Document
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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 September 30, 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, a 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 for 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 October 31, 2017, there were 484,744,182 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

 
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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 September 30, 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 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 September 30, 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 non-interest expenses primarily consist of the provision for credit losses, operating expenses, marketing expenses and income taxes.
Our principal operations are 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.

 
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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 September 25, 2017, we completed the previously announced acquisition from Synovus Bank of credit card assets and related liabilities of World’s Foremost Bank, a wholly-owned subsidiary of Cabela’s Incorporated (“Cabela’s acquisition”). The Cabela’s acquisition added approximately $5.7 billion to our domestic credit card loans held for investment portfolio as of the acquisition date. See “Note 1—Summary of Significant Accounting Policies” for additional details.

 
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SUMMARY OF SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data and performance from our results of operations for the third quarter and first nine months of 2017 and 2016 and selected comparative balance sheet data as of September 30, 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 September 30,
 
Nine Months Ended September 30,
(Dollars in millions, except per share data and as noted)
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Income statement
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
5,700

 
$
5,277

 
8
 %
 
$
16,647

 
$
15,426

 
8
 %
Non-interest income
 
1,285

 
1,184

 
9

 
3,577

 
3,509

 
2

Total net revenue
 
6,985

 
6,461

 
8

 
20,224

 
18,935

 
7

Provision for credit losses
 
1,833

 
1,588

 
15

 
5,625

 
4,707

 
20

Non-interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Marketing
 
379

 
393

 
(4
)
 
1,210

 
1,236

 
(2
)
Amortization of intangibles
 
61

 
89

 
(31
)
 
184

 
285

 
(35
)
Operating expenses
 
3,127

 
2,879

 
9

 
9,021

 
8,358

 
8

Total non-interest expense
 
3,567

 
3,361

 
6

 
10,415

 
9,879

 
5

Income from continuing operations before income taxes
 
1,585

 
1,512

 
5

 
4,184

 
4,349

 
(4
)
Income tax provision
 
448

 
496

 
(10
)
 
1,205

 
1,372

 
(12
)
Income from continuing operations, net of tax
 
1,137

 
1,016

 
12

 
2,979

 
2,977

 
—

Income (loss) from discontinued operations, net of tax
 
(30
)
 
(11
)
 
173

 
(26
)
 
(17
)
 
53

Net income
 
1,107

 
1,005

 
10

 
2,953

 
2,960

 
—

Dividends and undistributed earnings allocated to participating securities
 
(8
)
 
(6
)
 
33

 
(21
)
 
(18
)
 
17

Preferred stock dividends
 
(52
)
 
(37
)
 
41

 
(185
)
 
(139
)
 
33

Net income available to common stockholders
 
$
1,047

 
$
962

 
9

 
$
2,747

 
$
2,803

 
(2
)
Common share statistics
 
 

 
 
 
 

 
 
 
 
 
 

Basic earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
2.22

 
$
1.94

 
14
 %
 
$
5.73

 
$
5.50

 
4
 %
Income (loss) from discontinued operations
 
(0.06
)
 
(0.02
)
 
200

 
(0.05
)
 
(0.03
)
 
67

Net income per basic common share
 
$
2.16

 
$
1.92

 
13

 
$
5.68

 
$
5.47

 
4

Diluted earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
2.20

 
$
1.92

 
15

 
$
5.68

 
$
5.45

 
4

Income (loss) from discontinued operations
 
(0.06
)
 
(0.02
)
 
200

 
(0.05
)
 
(0.03
)
 
67

Net income per diluted common share
 
$
2.14

 
$
1.90

 
13

 
$
5.63

 
$
5.42

 
4

Weighted-average common shares outstanding (in millions):
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
484.9

 
501.1

 
(3
)%
 
483.7

 
512.0

 
(6
)%
Diluted
 
489.0

 
505.9

 
(3
)
 
488.1

 
516.8

 
(6
)
Common shares outstanding (period-end, in millions)
 
484.4

 
489.2

 
(1
)
 
