CAPITAL ONE FINANCIAL CORP - Quarter Report: 2017 March (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 March 31, 2017 |
OR |
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to Commission File No. 1-13300 |
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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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ý | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period of complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No ý
As of April 28, 2017, there were 482,968,623 shares of the registrant’s Common Stock outstanding.
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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 March 31, 2017 included in this Report.
Management monitors a variety of key indicators to evaluate our business results and financial condition. The following MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements and related notes in this Report and the more detailed information contained in our 2016 Form 10-K.
INTRODUCTION |
We are a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company”) offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of March 31, 2017, our principal subsidiaries included:
• | Capital One Bank (USA), National Association (“COBNA”), which offers credit and debit card products, other lending products and deposit products; and |
• | Capital One, National Association (“CONA”), which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients. |
The Company is hereafter collectively referred to as “we,” “us” or “our.” COBNA and CONA are collectively referred to as the “Banks.” Certain business terms used in this document are defined in the “MD&A—Glossary and Acronyms” and should be read in conjunction with the consolidated financial statements included in this Report.
Our consolidated total net revenues are derived primarily from lending to consumer and commercial customers net of funding costs associated with interest on deposits, short-term borrowings and long-term debt. We also earn non-interest income which primarily consists of interchange income net of rewards expenses and service charges and other customer-related fees. Our expenses primarily consist of the provision for credit losses, operating expenses, marketing expenses and income taxes.
Our principal operations are currently organized for management reporting purposes into three major business segments, which are defined based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group, are included in the Other category.
• | Credit Card: Consists of our domestic consumer and small business card lending, and international card businesses in Canada and the United Kingdom (“U.K.”). |
• | Consumer Banking: Consists of our branch-based lending and deposit gathering activities for consumers and small businesses, national deposit gathering, auto lending and consumer home loan lending and servicing activities. |
• | Commercial Banking: Consists of our lending, deposit gathering and servicing activities provided to commercial real estate and commercial and industrial customers. Our commercial and industrial customers typically include companies with annual revenues between $10 million and $1 billion. |
1 | Capital One Financial Corporation (COF) |
Recent Acquisitions and Dispositions
We regularly explore and evaluate opportunities to acquire financial services and financial assets, including credit card and other loan portfolios, and enter into strategic partnerships as part of our growth strategy. We also explore opportunities to acquire digital companies and related assets to improve our information technology infrastructure and to deliver on our digital strategy. We also regularly consider the potential disposition of certain of our assets, branches, partnership agreements or lines of business. We may issue equity or debt in connection with acquisitions, including public offerings, to fund such acquisitions.
On October 3, 2016, we announced that we entered into a 10-year program agreement (the “Program Agreement”) to become the exclusive issuing partner of co-branded credit cards to Cabela’s customers. In connection with this credit card program, we entered into a definitive agreement under which we would acquire the credit card operations from Cabela’s, including approximately $5.2 billion in credit card receivables and other assets and approximately $5.0 billion in associated funding liabilities. This transaction was subject to the satisfaction of customary closing conditions, including receipt of various regulatory approvals and the approval of the stockholders of Cabela’s. On January 28, 2017, Capital One withdrew its Bank Merger Act (“BMA”) application from the OCC, as we did not expect to receive regulatory approval of any BMA application for this transaction prior to October 3, 2017. This is the date when any of the parties involved in the agreement could terminate the agreement.
On April 17, 2017, we entered into agreements with subsidiaries of Synovus Financial Corp. (“Synovus”) and Cabela’s under which Synovus will acquire certain assets and assume certain liabilities of Cabela’s wholly-owned subsidiary, World’s Foremost Bank (“WFB”), including WFB’s deposits. Immediately following the completion of this acquisition, Synovus will sell WFB’s credit card assets and related liabilities to Capital One. Synovus will retain WFB’s deposits. Capital One is not required to file any regulatory applications to complete this acquisition from Synovus. These transactions are subject to customary closing conditions, including approvals by Synovus’s primary banking regulators and by Cabela’s stockholders. The closing of these transactions are also subject to the closing of the Agreement and Plan of Merger between Cabela’s and Bass Pro Group, LLC, entered into on October 3, 2016. We expect these transactions will close after all closing conditions have been satisfied. These agreements may be terminated by any of the parties if all closing conditions have not been satisfied by October 3, 2017. Upon closing of the acquisition of the credit card assets and related liabilities from Synovus, Capital One will become the exclusive issuing partner of co-branded credit cards to Cabela’s customers under the Program Agreement.
We had no significant acquisitions or dispositions in the first quarter of 2017.
