Capital One 2002 Annual Report Download - page 72

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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 2002 2001
Loans Loans Loans Loans
Outstanding Delinquent Outstanding Delinquent
Managed loans $ 59,746,537 $ 3,345,394 $ 45,263,963 $ 2,241,647
Off-balance sheet loans (31,892,885) (1,533,030) (24,342,949) (1,229,090)
Reported consumer loans $ 27,853,652 $ 1,812,364 $ 20,921,014 $ 1,012,557
Average Net Charge- Average Net Charge-
Loans Offs Loans Offs
Managed loans $ 52,799,566 $ 2,769,249 $ 35,612,317 $ 1,655,947
Off-balance sheet loans (27,259,570) (1,509,565) (18,328,011) (833,690)
Reported consumer loans $ 25,539,996 $ 1,259,684 $ 17,284,306 $ 822,257
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 and accrued
but unbilled interest on the transferred 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 $1.1 billion
and $934.3 million at December 31, 2002 and 2001, respectively. The
Company’s retained residual interests, as well as the billed finance charge and
fee receivables, 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 in servicing and securitizations 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. The
Company periodically reviews the key assumptions and estimates used in
determining the value of the interest-only strip. Prior to December 31, 2002,
decreases in fair value below the carrying amount as a result of changes in the
key assumptions were recognized in servicing and securitizations income,
while, increases in fair values as a result of changes in key assumptions were
recorded as unrealized gains and included as a component of cumulative
other comprehensive income, on a net-of-tax basis, in accordance with the
provisions of SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Effective December 31, 2002 and for all subsequent
periods, the Company recognizes all changes in the fair value of
the interest-only strip immediately in servicing and securitizations on the
consolidated statements of income. In accordance with 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.
Securitization Key Assumptions
Year Ended December 31 2002 2001
Weighted average life
for receivables (months) 8 to 10 6 to 9
Principal repayment rate
(weighted average rate) 13% to 15% 13% to 15%
Charge-off rate
(weighted average rate) 5% to 6% 4% to 6%
Discount rate
(weighted average rate) 8% to 9% 9% to 11%
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.