Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2009.

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED).

For the transition period from              to             

Commission File No. 1-13300

 

 

CAPITAL ONE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

  54-1719854

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

1680 Capital One Drive McLean, Virginia   22102
(Address of Principal Executive Offices)   (Zip Code)

(703) 720-1000

Registrant’s telephone number, including area code:

(Not applicable)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x            Accelerated filer  ¨            Non-accelerated filer  ¨            Smaller reporting company  ¨

As of October 31, 2009 there were 449,924,631 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

 

 

 


Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

FORM 10-Q

INDEX

September 30, 2009

 

         Page
PART 1. FINANCIAL INFORMATION    3
Item 1  

Financial Statements (unaudited):

   3
 

Consolidated Balance Sheets

   3
 

Consolidated Statements of Income

   4
 

Consolidated Statements of Changes in Stockholders’ Equity

   6
 

Consolidated Statements of Cash Flows

   7
 

Notes to Consolidated Financial Statements

   9
Item 2  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   53
Item 3  

Quantitative and Qualitative Disclosure of Market Risk

   95
Item 4  

Controls and Procedures

   95
PART 2. OTHER INFORMATION    95
Item 1  

Legal Proceedings

   95
Item 1A  

Risk Factors

   95
Item 2  

Unregistered Sales of Equity Securities and Use of Proceeds

   95
Item 6  

Exhibits

   96
 

Signatures

   99

 

2


Table of Contents

Part 1. Financial Information

 

Item 1. Financial Statements

CAPITAL ONE FINANCIAL CORPORATION

Consolidated Balance Sheets

(Dollars in thousands, except share and per share data) (unaudited)

 

     September 30,
2009
    December 31,
2008
 

Assets:

    

Cash and due from banks

   $ 2,719,100      $ 2,047,839   

Federal funds sold and resale agreements

     544,793        636,752   

Interest-bearing deposits at other banks

     863,310        4,806,752   
                

Cash and cash equivalents

     4,127,203        7,491,343   

Securities available for sale

     37,693,001        31,003,271   

Securities held to maturity

     83,608        —     

Mortgage loans held for sale

     141,158        68,462   

Loans held for investment

     96,783,165        101,017,771   

Less: Allowance for loan and lease losses

     (4,513,493     (4,523,960
                

Net loans held for investment

     92,269,672        96,493,811   

Accounts receivable from securitizations

     6,985,200        6,342,754   

Premises and equipment, net

     2,773,173        2,313,106   

Interest receivable

     947,738        827,909   

Goodwill

     13,524,978        11,964,487   

Other

     9,958,190        9,408,309   
                

Total assets

   $ 168,503,921      $ 165,913,452   
                

Liabilities:

    

Non-interest-bearing deposits

   $ 12,734,589      $ 11,293,852   

Interest-bearing deposits

     101,768,522        97,326,937   
                

Total deposits

     114,503,111        108,620,789   

Senior and subordinated notes

     9,208,769        8,308,843   

Other borrowings

     12,126,181        14,869,648   

Interest payable

     582,969        676,398   

Other

     5,860,739        6,825,341   
                

Total liabilities

     142,281,769        139,301,019   
                

Stockholders’ Equity:

    

Preferred stock, par value $.01 per share; authorized 50,000,000 shares, zero and 3,555,199 issued or outstanding as of September 30, 2009 and December 31, 2008, respectively

     —          3,096,466   

Common stock, par value $.01 per share; authorized 1,000,000,000 shares, 502,097,580 and 438,434,235 issued as of September 30, 2009 and December 31, 2008, respectively

     5,021        4,384   

Paid-in capital, net

     18,928,719        17,278,102   

Retained earnings

     10,404,255        10,621,164   

Cumulative other comprehensive income (loss)

     56,524        (1,221,796

Less: Treasury stock, at cost; 47,014,878 and 46,637,241 shares as of September 30, 2009 and December 31, 2008, respectively

     (3,172,367     (3,165,887
                

Total stockholders’ equity

     26,222,152        26,612,433   
                

Total liabilities and stockholders’ equity

   $ 168,503,921      $ 165,913,452   
                

See Notes to Consolidated Financial Statements.

 

3


Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

Consolidated Statements of Income

(Dollars in thousands, except per share data) (unaudited)

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
     2009     2008     2009     2008  

Interest Income:

        

Loans held for investment, including past-due fees

   $ 2,265,720      $ 2,347,480      $ 6,689,859      $ 7,153,582   

Investment securities

     398,835        317,268        1,206,460        856,093   

Other

     83,195        107,048        214,294        333,503   
                                

Total interest income

     2,747,750        2,771,796        8,110,613        8,343,178   

Interest Expense:

        

Deposits

     479,178        624,319        1,666,605        1,827,284   

Senior and subordinated notes

     74,032        96,568        189,189        352,335   

Other borrowings

     143,860        244,264        470,802        817,241   
                                

Total interest expense

     697,070        965,151        2,326,596        2,996,860   
                                

Net interest income

     2,050,680        1,806,645        5,784,017        5,346,318   

Provision for loan and lease losses

     1,173,165        1,093,917        3,386,340        3,002,119   
                                

Net interest income after provision for loan and lease losses

     877,515        712,728        2,397,677        2,344,199   

Non-Interest Income:

        

Servicing and securitizations

     720,698        875,718        1,536,751        2,793,520   

Service charges and other customer-related fees

     496,404        576,762        1,494,292        1,675,032   

Mortgage servicing and other

     8,656        39,183        45,199        90,990   

Interchange

     122,585        148,076        389,378        432,708   

Net impairment losses recognized in earnings(1)

     (11,173     —          (21,567     —     

Other

     215,210        57,152        430,348        383,435   
                                

Total non-interest income

     1,552,380        1,696,891        3,874,401        5,375,685   

Non-Interest Expense:

        

Salaries and associate benefits

     648,180        571,686        1,836,430        1,761,538   

Marketing

     103,698        267,372        400,380        853,265   

Communications and data processing

     175,575        176,720        569,257        559,065   

Supplies and equipment

     122,777        126,781        370,160        389,649   

Occupancy

     113,913        96,483        329,049        264,700   

Restructuring expense

     26,357        15,306        87,358        81,625   

Other

     611,978        555,858        1,876,692        1,542,242   
                                

Total non-interest expense

     1,802,478        1,810,206        5,469,326        5,452,084   
                                

Income from continuing operations before income taxes

     627,417        599,413        802,752        2,267,800   

Income tax provision

     158,191        213,624        190,246        786,958   
                                

Income from continuing operations, net of tax

     469,226        385,789        612,506        1,480,842   

Loss from discontinued operations, net of tax

     (43,587     (11,650     (74,543     (105,294
                                

Net income

   $ 425,639      $ 374,139      $ 537,963      $ 1,375,548   
                                

Net income (loss) available to common shareholders

   $ 425,639      $ 374,139      $ (25,945   $ 1,375,548   
                                

Basic earnings per common share:

        

Income from continuing operations

   $ 1.04      $ 1.03      $ 0.12      $ 3.98   

Loss from discontinued operations

     (0.09     (0.03     (0.18     (0.28
                                

Net income (loss)

   $ 0.95      $ 1.00      $ (0.06   $ 3.70   
                                

Diluted earnings per common share:

        

Income (loss) from continuing operations

   $ 1.03      $ 1.03      $ 0.12      $ 3.96   

Loss from discontinued operations

     (0.09     (0.03     (0.18     (0.28
                                

Net income (loss)

   $ 0.94      $ 1.00      $ (0.06   $ 3.68   
                                

Dividends paid per common share

   $ 0.05      $ 0.375      $ 0.475      $ 1.125   
                                

 

4


Table of Contents

 

(1) For the three and nine months ended September 30, 2009, the Company recorded other-than-temporary impairment losses of $11.2 million and $21.6 million, respectively. Total unrealized losses on these securities recognized in other comprehensive income as a component of stockholders’ equity at September 30, 2009 was $158.8 million.

See Notes to Consolidated Financial Statements.

 

5


Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands, except per share data) (unaudited)

 

     Common Stock    Preferred Stock     Paid-In Capital,
Net
   Retained
Earnings
    Cumulative Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total
Stockholders’
Equity
 

(In Thousands, Except Per Share Data)

   Shares    Amount              

Balance, December 31, 2007

   419,224,900    $ 4,192    $ —        $ 15,860,490    $ 11,267,568      $ 315,248      $ (3,153,386   $ 24,294,112   

Adjustment to initially apply the measurement date provision for post retirement benefits of ASC 715-20 of the Codification, net of income tax benefit of $317

   —        —        —          —        572        (1,161     —          (589

Comprehensive income:

                   

Net income

   —        —        —          —        1,375,548        —          —          1,375,548   

Other comprehensive income, net of income tax:

                   

Unrealized losses on securities, net of income tax benefit of $144,858

   —        —        —          —        —          (269,022     —          (269,022

Defined benefit pension plans, net of income tax benefit of $2,089

   —        —        —          —        —          (4,032     —          (4,032

Foreign currency translation adjustments

   —        —        —          —        —          (253,790     —          (253,790

Unrealized loss on cash flow hedging instruments, net of income tax benefit of $5,964

   —        —        —          —        —          11,077        —          11,077   
                                                           

Other comprehensive income (loss)

   —        —        —          —        —          (515,767     —          (515,767
                                                           

Comprehensive income

                      859,781   

Cash dividends—Common stock $1.125 per share

   —        —        —          —        (421,518     —          —          (421,518

Purchase of treasury stock

   —        —        —          —        —          —          (12,025     (12,025

Issuances of common stock and restricted stock, net of forfeitures

   17,170,062      172      —          758,602      —          —          —          758,774   

Exercise of stock options and tax benefits of exercises and restricted stock vesting

   1,910,252      19      —          60,699      —          —          —          60,718   

Compensation expense for restricted stock awards and stock options

   —        —        —          67,576      —          —          —          67,576   

Allocation of ESOP shares

   —        —        —          4,711      —          —          —          4,711   
                                                           

Balance, September 30, 2008

   438,305,214    $ 4,383      —        $ 16,752,078    $ 12,222,170      $ (201,680   $ (3,165,411   $ 25,611,540   
                                                           

Balance, December 31, 2008

   438,434,235    $ 4,384    $ 3,096,466      $ 17,278,102    $ 10,621,164      $ (1,221,796   $ (3,165,887   $ 26,612,433   

Comprehensive income:

                   

Net income

   —        —        —          —        537,963        —          —          537,963   

Other comprehensive income (loss), net of income tax:

                   

Unrealized gains on securities, net of income taxes of $544,333

   —        —        —          —        —          1,026,279        —          1,026,279   

Defined benefit pension plans, net of net income tax benefit of $1,641

   —        —        —          —        —          (2,944     —          (2,944

Foreign currency translation adjustments

   —        —        —          —        —          177,489        —          177,489   

Unrealized gains in cash flow hedging instruments, net of income taxes of $51,792

   —        —        —          —        —          77,496        —          77,496   
                                                           

Other comprehensive income (loss)

   —        —        —          —        —          1,278,320        —          1,278,320   
                                                           

Comprehensive income (loss)

                      1,816,283   

Cash dividends-Common stock $0.475 per share

   —        —        —          —        (190,964     —          —          (190,964

Cash dividends-Preferred stock 5% per annum

   —        —        (22,714     —        (82,461     —          —          (105,175

Purchase of treasury stock

   —        —        —          —        —          —          (6,480     (6,480

Issuances of common stock and restricted stock, net of forfeitures

   61,009,827      610      —          1,528,688      —          —          —          1,529,298   

Exercise of stock options and tax benefits of exercises and restricted stock vesting

   92,917      1      —          894      —          —          —          895   

Accretion of preferred stock discount

   —        —        33,554        —        (33,554     —          —          —     

Redemption of preferred stock

   —        —        (3,107,306     —        (447,893     —          —          (3,555,199

Compensation expense for restricted stock awards and stock options

   —        —        —          88,972      —          —          —          88,972   

Issuance of common stock for acquisition

   2,560,601      26      —          30,830      —          —          —          30,856   

Allocation of ESOP shares

   —        —        —          1,233      —          —          —          1,233   
                                                           

Balance, September 30, 2009

   502,097,580    $ 5,021    $ —        $ 18,928,719    $ 10,404,255      $ 56,524      $ (3,172,367   $ 26,222,152   
                                                           

See Notes to Consolidated Financial Statements.

