Capital One 2012 Annual Report Download - page 191

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 security. The excess of cash
flows expected to be collected over the estimated fair value of credit-impaired debt securities at acquisition is
referred to as the accretable yield, which is accreted into interest income over the remaining life of the security
using the effective interest method.
Subsequent to acquisition, we complete quarterly evaluations of expected cash flows. Decreases in expected cash
flows attributable to credit result in the recognition of other-than-temporary impairment. Increases in expected
cash flows are recognized prospectively over the remaining life of the security as an adjustment to the accretable
yield.
In accounting for the acquired investments in debt securities that we did not consider to be credit impaired at
acquisition, any premium or discount at acquisition is recognized in interest income over the contractual life of
the security using the effective interest method.
Initial Fair Value and Accretable Yield of Acquired Credit-Impaired Investment Debt Securities
The table below displays the contractually required principal and interest cash flows expected to be collected and
the fair value, at acquisition, of the acquired ING Direct credit-impaired investment debt securities. The table
also displays the nonaccretable difference and the accretable yield at acquisition.
At Acquisition on February 17, 2012
(Dollars in millions)
Purchased
Credit-Impaired
Securities
Contractually outstanding principal and interest at acquisition ............................ $ 5,646
Less: Nonaccretable difference (expected principal losses of $1.1 billion and foregone interest
of $157 million) .............................................................. (1,260)
Cash flows expected to be collected at acquisition(1) ................................... 4,386
Less: Accretable yield ........................................................... (1,474)
Fair value of securities acquired ................................................... $ 2,912
(1) Represents undiscounted expected principal and interest cash flows at acquisition.
Outstanding Balance and Carrying Value of Acquired Securities
The table below presents the outstanding contractual balance and the carrying value of the acquired credit-
impaired investment debt securities as of December 31, 2012:
December 31, 2012
(Dollars in millions)
Purchased
Credit-Impaired
Securities
Contractual principal and interest ................................................. $5,242
Carrying value ................................................................ $2,585
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