CAPITAL ONE FINANCIAL CORP - Quarter Report: 2017 June (Form 10-Q)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 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 |
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CAPITAL ONE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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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 June 30, 2017, there were 483,692,646 shares of the registrant’s Common Stock outstanding.
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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) |
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 June 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 June 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 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. |
1 | Capital One Financial Corporation (COF) |
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 from Cabela’s wholly-owned subsidiary, World’s Foremost Bank (“WFB”). 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 Synovus Bank, a subsidiary of Synovus Financial Corp. (“Synovus”) and Cabela’s under which Synovus will acquire certain assets and assume certain liabilities of 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 approval by Synovus’s primary banking regulators. The closing of these transactions is 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 six months of 2017.
2 | Capital One Financial Corporation (COF) |
SUMMARY OF SELECTED FINANCIAL DATA |
The following table presents selected consolidated financial data and performance from our results of operations for the second quarter and first six months of 2017 and 2016 and selected comparative balance sheet data as of June 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 June 30, | Six Months Ended June 30, | |||||||||||||||||||||
(Dollars in millions, except per share data and as noted) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||
Income statement | ||||||||||||||||||||||
Net interest income | $ | 5,473 | $ | 5,093 | 7% | $ | 10,947 | $ | 10,149 | 8% | ||||||||||||
Non-interest income | 1,231 | 1,161 | 6 | 2,292 | 2,325 | (1 | ) | |||||||||||||||
Total net revenue | 6,704 | 6,254 | 7 | 13,239 | 12,474 | 6 | ||||||||||||||||
Provision for credit losses | 1,800 | 1,592 | 13 | 3,792 | 3,119 | 22 | ||||||||||||||||
Non-interest expense: | ||||||||||||||||||||||
Marketing | 435 | 415 | 5 | 831 | 843 | (1 | ) | |||||||||||||||
Amortization of intangibles | 61 | 95 | (36 | ) | 123 | 196 | (37 | ) | ||||||||||||||
Operating expenses | 2,918 | 2,785 | 5 | 5,894 | 5,479 | 8 | ||||||||||||||||
Total non-interest expense | 3,414 | 3,295 | 4 | 6,848 | 6,518 | 5 | ||||||||||||||||
Income from continuing operations before income taxes | 1,490 | 1,367 | 9 | 2,599 | 2,837 | (8 | ) | |||||||||||||||
Income tax provision | 443 | 424 | 4 | 757 | 876 | (14 | ) | |||||||||||||||
Income from continuing operations, net of tax | 1,047 | 943 | 11 | 1,842 | 1,961 | (6 | ) | |||||||||||||||
Income (loss) from discontinued operations, net of tax | (11 | ) | (1 | ) | ** | 4 | (6 | ) | ** | |||||||||||||
Net income | 1,036 | 942 | 10 | 1,846 | 1,955 | (6 | ) | |||||||||||||||
Dividends and undistributed earnings allocated to participating securities | (8 | ) | (6 | ) | 33 | (13 | ) | (12 | ) | 8 | ||||||||||||
Preferred stock dividends | (80 | ) | (65 | ) | 23 | (133 | ) | (102 | ) | 30 | ||||||||||||
Net income available to common stockholders | $ | 948 | $ | 871 | 9 | $ | 1,700 | $ | 1,841 | (8 | ) | |||||||||||
Common share statistics | ||||||||||||||||||||||
Basic earnings per common share: | ||||||||||||||||||||||
Net income from continuing operations | $ | 1.98 | $ | 1.70 | 16% | $ | 3.51 | $ | 3.57 | (2)% | ||||||||||||
Income (loss) from discontinued operations | (0.02 | ) | — | ** | 0.01 | (0.01 | ) | ** | ||||||||||||||
Net income per basic common share | $ | 1.96 | $ | 1.70 | 15 | $ | 3.52 | $ | 3.56 | (1 | ) | |||||||||||
Diluted earnings per common share: | ||||||||||||||||||||||
Net income from continuing operations | $ | 1.96 | $ | 1.69 | 16 | $ | 3.48 | $ | 3.53 | (1 | ) | |||||||||||
Income (loss) from discontinued operations | (0.02 | ) | — | ** | 0.01 | (0.01 | ) | ** | ||||||||||||||
Net income per diluted common share | $ | 1.94 | $ | 1.69 | 15 | $ | 3.49 | $ | 3.52 | (1 | ) | |||||||||||
Weighted-average common shares outstanding (in millions): | ||||||||||||||||||||||
Basic | 484.0 | 511.7 | (5)% | 483.1 | 517.6 | (7)% | ||||||||||||||||
Diluted | 488.1 | 516.5 | (5 | ) | 487.7 | 522.3 | (7 | ) | ||||||||||||||
Common shares outstanding (period-end, in millions) | 483.7 | 505.9 | (4 | ) | 483.7 | 505.9 | (4 | ) | ||||||||||||||
Dividends paid per common share | $ | 0.40 | $ | 0.40 | — | $ | 0.80 | $ | 0.80 | — | ||||||||||||
Tangible book value per common share (period-end)(1) | 60.94 | 57.84 | 5 | 60.94 | 57.84 | 5 | ||||||||||||||||
Balance sheet (average balances) | ||||||||||||||||||||||
Loans held for investment | $ | 242,241 | $ | 230,379 | 5% | $ | 241,875 | $ | 228,557 | 6% | ||||||||||||
Interest-earning assets | 318,078 | 302,764 | 5 | 318,215 | 301,106 | 6 | ||||||||||||||||
Total assets | 349,891 | 334,479 | 5 | 350,761 | 333,197 | 5 | ||||||||||||||||
Interest-bearing deposits | 214,412 | 195,641 | 10 | 213,696 | 194,883 | 10 | ||||||||||||||||
Total deposits | 240,550 | 221,146 | 9 | 239,555 | 220,163 | 9 | ||||||||||||||||
Borrowings | 48,838 | 54,359 | (10 | ) | 51,085 | 54,060 | (6 | ) | ||||||||||||||
Common equity | 44,645 | 45,640 | (2 | ) | 44,241 | 45,711 | (3 | ) |