2 | Capital One Financial Corporation (COF) |
SUMMARY OF SELECTED FINANCIAL DATA |
The following table presents selected consolidated financial data and performance from our results of operations for the first quarters of 2017 and 2016 and selected comparative balance sheet data as of March 31, 2017 and December 31, 2016. We also provide selected key metrics we use in evaluating our performance including certain metrics that are computed using non-GAAP measures. We believe these non-GAAP metrics provide useful insight to investors and users of our financial information in assessing the results of the Company.
Table 1: Consolidated Financial Highlights
Three Months Ended March 31, | |||||||||||
(Dollars in millions, except per share data and as noted) | 2017 | 2016 | Change | ||||||||
Income statement | |||||||||||
Net interest income | $ | 5,474 | $ | 5,056 | 8% | ||||||
Non-interest income | 1,061 | 1,164 | (9 | ) | |||||||
Total net revenue | 6,535 | 6,220 | 5 | ||||||||
Provision for credit losses | 1,992 | 1,527 | 30 | ||||||||
Non-interest expense: | |||||||||||
Marketing | 396 | 428 | (7 | ) | |||||||
Amortization of intangibles | 62 | 101 | (39 | ) | |||||||
Operating expenses | 2,976 | 2,694 | 10 | ||||||||
Total non-interest expense | 3,434 | 3,223 | 7 | ||||||||
Income from continuing operations before income taxes | 1,109 | 1,470 | (25 | ) | |||||||
Income tax provision | 314 | 452 | (31 | ) | |||||||
Income from continuing operations, net of tax | 795 | 1,018 | (22 | ) | |||||||
Income (loss) from discontinued operations, net of tax | 15 | (5 | ) | ** | |||||||
Net income | 810 | 1,013 | (20 | ) | |||||||
Dividends and undistributed earnings allocated to participating securities | (5 | ) | (6 | ) | (17 | ) | |||||
Preferred stock dividends | (53 | ) | (37 | ) | 43 | ||||||
Net income available to common stockholders | $ | 752 | $ | 970 | (22 | ) | |||||
Common share statistics | |||||||||||
Basic earnings per common share: | |||||||||||
Net income from continuing operations | $ | 1.53 | $ | 1.86 | (18)% | ||||||
Income (loss) from discontinued operations | 0.03 | (0.01 | ) | ** | |||||||
Net income per basic common share | $ | 1.56 | $ | 1.85 | (16 | ) | |||||
Diluted earnings per common share: | |||||||||||
Net income from continuing operations | $ | 1.51 | $ | 1.85 | (18 | ) | |||||
Income (loss) from discontinued operations | 0.03 | (0.01 | ) | ** | |||||||
Net income per diluted common share | $ | 1.54 | $ | 1.84 | (16 | ) | |||||
Weighted-average common shares outstanding (in millions): | |||||||||||
Basic | 482.3 | 523.5 | (8)% | ||||||||
Diluted | 487.9 | 528.0 | (8 | ) | |||||||
Common shares outstanding (period-end, in millions) | 482.8 | 514.5 | (6 | ) | |||||||
Dividends paid per common share | $ | 0.40 | $ | 0.40 | — | ||||||
Tangible book value per common share (period-end)(1) | 58.66 | 55.94 | 5 | ||||||||
Balance sheet (average balances) | |||||||||||
Loans held for investment | $ | 241,505 | $ | 226,736 | 7% | ||||||
Interest-earning assets | 318,358 | 299,456 | 6 | ||||||||
Total assets | 351,641 | 331,919 | 6 | ||||||||
Interest-bearing deposits | 212,973 | 194,125 | 10 | ||||||||
Total deposits | 238,550 | 219,180 | 9 | ||||||||
Borrowings | 53,357 | 53,761 | (1 | ) | |||||||
Common equity | 43,833 | 45,782 | (4 | ) | |||||||
Total stockholders’ equity | 48,193 | 49,078 | (2 | ) |
3 | Capital One Financial Corporation (COF) |
Three Months Ended March 31, | |||||||||||
(Dollars in millions, except per share data and as noted) | 2017 | 2016 | Change | ||||||||
Selected performance metrics | |||||||||||
Purchase volume(2) | $ | 73,197 | $ | 68,189 | 7% | ||||||
Total net revenue margin(3) | 8.21% | 8.31% | (10 | )bps | |||||||
Net interest margin(4) | 6.88 | 6.75 | 13 | ||||||||
Return on average assets | 0.90 | 1.23 | (33 | ) | |||||||
Return on average tangible assets(5) | 0.95 | 1.29 | (34 | ) | |||||||
Return on average common equity(6) | 6.73 | 8.52 | (179 | ) | |||||||
Return on average tangible common equity (“TCE”)(7) | 10.37 | 12.94 | (257 | ) | |||||||
Equity-to-assets ratio(8) | 13.71 | 14.79 | (108 | ) | |||||||
Non-interest expense as a percentage of average loans held for investment(9) | 5.69 | 5.69 | — | ||||||||
Efficiency ratio(10) | 52.55 | 51.82 | 73 | ||||||||
Effective income tax rate from continuing operations | 28.3 | 30.7 | (240 | ) | |||||||
Net charge-offs | $ | 1,510 | $ | 1,178 | 28% | ||||||
Net charge-off rate(11) | 2.50% | 2.08% | 42 | bps |
(Dollars in millions, except as noted) | March 31, 2017 | December 31, 2016 | Change | ||||||||
