Document
______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 10-Q
____________________________________
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2017
OR
 ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No. 1-13300
____________________________________
CAPITAL ONE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter) 
____________________________________
Delaware
 
54-1719854
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
1680 Capital One Drive,
McLean, Virginia
 
22102
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (703) 720-1000
(Former name, former address and former fiscal year, if changed since last report)
(Not applicable)
____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý  No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period of complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No ý
As of April 28, 2017, there were 482,968,623 shares of the registrant’s Common Stock outstanding.

______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________


TABLE OF CONTENTS
 
 
Page
PART I—FINANCIAL INFORMATION
Item 1.
 
 
 
 
 
 
 
Note 1—Summary of Significant Accounting Policies
 
Note 2—Discontinued Operations
 
Note 3—Investment Securities
 
Note 4—Loans
 
Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments
 
Note 6—Variable Interest Entities and Securitizations
 
Note 7—Goodwill and Intangible Assets
 
Note 8—Deposits and Borrowings
 
Note 9—Derivative Instruments and Hedging Activities
 
Note 10—Stockholders’ Equity
 
Note 11—Earnings Per Common Share
 
Note 12—Fair Value Measurement
 
Note 13—Business Segments
 
Note 14—Commitments, Contingencies, Guarantees and Others
Item 2.
 
 
Summary of Selected Financial Data
 
Executive Summary and Business Outlook
 
Consolidated Results of Operations
 
Consolidated Balance Sheets Analysis
 
 
Business Segment Financial Performance
 
 
 
Capital Management
 
Risk Management
 
Credit Risk Profile
 
Liquidity Risk Profile
 
Market Risk Profile
 
Supervision and Regulation
 
 
Supplemental Table
 
Glossary and Acronyms

 
i
Capital One Financial Corporation (COF)

Item 3.
Item 4.
 
 
 
PART II—OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
SIGNATURES
EXHIBIT INDEX

 
ii
Capital One Financial Corporation (COF)

INDEX OF MD&A AND SUPPLEMENTAL TABLES
MD&A Tables:
Page
1
Consolidated Financial Highlights
2
Average Balances, Net Interest Income and Net Interest Margin
3
Rate/Volume Analysis of Net Interest Income
4
Non-Interest Income
5
Non-Interest Expense
6
Investment Securities
7
Non-Agency Investment Securities Credit Ratings
8
Loans Held for Investment
9
Business Segment Results
10
Credit Card Business Results
10.1
Domestic Card Business Results
11
Consumer Banking Business Results
12
Commercial Banking Business Results
13
Other Category Results
14
Capital Ratios under Basel III
15
Regulatory Capital Reconciliations between Basel III Transition to Fully Phased-in
16
Preferred Stock Dividends Paid Per Share
17
Loans Held for Investment Portfolio Composition
18
Commercial Loans by Industry
19
Home Loans—Risk Profile by Lien Priority
20
Sensitivity Analysis—PCI Home Loans
21
Credit Score Distribution
22
30+ Day Delinquencies
23
Aging and Geography of 30+ Day Delinquent Loans
24
90+ Day Delinquent Loans Accruing Interest
25
Nonperforming Loans and Other Nonperforming Assets
26
Net Charge-Offs (Recoveries)
27
Troubled Debt Restructurings
28
Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity
29
Allowance Coverage Ratios
30
Liquidity Reserves
31
Deposits Composition and Average Deposits Interest Rates
32
Senior Unsecured Long-Term Debt Credit Ratings
33
Interest Rate Sensitivity Analysis
 
 
 
 
A
Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures

 
iii
Capital One Financial Corporation (COF)

Table of Contents

PART I—FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “MD&A—Forward-Looking Statements” for more information on the forward-looking statements in this Quarterly Report on Form 10-Q (“this Report”). Our actual results may differ materially from those included in these forward-looking statements due to a variety of factors including, but not limited to, those described in “Part II—Item 1A. Risk Factors” in this Report and in “Part I—Item 1A. Risk Factors” in our 2016 Annual Report on Form 10-K (“2016 Form 10-K”). Unless otherwise specified, references to notes to our consolidated financial statements refer to the notes to our unaudited consolidated financial statements as of March 31, 2017 included in this Report.
 
Management monitors a variety of key indicators to evaluate our business results and financial condition. The following MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements and related notes in this Report and the more detailed information contained in our 2016 Form 10-K.
INTRODUCTION
We are a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company”) offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of March 31, 2017, our principal subsidiaries included:
•
Capital One Bank (USA), National Association (“COBNA”), which offers credit and debit card products, other lending products and deposit products; and
•
Capital One, National Association (“CONA”), which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.
The Company is hereafter collectively referred to as “we,” “us” or “our.” COBNA and CONA are collectively referred to as the “Banks.” Certain business terms used in this document are defined in the “MD&A—Glossary and Acronyms” and should be read in conjunction with the consolidated financial statements included in this Report.
Our consolidated total net revenues are derived primarily from lending to consumer and commercial customers net of funding costs associated with interest on deposits, short-term borrowings and long-term debt. We also earn non-interest income which primarily consists of interchange income net of rewards expenses and service charges and other customer-related fees. Our expenses primarily consist of the provision for credit losses, operating expenses, marketing expenses and income taxes.
Our principal operations are currently organized for management reporting purposes into three major business segments, which are defined based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group, are included in the Other category.
•
Credit Card: Consists of our domestic consumer and small business card lending, and international card businesses in Canada and the United Kingdom (“U.K.”).
•
Consumer Banking: Consists of our branch-based lending and deposit gathering activities for consumers and small businesses, national deposit gathering, auto lending and consumer home loan lending and servicing activities.
•
Commercial Banking: Consists of our lending, deposit gathering and servicing activities provided to commercial real estate and commercial and industrial customers. Our commercial and industrial customers typically include companies with annual revenues between $10 million and $1 billion.

 
1
Capital One Financial Corporation (COF)

Table of Contents

Recent Acquisitions and Dispositions
We regularly explore and evaluate opportunities to acquire financial services and financial assets, including credit card and other loan portfolios, and enter into strategic partnerships as part of our growth strategy. We also explore opportunities to acquire digital companies and related assets to improve our information technology infrastructure and to deliver on our digital strategy. We also regularly consider the potential disposition of certain of our assets, branches, partnership agreements or lines of business. We may issue equity or debt in connection with acquisitions, including public offerings, to fund such acquisitions.
On October 3, 2016, we announced that we entered into a 10-year program agreement (the “Program Agreement”) to become the exclusive issuing partner of co-branded credit cards to Cabela’s customers. In connection with this credit card program, we entered into a definitive agreement under which we would acquire the credit card operations from Cabela’s, including approximately $5.2 billion in credit card receivables and other assets and approximately $5.0 billion in associated funding liabilities. This transaction was subject to the satisfaction of customary closing conditions, including receipt of various regulatory approvals and the approval of the stockholders of Cabela’s. On January 28, 2017, Capital One withdrew its Bank Merger Act (“BMA”) application from the OCC, as we did not expect to receive regulatory approval of any BMA application for this transaction prior to October 3, 2017. This is the date when any of the parties involved in the agreement could terminate the agreement.
On April 17, 2017, we entered into agreements with subsidiaries of Synovus Financial Corp. (“Synovus”) and Cabela’s under which Synovus will acquire certain assets and assume certain liabilities of Cabela’s wholly-owned subsidiary, World’s Foremost Bank (“WFB”), including WFB’s deposits. Immediately following the completion of this acquisition, Synovus will sell WFB’s credit card assets and related liabilities to Capital One. Synovus will retain WFB’s deposits. Capital One is not required to file any regulatory applications to complete this acquisition from Synovus. These transactions are subject to customary closing conditions, including approvals by Synovus’s primary banking regulators and by Cabela’s stockholders. The closing of these transactions are also subject to the closing of the Agreement and Plan of Merger between Cabela’s and Bass Pro Group, LLC, entered into on October 3, 2016. We expect these transactions will close after all closing conditions have been satisfied. These agreements may be terminated by any of the parties if all closing conditions have not been satisfied by October 3, 2017. Upon closing of the acquisition of the credit card assets and related liabilities from Synovus, Capital One will become the exclusive issuing partner of co-branded credit cards to Cabela’s customers under the Program Agreement.
We had no significant acquisitions or dispositions in the first quarter of 2017.

