| CAPITAL ONE FINANCIAL CORP Item 1A Risk Factors |
| 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 about 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,” “target” 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 |
| 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, automobile loans, retail banking services 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 |
| Our credit card business also competes with providers of other types of financial services and consumer loans such as home equity lines and other mortgage related products that offer consumer debt consolidation |
| Thus, the cost to acquire new accounts will continue to vary among product lines and may rise |
| Other companies may compete with us for customers by offering lower initial interest rates and fees, higher credit limits and/or customer services or product features that are or may appear to be more attractive than those we offer |
| Because customers often 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 |
| In addition, intense competition may lead to product and pricing practices that may adversely impact long-term customer loyalty; we may choose to not engage in such practices, which may adversely impact our ability to compete, particularly in the short term |
| 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 other consumer lending businesses, including auto lending, small business lending, home loan lending, installment lending, our commercial lending businesses, and our businesses in international markets 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 an increase in customer attrition |
| Additionally, the National 19 ______________________________________________________________________ [50]Table of Contents Bank competes with national and state banks for deposits, loans, and trust accounts, and also competes with other financial services companies in offering various types of financial services |
| 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 and intensify our competitive environment |
| 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 lending 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 |
| Similarly, customer attrition from our deposit products, in addition to an increase of rates an/or services that we may undertake to retain those deposits, may increase our expenses and therefore reduce 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 |
| Rising losses or leading indicators of rising losses (higher delinquencies or bankruptcy rates; lower collateral values) may require us to increase our allowance for loan losses and may degrade our profitability if we are unable to raise revenue or reduce costs to compensate for higher losses |
| In addition, higher losses may adversely affect the performance of our securitizations, may increase our cost of funds, and may limit our access to financial markets |
| In particular, we face the following risks in this area: • Missed Payments |
| We face the risk that customers will miss payments |
| Loan charge-offs are generally preceded by missed payments or other indications of worsening financial condition |
| Our reported delinquency levels measure these trends |
| In some instances, customers declare bankruptcy without first missing payments |
| We usually charge-off at least a portion of a customer’s outstanding loan balance in the case of bankruptcy |
| Our bankruptcy experience is correlated with national bankruptcy filing trends |
| We face the risk that collateral, when we have it, will be insufficient to compensate us for loan losses |
| When customers default on their loans and we have collateral, we attempt to seize it |
| However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from our customers |
| Our automobile loans are subject to collateral risk through declining used car prices |
| Our commercial and real-estate exposures are also subject to collateral risk, especially those that were affected by Hurricane Katrina |
| • Estimates of future losses |
| We face the risk that we may underestimate our future losses and fail to hold a loan loss allowance sufficient to account for these losses |
| We update our forecast of future losses and analyze certain scenarios each quarter |
| We incorporate these estimates into our financial plans, strategies, loan loss allowance, and forward looking statements |
| These estimates are based on observed trends in delinquency, charge-offs, bankruptcies, and collateral recoveries; on our marketing strategies and underwriting models; and on our views about future economic, interest rate, and competitive conditions |
| Incorrect assumptions could lead to material underestimates of future losses |
| We face the risk that 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 20 ______________________________________________________________________ [51]Table of Contents designed to 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 |
| If the models and approaches we use to select, manage, and underwrite our customers become less predictive of future charge-offs (due, for example, to changes in the competitive environment or in the economy), our credit losses and returns may deteriorate |
| We face the risk that our business mix will change in ways that could adversely affect credit losses |
| We participate in a mix of businesses with a broad range of credit loss characteristics |
| Consequently, changes in segment mix may change our charge-off rate |
| In addition, significant changes in our organic growth rate may change our charge-off rate since young accounts tend to have lower charge-offs than older accounts (ie slower organic growth may drive a higher charge-off rate) |
| • Charge-off recognition |
| We face the risk that the rules governing charge-off recognition could change |
| 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 |
| • Industry practices |
| We face the risk that our charge-off and delinquency rates may be impacted by industry developments |
| For example, actions by our competitors to change minimum payment practices in response to advice from the regulators regarding the application of FFIEC Account Management Guidance may adversely impact industry charge-off and delinquency rates and, in turn, our rates |
