 ACRES LOCATED ON THE EAST LINE OF COX ROAD, THREE CHOPT DISTRICT, HENRICO COUNTY, VIRGINIA”, dated November 9, 1998, last revised November , 1998. See instrument and plats for particulars.
| 10. | Easement: Innsbrook North Associates to County of Henrico, Virginia, dated June 13, 1990, recorded August 6, 1990, in Deed Book 2254, Page 1235. Grants easement for utility lines and appurtenances thereto, with the right of ingress, egress and clearage. Plat recorded therewith shows easement cross the northerly portion of insured premises. Also as shown on a plat of survey made by Foster & Miller, P. C., dated February 13, 1996, entitled “As Built Survey, 9.735 Acres Located On The East Line of Cox Road, Three Chopt District, Henrico County, Virginia” recorded in Plat P. C.; Engineers, Surveyors, Planners, entitled “ALTA/ACSM LAND TITLE SURVEY 9.735 ACRES LOCATED ON THE EAST LINE OF COX ROAD, THREE CHOPT DISTRICT, HENRICO COUNTY, VIRGINIA”, dated November 9, 1998, last revised November , 1998. See instrument and plats for particulars. |
| 11. | Terms, conditions, obligations and provisions contained in that certain Cross Easement and Access Road Agreement, by and between Liberty Property Limited Partnership, a Pennsylvania limited partnership and Capital One Bank, a Virginia corporation, dated July 21, 1995, recorded July 28, 1995 in Deed Book 2595, Page 1570; as amended by that certain First Amendment to Cross Easement and Access Road Agreement, made as of October 14, 1998, by and among Val T. Orton, not individually, but solely in his capacity as owner trustee of the COB Real Estate Trust 1995 - 1, as amended by that certain Amended and Restated Trust Agreement dated as of October 14, 1998; Capital one Bank, a Virginia corporation; and Capital One Relaty, Inc., a Delaware corporation, recorded November , 1998, in the aforesaid Clerk’s Office in Deed Book , Page , and located as shown on plat of survey made by Foster & Miller, P. C., Engineers, Surveyors, Planners, entitled “ALTA/ACSM LAND TITLE SURVEY 9.735 ACRES LOCATED ON THE EAST LINE OF COX ROAD, THREE CHOPT DISTRICT, HENRICO COUNTY, VIRGINIA”, dated November 9, 1998, last revised November , 1998. See instrument and plats for particulars. |
| 12. | Reservations as contained in Deed by and between Innsbrook North Associates, a Virginia general partnership and Liberty Property Limited Partnership, a Pennsylvania limited partnership, dated July 21, 1995, recorded July 28, 1995, in Deed Book 2595, Page 1555; and located as shown on plat of survey made by Foster & Miller, P. C., Engineers, Surveyors, Planners, entitled “ALTA/ACSM LAND TITLE SURVEY 9. 735 ACRES LOCATED ON THE EAST LINE OF COX ROAD, THREE CHOPT DISTRICT, HENRICO COUNTY, VIRGINIA”, dated November 9, 1998, last revised November , 1998. See instruments and plat for particulars. |
| 13. | Counterpart Water and Sewer Agreement with Liberty Property Limited Partnership to Henrico County, Virginia, dated August 14, 1995, recorded August 23, 1995, in Deed Book 2600, Page 1532. Provides for the construction, operation and maintenance of water distribution and sewerage disposal systems to service premises, incorporating by reference the terms and provisions of prior agreements. See instrument for particulars. |
| 14. | Deed of Easement from Liberty Property Limited Partnership, a Pennsylvania limited partnership to County of Henrico, Virginia, dated February 14, 1996, recorded February 15, 1996, in Deed Book 2632, Page 2444. Grants easement for utility lines and appurtenances thereto, together with the right of ingress, egress and clearage. Plat attached therewith shows |
Schedule G
KNOLLS OFFICE BUILDING
PERMITTED ENCUMBRANCES
easements crossing portions of insured premises. Also as shown on a plat of survey made by Foster & Miller, P.C., dated February 13, 1996, entitled “As Built Survey, 9.735 Acres Located on The East Line of Cox Road, Three Chopt District, Henrico County, Virginia” recorded in Plat Book 102, at Pages 24 and 25; and plat of survey made by Foster & Miller, P. C., Engineers, Surveyors, Planners, entitled “ALTA/ACSM LAND TITLE SURVEY 9.735 ACRES LOCATED ON THE EAST LINE OF COX ROAD, THREE CHOPT DISTRICT, HENRICO COUNTY, VIRGINIA”, dated November 9, 1998, last revised November , 1998. See instrument and plats for particulars.
| 15. | Plat of survey made by Foster & Miller, P. C., Engineers, Surveyors, Planners, entitled “ALTA/ACSM LAND TITLE SURVEY 9.735 ACRES LOCATED ON THE EAST LINE OF COX ROAD, THREE CHOPT DISTRICT, HENRICO COUNTY, VIRGINIA”, dated November 9, 1998, last revised November , 1998, recorded in Plat Book , at Pages and , discloses the following matters adverse to the title herein insured: |
| a) | Wetlands across the northerly portion of insured premises. |
NOTE: While such matters are excluded from the coverage of this policy, attention is directed to the fact that said plat shows that portions of the insured premises constitute Wetlands and are subject to the provisions of state and federal regulations.
| b) | Fire hydrants, light poles and ground lights, transformers, drainage structures, emergency phones, telephone pedestals and manholes, and water valves lie within portions of insured premises. |
| c) | Brick building for electric pad, concrete walls and walks, concrete curb and gutter, concrete curbing, asphalt, signs, chain and drainage structures cross portions of easement areas. |
NOTE: Subject to the Conditions and Stipulations of the Policy and the Exclusions from Coverage contained in the Policy, the Company hereby insures the Insured against any monetary loss or cost occasioned by the final decree of a court of competent jurisdictions ordering the removal of the aforesaid encroaching/violating improvement(s), at any time prior to their demolition or their destruction by fire or other hazard, but not thereafter.
