Capital One 2011 Annual Report Download - page 164

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS—(Continued)
participant would consider in determining fair value. We are permitted to aggregate PCI loans acquired in the
same fiscal quarter into one or more pools if the loans have common risk characteristics. A pool is then
accounted for as a single asset with a single composite interest rate and an aggregate fair value and expected cash
flows.
The difference between contractually required payments due and the cash flows expected to be collected at
acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference. The
nonaccretable difference, which is neither accreted into income nor recorded on our consolidated balance sheet,
reflects estimated future credit losses expected to be incurred over the life of the loan. The excess of cash flows
expected to be collected over the estimated fair value of PCI loans is referred to as the accretable yield. This
amount is not recorded on our consolidated balance sheet, but is accreted into interest income over the remaining
life of the loan, or pool of loans, using the effective interest method.
Subsequent to acquisition, we complete quarterly evaluations of expected cash flows. Decreases in expected cash
flows attributable to credit will generally result in an impairment charge to the provision for loan and lease losses
and the establishment of an allowance for loan and lease losses. Increases in expected cash flows will generally
result in a reduction in any allowance for loan and lease losses established subsequent to acquisition and an
increase in the accretable yield through a reclassification from the nonaccretable difference. The adjusted
accretable yield is recognized in interest income over the remaining life of the loan, or pool of loans. Disposals of
loans, which may include sales of loans to third parties, receipt of payments in full or part by the borrower, and
foreclosure of the collateral result in removal of the loan from the PCI loan portfolio at its carrying amount.
Because the initial fair value of PCI loans recorded at acquisition includes an estimate of credit losses expected to
be realized over the remaining lives of the loans, we separately track and report PCI loans and exclude these
loans from our delinquency and nonperforming loan statistics. Even though substantially all of these loans are 90
days or more contractually past due, they are considered to be accruing since we have a reasonable expectation
about the timing and amount of cash flows expected to be collected.
For acquired loans that are not deemed impaired at acquisition, subsequent to acquisition we recognize the
difference between the initial fair value at acquisition and the undiscounted expected cash flows in interest
income over the life of the loans using the effective interest method.
Loan Modifications and Restructurings
As part of our loss mitigation efforts, we may make loan modifications that are intended to minimize the
economic loss and to avoid the need for foreclosure or repossession of collateral. We may provide short-term
(three to twelve months) or long-term (greater than twelve months) modifications to a borrower experiencing
financial difficulty to improve long-term loan performance and collectability. Our modifications typically include
a reduction in the borrower’s initial monthly or quarterly principal and interest payment through an extension of
the loan term, a reduction in the interest rate, or a combination of both. For credit card loan agreements, such
modifications may include canceling the customer’s available line of credit on the credit card, reducing the
interest rate on the card, and placing the customer on a fixed payment plan not exceeding 60 months. These
modifications may result in our receiving the full amount due, or certain installments due, under the loan over a
period of time that is longer than the period of time originally provided for under the terms of the loan. In some
cases, we may curtail the amount of principal owed by the borrower.
A loan modification in which a concession is granted to a borrower experiencing financial difficulty is accounted
for as a troubled debt restructuring (“TDR”). We describe our accounting for and measurement of impairment on
restructured loans below under “Impaired Loans.” See “Note 5—Loans” for additional information on our loan
modifications and restructurings.
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