Capital One 2012 Annual Report Download - page 165

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
•Commercial banking loans: Commercial loans classified as nonperforming and commercial loans that have
been modified in a troubled debt restructuring are generally reported as individually impaired.
•Acquired loans: We track and report acquired loans separately from other impaired loans.
The majority of 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 and lease 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 the present value of the expected future cash
flows, discounted at the original effective interest rate of the loan at the time of modification. 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 through a direct write-
down of the loan, by establishing an allowance for the loan or by adjusting the 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
losses from charge-offs. Charge-offs are recorded as a reduction to the allowance for loan and lease losses and
subsequent recoveries of previously charged off amounts are credited to the allowance for loan and lease losses.
Costs incurred to recover charged-off loans are recorded as collection expense and included in our consolidated
statements of income as a component of other non-interest expense. Our charge-off time frame for loans, which
varies based on the loan type, is presented below.
•Credit card loans: We generally charge-off credit card loans when the account is 180 days past due from the
statement cycle date. During the fourth quarter 2012, we began charging off delinquent credit card loans for
which revolving privileges have been revoked as part of a closed end loan workout when the account
becomes 120 days past due. Credit card loans in bankruptcy are charged-off within 60 days of receipt of a
complete bankruptcy notification from the bankruptcy court. Credit card loans of deceased account holders
are charged-off within 60 days of receipt of notification.
•Consumer banking loans: We generally charge-off consumer loans at the earlier of the date when the
account is a specified number of days past due or upon repossession of the underlying collateral. Our
charge-off time frame is 180 days for home loans and unsecured small business lines of credit and 120 days
for auto and other non-credit card consumer loans. We calculate the charge-off amount for home loans
based on the excess of our recorded investment in the loan over the fair value of the underlying property less
estimated selling costs as of the date of the charge-off. We update our home value estimates on a regular
basis and recognize additional charge-offs for declines in home values below our initial fair value less
selling cost estimate at the date home loans are charged-off. Consumer loans in bankruptcy, except for auto
and home loans, generally are charged-off within 40 days of receipt of notification from the bankruptcy
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