Capital One 2012 Annual Report Download - page 188

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We assess, measure and recognize OTTI in accordance with the accounting guidance for recognition and
presentation of OTTI. Under this guidance, if we determine that impairment on our debt securities is other-than-
temporary and we have made the decision to sell the security or it is more likely than not that we will be required
to sell the security prior to recovery of its amortized cost basis, we recognize the entire portion of the impairment
in earnings. If we have not made a decision to sell the security and we do not expect that we will be required to
sell the security prior to recovery of the amortized cost basis, we recognize only the credit component of OTTI in
earnings. The remaining unrealized loss due to factors other than credit, or the non-credit component, is recorded
in AOCI. We determine the credit component based on the difference between the security’s amortized cost basis
and the present value of its expected future cash flows, discounted based on the effective yield. The non-credit
component represents the difference between the security’s fair value and the present value of expected future
cash flows.
The following table summarizes other-than-temporary impairment losses on debt securities recognized in
earnings for the years ended December 31, 2012, 2011 and 2010:
Year Ended December 31,
(Dollars in millions) 2012 2011 2010 (1)
Total OTTI losses ................................................. $38 $ 131 $128
Portion of other-than-temporary losses recorded in AOCI (2) ................ 14 (110) (63)
Net OTTI losses recognized in earnings ................................ $52 $ 21 $ 65
(1) We recognized $36 million of OTTI losses in earnings for securities sold during 2010.
(2) In 2012, based on our ongoing OTTI assessments, we determined that the projected cash flows on certain acquired investment securities
were less than their initial fair value at acquisition and the difference was therefore recognized in earnings.
As indicated in the table above, we recorded net OTTI in earnings totaling $52 million, $21 million and $65
million in 2012, 2011 and 2010, respectively. The cumulative non-credit related portion of OTTI on these
securities recorded in AOCI totaled $9 million and $170 million as of December 31, 2012 and 2011, respectively.
We estimate the portion of losses attributable to credit using a discounted cash flow model and we estimate the
expected cash flows from the underlying collateral using industry-standard third-party modeling tools. These
tools take into consideration security specific delinquencies, product specific delinquency roll rates and expected
severities. Key assumptions used in estimating the expected cash flows include default rates, loss severity and
prepayment rates. Assumptions used can vary widely based on the collateral underlying the securities and are
influenced by factors such as collateral type, loan interest rate, geographical location of the borrower, and
borrower characteristics.
We believe the gross unrealized losses related to securities for which we have not recognized an OTTI on of $82
million and $57 million as of December 31, 2012 and 2011, respectively, are attributable to issuer specific credit
spreads and changes in market interest rates and asset spreads. Therefore, we currently do not expect to incur
credit losses related to these securities. In addition, we have no intent to sell these securities with unrealized
losses and it is not more likely than not that we will be required to sell these securities prior to recovery of their
amortized cost. Accordingly, we have concluded that the impairment on these securities is not other-than-
temporary.
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