Capital One 2014 Annual Report Download - page 162

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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.
In accounting for purchased loans based on expected cash flows, we first determine the contractually required
payments due, which represent the total undiscounted amount of all uncollected principal and interest payments,
adjusted for the effect of estimated prepayments. We then estimate the undiscounted cash flows we expect to collect
by incorporating several key assumptions including default rates, loss severities and the amount and timing of
prepayments. We estimate the fair value by discounting the estimated cash flows we expect to collect using an
observable market rate of interest, when available, adjusted for factors that a market participant would consider in
determining fair value. We are permitted to aggregate loans acquired in the same fiscal quarter into one or more
pools if the loans have common risk characteristics. A pool is then accounted for as a single asset, with a single
composite interest rate and an aggregate fair value and expected cash flows.
The difference between total contractual payments on the loans and all expected cash flows represents the
nonaccretable difference or the amount of principal and interest not considered collectible, which incorporates future
expected credit losses over the life of the loans. Decreases in expected cash flows resulting from further credit
deterioration will generally result in a loan loss recognized in our provision for credit losses and an increase in the
allowance for loan and lease losses. Charge-offs are not recorded until the expected credit losses within the
nonaccretable difference are depleted. In addition, Acquired Loans are not classified as delinquent or nonperforming
as we expect to collect our net investment in these loans and the nonaccretable difference will absorb the majority
of the losses associated with these loans. The excess of cash flows expected to be collected over the estimated fair
value of purchased loans is referred to as the accretable yield. This amount is not recorded on our consolidated
balance sheets, but is accreted into interest income over the life of the loan, or pool of loans, using the effective
interest method.
Subsequent to acquisition, we are required to periodically evaluate our estimate of cash flows expected to be
collected. These evaluations, which we perform quarterly, require the use of key assumptions and estimates similar
to those used in estimating the initial fair value at acquisition. Subsequent changes in the estimated cash flows
expected to be collected may result in changes in the accretable yield and nonaccretable difference or reclassifications
from the nonaccretable difference to the accretable yield. Decreases in expected cash flows resulting from credit
deterioration will generally result in an impairment charge recognized in our provision for credit losses and an
increase in the allowance for loan and lease losses. Increases in the cash flows expected to be collected would first
reduce any previously recorded allowance for loan and lease losses established subsequent to acquisition. The excess
over the recorded allowance for loan and lease losses would result in a reclassification to the accretable yield from
the nonaccretable difference and an increase in interest income recognized over the remaining life of the loan or
pool of loans. Disposals of loans, which may include sales to third parties, receipt of payments in full or in part by
the borrower, and foreclosure of the collateral, result in removal of the loan from the Acquired Loan portfolio. See
“Note 4—Loans” for additional information.
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Capital One Financial Corporation (COF)