 
2
Capital One Financial Corporation (COF)

Table of Contents

SUMMARY OF SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data and performance from our results of operations for the first quarters of 2017 and 2016 and selected comparative balance sheet data as of March 31, 2017 and December 31, 2016. We also provide selected key metrics we use in evaluating our performance including certain metrics that are computed using non-GAAP measures. We believe these non-GAAP metrics provide useful insight to investors and users of our financial information in assessing the results of the Company.
Table 1: Consolidated Financial Highlights
 
 
Three Months Ended March 31,
(Dollars in millions, except per share data and as noted)
 
2017
 
2016
 
Change
Income statement
 
 
 
 
 
 
Net interest income
 
$
5,474

 
$
5,056

 
8%

Non-interest income
 
1,061

 
1,164

 
(9
)
Total net revenue
 
6,535

 
6,220

 
5

Provision for credit losses
 
1,992

 
1,527

 
30

Non-interest expense:
 
 
 
 
 


Marketing
 
396

 
428

 
(7
)
Amortization of intangibles
 
62

 
101

 
(39
)
Operating expenses
 
2,976

 
2,694

 
10

Total non-interest expense
 
3,434

 
3,223

 
7

Income from continuing operations before income taxes
 
1,109

 
1,470

 
(25
)
Income tax provision
 
314

 
452

 
(31
)
Income from continuing operations, net of tax
 
795

 
1,018

 
(22
)
Income (loss) from discontinued operations, net of tax
 
15

 
(5
)
 
**

Net income
 
810

 
1,013

 
(20
)
Dividends and undistributed earnings allocated to participating securities
 
(5
)
 
(6
)
 
(17
)
Preferred stock dividends
 
(53
)
 
(37
)
 
43

Net income available to common stockholders
 
$
752

 
$
970

 
(22
)
Common share statistics
 
 

 
 

 
 

Basic earnings per common share:
 
 
 
 
 
 
Net income from continuing operations
 
$
1.53

 
$
1.86

 
(18)%

Income (loss) from discontinued operations
 
0.03

 
(0.01
)
 
**

Net income per basic common share
 
$
1.56

 
$
1.85

 
(16
)
Diluted earnings per common share:
 
 
 
 
 


Net income from continuing operations
 
$
1.51

 
$
1.85

 
(18
)
Income (loss) from discontinued operations
 
0.03

 
(0.01
)
 
**

Net income per diluted common share
 
$
1.54

 
$
1.84

 
(16
)
Weighted-average common shares outstanding (in millions):
 
 
 
 
 
 
Basic
 
482.3

 
523.5

 
(8)%

Diluted
 
487.9

 
528.0

 
(8
)
Common shares outstanding (period-end, in millions)
 
482.8

 
514.5

 
(6
)
Dividends paid per common share
 
$
0.40

 
$
0.40

 
—

Tangible book value per common share (period-end)(1)
 
58.66

 
55.94

 
5

Balance sheet (average balances)
 
 
 
 
 
 
Loans held for investment
 
$
241,505

 
$
226,736

 
7%

Interest-earning assets
 
318,358

 
299,456

 
6

Total assets
 
351,641

 
331,919

 
6

Interest-bearing deposits
 
212,973

 
194,125

 
10

Total deposits
 
238,550

 
219,180

 
9

Borrowings
 
53,357

 
53,761

 
(1
)
Common equity
 
43,833

 
45,782

 
(4
)
Total stockholders’ equity
 
48,193

 
49,078

 
(2
)

 
3
Capital One Financial Corporation (COF)

Table of Contents

 
 
Three Months Ended March 31,
(Dollars in millions, except per share data and as noted)
 
2017
 
2016
 
Change
Selected performance metrics
 
 

 
 

 
 

Purchase volume(2)
 
$
73,197

 
$
68,189

 
7%

Total net revenue margin(3)
 
8.21%

 
8.31%

 
(10
)bps
Net interest margin(4)
 
6.88

 
6.75

 
13

Return on average assets
 
0.90

 
1.23

 
(33
)
Return on average tangible assets(5)
 
0.95

 
1.29

 
(34
)
Return on average common equity(6)
 
6.73

 
8.52

 
(179
)
Return on average tangible common equity (“TCE”)(7)
 
10.37

 
12.94

 
(257
)
Equity-to-assets ratio(8)
 
13.71

 
14.79

 
(108
)
Non-interest expense as a percentage of average loans held for investment(9)
 
5.69

 
5.69

 
—

Efficiency ratio(10)
 
52.55

 
51.82

 
73

Effective income tax rate from continuing operations
 
28.3

 
30.7

 
(240
)
Net charge-offs
 
$
1,510

 
$
1,178

 
28%

Net charge-off rate(11)
 
2.50%

 
2.08%

 
42
bps
(Dollars in millions, except as noted)

March 31,
2017
 
December 31,
2016
 
Change
Balance sheet (period-end)
 
 
 
 
 
 
Loans held for investment
 
$
240,588

 
$
245,586

 
(2)%

Interest-earning assets
 
316,712

 
321,807

 
(2
)
Total assets
 
348,549

 
357,033

 
(2
)
Interest-bearing deposits
 
214,818

 
211,266

 
2

Total deposits
 
241,182

 
236,768

 
2

Borrowings
 
48,439

 
60,460

 
(20
)
Common equity
 
43,680

 
43,154

 
1

Total stockholders’ equity
 
48,040

 
47,514

 
1

Credit quality metrics
 
 
 
 
 


Allowance for loan and lease losses
 
$
6,984

 
$
6,503

 
7%

Allowance as a percentage of loans held for investment (“allowance coverage ratio”)
 
2.90%

 
2.65%

 
25
bps
30+ day performing delinquency rate
 
2.61

 
2.93

 
(32
)
30+ day delinquency rate
 
2.92

 
3.27

 
(35
)
Capital ratios
 
 

 
 
 


Common equity Tier 1 capital(12)
 
10.4%

 
10.1%

 
30
bps
Tier 1 capital(12)
 
12.0

 
11.6

 
40

Total capital(12)
 
14.7

 
14.3

 
40

Tier 1 leverage (12)
 
9.9

 
9.9

 
—

Tangible common equity(13)
 
8.5

 
8.1

 
40

Supplementary leverage(12)
 
8.6

 
8.6

 
—

Other
 
 
 
 
 


Employees (period end, in thousands)
 
48.4

 
47.3

 
2%

__________
(1)  
Tangible book value per common share is a non-GAAP measure calculated based on tangible common equity divided by common shares outstanding. See “MD&A—Table A —Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information on non-GAAP measures.
(2) 
Purchase volume consists of purchase transactions, net of returns, for the period for loans both classified as held for investment and held for sale. Excludes cash advance and balance transfer transactions.
(3) 
Total net revenue margin is calculated based on annualized total net revenue for the period divided by average interest-earning assets for the period.
(4) 
Net interest margin is calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.
(5) 
Return on average tangible assets is a non-GAAP measure calculated based on annualized income from continuing operations, net of tax, for the period divided by average tangible assets for the period. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information on non-GAAP measures.
(6) 
Return on average common equity is calculated based on annualized (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average common equity. Our calculation of return on average common equity may not be comparable to similarly-titled measures reported by other companies.