| d) | Setback lines as shown, which have not been violated. |
| e) | Walkways with lighting, curbing and paved parking merging with adjoining property. |
| f) | Reference is made to the Surveyor’s “Notes” as shown on plat. |
Schedule G
KNOLLS OFFICE BUILDING
PERMITTED ENCUMBRANCES
SCHEDULE B - PART II:
In addition to the matters set forth in Part I of this Schedule, the title of the estate or interest in the land described or referred to in Schedule A is subject to the following matters, if any be shown, but the Company insures that such matters are subordinate to the lien or charge of the insured mortgage upon said estate or interest:
SCHEDULE G
This policy does not insure against loss or damage by reason of the following exceptions:
GENERAL EXCEPTIONS:
| 1. | Rights or claims of parties in possession not shown by the public records. |
| 2. | Easements or claims of easements not shown by the public records. |
| 3. | Encroachments, overlaps, boundary line disputes, or other matters which would be disclosed by an accurate survey or inspection of the premises. |
| 4. | Any lien, or right to a lien, for services, labor, or material heretofore or hereafter furnished, imposed by law and not shown by the public records. |
| 5. | Any adverse claim to any portion of said land which has been created by artificial means or has accreted to any such portion so created and riparian rights, if any. |
| 6. | Taxes or special assessments which are not shown as existing liens by the public records. |
NOTE: GENERAL EXCEPTIONS NUMBERED **1 thru 6** ABOVE ARE HEREBY DELETED.
SPECIAL EXCEPTIONS:
| 7. | The mortgage, if any, referred to in Item 4 of Schedule A. |
| 8. | The lien of the taxes for the year 2004 and all subsequent years, which are not yet due and payable. |
| 9. | Terms and conditions of that certain Partial Assignment of Rights Under Development Order, between Waters Avenue Land Partners, Ltd., a Florida limited partnership, and Capital One Services, Inc., a Delaware corporation, recorded September 18, 1996 in O.R. Book 8288, Page 652. |
| 10. | Terms and conditions of that certain Assignment of Impact Fee Credits and Restriction on Development Rights, between Waters Avenue Land Partners, Ltd., a Florida limited partnership, and Capital One Services, Inc., a Delaware corporation, recorded September 18, 1996 in O.R. Book 8288, Page 657; as affected by: Modification of Partial Assignment of Rights Under Development Order and Modification of Assignment of Impact Fee Credits and Restrictions on Development Rights, recorded in O.R. Book 9867, Page 846. |
| 11. | Terms and conditions of that certain Reciprocal Stormwater and Drainage Easement by and between Dayton Hudson Corporation, a Minnesota corporation, Waters Avenue Land Partners, |
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Ltd., a Florida limited partnership and Capital One Services, Inc., a Delaware corporation, recorded December 11, 1996 in O.R. Book 8383, Page 1992; as affected by: First Amendment to Reciprocal Stormwater and Drainage Easement, recorded in O.R. Book 8442, Page 798. (As shown on survey prepared by King Engineering Associates, Inc., dated February 12, 2004, last revised February 26, 2004, under Job No.: 5847-001-001.)
| 12. | Terms and conditions contained in Force Main Easement between Dayton Hudson Corporation, a Minnesota corporation, and Capital One Services, Inc., a Delaware corporation, recorded December 11, 1996 in O.R. Book 8383, Page 2012. (As shown on survey prepared by King Engineering Associates, Inc., dated February 12, 2004, last revised February 26, 2004, under Job No.: 5847-001-001.) |
| 13. | Survey prepared by King Engineering Associates, Inc., dated February 12, 2004, last revised February 25, 2004, under Job No. 5847-001-001, shows the following: a) Parking Garage encroaches into easements recorded in O.R. Book 8901, Page 1875 and O.R. Book 9811, Page 1229. |
| 14. | Terms and conditions of the Approval and Mitigation Agreement between Executive Director of the Environmental Protection Commission of Hillsborough County and Towermarc Corporation recorded in O.R. Book 8061, Page 947; as affected by: Assignment and Acceptance, recorded October 8, 1997 in O.R. Book 8747, Page 339.(As to Parcel VI ONLY) (As shown on survey prepared by King Engineering Associates, Inc., dated February 12, 2004, last revised February 26, 2004, under Job No.: 5847-001-001.) |
| 15. | Terms, provisions and obligations of the Short Form Ground and Grant of Easement Agreement by and between Capital One Services, Inc., a Delaware corporation, Lessor, and First Security Bank, National Association, a national banking association, dated September 3, 1999 and recorded in O.R. Book 9811 Page 1229 ; as affected by: |
Amendment to Ground Lease, Short Form Ground Lease and Grant of Easement Agreement, recorded in O.R. Book 10323, Page 1148, as affected by: ASSIGNMENT OF GROUND LEASE, dated September 3, 2003 and filed December 9, 2003 in Official Records Book 13378, Page 1831; as affected by Assignment of Ground Lease, between CAPITAL ONE REALTY, INC., a Delaware corporation and WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION (formerly First Security Bank, N.A.), a national banking association, and VAL T. ORTON, not individually, but solely in their capacities as owner trustee under that certain Amended and Restated Trust Agreement dated as of October 14, 1998, the trust thereunder being referred to as the COB Real Estate Trust 1995-1, dated , recorded in O.R. Book , Page ; as affected by: SECOND AMENDMENT TO GROUND LEASE, SHORT FORM GROUND LEASE AND GRANT OF EASEMENT AGREEMENT AND CONSENT TO ASSIGNMENT OF GROUND LEASE, by and between Capital One Services, Inc., a Delaware corporation and Wells Fargo Bank Northwest, National Association (formerly First Security Bank, N.A., the correct name of which was First Security Bank, National Association), a national banking association, and Val T. Orton, not individually, but solely in their capacities as Owner Trustee under the COB Real Estate Trust 1995-1, dated , recorded in O.R. Book , Page , OF THE PUBLIC RECORDS OF HILLSBOROUGH COUNTY, FLORIDA.