484.4

 
489.2

 
(1
)
Dividends paid per common share
 
$
0.40

 
$
0.40

 
—

 
$
1.20

 
$
1.20

 
—

Tangible book value per common share (period-end)(1)
 
63.06

 
59.00

 
7

 
63.06

 
59.00

 
7

Balance sheet (average balances)
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment
 
$
245,822

 
$
235,843

 
4
 %
 
$
243,205

 
$
231,004

 
5
 %
Interest-earning assets
 
322,015

 
310,987

 
4

 
319,497

 
304,423

 
5

Total assets
 
355,191

 
343,153

 
4

 
352,216

 
336,539

 
5

Interest-bearing deposits
 
213,137

 
196,913

 
8

 
213,508

 
195,565

 
9

Total deposits
 
238,843

 
222,251

 
7

 
239,316

 
220,864

 
8

Borrowings
 
54,271

 
60,708

 
(11
)
 
52,159

 
56,292

 
(7
)
Common equity
 
45,816

 
45,314

 
1

 
44,772

 
45,578

 
(2
)
Total stockholders’ equity
 
50,176

 
49,033

 
2

 
49,132

 
49,015

 
—


 
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Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions, except per share data and as noted)
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Selected performance metrics
 
 

 
 

 
 

 
 
 
 
 
 

Purchase volume(2)
 
$
84,505

 
$
78,106

 
8
 %
 
$
240,781

 
$
224,314

 
7
 %
Total net revenue margin(3)
 
8.68
%
 
8.31
%
 
37
bps
 
8.44
%
 
8.29
%
 
15
bps
Net interest margin(4)
 
7.08

 
6.79

 
29

 
6.95

 
6.76

 
19

Return on average assets
 
1.28

 
1.18

 
10

 
1.13

 
1.18

 
(5
)
Return on average tangible assets(5)
 
1.34

 
1.24

 
10

 
1.18

 
1.24

 
(6
)
Return on average common equity(6)
 
9.40

 
8.59

 
81

 
8.26

 
8.25

 
1

Return on average tangible common equity (“TCE”)(7)
 
14.11

 
13.06

 
105

 
12.56

 
12.54

 
2

Equity-to-assets ratio(8)
 
14.13

 
14.29

 
(16
)
 
13.95

 
14.56

 
(61
)
Non-interest expense as a percentage of average loans held for investment(9)
 
5.80

 
5.70

 
10

 
5.71

 
5.70

 
1

Efficiency ratio(10)
 
51.07

 
52.02

 
(95
)
 
51.50

 
52.17

 
(67
)
Effective income tax rate from continuing operations
 
28.3

 
32.8

 
(450
)
 
28.8

 
31.5

 
(270
)
Net charge-offs
 
$
1,606

 
$
1,240

 
30
 %
 
$
4,734

 
$
3,573

 
32
 %
Net charge-off rate(11)
 
2.61
%
 
2.10
%
 
51
bps
 
2.60
%
 
2.06
%
 
54
bps
(Dollars in millions, except as noted)

September 30,
2017
 
December 31,
2016
 
Change
Balance sheet (period-end)
 
 
 
 
 
 
Loans held for investment
 
$
252,422

 
$
245,586

 
3
 %
Interest-earning assets
 
329,002

 
321,807

 
2

Total assets
 
361,402

 
357,033

 
1

Interest-bearing deposits
 
212,956

 
211,266

 
1

Total deposits
 
239,062

 
236,768

 
1

Borrowings
 
59,458

 
60,460

 
(2
)
Common equity
 
45,794

 
43,154

 
6

Total stockholders’ equity
 
50,154

 
47,514

 
6

Credit quality metrics
 
 
 
 
 


Allowance for loan and lease losses
 
$
7,418

 
$
6,503

 
14
 %
Allowance as a percentage of loans held for investment (“allowance coverage ratio”)
 
2.94
%
 
2.65
%
 
29
bps
30+ day performing delinquency rate
 
2.93

 
2.93

 
—

30+ day delinquency rate
 
3.24

 
3.27

 
(3
)
Capital ratios
 
 

 
 
 


Common equity Tier 1 capital(12)
 
10.7
%
 
10.1
%
 
60
bps
Tier 1 capital(12)
 
12.2

 
11.6

 
60

Total capital(12)
 
14.8

 
14.3

 
50

Tier 1 leverage (12)
 
10.5

 
9.9

 
60

Tangible common equity(13)
 
8.8

 
8.1

 
70

Supplementary leverage(12)
 
9.0

 
8.6

 
40

Other
 
 
 
 
 


Employees (period end, in thousands)
 
50.4

 
47.3

 
7
 %
__________
(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.