 
4
Capital One Financial Corporation (COF)

Table of Contents

(7) 
Return on average tangible common equity is a non-GAAP measure calculated based on annualized (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average TCE. Our calculation of return on average TCE may not be comparable to similarly-titled measures reported by other companies. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information on non-GAAP measures.
(8) 
Equity-to-assets ratio is calculated based on average stockholders’ equity for the period divided by average total assets for the period.
(9) 
Non-interest expense as a percentage of average loans held for investment is calculated based on annualized non-interest expense for the period divided by average loans held for investment for the period.
(10) 
Efficiency ratio is calculated based on non-interest expense for the period divided by total net revenue for the period.
(11) 
Net charge-off rate is calculated based on annualized net charge-offs for the period divided by average loans held for investment for the period.
(12) 
Capital ratios are calculated based on the Basel III Standardized Approach framework, subject to applicable transition provision. See “MD&A—Capital Management” for additional information.
(13) 
Tangible common equity ratio is a non-GAAP measure calculated based on TCE divided by tangible assets. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for the calculation of this measure and reconciliation to the comparative U.S. GAAP measure.
**
Change is not meaningful.
EXECUTIVE SUMMARY AND BUSINESS OUTLOOK
Financial Highlights
We reported net income of $810 million ($1.54 per diluted common share) on total net revenue of $6.5 billion for the first quarter of 2017. In comparison, we reported net income of $1.0 billion ($1.84 per diluted common share) on total net revenue of $6.2 billion for the first quarter of 2016.
Our common equity Tier 1 capital ratio as calculated under the Basel III Standardized Approach, including transition provisions, was 10.4% and 10.1% as of March 31, 2017 and December 31, 2016, respectively. See “MD&A—Capital Management” below for additional information.
On June 29, 2016, we announced that our Board of Directors authorized the repurchase of up to $2.5 billion in shares of our common stock (“2016 Stock Repurchase Program”) from the third quarter of 2016 through the end of the second quarter of 2017. Through the end of the first quarter of 2017, we repurchased approximately $2.2 billion of common stock as part of the 2016 Stock Repurchase Program. See “MD&A—Capital Management” below for additional information.
Below are additional highlights of our performance in the first quarter of 2017. These highlights are generally based on a comparison between the results of the first quarters of 2017 and 2016, except as otherwise noted. The changes in our financial condition and credit performance are generally based on our financial condition and credit performance as of March 31, 2017 compared to our financial condition and credit performance as of December 31, 2016. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary and Business Outlook.”
Total Company Performance
•
Earnings: Our net income decreased by $203 million to $810 million in the first quarter of 2017 compared to the first quarter of 2016. The decrease was primarily due to:
◦
higher provision for credit losses primarily driven by higher charge-offs and a larger allowance build in our domestic credit card loan portfolio; and
◦
higher operating expenses associated with loan growth, as well as continued investments in technology and infrastructure.
These higher expenses were partially offset by:
◦
higher interest income due to growth in our credit card and auto loan portfolios; and
◦
lower income tax expense as a result of lower income before taxes and increased discrete tax benefits related to the adoption of Accounting Standards Update (“ASU”) 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting.

 
5
Capital One Financial Corporation (COF)

Table of Contents

•
Loans Held for Investment:
◦
Period-end loans held for investment decreased by $5.0 billion to $240.6 billion as of March 31, 2017 from December 31, 2016 primarily due to expected seasonal paydowns in our domestic credit card loan portfolio and run-off of our acquired home loan portfolio, partially offset by growth in our auto and commercial loan portfolios.
◦
Average loans held for investment increased by $14.8 billion to $241.5 billion in the first quarter of 2017 compared to the first quarter of 2016 primarily driven by growth in our credit card, auto and commercial loan portfolios, partially offset by run-off of our acquired home loan portfolio.
•
Net Charge-Off and Delinquency Metrics: Our net charge-off rate increased by 42 basis points to 2.50% in the first quarter of 2017 compared to the first quarter of 2016, primarily due to growth and seasoning of recent domestic credit card loan originations.
Our 30+ day delinquency rate decreased by 35 basis points to 2.92% as of March 31, 2017 from December 31, 2016 primarily due to seasonally lower delinquency inventories.
We provide additional information on our credit quality metrics below under “MD&A—Business Segment Financial Performance” and “MD&A —Credit Risk Profile.”
•
Allowance for Loan and Lease Losses: Our allowance for loan and lease losses increased by $481 million to $7.0 billion as of March 31, 2017 from December 31, 2016, and the allowance coverage ratio increased by 25 basis points to 2.90% as of March 31, 2017 from December 31, 2016. The increases were primarily driven by:
◦
an allowance build in our domestic credit card loan portfolio due to increasing loss expectations on recent originations; and
◦
an allowance build in our auto loan portfolio due to higher loss rates associated with growth, as well as further expected declines in used car auction prices.
These increases were partially offset by:
◦
an allowance release in our Commercial Banking business, reflecting improved portfolio performance in our oil and gas portfolio.
Business Outlook
We discuss below our current expectations regarding our total company performance and the performance of each of our business segments over the near-term based on market conditions, the regulatory environment and our business strategies as of the time we filed this Report. The statements contained in this section are based on our current expectations regarding our outlook for our financial results and business strategies. Our expectations take into account, and should be read in conjunction with, our expectations regarding economic trends and analysis of our business as discussed in “Part I—Item 1. Business” and “MD&A” in our 2016 Form 10-K. Certain statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those in our forward-looking statements. Except as otherwise disclosed, forward-looking statements do not reflect:
•
any change in current dividend or repurchase strategies;
•
the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; or
•
any changes in laws, regulations or regulatory interpretations, in each case after the date as of which such statements are made.
See “MD&A—Forward-Looking Statements” in this Report for more information on the forward-looking statements included in this Report and “Part I—Item 1A. Risk Factors” in our 2016 Form 10-K for factors that could materially influence our results.

 
6
Capital One Financial Corporation (COF)

Table of Contents

Total Company Expectations
We expect annual efficiency ratio for 2017, excluding adjusting items, will be in the 51%s, plus or minus a reasonable margin of volatility. Over the longer-term, we believe that we will be able to achieve additional efficiency improvement, driven by growth and digital productivity gains.
We expect our strong growth over the last two years puts us in a position to deliver earnings per share growth, excluding adjusting items, between 7% and 11% in 2017, assuming no substantial change in the broader credit and economic cycles.
We believe our actions have created a well-positioned balance sheet with strong capital and liquidity. We believe that we are currently at the destination capital ratios appropriate for our current balance sheet mix. Pursuant to our approved 2016 capital plan, our Board of Directors has authorized repurchases of up to $2.5 billion of common stock through the end of the second quarter of 2017. Through the end of the first quarter of 2017, we repurchased approximately $2.2 billion of common stock as part of the 2016 Stock Repurchase Program. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, opportunities for growth, utilizing Rule 10b5-1 programs, and may be suspended at any time. See “MD&A—Capital Management—Dividend Policy and Stock Purchases” for more information.
Business Segment Expectations
Credit Card: In our Domestic Card business, we expect the full-year 2017 charge-off rate will be in the high 4%s to around 5%, with quarterly variability.
Consumer Banking: In our Consumer Banking business, we expect that the charge-off rate in our auto finance business will increase gradually and the growth we have experienced in that business will moderate.
Commercial Banking: In our Commercial Banking business, we expect credit pressures will continue to be focused in our oil field service and taxi medallion lending portfolios.
CONSOLIDATED RESULTS OF OPERATIONS
The section below provides a comparative discussion of our consolidated financial performance for the first quarters of 2017 and 2016. We provide a discussion of our business segment results in the following section, “MD&A—Business Segment Financial Performance.” You should read this section together with our “MD&A—Executive Summary and Business Outlook,” where we discuss trends and other factors that we expect will affect our future results of operations.
Net Interest Income
Net interest income represents the difference between the interest income, including certain fees, earned on our interest-earning assets and the interest expense on our interest-bearing liabilities. Interest-earning assets include loans, investment securities and other interest-earning assets, while our interest-bearing liabilities include interest-bearing deposits, securitized debt obligations, senior and subordinated notes, and other borrowings. Generally, we include in interest income any past due fees on loans that we deem collectible. Our net interest margin, based on our consolidated results, represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities, including the notional impact of non-interest-bearing funding. We expect net interest income and our net interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities.