 

6


Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

Consolidated Statements of Cash Flows

(Dollars in thousands) (unaudited)

 

     Nine Months Ended
September 30,
 
     2009     2008  

Operating Activities:

    

Income from continuing operations, net of tax

   $ 612,506      $ 1,480,842   

Loss from discontinued operations, net of tax

     (74,543     (105,294
                

Net Income

     537,963        1,375,548   

Adjustments to reconcile net income to cash provided by operating activities:

    

Provision for loan and lease losses

     3,386,340        3,002,119   

Depreciation and amortization, net

     585,874        536,436   

Gain on sales of securities available for sale

     (217,044     (13,713

Gain on sales of auto loans

     —          (2,428

Gain on repurchase of senior notes

     —          (53,860

Mortgage loans held for sale:

    

Transfers and originations

     (6,765,798     (1,639,636

Loss (Gain) on sales

     399        (26,062

Proceeds from sales

     6,924,248        1,864,311   

Stock plan compensation expense

     102,036        81,239   

Changes in assets and liabilities:

    

(Increase) Decrease in interest receivable

     (119,829     88,600   

Increase in accounts receivable from securitizations

     (642,446     (262,944

Decrease (Increase) in other assets

     1,105,795        (960,113

Decreases in interest payable

     (93,429     (123,518

(Decreases) Increase in other liabilities

     (1,712,839     85,499   

Net cash used in operating activities attributable to discontinued operations

     39,984        129,659   
                

Net cash provided by operating activities

     3,131,254        4,081,137   
                

Investing Activities:

    

Purchases of securities available for sale

     (22,368,668     (15,266,177

Proceeds from maturities of securities available for sale

     7,710,694        5,189,006   

Proceeds from sales of securities available for sale

     10,977,685        2,504,289   

Proceeds from securitizations of loans

     8,816,378        8,446,956   

Net (increase) decrease in loans held for investment

     375,936        (7,649,922

Principal recoveries of loans previously charged off

     592,514        501,970   

Additions of premises and equipment, net

     (213,799     (270,064

Net payment for companies acquired

     (448,151     —     

Net cash provided by investing activities attributable to discontinued operations

     451        11,659   
                

Net cash provided by (used in) investing activities

     5,443,040        (6,532,283
                

Financing Activities:

    

Net (decrease) increase in deposits

     (7,674,317     16,151,798   

Net decreases in other borrowings

     (4,748,368     (10,834,872

Maturities of senior notes

     (1,447,365     (1,318,694

Repurchases of senior notes

     —          (1,120,724

Redemptions of acquired company debt and noncontrolling interest

     (464,915     —     

Issuance of junior subordinated notes

     1,000,000        —     

Issuance of senior notes

     1,000,000        —     

Issuance of subordinated notes

     1,500,000        —     

Redemption of preferred stock

     (3,555,199     —     

Purchases of treasury stock

     (6,480     (12,025

Dividends paid-common stock

     (190,964     (421,518

Dividends paid-preferred stock

     (105,175     —     

Net proceeds from issuances of common stock

     1,530,531        763,485   

Proceeds from share based payment activities

     895        60,718   

Net cash used in financing activities attributable to discontinued operations

     (3,394     (17,690
                

Net cash (used in) provided by financing activities

     (13,164,751     3,250,478   
                

Net (decrease) increase in cash and cash equivalents

     (4,590,457     799,332   

 

7


Table of Contents
     Nine Months Ended
September 30,
     2009    2008

Cash and cash equivalents at beginning of year

     7,491,343      4,821,409

Cash and cash equivalents of acquired companies

     1,226,317      —  
             

Cash and cash equivalents at end of period

   $ 4,127,203    $ 5,620,741
             

See Notes to Consolidated Financial Statements.

 

8


Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

(in thousands, except per share data) (unaudited)

Note 1

Significant Accounting Policies

Business

Capital One Financial Corporation (the “Corporation”) is a diversified financial services company whose banking and non-banking subsidiaries market a variety of financial products and services. The Corporation’s principal subsidiaries are:

 

   

Capital One Bank (USA), National Association (“COBNA”) which currently offers credit and debit card products, other lending products and deposit products.

 

   

Capital One, National Association (“CONA”) which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.

On February 27, 2009, the Corporation acquired Chevy Chase Bank, F.S.B. (“Chevy Chase Bank”) for $475.9 million comprised of cash of $445.0 million and 2.56 million shares of common stock valued at $30.9 million. Chevy Chase Bank has the largest retail branch presence in the Washington D.C. region. See Note 2 for more information regarding the acquisition.

On July 30, 2009 the Company merged Chevy Chase Bank with and into CONA.

During the third quarter of 2009, the Company realigned its business segment reporting structure to better reflect the manner in which the performance of the Company’s operations are evaluated. The Company now reports the results of its business through three operating segments: Credit Card, Commercial Banking and Consumer Banking.

Segment and sub-segment results where presented have been recast for all periods presented. The three segments consist of the following:

 

   

Credit Card includes the Company’s domestic consumer and small business card lending, domestic national small business lending, national closed end installment lending and the international card lending businesses in Canada and the United Kingdom.

 

   

Commercial Banking includes the Company’s lending, deposit gathering and treasury management services to commercial real estate and middle market customers. The Commercial segment also includes the financial results of a national portfolio of small ticket commercial real estate loans that are in run-off mode.

 

   

Consumer Banking includes the Company’s branch based lending and deposit gathering activities for small business customers as well as its branch based consumer deposit gathering and lending activities, national deposit gathering, consumer mortgage lending and servicing activities and national automobile lending.

The segment reorganization includes the allocation of Chevy Chase Bank to the appropriate segments. Chevy Chase Bank’s operations are included in the Commercial Banking and Consumer Banking segments beginning in the second quarter 2009. Chevy Chase Bank’s operations for the first quarter of 2009 remain in the Other category due to the short duration since acquisition. The Other category includes GreenPoint originated consumer mortgages originated for sale but held for investment since originations were suspended in 2007, the results of corporate treasury activities, including asset-liability management and the investment portfolio, the net impact of transfer pricing, brokered deposits, certain unallocated expenses, gains/losses related to the securitization of assets, and restructuring charges related to the Company’s cost initiative and to the Chevy Chase Bank acquisition.

During 2008, the Corporation completed several reorganizations and consolidations to streamline operations and regulatory relationships. On January 1, Capital One Auto Finance Inc. (“COAF”) moved from a direct subsidiary of the Corporation to become a direct operating subsidiary of CONA. In connection with the COAF move, one of COAF’s direct operating subsidiaries, Onyx Acceptance Corporation (“Onyx”), became a direct subsidiary of the Corporation. On March 1, the Corporation converted Capital One Bank from a Virginia-state chartered bank to a national association called Capital One Bank (USA), National Association (“COBNA”). On March 8, Superior Savings of New England, N.A. (“Superior”) merged with and into CONA. Both COBNA and CONA are primarily regulated by the Office of the Comptroller of the Currency (the “OCC”). In May 2008, we consolidated the business and operations of two registered broker-dealers, Capital One Securities, LLC (dba Capital One Investments, LLC) and Capital One Investment Services Corporation (formerly NFB Investment Services Corporation), into Capital One Investments Services Corporation. In addition, in May 2008, we consolidated the business and operations of three insurance agencies, Capital One Agency Corp., GreenPoint Agency, Inc. and Hibernia Insurance Agency, LLC into Green Point Agency, Inc., which is now known as Capital One Agency LLC.

The Corporation and its subsidiaries are hereafter collectively referred to as the “Company”.

 

9


Table of Contents

CONA and COBNA are hereafter collectively referred to as the “Banks”.

Basis of Presentation

The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) that require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made.

The Consolidated Financial Statements include the accounts of the Company in which it has a controlling financial interest. Investments in unconsolidated entities where we have the ability to exercise significant influence over the operations of the investee are accounted for using the equity method of accounting. This includes interests in variable interest entities (“VIEs”) where we are not the primary beneficiary. Investments not meeting the criteria for equity method accounting are accounted for using the cost method of accounting. Investments in unconsolidated entities are included in other assets, and our share of income or loss is recorded in other non-interest income. All significant intercompany balances and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the 2009 presentation. All amounts in the following notes, excluding per share data, are presented in thousands unless noted otherwise.

During the second quarter of 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162 (“ASC 105-10-65/SFAS 168”). This standard establishes the Accounting Standards Codification for the FASB (“Codification” or “ASC”) as the single source of authoritative U.S. GAAP. The Codification does not change GAAP, but rather how the guidance is organized and presented to users. Effective July 1, 2009, changes to the source of authoritative U.S. GAAP are communicated through an Accounting Standards Update (“ASU”). ASUs will be published for all authoritative U.S. GAAP promulgated by the FASB, regardless of the form in which such guidance may have been issued prior to release of the FASB Codification (e.g., FASB Statements, EITF Abstracts, FASB Staff Positions, etc.). ASUs also will be issued for amendments to the SEC content in the FASB Codification as well as for editorial changes. Subsequently, the Codification will require companies to change how they reference GAAP throughout the financial statements. The Company has adopted the Codification for the third quarter of 2009 and has provided the pre-Codification references along with the related ASC references to allow readers an opportunity to see the impact of the Codification on our financial statements and disclosures.

Special Purpose Entities and Variable Interest Entities

Special purpose entities (“SPEs”) are broadly defined as legal entities structured for a particular purpose. There are two different accounting frameworks applicable to SPEs: the qualifying SPE (“QSPE”) framework under Statement of Financial Accounting Standard (“SFAS”) No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“ASC 860-10/SFAS 140”) and the VIE framework under Financial Accounting Standards Board Interpretation No. 46 (Revised 2003), Consolidation of Variable Interest Entities (“VIE”), (“ASC 810-10/FIN 46(R)”).