| 16. | Easement granted to Tampa Electric Company, a Florida corporation, according to instrument recorded in O.R. Book 10049 Page 955. |
| 17. | Short Form Lease and Grant of Easement Agreement, between CAPITAL ONE SERVICES, INC., a Delaware corporation and WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION (formerly First Security Bank, N.A.), a national banking association, and VAL T. ORTON, not individually, but solely in their capacities as owner trustee under that certain Amended and Restated Trust Agreement dated as of October 14, 1998, the trust thereunder being referred to as the COB Real Estate Trust 1995-1, dated , recorded in O.R. Book , Page . |
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| 18. | Indenture, Fee and Leasehold Deed of Trust, Mortgage, Security Agreement and Fixture Filing from First Security Bank, N.A., a national banking association, and Val T. Orton, not individually, but solely in their capacities as owner trustee under that certain Amended and Restated Trust Agreement dated as of October 14, 1998, the Trust thereunder being referred to as the COB Real Estate Trust 1995-1, Capital One Realty, Inc., and First Union National Bank, as Indenture Trustee, dated as of October 14, 1998, and filed December 1, 1998, recorded in O.R. Book 9354, Page 1517; as amended by First Modification, between WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION (formerly First Security Bank, N.A.), a national banking association, and VAL T. ORTON, not individually but solely in their capacities as owner trustee under that certain Amended and Restated Trust Agreement dated as of October 14, 1998, the trust thereunder being referred to as the COB Real Estate Trust 1995-1, WACHOVIA BANK, NATIONAL ASSOCIATION (formerly First Union National Bank), not individually, but solely in its capacity as indenture trustee under the Indenture and CAPITAL ONE REALTY, INC., a Delaware corporation, dated , recorded in O.R. Book , Page , Public Records of Hillsborough County, Florida. |
| 19. | Amended and Restated Lease Agreement dated as of October 14, 1998 between First Security Bank, N.A., a national banking association, and Val T. Orton, not individually but solely in their capacities as owner trustee under that certain Amended and Restated Trust Agreement dated as of October 14, 1998, the trust thereunder being referred to as the COB Real Estate Trust 1995-1, as evidenced by that Memorandum of Amended and Restated Lease Agreement dated as of October 14, 1998, filed December 1, 1998 recorded in O.R. Book 9354, Page 1476; as affected by Confirmation of Subordination recorded in O.R. Book 9384, Page 312; and as affected by First Modification, between WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION (formerly First Security Bank, N.A.), a national banking association, and VAL T. ORTON, not individually, but solely in their capacities as owner trustee under that certain Amended and Restated Trust Agreement dated as of October 14, 1998, the trust thereunder being referred to as the COB Real Estate Trust 1995-1 and CAPITAL ONE REALTY, INC., a Delaware corporation, dated , recorded in O.R. Book , Page . |
| 20 | Assignment of Lease from First Security Bank, N.A., a national banking association, and Val T. Orton, not individually, but solely in their capacities as owner trustee under that certain Amended and Restated Trust Agreement dated as of October 14, 1998, the trust thereunder being referred to as the COB Real Estate Trust 1995-1, as assignor to First Union National Bank, not individually but solely in its capacity as Indenture Trustee under that certain Indenture, Fee and Leasehold Deed of Trust, Mortgage, Security Agreement and Fixture Filing dated as of October 14, 1998, as assignee, filed December 1, 1998, recorded in O.R. Book 9354, Page 1662; as affected by First Modification, between WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION (formerly First Security Bank, N.A.), a national banking association, and VAL T. ORTON, not individually but solely in their capacities as owner trustee under that certain Amended and Restated Trust Agreement dated as of October 14, 1998, the trust thereunder being referred to as the COB Real Estate Trust 1995-1, WACHOVIA BANK, NATIONAL ASSOCIATION (formerly First Union National Bank), not individually, but solely in its capacity as indenture trustee under the Indenture and CAPITAL ONE REALTY, INC., a Delaware corporation, dated , recorded in O.R. Book , Page . |
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| 21. | Fee and Leasehold Deed of Trust, Mortgage, Security Agreement and Fixture Filing from First Security Bank, N.A., a national banking association, and Val T. Orton, not individually, but solely in their capacities as owner trustee under that certain Amended and Restated Trust Agreement dated as of October 14, 1998, the trust thereunder being referred to as the COB Real Estate Trust 1995-1, to BTM Capital Corporation, as Beneficiary and Grantee dated as of October 14, 1998, filed December 1, 1998 recorded in O.R. Book 9354, Page 1733; as affected by First Modification, between WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION (formerly First Security Bank, N.A.), a national banking association, and VAL T. ORTON, not individually but solely in their capacities as owner trustee under that certain Amended and Restated Trust Agreement dated as of October 14, 1998, the trust thereunder being referred to as the COB Real Estate Trust 1995-1, BTM CAPITAL CORPORATION, a Delaware corporation and CAPITAL ONE REALTY, INC., a Delaware corporation, dated , recorded in O.R. Book , Page . |
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SCHEDULE J
Allocable Percentages
Capital One Operations Center (Glen Allen, Virginia):
30.057%
Knolls Office Building (Glen Allen, Virginia):
13.559%
Knolls Two Phase Three (Glen Allen, Virginia):
19.774%
Renaissance Business Park Phase III (Tampa, Florida):
18.192%
Renaissance Business Park Phase IV (Tampa, Florida):
18.418%
Exhibit 10.16.2.2
REAFFIRMATION OF GUARANTY
THIS REAFFIRMATION OF GUARANTY (this “Reaffirmation”) is made as of this 1st day of March, 2004, by CAPITAL ONE BANK, a Virginia banking corporation (the “Guarantor”) for the benefit of (i) Wells Fargo Bank Northwest, National Association (formerly, First Security Bank, N.A., the correct name of which was First Security Bank, National Association), a national banking association, and Val T. Orton, not individually, but solely in their capacities as Owner Trustee of the COB Real Estate Trust 1995-1 (collectively, the “Lessor”), (ii) Wachovia Bank, National Association (formerly, First Union National Bank), not individually, but solely in its capacity as Indenture Trustee (the “Indenture Trustee”) and Lawyers Title Realty Services, Inc, in its capacity as deed of trust trustee under the Indenture (the “Deed of Trust Trustee”), (iii) the Note Purchasers, (iv) the Registered Owners and (v) BTM Capital Corporation (the “LC Issuer”). The Lessor, the Indenture Trustee, the Deed of Trust Trustee, the Note Purchasers, the Registered Owners and the LC Issuer are, hereinafter, collectively referred to as the “Obligees”.