Balance sheet (period-end) | |||||||||||
Loans held for investment | $ | 240,588 | $ | 245,586 | (2)% | ||||||
Interest-earning assets | 316,712 | 321,807 | (2 | ) | |||||||
Total assets | 348,549 | 357,033 | (2 | ) | |||||||
Interest-bearing deposits | 214,818 | 211,266 | 2 | ||||||||
Total deposits | 241,182 | 236,768 | 2 | ||||||||
Borrowings | 48,439 | 60,460 | (20 | ) | |||||||
Common equity | 43,680 | 43,154 | 1 | ||||||||
Total stockholders’ equity | 48,040 | 47,514 | 1 | ||||||||
Credit quality metrics | |||||||||||
Allowance for loan and lease losses | $ | 6,984 | $ | 6,503 | 7% | ||||||
Allowance as a percentage of loans held for investment (“allowance coverage ratio”) | 2.90% | 2.65% | 25 | bps | |||||||
30+ day performing delinquency rate | 2.61 | 2.93 | (32 | ) | |||||||
30+ day delinquency rate | 2.92 | 3.27 | (35 | ) | |||||||
Capital ratios | |||||||||||
Common equity Tier 1 capital(12) | 10.4% | 10.1% | 30 | bps | |||||||
Tier 1 capital(12) | 12.0 | 11.6 | 40 | ||||||||
Total capital(12) | 14.7 | 14.3 | 40 | ||||||||
Tier 1 leverage (12) | 9.9 | 9.9 | — | ||||||||
Tangible common equity(13) | 8.5 | 8.1 | 40 | ||||||||
Supplementary leverage(12) | 8.6 | 8.6 | — | ||||||||
Other | |||||||||||
Employees (period end, in thousands) | 48.4 | 47.3 | 2% |
(1) | Tangible book value per common share is a non-GAAP measure calculated based on tangible common equity divided by common shares outstanding. See “MD&A—Table A —Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information on non-GAAP measures. |
(2) | Purchase volume consists of purchase transactions, net of returns, for the period for loans both classified as held for investment and held for sale. Excludes cash advance and balance transfer transactions. |
(3) | Total net revenue margin is calculated based on annualized total net revenue for the period divided by average interest-earning assets for the period. |
(4) | Net interest margin is calculated based on annualized net interest income for the period divided by average interest-earning assets for the period. |
(5) | Return on average tangible assets is a non-GAAP measure calculated based on annualized income from continuing operations, net of tax, for the period divided by average tangible assets for the period. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information on non-GAAP measures. |
(6) | Return on average common equity is calculated based on annualized (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average common equity. Our calculation of return on average common equity may not be comparable to similarly-titled measures reported by other companies. |
4 | Capital One Financial Corporation (COF) |
(7) | Return on average tangible common equity is a non-GAAP measure calculated based on annualized (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average TCE. Our calculation of return on average TCE may not be comparable to similarly-titled measures reported by other companies. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information on non-GAAP measures. |
(8) | Equity-to-assets ratio is calculated based on average stockholders’ equity for the period divided by average total assets for the period. |
(9) | Non-interest expense as a percentage of average loans held for investment is calculated based on annualized non-interest expense for the period divided by average loans held for investment for the period. |
(10) | Efficiency ratio is calculated based on non-interest expense for the period divided by total net revenue for the period. |
(11) | Net charge-off rate is calculated based on annualized net charge-offs for the period divided by average loans held for investment for the period. |
(12) | Capital ratios are calculated based on the Basel III Standardized Approach framework, subject to applicable transition provision. See “MD&A—Capital Management” for additional information. |
(13) | Tangible common equity ratio is a non-GAAP measure calculated based on TCE divided by tangible assets. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for the calculation of this measure and reconciliation to the comparative U.S. GAAP measure. |
** | Change is not meaningful. |
EXECUTIVE SUMMARY AND BUSINESS OUTLOOK |
Financial Highlights
We reported net income of $810 million ($1.54 per diluted common share) on total net revenue of $6.5 billion for the first quarter of 2017. In comparison, we reported net income of $1.0 billion ($1.84 per diluted common share) on total net revenue of $6.2 billion for the first quarter of 2016.
