Capital One 2011 Annual Report Download - page 253

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS—(Continued)
Loans Held For Sale
Loans held for sale are carried at the lower of aggregate cost, net of deferred fees, deferred origination costs and
effects of hedge accounting, or fair value. The fair value of loans held for sale is determined using current
secondary market prices for portfolios with similar characteristics. The carrying amounts as of December 31,
2011 and 2010 approximate fair value.
Loans Held For Investment, Net
The fair values of credit card loans, installment loans, auto loans, home loans and commercial loans were
estimated using a discounted cash flow method, a form of the income approach. Discount rates were determined
considering rates at which similar portfolios of loans would be made under current conditions and considering
liquidity spreads applicable to each loan portfolio based on the secondary market. The fair value of credit card
loans excluded any value related to customer account relationships. The increase in fair value above carrying
amount at December 31, 2011 was primarily due to a tightening of liquidity spreads and improved credit
performance noted in our credit card, auto and commercial loan portfolios.
Interest Receivable
The carrying amount of interest receivable approximates the fair value of this asset due to its relatively short-
term nature.
Accounts Receivable from Securitizations
Accounts receivable from securitizations include the interest-only strip, retained notes accrued interest
receivable, cash reserve accounts and cash spread accounts for those securitization structures achieving
off-balance sheet treatment. Refer to “Note 7—Variable Interest Entities and Securitizations” for discussion
regarding the adoption of the new accounting consolidation standards on January 1, 2010. We use a valuation
model that calculates the present value of estimated future cash flows. The model incorporates our estimate of
assumptions market participants use in determining fair value, including estimates of payment rates, defaults, and
discount rates including adjustments for liquidity, and contractual interest and fees. Other retained interests
related to securitizations are carried at cost, which approximates fair value. The valuation technique for these
securities is discussed in more detail in “Note 7—Variable Interest Entities and Securitizations.”
Derivative Assets
Most of our derivatives are not exchange traded, but instead traded in over the counter markets where quoted
market prices are not readily available. The fair value derived for those derivatives using models that use
primarily market observable inputs, such as interest rate yield curves, credit curves, option volatility and currency
rates are classified as Level 2. Any derivative fair value measurements using significant assumptions that are
unobservable are classified as Level 3, which include interest rate swaps whose remaining terms do not correlate
with market observable interest rate yield curves. The impact of counterparty non-performance risk is considered
when measuring the fair value of derivative assets. These derivatives are included in other assets on the balance
sheet.
We validate the pricing obtained from the internal models through comparison of pricing to additional sources,
including external valuation agents and other internal sources. Pricing variances among different pricing sources
are analyzed and validated.
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