RECITALS
WHEREAS, the Guarantor has heretofore executed a Guaranty dated as of October 14, 1998 (as the same may be amended, modified or supplemented from time to time, the “Guaranty”), in favor of the Obligees, pursuant to which the Guarantor guaranteed all of the obligations of Capital One Realty, Inc., a Delaware corporation (the “Lessee”) under (i) that certain Amended and Restated Lease Agreement dated as of October 14, 1998 (together with all supplements and amendments thereto and any memorandum or short form in respect of any thereof entered into for the purpose of recording, the “Lease”) and (ii) that certain Assignment of Lease dated as of October 14, 1998 (together will all supplements and amendments thereto, the “Assignment of Lease”); and
WHEREAS, pursuant to the Lease, the Lessee, with the approval of the Indenture Trustee in accordance with the terms thereof, has requested to (i) substitute all of Lessor’s right, title, and interest in the parcel of real property located in Hillsborough County, Florida and more particularly described in Exhibit A attached hereto and incorporated herein by this reference, together with all of Lessor’s right, title, and interest in the Improvements (as defined in the Lease) thereon and all easements, rights and appurtenances thereto, for all of Lessor’s right, title, and interest in the parcel of real property located in Hillsborough County, Florida and identified in the Lease as Renaissance Business Park Phase I, together with all of Lessor’s right, title, and interest in the Improvements thereon and all easements, rights and appurtenances thereto, and (ii) substitute all of Lessor’s right, title, and interest in the parcel of real property located in Hillsborough County, Florida and more particularly described in Exhibit B attached hereto and incorporated herein by this reference, together with all of Lessor’s right, title, and interest in the Improvements thereon and all easements, rights and appurtenances thereto, for all of Lessor’s right, title, and interest in the parcel of real property located in Hillsborough County, Florida and identified in the Lease as Renaissance Business Park Phase II, together with all of Lessor’s right, title, and interest in the Improvements thereon and all easements, rights and appurtenances thereto; and
WHEREAS, in connection with such substitutions, the Lessor and the Lessee will enter into amendments or modifications to the Lease in the form of (i) that certain First Modification to Amended and Restated Lease Agreement and Memorandum of Amended and Restated Lease Agreement dated of even date herewith and (ii) that certain Lease Supplement dated of even date herewith (collectively, the “Lease Modification Documents”); and
WHEREAS, in connection with such substitutions, the Lessor and the Indenture Trustee, with the consent of the Lessee, will enter into an amendment or modification to the Assignment of Lease in the form of that certain First Modification to Assignment of Lease dated of even date herewith (the “Assignment of Lease Modification”); and
WHEREAS, it is a condition of the execution and delivery of the Lease Modification Documents and the Assignment of Lease Modification that the Guarantor execute and deliver this Reaffirmation in order to reaffirm its obligations under the Guaranty and to acknowledge and consent to the execution and delivery of the Lease Modification Documents and the Assignment of Lease Modification as hereinafter provided;
NOW, THEREFORE, in consideration of the premises, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Guarantor hereby agrees as follows:
1. Definitions. Capitalized terms used herein but not defined herein shall have the meanings assigned to such terms in the Guaranty.
2. Acknowledgement and Consent. The Guarantor hereby expressly (i) acknowledges that it has received copies of the Lease Modification Documents and the Assignment of Lease Modification, (ii) acknowledges that it understands the nature of the transactions contemplated by the Lease Modification Documents and the Assignment of Lease Modification, and (iii) consents to the execution, delivery and performance of the Lease Modification Documents and the Assignment of Lease Modification and to the transactions contemplated thereunder.
3. Reaffirmation and Confirmation of Guaranty. The Guarantor hereby expressly ratifies, affirms and confirms to the Obligees its obligations under the Guaranty, and acknowledges, renews and extends its continued liability under the Guaranty and agrees that the Guaranty remains, and following the execution and delivery of the Lease Modification Documents and the Assignment of Lease Modification will remain, in full force and effect and enforceable in accordance with its terms.
4. Notice Addresses. From and after the date hereof, the addresses for the delivery of all notices under the Guaranty pursuant to Section 6.3 thereof shall be as follows:
| Lessor: |
c/o Wells Fargo Bank Northwest, National Association | |
| Corporate Trust Services | ||
| MAC: U1228-120 | ||
| 299 South Main Street, 12 Floor | ||
| Salt Lake City, Utah 84111 | ||
| Guarantor: |
Capital One Bank | |
| 1680 Capital One Drive | ||
| McLean, Virginia 22102 | ||
| Attn: Amy D. Cook, Assistant General Counsel | ||
| Indenture Trustee: |
Wachovia Bank, National Association | |
| Wachovia Bank-Corp. Trust Group | ||
| 200 Berkeley Street, 17th Floor | ||
| Boston, Massachusetts 02116 | ||
5. Governing Law. This Reaffirmation shall be governed by and construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the Guarantor has caused this Reaffirmation to be duly executed as of the date first above written.
| CAPITAL ONE BANK, a Virginia banking corporation | ||
| By: | /s/ Stephen Linehan | |
| Name: | Stephen Linehan | |
| Title: | Senior Vice President and Treasurer | |
Exhibit 10.20.2
CAPITAL ONE FINANCIAL CORPORATION
2004 Stock Incentive Plan
Restricted Stock Award Agreement
No. of Shares: <No. of Shares>
THIS AGREEMENT, dated the of , 2005 (the “Date of Grant”), between CAPITAL ONE FINANCIAL CORPORATION, a Delaware corporation (“Capital One”), and <Name> (“you”), is made pursuant and subject to the provisions of the Company’s 2004 Stock Incentive Plan (the “Plan”) and all terms used herein that are defined in the Plan shall have the same meaning given them in the Plan unless they are otherwise defined herein.