 
7
Capital One Financial Corporation (COF)

Table of Contents

Table 2 below presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balance, interest income earned or interest expense incurred, and average yield for the first quarters of 2017 and 2016.
Table 2: Average Balances, Net Interest Income and Net Interest Margin
 
 
Three Months Ended March 31,
 
 
2017
 
2016
(Dollars in millions)
 
Average
Balance
 
Interest
Income/
Expense
 
Average Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Average Yield/
Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:(1)
 
 
 
 
 
 
 
 
 
 
 
 
Credit card
 
$
101,169

 
$
3,790

 
14.98
%
 
$
93,158

 
$
3,394

 
14.57
%
Consumer banking
 
73,510

 
1,190

 
6.48

 
70,441

 
1,088

 
6.18

Commercial banking(2)
 
67,503

 
615

 
3.64

 
63,884

 
539

 
3.37

Other(3)
 
67

 
31

 
185.07

 
90

 
64

 
284.44

Total loans, including loans held for sale
 
242,249

 
5,626

 
9.29

 
227,573

 
5,085

 
8.94

Investment securities
 
68,418

 
416

 
2.43

 
65,156

 
415

 
2.55

Cash equivalents and other interest-earning assets
 
7,691

 
28

 
1.46

 
6,727

 
17

 
1.01

Total interest-earning assets
 
318,358

 
6,070

 
7.63

 
299,456

 
5,517

 
7.37

Cash and due from banks
 
3,487

 
 
 
 
 
3,355

 
 
 
 
Allowance for loan and lease losses
 
(6,513
)
 
 
 
 
 
(5,131
)
 
 
 
 
Premises and equipment, net
 
3,797

 
 
 
 
 
3,642

 
 
 
 
Other assets
 
32,512

 
 
 
 
 
30,597

 
 
 
 
Total assets
 
$
351,641

 
 
 
 
 
$
331,919

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:(3)
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
212,973

 
$
353

 
0.66
%
 
$
194,125

 
$
283

 
0.58
%
Securitized debt obligations
 
17,176

 
69

 
1.61

 
15,361

 
48

 
1.25

Senior and subordinated notes
 
24,804

 
149

 
2.40

 
21,993

 
106

 
1.93

Other borrowings and liabilities
 
12,356

 
25

 
0.81

 
17,176

 
24

 
0.56

Total interest-bearing liabilities
 
267,309

 
596

 
0.89

 
248,655

 
461

 
0.74

Non-interest-bearing deposits
 
25,577

 
 
 
 
 
25,055

 
 
 
 
Other liabilities
 
10,562

 
 
 
 
 
9,131

 
 
 
 
Total liabilities
 
303,448

 
 
 
 
 
282,841

 
 
 
 
Stockholders’ equity
 
48,193

 
 
 
 
 
49,078

 
 
 
 
Total liabilities and stockholders’ equity
 
$
351,641

 
 
 
 
 
$
331,919

 
 
 
 
Net interest income/spread
 
$
5,474

 
6.74

 
 
 
$
5,056

 
6.63

Impact of non-interest-bearing funding
 
0.14

 
 
 
 
 
0.12

Net interest margin
 
6.88%

 
 
 
 
 
6.75
%
__________
(1)  
Past due fees included in interest income totaled approximately $384 million and $351 million in the first quarters of 2017 and 2016, respectively.
(2) 
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately equal to our federal statutory rate of 35% with offsetting reclassifications to the Other category.
(3) 
Interest income and interest expense and the calculation of average yields on interest-earning assets and average rates on interest-bearing liabilities include the impact of hedge accounting.
 

 
8
Capital One Financial Corporation (COF)

Table of Contents

Net interest income increased by $418 million to $5.5 billion in the first quarter of 2017 compared to the first quarter of 2016 primarily driven by:
•
growth in our domestic credit card and auto loan portfolios; and
•
higher net interest margins.
These increases were partially offset by:
•
an additional day in the first quarter of 2016.
Net interest margin increased by 13 basis points to 6.88% in the first quarter of 2017 compared to the first quarter of 2016 primarily driven by:
•
growth in our domestic credit card loan portfolio;
•
higher yields as a result of higher interest rates; and
•
run-off of our acquired home loan portfolio.
These increases were partially offset by:
•
an additional day in the first quarter of 2016.
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
9
Capital One Financial Corporation (COF)

Table of Contents

Table 3 displays the change in our net interest income between periods and the extent to which the variance is attributable to:
•
changes in the volume of our interest-earning assets and interest-bearing liabilities; or
•
changes in the interest rates related to these assets and liabilities.
Table 3: Rate/Volume Analysis of Net Interest Income(1)
 
 
Three Months Ended March 31,
 
 
2017 vs. 2016
(Dollars in millions)
 
Total Variance
 
Volume
 
Rate
Interest income:
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
Credit card
 
$
396

 
$
298

 
$
98

Consumer banking
 
102

 
48

 
54

Commercial banking(2)
 
76

 
32

 
44

Other
 
(33
)
 
(14
)
 
(19
)
Total loans, including loans held for sale
 
541

 
364

 
177

Investment securities
 
1

 
20

 
(19
)
Cash equivalents and other interest-earning assets
 
11

 
3

 
8

Total interest income
 
553

 
387

 
166

Interest expense:
 
 
 
 
 
 
Deposits
 
70

 
29

 
41

Securitized debt obligations
 
21

 
6

 
15

Senior and subordinated notes
 
43

 
15

 
28

Other borrowings and liabilities
 
1

 
(7
)
 
8

Total interest expense
 
135

 
43

 
92

Net interest income
 
$
418

 
$
344

 
$
74

__________
(1) 
We calculate the change in interest income and interest expense separately for each item. The portion of interest income or interest expense attributable to both volume and rate is allocated proportionately when the calculation results in a positive value. When the portion of interest income or interest expense attributable to both volume and rate results in a negative value, the total amount is allocated to volume or rate, depending on which amount is positive.
(2) 
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately equal to our federal statutory rate of 35% with offsetting reclassifications to the Other category.
Non-Interest Income
Non-interest income primarily consists of interchange fees net of rewards expense, service charges and other customer-related fees and other non-interest income. Other non-interest income includes the pre-tax net benefit (provision) for mortgage representation and warranty losses related to continuing operations, gains and losses on free-standing derivatives not accounted for in hedge accounting relationships and hedge ineffectiveness.