 
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(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.
EXECUTIVE SUMMARY AND BUSINESS OUTLOOK
Financial Highlights
We reported net income of $1.1 billion ($2.14 per diluted common share) on total net revenue of $7.0 billion and net income of $3.0 billion ($5.63 per diluted common share) on total net revenue of $20.2 billion for the third quarter and first nine months of 2017, respectively. In comparison, we reported net income of $1.0 billion ($1.90 per diluted common share) on total net revenue of $6.5 billion and net income of $3.0 billion ($5.42 per diluted common share) on total net revenue of $18.9 billion for the third quarter and first nine months of 2016, respectively.
Our common equity Tier 1 capital ratio as calculated under the Basel III Standardized Approach, including transition provisions, was 10.7% and 10.1% as of September 30, 2017 and December 31, 2016, respectively. See “MD&A—Capital Management” below for additional information.
On June 28, 2017, we announced that our Board of Directors authorized the repurchase of up to $1.85 billion of shares of our common stock (“2017 Stock Repurchase Program”) from the third quarter of 2017 through the end of the second quarter of 2018. See “MD&A—Capital Management” below for additional information.
Below are additional highlights of our performance in the third quarter and first nine months of 2017. These highlights are generally based on a comparison between the results of the third quarter and first nine months 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 September 30, 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 increased by $102 million to $1.1 billion in the third quarter of 2017 and was substantially flat at $3.0 billion in the first nine months of 2017 primarily driven by:
◦
higher interest income due to growth in our domestic credit card and auto loan portfolios, as well as higher yields as a result of higher interest rates;
◦
lower income tax provision due to a lower effective income tax rate primarily driven by increases in the relative benefit of tax exempt income and tax credits; and
◦
higher non-interest income primarily attributable to gains from the sale of investment securities as a result of portfolio repositioning and higher net interchange fees primarily driven by higher purchase volume.
These drivers were partially offset by:
◦
higher provision for credit losses primarily driven by higher charge-offs;

 
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◦
higher operating expenses as a result of (i) loan growth; (ii) continued investments in technology and infrastructure; and (iii) restructuring activities, which primarily consisted of severance and related benefits pursuant to our ongoing benefit programs, that are the result of exiting certain business activities and locations; and
◦
higher interest expense due to the net effect of higher interest rates, as well as growth and mix changes in our interest-bearing liabilities.
•
Loans Held for Investment:
◦
Period-end loans held for investment increased by $6.8 billion to $252.4 billion as of September 30, 2017 from December 31, 2016 primarily due to growth in our auto and domestic credit card loan portfolios, including loans acquired in the Cabela’s acquisition, partially offset by expected seasonal paydowns in our domestic credit card loan portfolio and run-off of our acquired home loan portfolio.
◦
Average loans held for investment increased by $10.0 billion to $245.8 billion in the third quarter of 2017 compared to the third quarter of 2016, and increased by $12.2 billion to $243.2 billion in the first nine months of 2017 compared to the first nine months of 2016, primarily driven by growth in our auto, domestic credit card 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 51 basis points to 2.61% in the third quarter of 2017 compared to the third quarter of 2016, and increased by 54 basis points to 2.60% in the first nine months of 2017 compared to the first nine months of 2016, primarily due to growth and seasoning of recent domestic credit card loan originations and higher losses in our auto loan portfolio due to recent growth and declines in used car auction prices, as well as higher charge-offs in our taxi medallion lending portfolio.
Our 30+ day delinquency rate decreased by 3 basis points to 3.24% as of September 30, 2017 from December 31, 2016 primarily due to growth in our domestic credit card and auto loan portfolios, as well as the impact of the transfer of certain nonperforming loans in our home loan portfolio from loans held for investment to loans held for sale, partially offset by higher domestic credit card and auto 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 $915 million to $7.4 billion as of September 30, 2017 from December 31, 2016, and the allowance coverage ratio increased by 29 basis points to 2.94% as of September 30, 2017 from December 31, 2016. The increases were primarily driven by:
◦
an allowance build in our domestic credit card loan portfolio primarily due to increasing losses from recent vintages and portfolio seasoning, as well as an initial quarterly allowance build related to the loans acquired in the Cabela’s acquisition;
◦
an allowance build in our auto loan portfolio due to higher losses associated with growth; and
◦
an allowance build for estimated hurricane-related losses.
These increases were partially offset by an allowance decrease in our commercial loan portfolio due to charge-offs in our taxi medallion lending 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:

