Capital One 2011 Annual Report Download - page 166

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS—(Continued)
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that we will be
unable to collect all amounts due from the borrower in accordance with the original contractual terms of the loan.
Loans with insignificant delays or insignificant short falls in the amount of payments expected to be collected are
not considered to be impaired. Income recognition on impaired loans is consistent with that of nonaccrual loans
discussed above under “Delinquent and Nonperforming Loans.”
Loans defined as individually impaired, based on applicable accounting guidance, include larger balance
nonperforming loans and TDR loans. Our policies for identifying loans as individually impaired, by loan
category, are as follows:
•Credit card loans: Credit card loans that have been modified in a troubled debt restructuring are identified
and accounted for as individually impaired.
•Consumer loans: Consumer loans that have been modified in a troubled debt restructuring are identified and
accounted for as individually impaired.
•Commercial loans: Commercial loans classified as nonperforming and commercial loans that have been
modified in a troubled debt restructuring are reported as impaired.
•Purchased credit-impaired loans: We track and report PCI loans separately from other impaired loans.
We do not report nonperforming consumer loans that have not been modified in a TDR as individually impaired,
as we collectively evaluate these smaller-balance homogenous loans for impairment in accordance with
applicable accounting guidance. Held for sale loans are also not reported as impaired, as these loans are recorded
at lower of cost or fair value.
All individually impaired loans are evaluated for an asset-specific allowance. Once a loan is modified in a
troubled debt restructuring, the loan is generally considered impaired until maturity regardless of whether the
borrower performs under the modified terms. Although the loan may be returned to accrual status if the criteria
above under “Delinquent and Nonperforming Loans” are met, the loan would continue to be evaluated for an
asset-specific allowance for loan losses and we would continue to report the loan as impaired.
We generally measure impairment and the related asset-specific allowance for individually impaired loans based
on the difference between the recorded investment of the loan and present value of the loans’ expected future
cash flows, discounted at the effective original interest rate of the loan at the time of modification or the loan’s
observable market price. If the loan is collateral dependent, we measure impairment based upon the fair value of
the underlying collateral, which we determine based on the current fair value of the collateral less estimated
selling costs, instead of discounted cash flows. Loans are identified as collateral dependent if we believe that
collateral is the sole source of repayment.
If the fair value of the loan is less than the recorded investment, we recognize impairment by either a direct
write-down or establishing an allowance for the loan or by adjusting an allowance for the impaired loan. See
“Note 6—Allowance for Loan and Lease Losses” for additional information on the asset-specific component of
our allowance.
Charge-Offs
Net charge-offs consist of the unpaid principal balance of loans held for investment that we determine are
uncollectible, net of recovered amounts. We exclude accrued and unpaid finance charges and fees and fraud
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