Our common equity Tier 1 capital ratio as calculated under the Basel III Standardized Approach, including transition provisions, was 10.4% and 10.1% as of March 31, 2017 and December 31, 2016, respectively. See “MD&A—Capital Management” below for additional information.
On June 29, 2016, we announced that our Board of Directors authorized the repurchase of up to $2.5 billion in shares of our common stock (“2016 Stock Repurchase Program”) from the third quarter of 2016 through the end of the second quarter of 2017. Through the end of the first quarter of 2017, we repurchased approximately $2.2 billion of common stock as part of the 2016 Stock Repurchase Program. See “MD&A—Capital Management” below for additional information.
Below are additional highlights of our performance in the first quarter of 2017. These highlights are generally based on a comparison between the results of the first quarters of 2017 and 2016, except as otherwise noted. The changes in our financial condition and credit performance are generally based on our financial condition and credit performance as of March 31, 2017 compared to our financial condition and credit performance as of December 31, 2016. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary and Business Outlook.”
Total Company Performance
• | Earnings: Our net income decreased by $203 million to $810 million in the first quarter of 2017 compared to the first quarter of 2016. The decrease was primarily due to: |
◦ | higher provision for credit losses primarily driven by higher charge-offs and a larger allowance build in our domestic credit card loan portfolio; and |
◦ | higher operating expenses associated with loan growth, as well as continued investments in technology and infrastructure. |
These higher expenses were partially offset by:
◦ | higher interest income due to growth in our credit card and auto loan portfolios; and |
◦ | lower income tax expense as a result of lower income before taxes and increased discrete tax benefits related to the adoption of Accounting Standards Update (“ASU”) 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting. |
5 | Capital One Financial Corporation (COF) |
• | Loans Held for Investment: |
◦ | Period-end loans held for investment decreased by $5.0 billion to $240.6 billion as of March 31, 2017 from December 31, 2016 primarily due to expected seasonal paydowns in our domestic credit card loan portfolio and run-off of our acquired home loan portfolio, partially offset by growth in our auto and commercial loan portfolios. |
◦ | Average loans held for investment increased by $14.8 billion to $241.5 billion in the first quarter of 2017 compared to the first quarter of 2016 primarily driven by growth in our credit card, auto and commercial loan portfolios, partially offset by run-off of our acquired home loan portfolio. |
• | Net Charge-Off and Delinquency Metrics: Our net charge-off rate increased by 42 basis points to 2.50% in the first quarter of 2017 compared to the first quarter of 2016, primarily due to growth and seasoning of recent domestic credit card loan originations. |
Our 30+ day delinquency rate decreased by 35 basis points to 2.92% as of March 31, 2017 from December 31, 2016 primarily due to seasonally lower delinquency inventories.
We provide additional information on our credit quality metrics below under “MD&A—Business Segment Financial Performance” and “MD&A —Credit Risk Profile.”
• | Allowance for Loan and Lease Losses: Our allowance for loan and lease losses increased by $481 million to $7.0 billion as of March 31, 2017 from December 31, 2016, and the allowance coverage ratio increased by 25 basis points to 2.90% as of March 31, 2017 from December 31, 2016. The increases were primarily driven by: |
◦ | an allowance build in our domestic credit card loan portfolio due to increasing loss expectations on recent originations; and |
◦ | an allowance build in our auto loan portfolio due to higher loss rates associated with growth, as well as further expected declines in used car auction prices. |
These increases were partially offset by:
◦ | an allowance release in our Commercial Banking business, reflecting improved portfolio performance in our oil and gas portfolio. |
Business Outlook
We discuss below our current expectations regarding our total company performance and the performance of each of our business segments over the near-term based on market conditions, the regulatory environment and our business strategies as of the time we filed this Report. The statements contained in this section are based on our current expectations regarding our outlook for our financial results and business strategies. Our expectations take into account, and should be read in conjunction with, our expectations regarding economic trends and analysis of our business as discussed in “Part I—Item 1. Business” and “MD&A” in our 2016 Form 10-K. Certain statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those in our forward-looking statements. Except as otherwise disclosed, forward-looking statements do not reflect:
• | any change in current dividend or repurchase strategies; |
• | the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; or |
• | any changes in laws, regulations or regulatory interpretations, in each case after the date as of which such statements are made. |
See “MD&A—Forward-Looking Statements” in this Report for more information on the forward-looking statements included in this Report and “Part I—Item 1A. Risk Factors” in our 2016 Form 10-K for factors that could materially influence our results.
