SEC Company Response from CAPITAL ONE FINANCIAL CORP (COF, COF-PI, COF-PJ, COF-PK, COF-PL, COF-PN) (CIK 0000927628) (COF) — Jul 30, 2010
CAPITAL ONE FINANCIAL CORP (COF, COF-PI, COF-PJ, COF-PK, COF-PL, COF-PN) (CIK 0000927628)
Date: July 30, 2010 · CIK: 0000927628 · Accession: 0001140361-10-030822
AI Filing Summary & Sentiment
Letter
Division of Corporate Finance United States Securities and Exchange Commission Filed February 26, 2010 Form 10-Q for Fiscal Quarter Ended March 31, 2010 File Number 1-13300
Dear Mr. Amit Pande:
On behalf of Capital One Financial Corporation (the “Company”), we are submitting this letter in response to the comments contained in the Staff’s letter of June 24, 2010, regarding the Company’s Form 10-K for Fiscal Year Ended December 31, 2009 (our “2009 Form 10-K”) and Form 10-Q for Fiscal Quarter Ended March 31, 2010 (our “First Quarter 2010 Form 10-Q”).
Below are our responses to each of your comments and requests. For ease of reference, we have repeated the Staff’s comments.
Form 10-K for Fiscal Year Ended December 31, 2009
Selected Financial Data, page 25
1.
We note from footnote seven to your Selected Financial Data on page 26 that the 2009 data includes the impact of the acquisition of Chevy Chase Bank, FSB (Chevy Chase) during the current year. Given your disclosure on page 113 that a majority of the loans acquired from Chevy Chase were credit impaired and were predominantly accounted for pursuant to ASC 310-30/SOP 03-3 and your disclosures in Table I on page 91, we believe more transparency is needed around presentation of asset quality ratios impacted by this acquisition, such as the delinquency rate and net charge-off rate, similar to that done in other parts of the filing. Please revise future filings to include footnote explanations to the asset quality ratios that would enable a reader to assess the impact of these acquired loans on the ratios presented.
Response:
The Company will comply with the Staff’s comment by including in our future filings footnote disclosures to the Selected Financial Data table and to other tables where we present asset quality ratios that explain how the loans acquired from Chevy Chase Bank affect the asset quality ratios. We will provide these disclosures in a manner similar to the disclosure we provided in footnote one to Table 8 on page 18 of our First Quarter 2010 Form 10-Q. This disclosure explained that the loans acquired from Chevy Chase Bank are not classified as nonperforming unless they do not perform in accordance with our expectations as of the purchase date and that we include these loans in the denominator for purposes of calculating the nonperforming loan ratios. The disclosure also presents the nonperforming loan ratios excluding from the denominator the loans acquired from Chevy Chase Bank.
Credit Concentration, page 57
2.
We note disclosure of your commercial real estate concentration in New York, which has experienced market deterioration in residential construction/redevelopment and Class A office space. As it relates to your $2.4 billion in outstanding real estate construction loans as of December 31, 2009 and to the extent that you use interest reserves on these loans, please address the following:
·
Disclose the amount of such loans and the accompanying interest reserves as of each period-end;
Response:
For the Staff’s information, we have presented below the outstanding amount of construction loans with interest reserves and the accompanying interest reserves as of December 31, 2009 and December 31, 2008.
(Dollars in millions)
December 31, 2009
December 31, 2008
Construction loans with interest reserves
$ 1,357
$ 1,468
Interest reserves
$
$
Total construction loans
$ 2,516
$ 2,425
·
Disclose how you monitor such projects throughout their lives to make sure the properties are moving along as planned such that it is appropriate to continue to capitalize the interest on the loan;
Response:
The Company reviews all construction loans on a regular basis. Prior to any disbursement of funds under a construction loan draw request, a professional engineer retained by the Company (or, on occasion, the Company’s on-staff engineer) inspects the subject property and submits an inspection report to the Company confirming the following: (1) all costs for which reimbursement is being requested have been expended; (2) construction is proceeding in accordance with the plans and specifications approved by the Company; and (3) the remaining construction budget is sufficient to complete the project (i.e., that the loan is “in balance”). On-staff engineers also may review the draw requests for larger loans. Following completion of the engineer’s inspection report, the inspection report, together with the draw request is submitted to the our Underwriting, Loan Administration and/or Commercial Loan Servicing or Monitoring groups for review to verify that the loan complies with the applicable requirements before the disbursement is authorized.