WHEREAS, Article 8 of the Plan provides for the award from time to time in the discretion of the Capital One Board of Directors (the “Board”) or its Compensation Committee (the “Committee”) of shares of common stock of Capital One, .$.01 par value per share (the “Common Stock”), the vesting of which are subject to continued employment or other conditions;
W I T N E S S E T H :
1. Grant of Restricted Stock. Pursuant and subject to the terms and conditions of the Plan, Capital One hereby grants to you <No. of Shares> shares of Common Stock (the “Restricted Stock”). The Restricted Stock shall vest and become freely transferable only in accordance with the provisions of this Agreement and of the Plan.
2. Non-Transferability. Subject to the provisions of Section 3 hereof, the rights represented by the Restricted Stock shall not be assignable or transferable, or otherwise alienated or hypothecated, under any circumstances. Any purported or attempted transfer of such shares or such rights shall be null and void and shall result in the immediate forfeiture and cancellation of the Restricted Stock.
3. Lapse of Restrictions.
(a) Vesting. Except as provided in subsections 3(b) and 3(c) below, the Restricted Stock shall, to the extent not theretofore vested or forfeited as provided herein, become transferable and the restrictions thereon shall lapse in full as follows: 25% of the Restricted Stock on the first anniversary of the Date of Grant; 25% of the Restricted Stock on the second anniversary of the Date of Grant; and the remaining 50% of the Restricted Stock on the third anniversary of the Date of Grant.
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(b) Effect of Termination of Employment.
(i) Upon your termination of employment with Capital One for any reason other than death, Disability, or Retirement, all shares of Restricted Stock, to the extent not theretofore vested as provided herein, shall immediately be forfeited.
(ii) Upon your termination of employment with Capital One as a result of your death, Disability or Retirement, all of the shares of Restricted Stock shall, to the extent not previously vested or forfeited as provided herein, immediately become transferable and all restrictions thereon shall lapse upon such termination of employment.
(c) Vesting Schedule Upon Eligibility for Retirement.
(i) Unless otherwise determined by the Committee or the Independent Directors, as applicable, and to the extent permitted or required by law, the Shares granted under this Agreement shall become transferable upon the Grantee becoming eligible for Retirement, as defined in the Plan, only and to the extent sufficient, if sold at Fair Market Value, as defined in the Plan, on the date of such eligibility, to provide for the payment of the tax liability caused as a consequence of such eligibility condition in accordance with applicable tax laws. It is understood that the remaining portion of the Shares granted under this Agreement shall continue to vest according to its original schedule.
(ii) Notwithstanding any other provision of this Agreement to the contrary, Capital One will instruct the Plan administrator to withhold and transfer to Capital One the Restricted Stock that becomes transferable pursuant to the immediately foregoing paragraph in satisfaction of Grantee’s tax withholding liability, unless Grantee notifies Capital One of Grantee’s intention to satisfy such tax withholding obligations in another permissible manner not less than 60 days prior to such eligibility date. Capital One reserves the right to change this instruction at any time.
(d) Effect of Change of Control. If a Change of Control of Capital One occurs, then all of the shares of Restricted Stock shall, to the extent not previously vested or forfeited as provided herein, become transferable and all restrictions thereon shall lapse upon the occurrence of such Change of Control.
4. Prohibition of Tax Election. You shall not attempt or purport to elect under Section 83(b) of the Internal Revenue Code to pay income tax at the time of your Restricted Stock grant, and any such attempted or purported election shall result in the immediate forfeiture and cancellation of all Restricted Stock granted to you under this Agreement.
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5. Modification and Waiver. Except as provided in the Plan with respect to determinations of the Board or the Committee and subject to the Board’s right to amend the Plan, neither this Agreement nor any provision hereof can be changed, modified, amended, discharged, terminated or waived orally or by any course of dealing or purported course of dealing, but only by an agreement in writing signed by you and Capital One; provided, that changes, modifications and amendments not detrimental to you may be made in writing signed only by Capital One. No such agreement shall extend to or affect any provision of this Agreement not expressly changed, modified, amended, discharged, terminated or waived or impair any right consequent on such a provision. The waiver of or failure to enforce any breach of this Agreement shall not be deemed to be a waiver or acquiescence in any other breach thereof.
6. Tax Withholding. If you become subject to withholding under applicable tax laws, you agree to pay Capital One the amount required to be withheld by one or more of the following methods:
| (a) | by cash or check payment; |
| (b) | if the Restricted Stock has vested, by instructing the Plan administrator to sell that number of shares having a Fair Market Value equal to the amount required to be withheld and to deliver the proceeds thereof to Capital One; or |
| (c) | by such other methods as Capital One may make available from time to time. |
7. Governing Law. This Agreement shall be governed by federal law and, to the extent not preempted thereby, by the laws of the Commonwealth of Virginia.
8. Conflicts. In the event of any conflict between the provisions of the Plan as in effect on the Date of Grant and the provisions of this Agreement, the provisions of the Plan shall govern. All references herein to the Plan shall mean the Plan as in effect on the date hereof.
9. Bound by Plan. In consideration of the grant of the Restricted Stock, you agree that you will comply with such conditions as the Board of Directors and the Committee may impose on the Restricted Stock and be bound by the terms of the Plan.
10. Employment Status. This Agreement does not constitute a contract of employment nor does it alter your terminable at will status or otherwise guarantee future employment.
11. Binding Effect. This Agreement shall be binding upon, enforceable against, and inure to the benefit of you and your legatees, distributees and personal representatives, and Capital One and its successors and assigns.
Capital One from time to time distributes and makes available to associates a disclosure document relating to the Plan. You may also contact the HR Help Center to obtain a copy of the Plan disclosure document and the Plan. You should carefully read the Plan disclosure document and the Plan. By accepting the benefits of this Restricted Stock Agreement you acknowledge receipt of the Plan and the Plan disclosure document and agree to be bound by the terms of this Agreement and the Plan.
