Capital One 2006 Annual Report Download - page 50

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32
Securitization Guarantees
In connection with certain installment loan securitization transactions, the transferee (off-balance sheet special purpose entity
receiving the installment loans) entered into interest rate hedge agreements (the swaps) with a counterparty to reduce
interest rate risk associated with the transactions. In connection with the swaps, the Corporation entered into letter
agreements guaranteeing the performance of the transferee under the swaps. If at anytime the Class A invested amount equals
zero and the notional amount of the swap is greater than zero resulting in an Early Termination Date (as defined in the
securitization transactions Master Agreement), then (a) to the extent that, in connection with the occurrence of such Early
Termination Date, the transferee is obligated to make any payments to the counterparty pursuant to the Master Agreement,
the Corporation shall reimburse the transferee for the full amount of such payment and (b) to the extent that, in connection
with the occurrence of an Early Termination Date, the transferee is entitled to receive any payment from the counterparty
pursuant to the Master Agreement, the transferee will pay to the Corporation the amount of such payment.
IV. Reconciliation to GAAP Financial Measures
The Companys consolidated financial statements prepared in accordance with accounting principles generally accepted in
the United States (GAAP) are referred to as its reported financial statements. Loans included in securitization
transactions which qualify as sales under GAAP have been removed from the Companys reported balance sheet. However,
servicing fees, finance charges, and other fees, net of charge-offs, and interest paid to investors of securitizations are
recognized as servicing and securitizations income on the reported income statement.
The Companys managed consolidated financial statements reflect adjustments made related to effects of securitization
transactions qualifying as sales under GAAP. The Company generates earnings from its managed loan portfolio which
includes both the on-balance sheet loans and off-balance sheet loans. The Companys managed income statement takes the
components of the servicing and securitizations income generated from the securitized portfolio and distributes the revenue
and expense to appropriate income statement line items from which it originated. For this reason, the Company believes the
managed consolidated financial statements and related managed metrics to be useful to stakeholders.
As of and for the year Ended December 31, 2006
(Dollars in millions) Total Reported
Securitization
Adjustments(1) Total Managed(2)
Income Statement Measures
Net interest income $ 5,100 $ 3,841 $ 8,941
Non-interest income $ 6,997 $ (2,094) $ 4,903
Total revenue $ 12,097 $ 1,747 $ 13,844
Provision for loan losses $ 1,476 $ 1,748 $ 3,224
Net charge-offs $ 1,407 $ 1,751 $ 3,158
Balance Sheet Measures
Loans held for investment $ 96,512 $ 49,639 $ 146,151
Total assets $ 149,739 $ 48,906 $ 198,645
Average loans held for investment $ 63,577 $ 47,752 $ 111,329
Average earning assets $ 84,522 $ 45,726 $ 130,248
Average total assets $ 95,810 $ 47,172 $ 142,982
Delinquencies $ 2,648 $ 1,766 $ 4,414
(1) Income statement adjustments for the year ended December 31, 2006 reclassify the net of finance charges of $5,485.0 million, past due fees of $938.6 million,
interest income of $(239.7) million and interest expense of $2,342.7 million; and net charge-offs of $1,747.5 million to Non-interest income from Net interest
income and Provision for loan losses, respectively.
(2) The managed loan portfolio does not include auto loans which have been sold in whole loan sale transactions where the Company has retained servicing rights.
V. Management Summary
The following discussion provides a summary of 2006 results compared to 2005 results and 2005 results compared to 2004
results. Each component is discussed in further detail in subsequent sections of this analysis.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Net income increased 33% to $2.4 billion for the year ended December 31, 2006. The Company reported 13% diluted
earnings per share growth in 2006, while achieving a number of significant milestones, including the successful integration of
Hibernia, the acquisition of North Fork, upgraded credit ratings, and a significant upgrade of the systems infrastructure.