6 | Capital One Financial Corporation (COF) |
Total Company Expectations
We expect annual efficiency ratio for 2017, excluding adjusting items, will be in the 51%s, plus or minus a reasonable margin of volatility. Over the longer-term, we believe that we will be able to achieve additional efficiency improvement, driven by growth and digital productivity gains.
We expect our strong growth over the last two years puts us in a position to deliver earnings per share growth, excluding adjusting items, between 7% and 11% in 2017, assuming no substantial change in the broader credit and economic cycles.
We believe our actions have created a well-positioned balance sheet with strong capital and liquidity. We believe that we are currently at the destination capital ratios appropriate for our current balance sheet mix. Pursuant to our approved 2016 capital plan, our Board of Directors has authorized repurchases of up to $2.5 billion of common stock through the end of the second quarter of 2017. Through the end of the first quarter of 2017, we repurchased approximately $2.2 billion of common stock as part of the 2016 Stock Repurchase Program. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, opportunities for growth, utilizing Rule 10b5-1 programs, and may be suspended at any time. See “MD&A—Capital Management—Dividend Policy and Stock Purchases” for more information.
Business Segment Expectations
Credit Card: In our Domestic Card business, we expect the full-year 2017 charge-off rate will be in the high 4%s to around 5%, with quarterly variability.
Consumer Banking: In our Consumer Banking business, we expect that the charge-off rate in our auto finance business will increase gradually and the growth we have experienced in that business will moderate.
Commercial Banking: In our Commercial Banking business, we expect credit pressures will continue to be focused in our oil field service and taxi medallion lending portfolios.
CONSOLIDATED RESULTS OF OPERATIONS |
The section below provides a comparative discussion of our consolidated financial performance for the first quarters of 2017 and 2016. We provide a discussion of our business segment results in the following section, “MD&A—Business Segment Financial Performance.” You should read this section together with our “MD&A—Executive Summary and Business Outlook,” where we discuss trends and other factors that we expect will affect our future results of operations.
Net Interest Income
Net interest income represents the difference between the interest income, including certain fees, earned on our interest-earning assets and the interest expense on our interest-bearing liabilities. Interest-earning assets include loans, investment securities and other interest-earning assets, while our interest-bearing liabilities include interest-bearing deposits, securitized debt obligations, senior and subordinated notes, and other borrowings. Generally, we include in interest income any past due fees on loans that we deem collectible. Our net interest margin, based on our consolidated results, represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities, including the notional impact of non-interest-bearing funding. We expect net interest income and our net interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities.
7 | Capital One Financial Corporation (COF) |
Table 2 below presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balance, interest income earned or interest expense incurred, and average yield for the first quarters of 2017 and 2016.
Table 2: Average Balances, Net Interest Income and Net Interest Margin
__________
Three Months Ended March 31, | ||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||
(Dollars in millions) | Average Balance | Interest Income/ Expense | Average Yield/ Rate | Average Balance | Interest Income/ Expense | Average Yield/ Rate | ||||||||||||||||
Assets: | ||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||
Loans:(1) | ||||||||||||||||||||||
Credit card | $ | 101,169 | $ | 3,790 | 14.98 | % | $ | 93,158 | $ | 3,394 | 14.57 | % | ||||||||||
Consumer banking | 73,510 | 1,190 | 6.48 | 70,441 | 1,088 | 6.18 | ||||||||||||||||
Commercial banking(2) | 67,503 | 615 | 3.64 | 63,884 | 539 | 3.37 | ||||||||||||||||
Other(3) | 67 | 31 | 185.07 | 90 | 64 | 284.44 | ||||||||||||||||
Total loans, including loans held for sale | 242,249 | 5,626 | 9.29 | 227,573 | 5,085 | 8.94 | ||||||||||||||||
Investment securities | 68,418 | 416 | 2.43 | 65,156 | 415 | 2.55 | ||||||||||||||||
Cash equivalents and other interest-earning assets | 7,691 | 28 | 1.46 | 6,727 | 17 | 1.01 | ||||||||||||||||
Total interest-earning assets | 318,358 | 6,070 | 7.63 | 299,456 | 5,517 | 7.37 | ||||||||||||||||
Cash and due from banks | 3,487 | 3,355 | ||||||||||||||||||||
Allowance for loan and lease losses | (6,513 | ) | (5,131 | ) | ||||||||||||||||||
Premises and equipment, net | 3,797 | 3,642 | ||||||||||||||||||||
Other assets | 32,512 | 30,597 | ||||||||||||||||||||