 
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•
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.
Total Company Expectations
We expect annual efficiency ratio for 2017, excluding adjusting items, will be in the low 51%s.
We expect 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 expect to deliver solid earnings per share growth in 2018, excluding adjusting items, 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. On June 28, 2017, we announced that our Board of Directors authorized the repurchase of up to $1.85 billion of shares of our common stock from the third quarter of 2017 through the end of the second quarter of 2018 as part of the 2017 Stock Repurchase Program. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, opportunities for growth and 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 at the high end of the high 4%s to around 5% range, whether or not the impact from the Cabela’s acquisition is considered. We expect the impact of the Cabela’s acquisition to be favorable to the full-year 2017 charge-off rate in our Domestic Card business by single-digit basis points. Going forward, we expect the impact of the Cabela’s acquisition to reduce the 30+ day performing delinquency rate in our Domestic Card business by approximately 15 basis points, the charge-off rate in our Domestic Card business by approximately 25 basis points, and revenue margin in our Domestic Card business by approximately 65 basis points, all else being equal. We expect the impacts of the upward pressure on charge-offs as new loan balances in our front book season and become a larger proportion of our overall portfolio relative to the older and highly seasoned back book, will continue to moderate with a small impact in 2018. As the impact of front book seasoning moderates, our delinquency and charge-off rate trends will be driven primarily by broader industry factors.
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 third quarter and first nine months 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

 
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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.

 
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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 third quarter and first nine months of 2017 and 2016.
Table 2: Average Balances, Net Interest Income and Net Interest Margin
 
 
Three Months Ended September 30,
 
 
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
 
$
102,545

 
$
3,995

 
15.58
%
 
$
98,006

 
$
3,598

 
14.68
%
Consumer banking
 
75,645

 
1,280

 
6.77

 
71,957

 
1,150

 
6.39

Commercial banking(2)
 
68,777

 
684

 
3.98

 
67,028

 
584

 
3.49

Other(3)
 
55

 
1

 
7.27

 
76

 
51

 
268.42

Total loans, including loans held for sale
 
247,022

 
5,960

 
9.65

 
237,067

 
5,383

 
9.08

Investment securities
 
69,302

 
431

 
2.49

 
66,291

 
386

 
2.33

Cash equivalents and other interest-earning assets
 
5,691

 
29

 
2.04

 
7,629

 
25

 
1.31

Total interest-earning assets
 
322,015

 
6,420

 
7.97

 
310,987

 
5,794

 
7.45

Cash and due from banks
 
3,336

 
 
 
 
 
3,182

 
 
 
 
Allowance for loan and lease losses
 
(7,180
)
 
 
 
 
 
(5,883
)
 
 
 
 
Premises and equipment, net
 
3,983

 
 
 
 
 
3,655

 
 
 
 
Other assets
 
33,037

 
 
 
 
 
31,212

 
 
 
 
Total assets
 
$
355,191

 
 
 
 
 
$
343,153

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:(3)
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
213,137

