Capital One 2011 Annual Report Download - page 174

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS—(Continued)
Delinquent and Nonperforming Loans,” interest and fees continue to accrue on past due loans until the date the
loan is placed on nonaccrual status, if applicable. Interest and fees accrued but not collected at the date a loan is
placed on nonaccrual status are reversed against earnings.
Finance charges and fees on credit card loans are included in loan receivables when billed to the customer. We
continue to accrue finance charges and fees on credit card loans until the account is charged-off. However, when
we do not expect full payment of billed finance charges and fees, we reduce the balance of our credit card loan
receivables by the amount of finance charges billed but not expected to be collected and exclude this amount
from revenue. Our methodology for estimating the uncollectible portion of billed finance charges and fees is
consistent with the methodology we use to estimate the allowance for incurred principal losses on our credit card
loan receivables. Revenue was reduced by $372 million, $950 million and $2.1 billion in 2011, 2010 and 2009,
respectively, for the estimated uncollectible portion of billed finance charges and fees.
We determine the adequacy of the uncollectible finance charge and fee reserve on a quarterly basis, primarily
based on the use of a roll-rate methodology. We refine our estimation process and key assumptions used in
determining our loss reserves as additional information becomes available. In the third quarter of 2011, we
revised the manner in which we estimate expected recoveries of finance charge and fee amounts previously
considered to be uncollectible. Our revised recovery assumptions better reflect the post-recession pattern of
relatively low delinquency roll-rates combined with increased recoveries of finance charges and fees previously
considered uncollectible. This change in assumptions resulted in reduction in our uncollectible finance charge
and fee reserves of $83 million as of September 30, 2011, and in a corresponding increase in revenues. We also
applied these revised assumptions to the estimated recovery of principal charge-offs in determining our
allowance for loan and lease losses. The revision, however, had an insignificant impact on the overall
determination of our allowance for lease and loan losses.
Interchange income is a discount on the payment due from the card-issuing bank to the merchant bank through
the interchange network. Interchange rates are set by MasterCard International Inc. (“MasterCard”) and Visa
U.S.A. Inc. (“Visa”) and are based on cardholder purchase volumes. We recognize interchange income as earned.
Annual membership fees and direct loan origination costs specific to credit card loans are deferred and amortized
over one year on a straight-line basis. Fees and origination costs and premiums and discounts are deferred and
amortized over the average life of the related loans using the effective interest method for qualifying consumer
and commercial loan originations. Direct loan origination costs consist of both internal and external costs
associated with the origination of a loan.
Marketing Expense
We expense marketing costs as incurred. Television advertising costs are expensed during the period in which the
advertisements are aired. We recognized marketing expense of $1.3 billion, $1.0 billion and $0.6 billion in 2011,
2010 and 2009, respectively.
Fraud Losses
We experience fraud losses from the unauthorized use of credit cards, debit cards and customer bank accounts.
Additional fraud losses may be incurred when loans are obtained through fraudulent means. Transactions
suspected of being fraudulent are charged to non-interest expense after an investigation period. Recoveries of
fraud losses also are also included in non-interest expense. See “Note 15—Other Non-Interest Expense” for
additional information.
154