Total assets | $ | 351,641 | $ | 331,919 | ||||||||||||||||||
Liabilities and stockholders’ equity: | ||||||||||||||||||||||
Interest-bearing liabilities:(3) | ||||||||||||||||||||||
Deposits | $ | 212,973 | $ | 353 | 0.66 | % | $ | 194,125 | $ | 283 | 0.58 | % | ||||||||||
Securitized debt obligations | 17,176 | 69 | 1.61 | 15,361 | 48 | 1.25 | ||||||||||||||||
Senior and subordinated notes | 24,804 | 149 | 2.40 | 21,993 | 106 | 1.93 | ||||||||||||||||
Other borrowings and liabilities | 12,356 | 25 | 0.81 | 17,176 | 24 | 0.56 | ||||||||||||||||
Total interest-bearing liabilities | 267,309 | 596 | 0.89 | 248,655 | 461 | 0.74 | ||||||||||||||||
Non-interest-bearing deposits | 25,577 | 25,055 | ||||||||||||||||||||
Other liabilities | 10,562 | 9,131 | ||||||||||||||||||||
Total liabilities | 303,448 | 282,841 | ||||||||||||||||||||
Stockholders’ equity | 48,193 | 49,078 | ||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 351,641 | $ | 331,919 | ||||||||||||||||||
Net interest income/spread | $ | 5,474 | 6.74 | $ | 5,056 | 6.63 | ||||||||||||||||
Impact of non-interest-bearing funding | 0.14 | 0.12 | ||||||||||||||||||||
Net interest margin | 6.88% | 6.75 | % |
(1) | Past due fees included in interest income totaled approximately $384 million and $351 million in the first quarters of 2017 and 2016, respectively. |
(2) | Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately equal to our federal statutory rate of 35% with offsetting reclassifications to the Other category. |
(3) | Interest income and interest expense and the calculation of average yields on interest-earning assets and average rates on interest-bearing liabilities include the impact of hedge accounting. |
8 | Capital One Financial Corporation (COF) |
Net interest income increased by $418 million to $5.5 billion in the first quarter of 2017 compared to the first quarter of 2016 primarily driven by:
• | growth in our domestic credit card and auto loan portfolios; and |
• | higher net interest margins. |
These increases were partially offset by:
• | an additional day in the first quarter of 2016. |
Net interest margin increased by 13 basis points to 6.88% in the first quarter of 2017 compared to the first quarter of 2016 primarily driven by:
• | growth in our domestic credit card loan portfolio; |
• | higher yields as a result of higher interest rates; and |
• | run-off of our acquired home loan portfolio. |
These increases were partially offset by:
• | an additional day in the first quarter of 2016. |
9 | Capital One Financial Corporation (COF) |
Table 3 displays the change in our net interest income between periods and the extent to which the variance is attributable to:
• | changes in the volume of our interest-earning assets and interest-bearing liabilities; or |
• | changes in the interest rates related to these assets and liabilities. |
Table 3: Rate/Volume Analysis of Net Interest Income(1)
__________
Three Months Ended March 31, | ||||||||||||
2017 vs. 2016 | ||||||||||||
(Dollars in millions) | Total Variance | Volume | Rate | |||||||||
Interest income: | ||||||||||||
Loans: | ||||||||||||
Credit card | $ | 396 | $ | 298 | $ | 98 | ||||||
Consumer banking | 102 | 48 | 54 | |||||||||
Commercial banking(2) | 76 | 32 | 44 | |||||||||
Other | (33 | ) | (14 | ) | (19 | ) | ||||||
Total loans, including loans held for sale | 541 | 364 | 177 | |||||||||
Investment securities | 1 | 20 | (19 | ) | ||||||||
Cash equivalents and other interest-earning assets | 11 | 3 | 8 | |||||||||
Total interest income | 553 | 387 | 166 | |||||||||
Interest expense: | ||||||||||||
Deposits | 70 | 29 | 41 | |||||||||
Securitized debt obligations | 21 | 6 | 15 | |||||||||
Senior and subordinated notes | 43 | 15 | 28 | |||||||||
Other borrowings and liabilities | 1 | (7 | ) | 8 | ||||||||
Total interest expense | 135 | 43 | 92 | |||||||||
Net interest income | $ | 418 | $ | 344 | $ | 74 |
(1) | We calculate the change in interest income and interest expense separately for each item. The portion of interest income or interest expense attributable to both volume and rate is allocated proportionately when the calculation results in a positive value. When the portion of interest income or interest expense attributable to both volume and rate results in a negative value, the total amount is allocated to volume or rate, depending on which amount is positive. |
(2) | Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately equal to our federal statutory rate of 35% with offsetting reclassifications to the Other category. |
Non-Interest Income
Non-interest income primarily consists of interchange fees net of rewards expense, service charges and other customer-related fees and other non-interest income. Other non-interest income includes the pre-tax net benefit (provision) for mortgage representation and warranty losses related to continuing operations, gains and losses on free-standing derivatives not accounted for in hedge accounting relationships and hedge ineffectiveness.