3 | Capital One Financial Corporation (COF) |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||
(Dollars in millions, except per share data and as noted) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||
Total stockholders’ equity | 49,005 | 48,934 | — | 48,602 | 49,007 | (1 | ) | |||||||||||||||
Selected performance metrics | ||||||||||||||||||||||
Purchase volume(2) | $ | 83,079 | $ | 78,019 | 6% | $ | 156,276 | $ | 146,208 | 7% | ||||||||||||
Total net revenue margin(3) | 8.43% | 8.26% | 17 | bps | 8.32% | 8.29% | 3 | bps | ||||||||||||||
Net interest margin(4) | 6.88 | 6.73 | 15 | 6.88 | 6.74 | 14 | ||||||||||||||||
Return on average assets | 1.20 | 1.13 | 7 | 1.05 | 1.18 | (13 | ) | |||||||||||||||
Return on average tangible assets(5) | 1.25 | 1.18 | 7 | 1.10 | 1.24 | (14 | ) | |||||||||||||||
Return on average common equity(6) | 8.59 | 7.64 | 95 | 7.67 | 8.08 | (41 | ) | |||||||||||||||
Return on average tangible common equity (“TCE”)(7) | 13.09 | 11.61 | 148 | 11.75 | 12.28 | (53 | ) | |||||||||||||||
Equity-to-assets ratio(8) | 14.01 | 14.63 | (62 | ) | 13.86 | 14.71 | (85 | ) | ||||||||||||||
Non-interest expense as a percentage of average loans held for investment(9) | 5.64 | 5.72 | (8 | ) | 5.66 | 5.70 | (4 | ) | ||||||||||||||
Efficiency ratio(10) | 50.92 | 52.69 | (177 | ) | 51.73 | 52.25 | (52 | ) | ||||||||||||||
Effective income tax rate from continuing operations | 29.7 | 31.0 | (130 | ) | 29.1 | 30.9 | (180 | ) | ||||||||||||||
Net charge-offs | $ | 1,618 | $ | 1,155 | 40% | $ | 3,128 | $ | 2,333 | 34% | ||||||||||||
Net charge-off rate(11) | 2.67% | 2.01% | 66 | bps | 2.59% | 2.04% | 55 | bps |
(Dollars in millions, except as noted) | June 30, 2017 | December 31, 2016 | Change | ||||||||
Balance sheet (period-end) | |||||||||||
Loans held for investment | $ | 244,302 | $ | 245,586 | (1)% | ||||||
Interest-earning assets | 319,286 | 321,807 | (1 | ) | |||||||
Total assets | 350,593 | 357,033 | (2 | ) | |||||||
Interest-bearing deposits | 213,810 | 211,266 | 1 | ||||||||
Total deposits | 239,763 | 236,768 | 1 | ||||||||
Borrowings | 49,954 | 60,460 | (17 | ) | |||||||
Common equity | 44,777 | 43,154 | 4 | ||||||||
Total stockholders’ equity | 49,137 | 47,514 | 3 | ||||||||
Credit quality metrics | |||||||||||
Allowance for loan and lease losses | $ | 7,170 | $ | 6,503 | 10% | ||||||
Allowance as a percentage of loans held for investment (“allowance coverage ratio”) | 2.93% | 2.65% | 28 | bps | |||||||
30+ day performing delinquency rate | 2.69 | 2.93 | (24 | ) | |||||||
30+ day delinquency rate | 2.99 | 3.27 | (28 | ) | |||||||
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) | 14.9 | 14.3 | 60 | ||||||||
Tier 1 leverage (12) | 10.3 | 9.9 | 40 | ||||||||
Tangible common equity(13) | 8.8 | 8.1 | 70 | ||||||||
Supplementary leverage(12) | 8.9 | 8.6 | 30 | ||||||||
Other | |||||||||||
Employees (period end, in thousands) | 49.9 | 47.3 | 5% |
(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) |
(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 $1.0 billion ($1.94 per diluted common share) on total net revenue of $6.7 billion and net income of $1.8 billion ($3.49 per diluted common share) on total net revenue of $13.2 billion for the second quarter and first six months of 2017, respectively. In comparison, we reported net income of $942 million ($1.69 per diluted common share) on total net revenue of $6.3 billion and net income of $2.0 billion ($3.52 per diluted common share) on total net revenue of $12.5 billion for the second quarter and first six 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 June 30, 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 second quarter of 2017, we repurchased approximately $2.2 billion of common stock as part of the 2016 Stock Repurchase Program. Additionally, 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 second quarter and first six months of 2017. These highlights are generally based on a comparison between the results of the second quarter and first six 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 June 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 $94 million to $1.0 billion in the second quarter of 2017 primarily driven by: |
◦ | higher interest income due to growth in our auto and domestic credit card loan portfolios, as well as higher yields as a result of higher interest rates; and |
◦ | higher non-interest income primarily attributable to higher net interchange fees driven by higher purchase volume. |
These increases were partially offset by:
◦ | higher provision for credit losses primarily driven by higher charge-offs, partially offset by smaller allowance builds in our domestic credit card and commercial loan portfolios; |
5 | Capital One Financial Corporation (COF) |
◦ | higher interest expense due to higher interest rates and growth in our interest-bearing liabilities; and |
◦ | higher operating expenses associated with loan growth, as well as continued investments in technology and infrastructure. |
Our net income decreased by $109 million to $1.8 billion in the first six months of 2017 primarily due to:
◦ | higher provision for credit losses primarily driven by higher charge-offs; |
◦ | higher operating expenses associated with loan growth, as well as continued investments in technology and infrastructure; and |
◦ | higher interest expense due to higher interest rates and growth in our interest-bearing liabilities. |
These higher expenses were partially offset by higher interest income due to growth in our auto and domestic credit card loan portfolios, as well as higher yields as a result of higher interest rates.
