Capital One 2007 Annual Report Download - page 53

Download and view the complete annual report

Please find page 53 of the 2007 Capital One annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 147

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147

31
In August 2006, the Company issued $1.0 billion aggregate principal amount of 6.150% Subordinated Notes due September 1, 2016.
In September 2006, the Company issued $1.1 billion of Floating Rate Senior Notes due September 10, 2009 and $1.1 billion of 5.7%
Senior Notes due September 15, 2011.
North Fork Balance Sheet Derivative
In April 2006, the Company entered into derivative instruments to mitigate certain exposures it faced as a result of the expected
acquisition of North Fork. The position was designed to protect the Companys tangible capital ratios from falling below a desired
level in the event that subsequent increases in interest rates had reduced the mark-to-market value of North Forks balance sheet prior
to closing. The Companys maximum negative exposure was expected to be no more than approximately $50 million. The derivative
instruments were not treated as designated hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and as such were marked to market through the income statement until the derivatives were terminated. The derivative
instruments expired out of the money and unexercised on October 2, 2006 with a $50.1 million reduction to non-interest income.
Loss on Sale of Securities
Subsequent to the North Fork acquisition, in December 2006 the Company sold a number of Treasury and Agency securities realizing
a loss of $34.9 million in non-interest expense.
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 discontinued operations. 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 discontinued operations.
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 Local Banking segment include the reversal of this allowance.