Capital One 2011 Annual Report Download - page 168

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS—(Continued)
Foreclosed property and repossessed assets, which we report in our consolidated balance sheet under other assets,
totaled $169 million and $20 million, respectively, as of December 31, 2011, compared with $306 million and
$20 million, respectively, as of December 31, 2010.
Allowance for Loan and Lease Losses
We maintain an allowance for loan and lease losses (“the allowance”) that represents management’s best
estimate of incurred loan and lease credit losses inherent in our held-for-investment portfolio as of each balance
sheet date. We do not maintain an allowance for held-for-sale loans or purchased-credit impaired loans that are
performing in accordance with or better than our expectations as of the date of acquisition, as the fair values of
these loans already reflect a credit component. The allowance for loan and lease losses is increased through the
provision for loan and lease losses and reduced by net charge-offs. The provision for loan and lease losses, which
is charged to earnings, reflects credit losses we believe have been incurred and will eventually be reflected over
time in our charge-offs. Charge-offs of uncollectible amounts are deducted from the allowance and subsequent
recoveries are added.
In determining the allowance for loan and lease losses, we disaggregate loans in our portfolio with similar credit
risk characteristics into portfolio segments. Management performs quarterly analysis of these portfolios to
determine if impairment has occurred and to assess the adequacy of the allowance based on historical and current
trends and other factors affecting credit losses. We apply documented systematic methodologies to separately
calculate the allowance for our consumer loan and commercial loan portfolio and for loans within each of these
portfolios that we identify as individually impaired. Our allowance for loan and lease losses consists of three
components that are allocated to cover the estimated probable losses in each loan portfolio based on the results of
our detailed review and loan impairment assessment process: (1) a formula-based component for loans
collectively evaluated for impairment; (2) an asset-specific component for individually impaired loans; and (3) a
component related to purchased credit-impaired loans that have experienced significant decreases in expected
cash flows subsequent to acquisition.
Our consumer loan portfolio consists of smaller-balance, homogeneous loans, divided into four primary portfolio
segments: credit card loans, auto loans, residential home loans and retail banking loans. Each of these portfolios
is further divided by our business units into pools based on common risk characteristics, such as origination year,
contract type, interest rate and geography that are collectively evaluated for impairment. The commercial loan
portfolio is primarily composed of larger-balance, non-homogeneous loans. These loans are subject to individual
reviews that result in risk ratings. In assessing the risk rating of a particular loan, among the factors we consider
are the financial condition of the borrower, geography, collateral performance, historical loss experience, and
industry-specific information that management believes is relevant in determining the occurrence of a loss event
and measuring impairment. These factors are based on an evaluation of historical and current information, and
involve subjective assessment and interpretation. Emphasizing one factor over another or considering additional
factors could impact the risk rating assigned to that loan.
The formula-based component of the allowance for credit card and other consumer loans that we collectively
evaluate for impairment is based on a statistical calculation. Because of the homogenous nature of our consumer
loan portfolios, the allowance is based on the aggregated portfolio segment evaluations. The allowance is
established through a process that begins with estimates of incurred losses in each pool based upon various
statistical analyses. Loss forecast models are utilized to estimate incurred losses and consider several portfolio
indicators including, but not limited to, historical loss experience, account seasoning, the value of collateral
underlying secured loans, estimated foreclosures or defaults based on observable trends, delinquencies,
bankruptcy filings, unemployment and credit bureau scores, and general economic and business trends.
Management believes these factors are relevant in estimating incurred losses and also considers an evaluation of
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