Capital One 2011 Annual Report Download - page 171

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS—(Continued)
Goodwill is not amortized but is tested for impairment at least annually or more frequently if events or changes
in circumstances indicate that the asset might be impaired. Goodwill is the only intangible asset with an
indefinite life on our consolidated balance sheets. We have elected October 1 as the date to perform our annual
goodwill impairment test. Intangible assets with definite useful lives are amortized either on a straight-line or on
an accelerated basis over their estimated useful lives and evaluated for impairment whenever events or changes
in circumstances indicate the carrying amount of the assets may not be recoverable.
Other Assets
We report our investment in Federal Home Loan Bank (“FHLB”) stock, which totaled $362 million and $269
million as of December 31, 2011 and 2010, respectively, and our investment in Federal Reserve stock, which
totaled $863 million and $861 million, as of December 31, 2011 and 2010, respectively, in other assets on our
consolidated balance sheets. We carry these investments at cost and assess for other-than-temporary impairment
in accordance with applicable accounting guidance for evaluating impairment. We did not recognize any
impairment on these investments in 2011 or 2010.
Mortgage Servicing Rights
Mortgage servicing rights (“MSRs”) are initially recorded at fair value when mortgage loans are sold or
securitized in the secondary market and the right to service these loans is retained for a fee. Subsequently, MSRs
are carried at fair value on our consolidated balance sheet with changes in fair value recognized in other income.
In measuring the fair value of our MSRs, we stratify the underlying loans based on certain risk characteristics,
including loan type, note rate and investor servicing requirements. We determine the fair value of MSRs based
on the present value of the estimated future cash flows of net servicing income. We use assumptions in the
valuation model that market participants use when estimating future net servicing income, including prepayment
speeds, discount rates, default rates, cost to service, escrow account earnings, contractual servicing fee income,
ancillary income and late fees. This model is highly sensitive to changes in certain assumptions. Different
anticipated prepayment speeds, in particular, can result in substantial changes in the estimated fair value of
MSRs. If actual prepayment experience differs from the anticipated rates used in the model, this difference could
result in a material change in the value of our MSRs.
MSRs, which are included in other assets on our consolidated balance sheets, totaled $93 million and $141
million as of December 31, 2011 and 2010, respectively. Our acquisition of Chevy Chase Bank resulted in
additional mortgage servicing rights of $110 million as of the acquisition date. See “Note 8—Goodwill and Other
Intangible Assets” and “Note 7—Variable Interest Entities and Securitizations” for additional information.
Upon adoption of the accounting consolidation guidance, certain mortgage loans that had been securitized and
accounted for as a sale were subject to consolidation and accounted for as a secured borrowing. Accordingly,
effective January 1, 2010, mortgage securitization trusts that contain approximately $1.6 billion of mortgage
loans and related debt securities issued to third party investors were consolidated and the retained interests and
mortgage servicing rights related to these newly consolidated trusts were eliminated in consolidation. See “Note
1—Summary of Significant Accounting Policies” and “Note 8—Goodwill and Other Intangible Assets” for
additional information.
Fair Value
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly
transaction between market participants on the measurement date (also referred to as an exit price). The fair value
accounting guidance provides a three-level fair value hierarchy for classifying financial instruments. This
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