10 | Capital One Financial Corporation (COF) |
Table 4 displays the components of non-interest income for the first quarters of 2017 and 2016.
Table 4: Non-Interest Income
__________
Three Months Ended March 31, | ||||||||
(Dollars in millions) | 2017 | 2016(1) | ||||||
Interchange fees, net | $ | 570 | $ | 604 | ||||
Service charges and other customer-related fees | 371 | 423 | ||||||
Net securities gains (losses) | — | (8 | ) | |||||
Other non-interest income: | ||||||||
Benefit for mortgage representation and warranty losses(2) | 25 | 1 | ||||||
Net fair value gains on free-standing derivatives | 17 | 30 | ||||||
Other | 78 | 114 | ||||||
Total other non-interest income | 120 | 145 | ||||||
Total non-interest income | $ | 1,061 | $ | 1,164 |
(1) | We made certain non-interest income reclassifications in the fourth quarter of 2016 to conform to the current period presentation. The primary net effects of the reclassifications for the three months ended March 31, 2016 compared to previously reported results were (i) an increase to Service charges and other customer-related fees of $19 million; and (ii) a decrease to Other non-interest income of $27 million. We have also consolidated the Non-interest income presentation of Other-than-temporary impairment (“OTTI”) with net realized gains or losses from investment securities into a new Net securities gains(losses) line. See Note 1—Summary of Significant Accounting Policies in our 2016 Form 10-K for additional information. |
(2) | Represents the benefit for mortgage representation and warranty losses recorded in continuing operations. |
Non-interest income decreased by $103 million to $1.1 billion in the first quarter of 2017 compared to the first quarter of 2016 primarily driven by:
• | lower service charges and other customer-related fees primarily due to a build in our U.K. payment protection insurance customer refund reserve (“U.K. PPI Reserve”) in the first quarter of 2017 compared to the absence of a build in the first quarter of 2016, as well as the exit of our legacy payment protection products in our Domestic Card business during the first quarter of 2016; and |
• | lower net interchange fees, as an increase in gross interchange fees driven by higher purchase volume was more than offset by higher rewards expense from the continued expansion of our rewards franchise, as well as a customer rewards reserve release within our retail banking business in the first quarter of 2016 related to the discontinuation of certain debit card and deposit products. |
These decreases were partially offset by:
• | higher revenue in our capital markets and agency businesses in our Commercial Banking business; and |
• | a mortgage representation and warranty reserve release in our Consumer Banking business. |
We provide additional information on our U.K. PPI Reserve in “Note 14—Commitments, Contingencies, Guarantees and Others.”
Provision for Credit Losses
Our provision for credit losses in each period is driven by net charge-offs, changes to the allowance for loan and lease losses and changes to the reserve for unfunded lending commitments. We recorded a provision for credit losses of $2.0 billion and $1.5 billion in the first quarters of 2017 and 2016, respectively. The provision for credit losses as a percentage of net interest income was 36.4% and 30.2% in the first quarters of 2017 and 2016, respectively.
11 | Capital One Financial Corporation (COF) |
Our provision for credit losses increased by $465 million in the first quarter of 2017 compared to the first quarter of 2016 primarily driven by:
• | a larger allowance build in our domestic credit card loan portfolio due to increasing loss expectations on recent originations; and |
• | higher charge-offs in our domestic credit card loan portfolio due to seasoning of recent growth. |
These increases were partially offset by:
• | an allowance release in our Commercial Banking business in the first quarter of 2017 compared to a build in the first quarter of 2016, reflecting lower exposure in our oil and gas and taxi medallion lending portfolios. |
We provide additional information on the provision for credit losses and changes in the allowance for loan and lease losses within “MD&A—Credit Risk Profile,” “Note 4—Loans” and “Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments.” For information on the allowance methodology for each of our loan categories, see “Note 1—Summary of Significant Accounting Policies” in our 2016 Form 10-K.
