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branching out 2005 annual report CHAIRMAN’S LETTER TO SHAREHOLDERS AND FRIENDS “We’re delivering on our strategy of combining the power of national scale lending and local scale banking.” 2005 was a transformational year for Capital One. Two years ago, we announced our intention to buy a bank. In November of 2005, we made banking a reality at Capital One with the acquisition of Hibernia. Our diversification strategy continued to drive strong results. We delivered our 11th straight year of record earnings with diluted earnings per share of $6.73. Asset growth was strong, with managed loans increasing 32% to $106 billion in 2005, including Hibernia. Our balance sheet remained solid and diversified with $47.9 billion of total deposits, exceptional liquidity, and more than half of our managed loans now in businesses beyond U.S. credit cards. We also continued to see stellar credit performance with managed charge-offs of 4.25%. We’re Delivering On Our Strategy At Capital One, we believe that the essence of strategy is figuring out where the world is going and then working backwards from that vision to position our company to win. Here’s where we believe the world of consumer banking is going. Consumer lending businesses, like credit cards and home equity, used to be dominated by the local branch on the corner. However, the ability to win in these markets is increasingly dependent on having national marketing capabilities, a national customer base, a national brand, and the efficiencies that go along with national scale. Consumer lending businesses are consolidating nationally at a rapid pace. A handful of big players ultimately will emerge as winners as these businesses continue to consolidate one product at a time. Certain banking businesses, like deposits and parts of small business, remain steadfastly local in nature. Success in these businesses is not driven by national scale. Instead, banks with a sizeable share in their local markets tend to disproportionately win in those businesses. We believe that the winners in consumer banking will be the nationally branded players who bring together the best of national scale lending and local scale banking. However, while banks are focused on consolidation, few are directly pursuing our vision of the end game. Monolines specializing in a single lending product generally are focused on building bigger and bigger versions of themselves, but they’re not diversifying. Regional banks typically are focused on expanding geographically, but they’re not building national scale lending platforms in the process. The largest national banks have both national and local scale, but often tend to take a national approach to competing in their local businesses. Only a handful of banks are building a national brand. We’ve been focused on the inevitable transformation of consumer banking since we began building our credit card business in 1988. We chose to enter the credit card business because we believed that it was at the forefront of this transformation. We thought that, using the power of information, technology and testing, we could build a winning national scale business as the credit card business consolidated. We believed that we could export the capabilities that we built in credit cards to other consumer lending businesses as they eventually followed a similar path. Our vision was to acquire or build growth platforms in key consumer lending businesses to capitalize on future waves of consolidation. Seven years ago, we started down the diversification path in the United States with our move into auto finance. We’ve also created national scale growth platforms in small business lending, home equity, installment lending and other emerging lending businesses, as well as diversifying internationally in the United Kingdom and Canada. - 1 - “Capital One now has one of the most powerful brands in financial services with 97% total brand awareness.” Today, the end game that we envisioned many years ago is playing out before our eyes. Consolidation in the credit card market has largely run its course. Capital One and the other top players now have almost 90% of all credit card assets in America. Other consumer lending businesses are marching inexorably toward national consolidation. With the acquisition of Hibernia, we’re delivering on our strategy of combining the power of national scale lending and local scale banking. Hibernia is the banking leader in Louisiana with 21% deposit share of the local market, and it has a strong growth play in Texas – one of the fastest growing banking markets in America. We don’t need to compete everywhere to be successful. We can be selective and choose to enter the most financially attractive national lending businesses and local banking markets. In the markets where we choose to compete, we are positioning ourselves to be “end game players.” As we’ve diversified, we’ve created one of the nation’s largest customer franchises with almost 50 million customer accounts. We’ve built a powerful national brand through our direct marketing and television advertising campaigns. And we’ve developed the ability to serve our customers across every marketing channel – direct mail, the telephone, the internet, our auto dealer network and our newly acquired bank branches. Our national brand, massive customer base and multiple marketing channels provide strong competitive advantages that we can leverage to drive growth and profits across each of our businesses. We’re the only former monoline to have undertaken such massive diversification, and we’re well-positioned to win in each of our businesses. Capital One already has the scarcest commodity – a national scale credit card business. We’re building growth platforms during critical consolidation windows in key consumer lending businesses. And we’ve added the capability to gather deposits and compete locally in banking with Hibernia. Hibernia Provides A Banking Growth Platform We scoured the country to find the right partner as we entered into banking. In Hibernia, we found the perfect fit. Hibernia has market-leading share in Louisiana and a proven growth strategy in the best markets in Texas. Hibernia also has a capable management team, led by Herb Boydstun, and talented people who are dedicated to delivering great service to their customers. Shortly before we closed the Hibernia deal, New Orleans and the surrounding areas were hit by Hurricane Katrina – the biggest natural disaster in America’s history. The courage and commitment of Hibernia’s people following this tragedy was awe-inspiring. They rose to the occasion at every turn, and are working with our customers and communities to help lead the recovery. We learned a lot about Hibernia’s people as they faced adversity, and we were incredibly impressed by everything we saw. Our integration with Hibernia is going smoothly. The Louisiana franchise is delivering strong results, especially as new investments flow into the region. We’re accelerating Hibernia’s already successful de novo growth strategy in the fastest growing markets in Texas. Our de novo branches are already outperforming the competition in these markets. We’re building a strong retail branch model which preserves Hibernia’s tradition of great customer service, with a focus on consumer deposits and small business – some of the most profitable segments in banking. Capital One brings significant value to our newly acquired banking business. We already have millions of customers in Louisiana and Texas that we can now serve through our convenient branches. We can offer very competitive national lending products through our branches. And we can leverage our national brand to accelerate growth. - 2- The power“ of attracting great people outweighs everything else we do. ” US Card Continues To Deliver Exceptional Results Our US Card business continued to generate exceptional results. Our profits were up 16% to $1.6 billion, and our managed charge-off rate was near an industry low at 5% in 2005. The credit card market is intensely competitive and highly consolidated. In certain market segments, like the prime revolver segment, our competitors are offering 0% balance transfer “teaser” rates for long periods that are heavily dependent on penalty repricing. We have chosen to pull back from this segment because we believe that the prevailing pricing practices compromise long-term returns and customer loyalty for the sake of short-term asset growth. Instead, we chose to focus on rewards products, like our “No Hassle Rewards” card which allows customers to fly on any airline, anytime, with no blackout dates. These products consistently drive purchase volume growth and provide a compelling customer experience. In 2005, purchase volume grew 15% and profits were up 16% in our US Card business. Even though growth in the US credit card market is modest, this business offers the most attractive risk-adjusted returns in all of consumer lending. Our US Card business continued to deliver strong results with after-tax returns on managed loans of 3.4% in 2005. Despite industry challenges, we remain well-positioned to continue to deliver profitable growth. Our Auto Finance Business Has Strong Earnings Power Capital One Auto Finance had a great year in 2005. We delivered after-tax profits of $132 million driven by continuing efficiency gains, strong credit performance, and strong growth in originations. The auto finance market is growing at a relatively modest rate and, historically, the captive auto lenders have captured a significant share of the market. Despite these issues, we are positioned to deliver exceptional growth in this business as the market continues to consolidate and we leverage our proven skills as consolidators. We became the #2 non-captive auto lender in 2005 with a 6.4% share of non-captive auto loan originations. We continued to ramp up growth with $10.4 billion in auto originations in 2005, and $16.4 billion in outstandings at year end, excluding Hibernia’s auto finance business.

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