 
$
410

 
0.77
%
 
$
196,913

 
$
306

 
0.62
%
Securitized debt obligations
 
17,598

 
85

 
1.93

 
17,389

 
56

 
1.29

Senior and subordinated notes
 
28,753

 
194

 
2.70

 
22,342

 
121

 
2.17

Other borrowings and liabilities
 
9,320

 
31

 
1.33

 
21,840

 
34

 
0.62

Total interest-bearing liabilities
 
268,808

 
720

 
1.07

 
258,484

 
517

 
0.80

Non-interest-bearing deposits
 
25,706

 
 
 
 
 
25,338

 
 
 
 
Other liabilities
 
10,501

 
 
 
 
 
10,298

 
 
 
 
Total liabilities
 
305,015

 
 
 
 
 
294,120

 
 
 
 
Stockholders’ equity
 
50,176

 
 
 
 
 
49,033

 
 
 
 
Total liabilities and stockholders’ equity
 
$
355,191

 
 
 
 
 
$
343,153

 
 
 
 
Net interest income/spread
 
$
5,700

 
6.90

 
 
 
$
5,277

 
6.65

Impact of non-interest-bearing funding
 
0.18

 
 
 
 
 
0.14

Net interest margin
 
7.08
%
 
 
 
 
 
6.79
%

 
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Nine Months Ended September 30,
 
 
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
 
$
101,258

 
$
11,572

 
15.24
%
 
$
95,190

 
$
10,411

 
14.58
%
Consumer banking
 
74,607

 
3,693

 
6.60

 
71,192

 
3,354

 
6.28

Commercial banking(2)
 
68,171

 
1,946

 
3.81

 
65,600

 
1,691

 
3.44

Other(3)
 
61

 
44

 
96.17

 
82

 
160

 
260.16

Total loans, including loans held for sale
 
244,097

 
17,255

 
9.43

 
232,064

 
15,616

 
8.97

Investment securities
 
68,862

 
1,280

 
2.48

 
65,735

 
1,206

 
2.45

Cash equivalents and other interest-earning assets
 
6,538

 
83

 
1.69

 
6,624

 
60

 
1.21

Total interest-earning assets
 
319,497

 
18,618

 
7.77

 
304,423

 
16,882

 
7.39

Cash and due from banks
 
3,378

 
 
 
 
 
3,222

 
 
 
 
Allowance for loan and lease losses
 
(6,894
)
 
 
 
 
 
(5,481
)
 
 
 
 
Premises and equipment, net
 
3,879

 
 
 
 
 
3,647

 
 
 
 
Other assets
 
32,356

 
 
 
 
 
30,728

 
 
 
 
Total assets
 
$
352,216

 
 
 
 
 
$
336,539

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:(3)
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
213,508

 
$
1,145

 
0.72
%
 
$
195,565

 
$
881

 
0.60
%
Securitized debt obligations
 
17,726

 
236

 
1.78

 
15,997

 
151

 
1.26

Senior and subordinated notes
 
27,140

 
522

 
2.56

 
22,019

 
338

 
2.05

Other borrowings and liabilities
 
8,434

 
68

 
1.08

 
19,099

 
86

 
0.60

Total interest-bearing liabilities
 
266,808

 
1,971

 
0.98

 
$
252,680

 
1,456

 
0.77

Non-interest-bearing deposits
 
25,808

 
 
 
 
 
25,299

 
 
 
 
Other liabilities
 
10,468

 
 
 
 
 
9,545

 
 
 
 
Total liabilities
 
303,084

 
 
 
 
 
287,524

 
 
 
 
Stockholders’ equity
 
49,132

 
 
 
 
 
49,015

 
 
 
 
Total liabilities and stockholders’ equity
 
$
352,216

 
 
 
 
 
$
336,539

 
 
 
 
Net interest income/spread
 
$
16,647

 
6.79

 
 
 
$
15,426

 
6.62

Impact of non-interest-bearing funding
 
0.16

 
 
 
 
 
0.14

Net interest margin
 
6.95
%
 
 
 
 
 
6.76
%
__________
(1)  
Past due fees included in interest income totaled approximately $413 million and $1.2 billion in the third quarter and first nine months of 2017, respectively, and $390 million and $1.1 billion in the third quarter and first nine months of 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.

