Capital One 2006 Annual Report Download - page 45

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27
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
I. Introduction
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 (the Bank) which currently offers credit card products and deposit products and also can
engage in a wide variety of lending and other financial activities
Capital One, F.S.B. (the Savings Bank) which offers consumer and commercial lending and consumer deposit
products
Capital One, National Association (CONA) which offers a broad spectrum of financial products and services to
consumers, small businesses and commercial clients
Capital One Auto Finance, Inc. (COAF) which offers automobile and other motor vehicle financing products
North Fork Bank (North Fork Bank) which offers a full range of banking products and financial services, to both
consumer and commercial customers
Another subsidiary of the Corporation, Superior Savings of New England, N.A. (Superior) focuses on telephonic and
media-based generation of deposits. In addition, a subsidiary of North Fork Bank, GreenPoint Mortgage Funding, Inc.
(GreenPoint) offers residential and commercial mortgages.
The Corporation and its subsidiaries are hereafter collectively referred to as the Company. The Company is delivering on
its strategy of combining the power of national scale lending and local scale banking. As of December 31, 2006, the
Company had $85.8 billion in deposits and $146.2 billion in managed loans outstanding.
The Companys earnings are primarily driven by lending to consumers and commercial customers and by deposit-taking
activities which generate net interest income, and by activities that generate non-interest income, including the sale and
servicing of loans and providing fee-based services to customers. Customer usage and payment patterns, credit quality, levels
of marketing expense and operating efficiency all affect the Companys profitability.
The Companys primary expenses are the costs of funding assets, provision for loan losses, operating expenses (including
associate salaries and benefits, infrastructure maintenance and enhancements, and branch operations and expansion costs),
marketing expenses, and income taxes.
II. Critical Accounting Estimates
The Notes to the Consolidated Financial Statements contain a summary of the Companys significant accounting policies,
including a discussion of recently issued accounting pronouncements. Several of these policies are considered to be more
critical to the portrayal of the Companys financial condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently uncertain. Areas with significant judgment
and/or estimates or that are materially dependent on management judgment include: determination of the level of allowance
for loan and lease losses, valuation of goodwill and other intangibles, finance charge and fee revenue recognition, valuation
of mortgage servicing rights, valuation of representation and warranty reserves, valuation of retained interests from
securitization transactions, recognition of customer reward liability, treatment of derivative instruments and hedging
activities, and accounting for income taxes.
Additional information about accounting policies can be found in Item 8 Financial Statements and Supplementary Data
Notes to the Consolidated Financial StatementsNote 1 on pages 70-76.
Determination of Allowance for Loan and Lease Losses
The allowance for loan and lease losses is maintained at the amount estimated to be sufficient to absorb probable principal
losses, net of principal recoveries (including recovery of collateral), inherent in the existing reported loan portfolios. The
provision for loan losses is the periodic cost of maintaining an adequate allowance. The amount of allowance necessary is
based on distinct allowance methodologies depending on the type of loans which include specifically identified criticized
loans, migration analysis, forward loss curves and historical loss trends. In evaluating the sufficiency of the allowance for
loan and lease losses, management takes into consideration the following factors: recent trends in delinquencies and charge-
offs including bankrupt, deceased and recovered amounts; forecasting uncertainties and size of credit risks; the degree of risk
inherent in the composition of the loan portfolio; economic conditions; legal and regulatory guidance; credit evaluations and