QSPEs are passive entities that are commonly used in mortgage, credit card, auto and installment loan securitization transactions. ASC 860-10/SFAS 140 establishes the criteria an entity must satisfy to be a QSPE which includes restrictions on the types of assets a QSPE may hold, limits on repurchase of assets, the use of derivatives and financial guarantees, and the level of discretion a servicer may exercise to collect receivables. SPEs that meet the criteria for QSPE status are not required to be consolidated. The Company uses the QSPE model to conduct off-balance sheet securitization activities. See Note 14 for more information on the Company’s off-balance sheet securitization activities.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, An Amendment of FASB Statement No. 140 (“SFAS 166”), and Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). SFAS 166 removes the concept of a qualifying special-purpose entity (“QSPE”) from SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities and removes the exception from applying FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“ASC 810-10/FIN 46(R)”), to variable interest entities that are qualifying special-purpose entities. SFAS 167 retains the scope of FIN 46(R) with the addition of entities previously considered qualifying special-purpose entities. SFAS 166 and SFAS 167 are effective for the Company’s annual reporting period beginning January 1, 2010. The adoption of SFAS 166 and SFAS 167 could have a significant impact on the Company’s consolidated financial statements because the Company expects it will be required to consolidate at least some of its special purpose entities to which pools of loan receivables have been transferred in transactions previously qualifying as sales. Holding more of these assets on the Company’s balance sheet may require it to take various actions, including raising additional capital, in order to meet regulatory capital requirements. Such capital may not be available on terms favorable to the Company, if at all, and could have a negative impact on the Company’s financial results. As of September 30, 2009, the Company had approximately $44.3 billion of credit card receivables held by QSPEs of which $41.3 billion are backed securities held by external investors; and $4.8 billion in mortgage receivables that are considered at risk for consolidation. Additionally, the Company has mortgage loans, HELOC’s and manufactured housing loans serviced for others that the Company does not believe will be consolidated under the new guidance.

 

10


Table of Contents

VIEs Special purpose entities that are not QSPEs are considered for consolidation in accordance with ASC 810-10/FIN 46(R), which defines a VIE as an entity that (1) lacks sufficient equity to finance its activities without additional subordinated financial support; (2) has equity owners that lack the ability to make significant decisions about the entity; or (3) has equity owners that do not have the obligation to absorb expected losses or the right to receive expected returns. In general, a VIE may be formed as a corporation, partnership, limited liability corporation, or any other legal structure used to conduct activities or hold assets. A VIE often holds financial assets, including loans or receivables, real estate or other property.

The Company consolidates a VIE if the Company is considered to be its primary beneficiary. The primary beneficiary is subject to absorbing the majority of the expected losses from the VIE’s activities, is entitled to receive a majority of the entity’s residual returns, or both.

The Company, in the ordinary course of business, has involvement with or retains interests in VIEs in connection with some of its securitization activities, servicing activities and the purchase or sale of mortgage-backed and other asset-backed securities in connection with its investment portfolio. The Company also makes loans to VIEs that hold debt, equity, real estate or other assets. In certain instances, the Company provides guarantees to VIEs or holders of variable interests in VIEs. The adoption of SFAS 167 could have an impact on the Company’s consolidated financial statements because the Corporation expects it will consolidate certain VIE’s as a result of applying the qualitative considerations called for in SFAS 167 versus the quantitative requirements under FIN 46(R). We are currently assessing the impact of SFAS 167 on our VIE structures at this time. See Note 11—Mortgage Servicing Rights; Note 14—Securitizations; Note 15—Commitments, Contingencies and Guarantees; and Note 16—Other Variable Interest Entities for more detail on the Company’s involvement and exposure related to non-consolidated VIEs.

Derivative Instruments and Hedging Activities

The Company recognizes all of its derivative instruments as either assets or liabilities in the balance sheet at fair value. These instruments are recorded in other assets or other liabilities on the Consolidated Balance Sheets and in the operating section of the Statements of Cash Flows as increases (decreases) of other assets and other liabilities. The Company’s policy is not to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments recognized at fair value executed with the same counterparty under netting arrangements. As of September 30, 2009 the Company had recorded $343.9 million for the right to reclaim cash collateral and $406.9 million for the obligation to return cash collateral under master netting arrangements.

Loans Acquired

Loans acquired in connection with acquisitions are accounted for under SFAS 141(R), Business Combinations (“ASC 805-10/SFAS 141(R)”) or Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“ASC 310-10/SOP 03-3”) if the loan has experienced a deterioration of credit quality at the time of acquisition. Under both statements, acquired loans are recorded at fair value and the carry-over of the related allowance for loan and lease losses is prohibited. Fair value of the loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. During the evaluation of whether a loan was considered impaired under ASC 310-10/SOP 03-3 or performing under ASC 805-10/SFAS 141(R), the Company considered a number of factors, including the delinquency status of the loan, payment options and other loan features (i.e. reduced documentation or stated income loans, interest only, or negative amortization features), the geographic location of the borrower or collateral, the loan-to-value ratio and the risk rating assigned to the loans. Based on the criteria, the Company considered the entire Chevy Chase Bank option arm portfolio to be impaired and accounted for under ASC 310-10/SOP 03-3. Portions of the Chevy Chase Bank commercial loan portfolio, HELOC portfolio and the fixed mortgage portfolio were also considered impaired.

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference. The nonaccretable difference includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows will require the Company to evaluate the need for an additional allowance for loan and lease losses. Subsequent improvement in cash flows will result in the reversal of the nonaccretable difference which will then get reclassified as accretable yield and have a positive impact on interest income. In addition, net charge-offs on such loans are applied to the nonaccretable difference recorded at acquisition for the estimated future credit losses.

Loans acquired that were previously classified as nonaccrual are considered performing, regardless of whether the customer is contractually delinquent. The Company expects to fully collect the new carrying value of the loans. As such, the Company no longer considers the loans to be nonaccrual or nonperforming because we will continue to accrue interest on these loans because of the establishment of an accretable yield in accordance with ASC 805-10/SFAS 141(R) and ASC 310-10/SOP 03-3.

 

11


Table of Contents

Securities Available for Sale

The Company considers debt securities in its investment portfolio as available for sale. These securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of cumulative other comprehensive income. The fair values of securities is based on quoted market prices, or if quoted market prices are not available, then the fair value is estimated using the quoted market prices for similar securities, pricing models or discounted cash flow analyses, using observable market data where available. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization or accretion is included in interest income. Realized gains and losses on sales of securities are determined using the specific identification method. The Company evaluates its unrealized loss positions for impairment in accordance with ASC 320-10/SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, as amended by FSP No. 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairment. As such, when there is other-than-temporary impairment, the Company recognizes credit related impairments in earnings while other impairments are recorded in other comprehensive income. See Note 6 for additional details.

Income Taxes

The Company accounts for income taxes in accordance with SFAS 109, Accounting for Income Taxes (“ASC740-10/SFAS 109”), recognizing the current and deferred tax consequences of all transactions that have been recognized in the financial statements using the provisions of the enacted tax laws.

The Company recorded income tax expense of $158.2 million and $190.2 million for the three and nine month periods ended September 30, 2009. The related effective income tax rates were 25.2% and 23.7% for the three month and nine month periods ended September 30, 2009, respectively, compared to 35.6% and 34.7% for the same periods in the prior year. The decrease in the tax rates were primarily due to increases in permanent tax preferences, including tax-exempt interest and business tax credits, relative to the lower net income before tax in 2009.

On September 21, 2009, the U.S. Tax Court issued a decision with respect to certain tax issues for the years 1995-1999, with both parties prevailing on certain issues. At issue were proposed adjustments by the IRS with respect to the timing of recognition of items of income and expense derived from the Company’s credit card business in various tax years. As a result of the Tax Court decision, the Company reduced the amount of unrecognized tax benefits by approximately $69.3 million. The time period for an appeal by each party of the Tax Court decision is pending and the ultimate outcome may also impact tax years after 1999. It is reasonably possible that a settlement related to these timing issues may be made within twelve months of the reporting date. At this time, an estimate of the potential change to the amount of unrecognized tax benefits resulting from such a settlement cannot be made.

Also during the third quarter of 2009, the IRS concluded its examination of the Company’s federal income tax returns for the years 2005 and 2006 and the Company made cash payments to the IRS related to these concluded examinations which resulted in a reduction of approximately $220.6 million to the balance of net unrecognized tax benefits.

Primarily as a result of the U.S. Tax Court decision, the Company recorded a $30.3 million discrete tax benefit during the third quarter.

Recent Accounting Pronouncements

In September 2009, the FASB issued ASU No. 2009-08, Earnings per Share- Amendments to Section 260-10-S99 (SEC Update) (“ASU 2009-08”), which provided corrections to various parts of the Codification regarding EPS. ASU 2009-08 is effective immediately upon being issued. The initial adoption of ASU 2009-08 did not have an impact on the consolidated earnings or financial position of the Company as the update amended the reference between the Codification and pre-Codification references.

In September 2009, the FASB issued ASU No. 2009-07, Accounting for Various Topics- Technical Corrections to SEC Paragraphs (SEC Update) (“ASU 2009-07”), which provided corrections to various parts of the Codification including Regulation S-X. ASU 2009-07 is effective immediately upon being issued. The initial adoption of ASU 2009-07 did not have an impact on the consolidated earnings or financial position of the Company as the update amended the reference between the Codification and pre-Codification references.

In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820)- Measuring Liabilities at Fair Value (“ASU 2009-05”), which provided additional details on calculating the fair value of liabilities. ASU 2009-05 is effective immediately upon being issued. The initial adoption of ASU 2009-05 did not have an impact on the consolidated earnings or financial position of the Company as the Company already uses the prescribed valuation techniques within ASU 2009-05.

 

12


Table of Contents

In August 2009, the FASB issued ASU No. 2009-03, SEC Update- Amendments to Various Topics Containing SEC Staff Accounting Bulletins (SEC Update) (“ASU 2009-03”), which provided corrections to various parts of the Codification. ASU 2009-03 is effective immediately upon being issued. The initial adoption of ASU 2009-03 did not have an impact on the consolidated earnings or financial position of the Company as the update amended the reference between the Codification and pre-Codification references.

On June 30, 2009, the FASB issued ASU No. 2009-02, Omnibus Update- Amendments to Various Topics for Technical Corrections (“ASU 2009-02”), which provided corrections to various parts of the Codification. ASU 2009-02 is effective immediately upon being issued. The initial adoption of ASU 2009-02 did not have an impact on the consolidated earnings or financial position of the Company as the update amended the reference between the Codification and pre-Codification references.

On June 30, 2009, the FASB issued ASU No. 2009-01, Topic 105- Generally Accepted Accounting Principles- amendments based on- Statement of Financial Accounting Standards No. 168- The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles (“ASU 2009-01”), which made the Codification effective for interim and annual periods ending after September 15, 2009, and will supersede all existing non-SEC accounting and reporting standards. All non-grandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. Once ASU 2009-01 is effective, the FASB will no longer issue updates in the form of statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; rather it will issue ASUs. The initial adoption of the FASB’s Accounting Standards Codification did not have an impact on the consolidated earnings or financial position of the Company because it only amends the referencing to existing accounting standards.

On June 12, 2009, the FASB issued SFAS No. 167, Determining Amendments to FASB Interpretation No. 46(R), which provides additional guidance on how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 will be effective for interim and annual reporting periods beginning after November 15, 2009, and early adoption is prohibited. On June 12, 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets (“SFAS 166”), which will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a QSPE, changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS 166 will be effective for interim and annual reporting periods beginning after November 15, 2009, and early adoption is prohibited. The adoption of SFAS 166 and SFAS 167 could have a significant impact on the Company’s consolidated financial statements because the Company expects it will be required to consolidate at least some of its special purpose entities to which pools of loan receivables have been transferred in transactions previously qualifying as sales. Holding more of these assets on the Company’s balance sheet may require it to take various actions, including raising additional capital, in order to meet regulatory capital requirements. Such capital may not be available on terms favorable to the Company, if at all, and could have a negative impact on the Company’s financial results. As of September 30, 2009, the Company had approximately $44.3 billion of credit card receivables held by QSPEs of which $41.3 billion are backed securities held by external investors; and $4.8 billion in mortgage receivables that are considered at risk for consolidation. Additionally, the Company has mortgage loans, HELOC’s and manufactured housing loans serviced for others that the Company does not believe will be consolidated.