IN WITNESS WHEREOF, CAPITAL ONE FINANCIAL CORPORATION has caused this Agreement to be signed on its behalf.
| CAPITAL ONE FINANCIAL CORPORATION | ||
| By: |
| |
| [signature] | ||
| Matthew Schuyler | ||
| Executive Vice President, Human Resources | ||
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Exhibit 10.20.3
CAPITAL ONE FINANCIAL CORPORATION
2004 Stock Incentive Plan
Nonstatutory Stock Option Agreement
No. of Shares Subject to Option: No. of Options
THIS AGREEMENT, dated the of , 2005 (the “Date of Grant”), between CAPITAL ONE FINANCIAL CORPORATION, a Delaware corporation (the “Company”), and First Last (“Optionee”), is made pursuant and subject to the provisions of the Company’s 2004 Stock Incentive Plan (the “Plan”), and all terms used herein that are defined in the Plan shall have the same meaning given them in the Plan unless they are otherwise defined herein:
W I T N E S S E T H :
1. Grant of Option. Pursuant and subject to the terms and conditions of the Plan and of this Agreement, the Company has granted to Optionee, effective the Date of Grant, the right and option to purchase from the Company (the “Option”) all or any part of an aggregate of No. of Options shares of Company Stock (the “Option Shares”) at the purchase price per share of $ (the “Option Price”), being not less than 100% of the Fair Market Value per share of the Common Stock on the Date of Grant, such Option to be exercisable as hereinafter provided. The Option evidenced hereby is intended to be a nonstatutory stock option that does not receive special tax treatment under Section 422 of the Internal Revenue Code.
2. Terms and Conditions. The Option evidenced by this Agreement is subject to the following terms and conditions:
(a) Expiration Date. The Option shall expire on , 2015 (ten years from the Date of Grant) unless earlier terminated as provided for herein.
(b) Transferability.
(i) Except as provided in the following sentence, the Option shall be nontransferable except by will or by the laws of descent and distribution and, during the lifetime of Optionee, may be exercised only by Optionee, except as provided in Section 3 below. The Option (or any portion thereof) may be transferred by the Optionee to (1) the spouse, children, or grandchildren of Optionee (“Immediate Family Members”), (2) a trust or trusts for the exclusive benefit of Optionee and/or such Immediate Family Members, or (3) a partnership in which Optionee and/or such Immediate Family Members are the only partners; provided that (w) no consideration is paid to the Optionee in connection with the
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transfer, (x) in the event of a transfer, the Option is exercisable, during the original transferee’s lifetime, only by the transferee or by his or her guardian or legal representative, (y) following such transfer, Optionee retains no interest or reversion in the Option (or the underlying shares upon exercise) and has no right to alter or amend the Option or revoke the transfer, and (z) subsequent transfer of the Option by the transferee (excluding transfers by will or by the laws of descent and distribution) is prohibited. Following transfer, the Option shall continue to be subject to the same terms and conditions as were applicable to the Option immediately before transfer; provided that where appropriate, all references in this Agreement to “Optionee” shall be deemed to refer to the transferee.
(ii) Following transfer, the Option shall continue to be subject to the same terms and conditions as were applicable to the Option immediately before transfer (including terms and conditions based on the employment status of Optionee),.
(iii) Promptly upon transfer of the Option, the Optionee shall deliver written notice of the transfer to the Company’s Human Resources Department at the Company’s West Creek office in Richmond, Virginia. That written notice shall identify the transferee and the effective date of the transfer.
(iv) If sale to the transferee of the Company Stock issuable upon exercise of the Option is not registered under the Securities Act of 1933, as amended, the Company, in its sole discretion, may condition such sale upon such terms and requirements as it deems appropriate to comply with applicable law.
(c) Vesting of Option. Subject to the provisions of Section 3 below, the Option shall become exercisable in three tranches of one-third of the Option Shares each on the first, second and third anniversaries of the Date of Grant. Notwithstanding the foregoing, the Option shall become fully exercisable if a Change of Control occurs or upon Optionee’s Death, Disability or Retirement, as defined in the Plan.
(d) Method of Exercising and Payment for Shares. The Option may be exercised by:
(i) Following the procedures for the exercise of an Option as may be established from time to time by the Company or its designated agent (the “Procedures”). The Company will notify Optionees in writing of the Procedures which will specify (1) any required notification, whether oral or written, to the Company or its designated agent; (2) the method for cash payment of the Option Price and any additional amounts to the Company or its designated agent; (3) if an Optionee elects to substitute for all or any portion of the cash payment shares of Company Stock that an Optionee has owned for at least six months (valued at the Fair Market Value on the exercise date), the method for delivery of such shares of Company Stock to the Company or its designated agent; (4) if the Optionee exercises by means of a so-called “cashless exercise”, any requirements related to such cashless exercise and (5) any other requirements, including completion of any required tax or other forms, which must be completed prior to the exercise of the Option. The Optionee may contact the Human Resources Department at the Company’s West Creek office in Richmond, Virginia to obtain a copy of the Procedures; or
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(ii) Delivering written notice of exercise to the Human Resources Department at the Company’s West Creek office in Richmond, Virginia. Such notice shall be accompanied by payment of the Option Price in full by cash (which shall include payment by check, bank draft or money order payable to the order of the Company). Instead of paying an Optionee may by election substitute for all or any portion of the cash payment, the delivery of shares of Company Stock that Optionee has owned for at least six months (valued at their Fair Market Value on the date of exercise) duly endorsed for transfer, or Optionee may exercise the Option by means of a so-called “cashless exercise” pursuant to which Company Stock may be issued directly to Optionee’s designated broker/dealer upon receipt by the Company of the Option Price in cash from such broker/dealer.
The exercise date will be, in the case of (i) above, the date upon which all of the Procedures have been completed by the Optionee, or such later date as agreed to by the Optionee and the Company or its designated agent, and in the case of (ii) above, the date that the written notice, together with any accompanying payment, is received by the Company.
