Capital One 2014 Annual Report Download - page 161

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or purchased and whether purchased loans are considered credit-impaired at the date of acquisition. We used the
term “Acquired Loans” to refer to the substantial majority of consumer and commercial loans acquired in the Chevy
Chase Bank (“CCB”) and ING Direct acquisitions, and a limited portion of the credit card loans acquired in the
2012 U.S. card acquisition, which were recorded at fair value at acquisition and subsequently accounted for based
on expected cash flows to be collected, accounted for in accordance with Accounting Standard Codification (“ASC”)
310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly known as “Statement of
Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” commonly referred to as
“SOP 03-3”).
The classification criteria and accounting and measurement framework for loans held for investment, including
loans purchased, and loans held for sale are described below.
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 on
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 on 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. These loans are reported at the lower of amortized cost or fair
value and have interest recognized on an 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
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Capital One Financial Corporation (COF)