Capital One 2013 Annual Report Download - page 161

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Loans Held for Investment
Loans that we have the ability and intent to hold for the foreseeable future and loans associated with on-balance
sheet securitization transactions accounted for as secured borrowings are classified as held for investment. Loans
classified as held for investment, except Acquired Loans accounted for based upon expected cash flows, are
reported at their amortized cost, which is the outstanding principal balance, net of any unearned income,
unamortized deferred fees and costs, unamortized premiums and discounts and charge-offs. Credit card loans
also include billed finance charges and fees, net of the estimated uncollectible amount.
Interest income is recognized on loans held for investment on an accrual basis. We generally defer certain loan
origination fees and direct loan origination costs on originated loans, premiums and discounts on purchased loans
and loan commitment fees. We recognize these amounts in interest income as yield adjustments over the life of
the loan and/or commitment period using the effective interest method. Where appropriate, prepayment estimates
are factored into the calculation of the constant effective yield necessary to apply the interest method.
Prepayment estimates are based on historical prepayment data and existing and forecasted interest rates and
economic data. For credit card loans, loan origination fees and direct loan origination costs are amortized on a
straight-line basis over a 12-month period. We establish an allowance for loan losses for probable losses inherent
in our held for investment loan portfolio as of each balance sheet date.
Cash flows related to unrestricted loans held for investment are included in cash flows from investing activities
in our consolidated statements of cash flows. Because our securitization transactions are accounted for as secured
borrowings, the cash flows from these transactions are presented as cash flows from financing activities in our
consolidated statements of cash flows.
Loans Held for Sale
Loans purchased or originated with the intent to sell or for which we do not have the ability and intent to hold for
the foreseeable future are classified as held for sale, reported at the lower of amortized cost or fair value and have
interest recognized on the accrual basis. Loan origination fees and the direct loan origination costs are deferred
until the loan is sold and recognized as part of the total gain or loss on sale. The fair value of loans held for sale is
determined on an aggregate homogeneous portfolio basis.
If a loan is transferred from held for investment to held for sale, declines in fair value related to credit are
recorded as a charge-off and amortization of deferred loan origination fees and costs ceases. Subsequent to
transfer, we report write-downs or recoveries in fair value up to the amortized cost and realized gains or losses on
loans held for sale in our consolidated statements of income as a component of other non-interest income. We
calculate the gain or loss on loan sales as the difference between the proceeds received and the carrying value of
the loans sold, net of the fair value of any retained servicing rights.
Loans Acquired
Loans Acquired and Accounted for Based on Expected Cash Flows
All purchased loans, including loans transferred in a business combination, acquired on or after January 1, 2009,
are recorded at fair value, which incorporates expected future losses, as of the date of each acquisition. While we
may purchase loans with or without evidence of credit deterioration since origination, we elect to account for
purchased loans using the guidance for accounting for purchased credit-impaired loans and debt securities, which
is based upon expected cash flows, unless specifically scoped out of the guidance.
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