On May 28, 2009, the FASB issued SFAS No. 165, Subsequent Events (“ASC 855-10/SFAS 165”). This Statement establishes general standards of accounting for and disclosing events that occur after the balance sheet date, but prior to the issuance of financial statements. The Statement requires companies to disclose subsequent events as defined within ASC 855-10/SFAS 165 and disclose the date through which subsequent events have been evaluated. The Statement is effective for interim and annual periods ending after June 15, 2009. The adoption of ASC 855-10/SFAS 165 occurred during the second quarter of 2009 and did not have a material effect on consolidated earnings or financial position of the Company. See Note 17 for additional details.

On April 9, 2009, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-4, Determining Whether a Market Is Not Active and a Transaction is Not Distressed (“ASC 820-10-65-4/FSP 157-4”), which provides additional guidance on determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurements under SFAS No. 157, Fair Value Measurements (“ASC 820-10/SFAS 157”). The adoption of ASC 820-10-65-4/FSP 157-4 occurred during the second quarter of 2009, and did not have a material effect on the consolidated earnings and financial position of the Company.

On April 9, 2009, the FASB issued FASB Staff Position No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairment (“ASC 320-10-65/FSP 115-2 and FAS 124-2”), which eliminates the Company’s requirement to assert its intent and ability to hold an investment until its forecasted recovery to avoid recognizing an impairment loss. The FSP requires the Company to recognize an other-than-temporary impairment when the Company intends to sell the security or it is more likely than not that it will be required to sell the security before recovery. Credit related impairments are recorded in income while other impairments are recorded in other comprehensive income. ASC 320-10-65/FSP 115-2 and FAS 124-2are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of ASC 320-10-65/FSP 115-2 and FAS 124-2occurred during the second quarter of 2009. See Note 6 for additional detail.

On April 9, 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“ASC 825-10-65/FSP 107-1 and APB 28-1”), which will require the Company to include fair value disclosures of financial instruments for each interim and annual period that financial statements are prepared. ASC 825-10-65/FSP 107-1 and APB 28-1 is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of ASC 825-10-65/FSP 107-1 and APB 28-1 occurred during the second quarter of 2009, and did not have a material effect on the consolidated earnings and financial position of the Company because it only amends the disclosure requirements. See Note 7 for additional details.

 

13


Table of Contents

In January 2009, the FASB issued FASB Staff Position No. EITF 99-20-1, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets“ (“ASC 325-40-65/FSP EITF 99-20”). The FSP was issued to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,“ (“ASC 320-10/SFAS 115”) and other related guidance. ASC 325-40-65/FSP EITF 99-20 emphasizes that any other-than-temporary impairment resulting from the application of ASC 320-10/SFAS 115 or ASC 325-40-65/FSP EITF 99-20 shall be recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made. ASC 325-40-65/FSP EITF 99-20 is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. The adoption of ASC 325-40-65/FSP EITF 99-20 did not have impact on consolidated earnings or financial position of the Company.

In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities“ (“ASC 260-10-65/FSP EITF 03-6-1”) The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, “Earnings per Share“ (“ASC 260-10/SFAS 128”). The FSP requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. The FSP is effective for fiscal years beginning after December 15, 2008; earlier application is not permitted. The adoption of ASC 260-10-65/FSP EITF 03-6-1 did not have a material effect on our results of operations or earnings per share.

In September 2008, the FASB issued FSP No. FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (“ASC 815-10/FSP FAS 133-1 and FIN 45-4”). ASC 815-10/FSP FAS 133-1 and FIN 45-4 requires enhanced disclosures about credit derivatives and guarantees and amends FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others“ (“ASC 460-10/FIN 45”) to exclude credit derivative instruments accounted for at fair value under SFAS 133. The FSP is effective for financial statements issued for reporting periods ending after November 15, 2008. The adoption of ASC 815-10/FSP FAS 133-1 and FIN 45-4 did not have a material impact on the consolidated earnings or financial position of the Company. ASC 460-10/FIN 45 only requires additional disclosures concerning guarantees, which did not have an impact on the consolidated earnings or financial position of the Company because it only amends the disclosure requirements. See Note 15 for additional detail.

Effective January 1, 2008, the Company adopted ASC 820-10/SFAS 157 for all financial assets and liabilities measured at fair value; and for nonfinancial assets and liabilities measured at fair value on a recurring basis. ASC 820-10/SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The initial adoption of ASC 820-10/SFAS 157 did not have a material impact on the consolidated earnings and financial position of the Company. There are no material assets or liabilities recognized or disclosed at fair value for which the Company has not applied the provisions of SFAS 157. See Note 7 for additional detail.

Effective January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (“ASC 825-10/SFAS 159”). ASC 825-10/SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value with changes in fair value included in current earnings. The election is made on specified election dates, can be made on an instrument by instrument basis, and is irrevocable. The initial adoption of ASC 825-10/SFAS 159 did not have a material impact on the consolidated earnings and financial position of the Company. See Note 7 for additional detail.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133, (“ASC 815-10-65/SFAS 161”). This Statement changes the disclosure requirements for derivative and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under ASC 815-10-65/SFAS 161 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. The adoption of ASC 815-10-65/SFAS 161 did not have an impact on the consolidated earnings or financial position of the Company because it only amends the disclosure requirements for derivatives and hedged items. See Note 13 for derivatives disclosures under ASC 815-10-65/SFAS 161.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51, (“ASC 810-10-65/SFAS 160”). This Statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This Statement amends ASC810-10/ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial

 

14


Table of Contents

statements. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of ASC 810-10-65/SFAS 160 did not have a material impact on the consolidated earnings or financial position of the Company.

In December 2007, the FASB issued ASC 805-10/SFAS No. 141(R), which applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This Statement replaces SFAS 141, Business Combinations. It retains the fundamental requirements in SFAS 141; however, the scope is broader than that of SFAS 141 by applying to all transactions and other events in which one entity obtains control over one or more other businesses. ASC 805-10/SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, at their fair values as of that date, with limited exceptions, thereby replacing SFAS 141’s cost-allocation process. This Statement also changes the requirements for recognizing acquisition related costs, restructuring costs, and assets acquired and liabilities assumed arising from contingencies. It also changes the accounting for step acquisitions. The Company applied the provisions of ASC 805-10/SFAS No. 141(R) to the Chevy Chase Bank acquisition.

Note 2

Acquisitions

Chevy Chase Bank

On February 27, 2009, the Company acquired all of the outstanding common stock of Chevy Chase Bank in exchange for Capital One common stock and cash with a total value of $475.9 million. Under the terms of the stock purchase agreement, Chevy Chase Bank common shareholders received $445.0 million in cash and 2.56 million shares of Capital One common stock. In addition, to the extent that losses on certain of Chevy Chase Bank’s mortgage loans are less than the level reflected in the net credit mark estimated at the time the deal was signed, the Company will share a portion of the benefit with the former Chevy Chase Bank common shareholders (the “earn-out”). The maximum payment under the earn-out is $300.0 million and would occur after December 31, 2013. As of September 30, 2009, the Company has not recognized a liability nor does it expect to make any payments associated with the earn-out based on our expectations for credit losses on the portfolio. Subsequent to the closing of the acquisition all of the outstanding shares of preferred stock of Chevy Chase Bank and the subordinated debt of its wholly-owned REIT subsidiary, were redeemed. This acquisition improves the Company’s core deposit funding base, increases readily available and committed liquidity, adds additional scale in bank operations, and brings a strong customer base in an attractive banking market. Chevy Chase Bank’s results of operations are included in the Company’s results after the acquisition date of February 27, 2009.

The Chevy Chase Bank acquisition is being accounted for under the acquisition method of accounting. Accordingly, the purchase price was allocated to the acquired assets and liabilities based on their estimated fair values at the Chevy Chase Bank acquisition date, as summarized in the following table. Preliminary goodwill of $1.6 billion is calculated as the purchase premium after adjusting for the fair value of net assets acquired and represents the value expected from the synergies created through the scale, operational and product enhancement benefits that will result from combining the operations of the two companies. During the third quarter of 2009, the Company continued the analysis of the fair values and purchase price allocation of Chevy Chase Bank’s assets and liabilities. The Company recorded an increase to goodwill of $146.9 million as a result. The change was predominantly related to a reduction in the fair value of net loans. The Company has not finalized the analysis and still considers goodwill to be preliminary, except as it relates to deposits and borrowings. Upon completion of the analysis, the Company expects to recast previously presented information as if all adjustments to the purchase price allocation had occurred at the date of acquisition. The Company has not recast previously presented information as adjustments to the initial purchase price allocation made during the second and third quarters of 2009 have not been considered material. The fair value of the non-controlling interest was calculated based on the redemption price of the interests, as well as any accrued but unpaid dividends. The shares of preferred stock of Chevy Chase Bank have been redeemed as noted above, and therefore, there is no longer a non-controlling interest.

 

     Previous Allocation     Adjustments    Revised
Allocation
 

Costs to acquire Chevy Chase Bank:

       

Cash consideration paid

   $ 445,000         $ 445,000   

Capital One common stock issued (2,560,601 shares)

     30,855           30,855   

Fair value of contingent consideration

     —             —     

Transfer taxes paid on behalf of Chevy Chase Bank

     3,151           3,151   
                     

Total consideration paid for Chevy Chase Bank

   $ 479,006         $ 479,006   

Fair value of noncontrolling interest

     283,900           283,900   
                     

Fair value of Chevy Chase Bank

   $ 762,906         $ 762,906   

Chevy Chase Bank’s net assets at fair value:

       

Chevy Chase Bank’s stockholders’ equity at February 27, 2009

     641,537           641,537   

Elimination of Chevy Chase Bank’s intangible assets (including goodwill)

     (18,383        (18,383

 

15


Table of Contents
     Previous Allocation     Adjustments     Revised
Allocation
 

Adjustments to reflect assets and liabilities acquired at fair value:

      

Net loans

     (1,895,741   $ (73,129     (1,968,870

Investment securities

     (51,263     —          (51,263

Intangible assets

     286,750        (8,500     278,250   

Other assets

     563,834        (39,571     524,263   

Deposits

     (109,861     —          (109,861

Borrowings

     (12,871     —          (12,871

Other liabilities

     (46,244     (25,668     (71,912
                        

Less: Adjusted identifiable net liabilities acquired

     (642,242     (146,868     (789,110

Total preliminary goodwill(1)

   $ 1,405,148      $ 146,868      $ 1,552,016   
                        

 

(1) No goodwill is expected to be deductible for federal income tax purposes. The goodwill has been allocated to the appropriate segments during the third quarter of 2009, along with the operations of Chevy Chase Bank.

The following condensed balance sheet of Chevy Chase Bank discloses the amount assigned to each major asset and liability caption as of September 30, 2009. The allocation of the final purchase price is still subject to refinement as the integration process continues and additional information becomes available.