 
10
Capital One Financial Corporation (COF)

Table of Contents

Table 4 displays the components of non-interest income for the first quarters of 2017 and 2016.
Table 4: Non-Interest Income
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2017
 
2016(1)
Interchange fees, net
 
$
570

 
$
604

Service charges and other customer-related fees
 
371

 
423

Net securities gains (losses)
 
—

 
(8
)
Other non-interest income:
 
 
 
 
Benefit for mortgage representation and warranty losses(2)
 
25

 
1

Net fair value gains on free-standing derivatives
 
17

 
30

Other
 
78

 
114

Total other non-interest income
 
120

 
145

Total non-interest income
 
$
1,061

 
$
1,164

__________
(1) 
We made certain non-interest income reclassifications in the fourth quarter of 2016 to conform to the current period presentation. The primary net effects of the reclassifications for the three months ended March 31, 2016 compared to previously reported results were (i) an increase to Service charges and other customer-related fees of $19 million; and (ii) a decrease to Other non-interest income of $27 million. We have also consolidated the Non-interest income presentation of Other-than-temporary impairment (“OTTI”) with net realized gains or losses from investment securities into a new Net securities gains(losses) line. See Note 1—Summary of Significant Accounting Policies in our 2016 Form 10-K for additional information.
(2) 
Represents the benefit for mortgage representation and warranty losses recorded in continuing operations.
Non-interest income decreased by $103 million to $1.1 billion in the first quarter of 2017 compared to the first quarter of 2016 primarily driven by:
•
lower service charges and other customer-related fees primarily due to a build in our U.K. payment protection insurance customer refund reserve (“U.K. PPI Reserve”) in the first quarter of 2017 compared to the absence of a build in the first quarter of 2016, as well as the exit of our legacy payment protection products in our Domestic Card business during the first quarter of 2016; and
•
lower net interchange fees, as an increase in gross interchange fees driven by higher purchase volume was more than offset by higher rewards expense from the continued expansion of our rewards franchise, as well as a customer rewards reserve release within our retail banking business in the first quarter of 2016 related to the discontinuation of certain debit card and deposit products.
These decreases were partially offset by:
•
higher revenue in our capital markets and agency businesses in our Commercial Banking business; and
•
a mortgage representation and warranty reserve release in our Consumer Banking business.
We provide additional information on our U.K. PPI Reserve in “Note 14—Commitments, Contingencies, Guarantees and Others.”
Provision for Credit Losses
Our provision for credit losses in each period is driven by net charge-offs, changes to the allowance for loan and lease losses and changes to the reserve for unfunded lending commitments. We recorded a provision for credit losses of $2.0 billion and $1.5 billion in the first quarters of 2017 and 2016, respectively. The provision for credit losses as a percentage of net interest income was 36.4% and 30.2% in the first quarters of 2017 and 2016, respectively.

 
11
Capital One Financial Corporation (COF)

Table of Contents

Our provision for credit losses increased by $465 million in the first quarter of 2017 compared to the first quarter of 2016 primarily driven by:
•
a larger allowance build in our domestic credit card loan portfolio due to increasing loss expectations on recent originations; and
•
higher charge-offs in our domestic credit card loan portfolio due to seasoning of recent growth.
These increases were partially offset by:
•
an allowance release in our Commercial Banking business in the first quarter of 2017 compared to a build in the first quarter of 2016, reflecting lower exposure in our oil and gas and taxi medallion lending portfolios.
We provide additional information on the provision for credit losses and changes in the allowance for loan and lease losses within “MD&A—Credit Risk Profile,” “Note 4—Loans” and “Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments.” For information on the allowance methodology for each of our loan categories, see “Note 1—Summary of Significant Accounting Policies” in our 2016 Form 10-K.
Non-Interest Expense
Non-interest expense consists of operating expenses related to continuing operations, such as salaries and associate benefits, occupancy and equipment costs, professional services, communications and data processing expenses and other non-interest expenses, as well as marketing costs and amortization of intangibles.
Table 5 displays the components of non-interest expense for the first quarters of 2017 and 2016.
Table 5: Non-Interest Expense
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2017
 
2016(1)
Salaries and associate benefits
 
$
1,471

 
$
1,270

Occupancy and equipment
 
471

 
458

Marketing
 
396

 
428

Professional services
 
247

 
241

Communications and data processing
 
288

 
280

Amortization of intangibles
 
62

 
101

Other non-interest expense:
 
 
 
 
Collections
  
85

 
81

Fraud losses
  
78

 
90

Bankcard, regulatory and other fee assessments
  
136

 
107

Other
  
200

 
167

Total other non-interest expense
 
499

 
445

Total non-interest expense
 
$
3,434

 
$
3,223

__________
(1) 
We made certain non-interest expense reclassifications in the fourth quarter of 2016. The net effect of the reclassifications for the three months ended March 31, 2016 compared to previously reported results was an increase to Communications and data processing expense of $37 million, with a corresponding decrease to Professional services. See “Note 1—Summary of Significant Accounting Policies” in our 2016 Form 10-K for additional information.
Non-interest expense increased by $211 million to $3.4 billion in the first quarter of 2017 compared to the first quarter of 2016 primarily due to:
•
higher operating expenses associated with loan growth, as well as continued investments in technology and infrastructure;
•
higher other non-interest expense primarily driven by a build in our U.K. PPI Reserve in the first quarter of 2017 compared to the absence of a build in the first quarter of 2016; and

 
12
Capital One Financial Corporation (COF)

Table of Contents

•
higher Federal Deposit Insurance Corporation (“FDIC”) surcharges and premiums.
These increases are partially offset by:
•
lower amortization of intangibles; and
•
lower marketing expenses.
Income (Loss) from Discontinued Operations, Net of Tax
Income (loss) from discontinued operations consists of results from the discontinued mortgage origination operations of our wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc. (“GreenPoint”) and the discontinued manufactured housing operations of GreenPoint Credit, LLC, a subsidiary of GreenPoint, both of which were acquired as part of the North Fork Bancorporation, Inc. (“North Fork”) acquisition in December 2006. Income from discontinued operations, net of tax, was $15 million in the first quarter of 2017 compared to a loss of $5 million in the first quarter of 2016. We recorded a release related to our mortgage representation and warranty reserve, net of tax, of $42 million ($67 million before tax) in the first quarter of 2017, compared to a provision, net of tax, of $2 million ($3 million before tax) in the first quarter of 2016 as a result of favorable legal developments. This mortgage representation and warranty reserve release was partially offset by a pre-tax charge of $40 million to record a liability related to our contingent obligation to exercise certain mandatory clean-up calls associated with manufactured housing securitizations undertaken by GreenPoint Credit, LLC.
We provide additional information on the discontinued operations in “Note 2—Discontinued Operations” and on the net benefit (provision) for mortgage representation and warranty losses and the related reserve for representation and warranty claims in “MD&A—Consolidated Balance Sheets Analysis—Mortgage Representation and Warranty Reserve” and “Note 14—Commitments, Contingencies, Guarantees and Others.”
Income Taxes
We recorded income tax provisions of $314 million (28.3% effective income tax rate) and $452 million (30.7% effective income tax rate) in the first quarters of 2017 and 2016, respectively. Our effective tax rate on income from continuing operations varies between periods due, in part, to fluctuations in our pre-tax earnings, which affects the relative tax benefit of tax-exempt income, tax credits and other permanent tax items.
The decrease in our effective income tax rate in the first quarter of 2017 from the first quarter of 2016 was primarily due to:
•
increases in the relative benefit of tax exempt income and tax credits; and
•
increased discrete tax benefits related to the adoption of Accounting Standards Update (“ASU”) 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting.
This increase was partially offset by:
•
reduced benefits associated with foreign earnings.
We provide additional information on items affecting our income taxes and effective tax rate under “Note 16—Income Taxes” in our 2016 Form 10-K.