• | Loans Held for Investment: |
◦ | Period-end loans held for investment decreased by $1.3 billion to $244.3 billion as of June 30, 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, domestic credit card and commercial loan portfolios. |
◦ | Average loans held for investment increased by $11.9 billion to $242.2 billion in the second quarter of 2017 compared to the second quarter of 2016, and increased by $13.3 billion to $241.9 billion in the first six months of 2017 compared to the first six 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 66 basis points to 2.67% in the second quarter of 2017 compared to the second quarter of 2016, and increased by 55 basis points to 2.59% in the first six months of 2017 compared to the first six months of 2016, primarily due to growth and seasoning of recent domestic credit card loan originations, as well as higher losses in our auto loan portfolio due to recent growth and declines in used car auction prices, as well as changes in our charge-off practices for the treatment of certain loans within our consumer banking loan portfolio. |
Our 30+ day delinquency rate decreased by 28 basis points to 2.99% as of June 30, 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 $667 million to $7.2 billion as of June 30, 2017 from December 31, 2016, and the allowance coverage ratio increased by 28 basis points to 2.93% as of June 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 loss expectations on recent vintages and portfolio seasoning; and |
◦ | an allowance build in our auto loan portfolio due to higher losses associated with growth. |
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:
6 | Capital One Financial Corporation (COF) |
• | 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
All expectations herein exclude any potential impacts of the anticipated Cabela’s acquisition, which is subject to regulatory approval.
We expect annual efficiency ratio for 2017, excluding adjusting items, will be in the 51%s, plus or minus a reasonable margin of volatility.
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 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 in the high 4%s to around 5%, with quarterly variability. We continue to 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 moderate in the second half of 2017, with a small impact beyond 2017.
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. Beginning in the third quarter of 2017 and continuing into 2018, we expect changes in our charge-off practices for certain loans to increase annualized Auto charge-off rates by 15 to 20 basis points, after which the effect begins to reverse over time.
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 second quarter and first six 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,
7 | Capital One Financial Corporation (COF) |
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.
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 second quarter and first six months of 2017 and 2016.
Table 2: Average Balances, Net Interest Income and Net Interest Margin
Three Months Ended June 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 | $ | 100,043 | $ | 3,787 | 15.14 | % | $ | 94,374 | $ | 3,420 | 14.50 | % | ||||||||||
Consumer banking | 74,644 | 1,223 | 6.55 | 71,170 | 1,116 | 6.27 | ||||||||||||||||
Commercial banking(2) | 68,220 | 647 | 3.79 | 65,872 | 567 | 3.44 | ||||||||||||||||
Other(3) | 60 | 12 | 80.00 | 80 | 45 | 225.00 | ||||||||||||||||
Total loans, including loans held for sale | 242,967 | 5,669 | 9.33 | 231,496 | 5,148 | 8.90 | ||||||||||||||||
Investment securities | 68,857 | 433 | 2.52 | 65,754 | 405 | 2.46 | ||||||||||||||||
Cash equivalents and other interest-earning assets | 6,254 | 26 | 1.66 | 5,514 | 18 | 1.31 | ||||||||||||||||
Total interest-earning assets | 318,078 | 6,128 | 7.71 | 302,764 | 5,571 | 7.36 | ||||||||||||||||
Cash and due from banks | 3,314 | 3,129 | ||||||||||||||||||||
Allowance for loan and lease losses | (6,982 | ) | (5,425 | ) | ||||||||||||||||||
Premises and equipment, net | 3,855 | 3,645 | ||||||||||||||||||||
Other assets | 31,626 | 30,366 | ||||||||||||||||||||
Total assets | $ | 349,891 | $ | 334,479 | ||||||||||||||||||
Liabilities and stockholders’ equity: | ||||||||||||||||||||||
Interest-bearing liabilities:(3) | ||||||||||||||||||||||
Deposits | $ | 214,412 | $ | 382 | 0.71 | % | $ | 195,641 | $ | 292 | 0.60 | % | ||||||||||
Securitized debt obligations | 18,400 | 82 | 1.78 | 15,226 | 47 | 1.23 | ||||||||||||||||
Senior and subordinated notes | 27,821 | 179 | 2.57 | 21,717 | 111 | 2.04 | ||||||||||||||||
Other borrowings and liabilities | 3,656 | 12 | 1.31 | 18,255 | 28 | 0.61 | ||||||||||||||||
Total interest-bearing liabilities | 264,289 | 655 | 0.99 | 250,839 | 478 | 0.76 | ||||||||||||||||
Non-interest-bearing deposits | 26,138 | 25,505 | ||||||||||||||||||||
Other liabilities | 10,459 | 9,201 | ||||||||||||||||||||
Total liabilities | 300,886 | 285,545 | ||||||||||||||||||||
Stockholders’ equity | 49,005 | 48,934 | ||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 349,891 | $ | 334,479 | ||||||||||||||||||
Net interest income/spread | $ | 5,473 | 6.72 | $ | 5,093 | 6.60 | ||||||||||||||||
Impact of non-interest-bearing funding | 0.16 | 0.13 | ||||||||||||||||||||
Net interest margin | 6.88% | 6.73 | % |
8 | Capital One Financial Corporation (COF) |
Six Months Ended June 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 | $ | 100,603 | $ | 7,577 | 15.06 | % | $ | 93,766 | $ | 6,813 | 14.53 | % | ||||||||||
Consumer banking | 74,081 | 2,413 | 6.51 | 70,805 | 2,204 | 6.23 | ||||||||||||||||
Commercial banking(2) | 67,863 | 1,262 | 3.72 | 64,878 | 1,107 | 3.41 | ||||||||||||||||
Other(3) | 63 | 43 | 136.51 | 85 | 109 | 256.47 | ||||||||||||||||
Total loans, including loans held for sale | 242,610 | 11,295 | 9.31 | 229,534 | 10,233 | 8.92 | ||||||||||||||||
Investment securities | 68,637 | 849 | 2.47 | 65,455 | 820 | 2.51 | ||||||||||||||||
