Capital One 2012 Annual Report Download - page 203

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Commercial Banking
We evaluate the credit risk of commercial loans individually and use a risk-rating system to determine the credit
quality of our commercial loans. We assign internal risk ratings to loans based on relevant information about the
ability of borrowers to service their debt. In determining the risk rating of a particular loan, among the factors
considered are the borrower’s current financial condition, historical credit performance, projected future credit
performance, prospects for support from financially responsible guarantors, the estimated realizable value of any
collateral and current economic trends. The ratings scale based on our internal risk-rating system is as follows:
•Noncriticized: Loans that have not been designated as criticized, frequently referred to as “pass” loans.
•Criticized performing: Loans in which the financial condition of the obligor is stressed, affecting earnings,
cash flows or collateral values. The borrower currently has adequate capacity to meet near-term obligations;
however, the stress, left unabated, may result in deterioration of the repayment prospects at some future
date.
•Criticized nonperforming: Loans that are not adequately protected by the current sound worth and paying
capacity of the obligor or the collateral pledged, if any. Loans classified as criticized nonperforming have a
well-defined weakness, or weaknesses, which jeopardize the repayment of the debt. These loans are
characterized by the distinct possibility that we will sustain a credit loss if the deficiencies are not corrected
and are generally placed on nonaccrual status.
We use our internal risk-rating system for regulatory reporting, determining the frequency of review of the credit
exposures and evaluation and determination of the allowance for commercial loans. Loans of $1 million or more
designated as criticized performing and criticized nonperforming are reviewed quarterly by management for
further deterioration or improvement to determine if they are appropriately classified/graded and whether
impairment exists. Noncriticized loans greater than $1 million are specifically reviewed, at least annually, to
determine the appropriate loan grading. In addition, during the renewal process of any loan or if a loan becomes
past due, we evaluate the risk rating.
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