| 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 |
| In the United States, we face the risk that the effects of higher energy costs, higher interest rates, pressure on housing prices and hurricane damages may weaken the economy’s labor markets |
| Accordingly, an economic downturn in the United States (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 and reduce credit card purchase activity |
| 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, we face the risk that the recession and downturn in consumer credit in the United Kingdom may continue to worsen, which, could also hurt our financial performance |
| We Face Strategic Risks in Sustaining Our Growth and Pursuing Diversification Our growth strategy has multiple components |
| First, we seek to continue to grow our established businesses, such as our domestic credit card and automobile finance businesses |
| Second, we hope to continue to diversify our business, both geographically and in product mix |
| We seek to do this by growing our lending businesses, including credit cards, internationally, principally in the United Kingdom and Canada, and by identifying, pursuing and expanding new business opportunities, such as branch banking and other consumer loan products |
| Our acquisition of Hibernia enabled us to expand into the branch banking business, which we believe can be a growth business for the Company, and is a key component of our ongoing diversification strategy |
| Our ability to continue to grow is driven by the success of our fundamental business plan, the level of our investments in new businesses or regions and our ability to apply our risk management skills 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 21 ______________________________________________________________________ [52]Table of Contents 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 continue diversifying beyond our US credit card business |
| Our ability to successfully diversify is impacted by a number of factors, including: identifying appropriate acquisition targets, entering into successful negotiations with such targets and executing on acquisition transactions, successfully integrating acquired businesses, including Hibernia, developing and executing strategies to grow our existing consumer financial services businesses, and our 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 borrowing, changing regulatory and legislative environments, political developments, possible economic downturns in other countries exchange rates and differences from the historical experience of portfolio performance in the United States and other countries |
| We May Fail To Realize All of the Anticipated Benefits of our Merger with Hibernia Corporation |
| The success of the merger will depend, in part, on our ability to realize the anticipated benefits from combining the businesses of Capital One and Hibernia |
| However, to realize these anticipated benefits, we must successfully combine the businesses of Capital One and Hibernia |
| If we are not able to achieve these objectives, the anticipated benefits of the merger, such as cost savings and other synergies, may not be realized fully or at all or may take longer to realize than expected |
| Prior to the completion of the merger, Capital One and Hibernia operated independently |
| It is possible that the ongoing integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the merger |
| Integration efforts between the two companies will also divert management attention and resources |
| These integration matters could have an adverse effect on the Company during such transition period |
| 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 and/or our financial health |
| Adverse perceptions regarding our business practices and/or our financial health could damage our reputation in both the customer and funding markets, leading to difficulties in 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 may 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 the 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 governance structures to assist in evaluating such risks in our business practices and decisions |
| 22 ______________________________________________________________________ [53]Table of Contents 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 |
| We Face Risk Related to the Strength of our Operational, Technological and Organizational Infrastructure Our ability to grow and compete is dependent on our ability to build or acquire the necessary operational and technological infrastructure and to manage the cost of that infrastructure while we expand |
| Similar to other large corporations, in our case, operational risk can manifest itself in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees or persons outside of Capital One and exposure to external events |
| We are dependent on our operational infrastructure to help manage these risks |
| In addition, we are heavily 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 |
| Our ability to develop and implement effective marketing campaigns also depends on our technology |
| Additionally, our ability to run our business in compliance with applicable laws and regulations is dependent on these infrastructures |
| We continuously monitor our operational and technological capabilities and make modifications and improvements when we believe it will be cost effective to do so |
| In some instances, we may build and maintain these capabilities ourselves |
| We also outsource some of these functions to third parties |
| These third parties may experience errors or disruptions that could adversely impact us and over which we may have limited control |
| As we increase the amount of our infrastructure that we outsource to third parties, we increase our exposure to this risk |
| We also face risk from the integration of new infrastructure platforms and/or new third party providers of such platforms into our existing businesses |
| We are currently undertaking a project with Total System Services, Inc |