Cash equivalents and other interest-earning assets | 6,968 | 54 | 1.55 | 6,117 | 35 | 1.14 | ||||||||||||||||
Total interest-earning assets | 318,215 | 12,198 | 7.67 | 301,106 | 11,088 | 7.36 | ||||||||||||||||
Cash and due from banks | 3,400 | 3,244 | ||||||||||||||||||||
Allowance for loan and lease losses | (6,749 | ) | (5,278 | ) | ||||||||||||||||||
Premises and equipment, net | 3,826 | 3,643 | ||||||||||||||||||||
Other assets | 32,069 | 30,482 | ||||||||||||||||||||
Total assets | $ | 350,761 | $ | 333,197 | ||||||||||||||||||
Liabilities and stockholders’ equity: | ||||||||||||||||||||||
Interest-bearing liabilities:(3) | ||||||||||||||||||||||
Deposits | $ | 213,696 | $ | 735 | 0.69% | $ | 194,883 | $ | 575 | 0.59% | ||||||||||||
Securitized debt obligations | 17,791 | 151 | 1.70 | 15,293 | 95 | 1.24 | ||||||||||||||||
Senior and subordinated notes | 26,321 | 328 | 2.49 | 21,855 | 217 | 1.99 | ||||||||||||||||
Other borrowings and liabilities | 7,981 | 37 | 0.93 | 17,716 | 52 | 0.59 | ||||||||||||||||
Total interest-bearing liabilities | 265,789 | 1,251 | 0.94 | $ | 249,747 | 939 | 0.75 | |||||||||||||||
Non-interest-bearing deposits | 25,859 | 25,280 | ||||||||||||||||||||
Other liabilities | 10,511 | 9,163 | ||||||||||||||||||||
Total liabilities | 302,159 | 284,190 | ||||||||||||||||||||
Stockholders’ equity | 48,602 | 49,007 | ||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 350,761 | $ | 333,197 | ||||||||||||||||||
Net interest income/spread | $ | 10,947 | 6.73 | $ | 10,149 | 6.61 | ||||||||||||||||
Impact of non-interest-bearing funding | 0.15 | 0.13 | ||||||||||||||||||||
Net interest margin | 6.88% | 6.74 | % |
(1) | Past due fees included in interest income totaled approximately $382 million and $766 million in the second quarter and first six months of 2017, respectively, and $354 million and $706 million in the second quarter and first six 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. |
Net interest income increased by $380 million to $5.5 billion in the second quarter of 2017 compared to the second quarter of 2016 and increased by $798 million to $10.9 billion in the first six months of 2017 compared to the first six months of 2016. Net interest margin increased by 15 basis points to 6.88% in the second quarter of 2017 compared to the second quarter of 2016 and increased by 14 basis points to 6.88% in the first six months of 2017 compared to the first six months of 2016. These increases were primarily driven by:
• | growth in our auto and domestic credit card loan portfolios; and |
• | higher yields as a result of higher interest rates. |
9 | Capital One Financial Corporation (COF) |
These increases were partially offset by:
• | higher interest expense due to higher interest rates and growth in our interest-bearing liabilities; and |
• | one less day in the first six 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 June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2017 vs. 2016 | 2017 vs. 2016 | |||||||||||||||||||||||
(Dollars in millions) | Total Variance | Volume | Rate | Total Variance | Volume | Rate | ||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Credit card | $ | 367 | $ | 210 | $ | 157 | $ | 764 | $ | 509 | $ | 255 | ||||||||||||
Consumer banking | 107 | 56 | 51 | 209 | 104 | 105 | ||||||||||||||||||
Commercial banking(2) | 80 | 21 | 59 | 155 | 53 | 102 | ||||||||||||||||||
Other | (33 | ) | (9 | ) | (24 | ) | (66 | ) | (23 | ) | (43 | ) | ||||||||||||
Total loans, including loans held for sale | 521 | 278 | 243 | 1,062 | 643 | 419 | ||||||||||||||||||
Investment securities | 28 | 19 | 9 | 29 | 39 | (10 | ) | |||||||||||||||||
Cash equivalents and other interest-earning assets | 8 | 3 | 5 | 19 | 5 | 14 | ||||||||||||||||||
Total interest income | 557 | 300 | 257 | 1,110 | 687 | 423 | ||||||||||||||||||
Interest expense: | ||||||||||||||||||||||||
Deposits | 90 | 29 | 61 | 160 | 59 | 101 | ||||||||||||||||||
Securitized debt obligations | 35 | 11 | 24 | 56 | 17 | 39 | ||||||||||||||||||
Senior and subordinated notes | 68 | 35 | 33 | 111 | 49 | 62 | ||||||||||||||||||
Other borrowings and liabilities | (16 | ) | (22 | ) | 6 | (15 | ) | (29 | ) | 14 | ||||||||||||||
Total interest expense | 177 | 53 | 124 | 312 | 96 | 216 | ||||||||||||||||||
Net interest income | $ | 380 | $ | 247 | $ | 133 | $ | 798 | $ | 591 | $ | 207 |
(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 4 displays the components of non-interest income for the second quarter and first six months of 2017 and 2016.
Table 4: Non-Interest Income
__________
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Dollars in millions) | 2017 | 2016(1) | 2017 | 2016(1) | ||||||||||||
Interchange fees, net | $ | 676 | $ | 621 | $ | 1,246 | $ | 1,225 | ||||||||
Service charges and other customer-related fees | 418 | 393 | 789 | 816 | ||||||||||||
Net securities gains (losses) | (4 | ) | — | (4 | ) | (8 | ) | |||||||||
Other non-interest income: | ||||||||||||||||
Benefit for mortgage representation and warranty losses(2) | — | 1 | 25 | 2 | ||||||||||||
Net fair value gains on free-standing derivatives | 23 | 22 | 40 | 52 | ||||||||||||
Other | 118 | 124 | 196 | 238 | ||||||||||||
Total other non-interest income | 141 | 147 | 261 | 292 | ||||||||||||
Total non-interest income | $ | 1,231 | $ | 1,161 | $ | 2,292 | $ | 2,325 |
(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 $22 million and $41 million for the three and six months ended June 30, 2016, respectively; and (ii) a decrease to Other non-interest income of $29 million and $56 million for the three and six months ended June 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 $70 million to $1.2 billion in the second quarter of 2017 compared to the second quarter of 2016 primarily due to an increase in gross interchange fees driven by higher purchase volume. This increase was partially offset by higher rewards expense due to higher purchase volume and the continued expansion of our rewards franchise, net of the impact of updated rewards cost estimates.
