Capital One 2014 Annual Report Download - page 167

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also considers an evaluation of overall portfolio credit quality based on indicators such as changes in our credit
evaluation, underwriting and collection management policies, the effect of other external factors such as
competition and legal and regulatory requirements, general economic conditions and business trends and
uncertainties in forecasting and modeling techniques used in estimating our allowance. We update our consumer
loss forecast models and portfolio indicators on a quarterly basis to incorporate information reflective of the
current economic environment.
The component of the allowance for commercial loans that we collectively evaluate for impairment is based on our
historical loss experience for loans with similar risk characteristics and consideration of the current credit quality
of the portfolio, which is supplemented by management judgment as described above. We apply internal risk ratings
to commercial loans, which we use to assess credit quality and derive a total loss estimate based on an estimated
probability of default (default rate) and loss given default (loss severity). Management may also apply judgment to
adjust the loss factors derived, 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.
The asset-specific component of the allowance covers smaller-balance homogeneous credit card and other consumer
loans whose terms have been modified in a TDR and larger balance nonperforming, non-homogeneous commercial
loans. As discussed above under “Impaired Loans,” we generally measure the asset-specific component of the
allowance based on the difference between the recorded investment of individually impaired loans and the present
value of expected future cash flows. When the present value of expected future cash flows is lower than the carrying
value of the loan, impairment is recognized through the provision for credit losses. If the loan is collateral dependent,
we measure impairment based on the current fair value of the collateral less estimated selling costs, instead of
discounted cash flows. The asset-specific component of the allowance for smaller-balance impaired loans is
calculated on a pool basis using historical loss experience for the respective class of assets. The asset-specific
component of the allowance for larger-balance commercial loans is individually calculated for each loan. Key
considerations in determining the allowance include the borrower’s overall financial condition, resources and
payment history, prospects for support from financially responsible guarantors, and when applicable, the estimated
realizable value of any collateral.
We record all purchased loans at fair value at acquisition. Applicable accounting guidance prohibits the carry over or
creation of valuation allowances in the initial accounting for impaired loans acquired in a transfer. Subsequent to
acquisition, decreases in expected principal cash flows of Acquired Loans would trigger the recognition of impairment
through our provision for credit losses. Subsequent increases in expected cash flows would first result in a recovery of
any previously recorded allowance, to the extent applicable, and then increase the accretable yield. Write-downs on
purchased impaired loans in excess of the nonaccretable difference are charged against the allowance for loan and lease
losses. See “Note 4—Loans” for information on loan portfolios associated with acquisitions.
In addition to the allowance, we also estimate probable losses related to contractually binding 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 in 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.
CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Capital One Financial Corporation (COF)