Capital One 2013 Annual Report Download - page 186

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
losses. Probable and significant increases in expected cash flows would first reverse any previously recorded
allowance for loan and lease losses established subsequent to acquisition, with any remaining increase in
expected cash flows recognized prospectively in interest income over the remaining estimated life of the
underlying loans. We reduced the allowance and provision for credit losses by $19 million for the year ended
December 31, 2013 and increased the allowance and provision for credit losses by $31 million for the year ended
December 31, 2012 related to certain pools of Acquired Loans. The allowance on Acquired Loans totaled $38
million and $57 million as of December 31, 2013 and 2012, respectively. The credit performance of the
remaining pools has generally been 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, at acquisition there were $26.2 billion of loans
designated as held for investment that had revolving privileges at acquisition and were, therefore, accounted for
based on contractual cash flows. These loans were recorded at a fair value of $26.9 billion, resulting in a net
premium of $705 million at acquisition. We are required to amortize the $705 million net premium as an
adjustment to interest income over the remaining life of the loans. Given the guidance applicable to purchased
revolving loans, it was necessary to record an allowance through provision for credit losses to properly recognize
an estimate of incurred losses on the existing principal balances. 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 5—Allowance for Loan and Lease Losses”.
Excluded from the amounts above were purchased 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 in the third quarter of 2012.
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