Non-interest income decreased by $33 million to $2.3 billion in the first six months of 2017 compared to the first six months of 2016 primarily driven by:
• | 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; and |
• | higher rewards expense due to higher purchase volume and the continued expansion of our rewards franchise, net of the impact of updated rewards cost estimates. |
These decreases were partially offset by an increase in gross interchange fees driven by 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 $3.8 billion in the second quarter and first six months of 2017, respectively, compared to $1.6 billion and $3.1 billion in the second quarter and first six months of 2016, respectively. The provision for credit losses as a percentage of net interest income was 32.9% and 34.6% in the second quarter and first six months of 2017, respectively, compared to 31.3% and 30.7% in the second quarter and first six months of 2016, respectively.
11 | Capital One Financial Corporation (COF) |
Our provision for credit losses increased by $208 million in the second quarter of 2017 compared to the second 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 auto loan portfolio due to recent growth and declines in used car auction prices; and |
• | higher charge-offs in our commercial loan portfolio as a result of continued adverse industry conditions impacting certain segments of our oil and gas lending portfolio and our taxi medallion lending portfolio. |
These increases were partially offset by smaller allowance builds in our domestic credit card and commercial loan portfolios.
Our provision for credit losses increased by $673 million in the first six months of 2017 compared to the first six 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 loss expectations on recent vintages and portfolio seasoning; and |
• | higher charge-offs in our auto loan portfolio due to recent growth and declines in used car auction prices. |
These increases were partially offset by an allowance release in our Commercial Banking business in the first six months of 2017 compared to a build in the first six months of 2016, primarily reflecting charge-offs in our taxi medallion lending portfolio and certain segments of our oil and gas lending portfolio.
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.
12 | Capital One Financial Corporation (COF) |
Table 5 displays the components of non-interest expense for the second quarter and first six months of 2017 and 2016.
Table 5: Non-Interest Expense
__________
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Dollars in millions) | 2017 | 2016(1) | 2017 | 2016(1) | ||||||||||||
Salaries and associate benefits | $ | 1,383 | $ | 1,279 | $ | 2,854 | $ | 2,549 | ||||||||
Occupancy and equipment | 474 | 465 | 945 | 923 | ||||||||||||
Marketing | 435 | 415 | 831 | 843 | ||||||||||||
Professional services | 279 | 264 | 526 | 505 | ||||||||||||
Communications and data processing | 289 | 302 | 577 | 582 | ||||||||||||
Amortization of intangibles | 61 | 95 | 123 | 196 | ||||||||||||
Other non-interest expense: | ||||||||||||||||
Collections | 88 | 77 | 173 | 158 | ||||||||||||
Fraud losses | 78 | 89 | 156 | 179 | ||||||||||||
Bankcard, regulatory and other fee assessments | 146 | 129 | 282 | 236 | ||||||||||||
Other | 181 | 180 | 381 | 347 | ||||||||||||
Total other non-interest expense | 493 | 475 | 992 | 920 | ||||||||||||
Total non-interest expense | $ | 3,414 | $ | 3,295 | $ | 6,848 | $ | 6,518 |
(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 six months ended June 30, 2016 compared to previously reported results were increases to Communications and data processing expense of $40 million and $77 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 $119 million to $3.4 billion in the second quarter of 2017 compared to the second quarter of 2016, and increased by $330 million to $6.8 billion in the first six months of 2017 compared to the first six months of 2016 primarily due to higher operating expenses associated with loan growth, as well as continued investments in technology and infrastructure, 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 $11 million in the second quarter of 2017, compared to a loss of $1 million in the second quarter of 2016. Income from discontinued operations, net of tax, was $4 million in the first six months of 2017, compared to a loss of $6 million in the first six months of 2016.
We recorded a provision related to our mortgage representation and warranty reserve, net of tax, of $2 million ($6 million before tax) in the second quarter of 2017 primarily driven by settlement activities. We recorded a release, net of tax, of $40 million ($61 million before tax) in the first six months of 2017 primarily as a result of favorable legal developments, partially offset by a pre-tax charge of $42 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.”
13 | Capital One Financial Corporation (COF) |
Income Taxes
We recorded income tax provisions of $443 million (29.7% effective income tax rate) and $757 million (29.1% effective income tax rate) in the second quarter and first six months of 2017, respectively, compared to $424 million (31.0% effective income tax rate) and $876 million (30.9% effective income tax rate) in the second quarter and first six 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 second quarter of 2017 from the second quarter of 2016 was primarily due to increases in the relative benefit of tax exempt income and tax credits, partially offset by reduced benefits associated with foreign earnings.
The decrease in our effective income tax rate in the first six months of 2017 from the first six months of 2016 was primarily due to:
• | increases in the relative benefit of tax exempt income and tax credits; and |
• | increased discrete tax benefits recorded in the first six months of 2017. |
These decreases were 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.
CONSOLIDATED BALANCE SHEETS ANALYSIS |
Total assets decreased by $6.4 billion to $350.6 billion as of June 30, 2017 from December 31, 2016 primarily due to:
• | a decrease in cash, cash equivalents and restricted cash for securitization investors, partially offset by an increase in investment securities due to purchases outpacing paydowns; and |
• | 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, domestic credit card and commercial loan portfolios. |
Total liabilities decreased by $8.1 billion to $301.5 billion as of June 30, 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 $1.6 billion to $49.1 billion as of June 30, 2017 from December 31, 2016 primarily due to:
• | our net income of $1.8 billion in the first six months of 2017. |
This increase was partially offset by:
• | $526 million of dividend payments to our common and preferred stockholders; and |
• | $219 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 six 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 and our customers and our market risk exposure in accordance with our risk appetite.
