Capital One 2007 Annual Report Download - page 124

102
Note 24
Off-Balance Sheet Securitizations
Off-balance sheet securitizations involve the transfer of pools of loan receivables by the Company to one or more third-party trusts or
qualified special purpose entities in transactions that are accounted for as sales in accordance with SFAS 140. Certain undivided
interests in the pool of loan receivables are sold to investors as asset-backed securities in public underwritten offerings or private
placement transactions. The proceeds from off-balance sheet securitizations are distributed by the trusts to the Company as
consideration for the loan receivables transferred. Each new off-balance sheet securitization results in the removal of loan principal
receivables equal to the sold undivided interests in the pool from the Companys consolidated balance sheet (off-balance sheet
loans), the recognition of certain retained residual 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 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 loan receivables, representing, transferors interest was $11.4 billion and $9.9 billion as of
December 31, 2007 and 2006, respectively.
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 loan portfolios.
Supplemental Loan Information
Year Ended December 31
2007 2006
Loans
Outstanding
Loans
Delinquent
Loans
Outstanding
Loans
Delinquent
Managed loans $ 151,362,417 $ 5,863,797 $ 146,151,268 $ 4,414,045
Securitization adjustments (49,557,390) (2,142,353) (49,639,129) (1,765,642)
Reported loans $ 101,805,027 $ 3,721,444 $ 96,512,139 $ 2,648,403
Average
Loans
Net
Charge-
Offs
Average
Loans
Net
Charge-
Offs
Managed loans $ 144,727,007 $ 4,161,995 $ 111,328,595 $ 3,158,080
Securitization adjustments (51,185,182) (2,201,454) (47,751,316) (1,750,591)
Reported loans $ 93,541,825 $ 1,960,541 $ 63,577,279 $ 1,407,489
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 residual interests are recorded at estimated fair value. Retained residual interests totaled $2.3 billion and $2.2 billion
at December 31, 2007 and 2006, 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 strip and other subordinated retained interests resulting
from securitizations of loan receivables completed during the period included the weighted average ranges for charge-off rates,