 
13
Capital One Financial Corporation (COF)

Table of Contents

CONSOLIDATED BALANCE SHEETS ANALYSIS
Total assets decreased by $8.5 billion to $348.5 billion as of March 31, 2017 from December 31, 2016 primarily due to:
•
a decrease in loans held for investment primarily due to expected seasonal paydowns in our domestic credit card loan portfolio and run-off of our acquired home loan portfolio, partially offset by growth in our auto and commercial loan portfolios.
Total liabilities decreased by $9.0 billion to $300.5 billion as of March 31, 2017 from December 31, 2016 primarily driven by:
•
a decrease in other debt primarily attributable to a decrease in our FHLB advances outstanding, partially offset by an increase in our senior and subordinated notes.
Stockholders’ equity increased by $526 million to $48.0 billion as of March 31, 2017 from December 31, 2016 primarily due to:
•
our net income of $810 million in the first quarter of 2017.
This increase was partially offset by:
•
$250 million of dividend payments to our common and preferred stockholders; and
•
$218 million of share repurchases.
The following is a discussion of material changes in the major components of our assets and liabilities during the first quarter of 2017. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to ensure the adequacy of capital while managing the liquidity requirements of the Company and our customers and our market risk exposure in accordance with our risk appetite.
Investment Securities
Our investment portfolio consists primarily of the following: U.S. Treasury securities; U.S. government-sponsored enterprise or agency (“Agency”) and non-agency residential mortgage-backed securities (“RMBS”); Agency and non-agency commercial mortgage-backed securities (“CMBS”); other asset-backed securities (“ABS”); and other securities. The carrying value of our investments in U.S. Treasury and Agency securities represented 91% of our total investment securities as of both March 31, 2017 and December 31, 2016.
The fair value of our available for sale securities portfolio was $41.3 billion as of March 31, 2017, an increase of $523 million from December 31, 2016. The fair value of our held to maturity securities portfolio was $26.7 billion as of March 31, 2017, an increase of $461 million from December 31, 2016. The increase in the fair value of both of these portfolios was primarily driven by purchases outpacing sales and paydowns.
Gross unrealized gains on our available for sale securities portfolio increased slightly to $550 million as of March 31, 2017 compared to $539 million as of December 31, 2016 and gross unrealized losses on this portfolio decreased to $501 million as of March 31, 2017 compared to $535 million as of December 31, 2016. Of the $501 million gross unrealized losses as of March 31, 2017, $104 million was related to securities that had been in a loss position for 12 months or longer.

 
14
Capital One Financial Corporation (COF)

Table of Contents

Table 6 presents the amortized cost, carrying value and fair value for the major categories of our investment securities portfolio as of March 31, 2017 and December 31, 2016.
Table 6: Investment Securities
 
 
March 31, 2017
 
December 31, 2016
(Dollars in millions)
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Investment securities available for sale:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
5,195

 
$
5,170

 
$
5,103

 
$
5,065

RMBS:
 
 
 
 
 
 
 
 
Agency(1)
 
27,289

 
26,992

 
26,830

 
26,527

Non-agency
 
2,264

 
2,647

 
2,349

 
2,722

Total RMBS
 
29,553

 
29,639

 
29,179

 
29,249

CMBS:
 
 
 
 
 
 
 
 
Agency(1)
 
3,159

 
3,132

 
3,335

 
3,304

Non-agency
 
1,712

 
1,730

 
1,676

 
1,684

Total CMBS
 
4,871

 
4,862

 
5,011

 
4,988

Other ABS(2)
 
688

 
688

 
714

 
714

Other securities(3)
 
904

 
901

 
726

 
721

Total investment securities available for sale
 
$
41,211

 
$
41,260

 
$
40,733

 
$
40,737

 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Carrying Value
 
Fair
Value
 
Carrying Value
 
Fair
Value
Investment securities held to maturity:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
199

 
$
199

 
$
199

 
$
199

Agency RMBS
 
22,486

 
22,932

 
22,125

 
22,573

Agency CMBS
 
3,485

 
3,526

 
3,388

 
3,424

Total investment securities held to maturity
 
$
26,170

 
$
26,657

 
$
25,712

 
$
26,196

__________
(1) 
Includes securities guaranteed by Government National Mortgage Association (“Ginnie Mae”) and securities issued by Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”).
(2) 
ABS collateralized by credit card loans constituted approximately 54% and 57% of the other ABS portfolio as of March 31, 2017 and December 31, 2016, respectively, and ABS collateralized by auto dealer floor plan inventory loans and leases constituted approximately 24% and 23% of the other ABS portfolio as of March 31, 2017 and December 31, 2016, respectively.
(3) 
Includes supranational bonds, foreign government bonds, mutual funds and equity investments.
Credit Ratings
Our portfolio of investment securities continues to be concentrated in securities that generally have high credit ratings and low credit risk, such as securities issued and guaranteed by the U.S. Treasury and Agencies. As of March 31, 2017 and December 31, 2016, approximately 96% and 95% of our total investment securities portfolio was rated AA+ or its equivalent, or better, respectively, while approximately 4% was below investment grade, as of both March 31, 2017 and December 31, 2016. We categorize the credit ratings of our investment securities based on the lowest credit rating as issued by the following rating agencies: Standard & Poor’s Ratings Services (“S&P”), Moody’s Investors Service (“Moody’s”) and Fitch Ratings (“Fitch”).
Table 7 provides information on the credit ratings of our non-agency RMBS, non-agency CMBS, other ABS and other securities in our portfolio as of March 31, 2017 and December 31, 2016.

 
15
Capital One Financial Corporation (COF)

Table of Contents

Table 7: Non-Agency Investment Securities Credit Ratings
 
 
March 31, 2017
 
December 31, 2016
(Dollars in millions)
 
Fair Value
 
AAA
 
Other
Investment
Grade
 
Below
Investment
Grade(1)
 
Fair Value
 
AAA
 
Other
Investment
Grade
 
Below
Investment
Grade(1)
Non-agency RMBS
 
$
2,647

 
—

 
2%
 
98%
 
$
2,722

 
—
 
3%
 
97%
Non-agency CMBS
 
1,730

 
100
%
 
—
 
—
 
1,684

 
100%
 
—
 
—
Other ABS
 
688

 
99

 
1
 
—
 
714

 
99
 
1
 
—
Other securities
 
901

 
72

 
18
 
10
 
721

 
62
 
25
 
13
__________
(1)  
Includes investment securities that were not rated.
For additional information on our investment securities, see “Note 3—Investment Securities.”
Loans Held for Investment
Total loans held for investment (“HFI”) consists of both unsecuritized loans and loans held in our consolidated trusts. Table 8 summarizes the carrying value of our portfolio of loans held for investment by portfolio segment, net of the allowance for loan and lease losses, as of March 31, 2017 and December 31, 2016.
Table 8: Loans Held for Investment
 
 
March 31, 2017
 
December 31, 2016
(Dollars in millions)
 
Loans
 
Allowance
 
Net Loans
 
Loans
 
Allowance
 
Net Loans
Credit Card
 
$
99,213

 
$
5,058

 
$
94,155

 
$
105,552

 
$
4,606

 
$
100,946

Consumer Banking
 
73,982

 
1,163

 
72,819

 
73,054

 
1,102

 
71,952

Commercial Banking
 
67,320

 
761

 
66,559

 
66,916

 
793

 
66,123

Other
 
73

 
2

 
71

 
64

 
2

 
62

Total
 
$
240,588

 
$
6,984

 
$
233,604

 
$
245,586

 
$
6,503

 
$
239,083

Loans held for investment decreased by $5.0 billion to $240.6 billion as of March 31, 2017 from December 31, 2016 primarily due to expected seasonal paydowns in our domestic credit card loan portfolio and run-off of our acquired home loan portfolio, partially offset by growth in our auto and commercial loan portfolios.
We provide additional information on the composition of our loan portfolio and credit quality below in “MD&A—Credit Risk Profile,” “MD&A—Consolidated Results of Operations” and “Note 4—Loans.”
Deposits
Our deposits represent our largest source of funding for our operations and provide a consistent source of low-cost funds. Total deposits increased by $4.4 billion to $241.2 billion as of March 31, 2017 from December 31, 2016 primarily driven by growth in our Consumer Banking business. We provide information on the composition of our deposits, average outstanding balances, interest expense and yield in “MD&A—Liquidity Risk Profile.”
Securitized Debt Obligations
Securitized debt obligations decreased to $18.5 billion as of March 31, 2017, from $18.8 billion as of December 31, 2016, as debt maturities exceeded issuances during the first quarter of 2017. We provide additional information on our borrowings in “MD&A—Liquidity Risk Profile” and in “Note 8—Deposits and Borrowings.”

