Capital One 2011 Annual Report Download - page 252

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS—(Continued)
payable. The provisions requiring us to maximize the use of observable inputs and to measure fair value using a
notion of exit price were factored into our selection of inputs of our established valuation techniques.
Financial Assets
Cash and Cash Equivalents
The carrying amounts of cash and due from banks, federal funds sold and resale agreements and interest-bearing
deposits at other banks approximate fair value.
Restricted Cash or Securitization Investors
The carrying amounts of restricted cash for securitization investors approximate their fair value due to their
relatively short-term nature.
Securities Available For Sale
Quoted prices in active markets are used to measure the fair value of U.S. Treasury securities. For other
investment categories, we utilize multiple third party pricing services to obtain fair value measures for the large
majority of our securities. A pricing service may be considered as the primary pricing provider for certain types
of securities, and the designation of the primary pricing provider may vary depending on the type of securities.
The determination of the primary pricing provider is based on our experience and validation benchmark of the
pricing service’s performance in terms of providing fair value measurement for the various types of securities.
Certain securities available for sale are classified as Level 2 and 3, the majority of which are collateralized
mortgage obligations and mortgage-backed securities. Classification indicates that significant valuation
assumptions are not consistently observable in the market. When significant assumptions are not consistently
observable, fair values are derived using the best available data. Such data may include quotes provided by a
dealer, the use of external pricing services, independent pricing models, or other model-based valuation
techniques such as calculation of the present values of future cash flows incorporating assumptions such as
benchmark yields, spreads, prepayment speeds, credit ratings, and losses. The techniques used by the pricing
services utilize observable market data to the extent available. Pricing models may be used, which can vary by
asset class and may incorporate available trade, bid and other market information. Across asset classes,
information such as trader/dealer input, credit spreads, forward curves, and prepayment speeds are used to help
determine appropriate valuations. Because many fixed income securities do not trade on a daily basis, the
evaluated pricing applications may apply available information through processes such as benchmarking curves,
like securities, sector groupings, and matrix pricing to prepare valuations. In addition, model processes are used
by the pricing services to develop prepayment and interest rate scenarios.
We validate the pricing obtained from the primary pricing providers through comparison of pricing to additional
sources, including other pricing services, dealer pricing indications in transaction results, and other internal
sources. Pricing variances among different pricing sources are analyzed and validated.
As of December 31, 2011, we saw further improvements in the market value of our portfolio holdings driven by
lower interest rates and reduced risk premiums as compared to 2010. The decrease in the amount of Level 3
securities reflected continued run-off or liquidation of the securities and improvement in pricing consistency.
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