| (“TSYS”) to transfer to a new technological platform that will result in TSYS providing processing services for Capital One’s North American portfolio of consumer and small business credit card accounts |
| Our ability to successfully transition to this new platform as well as TSYS’s ongoing ability to provide services to us, could impact our performance in the future |
| In addition to creating a solid infrastructure platform, we are also dependent on recruiting management and operations personnel with the experience to run an increasingly large and complex business |
| 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 |
| 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 |
| 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, and the legal, regulatory, accounting and tax environments governing our funding transactions |
| 23 ______________________________________________________________________ [54]Table of Contents In addition, our ability to raise funds is strongly affected by the general state of the US 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, may have more capital and other resources and may 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 |
| As part of our capital markets financing, we actively securitize our consumer loans |
| 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 54-56 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, 2005 |
| Finally, Hibernia has experienced a significant increase in deposits since the Gulf Coast hurricanes, most likely as a result of customers receiving federal funds and insurance payments relating to the hurricanes |
| Currently, it is unclear what customers will do with these deposits on a long-term scale |
| It is possible that as rebuilding and reinvesting in the Gulf Coast area begins, the amount of these incremental deposits with Hibernia could decrease significantly |
| 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, Hibernia and the Corporation as investment grade |
| The following chart shows ratings for Capital One Financial Corporation, Capital One Bank and Hibernia National Bank as of December 31, 2005 |
| As of that date, the ratings outlooks were as follows: Standard & Poor’s Moody’s Fitch Capital One Financial Corporation BBB- Baa1 BBB Capital One Financial Corporation—Outlook Positive Stable Positive Capital One Bank BBB A3 BBB Capital One Bank—Outlook Positive Stable Positive Hibernia National Bank BBB A3 BBB Hibernia National Bank—Outlook Positive Stable Positive 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 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 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 24 ______________________________________________________________________ [55]Table of Contents 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, would fall |
| Our earnings could also be hurt if the rates on our consumer loans fall more quickly than those on our borrowings |
| We also seek to minimize market risk to a level that is immaterial to our net income |
| 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 |
| We could also mitigate this risk through hedging strategies, if available, if we are unable to do so, we could suffer adverse impacts on overall portfolio yield |
| 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 56-57 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, 2005 |
| 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 a wide 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 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 regulations, as well as laws and regulations 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 regulations, and laws and regulations of foreign jurisdictions where we conduct business, limit the manner in which we may offer and extend credit |
| From time to time, the US Congress, the states and foreign governments consider changing these laws and may enact new laws or amend existing laws and regulatory authorities may issue new regulations |
| Such new laws or regulations 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, the Federal Reserve has announced proposed rule-making, and has issued some final rules, and in the UK the Office of Fair Trading is conducting an industry investigation on the calculation of default charges, all of which may impact us |
| Additionally, the new bankruptcy reform legislation will put additional requirements on the Company regarding disclosures on the effects on consumers of making only minimum payments on their accounts |
| We cannot, however, predict whether and how any new 25 ______________________________________________________________________ [56]Table of Contents guidelines issued or other regulatory actions taken by the banking or other regulators will be applied to the Bank, the National Bank or the Savings Bank, in what manner such regulations might be applied, or the resulting effect on us, the Bank, the National Bank or the Savings Bank |
| There can be no assurance that this kind of regulatory action will not have a negative impact on us and/or our financial results |
| The Credit Card Industry Faces Increased Litigation Risks Relating to Industry Structure We face possible risks from the outcomes of certain credit card 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 and Discover Financial Services |
| In 2001, a New York district court entered judgment in favor of the Department of Justice and ordered the associations to repeal these policies |
| The United States Court of Appeals for the Second Circuit affirmed the district court and, on October 4, 2004, the United States Supreme Court denied certiorari in the case |
| In November 2004, American Express filed an antitrust lawsuit (the “Amex lawsuit”) against the associations and several member banks alleging that the associations and member banks jointly and severally implemented and enforced illegal exclusionary agreements that prevented member banks from issuing American Express and Discover cards |
| The complaint requests civil monetary damages, which could be trebled |
| The Corporation, the Bank, and the Savings Bank are named defendants in this lawsuit |