 
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Net interest income increased by $423 million to $5.7 billion in the third quarter of 2017 compared to the third quarter of 2016 and increased by $1.2 billion to $16.6 billion in the first nine months of 2017 compared to the first nine months of 2016. Net interest margin increased by 29 basis points to 7.08% in the third quarter of 2017 compared to the third quarter of 2016 and increased by 19 basis points to 6.95% in the first nine months of 2017 compared to the first nine months of 2016. These increases were primarily driven by:
•
growth in our domestic credit card and auto loan portfolios; and
•
higher yields as a result of higher interest rates.
These increases were partially offset by:
•
higher interest expense due to the net effect of higher interest rates, as well as growth and mix changes in our interest-bearing liabilities; and
•
one less day in the first nine months of 2017.
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 September 30,
 
Nine Months Ended September 30,
 
 
2017 vs. 2016
 
2017 vs. 2016
(Dollars in millions)
 
Total Variance
 
Volume
 
Rate
 
Total Variance
 
Volume
 
Rate
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Credit card
 
$
397

 
$
171

 
$
226

 
$
1,161

 
$
681

 
$
480

Consumer banking
 
130

 
60

 
70

 
339

 
165

 
174

Commercial banking(2)
 
100

 
16

 
84

 
255

 
68

 
187

Other
 
(50
)
 
(10
)
 
(40
)
 
(116
)
 
(32
)
 
(84
)
Total loans, including loans held for sale
 
577

 
237

 
340

 
1,639

 
882

 
757

Investment securities
 
45

 
18

 
27

 
74

 
58

 
16

Cash equivalents and other interest-earning assets
 
4

 
(7
)
 
11

 
23

 
(1
)
 
24

Total interest income
 
626

 
248

 
378

 
1,736

 
939

 
797

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
104

 
26

 
78

 
264

 
85

 
179

Securitized debt obligations
 
29

 
1

 
28

 
85

 
18

 
67

Senior and subordinated notes
 
73

 
39

 
34

 
184

 
87

 
97

Other borrowings and liabilities
 
(3
)
 
(19
)
 
16

 
(18
)
 
(48
)
 
30

Total interest expense
 
203

 
47

 
156

 
515

 
142

 
373

Net interest income
 
$
423

 
$
201

 
$
222

 
$
1,221

 
$
797

 
$
424

__________
(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.

 
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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.
Table 4 displays the components of non-interest income for the third quarter and first nine months of 2017 and 2016.
Table 4: Non-Interest Income
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
 
2017
 
2016(1)
 
2017
 
2016(1)
Interchange fees, net
 
$
662

 
$
603

 
$
1,908

 
$
1,828

Service charges and other customer-related fees
 
414

 
417

 
1,203

 
1,233

Net securities gains (losses)
 
68

 
1

 
64

 
(7
)
Other non-interest income:
 
 
 
 
 
 
 
 
Benefit for mortgage representation and warranty losses(2)
 
1

 
—

 
26

 
2

Net fair value gains on free-standing derivatives
 
36

 
39

 
76

 
91

Other
 
104

 
124

 
300

 
362

Total other non-interest income
 
141

 
163

 
402

 
455

Total non-interest income
 
$
1,285

 
$
1,184

 
$
3,577

 
$
3,509

__________
(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 compared to previously reported results were (i) an increase to Service charges and other customer-related fees of $30 million and $71 million for the three and nine months ended September 30, 2016, respectively; and (ii) a decrease to Other non-interest income of $31 million and $87 million for the three and nine months ended September 30, 2016, respectively. 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 increased by $101 million to $1.3 billion in the third quarter of 2017 compared to the third quarter of 2016, and increased by $68 million to $3.6 billion in the first nine months of 2017 compared to the first nine months of 2016 primarily due to:
•
gains from the sale of investment securities as a result of portfolio repositioning; and
•
an increase in net interchange fees primarily due to higher purchase volume.
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 $1.8 billion and $5.6 billion in the third quarter and first nine months of 2017, respectively, compared to $1.6 billion and $4.7 billion in the third quarter and first nine months of 2016, respectively. The provision for credit losses as a percentage of net interest income was 32.2% and 33.8% in the third quarter and first nine months of 2017, respectively, compared to 30.1% and 30.5% in the third quarter and first nine months of 2016, respectively.