 

     Previous Allocation     Adjustments     Revised
Allocation
 

Assets:

      

Cash and cash equivalents

   $ 1,217,837      $ —        $ 1,217,837   

Interest-bearing deposits

     8,480        —          8,480   

Investment securities

     1,425,611        —          1,425,611   

Net loans

     9,373,098        (73,129     9,299,969   

Other Intangible assets

     44,830        (8,500     36,330   

Core deposit intangibles

     241,920        —          241,920   

Other assets

     2,372,357        (39,571     2,332,786   
                        

Total assets

   $ 14,684,133      $ (121,200   $ 14,562,933   

Liabilities:

      

Deposits

   $ 13,556,639      $ —        $ 13,556,639   

Securities sold under repurchase agreements

     806,575        —          806,575   

Other borrowings

     376,600        —          376,600   

Other liabilities

     586,561        25,668        612,229   
                        

Total liabilities

     15,326,375        25,668        15,352,043   
                        

Net liabilities acquired

   $ (642,242   $ (146,868   $ (789,110
                        

The following table discloses the impact of Chevy Chase Bank since the acquisition on February 27, 2009, through the end of the third quarter 2009. The table also presents what the pro-forma Company results would have been had the acquisition taken place on January 1, 2009 and January 1, 2008. The pro forma financial information includes the impact of purchase accounting adjustments and the amortization of certain intangible assets. The pro-forma does not include the impact of possible business model changes nor does it consider any potential impacts of current market conditions or revenues, reduction of expenses, asset dispositions, or other factors.

 

     Chevy Chase Bank
Actual since acquisition for the period
ending September 30, 2009
   Total Company
        Pro-Forma results for the nine months
ending September 30,
        2009    2008

Revenue

   $ 336,379    $ 9,706,523    $ 11,359,410

Income from continuing operations, net of tax

   $ 20,555    $ 586,723    $ 1,595,251

Note 3

Loans Acquired in a Transfer

The Company’s acquired loans from the Chevy Chase Bank acquisition, subject to ASC 805-10/SFAS 141(R), are recorded at fair value and no separate valuation allowance is recorded at the date of acquisition. The Company is required to review each loan at acquisition to determine if it should be accounted for under ASC 310-10/SOP 03-3 and if so, determines whether each such loan is to be accounted for individually or whether such loans will be aggregated into pools of loans based on common risk characteristics. The

 

16


Table of Contents

Company has performed its analysis of the loans to be accounted for as impaired under ASC 310-10/SOP 03-3 (“Impaired Loans” in the tables below). The loans acquired with the Chevy Chase Bank acquisition not accounted for under ASC 310-10/SOP 03-3 have been accounted for under ASC 805-10/SFAS 141(R) (“Non-Impaired Loans” in the tables below) and are considered performing. The accounting treatment is essentially the same under both standards. The disclosure requirements under ASC 310-10/SOP 03-3 are more extensive, though the Company has elected to provide such disclosures for all of the acquired Chevy Chase Bank loans. During the evaluation of whether a loan was considered impaired under ASC 310-10/SOP 03-3 or performing under ASC 805-10/SFAS 141(R), the Company considered a number of factors, including the delinquency status of the loan, payment options and other loan features (i.e. reduced documentation, interest only, or negative amortization features), the geographic location of the borrower or collateral and the risk rating assigned to the loans. Based on the criteria, the Company considered the entire Chevy Chase Bank option arm, hybrid arm and construction to permanent portfolios to be impaired and accounted for under ASC 310-10/SOP 03-3. Portions of the Chevy Chase Bank commercial loan, auto, HELOC and other consumer loan portfolios and the fixed mortgage portfolio were also considered impaired.

The Company makes an estimate of the total cash flows it expects to collect from the loans (or pools of loans), which includes undiscounted expected principal and interest. The excess of that amount over the fair value of the loans is referred to as accretable yield. Accretable yield is recognized as interest income on a constant yield basis over the life of the loans. The Company also determines the loans’ contractual principal and contractual interest payments. The excess of that amount over the total cash flows it expects to collect from the loans is referred to as nonaccretable difference, which is not accreted into income. Judgmental prepayment assumptions are applied to both contractually required payments and cash flows expected to be collected at acquisition. The Company continues to estimate cash flows expected to be collected over the life of the loans. Subsequent increases in total cash flows it expects to collect are recognized as an adjustment to the accretable yield with the amount of periodic accretion adjusted over the remaining life of the loans. Subsequent decreases in cash flows expected to be collected over the life of the loans are recognized as impairment in the current period through allowance for loan loss. Adjustments to the acquisition date fair value of the acquired loans made during the refinement of the allocation of purchase price could impact accretable yield and/or nonaccretable difference.

In conjunction with the Chevy Chase Bank acquisition, the acquired loan portfolio was accounted for under ASC 310-10/SOP 03-3 or ASC 805-10/SFAS 141(R) at fair value and they are as follows:

 

     At Acquisition

(In Thousands)

   Impaired
Loans
   Non-Impaired
Loans
   Total Loans

Contractually required principal and interest at acquisition

   $ 11,141,180    $ 3,353,188    $ 14,494,368

Nonaccretable difference (expected losses of $2,205,853 and foregone interest of $760,958) (1)

     2,792,107      174,704      2,966,811
                    

Cash flows expected to be collected at acquisition

   $ 8,349,073    $ 3,178,484    $ 11,527,557

Accretable yield (interest component of expected cash flows)

     1,952,129      510,243      2,462,372
                    

Basis in acquired loans at acquisition(2)

   $ 6,396,944    $ 2,668,241    $ 9,065,185
                    

 

(1) Expected losses and foregone interest on the ASC 310-10/SOP 03-3 loans are $2,052,151 and $739,956, respectively. Expected losses and foregone interest on the non ASC 310-10/SOP 03-3 loans are $153,702 and $21,002, respectively.
(2) A portion of the acquired loans from Chevy Chase Bank acquisition were held for sale and are not included in these tabular disclosures. These held for sale loans were assigned a fair value of $235.1 million through purchase price allocation.

The carrying amount of these loans is included in the balance sheet amounts of loans receivable at September 30, 2009 and is as follows:

 

     Impaired
Loans
    Non-Impaired
Loans
    Total Loans  

Outstanding Balance

   $ 7,613,196      $ 2,504,756      $ 10,117,952   

Carrying Amount

   $ 5,647,290      $ 2,240,528      $ 7,887,818   
     Accretable Yield  
     Impaired
Loans
    Non-Impaired
Loans
    Total Loans  

Balance at January 1, 2009

   $ —        $ —        $ —     

Additions

     1,952,129        510,243        2,462,372   

Accretion

     (200,394     (73,709     (274,103
                        

Balance at September 30, 2009

   $ 1,751,735      $ 463,534      $ 2,188,269   
                        
     Credit Mark  
     Impaired
Loans
    Non-Impaired
Loans
    Total Loans  

Balance at January 1, 2009

   $ —        $ —        $ —     

 

17


Table of Contents
     Credit Mark  
     Impaired
Loans
    Non-Impaired
Loans
    Total Loans  

Additions

     (2,052,151     (153,702     (2,205,853

Principal and nonprincipal losses

     297,071        28,841        325,912   
                        

Balance at September 30, 2009

   $ (1,755,080   $ (124,861   $ (1,879,941
                        

Note 4

Discontinued Operations

Shutdown of Mortgage Origination Operations of Wholesale Mortgage Banking Unit

In the third quarter of 2007, the Company shut down the mortgage origination operations of its wholesale mortgage banking unit, GreenPoint Mortgage (“GreenPoint”). GreenPoint was acquired by the Company in December 2006 as part of the North Fork acquisition. The results of the mortgage origination operations of GreenPoint have been accounted for as a discontinued operation and have been removed from the Company’s results from continuing operations for the three and nine months ended September 30, 2009 and 2008. The Company will have no significant continuing involvement in the operations of the originate and sell business of GreenPoint.

The loss from discontinued operations for the three and nine months ended September 30, 2009 includes an expense of $83.0 million and $109.0 million, respectively, recorded in non-interest expense, for representations and warranties provided by the Company on loans previously sold to third parties by GreenPoint’s mortgage origination operation. The expense for representations and warranties is offset by a valuation adjustment for expected returns of spread account funding for certain securitization transactions.

The following is summarized financial information for discontinued operations related to the closure of the Company’s wholesale mortgage banking unit:

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
     2009     2008     2009     2008  

Net interest income

   $ —        $ 1,612      $ 776      $ 5,332   

Non-interest income

     2,150        2,287        2,275        5,517   

Non-interest expense

     69,853        22,125        118,837        175,577   

Income tax benefit

     (24,116     (6,576     (41,243     (59,434
                                

Loss from discontinued operations, net of taxes

   $ (43,587   $ (11,650   $ (74,543   $ (105,294
                                

The Company’s wholesale mortgage banking unit had assets of approximately $31.5 million as of September 30, 2009 consisting of $15.8 million of mortgage loans held for sale and other related assets. The related liabilities consisted of obligations to fund these assets, and obligations for representations and warranties provided by the Company on loans previously sold to third parties.

Note 5

Segments

During the third quarter of 2009, the Company realigned its business segment reporting structure to better reflect the manner in which the performance of the Company’s operations are evaluated. The Company now reports the results of its business through three operating segments: Credit Card, Commercial Banking and Consumer Banking.

Segment and sub-segment results where presented have been recast for all periods presented. The three segments consist of the following:

 

   

Credit Card includes the Company’s domestic consumer and small business card lending, domestic national small business lending, national closed end installment lending and the international card lending businesses in Canada and the United Kingdom.

 

   

Commercial Banking includes the Company’s lending, deposit gathering and treasury management services to commercial real estate and middle market customers. The Commercial segment also includes the financial results of a national portfolio of small ticket commercial real estate loans that are in run-off mode.

 

   

Consumer Banking includes the Company’s branch based lending and deposit gathering activities for small business customers as well as its branch based consumer deposit gathering and lending activities, national deposit gathering, consumer mortgage lending and servicing activities and national automobile lending.

 

18


Table of Contents

The segment reorganization includes the allocation of Chevy Chase Bank to the appropriate segments. Chevy Chase Bank’s operations are included in the Commercial Banking and Consumer Banking segments beginning in the second quarter 2009. Chevy Chase Bank’s operations for the first quarter of 2009 remain in the Other category due to the short duration since acquisition. The Other category includes GreenPoint originated consumer mortgages originated for sale but held for investment since originations were suspended in 2007, the results of corporate treasury activities, including asset-liability management and the investment portfolio, the net impact of transfer pricing, brokered deposits, certain unallocated expenses, gains/losses related to the securitization of assets, and restructuring charges related to the Company’s cost initiative and Chevy Chase Bank acquisition.

The Company maintains its books and records on a legal entity basis for the preparation of financial statements in conformity with GAAP. The following tables present information prepared from the Company’s internal management information systems, which is maintained on a line of business level through allocations from the consolidated financial results.

