Capital One 2004 Annual Report Download - page 111

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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) 8to9 9to10
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) 99
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)
88