Capital One Confidential 2
Each regional office holds a quarterly meeting to review its portfolio of construction loans. A construction loan review sheet is prepared for each loan prior to the quarterly meeting. The construction loan review sheet contains the following information: (a) a project summary; (b) the percentage of construction completed, the amount of the interest reserve and the estimated length of time the interest reserve will carry the loan; and (c) an outline of the action plan for the loan. Senior executives from the real estate line of business, relationship managers, underwriters, portfolio managers, credit officers and representatives from the Company’s commercial credit review group attend the quarterly loan review meetings.
If the Company concludes, based on the draw request review or quarterly evaluation that construction is not proceeding as expected and/or that the loan is out of balance, the Company initiates discussions with the borrower to ensure the loan is put back on track. If it is determined that the deficiency identified cannot be remediated the loan is reviewed to assess its performance classification, including accrual status, sufficiency of any specific valuation reserve being held (i.e. SFAS 114) and whether the loan should be considered impaired with an appropriate charge off recorded. If the loan is not considered to be a pass rated credit, it is downgraded to a criticized rating (special mention or worse) and monitored directly or on consult authority by Special Assets (the Company’s loan workout group).
·
Disclose whether you have ever extended, renewed or restructured terms of the related loans, and the reasons for the changes;
Response:
Yes we have extended, renewed or restructured construction loans to accommodate borrower needs or to address unexpected events at the property level such as cost overruns, weather-related casualties and delays caused by city agencies. The Company also may refinance construction loans if the borrower is unable to refinance with another lender or pay the loan off at maturity.
Although the exact terms of a loan extension, renewal or restructure generally vary for each transaction, a standard requirement is that the borrower must replenish the interest reserve. Replenishment generally occurs by obtaining a cash deposit from the borrower; however, the replenishment may occur by reallocating line items in the budget if there have been cost savings in other categories or by escrowing some portion of the sales proceeds in for-sale transactions. If the project is close to generating positive cash flows and debt servicing is 100% guaranteed by a person or entity with solid financial standing, the Company may be willing to proceed with the extension, renewal or restructure without replenishment of the interest reserve.
Capital One Confidential 3
·
Describe your underwriting process for loans with interest reserves, and any specific differences in how your underwrite loans with interest reserves and loans that do not have interest reserves; and
Response:
In most cases, loans with interest reserves would fall in the Construction category. Our underwriting process for these loans is consistent with the underwriting process employed for non-construction loans and, although not an all-inclusive list, would include the following items for analysis:
·
Sponsor and guarantor;
·
Management team (capabilities and track record);
·
Sources of repayment (sales, cash flow, refinance, etc.);
·
Cost review;
·
Contractor financials and capabilities;
·
Market and sub-market review;
·
Tenant analysis (if applicable); and
·
Valuation and environmental issues.
Interest reserves are typically included in all construction loans at origination, with the amount of the interest reserve included as a line item in the construction budget or, occasionally, as a separate borrower-funded, pledged escrow account. The amount of the interest reserve is calculated by Company based on the projected draw schedule for the loan and the projected interest rate plus a spread as a cushion against potential increases in interest rates over the term of the loan. As mentioned above, replenishment of the interest reserve is typically a condition precedent to the Company’s agreement to extend, renew or restructure a loan.
·
Disclose whether any of your loans with interest reserves are currently on nonaccrual status.
Response:
The Company currently has four loans with interest reserves on nonaccrual status with an aggregate outstanding of $36.1 million at June 30, 2010.
Loan Modifications and Restructurings, page 59
Capital One Confidential 4
3.
We note that the tabular disclosure on page 60 of your loan modifications and restructurings, which have increased from an immaterial amount as of December 31, 2008 to $279.6 million as of December 31, 2009. We further note that due to the consolidation of your off-balance sheet entities, your modifications and restructurings have increased to $729.1 million as of March 31, 2010. Please address the following:
·
Revise future filings to separately disclose the amount of loan modifications and restructurings which are considered troubled-debt restructurings (TDRs) pursuant to ASC 310-40;
Response:
The tabular disclosure provided on page 60 of our 2009 Form 10-K discloses the amount of loan modifications and restructurings which are considered TDRs. Accordingly, we will revise our disclosures in future filings by explicitly stating that all of our loan modifications and restructurings presented in the table are accounted for as TDRs.
