Capital One 2012 Annual Report Download - page 168

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 credit 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 these risk
classifications, in conjunction with historical loss experience, utilization assumptions, current economic
conditions, performance trends within specific portfolio segments and other pertinent information to estimate the
reserve for unfunded lending commitments.
Determining the appropriateness of the allowance is complex and requires judgment by management about the
effect of matters that are inherently uncertain. Subsequent evaluations of the loan portfolio, in light of the factors
then prevailing, may result in significant changes in the allowance for loan and lease losses and the reserve for
unfunded lending commitments in future periods.
Securitization of Loans
We primarily securitize credit card loans, auto loans and home loans. Securitizations have historically been
utilized for liquidity and funding purposes. See “Note 7—Variable Interest Entities and Securitizations” for
additional details. Loan securitization involves the transfer of a pool of loan receivables from our portfolio to a
trust from which the trust sells an undivided interest in the pool of loan receivables to third-party investors
through the issuance of debt securities. The debt securities are collateralized by the transferred receivables from
our portfolio, and we receive proceeds from the third-party investors in consideration for the loans transferred.
We remove loans from our consolidated balance sheet when securitizations qualify as sales to non-consolidated
VIEs, recognize assets retained and liabilities assumed at fair value and record a gain or loss on the transferred
loans. Alternatively, when the transfer does not qualify as a sale but instead is considered a secured borrowing or
when the sale is to a consolidated VIE, the asset will remain on our consolidated financial statements with an
offsetting liability recognized for the amount of proceeds received.
Premises and Equipment
Land is carried at cost. Properties and equipment, including leasehold improvements, are stated at cost less
accumulated depreciation and amortization. We capitalize direct costs (including external costs for purchased
software, contractors, consultants and internal staff costs) for internally developed software projects that have
been identified as being in the application development stage. Depreciation and amortization expenses are
computed generally by the straight-line method over the estimated useful lives of the assets. Useful lives for
premises and equipment are estimated as follows:
Premises & Equipment Useful Lives
Buildings and improvement 5-39 years
Furniture and equipment 3-10 years
Computers and software 3-7 years
Leasehold improvements Lesser of useful life or
the remaining fixed non-cancelable lease term
Expenditures for maintenance and repairs are charged to earnings as incurred. Gains or losses upon disposition
are reflected in earnings as realized.
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