Capital One 2005 Annual Report Download - page 104

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interests and a gain on the sale. The remaining undivided interests in principal receivables of the pool, as well as the unpaid
billed finance charge and fee receivables related to the Company’ s undivided interest in the principal receivables are retained
by the Company and recorded as consumer loans on the Consolidated Balance Sheet. The amounts of the remaining
undivided interests fluctuate as the accountholders make principal payments and incur new charges on the selected accounts.
The amount of retained consumer loan receivables was $11.0 billion and $10.3 billion as of December 31, 2005 and 2004,
r spectively. e
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
2005 2004
Loans
Outstanding
Loans
Delinquent
Loans
Outstanding
Loans
Delinquent
Managed loans $ 105,527,491 $ 3,423,820
$ 79,861,299 $ 3,054,078
Securitization adjustments (45,679,810) (1,544,812) (41,645,708) (1,581,884)
Reported consumer loans $ 59,847,681 $ 1,879,008
$ 38,215,591 $ 1,472,194
Average
Loans
Net
Charge-
Offs
Average
Loans
Net
Charge-
Offs
Managed loans $ 85,265,023 $ 3,623,152
$ 73,711,673 $ 3,251,761
Securitization adjustments (44,530,786) (2,176,503) (39,446,005) (1,956,193)
Reported consumer loans $ 40,734,237 $ 1,446,649
$ 34,265,668 $ 1,295,568
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, cash reserve accounts and unpaid interest and fees on the investors’ portion of the
transferred principal 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 $2.4 billion and $2.1 billion at December 31, 2005
and 2004, respectively. The Company’ s retained residual interests 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, net of transaction costs, in servicing and securitizations
income 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. 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
te curves, and are reflective of what market participants would use in a similar valuation. ra
95