Capital One 2013 Annual Report Download - page 183

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other-Than-Temporary Impairment
We evaluate all securities in an unrealized loss position at least on a quarterly basis, and more often as market
conditions require, to assess whether the impairment is other-than-temporary. Our OTTI assessment is based on a
discounted cash flow analysis which requires careful use of judgments and assumptions. A number of qualitative
and quantitative criteria may be considered in our assessment as applicable, including the size and the nature of
the portfolio; historical and projected performance such as prepayment, default and loss severity for the RMBS
portfolio; recent credit events specific to the issuer and/or industry to which the issuer belongs; the payment
structure of the security; external credit ratings of the issuer and any failure or delay of the issuer to make
scheduled interest or principal payments; the value of underlying collateral; our intent and ability to hold the
security for a long term; and current and projected market and macro-economic conditions.
For a debt security that has experienced a decline in the fair value below amortized cost basis, we recognize
OTTI in earnings if we have the intent to sell the security, or if we believe it is more-likely-than-not that we will
be required to sell in the near term. For those securities that we do not intend to sell or expect to be required to
sell, an analysis is performed to determine if any of the impairment is due to credit or whether it is due to other
factors, such as interest rates. Credit-related impairment is recognized in earnings, with the remaining unrealized
non-credit related impairment 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 cash flows, discounted based on
the effective yield.
The table below presents activity for the years ended December 31, 2013, 2012 and 2011, related to the credit
component of OTTI recognized in earnings on debt securities:
Table 3.8 Credit Impairment Rollforward
Year Ended December 31,
(Dollars in millions) 2013 2012 2011
Credit loss component, beginning of period ............................. $120 $ 68 $49
Additions:
Initial credit impairment ........................................ 14 22 3
Subsequent credit impairment .................................... 27 30 18
Total additions ............................................ 41 52 21
Reductions:
Payoff or sales of credit-impaired securities ......................... (1) 0 (2)
Credit loss component, end of period .................................. $160 $120 $68
Gross unrealized losses on our investment securities have generally increased since December 31, 2012. We
believe the unrealized losses related to investment securities for which we have not recognized credit impairment
are primarily attributable to changes in market interest rates. In addition, we do not intend to sell these securities
with unrealized losses, and it is not likely that we will be required to sell these securities prior to recovery of their
amortized cost. Except for the securities reported in the table above for which credit losses have been recognized
in earnings, we believe the securities with an unrealized loss in AOCI are not other than temporarily impaired as
of December 31, 2013.
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