| Separately, a number of entities, each purporting to represent a class of retail merchants, have also filed antitrust lawsuits (the “Interchange lawsuits”) against the associations and several member banks, including the Corporation and its subsidiaries, alleging among other things, that the associations and member banks conspired to fix the level of interchange fees |
| The complaints request civil monetary damages, which could be trebled |
| In October 2005, the Interchange lawsuits were consolidated before the United States District Court for the Eastern District of New York |
| We believe that we have meritorious defenses with respect to these cases and intend to defend these cases vigorously |
| At the present time, management is not in a position to determine whether the resolution of these cases will have a material adverse effect on either the consolidated financial position of the Corporation or the Corporation’s results of operations in any future reporting period |
| In addition, several merchants filed class action antitrust lawsuits, which were subsequently consolidated, against the associations relating to certain debit card products |
| In April 2003, the associations agreed to settle the lawsuit in exchange for payments to plaintiffs and for changes in policies and interchange rates for debit cards |
| Certain merchant plaintiffs have opted out of the settlements and have commenced separate lawsuits |
| Additionally, consumer class action lawsuits with claims mirroring the merchants’ allegations have been filed in several courts |
| Finally, the associations, as well as certain member banks, continue to face additional lawsuits regarding policies, practices, products and fees |
| With the exception of the Interchange lawsuits and the Amex lawsuit, the Corporation and its subsidiaries are not parties to the lawsuits against the associations described above and therefore will not be directly liable for any amount related to any possible or known settlements of such lawsuits |
| However, the Corporation’s subsidiary banks are member banks of MasterCard and Visa and thus may be affected by settlements or lawsuits relating to these issues, including changes in interchange payments |
| In addition, it is possible that the scope of these lawsuits may expand and that other member banks, including the Corporation’s subsidiary banks, may be brought into the lawsuits or future lawsuits |
| The associations are also subject to additional litigation, including suits regarding foreign exchange fees |
| As a result of such litigation, the associations are expected to continue to evolve as corporate entities, including by changing their governance structures, as previously announced by the associations |
| Given the complexity of the issues raised by these lawsuits and the uncertainty regarding: (i) the outcome of these suits, (ii) the likelihood and amount of any possible judgments, (iii) the likelihood, amount and validity of 26 ______________________________________________________________________ [57]Table of Contents any claim against the associations’ member banks, including the banks and the Corporation, and (iv) changes in industry structure that may result from the suits and (v) 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 |
| We Face the Risk of Fluctuations in Our Expenses and Other Costs that 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 may increase |
| 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 |
| We Face Risks Related to the Impact of the Gulf Coast Hurricanes That May Be Substantial and Cannot Be Predicted Hibernia is headquartered in New Orleans, Louisiana, and maintains branches in the areas of Louisiana and Texas that sustained significant damage from the Gulf Coast hurricanes |
| Hibernia’s operations in other parts of Louisiana and Texas have not been impacted, either significantly or at all, by the hurricanes |
| As a result of the hurricanes, Hibernia is experiencing increased costs, including the costs of rebuilding or repairing branches and other properties as well as repairing or replacing equipment, some of which are not covered by insurance |
| The Gulf Coast hurricanes have also affected Hibernia’s consumer, mortgage, auto, commercial and small business loan portfolios by damaging properties pledged as collateral and by impairing certain borrowers’ ability to repay their loans |
| In addition, Hibernia may experience losses from certain customer assistance policies, such as fee waivers, adopted in the wake of the hurricanes |
| The hurricanes may continue to affect Hibernia’s loan originations and loan portfolio quality into the future and could also adversely impact Hibernia’s deposit base |
| More generally, the combined company’s ability to compete effectively in the branch banking business in the future, especially with financial institutions whose operations were not concentrated in the affected area or which may have greater resources than the combined company, will depend primarily on Hibernia’s ability to continue normal business operations and experience growth despite the impact of the hurricanes |
| The severity and duration of these effects will depend on a variety of factors that are beyond Hibernia’s control, including the amount and timing of government, private and philanthropic investment (including deposits) in the region, the pace of rebuilding and economic recovery in the region generally, the extent to which the hurricanes’ property damage is covered by insurance, and the pace at which Hibernia restores its business operations in the various markets in which it operates |
| None of the effects described above can be accurately predicted or quantified |
| As a result, significant uncertainty remains regarding the impact the hurricanes will have on the business, financial condition and results of operations of the combined company and the ability of the combined company to realize the anticipated benefits from the merger |
| Further, the area in which Hibernia operates may experience hurricanes and other storms in the future, and some of those hurricanes and storms may have effects similar to those caused by the Gulf Coast hurricanes |