Capital One 2015 Annual Report Download - page 225

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
206 Capital One Financial Corporation (COF)
Cash and Cash Equivalents
The carrying amounts of cash and due from banks, federal funds sold and securities purchased under agreements to resell and
interest-bearing deposits with banks approximate fair value.
Restricted Cash for Securitization Investors
The carrying amount of restricted cash for securitization investors approximates the fair value due to its relatively short-term
nature.
Investment Securities
Quoted prices in active markets are used to measure the fair value of U.S. Treasury debt obligations. For the majority of securities
in other investment categories, we utilize multiple third-party pricing services to obtain fair value measurements. A pricing service
may be considered as the primary pricing provider for certain types of securities, and the designation of the primary pricing provider
may vary depending on the type of securities. The determination of the primary pricing provider is based on our experience and
validation benchmark of the pricing service’s performance in terms of providing fair value measurements for the various types of
securities.
Certain securities are classified as Level 2 and 3, the majority of which are RMBS and CMBS. When significant assumptions are
not consistently observable, fair values are derived using the best available data. Such data may include quotes provided by a
dealer, the use of external pricing services, independent pricing models or other model-based valuation techniques such as
calculation of the present values of future cash flows incorporating assumptions such as benchmark yields, spreads, prepayment
speeds, credit ratings and losses. The techniques used by the pricing services utilize observable market data to the extent available.
Pricing models may be used, which can vary by asset class and may incorporate available trade, bid and other market information.
Across asset classes, information such as trader/dealer input, credit spreads, forward curves and prepayment speeds are used to
help determine appropriate valuations. Because many fixed income securities do not trade on a daily basis, the pricing models
may apply available information through processes such as benchmarking curves, like securities, sector groupings and matrix
pricing to prepare valuations. In addition, model processes are used by the pricing services to develop prepayment and interest
rate scenarios.
We validate the pricing obtained from the primary pricing providers through comparison of pricing to additional sources, including
other pricing services, dealer pricing indications in transaction results and other internal sources. Pricing variances among different
pricing sources are analyzed and validated. Additionally, on an on-going basis, we select a sample of securities and test the third-
party valuation by obtaining more detailed information about the pricing methodology, sources of information and assumptions
used to value the securities.
The significant unobservable inputs used in the fair value measurement of our RMBS, CMBS and other ABS include yield,
prepayment rate, default rate and loss severity in the event of default. Significant increases or decreases in any of those inputs in
isolation or combination would result in a significant change in fair value measurement. Generally, an increase in the yield
assumption will result in a decrease in fair value measurement; however, an increase or decrease in prepayment rate, default rate
or loss severity may have a different impact on the fair value given various characteristics of the security including the capital
structure of the deal, credit enhancement for the security or other factors.
Net Loans Held For Investment
Loans held for investment that are individually impaired are carried at the lower of cost or fair value of the underlying collateral,
less the estimated cost to sell. The fair values of credit card loans, installment loans, auto loans, home loans and commercial loans
are estimated using a discounted cash flow method, which is a form of the income approach. Discount rates are determined
considering rates at which similar portfolios of loans would be made under current conditions and considering liquidity spreads
applicable to each loan portfolio based on the secondary market. The fair value of credit card loans excludes any value related to
customer account relationships. For loans held for investment that are recorded at fair value on our consolidated balance sheets
and are measured on a nonrecurring basis, the fair value is determined using appraisal values that are obtained from independent
appraisers, broker pricing opinions or other available market information, adjusted for the estimated costs to transact the sale.