Capital One 2009 Annual Report Download - page 32

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Certain laws and regulations, and any interpretations and applications with respect thereto, may benefit consumers, borrowers and
depositors, not stockholders. The legislative and regulatory environment is beyond our control, may change rapidly and unpredictably
and may negatively influence our revenue, costs, earnings, growth and capital levels. Our success depends on our ability to maintain
compliance with both existing and new laws and regulations. For a description of the laws and regulations to which we are subject,
please refer to Supervision and Regulation in Item 1.
We May Experience Increased Delinquencies And Credit Losses
Like other lenders, we face the risk that our customers will not repay their loans. Rising losses or leading indicators of rising losses
(such as higher delinquencies, non-performing loans, or bankruptcy rates; lower collateral values; elevated unemployment rates) may
require us to increase our allowance for loan and lease losses, which may degrade our profitability if we are unable to raise revenue or
reduce costs to compensate for higher losses. In particular, we face the following risks in this area:
• Missed Payments. Our customers may miss payments. Loan charge-offs (including from bankruptcies) are generally
preceded by missed payments or other indications of worsening financial condition. Our reported delinquency levels
measure these trends. Customers are more likely to miss payments during an economic downturn or prolonged periods of
slow economic growth. In addition, we face the risk that consumer and commercial customer behavior may change (i.e. an
increased unwillingness or inability to repay debt), causing a long-term rise in delinquencies and charge-offs.
• Estimates of inherent losses. The credit quality of our portfolio can have a significant impact on our earnings. We allow
for and reserve against credit risks based on our assessment of credit losses inherent in our loan portfolios. This process,
which is critical to our financial results and condition, requires complex judgments, including forecasts of economic
conditions. We may underestimate our inherent losses and fail to hold a loan loss allowance sufficient to account for these
losses. Incorrect assumptions could lead to material underestimates of inherent losses and inadequate allowance for loan
and lease losses. In addition, our estimate of inherent losses impacts the amount of allowances we build to account for
those losses. The increase or release of allowances impacts our current financial results.
• Underwriting. Our ability to assess the credit worthiness of our customers may diminish. If the models and approaches we
use to select, manage, and underwrite our consumer and commercial customers become less predictive of future charge-
offs (due, for example, to rapid changes in the economy, including the unemployment rate), our credit losses may increase
and our returns may deteriorate.
• Business mix. Our business mix could change in ways that could adversely affect credit losses. We participate in a mix of
businesses with a broad range of credit loss characteristics. Consequently, changes in our business mix may change our
charge-off rate.
• Charge-off recognition. The rules governing charge-off recognition could change. We record charge-offs according to
accounting and regulatory guidelines and rules. These guidelines and rules, including the FFIEC Account Management
Guidance, could require changes in our account management or loss allowance practices and cause our charge-offs to
increase for reasons unrelated to the underlying performance of our portfolio. Such changes could have an adverse impact
on our financial condition or results of operation.
• Industry practices. Our charge-off and delinquency rates may be negatively impacted by industry developments, including
new regulations applicable to our industry.
• Collateral. Collateral, when we have it, could be insufficient to compensate us for loan losses. When customers default on
their loans and we have collateral, we attempt to seize it. However, the value of the collateral may not be sufficient to
compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from
our customers. Particularly with respect to our commercial lending and mortgage activities, decreases in real estate values
could adversely affect the value of property used as collateral for our loans and investments. Thus, the recovery of such
property could be insufficient to compensate us for the value of these loans.
• New York Concentration. Although our lending is geographically diversified, in general, approximately 45% of our
commercial loan portfolio is concentrated in the New York metropolitan area. The regional economic conditions in the
New York area affect the demand for our commercial products and services as well as the ability of our customers to
repay their commercial loans and the value of the collateral securing these loans. A prolonged decline in the general
economic conditions in the New York region could have a material adverse effect on the performance of our commercial
loan portfolio and our results of operations.