·
We note disclosure that a restructured loan is considered performing if the borrower complies with the terms of the modified loan and has made payments in line with the modified terms over several payment cycles. We also note that all of these loans included in Table 16 are not included as non-performing loans at December 31, 2009. Please tell us whether you have any previously classified TDRs that are currently non-performing as of March 31, 2010;
Response:
As of March 31, 2010 the Company’s non-performing loans did not include any loans which had been previously considered a TDR.
·
Tell us whether at the time the loan is restructured you continue to accrue interest. If so, tell us all of the factors you consider in making this determination so as to be reasonably assured of repayment and performance according to the modified terms; and
Response:
A restructure of a loan does not in and of itself determine whether interest is still accrued. For all loans, when payment in full is not expected or it reaches a specified number of days past due, accrual status of interest is stopped. After restructure or modification, the decision to return a loan to accrual is based on the borrower’s compliance with the modified or restructured terms for at least six consecutive months. For loans considered to be TDRs, interest is accrued based on the terms of the TDR.
Capital One Confidential 5
·
Tell us and revise future filings to quantify the types of concessions made (i.e. reduction in interest rate, extensions of the loan’s maturity, reductions in the amount of principal owed by the borrower, or other actions) distinguishing between each loan product along with a discussion of your success with these different types of concessions as of both December 31, 2009 and March 31, 2010.
Response:
The Company will comply with the Staff’s comment in future filings by providing additional qualitative disclosures related to the concessions we are utilizing. Nearly all of the concessions for the TDRs on our Card portfolio include a reduction in interest rate and/or an extension of maturity. Card TDRs result in the conversion of the loan to a closed-end loan with the revocation of revolving privileges. Approximately 65% of TDRs fully pay off their balances, while 35% ultimately charge off.
For the TDRs on our mortgage portfolio, approximately 75% include a reduction in interest rate and approximately 20% include an extension of maturity. Due to the recency of the program and the limited volume of TDRs, we do not have extensive data on program success; however, 30+ delinquency rates on modified loans as of December 31, 2009 and March 31, 2010 are 37% and 42%, respectively, while delinquency rates for these loans prior to modification were greater than 70%.
The vast majority of TDRs in our Commercial portfolio include a reduction in interest rate or maturity extensions. Due to the low volume of Commercial TDRs and the case-by-case nature of this portfolio, specific data regarding the success of Commercial loan modifications is not readily available.
4.
As a related matter, we note disclosure of short-term and long-term modifications on page 19 of your Form 10-Q for the period ended March 31, 2010. Specifically as it relates to your credit card loan modifications and restructurings which total $663.7 million as of March 31, 2010, please address the following:
·
Compare and contrast what you consider a short-term modification from a long-term modification, with a separate discussion for each loan product to the extent that there are differences;
Response:
The Company considers modification periods of three to 12 months to be short-term modifications, while long-term modifications have a duration of greater than 12 months.
Capital One Confidential 6
·
Compare and contrast under what circumstances would you consider any of these modifications to be temporary in nature or permanent and whether these would be classified as troubled-debt restructurings. We note on page 19 of your Form 10-Q for the period ended March 31, 2010 that you only consider a loan modification for which an economic concession has been granted to be a troubled debt restructuring as compared to an extension of loan terms for which you expect full collection to be a modification;
Response:
For both short-term and long-term modifications that are considered TDRs for our credit card products, the modifications permanently convert the loans from revolving lines of credit to closed end loans and no further purchases can be made on the accounts. The modifications on TDR accounts are considered permanent in nature.