14 | Capital One Financial Corporation (COF) |
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 June 30, 2017 and December 31, 2016.
The fair value of our available for sale securities portfolio was $41.1 billion as of June 30, 2017, an increase of $383 million from December 31, 2016. The increase in fair value was primarily due to a decline in interest rates. The fair value of our held to maturity securities portfolio was $28.4 billion as of June 30, 2017, an increase of $2.2 billion from December 31, 2016. The increase in the fair value was primarily driven by purchases outpacing paydowns.
Gross unrealized gains on our available for sale securities portfolio increased to $647 million as of June 30, 2017 compared to $539 million as of December 31, 2016, and gross unrealized losses on this portfolio decreased to $360 million as of June 30, 2017 compared to $535 million as of December 31, 2016, both of which were primarily due to declines in interest rates. Of the $360 million gross unrealized losses as of June 30, 2017, $107 million was related to securities that had been in a loss position for 12 months or longer.
Table 6 presents the amortized cost, carrying value and fair value for the major categories of our investment securities portfolio as of June 30, 2017 and December 31, 2016.
Table 6: Investment Securities
__________
June 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 | $ | 5,218 | $ | 5,215 | $ | 5,103 | $ | 5,065 | ||||||||
RMBS: | ||||||||||||||||
Agency(1) | 26,693 | 26,511 | 26,830 | 26,527 | ||||||||||||
Non-agency | 2,163 | 2,617 | 2,349 | 2,722 | ||||||||||||
Total RMBS | 28,856 | 29,128 | 29,179 | 29,249 | ||||||||||||
CMBS: | ||||||||||||||||
Agency(1) | 3,136 | 3,124 | 3,335 | 3,304 | ||||||||||||
Non-agency | 1,777 | 1,802 | 1,676 | 1,684 | ||||||||||||
Total CMBS | 4,913 | 4,926 | 5,011 | 4,988 | ||||||||||||
Other ABS(2) | 626 | 627 | 714 | 714 | ||||||||||||
Other securities(3) | 1,220 | 1,224 | 726 | 721 | ||||||||||||
Total investment securities available for sale | $ | 40,833 | $ | 41,120 | $ | 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 | 23,910 | 24,537 | 22,125 | 22,573 | ||||||||||||
Agency CMBS | 3,611 | 3,687 | 3,388 | 3,424 | ||||||||||||
Total investment securities held to maturity | $ | 27,720 | $ | 28,423 | $ | 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 49% and 57% of the other ABS portfolio as of June 30, 2017 and December 31, 2016, respectively, and ABS collateralized by auto dealer floor plan inventory loans and leases constituted approximately 23% of the other ABS portfolio as of both June 30, 2017 and December 31, 2016. |
(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 June 30, 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 June 30, 2017 and December 31, 2016. We categorize the credit ratings of our investment securities based on the lower of credit ratings as issued by Standard & Poor’s Ratings Services (“S&P”) and Moody’s Investors Service (“Moody’s”).
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 June 30, 2017 and December 31, 2016.
Table 7: Non-Agency Investment Securities Credit Ratings
__________
June 30, 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 | $ | 2,617 | — | 3% | 97% | $ | 2,722 | — | 3% | 97% | |||||||||||
Non-agency CMBS | 1,802 | 100 | % | — | — | 1,684 | 100% | — | — | ||||||||||||
Other ABS | 627 | 99 | 1 | — | 714 | 99 | 1 | — | |||||||||||||
Other securities | 1,224 | 79 | 13 | 8 | 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 June 30, 2017 and December 31, 2016.
Table 8: Loans Held for Investment
June 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
(Dollars in millions) | Loans | Allowance | Net Loans | Loans | Allowance | Net Loans | ||||||||||||||||||
Credit Card | $ | 101,590 | $ | 5,210 | $ | 96,380 | $ | 105,552 | $ | 4,606 | $ | 100,946 | ||||||||||||
Consumer Banking | 74,973 | 1,199 | 73,774 | 73,054 | 1,102 | 71,952 | ||||||||||||||||||
Commercial Banking | 67,672 | 758 | 66,914 | 66,916 | 793 | 66,123 | ||||||||||||||||||
Other | 67 | 3 | 64 | 64 | 2 | 62 | ||||||||||||||||||
Total | $ | 244,302 | $ | 7,170 | $ | 237,132 | $ | 245,586 | $ | 6,503 | $ | 239,083 |
Loans held for investment decreased by $1.3 billion to $244.3 billion as of June 30, 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, domestic credit card 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 were substantially flat at $239.8 billion as of June 30, 2017. We provide information on the composition of our deposits, average outstanding balances, interest expense and yield in “MD&A—Liquidity Risk Profile.”
15 | Capital One Financial Corporation (COF) |
Securitized Debt Obligations
Securitized debt obligations decreased to $18.4 billion as of June 30, 2017 from $18.8 billion as of December 31, 2016, as debt maturities exceeded issuances during the first six months of 2017. We provide additional information on our borrowings in “MD&A—Liquidity Risk Profile” and in “Note 8—Deposits and Borrowings.”
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 $31.6 billion as of June 30, 2017, of which $30.6 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 $10.0 billion in the first six months 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 $521 million as of June 30, 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 June 30, 2017 is approximately $1.3 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.”
