Capital One 2009 Annual Report Download - page 131

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Note 3
Loans Acquired in a Transfer
The Company’s acquired loans from the Chevy Chase Bank acquisition are initially recorded at fair value and no separate valuation
allowance is recorded at the date of acquisition. The Company is required to review each loan at acquisition to determine if it should
be accounted for under ASC 310-10/SOP 03-3 and if so, determines whether each loan is to be accounted for individually or whether
loans will be aggregated into pools of loans based on common risk characteristics. The Company has performed its analysis of the
loans to be accounted for as impaired under ASC 310-10/SOP 03-3 (“Impaired Loans” in the tables below). For the loans acquired
with the Chevy Chase Bank acquisition that are not within the scope of ASC 310-10/SOP 03-3 (“Non-Impaired Loans” in the tables
below), the Company followed the income recognition and disclosure guidance in ASC 310-10/SOP 03-3.
During the evaluation of whether a loan was considered impaired under ASC 310-10/SOP 03-3 or performing under ASC 805-
10/SFAS 141(R), the Company considered a number of factors, including the delinquency status of the loan, payment options and
other loan features (i.e. reduced documentation, interest only, or negative amortization features), the geographic location of the
borrower or collateral and the risk rating assigned to the loans. Based on the criteria, the Company considered the entire Chevy Chase
Bank option arm, hybrid arm and construction to permanent portfolios to be impaired and accounted for under ASC 310-10/SOP 03-3.
Portions of the Chevy Chase Bank commercial, auto, fixed mortgage, home equity, and other consumer loan portfolios were also
considered impaired.
The Company makes an estimate of the total cash flows it expects to collect from the pools of loans, which includes undiscounted
expected principal and interest. The excess of that amount over the fair value of the loans is referred to as accretable yield. Accretable
yield is recognized as interest income on a level-yield basis over the life of the loans. The Company also determines the loans’
contractual principal and contractual interest payments. The excess of contractual amounts over the total cash flows expected to be
collected from the loans is referred to as nonaccretable difference, which is not accreted into income. Judgmental prepayment
assumptions are applied to both contractually required payments and cash flows expected to be collected at acquisition. The Company
continues to estimate cash flows expected to be collected over the life of the loans. Subsequent increases in total cash flows expected
to be collected are recognized as an adjustment to the accretable yield with the amount of periodic accretion adjusted over the
remaining life of the loans. Subsequent decreases in cash flows expected to be collected over the life of the loans are recognized as
impairment in the current period through allowance for loan loss.
In conjunction with the Chevy Chase Bank acquisition, the acquired loan portfolio was accounted for under ASC 310-10/SOP 03-3 or
ASC 805-10/SFAS 141(R) at fair value and are as follows:
At Acquisition
(In Thousands)
Impaired
Loans Non-Impaired Loans
Total Loans
Contractually required principal and interest at acquisition ........................................ $ 12,038,971 $ 3,348,058 $ 15,387,029
N
onaccretable difference (expected principal losses of $2,207,144 and foregone
interest of $1,820,065) (1)......................................................................................... 3,851,043 176,166 4,027,209
Cash flows expected to be collected at acquisition ..................................................... $ 8,187,928 $ 3,171,892 $ 11,359,820
Accretable yield (interest component of expected cash flows) ................................... 1,860,697 499,245 2,359,942
Fair value of loans acquired (2) .................................................................................... $ 6,327,231 $ 2,672,647 $ 8,999,878
(1) Expected principal losses and foregone interest on the impaired loans are $2,053,501 and $1,797,542, respectively. Expected
principal losses and foregone interest on the non impaired loans are $153,643 and $22,523, respectively.
(2) A portion of the acquired loans from Chevy Chase Bank acquisition were held for sale and are not included in these tabular
disclosures. These held for sale loans were assigned a fair value of $235.1 million through purchase price allocation.