·
Explain whether any loan would revert back to its original terms during any temporary modification period if consecutive late payments are made or if other terms of the modified agreement are violated. To further enhance our understanding of this process, please provide an example with an accompanying timeline explaining what triggering events would lead to such a change in status (classification) and discuss how these events would impact the accounting for the loan as well as the classification and presentation in your Guide III data; and
Response:
Credit card loans will revert to original interest and fee terms if payments for two consecutive cycles are less than the agreed minimum or the customer requests to be dropped f
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CORRESP
1
filename1.htm
corresp.htm
July 30, 2010
Mr. Amit Pande
Accounting Branch Chief
Division of Corporate Finance
United States Securities and Exchange Commission
100 F Street N.E.
Washington, D.C. 20549
Re:
Capital One Financial Corporation
Form 10-K for Fiscal Year Ended
December 31, 2009
Filed February 26, 2010
Form 10-Q for Fiscal Quarter Ended
March 31, 2010
File Number 1-13300
Dear Mr. Amit Pande:
On behalf of Capital One Financial Corporation (the “Company”), we are submitting this letter in response to the comments contained in the Staff’s letter of June 24, 2010, regarding the Company’s Form 10-K for Fiscal Year Ended December 31, 2009 (our “2009 Form 10-K”) and Form 10-Q for Fiscal Quarter Ended March 31, 2010 (our “First Quarter 2010 Form 10-Q”).
Below are our responses to each of your comments and requests. For ease of reference, we have repeated the Staff’s comments.
Form 10-K for Fiscal Year Ended December 31, 2009
Selected Financial Data, page 25
1.
We note from footnote seven to your Selected Financial Data on page 26 that the 2009 data includes the impact of the acquisition of Chevy Chase Bank, FSB (Chevy Chase) during the current year. Given your disclosure on page 113 that a majority of the loans acquired from Chevy Chase were credit impaired and were predominantly accounted for pursuant to ASC 310-30/SOP 03-3 and your disclosures in Table I on page 91, we believe more transparency is needed around presentation of asset quality ratios impacted by this acquisition, such as the delinquency rate and net charge-off rate, similar to that done in other parts of the filing. Please revise future filings to include footnote explanations to the asset quality ratios that would enable a reader to assess the impact of these acquired loans on the ratios presented.
Response:
The Company will comply with the Staff’s comment by including in our future filings footnote disclosures to the Selected Financial Data table and to other tables where we present asset quality ratios that explain how the loans acquired from Chevy Chase Bank affect the asset quality ratios. We will provide these disclosures in a manner similar to the disclosure we provided in footnote one to Table 8 on page 18 of our First Quarter 2010 Form 10-Q. This disclosure explained that the loans acquired from Chevy Chase Bank are not classified as nonperforming unless they do not perform in accordance with our expectations as of the purchase date and that we include these loans in the denominator for purposes of calculating the nonperforming loan ratios. The disclosure also presents the nonperforming loan ratios excluding from the denominator the loans acquired from Chevy Chase Bank.
Credit Concentration, page 57
2.
We note disclosure of your commercial real estate concentration in New York, which has experienced market deterioration in residential construction/redevelopment and Class A office space. As it relates to your $2.4 billion in outstanding real estate construction loans as of December 31, 2009 and to the extent that you use interest reserves on these loans, please address the following:
·
Disclose the amount of such loans and the accompanying interest reserves as of each period-end;
Response:
For the Staff’s information, we have presented below the outstanding amount of construction loans with interest reserves and the accompanying interest reserves as of December 31, 2009 and December 31, 2008.
(Dollars in millions)
December 31, 2009
December 31, 2008
Construction loans with interest reserves
$
1,357
$
1,468
Interest reserves
$
146
$
152
Total construction loans
$
2,516
$
2,425
·
Disclose how you monitor such projects throughout their lives to make sure the properties are moving along as planned such that it is appropriate to continue to capitalize the interest on the loan;
Response:
The Company reviews all construction loans on a regular basis. Prior to any disbursement of funds under a construction loan draw request, a professional engineer retained by the Company (or, on occasion, the Company’s on-staff engineer) inspects the subject property and submits an inspection report to the Company confirming the following: (1) all costs for which reimbursement is being requested have been expended; (2) construction is proceeding in accordance with the plans and specifications approved by the Company; and (3) the remaining construction budget is sufficient to complete the project (i.e., that the loan is “in balance”). On-staff engineers also may review the draw requests for larger loans. Following completion of the engineer’s inspection report, the inspection report, together with the draw request is submitted to the our Underwriting, Loan Administration and/or Commercial Loan Servicing or Monitoring groups for review to verify that the loan complies with the applicable requirements before the disbursement is authorized.