3. Termination of Employment. If Optionee’s employment with the Company or any Subsidiary terminates for any reason, Optionee shall forfeit all rights under the Option except to the extent that Optionee is vested in the Option. Except as otherwise provided in subsections 3(a) and 3(b) below, the right of Optionee and Optionee’s successors in interest to exercise the Option shall terminate three months after the date Optionee’s employment terminates (but no later than the expiration date of the Option period specified in subsection 2(a) above).
(a) Exercise following Death. If Optionee dies while employed by the Company or any Subsidiary or within three months following termination of employment, and before the exercise in full or expiration of the Option, Optionee’s estate, or the person or persons to whom the rights under the Option shall have passed by will or the laws of descent and distribution, may exercise the Option at any time within one year next following Optionee’s death (but in any event before the expiration date of the Option period specified in subsection 2(a) above) for the number of Option Shares for which Optionee could have exercised the Option on the date of death.
(b) Exercise following Disability or Retirement. In the event of termination of Optionee’s employment by the Company or any Subsidiary by reason of Disability approved by the Company or, by reason of Retirement before exercise in full or expiration of the Option, Optionee may exercise the Option at any time within one year next following such termination of employment (but in any event before the expiration date of the Option period specified in subsection 2(a) above) for the number of Option Shares for which Optionee could have exercised the Option on the date of termination.
For purposes of this Section 3, it shall not be considered a termination of employment if Optionee is placed by the Company or any Subsidiary on military or sick leave or such other type of leave of absence that the Committee in its sole discretion considers as continuing the employment relationship intact. At the time of any exercise of any Option exercised pursuant to this Section 3, the Option Price shall be paid in full as provided in Section 2.
Page 3
Notwithstanding subsections 3(a) and 3(b) above, in no event may an Option be exercised after the expiration date of the Option period specified in subsection 2(a) above.
4. Governing Law. This Agreement shall be governed by federal law and, to the extent not preempted thereby, by the laws of the Commonwealth of Virginia.
5. Conflicts. In the event of any conflict between the provisions of the Plan as in effect on the Date of Grant and the provisions of this Agreement, the provisions of the Plan shall govern. All references herein to the Plan shall mean the Plan as in effect on the date hereof.
6. Optionee Bound by Plan. In consideration of the grant of the Option, Optionee agrees that he will comply with such conditions as the Board of Directors and the Committee may impose on the exercise of the Option and be bound by the terms of the Plan.
7. Change in Capital Structure. In the event of changes in the capital structure of the Company, appropriate adjustments in the number of shares for which the Option shall be exercisable, the Option Price, or both, shall be made, as provided in Section 4.4 of the Plan.
8. Tax Obligations Upon Exercise of Options. The difference, on the date of exercise, between the fair market value of Company Stock purchased and the Option Price is compensation taxable to Optionee as ordinary income on the date of exercise and subject to applicable federal and state taxes that the Company is obligated to withhold. Optionee is required to make arrangements suitable to the Company for the payment of all applicable withholding taxes. By a timely election, Optionee may elect to have the Company withhold upon exercise the number of shares of Company Stock having a fair market value equal to the minimum applicable withholding taxes.
9. Employment Status. This Agreement does not constitute a contract of employment nor does it alter your terminable at will status or otherwise guarantee future employment.
10. Binding Effect. This Agreement shall be binding upon, enforceable against, and inure to the benefit of Optionee, his legatees, distributees and personal representatives, and the Company and its successors and assigns.
The Company from time to time distributes and makes available to associates a disclosure document relating to the Plan. You may also contact the HR Help Center to obtain a copy of the Plan disclosure document and the Plan. You should carefully read the Plan disclosure document and the Plan. By accepting the benefits of this option you acknowledge receipt of the Plan, and the Plan disclosure document and agree to be bound by the terms of this option and the Plan.
IN WITNESS WHEREOF, CAPITAL ONE FINANCIAL CORPORATION has caused this Agreement to be signed on its behalf.
| CAPITAL ONE FINANCIAL CORPORATION | ||
| By: |
| |
| [signature] | ||
| Matthew Schuyler | ||
| Executive Vice President, Human Resources | ||
Page 4
Exhibit 12
Exhibit 12: Computation of Ratio of Earnings to Combined Fixed Charges
| Year Ended December 31, |
||||||||||||||||||||
| (in thousands)
|
2004 |
2003 |
2002 |
2001 |
2000 |
|||||||||||||||
| Including Interest on Deposits |
||||||||||||||||||||
| Earnings: |
||||||||||||||||||||
| Income before income taxes |
$ | 2,360,064 | $ | 1,802,924 | $ | 1,451,039 | $ | 1,035,420 | $ | 757,474 | ||||||||||
| Fixed charges |
1,797,811 | 1,588,981 | 1,475,827 | 1,189,454 | 834,424 | |||||||||||||||
| Earnings, for computation purposes |
4,157,875 | 3,391,905 | 2,926,866 | 2,224,874 | 1,591,898 | |||||||||||||||
| Fixed Charges: |
||||||||||||||||||||
| Interest expense on deposits, senior and subordinated, and other borrowings |
1,791,442 | 1,582,565 | 1,461,654 | 1,171,007 | 801,017 | |||||||||||||||
| Portion of rent expense representative of interest |
6,369 | 6,416 | 14,173 | 18,447 | 33,407 | |||||||||||||||
| Total fixed charges, including interest on deposits, for computation purposes |
$ | 1,797,811 | $ | 1,588,981 | $ | 1,475,827 | $ | 1,189,454 | $ | 834,424 | ||||||||||
| Ratio of earnings to fixed charges, including interest on deposits |
2.31 | 2.13 | 1.98 | 1.87 | 1.91 | |||||||||||||||
| Excluding Interest on Deposits |
||||||||||||||||||||
| Earnings: |
||||||||||||||||||||
| Income before income taxes |
$ | 2,360,064 | $ | 1,802,924 | $ | 1,451,039 | 1,035,420 | $ | 757,474 | |||||||||||
| Fixed charges |
788,266 | 697,331 | 663,938 | 548,984 | 510,416 | |||||||||||||||
| Earnings, for computation purposes |
3,148,330 | 2,500,255 | 2,114,977 | 1,584,404 | 1,267,890 | |||||||||||||||
| Fixed Charges: |
||||||||||||||||||||
| Interest expense on deposits, senior and subordinated, and other borrowings |
1,791,442 | 1,582,565 | 1,461,654 | 1,171,007 | 801,017 | |||||||||||||||
| Portion of rent expense representative of interest |
6,369 | 6,416 | 14,173 | 18,447 | 33,407 | |||||||||||||||
| Interest expense on deposits |
(1,009,545 | ) | (891,650 | ) | (811,889 | ) | (640,470 | ) | (324,008 | ) | ||||||||||
| Total fixed charges, excluding interest on deposits, for computation purposes |
$ | 788,266 | $ | 697,331 | $ | 663,938 | $ | 548,984 | $ | 510,416 | ||||||||||
| Ratio of earnings to fixed charges, excluding interest on deposits |
3.99 | 3.59 | 3.19 | 2.89 | 2.48 | |||||||||||||||
Exhibit 21
Significant Subsidiaries
Capital One Bank
Capital One, F.S.B.
