Capital One 1998 Annual Report Download - page 29

27 Capital One Financial Corporation
sumer loan portfolio, nor can there be any assurance 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 reported consumer loan
portfolio. Additional information on the Company’s allowance for
loan loss policy can be found in Note A to the Consolidated Finan-
cial Statements. Table 8 sets forth the activity in the allowance for
loan losses for the periods indicated. See “Asset Quality,” “Delin-
quencies” and “Net Charge-Offs” for a more complete analysis of
asset quality.
Provision and Allowance for Loan Losses
The allowance for loan losses is maintained at the amount esti-
mated to be sufficient to absorb probable future losses, net of
recoveries (including recovery of collateral), inherent in the existing
reported loan portfolio. The provision for loan losses is the periodic
cost of maintaining an adequate allowance. Management believes
that the allowance for loan losses is adequate to cover anticipated
losses in the reported homogeneous 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 con-
The Company’s objective is to optimize the profitability of each
account within acceptable risk characteristics. The Company takes
measures as necessary, including requiring collateral on certain
accounts and other marketing and account management tech-
niques, to maintain the Company’s credit quality standards and to
manage the risk of loss on existing accounts. See “Risk Adjusted
Revenue and Margin” for further discussion.
general economic trends in consumer credit performance compared
to the prior year, with less of an impact on reported net charge-offs
due to the increased level of seasoned and higher yielding products
included in the reported portfolio. Table 7 shows the Company’s net
charge-offs for the years presented on a reported and managed
basis.
Table 7: Net Charge-Offs
Year Ended December 31
(Dollars in Thousands) 1998 1997 1996 1995 1994
Reported:
Average loans outstanding $ 5,348,559 $ 4,103,036 $ 3,651,908 $2,940,208 $2,286,684
Net charge-offs 226,531 198,192 132,590 59,618 25,727
Net charge-offs as a percentage of average loans outstanding 4.24% 4.83% 3.63% 2.03% 1.13%
Managed:
Average loans outstanding $15,209,537 $13,007,182 $11,268,461 $9,089,278 $6,197,423
Net charge-offs 810,306 856,704 477,732 204,828 91,648
Net charge-offs as a percentage of average loans outstanding 5.33% 6.59% 4.24% 2.25% 1.48%
Table 8: Summary of Allowance for Loan Losses
Year Ended December 31
(Dollars in Thousands) 1998 1997 1996 1995 1994
Balance at beginning of year $(183,000 $(118,500 $(72,000 $(68,516 $(63,516
Provision for loan losses 267,028 262,837 167,246 65,895 30,727
Acquisitions/other 7,503 (2,770) (18,887) (11,504) (4,869)
Charge-offs (294,295) (223,029) (115,159) (64,260) (31,948)
Recoveries 67,764 27,462 13,300 13,353 11,090
Net charge-offs (226,531) (195,567) (101,859) (50,907) (20,858)
Balance at end of year $(231,000 $(183,000 $(118,500 $(72,000 $(68,516
Allowance for loan losses to loans at end of year 3.75% 3.76% 2.73% 2.86% 3.07%
For the year ended December 31, 1998, the provision for loan
losses increased to $267.0 million, or 2%, from the 1997 provi-
sion for loan losses of $262.8 million as average reported loans
increased by 30%, offset by general improvements in consumer
credit performance. The Company increased the allowance for loan
losses by $48.0 million during 1998 primarily due to the growth in
reported loans.
For the year ended December 31, 1997, the provision for loan
losses increased to $262.8 million, or 57%, from the 1996 provi-
sion for loan losses of $167.2 million. The allowance for loan
losses as a percentage of reported consumer loans increased to
3.76% as of December 31, 1997, from 2.73% as of December 31,
1996 primarily due to increases in the net charge-off rate to 4.83%
for 1997, from 3.63% in 1996, resulting from continued loan sea-
soning, general economic trends in consumer credit performance
and the modification in charge-off policy described earlier. The
provision increase also reflected the increase in reported consumer
loans to $4.9 billion as of December 31, 1997, an increase of