Capital One Confidential 2
Each regional office holds a quarterly meeting to review its portfolio of construction loans. A construction loan review sheet is prepared for each loan prior to the quarterly meeting. The construction loan review sheet contains the following information: (a) a project summary; (b) the percentage of construction completed, the amount of the interest reserve and the estimated length of time the interest reserve will carry the loan; and (c) an outline of the action plan for the loan. Senior executives from the real estate line of business, relationship managers, underwriters, portfolio managers, credit officers and representatives from the Company’s commercial credit review group attend the quarterly loan review meetings.
If the Company concludes, based on the draw request review or quarterly evaluation that construction is not proceeding as expected and/or that the loan is out of balance, the Company initiates discussions with the borrower to ensure the loan is put back on track. If it is determined that the deficiency identified cannot be remediated the loan is reviewed to assess its performance classification, including accrual status, sufficiency of any specific valuation reserve being held (i.e. SFAS 114) and whether the loan should be considered impaired with an appropriate charge off recorded. If the loan is not considered to be a pass rated credit, it is downgraded to a criticized rating (special mention or worse) and monitored directly or on consult authority by Special Assets (the Company’s loan workout group).
·
Disclose whether you have ever extended, renewed or restructured terms of the related loans, and the reasons for the changes;
Response:
Yes we have extended, renewed or restructured construction loans to accommodate borrower needs or to address unexpected events at the property level such as cost overruns, weather-related casualties and delays caused by city agencies. The Company also may refinance construction loans if the borrower is unable to refinance with another lender or pay the loan off at maturity.
Although the exact terms of a loan extension, renewal or restructure generally vary for each transaction, a standard requirement is that the borrower must replenish the interest reserve. Replenishment generally occurs by obtaining a cash deposit from the borrower; however, the replenishment may occur by reallocating line items in the budget if there have been cost savings in other categories or by escrowing some portion of the sales proceeds in for-sale transactions. If the project is close to generating positive cash flows and debt servicing is 100% guaranteed by a person or entity with solid financial standing, the Company may be willing to proceed with the extension, renewal or restructure without replenishment of the interest reserve.
Capital One Confidential 3
·
Describe your underwriting process for loans with interest reserves, and any specific differences in how your underwrite loans with interest reserves and loans that do not have interest reserves; and
Response:
In most cases, loans with interest reserves would fall in the Construction category. Our underwriting process for these loans is consistent with the underwriting process employed for non-construction loans and, although not an all-inclusive list, would include the following items for analysis:
·
Sponsor and guarantor;
·
Management team (capabilities and track record);
·
Sources of repayment (sales, cash flow, refinance, etc.);
·
Cost review;
·
Contractor financials and capabilities;
·
Market and sub-market review;
·
Tenant analysis (if applicable); and
·
Valuation and environmental issues.
Interest reserves are typically included in all construction loans at origination, with the amount of the interest reserve included as a line item in the construction budget or, occasionally, as a separate borrower-funded, pledged escrow account. The amount of the interest reserve is calculated by Company based on the projected draw schedule for the loan and the projected interest rate plus a spread as a cushion against potential increases in interest rates over the term of the loan. As mentioned above, replenishment of the interest reserve is typically a condition precedent to the Company’s agreement to extend, renew or restructure a loan.
·
Disclose whether any of your loans with interest reserves are currently on nonaccrual status.
Response:
The Company currently has four loans with interest reserves on nonaccrual status with an aggregate outstanding of $36.1 million at June 30, 2010.
Loan Modifications and Restructurings, page 59
Capital One Confidential 4
3.
We note that the tabular disclosure on page 60 of your loan modifications and restructurings, which have increased from an immaterial amount as of December 31, 2008 to $279.6 million as of December 31, 2009. We further note that due to the consolidation of your off-balance sheet entities, your modifications and restructurings have increased to $729.1 million as of March 31, 2010. Please address the following:
·
Revise future filings to separately disclose the amount of loan modifications and restructurings which are considered troubled-debt restructurings (TDRs) pursuant to ASC 310-40;
Response:
The tabular disclosure provided on page 60 of our 2009 Form 10-K discloses the amount of loan modifications and restructurings which are considered TDRs. Accordingly, we will revise our disclosures in future filings by explicitly stating that all of our loan modifications and restructurings presented in the table are accounted for as TDRs.