 

    Three Months Ended September 30, 2009
    Credit Card   Commercial
Banking
    Consumer
Banking
  Other     Total Managed
(Non-GAAP)
  Securitization
Adjustments
    Total
Reported

Net interest income

  $ 2,024,250   $ 297,484      $ 908,744   $ 27,069      $ 3,257,547   $ (1,206,867   $ 2,050,680

Non-interest income

    966,862     43,299        212,716     149,803        1,372,680     179,700        1,552,380

Provisions for loan and lease losses

    1,643,721     375,095        156,052     25,464        2,200,332     (1,027,167     1,173,165

Restructuring expenses

    —       —          —       26,357        26,357     —          26,357

Core deposit intangible amortization

    —       9,664        45,856     —          55,520     —          55,520

Other non-interest expenses

    897,578     156,379        635,535     31,109        1,720,601     —          1,720,601

Income tax provision (benefit)

    158,074     (70,125     99,406     (29,164     158,191     —          158,191
                                               

Net income (loss)

  $ 291,739   $ (130,230   $ 184,611   $ 123,106      $ 469,226   $ —        $ 469,226
                                               

Loans held for investment

  $ 70,368,809   $ 29,862,418      $ 40,479,805   $ 347,483      $ 141,058,515   $ (44,275,350   $ 96,783,165

Total deposits

  $ —     $ 18,617,112      $ 72,252,596   $ 23,633,403      $ 114,503,111   $ —        $ 114,503,111
    Three Months Ended September 30, 2008
    Credit Card   Commercial
Banking
    Consumer
Banking
  Other     Total Managed
(Non-GAAP)
  Securitization
Adjustments
    Total
Reported

Net interest income

  $ 1,862,034   $ 238,641      $ 754,439   $ 34,216      $ 2,889,330   $ (1,082,685   $ 1,806,645

Non-interest income

    1,181,015     35,608        194,741     (85,805     1,325,559     371,332        1,696,891

Provisions for loan and lease losses

    1,434,435     41,706        283,424     45,705        1,805,270     (711,353     1,093,917

Restructuring expenses

    —       —          —       15,306        15,306     —          15,306

Core deposit intangible amortization

    —       9,614        37,637     —          47,251     —          47,251

Other non-interest expenses

    1,059,641     111,944        577,103     (1,039     1,747,649     —          1,747,649

Income tax provision (benefit)

    192,461     38,845        17,856     (35,538     213,624     —          213,624
                                               

Net income (loss)

  $ 356,512   $ 72,140      $ 33,160   $ (76,023   $ 385,789   $ —        $ 385,789
                                               

Loans held for investment

  $ 79,616,456   $ 29,095,313      $ 38,077,606   $ 556,371      $ 147,345,746   $ (49,380,395   $ 97,965,351

Total deposits

  $ —     $ 16,764,330      $ 57,492,140   $ 24,656,504      $ 98,912,974   $ —        $ 98,912,974
    Nine Months Ended September 30, 2009
    Credit Card   Commercial
Banking
    Consumer
Banking
  Other     Total Managed
(Non-GAAP)
  Securitization
Adjustments
    Total
Reported

Net interest income

  $ 5,513,241   $ 817,870      $ 2,471,702   $ 157,681      $ 8,960,494   $ (3,176,477   $ 5,784,017

Non-interest income

    2,849,783     133,556        601,600     (37,093     3,547,846     326,555        3,874,401

Provisions for loan and lease losses

    4,846,799     614,896        626,340     148,227        6,236,262     (2,849,922     3,386,340

Restructuring expenses

    —       —          —       87,358        87,358     —          87,358

Core deposit intangible amortization

    —       28,731        128,896     —          157,627     —          157,627

Other non-interest expenses

    2,795,802     434,708        1,856,979     136,852        5,224,341     —          5,224,341

Income tax provision (benefit)

    252,727     (44,419     161,380     (179,442     190,246     —          190,246
                                               

Net income (loss)

  $ 467,696   $ (82,490   $ 299,707   $ (72,407   $ 612,506   $ —        $ 612,506
                                               

Loans held for investment

  $ 70,368,809   $ 29,862,418      $ 40,479,805   $ 347,483      $ 141,058,515   $ (44,275,350   $ 96,783,165

Total deposits

  $ —     $ 18,617,112      $ 72,252,596   $ 23,633,403      $ 114,503,111   $ —        $ 114,503,111

 

19


Table of Contents
    Nine Months Ended September 30, 2008
    Credit Card   Commercial
Banking
  Consumer
Banking
    Other     Total Managed
(Non-GAAP)
  Securitization
Adjustments
    Total
Reported

Net interest income

  $ 5,646,995   $ 712,459   $ 2,228,246      $ 66,475      $ 8,654,175   $ (3,307,857   $ 5,346,318

Non-interest income

    3,540,158     101,423     568,874        23,763        4,234,218     1,141,467        5,375,685

Provisions for loan and lease losses

    3,943,432     100,723     1,015,709        108,645        5,168,509     (2,166,390     3,002,119

Restructuring expenses

    —       —       —          81,625        81,625     —          81,625

Core deposit intangible amortization

    —       29,626     115,978        —          145,604     —          145,604

Other non-interest expenses

    3,317,525     329,937     1,707,402        (130,009     5,224,855     —          5,224,855

Income tax provision (benefit)

    671,961     123,759     (14,689     5,927        786,958     —          786,958
                                               

Net income (loss)

  $ 1,254,235   $ 229,837   $ (27,280   $ 24,050      $ 1,480,842   $ —        $ 1,480,842
                                               

Loans held for investment

  $ 79,616,456   $ 29,095,313   $ 38,077,606      $ 556,371      $ 147,345,746   $ (49,380,395   $ 97,965,351

Total deposits

  $ —     $ 16,764,330   $ 57,492,140      $ 24,656,504      $ 98,912,974   $ —        $ 98,912,974

Note 6

Securities Available for Sale

Expected maturities aggregated by investment category, gross unrealized gains and gross unrealized losses on securities available-for sale as of September 30, 2009 and December 31, 2008 were as follows:

 

    Expected Maturity Schedule
    1 Year or
Less
  1–5
Years
  5–10
Years
  Over 10
Years
  Market
Value
Totals
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
    Amortized
Cost Totals

September 30, 2009

               

U.S. Treasury and other U.S. government agency obligations

               

U.S. Treasury

  $ 30,000   $ 394,301   $ —     $ —     $ 424,301   $ 14,096   $ —        $ 410,205

FNMA

    77,914     161,150     —       —       239,064     10,645     —          228,419

FHLMC

    —       214,063     —       —       214,063     14,425     —          199,638

Other GSE and FDIC Debt Guaranteed Program (“DGP”)

    —       1,073     —       —       1,073     77     —          996
                                                 

Total U.S. Treasury and other U.S. government agency obligations

    107,914     770,587     —       —       878,501     39,243     —          839,258
                                                 

Collateralized mortgage obligations (“CMO”)

               

FNMA

    51,163     2,493,631     671,825     —       3,216,619     102,484     (12,912     3,127,047

FHLMC

    74,583     1,977,531     696,389     —       2,748,503     85,969     (10,108     2,672,642

GNMA

    7,023     179,671     809,158     —       995,852     17,428     (88     978,512

Non GSE

    50,807     1,144,781     165,746     125,789     1,487,123     —       (304,221     1,791,344
                                                 

Total CMO

    183,576     5,795,614     2,343,118     125,789     8,448,097     205,881     (327,329     8,569,545
                                                 

Mortgage backed securities (“MBS”)

               

FNMA

    27,909     3,241,173     4,603,616     103,953     7,976,651     257,054     (1,311     7,720,908

FHLMC

    75,087     1,951,156     2,678,215     546     4,705,004     136,690     (11,956     4,580,270

GNMA

    48     70,971     7,962,608     —       8,033,627     115,079     (667     7,919,215

Other GSE

    —       843     —       —       843     1     (3     845

Non GSE

    —       141,290     656,028     60,825     858,143     —       (210,231     1,068,374
                                                 

Total MBS

    103,044     5,405,433     15,900,467     165,324     21,574,268     508,824     (224,168     21,289,612
                                                 

 

20


Table of Contents
     Expected Maturity Schedule
     1 Year or
Less
   1–5
Years
   5–10
Years
   Over 10
Years
   Market
Value
Totals
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Amortized
Cost Totals

Asset backed securities

     2,324,220      3,844,643      192,097      —        6,360,960      162,349      (7,070     6,205,681

Other

     137,634      133,282      40,613      119,646      431,175      9,922      (3,827     425,080
                                                        

Total

   $ 2,856,388    $ 15,949,559    $ 18,476,295    $ 410,759    $ 37,693,001    $ 926,219    $ (562,394   $ 37,329,176
                                                        
     Expected Maturity Schedule
     1 Year or
Less
   1–5
Years
   5–10
Years
   Over 10
Years
   Market
Value
Totals
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Amortized
Cost Totals

December 31, 2008

                      

U.S. Treasury and other U.S. government agency obligations

                      

U.S. Treasury

   $ 40,751    $ 181,925    $ —      $ —      $ 222,676    $ 21,371    $ —        $ 201,305

FNMA

     86,584      245,427      —        —        332,011      15,262      —          316,749

FHLMC

     30,097      109,219      —        —        139,316      9,567      (821 )     130,570

Other GSE and FDIC Debt Guaranteed Program (“DGP”)

     265,733      650,593      —        —        916,326      16,099      (272 )     900,499
                                                        

Total U.S. Treasury and other U.S. government agency obligations

     423,165      1,187,164      —        —        1,610,329      62,299      (1,093 )     1,549,123
                                                        

Collateralized mortgage obligations (“CMO”)

                      

FNMA

     836,826      2,830,452      78,555      —        3,745,833      55,582      (21,699     3,711,950

FHLMC

     467,790      4,745,804      —        —        5,213,594      79,673      (27,851     5,161,772

GNMA

     63,168      74,852            138,020      1,584      (224     136,660

Other GSE

     —        78,860      —        —        78,860      3,753      —          75,107

Non GSE

     167,221      1,750,758      730      7,209      1,925,918      —        (604,306     2,530,224
                                                        

Total CMO

     1,535,005      9,480,726      79,285      7,209      11,102,225      140,592      (654,080     11,615,713
                                                        

Mortgage backed securities (“MBS”)

                      

FNMA

     29,206      7,651,869      18,976      —        7,700,051      93,591      (11,600     7,618,060

FHLMC

     80,504      4,619,503      1,295      —        4,701,302      54,917      (24,056     4,670,441

GNMA

     617      486,294      —        —        486,911      14,580      (1,120     473,451

Other GSE

     —        1,389      —        —        1,389      —        (14     1,403

Non GSE

     40,118      783,098      —        —        823,216      —        (430,936     1,254,152
                                                        

Total MBS

     150,445      13,542,153      20,271      —        13,712,869      163,088      (467,726     14,017,507
                                                        

Asset backed securities

     1,508,087      2,369,443      218,527      —        4,096,057      2,123      (339,494     4,433,428

Other

     162,975      128,267      44,566      145,983      481,791      5,166      (19,235     495,860
                                                        

Total

   $ 3,779,677    $ 26,707,753    $ 362,649    $ 153,192    $ 31,003,271    $ 373,268    $ (1,481,628   $ 32,111,631
                                                        

At September 30, 2009, the expected maturities of the Company’s mortgage-backed and asset-backed securities and the contractual maturities of the Company’s other debt securities were used to assign the securities into the above maturity groupings. The Company believes that the use of expected maturities aligns with how the securities will actually perform and provides information regarding liquidity needs and potential impacts on portfolio yields. The maturity distribution based solely on contractual maturities is: 1 Year or Less - $302.1 million, 1-5 Years - $6,121.7 million, 5-10 Years - $1,879.9 million, and Over 10 Years - $29,389.4 million. Actual maturities may differ from the contractual or expected maturities since borrowers may have the right to prepay obligations with or without prepayment penalties.

