Capital One 2014 Annual Report Download - page 166

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•Acquired Loans: We do not record charge-offs on Acquired Loans that are performing in accordance with or
better than our expectations as of the date of acquisition, as the fair values of these loans already reflect a credit
component. We record charge-offs on impaired loans only if actual losses exceed estimated losses incorporated
into the fair value recorded at acquisition.
Allowance for Loan and Lease Losses
We maintain an allowance for loan and lease losses (“the allowance”) that represents management’s best estimate
of incurred loan and lease losses inherent in our held-for-investment portfolio as of each balance sheet date. The
provision for credit losses, which is charged to earnings, reflects credit losses we believe have been incurred and
will eventually be reflected over time in our charge-offs. Charge-offs of uncollectible amounts are deducted from
the allowance and subsequent recoveries are added back.
Management performs a quarterly analysis of our loan portfolio to determine if impairment has occurred and to
assess the adequacy of the allowance based on historical and current trends and other factors affecting credit losses.
We apply documented systematic methodologies to separately calculate the allowance for our consumer loan and
commercial loan portfolios and for loans within each of these portfolios that we identify as individually impaired.
Our allowance for loan and lease losses consists of three components that are allocated to cover the estimated
probable losses in each loan portfolio based on the results of our detailed review and loan impairment assessment
process: (i) a component for loans collectively evaluated for impairment; (ii) an asset-specific component for
individually impaired loans; and (iii) a component related to Acquired Loans that have experienced significant
decreases in expected cash flows subsequent to acquisition. Each of our allowance components is supplemented by
an amount that represents management’s qualitative judgment of the imprecision and risks inherent in the processes
and assumptions used in establishing the allowance. Management’s judgment involves an assessment of subjective
factors, such as process risk, modeling assumption and adjustment risks and probable internal and external events
that will likely impact losses.
Our consumer loan portfolio consists of smaller-balance, homogeneous loans, divided into four primary portfolio
segments: credit card loans, auto loans, residential home loans and retail banking loans. Each of these portfolios is
further divided by our business units into pools based on common risk characteristics, such as origination year,
contract type, interest rate and geography, which are collectively evaluated for impairment. The commercial loan
portfolio is primarily composed of larger-balance, non-homogeneous loans. These loans are subject to individual
reviews that result in internal risk ratings. In assessing the risk rating of a particular loan, among the factors we
consider are the financial condition of the borrower, geography, collateral performance, historical loss experience,
and industry-specific information that management believes is relevant in determining the occurrence of a loss event
and measuring impairment. These factors are based on an evaluation of historical and current information, and
involve subjective assessment and interpretation. Emphasizing one factor over another or considering additional
factors could impact the risk rating assigned to that loan.
The component of the allowance related to credit card and other consumer loans that we collectively evaluate for
impairment is based on a statistical calculation, which is supplemented by management judgment as described
above. Because of the homogeneous nature of our consumer loan portfolios, the allowance is based on the
aggregated portfolio segment evaluations. The allowance is established through a process that begins with
estimates of incurred losses in each pool based upon various statistical analyses. Loss forecast models are utilized
to estimate incurred losses and consider several portfolio indicators including, but not limited to, historical loss
experience, account seasoning, the value of collateral underlying secured loans, estimated foreclosures or defaults
based on observable trends, delinquencies, bankruptcy filings, unemployment, credit bureau scores and general
economic and business trends. Management believes these factors are relevant in estimating incurred losses and
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Capital One Financial Corporation (COF)