16 | Capital One Financial Corporation (COF) |
BUSINESS SEGMENT FINANCIAL PERFORMANCE |
Our principal operations are 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 second quarter and first six months 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 June 30, 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 in “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 second quarter and first six months 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 June 30, | ||||||||||||||||||||||||
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 | $ | 4,169 | 63% | $ | 553 | 53% | $ | 3,904 | 62% | $ | 484 | 51% | ||||||||||||
Consumer Banking | 1,761 | 26 | 276 | 26 | 1,614 | 26 | 257 | 27 | ||||||||||||||||
Commercial Banking(3) | 752 | 11 | 146 | 14 | 688 | 11 | 138 | 15 | ||||||||||||||||
Other(4) | 22 | — | 72 | 7 | 48 | 1 | 64 | 7 | ||||||||||||||||
Total | $ | 6,704 | 100% | $ | 1,047 | 100% | $ | 6,254 | 100% | $ | 943 | 100% |
17 | Capital One Financial Corporation (COF) |
Six Months Ended June 30, | ||||||||||||||||||||||||
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 | $ | 8,253 | 63% | $ | 824 | 45% | $ | 7,784 | 62% | $ | 1,093 | 56% | ||||||||||||
Consumer Banking | 3,473 | 26 | 524 | 28 | 3,225 | 26 | 506 | 26 | ||||||||||||||||
Commercial Banking(3) | 1,476 | 11 | 359 | 20 | 1,343 | 11 | 205 | 10 | ||||||||||||||||
Other(4) | 37 | — | 135 | 7 | 122 | 1 | 157 | 8 | ||||||||||||||||
Total | $ | 13,239 | 100% | $ | 1,842 | 100% | $ | 12,474 | 100% | $ | 1,961 | 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 $553 million and $824 million in the second quarter and first six months of 2017, respectively, and $484 million and $1.1 billion in the second quarter and first six months of 2016, respectively.
18 | Capital One Financial Corporation (COF) |
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 June 30, | Six Months Ended June 30, | |||||||||||||||||||||
(Dollars in millions, except as noted) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||
Selected income statement data: | ||||||||||||||||||||||
Net interest income | $ | 3,294 | $ | 3,045 | 8% | $ | 6,640 | $ | 6,078 | 9% | ||||||||||||
Non-interest income | 875 | 859 | 2 | 1,613 | 1,706 | (5 | ) | |||||||||||||||
Total net revenue(1) | 4,169 | 3,904 | 7 | 8,253 | 7,784 | 6 | ||||||||||||||||
Provision for credit losses | 1,397 | 1,261 | 11 | 3,114 | 2,332 | 34 | ||||||||||||||||
Non-interest expense | 1,918 | 1,883 | 2 | 3,847 | 3,746 | 3 | ||||||||||||||||
Income from continuing operations before income taxes | 854 | 760 | 12 | 1,292 | 1,706 | (24 | ) | |||||||||||||||
Income tax provision | 301 | 276 | 9 | 468 | 613 | (24 | ) | |||||||||||||||
Income from continuing operations, net of tax | $ | 553 | $ | 484 | 14 | $ | 824 | $ | 1,093 | (25 | ) | |||||||||||
Selected performance metrics: | ||||||||||||||||||||||
Average loans held for investment(2) | $ | 100,043 | $ | 94,382 | 6 | $ | 100,603 | $ | 93,684 | 7 | ||||||||||||
Average yield on loans held for investment(3) | 15.14% | 14.49% | 65 | bps | 15.06% | 14.55% | 51 | bps | ||||||||||||||
Total net revenue margin(4) | 16.67 | 16.55 | 12 | 16.41 | 16.62 | (21 | ) | |||||||||||||||
Net charge-offs | $ | 1,256 | $ | 949 | 32% | $ | 2,527 | $ | 1,899 | 33% | ||||||||||||
Net charge-off rate | 5.02% | 4.02% | 100 | bps | 5.02% | 4.05% | 97 | bps | ||||||||||||||
Purchased credit card relationship (“PCCR”) intangible amortization | $ | 44 | $ | 67 | (34)% | $ | 88 | $ | 137 | (36)% | ||||||||||||
Purchase volume(5) | 83,079 | 78,019 | 6 | 156,276 | 146,208 | 7 | ||||||||||||||||
(Dollars in millions, except as noted) | June 30, 2017 | December 31, 2016 | Change | |||||||||||||||||||
Selected period-end data: | ||||||||||||||||||||||
Loans held for investment(2) | $ | 101,590 | $ | 105,552 | (4)% | |||||||||||||||||
30+ day performing delinquency rate | 3.60% | 3.91% | (31 | )bps | ||||||||||||||||||
30+ day delinquency rate | 3.62 | 3.94 | (32 | ) | ||||||||||||||||||
Nonperforming loan rate(6) | 0.03 | 0.04 | (1 | ) | ||||||||||||||||||
Allowance for loan and lease losses | $ | 5,210 | $ | 4,606 | 13% | |||||||||||||||||
Allowance coverage ratio(7) | 5.13 | % | 4.36% | 77 | 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 $313 million and $634 million in the second quarter and first six months of 2017, respectively, and by $244 million and $472 million in the second quarter and first six months of 2016, respectively, for the estimated uncollectible amount of billed finance charges and fees and related losses. The finance charge and fee reserve totaled $401 million and $402 million as of June 30, 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. |
(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) | Within our credit card loan portfolio, only certain loans in our international card businesses are classified as nonperforming. See “MD&A—Nonperforming Loans and Other Nonperforming Assets” for additional information. |
(7) | Allowance coverage ratio is calculated by dividing the period-end allowance for loan and lease losses by period-end loans held for investment. |
19 | Capital One Financial Corporation (COF) |
Key factors affecting the results of our Credit Card business for the second quarter and first six months of 2017 compared to the second quarter and first six months of 2016, and changes in financial condition and credit performance between June 30, 2017 and December 31, 2016 include the following:
• | Net Interest Income: Net interest income increased by $249 million to $3.3 billion in the second quarter of 2017 and increased by $562 million to $6.6 billion in the first six months of 2017 primarily driven by loan growth and higher yields as a result of higher interest rates in our Domestic Card business. |
• | Non-Interest Income: Non-interest income increased by $16 million to $875 million in the second quarter of 2017 primarily driven by: |
◦ | an increase in gross interchange fees driven by higher purchase volume; and |
◦ | the absence of a U.K. PPI Reserve build in the second quarter of 2017. |
These increases were partially offset by:
