Capital One 2011 Annual Report Download - page 169

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS—(Continued)
overall portfolio credit quality based on indicators such as changes in our credit evaluation, underwriting and
collection management policies, changes in the legal and regulatory environment, general economic conditions
and business trends and uncertainties in forecasting and modeling techniques used in estimating our allowance.
We update our consumer loss forecast models and portfolio indicators on a quarterly basis to incorporate
information reflective of the current economic environment.
The formula-based component of the allowance for commercial loans that we collectively evaluate for
impairment is based on our historical loss experience for loans with similar risk characteristics and consideration
of the current credit quality of the portfolio, supplemented by management judgment and interpretation. We
apply internal risk ratings to commercial loans, which we use to assess credit quality and derive a total loss
estimate based on an estimated probability of default (default rate) and loss given default (loss severity). We
generally use the prior three-year actual portfolio credit loss experience to develop our estimate of credit losses
inherent in the portfolio as of each balance sheet date. Management may also apply judgment to adjust the loss
factors derived, taking into consideration both quantitative and qualitative factors, including general economic
conditions, specific industry and geographic trends, portfolio concentrations, trends in internal credit quality
indicators and current and past underwriting standards that have occurred but are not yet reflected in the
historical data underlying our loss estimates.
The asset-specific component of the allowance covers smaller-balance homogenous credit card and consumer
loans whose terms have been modified in a TDR and larger balance nonperforming, non-homogenous
commercial loans. As discussed above under “Impaired Loans,” we generally measure the asset-specific
component of the allowance based on the difference between the recorded investment of individually impaired
loans and the present value of expected future cash flows. When the present value is lower than the carrying
value of the loan, impairment is recognized through the provision for loan and lease losses. 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. The asset specific component of the allowance for smaller-balance impaired loans is calculated on a pool
basis using historical loss experience for the respective class of assets. The asset-specific component of the
allowance for larger-balance, commercial loans is individually calculated for each loan. Key considerations in
determining the allowance include the borrower’s overall financial condition, resources and payment history,
prospects for support from financially responsible guarantors, and when applicable, the estimated realizable
value of any collateral.
Purchased credit-impaired loans are recorded at fair value at acquisition and applicable accounting guidance
prohibits the carry over or creation of valuation allowances in the initial accounting for impaired loans acquired
in a transfer. Subsequent to acquisition, decreases in expected principal cash flows of purchased impaired loans
are recorded as a valuation allowance included in the allowance for loan and lease losses. Subsequent increases
in expected principal cash flows result in a recovery of any previously recorded allowance for loan and lease
losses, to the extent applicable. Write-downs on purchased impaired loans in excess of the nonaccretable
difference are charged against the allowance for loan and lease losses. See “Note 5—Loans” for information on
purchased credit-impaired portfolios associated with acquisitions.
In addition to the allowance for loan and lease losses, we also estimate probable losses related to unfunded
lending commitments, such as letters of credit and financial guarantees, and binding unfunded loan
commitments. The provision for unfunded lending commitments is included in the provision for loan and lease
losses on our consolidated statements of income and the related reserve for unfunded lending commitments is
included in other liabilities on our consolidated balance sheets. Unfunded lending commitments are subject to
individual reviews and are analyzed and segregated by risk according to our internal risk rating scale. We assess
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