Capital One 2010 Annual Report Download - page 34

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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 (for example, an increase in the
unwillingness or inability of customers 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 where permissible and appropriate. 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 home loan 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, 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.
We May Experience Increased Losses Associated With Mortgage Repurchases and Indemnification Obligations
Certain of our subsidiaries, including GreenPoint Mortgage Funding, Inc. (“GreenPoint”), Capital One Home Loans and CONA, as
successor to Chevy Chase Bank, may be required to repurchase mortgage loans that have been sold to investors in the event there are
certain breaches of certain representations and warranties contained within the sales agreements. We may be required to repurchase
mortgage loans that we sell to investors in the event that there was improper underwriting or fraud or in the event that the loans
become delinquent shortly after they are originated. These subsidiaries also may be required to indemnify certain purchasers and
others against losses they incur in the event of breaches of representations and warranties and in various other circumstances, and the
amount of such losses could exceed the repurchase amount of the related loans. Consequently, we may be exposed to credit risk
associated with sold loans. We have established a reserve in our consolidated financial statements for potential losses that are
considered to be both probable and reasonably estimable related to the mortgage loans sold by our originating subsidiaries. The
adequacy of the reserve and the ultimate amount of losses incurred will depend on, among other things, the actual future mortgage