◦ | higher rewards expense due to higher purchase volume and the continued expansion of our rewards franchise, net of the impact of updated rewards cost estimates; and |
◦ | the absence of a gain recorded in the second quarter of 2016 related to the exchange of our ownership interest in Visa Europe with Visa Inc. as a result of Visa Inc.’s acquisition of Visa Europe. |
Non-interest income decreased by $93 million to $1.6 billion in the first six months of 2017 primarily driven by:
◦ | higher rewards expense due to higher purchase volume and the continued expansion of our rewards franchise, net of the impact of updated rewards cost estimates; |
◦ | 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; and |
◦ | the absence of a gain recorded in the second quarter of 2016 related to the exchange of our ownership interest in Visa Europe with Visa Inc. as a result of Visa Inc.’s acquisition of Visa Europe. |
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 $136 million to $1.4 billion in the second quarter of 2017 primarily driven by higher charge-offs due to growth and portfolio seasoning, partially offset by a smaller allowance build in our domestic credit card loan portfolio. |
The provision for credit losses increased by $782 million to $3.1 billion in the first six months of 2017 primarily driven by:
◦ | higher charge-offs due to growth and portfolio seasoning; and |
◦ | a larger allowance build in our domestic credit card loan portfolio due to increasing loss expectations on recent vintages and portfolio seasoning. |
• | Non-Interest Expense: Non-interest expense increased by $35 million to $1.9 billion in the second quarter of 2017 primarily driven by higher operating expenses associated with loan growth, as well as continued investments in technology and infrastructure. This increase was partially offset by: |
◦ | continued improvement in efficiency and scale; |
◦ | lower amortization of intangibles; and |
◦ | lower other non-interest expense primarily driven by the absence of a U.K. PPI Reserve build in the second quarter of 2017. |
Non-interest expense increased by $101 million to $3.8 billion in the first six months of 2017 primarily driven by higher operating expenses associated with loan growth, as well as continued investments in technology and infrastructure. This increase was partially offset by:
20 | Capital One Financial Corporation (COF) |
◦ | continued improvement in efficiency and scale; |
◦ | lower amortization of intangibles; and |
◦ | lower marketing expenses. |
• | Loans Held for Investment: Period-end loans held for investment decreased by $4.0 billion to $101.6 billion as of June 30, 2017 from December 31, 2016 primarily due to expected seasonal paydowns, partially offset by continued loan growth in our Domestic Card business. Average loans held for investment increased by $5.7 billion to $100.0 billion in the second quarter of 2017 compared to the second quarter of 2016 and increased by $6.9 billion to $100.6 billion in the first six months of 2017 compared to the first six months 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 100 basis points to 5.02% in the second quarter of 2017 compared to the second quarter of 2016 and increased by 97 basis points to 5.02% in the first six months of 2017 compared to the first six months of 2016 primarily driven by growth and seasoning of recent domestic credit card loan originations, partially offset by loan balance growth in our domestic credit card loan portfolio. The 30+ day delinquency rate decreased by 32 basis points to 3.62% as of June 30, 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. |
Domestic Card Business
Domestic Card generated net income from continuing operations of $482 million and $760 million in the second quarter and first six months of 2017, respectively, compared to net income from continuing operations of $463 million and $1.0 billion in the second quarter and first six months of 2016, respectively. In the second quarter and first six months of 2017 and 2016, Domestic Card accounted for greater than 90% of total net revenue of our Credit Card business.
21 | Capital One Financial Corporation (COF) |
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 June 30, | Six Months Ended June 30, | |||||||||||||||||||||
(Dollars in millions, except as noted) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||
Selected income statement data: | ||||||||||||||||||||||
Net interest income | $ | 3,011 | $ | 2,769 | 9% | $ | 6,104 | $ | 5,525 | 10% | ||||||||||||
Non-interest income | 802 | 792 | 1 | 1,501 | 1,566 | (4 | ) | |||||||||||||||
Total net revenue(1) | 3,813 | 3,561 | 7 | 7,605 | 7,091 | 7 | ||||||||||||||||
Provision for credit losses | 1,327 | 1,164 | 14 | 2,964 | 2,136 | 39 | ||||||||||||||||
Non-interest expense | 1,727 | 1,669 | 3 | 3,444 | 3,340 | 3 | ||||||||||||||||
Income from continuing operations before income taxes | 759 | 728 | 4 | 1,197 | 1,615 | (26 | ) | |||||||||||||||
Income tax provision | 277 | 265 | 5 | 437 | 588 | (26 | ) | |||||||||||||||
Income from continuing operations, net of tax | $ | 482 | $ | 463 | 4 | $ | 760 | $ | 1,027 | (26 | ) | |||||||||||
Selected performance metrics: | ||||||||||||||||||||||
Average loans held for investment(2) | $ | 91,769 | $ | 85,981 | 7 | $ | 92,398 | $ | 85,564 | 8 | ||||||||||||
Average yield on loans held for investment(3) | 15.07% | 14.40% | 67 | bps | 15.04% | 14.41% | 63 | bps | ||||||||||||||
Total net revenue margin(4) | 16.62 | 16.57 | 5 | 16.46 | 16.58 | (12 | ) | |||||||||||||||
Net charge-offs | $ | 1,172 | $ | 874 | 34% | $ | 2,368 | $ | 1,761 | 34% | ||||||||||||
Net charge-off rate | 5.11% | 4.07% | 104 | bps | 5.12% | 4.12% | 100 | bps | ||||||||||||||
PCCR intangible amortization | $ | 44 | $ | 67 | (34)% | $ | 88 | $ | 137 | (36)% | ||||||||||||
Purchase volume(5) | 75,781 | 71,050 | 7 | 142,731 | 133,667 | 7 | ||||||||||||||||
(Dollars in millions, except as noted) | June 30, 2017 | December 31, 2016 | Change | |||||||||||||||||||
Selected period-end data: | ||||||||||||||||||||||
Loans held for investment(2) | $ | 92,866 | $ | 97,120 | (4)% | |||||||||||||||||
30+ day delinquency rate |