Capital One 2010 Annual Report Download - page 118

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
98
Loans Held for Investment
Loans that we have the ability and intent to hold for the foreseeable future or to maturity and loans associated with on-balance sheet
securitization transactions accounted for as secured borrowings are classified as held for investment. The substantial majority of our
loans, which include unrestricted loans and restricted loans for securitization investors, are classified as held for investment.
Credit card loans classified as held for investment are reported at their outstanding unpaid principal balance plus uncollected billed
interest and fees net of billed interest and fees deemed uncollectible. Other loans classified as held for investment, except for
purchased credit-impaired loans, are reported at amortized cost. Amortized cost is measured based on the outstanding unpaid principal
amount, net of unearned income, unamortized deferred fees and costs and charge-offs. We generally defer certain loan origination fees
and direct loan origination costs on originated loans, premiums and discounts on purchased loans and loan commitment fees and
recognize these amounts in interest income as yield adjustments over the life of the loan and/or commitment period using the level
yield interest method. Interest income is recognized on loans held for investment, other than purchased credit-impaired loans, on an
accrual basis. We establish an allowance for loan losses for probable losses inherent in our held for investment loan portfolio as of
each balance sheet date.
Cash flows related to unrestricted loans held for investment are included in cash flows from investing activities in our consolidated
statements of cash flows regardless of a subsequent change in intent. Because our securitization transactions are accounted for under
the new consolidation accounting standards as secured borrowings, the cash flows from these transactions are presented as cash flows
from financing activities rather than as cash flows from operating or investing activities in our consolidated statement of cash flows
beginning in 2010.
Loans Held for Sale
Loans that we intend to sell or for which we do not have the ability and intent to hold for the foreseeable future are classified as held
for sale. We historically classified credit card loans necessary to support new securitization transactions expected to take place in the
next three months as held for sale. Management limited the timeframe in which it believed it could reasonably estimate the amount of
existing credit card loans to support securitization transactions to three months because of the uncertainity of customer repayment
behavior and the revolving nature of credit cards.
Loans classified as held for sale are reported at the lower of amortized cost or fair value as determined on an aggregate homogeneous
portfolio basis, with any write-downs or recoveries in fair value up to the amortized cost recorded in our consolidated statements of
income as a component of other non-interest income. We recognize interest on loans held for sale classified as performing on an
accrual basis. Because loans held for sale are reported at lower of cost or fair value, an allowance for loan losses is not established for
loans held for sale. The fair value of loans held for sale is estimated based on secondary market prices for loan portfolios with similar
characteristics.
In certain circumstances, we may transfer loans to/from held for sale or held for investment based on a change in strategy. We transfer
these loans at the lower of cost or fair value on the date of transfer and establish a new cost basis upon transfer. Write-downs on loans
transferred from held for investment to held for sale are recorded as charge-offs at the time of transfer.
We execute whole loan sales with either servicing rights released to the buyer or retained. When loans are sold and the servicing rights
are released to the buyer, the gain or loss recognized on the sale is calculated based on the difference between the proceeds received
and the carrying value of the loans sold. When loans are sold and the servicing rights are retained, the fair value attributed to the
retained servicing rights impacts the gain or loss recognized on the sale. We report gains or losses on loans held for sale when realized
in other non-interest income.
Loans Acquired
All purchased loans, including loans transferred in a business combination, acquired on or after January 1, 2009, are initially recorded
at fair value at the date of acquisition based on the present value of cash flows expected to be collected. Accordingly, any related
allowance for loan losses cannot be carried over or established at acquisition. Prior to January 1, 2009, non-impaired purchased loans
aquired in a business combination were generally recorded at the present value of amounts received, determined at appropriate current
interest rates, less allowances for uncollectibility and collection costs, if necessary.
Loans acquired with evidence of credit deterioration since origination and for which it is probable at the date of acquisition that we
will not collect all contractually required principal and interest payments are considered purchased credit impaired (“PCI”) loans.
Evidence of credit deterioration as of the acquisition date may include statistics such as delinquency and accrual status; current loan-