 
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Our provision for credit losses increased by $245 million in the third quarter of 2017 compared to the third quarter of 2016 primarily driven by:
•
higher charge-offs in our domestic credit card loan portfolio due to growth and portfolio seasoning;
•
higher charge-offs in our commercial loan portfolio due to increased charge-offs in our taxi medallion lending portfolio resulting from declines in taxi medallion values;
•
an allowance build for estimated hurricane-related losses;
•
an initial quarterly allowance build related to the loans acquired in the Cabela’s acquisition; and
•
higher charge-offs in our auto loan portfolio due to recent growth and declines in used car auction prices.
Our provision for credit losses increased by $918 million in the first nine months of 2017 compared to the first nine months of 2016 primarily driven by:
•
higher charge-offs in our domestic credit card loan portfolio due to growth and portfolio seasoning;
•
a larger allowance build in our domestic credit card loan portfolio due to increasing losses from recent vintages and portfolio seasoning, as well as an initial quarterly allowance build related to the loans acquired in the Cabela’s acquisition; and
•
higher charge-offs in our auto loan portfolio due to recent growth and declines in used car auction prices.
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 third quarter and first nine months of 2017 and 2016.
Table 5: Non-Interest Expense
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
 
2017
 
2016(1)
 
2017
 
2016(1)
Salaries and associate benefits
 
$
1,524

 
$
1,317

 
$
4,378

 
$
3,866

Occupancy and equipment
 
471

 
499

 
1,416

 
1,422

Marketing
 
379

 
393

 
1,210

 
1,236

Professional services
 
297

 
257

 
823

 
762

Communications and data processing
 
294

 
291

 
871

 
873

Amortization of intangibles
 
61

 
89

 
184

 
285

Other non-interest expense:
 
 
 
 
 
 
 
 
Collections
 
93

 
76

  
266

 
234

Fraud losses
 
89

 
77

  
245

 
256

Bankcard, regulatory and other fee assessments
 
156

 
163

  
438

 
399

Other
 
203

 
199

  
584

 
546

Total other non-interest expense
 
541

 
515

 
1,533

 
1,435

Total non-interest expense
 
$
3,567

 
$
3,361

 
$
10,415

 
$
9,879

__________
(1) 
We made certain non-interest expense reclassifications in the fourth quarter of 2016 to conform to the current period presentation. The net effects of the reclassifications for the three and nine months ended September 30, 2016 compared to previously reported results were increases to Communications and

 
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data processing expense of $39 million and $116 million, respectively, with corresponding decreases 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 $206 million to $3.6 billion in the third quarter of 2017 compared to the third quarter of 2016, and increased by $536 million to $10.4 billion in the first nine months of 2017 compared to the first nine months of 2016 primarily due to:
•
higher operating expenses associated with loan growth, as well as continued investments in technology and infrastructure; and
•
restructuring activities, which primarily consisted of severance and related benefits pursuant to our ongoing benefit programs, that are the result of exiting certain business activities and locations.
These increases were partially offset by lower amortization of intangibles.
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. Loss from discontinued operations, net of tax, was $30 million and $26 million in the third quarter and first nine months of 2017, respectively, and $11 million and $17 million in the third quarter and first nine months of 2016, respectively.
We recorded a provision related to our mortgage representation and warranty reserve, net of tax, of $10 million ($13 million before tax) in the third quarter of 2017. We had a benefit, net of tax, of $30 million ($48 million before tax) in the first nine months of 2017 primarily as a result of a release in this reserve due to favorable legal developments.
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 $448 million (28.3% effective income tax rate) and $1.2 billion (28.8% effective income tax rate) in the third quarter and first nine months of 2017, respectively, compared to $496 million (32.8% effective income tax rate) and $1.4 billion (31.5% effective income tax rate) in the third quarter and first nine months of 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 third quarter of 2017 and first nine months of 2017 compared to the third quarter of 2016 and first nine months of 2016 was primarily due to:
•
increases in the relative benefit of tax exempt income and tax credits;
•
increased benefits of lower taxed foreign earnings; and
•
increased discrete tax benefits.
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.

