Capital One 2012 Annual Report Download - page 193

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
$31 million for year ended December 31, 2012 related to certain pools of acquired loans. The cumulative
impairment recognized on acquired loans totaled $57 million and $26 million as of December 31, 2012 and 2011,
respectively. The credit performance of the remaining pools has generally been in line with our expectations,
and, in some cases, more favorable than expected, which has resulted in the reclassification of amounts from the
nonaccretable difference to the accretable yield.
Loans Acquired and Accounted for Based on Contractual Cash Flows
Of the loans acquired in the 2012 U.S. card acquisition, there were loans of $26.2 billion designated as held for
investment that had existing revolving privileges at acquisition and were, therefore, excluded from the
accounting guidance applied to the acquired loans described in the paragraphs above.
These loans were recorded at a fair value of $26.9 billion, resulting in a net premium of $705 million at
acquisition. Fair value was determined by discounting all expected cash flows (contractual principal, interest,
finance charges and fees of $33.3 billion less those amounts not expected to be collected of $3.0 billion) at a
market discount rate.
Under applicable accounting guidance, we are required to amortize the net premium of $705 million over the
contractual principal amount as an adjustment to interest income over the remaining life of the loans. Given the
guidance applicable to acquired revolving loans, it is necessary to record an allowance through provision expense
to properly recognize an estimate of incurred losses on the existing principal balances, which represents a portion
of the total amounts not expected to be collected described above. At acquisition, we recorded a provision for
credit losses of $1.2 billion to establish an initial allowance primarily related to these loans. The allowance was
calculated using the same methodology utilized for determining the allowance for our existing credit card
portfolio. The provision for credit losses of $1.2 billion is included in the total provision for credit losses of $4.4
billion recorded during 2012 as indicated in “Note 6—Allowance for Loan and Lease Losses.”
Excluded from the amounts above were acquired revolving loans from the 2012 U.S. card acquisition with a fair
value of $471 million that we designated as held for sale at acquisition. We closed on the sale of these
receivables early in the third quarter.
174