 

21


Table of Contents

The following table shows the weighted average yield by investment category as of September 30, 2009 and December 31, 2008:

 

     Weighted Average Yield Schedule  
     1 Year
or Less
    1–5
Years
    5–10
Years
    Over 10
Years
 

September 30, 2009

        

U.S. Treasury and other U.S. government agency obligations

        

U.S. Treasury

   0.59   2.37   —     —  

FNMA

   4.30      4.47      —        —     

FHLMC

   —        4.63      —        —     

Other GSE and FDIC Debt Guaranteed Program (“DGP”)

   —        5.44      —        —     
                        

Total U.S. Treasury and other U.S. government agency obligations

   3.25      3.43      —        —     
                        

Collateralized mortgage obligations (“CMO”)

        

FNMA

   4.96      5.44      4.66      —     

FHLMC

   5.18      5.35      4.98      —     

GNMA

   4.76      4.58      4.38      —     

Non GSE

   5.53      5.69      4.93      5.53   
                        

Total CMO

   5.22      5.44      4.68      5.53   
                        

Mortgage backed securities (“MBS”)

        

FNMA

   5.18      5.16      4.93      4.70   

FHLMC

   5.60      4.21      5.02      5.18   

GNMA

   7.11      6.11      4.87      —     

Other GSE

   —        3.44      —        —     

Non GSE

   —        5.61      6.07      5.59   
                        

Total MBS

   5.27      5.16      4.93      5.30   
                        

Asset backed securities

   3.77      4.20      5.21      —     

Other

   3.14      4.27      4.52      6.12   
                        

Total

   3.85   4.84   4.94   5.58
                        
     Weighted Average Yield Schedule  
     1 Year
or Less
    1–5
Years
    5–10
Years
    Over 10
Years
 

December 31, 2008

        

U.S. Treasury and other U.S. government agency obligations

        

U.S. Treasury

   4.04   4.15   —     —  

FNMA

   4.68      4.41      —        —     

FHLMC

   4.00      4.59      —        —     

Other GSE and FDIC Debt Guaranteed Program (“DGP”)

   4.81      3.13      —        —     
                        

Total U.S. Treasury and other U.S. government agency obligations

   4.65      3.67      —        —     
                        

Collateralized mortgage obligations (“CMO”)

        

FNMA

   4.98      5.53      5.50      —     

FHLMC

   5.23      5.22      —        —     

GNMA

   4.61      4.89      —        —     

Other GSE

   —        5.27      —        —     

Non GSE

   5.72      5.51      6.10      6.58   
                        

Total CMO

   5.14      5.37      5.51      6.58   
                        

Mortgage backed securities (“MBS”)

        

FNMA

   4.05      5.31      5.48      —     

FHLMC

   6.00      4.79      5.89      —     

GNMA

   7.08      5.65      —        —     

Other GSE

   —        3.43      —        —     

Non GSE

   6.30      5.96      —        —     
                        

Total MBS

   5.76      5.21      5.50      —     
                        

Asset backed securities

   4.07      4.72      5.16      —     

Other

   3.74      4.21      4.75      5.49   
                        

Total

   4.63   5.15   5.20   5.53
                        

 

22


Table of Contents

The available for sale portfolio continues to be heavily concentrated in high credit quality assets like government-sponsored enterprise (“GSE”) mortgage-backed securities and AAA rated asset-backed securities. In addition to debt securities held in the investment portfolio, the Company reports certain equity securities related to Community Reinvestment Act (“CRA”) investments as available for sale securities.

At September 30, 2009, the portfolio was 90% rated AAA, 4% rated other investment grade (AA to BBB), and 6% non investment grade or not rated.

The following table shows the fair value of investments and amount of unrealized losses segregated by those investments that have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve months or longer as of September 30, 2009 and December 31, 2008.

 

     Less than 12 Months    Greater than 12 Months    Total
     Fair Value    Unrealized
Losses
   Fair Value    Unrealized
Losses
   Fair Value    Unrealized
Losses

September 30, 2009

                 

Collateralized mortgage obligations

                 

FNMA

   $ 36,483    $ 70    $ 334,796    $ 12,842    $ 371,279    $ 12,912

FHLMC

     660      2      427,454      10,106      428,114      10,108

Other GSE

     —        —        4,943      88      4,943      88

Non GSE

     3,013      339      1,466,948      303,882      1,469,961      304,221
                                         

Total CMO

     40,156      411      2,234,141      326,918      2,274,297      327,329
                                         

Mortgage backed securities

                 

FNMA

     219,667      1,088      21,944      223      241,611      1,311

FHLMC

     278,706      2,363      327,499      9,593      606,205      11,956

GNMA

     153,463      498      10,829      169      164,292      667

Other GSE

     808      3      —        —        808      3

Non GSE

     36,812      5,991      810,243      204,240      847,055      210,231
                                         

Total MBS

     689,456      9,943      1,170,515      214,225      1,859,971      224,168
                                         

Asset backed securities

     158,545      110      191,521      6,960      350,066      7,070

Other

     25,361      86      120,405      3,741      145,766      3,827
                                         

Total

   $ 913,518    $ 10,550    $ 3,716,582    $ 551,844    $ 4,630,100    $ 562,394
                                         
     Less than 12 Months    Greater than 12 Months    Total
     Fair Value    Unrealized
Losses
   Fair Value    Unrealized
Losses
   Fair Value    Unrealized
Losses

December 31, 2008

                 

U.S. Treasury and other U.S. government agency obligations

                 

Freddie Mac

   $ —      $ —      $ 30,097    $ 821    $ 30,097    $ 821

Other GSE and DGP

     179,728      272      —        —        179,728      272
                                         

Total U.S. Treasury and other U.S. government agency obligations

     179,728      272      30,097      821      209,825      1,093
                                         

Collateralized mortgage obligations

                 

FNMA

     266,344      8,125      367,472      13,574      633,816      21,699

FHLMC

     307,667      2,445      729,283      25,406      1,036,950      27,851

GNMA

     —        —        11,159      224      11,159      224

Non GSE

     1,652,139      523,952      265,608      80,354      1,917,747      604,306
                                         

Total CMO

     2,226,150      534,522      1,373,522      119,558      3,599,672      654,080
                                         

Mortgage backed securities

                 

FNMA

     982,232      10,782      160,456      818      1,142,688      11,600

FHLMC

     721,443      20,671      155,234      3,385      876,677      24,056

GNMA

     24,876      957      7,108      163      31,984      1,120

Other GSE

     1,389      14      —        —        1,389      14

Non GSE

     668,837      349,753      158,870      81,183      827,707      430,936
                                         

Total MBS

     2,398,777      382,177      481,668      85,549      2,880,445      467,726
                                         

 

23


Table of Contents
     Less than 12 Months    Greater than 12 Months    Total
     Fair Value    Unrealized
Losses
   Fair Value    Unrealized
Losses
   Fair Value    Unrealized
Losses

Asset backed securities

     2,660,798      194,024      692,928      145,470      3,353,726      339,494

Other

     107,126      2,705      120,183      16,530      227,309      19,235
                                         

Total

   $ 7,572,579    $ 1,113,700    $ 2,698,398    $ 367,928    $ 10,270,977    $ 1,481,628
                                         

The Company monitors securities in its available for sale investment portfolio for other-than-temporary impairment based on a number of criteria, including the size of the unrealized loss position, the duration for which that security has been in a loss position, credit rating, the nature of the investments, and current market conditions. For debt securities, the Company also considers any intent to sell the security and the likelihood it will be required to sell the security before its anticipated recovery. The Company continually monitors the ratings of its security holdings and conducts regular reviews of the Company’s credit sensitive assets to monitor collateral performance by tracking collateral trends and looking for any potential collateral degradation.

Based on the evaluation, the Company recognized other-than-temporary impairment of $11.2 million and $21.2 million related to credit through earnings for the three and nine months ended September 30, 2009, respectively. For these impaired securities, unrealized losses not related to credit and therefore recognized in other comprehensive income was $158.8 million (net of tax was $101.8 million) as of September 30, 2009. Cumulative other-than-temporary impairment related to credit losses recognized in earnings for available-for-sale securities is as follows:

 

OTTI credit losses recognized for AFS debt
securities

   Beginning balance of
OTTI credit losses
recognized for
securities held at the
beginning of the
period for which a
portion of OTTI was
recognized in OCI
   Additional increases
to the amount related
to credit loss for
which an OTTI was
previously recognized
   Additions for the
amount related to
credit loss for which
OTTI was not
previously recognized
   Reductions for
securities sold
during the
period
   Ending balance of
the amount related
to credit losses
held at the end of
the period for
which a portion of
OTTI was
recognized in OCI

Three months ended September 30, 2009

              

CMO

   $ 3,622    $ 674    $ 5,003    $ —      $ 9,299

MBS

     5,592      2,023      3,473      —        11,088

Other-Home equity

     817      —        —        —        817
                                  

Total

   $ 10,031    $ 2,697    $ 8,476    $ —      $ 21,204
                                  

Nine months ended September 30, 2009

              

CMO

   $ —      $ —      $ 9,299    $ —      $ 9,299

MBS

     —        —        11,088      —        11,088

Other-Home equity

     —        —        817      —        817
                                  

Total

   $ —      $ —      $ 21,204    $ —      $ 21,204
                                  

Collateralized Mortgage Obligations The Company’s portfolio includes investments in GSE collateralized mortgage obligations and prime non-agency collateralized mortgage obligations. The unrealized losses on the Company’s investment in collateralized mortgage obligations were primarily caused by higher credit spreads and interest rates. As of September 30, 2009, the majority of the unrealized losses in this category are due to prime non-agency collateralized mortgage obligations, of which 6% are rated AAA, 23% are rated other investment grade and 71% are non investment grade or not rated.

The Company recognized credit related other-than-temporary impairment of $5.7 million and $9.3 million through earnings for the three and nine months ended September 30, 2009, respectively, for seven prime non-agency collateralized mortgage obligations. For these impaired securities, unrealized losses not related to credit and therefore recognized in other comprehensive income was $66.2 million (net of tax was $42.4 million) as of September 30, 2009. While these securities experienced significant decreases in fair value due to deteriorating credit fundamentals and elevated liquidity premiums in the second half of 2008, there has been substantial improvement in fair value as market has stabilized, risk premiums have fallen and interest rates have declined. The credit related impairment was calculated based on internal forecasts using security specific delinquencies, product specific delinquency roll rates and expected severities, using industry standard third party modeling tools. The significant key assumptions used to measure the credit related component of securities deemed to be other-than-temporary impaired in the third quarter are as follows: a weighted average credit default rate of 6.86% and a weighted average expected severity of 49%. Based on its view of each security’s current credit performance along with the sufficiency of subordination to protect cash flows, the Company expects to recover the entire amortized cost basis of its remaining collateralized mortgage obligations. However, future declines could result in other-than-temporary impairment being recognized. Furthermore, since the Company does not have the intent to sell nor will it more likely than not be required to sell before anticipated recovery, it does not consider any of its remaining collateralized mortgage obligations in unrealized loss positions to be other-than-temporarily impaired at September 30, 2009.

 

24


Table of Contents

Mortgage-Backed Securities The Company’s portfolio includes investments in GSE mortgage-backed securities and prime non-agency mortgage-backed securities. As of September 30, 2009, the unrealized losses on the Company’s investment in GSE mortgage-backed securities were primarily caused by higher credit spreads and interest rates. However, since the contractual cash flows of these investments are guaranteed by a GSE of the U.S. government, it is expected that the securities will not be settled at a price less than the Company’s amortized cost. However, future declines could result in other-than-temporary impairment being recognized. Furthermore, since the Company does not have the intent to sell nor will it more likely than not be required to sell before anticipated recovery, it does not consider any of its GSE mortgage-backed securities in unrealized loss positions to be other-than-temporarily impaired at September 30, 2009.

