Capital One 2013 Annual Report Download - page 69

Allowance for Loan and Lease Losses
We have an established process, using analytical tools and management judgment, to determine our allowance
for loan and lease losses. Losses are inherent in our loan portfolio and we calculate the allowance for loan and
lease losses by estimating incurred losses for segments of our loan portfolio with similar risk characteristics and
record a provision for credit losses. We build our allowance for loan and lease losses and unfunded lending
commitment reserves through the provision for credit losses. Our provision for credit losses in each period is
driven by charge-offs, changes to allowance for loan and lease losses, and changes to unfunded lending
commitments. We recorded a provision for credit losses of $3.5 billion, $4.4 billion and $2.4 billion in 2013,
2012 and 2011, respectively. The allowance totaled $4.3 billion as of December 31, 2013, compared with
$5.2 billion as of December 31, 2012.
We review and assess our allowance methodologies and adequacy of the allowance for loan and lease losses on a
quarterly basis. Our assessment involves evaluating many factors including, but not limited to, historical loss and
recovery experience, recent trends in delinquencies and charge-offs, risk ratings, the impact of bankruptcy
filings, the value of collateral underlying secured loans, account seasoning, changes in our credit evaluation,
underwriting and collection management policies, seasonality, general economic conditions, changes in the legal
and regulatory environment and uncertainties in forecasting and modeling techniques used in estimating our
allowance for loan and lease losses. Key factors that have a significant impact on our allowance for loan and
lease losses include assumptions about unemployment rates, home prices, and the valuation of commercial
properties, consumer real estate, and automobiles.
Although we examine a variety of externally available data, as well as our internal loan performance data, to
determine our allowance for loan and lease losses, our estimation process is subject to risks and uncertainties,
including a reliance on historical loss and trend information that may not be representative of current conditions
and indicative of future performance. Accordingly, our actual credit loss experience may not be in line with our
expectations. We provide additional information on the methodologies and key assumptions used in determining
our allowance for loan and lease losses for each of our loan portfolio segments in “Note 1—Summary of
Significant Accounting Policies.” We provide information on the components of our allowance, disaggregated by
impairment methodology, and changes in our allowance in “Note 5—Allowance for Loan and Lease Losses.”
Reserve for Unfunded Lending Commitments
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. Our commercial loan portfolio is primarily composed of larger-balance, non-homogeneous loans.
We determine the allowance and reserve for unfunded lending commitments for our commercial loan portfolio
by evaluating loans with similar risk characteristics and applying internal risk ratings. We use these risk ratings
to assess credit quality and derive a total loss estimate based on an estimated probability of default and loss given
default. Factors we consider in determining risk ratings and deriving loss estimates include historical loss
experience for loans with similar risk characteristics, the financial condition of the borrower, geography,
collateral performance and industry-specific information that management believes is relevant. Management may
also apply judgment to adjust the derived loss factors, 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.
Finance Charge and Fee Reserves
Finance charges and fees on credit card loans, net of amounts that we consider uncollectible, are included in loan
receivables and revenue when the finance charges and fees are earned. 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
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