Capital One Auto Finance, Inc.
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements, as listed below, of Capital One Financial Corporation and in the related Prospectuses, where applicable, of our reports dated February 11, 2005, except for Note 24, as to which the date is March 7, 2005, with respect to the consolidated financial statements of Capital One Financial Corporation, and our report dated February 11, 2005, with respect to Capital One Financial Corporation management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Capital One Financial Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2004.
| Registration Statement Number |
Form |
Description | ||
| 33-80263 |
Form S-8 | Marketing and Management Services Agreement | ||
| 33-86986 |
Form S-8 | 1994 Stock Incentive Plan | ||
| 33-91790 |
Form S-8 | 1995 Non-Employee Directors Stock Incentive Plan | ||
| 33-97032 |
Form S-8 | Amendment to 1994 Stock Incentive Plan | ||
| 33-99748 |
Form S-3 | Dividend Reinvestment and Stock Purchase Plan | ||
| 333-42853 |
Form S-8 | 1994 Stock Incentive Plan | ||
| 333-51637 |
Form S-8 | 1994 Stock Incentive Plan | ||
| 333-57317 |
Form S-8 | 1994 Stock Incentive Plan | ||
| 1998 Special Option Program | ||||
| 333-60831 |
Form S-3 | Acquisition of Summit Acceptance Corporation | ||
| 333-78067 |
Form S-8 | 1994 Stock Incentive Plan | ||
| 333-78609 |
Form S-8 | 1999 Stock Incentive Plan | ||
| 333-78635 |
Form S-8 | 1999 Non-Employee Directors Stock Incentive Plan | ||
| 333-91327 |
Form S-8 | 1994 Stock Incentive Plan | ||
| 333-92345 |
Form S-8 | 1994 Stock Incentive Plan | ||
| 333-43288 |
Form S-8 | 1994 Stock Incentive Plan | ||
| 333-58628 |
Form S-8 | 1994 Stock Incentive Plan | ||
| 333-61574 |
Form S-3 | Registration of Securities for Resale | ||
| 333-72822 |
Form S-8 | 1994 Stock Incentive Plan | ||
| 333-72820 |
Form S-8 | 1999 Non-Employee Stock Incentive Plan | ||
| 333-72832 |
Form S-3 | Registration of Securities for Resale by Selling Stockholders in PeopleFirst Acquisition | ||
| 333-76726 |
Form S-8 | 1994 Stock Incentive Plan | ||
| 333-72820 |
Form S-8 | 1999 Non-Employee Directors Stock Incentive Plan | ||
| 333-97127 |
Form S-8 | 2002 Associate Savings Plan | ||
| 333-97125 |
Form S-3 | 2002 Dividend Reinvestment Stock Purchase Plan | ||
| 333-97123 |
Form S-8 | 2002 Non-Executive Officer Stock Incentive Plan | ||
| 333-97119 |
Form S-3 | Common Stock, Debt Securities, Preferred Stock, Stock Purchase Contracts & Equity Units in the amount of $2 Billion | ||
| 333-100488 |
Form S-8 | 2002 Associate Stock Purchase Plan | ||
| 333-117920 |
Form S-8 | 2004 Stock Incentive Plan |
/s/ ERNST & YOUNG LLP
McLean, Virginia
March 7, 2005
Exhibit 31.1
CERTIFICATION FOR ANNUAL REPORT ON FORM 10-K OF
CAPITAL ONE FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
I, Richard D. Fairbank, certify that:
| 1. | I have reviewed this annual report of Capital One Financial Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 9, 2005
| CAPITAL ONE FINANCIAL CORPORATION | ||
| By: | /s/ RICHARD D. FAIRBANK | |
| Richard D. Fairbank Chairman of the Board, Chief Executive Officer and President | ||
Exhibit 31.2
CERTIFICATION FOR ANNUAL REPORT ON FORM 10-K OF
CAPITAL ONE FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
I, Gary L. Perlin, certify that:
| 1. | I have reviewed this annual report of Capital One Financial Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 9, 2005
| CAPITAL ONE FINANCIAL CORPORATION | ||
| By: | /s/ GARY L. PERLIN | |
| Gary L. Perlin Executive Vice President and Chief Financial Officer | ||
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Richard D. Fairbank, Chairman and Chief Executive Officer of Capital One Financial Corporation, a Delaware corporation (“Capital One”), do hereby certify that:
The Annual Report on Form 10-K for the period ended December 31, 2004 (the “Form 10-K”) of Capital One fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Capital One.
Dated: March 9, 2005
| By: | /s/ RICHARD D. FAIRBANK | |
| Richard D. Fairbank Chairman of the Board, Chief Executive Officer and President | ||
Exhibit 32.2
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Gary L. Perlin, Executive Vice President and Chief Financial Officer of Capital One Financial Corporation, a Delaware corporation (“Capital One”), do hereby certify that:
The Annual Report on Form 10-K for the period ended December 31, 2004 (the “Form 10-K”) of Capital One fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Capital One.
Dated: March 9, 2005
| By: | /s/ GARY L. PERLIN | |
| Gary L. Perlin Executive Vice President and Chief Financial Officer |