As of September 30, 2009, the majority of unrealized losses is due to prime non-agency mortgage-backed securities of which 11% are rated AAA, 8% are rated other investment grade and 81% are non investment grade or not rated.

The Company recognized credit related other-than-temporary impairment of $5.5 million and $11.1 million through earnings for the three and nine months ended September 30, 2009, respectively, for twelve prime non-agency mortgage-backed securities. For these impaired securities, unrealized losses not related to credit and therefore recognized in other comprehensive income was $92.1 million (net of tax was $59.0 million) as of September 30, 2009. While these securities experienced significant decreases in fair value due to deteriorating credit fundamentals and elevated liquidity premiums in the second half of 2008, there has been substantial improvement in fair value as market has stabilized, risk premiums have fallen and interest rates have declined. The credit related impairment was calculated based on internal forecasts using security specific delinquencies, product specific delinquency roll rates and expected severities, using industry standard third party modeling tools. The significant key assumptions used to measure the credit related component of securities deemed to be other-than-temporary impaired in the third quarter of 2009 are as follows: a weighted average credit default rate of 6.49% and a weighted average expected severity of 47%. Based on its view of each security’s current credit performance along with the sufficiency of subordination to protect cash flows, the Company expects to recover the entire amortized cost basis of its remaining non GSE mortgage backed securities. Furthermore, since the Company does not have the intent to sell nor will it more likely than not be required to sell before anticipated recovery, it does not consider any of its remaining non-agency mortgage backed securities in unrealized loss positions to be other-than-temporarily impaired at September 30, 2009.

Asset-Backed Securities This category is comprised of investments backed by credit card, auto and student loans; commercial mortgage backed loans; and minor investments backed by home equity lines of credit. As of September 30, 2009, the portfolio is 85.1% rated AAA and is comprised of 71.3% credit card, 19.0% auto, 8.1% student loans, 1.2% dealer floor securities, 0.3% home equity lines of credit, and 0.1% equipment-backed securities. The unrealized losses on the Company’s investments in asset-backed securities were primarily caused by higher credit spreads and interest rates.

The Company recognized $0.8 million in credit related other-than-temporary impairment through earnings for the three and nine months ended September 30, 2009 related to one home equity line of credit security. For this security, unrealized losses not related to credit and therefore recognized in other comprehensive income was $0.5 million (net of tax was $0.3 million) as of September 30, 2009.

The Company did not recognize any credit related other-than-temporary impairment in the third quarter of 2009. Based on its view of each security’s current credit performance along with the sufficiency of subordination to protect cash flows, the Company expects to recover the entire amortized cost basis of its remaining asset backed securities. Furthermore, since the Company does not have the intent to sell nor will it more likely than not be required to sell before anticipated recovery, it does not consider any of its remaining asset-backed securities in unrealized loss positions to be other-than-temporarily impaired at September 30, 2009.

Other This category consists primarily of municipal securities and limited investments in equity securities, primarily related to CRA activities. The unrealized losses on the Company’s investments in other items were primarily caused by higher risk premiums and interest rates. The Company expects to recover the entire amortized cost basis of the securities in this category. Furthermore, since the Company does not have the intent to sell nor will it more likely than not be required to sell before anticipated recovery, it does not consider any of the securities in unrealized loss positions to be other-than-temporarily impaired at September 30, 2009.

Gross realized gains on sales and calls of securities were $157.7 million and $210.5 million for the three and nine months ended September 30, 2009, respectively. Gross realized losses on sales and calls of securities were $11.8 million and $12.8 million for the three and nine months ended September 30, 2009, respectively. Tax expense on net realized gains was $51.6 million and $70.4 million for the three and nine months ended September 30, 2009, respectively.

The Company’s sale of securities resulted in the reclassification of $49.2 million and $59.5 million of net gains after tax, from cumulative other comprehensive income into earnings, for the three and nine months ended September 30, 2009, respectively.

Securities available for sale included pledged securities of $11.4 billion at September 30, 2009.

 

25


Table of Contents

Note 7

Fair Values of Assets and Liabilities

ASC 820-10/SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10/SFAS 157 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820-10/SFAS 157 also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:

 

   

Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 assets and liabilities include debt and equity securities traded in an active exchange market, as well as U.S. Treasury securities.

 

   

Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

   

Level 3—Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option pricing models, discounted cash flow models and similar techniques.

ASC 825-10/SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has not made any material ASC 825-10/SFAS 159 elections as of the end of the third quarter of 2009.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

     September 30, 2009
     Fair Value Measurements Using (3)    Assets/Liabilities
at Fair Value
     Level 1    Level 2    Level 3   

Assets

           

Securities available for sale

           

U.S. Treasury and other U.S. Gov’t agency

     424,301      454,200      —        878,501

Collateralized mortgage obligations

     —        7,204,977      1,243,120      8,448,097

Mortgage-backed securities

     —        21,007,992      566,276      21,574,268

Asset-backed securities

     —        6,285,960      75,000      6,360,960

Other

     70,019      335,909      25,247      431,175
                           

Total securities available for sale

   $ 494,320    $ 35,289,038    $ 1,909,643    $ 37,693,001

Other assets

           

Mortgage servicing rights

     —        —        271,518      271,518

Derivative receivables(1)

     10,514      877,022      537,137      1,424,673

Retained interests in securitizations

     —        —        3,871,050      3,871,050
                           

Total Assets

   $ 504,834    $ 36,166,060    $ 6,589,348    $ 43,260,242
                           

Liabilities

           

Other liabilities

           

Derivative payables(1)

   $ 2,899    $ 925,503    $ 40,175    $ 968,577
                           

Total Liabilities

   $ 2,899    $ 925,503    $ 40,175    $ 968,577
                           
     December 31, 2008
     Fair Value Measurements Using    Assets/Liabilities
at Fair Value
     Level 1    Level 2    Level 3   

Assets

           

Securities available for sale(2)

   $ 291,907    $ 28,331,103    $ 2,380,261    $ 31,003,271

Other assets

           

Mortgage servicing rights

     —        —        150,544      150,544

Derivative receivables(1)

     8,020      1,768,902      59,895      1,836,817

Retained interests in securitizations

     —        —        1,470,385      1,470,385
                           

Total Assets

   $ 299,927    $ 30,100,005    $ 4,061,085    $ 34,461,017
                           

 

26


Table of Contents
     September 30, 2009
     Fair Value Measurements Using (3)    Assets/Liabilities
at Fair Value
     Level 1    Level 2    Level 3   

Derivative payables(1)

   $ 937    $ 1,260,062    $ 60,672    $ 1,321,671
                           

Total Liabilities

   $ 937    $ 1,260,062    $ 60,672    $ 1,321,671
                           

 

(1) The Company does not offset the fair value of derivative contracts in a loss position against the fair value of contracts in a gain position. The Company also does not offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a master netting arrangement.
(2) Securities available for sale were not broken-out by security type as of December 31, 2008, as ASC 820-10-65-4/FSP FAS 157-4 is applied prospectively.
(3) The above table does not reflect ($0.5) million of counterparty credit risk. Counterparty credit risk is reflected in other assets/liabilities on the balance sheet and offset through the income statement in other income.

Financial instruments are considered Level 3 when their values are determined using pricing models, which include comparison of prices from multiple sources, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable or there is significant variability among pricing sources. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. The table below presents a reconciliation for all assets and liabilities measured and recognized at fair value on a recurring basis using significant unobservable inputs (Level 3) during 2009. All Level 3 instruments presented in the table were carried at fair value prior to the adoption of ASC 825-10/SFAS 159.

Level 3 Instruments Only

 

     Three Months Ended September 30, 2009  
     Securities
Available for
Sale
    Mortgage
Servicing
Rights(1)
    Derivative
Receivables(2)
    Retained
Interests in
Securitizations(3)
    Derivative
Payables(2)
 

Balance, June 30, 2009

   $ 1,969,423      $ 280,742      $ 541,052      $ 3,939,213      $ 37,095   

Total realized and unrealized gains (losses):

          

Included in earnings

     47        (7,868     16,995        22,846        3,212   

Included in other comprehensive income

     147,508        —          —          40,644        —     

Purchases, issuances and settlements, net

     (32,250     (1,356     7,807        (131,653     57   

Transfers in/out of Level 3(4)

     (175,085     —          (28,717     —          (189
                                        

Balance, September 30, 2009

   $ 1,909,643      $ 271,518      $ 537,137      $ 3,871,050      $ 40,175   
                                        

Change in unrealized gains (losses) included in earnings related to financial instruments held at September 30, 2009

   $ 47      $ (7,868   $ 16,995      $ 54,612      $ 3,212   

 

     Three Months Ended September 30, 2009  

Securities Available for Sale

   U.S. Treasury
& other U.S.
Gov’t agency
   Collateralized
mortgage
obligations
    Mortgage-
backed
securities
    Asset-
backed
securities
    Other     Total  

Balance, June 30, 2009

   $ —      $ 1,309,089      $ 629,322      $ 1,716      $ 29,296      $ 1,969,423   

Total realized and unrealized gains (losses):

             

Included in earnings

     —        47        —          —          —          47   

Included in other comprehensive income

     —        102,865        44,643        —          —          147,508   

Purchases, issuances and settlements, net

     —        (103,201     —          75,000        (4,049     (32,250

Transfers in/out of Level 3(4)

     —        (65,680     (107,689     (1,716     —          (175,085
                                               

Balance, September 30, 2009

   $ —        1,243,120        566,276        75,000        25,247      $ 1,909,643   
                                               

Change in unrealized gains (losses) included in earnings related to financial instruments held at September 30, 2009

   $ —      $ 47      $ —        $ —        $ —        $ 47   

 

27


Table of Contents
     Nine Months Ended September 30, 2009  
     Securities
Available for
Sale
    Mortgage
Servicing
Rights(1)
   Derivative
Receivables(2)
    Retained
Interests in
Securitizations(3)
    Derivative
Payables(2)
 

Balance, January 1, 2009

   $ 2,380,261      $ 150,544    $ 59,895      $ 1,470,385      $ 60,672   

Total realized and unrealized gains (losses):

           

Included in earnings

     55        19,588      (136,564     (195,620     (19,855

Included in other comprehensive income

     (105,757     —        —          91,851        —     

Purchases, issuances and settlements, net

     (62,508     101,386      53,385        2,504,434        595   

Transfers in/out of Level 3(4)

     (302,408     —        560,421        —          (1,237
                                       

Balance, September 30, 2009

   $ 1,909,643      $ 271,518    $ 537,137      $ 3,871,050      $ 40,175   
                                       

Change in unrealized gains (losses) included in earnings related to financial instruments held at September 30, 2009

   $ 55      $ 19,588    $ (136,564   $ 70,651      $ (19,855

 

     Nine Months Ended September 30, 2009  

Securities Available for Sale

   U.S. Treasury
& other U.S.
Gov’t agency
   Collateralized
mortgage
obligations
    Mortgage-
backed
securities
    Asset-
backed
securities
    Other     Total  

Balance, January 1, 2009

   $ —      $ 1,579,909      $ 773,200      $ —        $ 27,152      $ 2,380,261   

Total realized and unrealized gains (losses):

             

Included in earnings

     —        169        —          (114     —          55   

Included in other comprehensive income

     —        (119,415     13,658        —          —          (105,757

Purchases, issuances and settlements, net

     —        (183,151     48,347        74,201        (1,905     (62,508

Transfers in/out of Level 3(4)

     —        (34,392     (268,929     913        —          (302,408