Capital One 2006 Annual Report Download - page 53

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35
Sale of Mortgage Loans
During the fourth quarter, the Company entered agreements and established the price with third parties to sell $1.5 billion of
CONAs residential mortgage portfolio and $4.2 billion of North Fork Banks mortgage portfolio as part of a balance sheet
downsizing related to the acquisition of North Fork. In December 2006, $0.2 billion of loans were sold, resulting in a loss of
$9.2 million. The Company recognized a loss of $21.4 million resulting from the mark to lower of cost or market on the
remaining $5.5 billion of mortgage loans held for sale which was recorded in mortgage banking operations income. The
Company entered into freestanding interest rate swaps to mitigate the interest rate exposure on the mortgage loans held for
sale. The Company recognized a mark-to-market gain on the freestanding interest rates swaps of $35.7 million in mortgage
banking operations income.
MasterCard, Inc. Initial Public Offering
In May 2006, MasterCard, Inc. completed an initial public offering of its stock. In connection with this transaction the
Company received 2,305,140 Class B shares of which 1,360,032 Class B shares were immediately redeemed by MasterCard,
Inc. The Company recognized a $20.5 million gain from the share redemption, which was recorded in other non-interest
income. The Class B shares carry certain trading restrictions which lapse in 2010.
Charged-Off Loan Portfolio Sale
In February 2006, the Company recognized $83.8 million of income from the sale of a combination of previously purchased
charged-off loan portfolios and Company originated charged-off loans. The sale resulted in the acceleration of certain future
portfolio returns. The pre-tax income is reflected in the following income statement line items: an increase of $66.4 million to
various revenue line items, the majority of which was recorded to other non-interest income for the portion related to
purchased charged-off loan portfolios; a $7.0 million reduction in the provision for loan losses through an increase in
recoveries for the portion of charged-off loans originated by the Company and not securitized; and an increase of $10.4
million to servicing and securitizations income for the portion of charged-off loans originated by the Company and
securitized.
Resolution of Tax Issues
During 2006, the Companys income tax expense was reduced by $70.7 million due to the resolution of certain tax issues and
audits for prior years with the Internal Revenue Service. This reduction represented the release of previous accruals for
potential audit adjustments which were subsequently settled or eliminated and further refinement of existing tax exposures.
Release of Hurricane Reserve
During 2006, the Company determined that $25.7 million of allowance for loan losses previously established to cover
expected losses in the portion of the loan portfolio impacted by the 2005 hurricanes was no longer needed. This
determination was driven by improvements in credit performance of the impacted portfolios since the time those reserves
were established. As a result, results for the Banking segment include the reversal of this allowance.
VI. Financial Summary
Table 1 provides a summary view of the consolidated income statement and selected metrics at and for the years ended
December 31, 2006, 2005 and 2004.