Capital One 1997 Annual Report Download - page 30

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Provision and Allowance for
Loan Losses
The provision for loan losses is the periodic expense of maintaining
an adequate allowance at the amount estimated to be sufficient to
absorb possible future losses, net of recoveries (including recovery
of collateral), inherent in the existing on-balance sheet loan portfo-
lio. In evaluating the adequacy of the allowance for loan losses, the
Company takes into consideration several factors including eco-
nomic trends and conditions, overall asset quality, loan seasoning
and trends in delinquencies and expected charge-offs.The Com-
pany’s primary guideline is a calculation which uses current delin-
quency levels and other measures of asset quality to estimate net
charge-offs. Consumer loans are typically charged off (net of any
collateral) at 180 days past-due, although earlier charge-offs may
occur on accounts of bankrupt or deceased consumers. Bankrupt
consumers’ accounts are generally charged off within 30 days after
receipt of the bankruptcy petition. Once a loan is charged off, it
is the Company’s policy to continue to pursue the collection of
principal, interest and fees for non-bankrupt accounts.
Management believes that the allowance for loan losses is ade-
quate to cover anticipated losses in the on-balance sheet consumer
loan portfolio under current conditions.There can be no assurance
as to future credit losses that may be incurred in connection with
the Company’s consumer loan portfolio, nor can there be any assur-
ance that the loan loss allowance that has been established by the
Company will be sufficient to absorb such future credit losses.
The allowance is a general allowance applicable to the on-balance
sheet consumer loan portfolio.Table 8 sets forth the activity in
the allowance for loan losses for the periods indicated. See “Asset
Quality,” “Delinquencies” and “Net Charge-Offs” for a more
complete analysis of asset quality.
For the year ended December 31, 1997, the provision for loan
losses increased to $262.8 million, or 57%, from the 1996 provision
for loan losses of $167.2 million.The allowance for loan losses as a
Table 7: Net Charge-Offs(1)
Year Ended December 31
(Dollars in Thousands) 1997 1996 1995 1994 1993
Reported:
Average loans outstanding $ 4,103,036 $ 3,651,908 $2,940,208 $2,286,684 $2,213,378
Net charge-offs 198,192 132,590 59,618 25,727 26,307
Net charge-offs as a percentage of average loans outstanding 4.83% 3.63% 2.03% 1.13% 1.19%
Managed:
Average loans outstanding $13,007,182 $11,268,461 $9,089,278 $6,197,423 $3,265,565
Net charge-offs 856,704 477,732 204,828 91,648 68,332
Net charge-offs as a percentage of average loans outstanding 6.59% 4.24% 2.25% 1.48% 2.09%
(1) Includes consumer loans held for securitization.
Table 8: Summary of Allowance for Loan Losses
Year Ended December 31
(Dollars in Thousands) 1997 1996 1995 1994 1993
Balance at beginning of year $(118,500 $(72,000 $(68,516 $(63,516 $(55,993
Provision for loan losses 262,837 167,246 65,895 30,727 34,030
Transfer to loans held for securitization (2,770) (27,887) (11,504) (4,869) (2,902)
Increase from consumer loan purchase 9,000
Charge-offs (223,029) (115,159) (64,260) (31,948) (39,625)
Recoveries 27,462 13,300 13,353 11,090 16,020
Net charge-offs (1) (195,567) (101,859) (50,907) (20,858) (23,605)
Balance at end of year $(183,000 $(118,500 $(72,000 $(68,516 $(63,516
Allowance for loan losses to loans at end of year(1) 3.76% 2.73% 2.85% 3.07% 3.41%
(1) Excludes consumer loans held for securitization.