 
16
Capital One Financial Corporation (COF)

Table of Contents

Other Debt
Other debt, which consists primarily of federal funds purchased and securities loaned or sold under agreements to repurchase, senior and subordinated notes, and Federal Home Loan Banks (“FHLB”) advances, totaled $29.9 billion as of March 31, 2017, of which $28.9 billion represented long-term debt and the remainder represented short-term borrowings. Other debt totaled $41.6 billion as of December 31, 2016, of which $40.6 billion represented long-term debt and the remainder represented short-term borrowings.
The decrease in other debt of $11.7 billion in the first quarter of 2017 was primarily attributable to a decrease in our FHLB advances outstanding, partially offset by an increase in our senior and subordinated notes. We provide additional information on our borrowings in “MD&A—Liquidity Risk Profile” and in “Note 8—Deposits and Borrowings.”
Mortgage Representation and Warranty Reserve
We acquired three subsidiaries that originated residential mortgage loans and sold these loans to various purchasers, including purchasers who created securitization trusts. These subsidiaries are Capital One Home Loans, LLC, which was acquired in February 2005; GreenPoint, which was acquired in December 2006 as part of the North Fork acquisition; and Chevy Chase Bank, F.S.B. (“CCB”), which was acquired in February 2009 and subsequently merged into CONA.
We have established representation and warranty reserves for losses associated with the mortgage loans sold by each subsidiary that we consider to be both probable and reasonably estimable, including both litigation and non-litigation liabilities. These reserves are reported on our consolidated balance sheets as a component of other liabilities. The reserve setting process relies heavily on estimates, which are inherently uncertain, and requires judgment. We evaluate these estimates on a quarterly basis. We build our representation and warranty reserves through the provision for mortgage representation and warranty losses, which we report in our consolidated statements of income as a component of non-interest income for loans originated and sold by CCB and Capital One Home Loans, LLC and as a component of discontinued operations for loans originated and sold by GreenPoint. The aggregate reserve for all three entities decreased to $516 million as of March 31, 2017, compared to $630 million as of December 31, 2016 primarily due to favorable legal developments.
As part of our business planning processes, we have considered various outcomes relating to the future representation and warranty liabilities of our subsidiaries that are possible but do not rise to the level of being both probable and reasonably estimable outcomes justifying an incremental reserve under applicable accounting standards. Our current best estimate of reasonably possible future losses from representation and warranty claims beyond what was in our reserve as of March 31, 2017 is approximately $1.4 billion, a decrease from our estimate of $1.5 billion as of December 31, 2016.
We provide additional information related to the representation and warranty reserve, including factors that may impact the adequacy of the reserve and the ultimate amount of losses incurred by our subsidiaries, in “Note 14—Commitments, Contingencies, Guarantees and Others.”
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, we engage in certain activities that are not reflected on our consolidated balance sheets, generally referred to as off-balance sheet arrangements. These activities typically involve transactions with unconsolidated variable interest entities (“VIEs”) as well as other arrangements, such as letter of credits, loan commitments and guarantees, to meet the financing needs of our customers and support their ongoing operations. We provide additional information regarding these types of activities in the “MD&A—Liquidity Risk Profile” as well as “Note 6—Variable Interest Entities and Securitizations” and “Note 14—Commitments, Contingencies, Guarantees and Others.”

 
17
Capital One Financial Corporation (COF)

Table of Contents

BUSINESS SEGMENT FINANCIAL PERFORMANCE
Our principal operations are currently organized into three major business segments, which are defined based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group, are included in the Other category.
The results of our individual businesses, which we report on a continuing operations basis, reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 18—Business Segments” in our 2016 Form 10-K.
We refer to the business segment results derived from our internal management accounting and reporting process as our “managed” presentation, which differs in some cases from our reported results prepared based on U.S. GAAP. There is no comprehensive authoritative body of guidance for management accounting equivalent to U.S. GAAP; therefore, the managed presentation of our business segment results may not be comparable to similar information provided by other financial services companies. In addition, our individual business segment results should not be used as a substitute for comparable results determined in accordance with U.S. GAAP.
Below we summarize our business segment results for the first quarters of 2017 and 2016 and provide a comparative discussion of these results, as well as changes in our financial condition and credit performance metrics as of March 31, 2017 compared to December 31, 2016. We provide a reconciliation of our total business segment results to our reported consolidated results in “Note 13—Business Segments.” Additionally, we provide information on the outlook for each of our business segments as described above under “MD&A—Executive Summary and Business Outlook.”
Business Segment Financial Performance
Table 9 summarizes our business segment results, which we report based on revenue and income from continuing operations, for
the first quarters of 2017 and 2016. We provide information on the allocation methodologies used to derive our business segment results in “Note 18—Business Segments” in our 2016 Form 10-K. We also provide a reconciliation of our total business segment results to our consolidated U.S. GAAP results in “Note 13—Business Segments” of this Report.

Table 9: Business Segment Results
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
Total Net
Revenue(1)
 
Net Income(2)
 
Total Net
Revenue(1)
 
Net Income(2)
(Dollars in millions)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Credit Card
 
$
4,084

 
63%
 
$
271

 
34%
 
$
3,880

 
62%
 
$
609

 
60%
Consumer Banking
 
1,712

 
26
 
248

 
31
 
1,611

 
26
 
249

 
24
Commercial Banking(3)
 
724

 
11
 
213

 
27
 
655

 
11
 
67

 
7
Other(4)
 
15

 
—
 
63

 
8
 
74

 
1
 
93

 
9
Total
 
$
6,535

 
100%
 
$
795

 
100%
 
$
6,220

 
100%
 
$
1,018

 
100%
__________
(1) 
Total net revenue consists of net interest income and non-interest income.
(2) 
Net income for our business segments and the Other category is based on income (loss) from continuing operations, net of tax.
(3) 
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately equal to our federal statutory tax rate of 35% with offsetting reclassifications to the Other category.
(4) 
The Other category includes the residual impact of the allocation of our centralized Corporate Treasury group activities, unallocated corporate expenses that do not directly support the operations of the business segments and other items as described in “Note 18—Business Segments” in our 2016 Form 10-K.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit Card Business
The primary sources of revenue for our Credit Card business are interest income, net interchange income and fees collected from customers. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses.
Our Credit Card business generated net income from continuing operations of $271 million and $609 million in the first quarters of 2017 and 2016, respectively.
Table 10 summarizes the financial results of our Credit Card business and displays selected key metrics for the periods indicated.
Table 10: Credit Card Business Results
 
 
Three Months Ended March 31,
(Dollars in millions, except as noted)
 
2017
 
2016
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
3,346

 
$
3,033

 
10%

Non-interest income
 
738

 
847

 
(13
)
Total net revenue(1)
 
4,084

 
3,880

 
5

Provision for credit losses
 
1,717

 
1,071

 
60

Non-interest expense
 
1,929

 
1,863

 
4

Income from continuing operations before income taxes
 
438

 
946

 
(54
)
Income tax provision
 
167

 
337

 
(50
)
Income from continuing operations, net of tax
 
$
271

 
$
609

 
(56
)
Selected performance metrics:
 
 
 
 
 
 
Average loans held for investment(2)
 
$
101,169

 
$
92,987

 
9

Average yield on loans held for investment(3)
 
14.99%

 
14.60%

 
39
bps
Total net revenue margin(4)
 
16.14

 
16.69

 
(55
)
Net charge-offs
 
$
1,271

 
$
950

 
34%

Net charge-off rate
 
5.02%

 
4.09%

 
93
bps
Purchased credit card relationship (“PCCR”) intangible amortization
 
$
44

 
$
70

 
(37)%

Purchase volume(5)
 
73,197

 
68,189

 
7

 
 
 
 
 
 
 
(Dollars in millions, except as noted)
 
March 31, 2017
 
December 31, 2016
 
Change
Selected period-end data:
 
 
 
 
 
 
Loans held for investment(2)
 
$
99,213

 
$
105,552

 
(6)%

30+ day performing delinquency rate
 
3.68%

 
3.91%

 
(23
)bps
30+ day delinquency rate
 
3.71

 
3.94

 
(23
)
Nonperforming loan rate
 
0.04

 
0.04

 
—

Allowance for loan and lease losses
 
$
5,058

 
$
4,606

 
10%

Allowance coverage ratio(6)
 
5.10%

 
4.36%

 
74
bps
__________
(1) 
We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in revenue and is not included in our net charge-offs. Total net revenue was reduced by $321 million and $228 million in the first quarters of 2017 and 2016, respectively, for the estimated uncollectible amount of billed finance charges and fees and related losses. The finance charge and fee reserve totaled $398 million and $402 million as of March 31, 2017 and December 31, 2016, respectively.
(2) 
Period-end loans held for investment and average loans held for investment include billed finance charges and fees, net of the estimated uncollectible amount.
(3) 
Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.