 
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CONSOLIDATED BALANCE SHEETS ANALYSIS
Total assets increased by $4.4 billion to $361.4 billion as of September 30, 2017 from December 31, 2016 primarily driven by an increase in loans held for investment due to growth in our auto and domestic credit card loan portfolios, including loans acquired in the Cabela’s acquisition. This increase was partially offset by expected seasonal paydowns in our domestic credit card loan portfolio.
Total liabilities increased by $1.7 billion to $311.2 billion as of September 30, 2017 from December 31, 2016 primarily driven by:
•
an increase in deposits; and
•
an increase in our senior and subordinated notes.
These drivers were partially offset by a decrease in our Federal Home Loan Banks (“FHLB”) advances outstanding, which is included in other debt.
Stockholders’ equity increased by $2.6 billion to $50.2 billion as of September 30, 2017 from December 31, 2016 primarily due to our net income of $3.0 billion in the first nine months of 2017.
This increase was partially offset by:
•
$773 million of dividend payments to our common and preferred stockholders; and
•
$236 million of treasury stock purchases.
The following is a discussion of material changes in the major components of our assets and liabilities during the first nine months 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, our customers, and our market risk exposure in accordance with our risk appetite.

 
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Capital One Financial Corporation (COF)

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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 92% and 91% of our total investment securities as of September 30, 2017 and December 31, 2016, respectively.
The fair value of our available for sale securities portfolio was $39.7 billion as of September 30, 2017, a decrease of $995 million from December 31, 2016. The decrease in fair value was primarily due to sales and paydowns outpacing purchases, partially offset by fair value gains as a result of declines in long-term interest rates. The fair value of our held to maturity securities portfolio was $29.3 billion as of September 30, 2017, an increase of $3.1 billion from December 31, 2016. The increase in fair value was primarily driven by purchases outpacing paydowns.
Gross unrealized gains on our available for sale securities portfolio were substantially flat at $590 million as of September 30, 2017 compared to $539 million as of December 31, 2016. Gross unrealized losses on this portfolio decreased to $287 million as of September 30, 2017 compared to $535 million as of December 31, 2016 primarily due to declines in long-term interest rates. Of the $287 million gross unrealized losses as of September 30, 2017, $193 million was related to securities that had been in a loss position for 12 months or longer.

 
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Capital One Financial Corporation (COF)

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Table 6 presents the amortized cost, carrying value and fair value for the major categories of our investment securities portfolio as of September 30, 2017 and December 31, 2016.
Table 6: Investment Securities
 
 
September 30, 2017
 
December 31, 2016
(Dollars in millions)
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Investment securities available for sale:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
5,110

 
$
5,139

 
$
5,103

 
$
5,065

RMBS:
 
 
 
 
 
 
 
 
Agency(1)
 
26,186

 
26,039

 
26,830

 
26,527

Non-agency
 
1,797

 
2,199

 
2,349

 
2,722

Total RMBS
 
27,983

 
28,238

 
29,179

 
29,249

CMBS:
 
 
 
 
 
 
 
 
Agency(1)
 
3,033

 
3,021

 
3,335

 
3,304

Non-agency
 
1,783

 
1,808

 
1,676

 
1,684

Total CMBS
 
4,816

 
4,829

 
5,011

 
4,988

Other ABS(2)
 
546

 
547

 
714

 
714

Other securities(3)
 
984

 
989

 
726

 
721

Total investment securities available for sale
 
$
39,439

 
$
39,742

 
$
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
 
24,795

 
25,397

 
22,125

 
22,573

Agency CMBS
 
3,656

 
3,731

 
3,388

 
3,424

Total investment securities held to maturity
 
$