·
We note disclosure that a restructured loan is considered performing if the borrower complies with the terms of the modified loan and has made payments in line with the modified terms over several payment cycles. We also note that all of these loans included in Table 16 are not included as non-performing loans at December 31, 2009. Please tell us whether you have any previously classified TDRs that are currently non-performing as of March 31, 2010;
Response:
As of March 31, 2010 the Company’s non-performing loans did not include any loans which had been previously considered a TDR.
·
Tell us whether at the time the loan is restructured you continue to accrue interest. If so, tell us all of the factors you consider in making this determination so as to be reasonably assured of repayment and performance according to the modified terms; and
Response:
A restructure of a loan does not in and of itself determine whether interest is still accrued. For all loans, when payment in full is not expected or it reaches a specified number of days past due, accrual status of interest is stopped. After restructure or modification, the decision to return a loan to accrual is based on the borrower’s compliance with the modified or restructured terms for at least six consecutive months. For loans considered to be TDRs, interest is accrued based on the terms of the TDR.
Capital One Confidential 5
·
Tell us and revise future filings to quantify the types of concessions made (i.e. reduction in interest rate, extensions of the loan’s maturity, reductions in the amount of principal owed by the borrower, or other actions) distinguishing between each loan product along with a discussion of your success with these different types of concessions as of both December 31, 2009 and March 31, 2010.
Response:
The Company will comply with the Staff’s comment in future filings by providing additional qualitative disclosures related to the concessions we are utilizing. Nearly all of the concessions for the TDRs on our Card portfolio include a reduction in interest rate and/or an extension of maturity. Card TDRs result in the conversion of the loan to a closed-end loan with the revocation of revolving privileges. Approximately 65% of TDRs fully pay off their balances, while 35% ultimately charge off.
For the TDRs on our mortgage portfolio, approximately 75% include a reduction in interest rate and approximately 20% include an extension of maturity. Due to the recency of the program and the limited volume of TDRs, we do not have extensive data on program success; however, 30+ delinquency rates on modified loans as of December 31, 2009 and March 31, 2010 are 37% and 42%, respectively, while delinquency rates for these loans prior to modification were greater than 70%.
The vast majority of TDRs in our Commercial portfolio include a reduction in interest rate or maturity extensions. Due to the low volume of Commercial TDRs and the case-by-case nature of this portfolio, specific data regarding the success of Commercial loan modifications is not readily available.
4.
As a related matter, we note disclosure of short-term and long-term modifications on page 19 of your Form 10-Q for the period ended March 31, 2010. Specifically as it relates to your credit card loan modifications and restructurings which total $663.7 million as of March 31, 2010, please address the following:
·
Compare and contrast what you consider a short-term modification from a long-term modification, with a separate discussion for each loan product to the extent that there are differences;
Response:
The Company considers modification periods of three to 12 months to be short-term modifications, while long-term modifications have a duration of greater than 12 months.
Capital One Confidential 6
·
Compare and contrast under what circumstances would you consider any of these modifications to be temporary in nature or permanent and whether these would be classified as troubled-debt restructurings. We note on page 19 of your Form 10-Q for the period ended March 31, 2010 that you only consider a loan modification for which an economic concession has been granted to be a troubled debt restructuring as compared to an extension of loan terms for which you expect full collection to be a modification;
Response:
For both short-term and long-term modifications that are considered TDRs for our credit card products, the modifications permanently convert the loans from revolving lines of credit to closed end loans and no further purchases can be made on the accounts. The modifications on TDR accounts are considered permanent in nature.
·
Explain whether any loan would revert back to its original terms during any temporary modification period if consecutive late payments are made or if other terms of the modified agreement are violated. To further enhance our understanding of this process, please provide an example with an accompanying timeline explaining what triggering events would lead to such a change in status (classification) and discuss how these events would impact the accounting for the loan as well as the classification and presentation in your Guide III data; and
Response:
Credit card loans will revert to original interest and fee terms if payments for two consecutive cycles are less than the agreed minimum or the customer requests to be dropped f