Capital One 2009 Annual Report Download - page 142

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Cumulative other-than-temporary impairment related to credit losses recognized in earnings for available-for-sale securities is as
follows:
OTTI credit losses recognized for
AFS debt
securities
Beginning balance of
OTTI credit losses
recognized for
securities held at the
beginning of the
period for which a
portion of OTTI was
recognized in OCI
Additional increases
to the amount related
to credit loss for
which an OTTI was
previously recognized
Additions for the
amount related to
credit loss for which
OTTI was not
previously recognized
Reductions for
securities sold
during the
period
Ending balance of
the amount related
to credit losses
held at the end of
the period for
which a portion of
OTTI was
recognized in OCI
Year ended
December 31, 2009
CMO ........................ $ — $ — $ 15,159 $ — $ 15,159
MBS ......................... — — 15,612 — 15,612
Other-Home
equity ................... — — 817 — 817
Total................................... $ — $ — $ 31,588 $ — $ 31,588
Collateralized Mortgage Obligations The Company’s portfolio includes investments in GSE collateralized mortgage obligations and
prime non-agency collateralized mortgage obligations. The unrealized losses on the Company’s investment in collateralized mortgage
obligations were primarily caused by credit spreads and interest rates that are higher than levels existing at the date of purchase. As of
December 31, 2009, the majority of the unrealized losses in this category are due to prime non-agency collateralized mortgage
obligations, of which 2% are rated AAA, 24% are rated other investment grade and 74% are non-investment grade or not rated. As of
December 31, 2008, the majority of the unrealized losses in this category is due to prime non-agency collateralized mortgage
obligations, of which 61% are rated AAA, 35% are rated other investment grade and 4% are non-investment grade or not rated. The
decline in ratings reflects the continued deterioration in non-agency collateralized mortgage obligations due to the challenging
economic environment. While the ratings for this sub-category of CMO declined significantly from 2008 to 2009, these investments
represent only 4% and 8% of the Company’s total available-for-sale portfolio at December 31, 2009 and 2008, respectively.
The Company recognized credit-related other-than-temporary impairment of $15.2 million through earnings for the year ended
December 31, 2009, for thirteen prime non-agency collateralized mortgage obligations. For these impaired securities, unrealized
losses not related to credit and therefore recognized in other comprehensive income was $96.1 million (net of tax was $61.9 million)
as of December 31, 2009. While these securities experienced significant decreases in fair value in the second half of 2008 due to
deteriorating credit fundamentals and elevated liquidity premiums, there has been substantial improvement in fair value during 2009
as the market has stabilized and risk premiums have tightened despite interest rates increasing. The credit-related impairment was
calculated based on internal forecasts using security specific delinquencies, product specific delinquency roll rates and expected
severities, using industry standard third party modeling tools. The significant key assumptions used to measure the credit-related
component of securities deemed to be other-than-temporarily impaired in 2009 are as follows: a weighted average credit default rate
of 6.76% and a weighted average expected severity of 51%. See “Note 1- Significant Accounting Policies” for a discussion of the
2009 changes to key assumptions used to measure the credit-related component of securities deemed to be other-than-temporarily
impaired.
Based on its view of each prime non-agency security’s current credit performance along with the sufficiency of subordination to
protect cash flows and the implicit U.S. Government guarantee of FNMA/FHLMC securities and the explicit U.S. Government
guarantee of GNMA securities, the Company expects to recover the entire amortized cost basis of its remaining collateralized
mortgage obligations. Furthermore, since the Company does not have the intent to sell nor will it more likely than not be required to
sell before anticipated recovery, it does not consider any of its remaining collateralized mortgage obligations in unrealized loss
positions to be other-than-temporarily impaired at December 31, 2009 and 2008.
Mortgage-Backed Securities The Company’s portfolio includes investments in GSE mortgage-backed securities and prime non-
agency mortgage-backed securities. The unrealized losses on the Company’s investment in mortgage-backed securities were primarily
caused by credit spreads and interest rates that are higher than levels existing at the date of purchase. As of December 31, 2009 the
majority of unrealized losses is due to prime non-agency mortgage-backed securities of which 4% are rated AAA, 7% are rated other
investment grade and 89% are non-investment grade or not rated. As of December 31, 2008, the majority of unrealized losses is due to
prime non-agency mortgage-backed securities of which 67% are rated AAA, 23% are rated other investment grade and 10% are non-
investment grade or not rated. The decline noted in ratings for non-agency mortgage backed securities reflects the continued
deterioration the investments were subject to due to the continued economic challenges facing mortgage-related assets. While the
ratings for this sub-category of MBS declined significantly from 2008 to 2009, these investments represent only 3% and 4% of the
Company’s total available-for-sale portfolio at December 31, 2009 and 2008, respectively.