 
18
Capital One Financial Corporation (COF)

Table of Contents

(4) 
Total net revenue margin is calculated by dividing annualized total net revenue for the period by average loans held for investment during the period. Interest income also includes interest income on loans held for sale.
(5) 
Purchase volume consists of purchase transactions, net of returns, for the period for loans both classified as held for investment and held for sale. Excludes cash advance and balance transfer transactions.
(6) 
Allowance coverage ratio is calculated by dividing the period-end allowance for loan and lease losses by period-end loans held for investment.
Key factors affecting the results of our Credit Card business for the first quarter of 2017 compared to the first quarter of 2016, and changes in financial condition and credit performance between March 31, 2017 and December 31, 2016 include the following:
•
Net Interest Income: Net interest income increased by $313 million to $3.3 billion in the first quarter of 2017 primarily driven by loan growth and higher net interest margins in our Domestic Card business.
•
Non-Interest Income: Non-interest income decreased by $109 million to $738 million in the first quarter of 2017 primarily driven by:
◦
higher rewards expense from the continued expansion of our rewards franchise;
◦
a build in our U.K. PPI Reserve in the first quarter of 2017 compared to the absence of a build in the first quarter of 2016; and
◦
lower service charges and other customer-related fees primarily due to the exit of our legacy payment protection products in our Domestic Card business during the first quarter of 2016.
These decreases were partially offset by:
◦
an increase in gross interchange fees driven by higher purchase volume.
•
Provision for Credit Losses: The provision for credit losses increased by $646 million to $1.7 billion in the first quarter of 2017 primarily driven by:
◦
a larger allowance build in our domestic credit card loan portfolio due to increasing loss expectations on recent originations; and
◦
higher charge-offs due to seasoning of recent growth.
•
Non-Interest Expense: Non-interest expense increased by $66 million to $1.9 billion in the first quarter of 2017 primarily driven by:
◦
higher operating expenses associated with loan growth and continued investments in technology; and
◦
higher other non-interest expense primarily driven by a build in our U.K. PPI Reserve in the first quarter of 2017 compared to the absence of a build in the first quarter of 2016.
These increases were partially offset by:
◦
lower marketing expenses and operating efficiencies.
•
Loans Held for Investment: Period-end loans held for investment decreased by $6.3 billion to $99.2 billion as of March 31, 2017 from December 31, 2016 primarily due to expected seasonal paydowns. Average loans held for investment increased by $8.2 billion to $101.2 billion in the first quarter of 2017 compared to the first quarter of 2016, primarily due to growth in our domestic credit card loan portfolio.
•
Net Charge-Off and Delinquency Metrics: The net charge-off rate increased by 93 basis points to 5.02% in the first quarter of 2017 compared to the first quarter of 2016 primarily driven by growth and seasoning of recent domestic credit card loan originations, partially offset by growth in our domestic credit card loan portfolio. The 30+ day delinquency rate decreased by 23 basis points to 3.71% as of March 31, 2017 from December 31, 2016 primarily due to seasonally lower delinquency inventories, partially offset by seasonally lower loan balances in our domestic credit card loan portfolio.

 
19
Capital One Financial Corporation (COF)

Table of Contents

Domestic Card Business
Domestic Card generated net income from continuing operations of $278 million and $564 million in the first quarters of 2017 and 2016, respectively. In the first quarters of 2017 and 2016, Domestic Card accounted for greater than 90% of both total net revenues and net income of our Credit Card business.
Table 10.1 summarizes the financial results for Domestic Card and displays selected key metrics for the periods indicated.
Table 10.1: Domestic Card Business Results
 
 
Three Months Ended March 31,
(Dollars in millions, except as noted)
 
2017
 
2016
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
3,093

 
$
2,756

 
12%

Non-interest income
 
699

 
774

 
(10
)
Total net revenue(1)
 
3,792

 
3,530

 
7

Provision for credit losses
 
1,637

 
972

 
68

Non-interest expense
 
1,717

 
1,671

 
3

Income from continuing operations before income taxes
 
438

 
887

 
(51
)
Income tax provision
 
160

 
323

 
(50
)
Income from continuing operations, net of tax
 
$
278

 
$
564

 
(51
)
Selected performance metrics:
 
 
 
 
 
 
Average loans held for investment(2)
 
$
93,034

 
$
85,148

 
9

Average yield on loans held for investment(3)
 
15.01%

 
14.43%

 
58
bps
Total net revenue margin(4)
 
16.30

 
16.58

 
(28
)
Net charge-offs
 
$
1,196

 
$
887

 
35%

Net charge-off rate
 
5.14%

 
4.16%

 
98
bps
PCCR intangible amortization
 
$
44

 
$
70

 
(37)%

Purchase volume(5)
 
66,950

 
62,617

 
7

 
 
 
 
 
 
 
(Dollars in millions, except as noted)
 
March 31, 2017
 
December 31, 2016
 
Change
Selected period-end data:
 
 
 
 
 
 
Loans held for investment(2)
 
$
91,092

 
$
97,120

 
(6)%

30+ day delinquency rate
 
3.71%

 
3.95%

 
(24
)bps
Allowance for loan and lease losses
 
$
4,670

 
$
4,229

 
10%

Allowance coverage ratio(6)
 
5.13%

 
4.35%

 
78
bps
__________
(1) 
We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in revenue and is not included in our net charge-offs.
(2) 
Period-end loans held for investment and average loans held for investment include billed finance charges and fees, net of the estimated uncollectible amount.
(3) 
Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(4) 
Total net revenue margin is calculated by dividing annualized total net revenue for the period by average loans held for investment during the period.
(5) 
Purchase volume consists of purchase transactions, net of returns, for the period for loans both classified as held for investment and held for sale. Excludes cash advance and balance transfer transactions.
(6)
Allowance coverage ratio is calculated by dividing the period-end allowance for loan and lease losses by period-end loans held for investment.
Because our Domestic Card business accounts for the substantial majority of our Credit Card business, the key factors driving the results are similar to the key factors affecting our total Credit Card business. Net income for our Domestic Card business decreased in the first quarter of 2017 compared to the first quarter of 2016 primarily driven by:

 
20
Capital One Financial Corporation (COF)

Table of Contents

•
higher provision for credit losses;
•
lower non-interest income; and
•
higher operating expenses associated with loan growth.
These drivers were partially offset by:
•
higher net interest income resulting from loan growth and higher net interest margins; and
•
lower marketing expenses and operating efficiencies.
Consumer Banking Business
The primary sources of revenue for our Consumer Banking business are net interest income from loans and deposits and non-interest income from service charges and customer-related fees. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses.
Our Consumer Banking business generated net income from continuing operations of $248 million and $249 million in the first quarters of 2017 and 2016, respectively.
Table 11 summarizes the financial results of our Consumer Banking business and displays selected key metrics for the periods indicated.

 
21
Capital One Financial Corporation (COF)

Table of Contents

Table 11: Consumer Banking Business Results
 
 
Three Months Ended March 31,
(Dollars in millions, except as noted)
 
2017
 
2016
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
1,517

 
$
1,420

 
7%

Non-interest income
 
195

 
191

 
2

Total net revenue
 
1,712