Non-Interest Expense
Non-interest expense consists of operating expenses related to continuing operations, such as salaries and associate benefits, occupancy and equipment costs, professional services, communications and data processing expenses and other non-interest expenses, as well as marketing costs and amortization of intangibles.
Table 5 displays the components of non-interest expense for the first quarters of 2017 and 2016.
Table 5: Non-Interest Expense
__________
Three Months Ended March 31, | ||||||||
(Dollars in millions) | 2017 | 2016(1) | ||||||
Salaries and associate benefits | $ | 1,471 | $ | 1,270 | ||||
Occupancy and equipment | 471 | 458 | ||||||
Marketing | 396 | 428 | ||||||
Professional services | 247 | 241 | ||||||
Communications and data processing | 288 | 280 | ||||||
Amortization of intangibles | 62 | 101 | ||||||
Other non-interest expense: | ||||||||
Collections | 85 | 81 | ||||||
Fraud losses | 78 | 90 | ||||||
Bankcard, regulatory and other fee assessments | 136 | 107 | ||||||
Other | 200 | 167 | ||||||
Total other non-interest expense | 499 | 445 | ||||||
Total non-interest expense | $ | 3,434 | $ | 3,223 |
(1) | We made certain non-interest expense reclassifications in the fourth quarter of 2016. The net effect of the reclassifications for the three months ended March 31, 2016 compared to previously reported results was an increase to Communications and data processing expense of $37 million, with a corresponding decrease to Professional services. See “Note 1—Summary of Significant Accounting Policies” in our 2016 Form 10-K for additional information. |
Non-interest expense increased by $211 million to $3.4 billion in the first quarter of 2017 compared to the first quarter of 2016 primarily due to:
• | higher operating expenses associated with loan growth, as well as continued investments in technology and infrastructure; |
• | higher other non-interest expense primarily driven by a build in our U.K. PPI Reserve in the first quarter of 2017 compared to the absence of a build in the first quarter of 2016; and |
12 | Capital One Financial Corporation (COF) |
• | higher Federal Deposit Insurance Corporation (“FDIC”) surcharges and premiums. |
These increases are partially offset by:
• | lower amortization of intangibles; and |
• | lower marketing expenses. |
Income (Loss) from Discontinued Operations, Net of Tax
Income (loss) from discontinued operations consists of results from the discontinued mortgage origination operations of our wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc. (“GreenPoint”) and the discontinued manufactured housing operations of GreenPoint Credit, LLC, a subsidiary of GreenPoint, both of which were acquired as part of the North Fork Bancorporation, Inc. (“North Fork”) acquisition in December 2006. Income from discontinued operations, net of tax, was $15 million in the first quarter of 2017 compared to a loss of $5 million in the first quarter of 2016. We recorded a release related to our mortgage representation and warranty reserve, net of tax, of $42 million ($67 million before tax) in the first quarter of 2017, compared to a provision, net of tax, of $2 million ($3 million before tax) in the first quarter of 2016 as a result of favorable legal developments. This mortgage representation and warranty reserve release was partially offset by a pre-tax charge of $40 million to record a liability related to our contingent obligation to exercise certain mandatory clean-up calls associated with manufactured housing securitizations undertaken by GreenPoint Credit, LLC.
We provide additional information on the discontinued operations in “Note 2—Discontinued Operations” and on the net benefit (provision) for mortgage representation and warranty losses and the related reserve for representation and warranty claims in “MD&A—Consolidated Balance Sheets Analysis—Mortgage Representation and Warranty Reserve” and “Note 14—Commitments, Contingencies, Guarantees and Others.”
Income Taxes
We recorded income tax provisions of $314 million (28.3% effective income tax rate) and $452 million (30.7% effective income tax rate) in the first quarters of 2017 and 2016, respectively. Our effective tax rate on income from continuing operations varies between periods due, in part, to fluctuations in our pre-tax earnings, which affects the relative tax benefit of tax-exempt income, tax credits and other permanent tax items.
The decrease in our effective income tax rate in the first quarter of 2017 from the first quarter of 2016 was primarily due to:
• | increases in the relative benefit of tax exempt income and tax credits; and |
• | increased discrete tax benefits related to the adoption of Accounting Standards Update (“ASU”) 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting. |
This increase was partially offset by:
• | reduced benefits associated with foreign earnings. |
We provide additional information on items affecting our income taxes and effective tax rate under “Note 16—Income Taxes” in our 2016 Form 10-K.
13 | Capital One Financial Corporation (COF) |
CONSOLIDATED BALANCE SHEETS ANALYSIS |
Total assets decreased by $8.5 billion to $348.5 billion as of March 31, 2017 from December 31, 2016 primarily due to:
• | a decrease in loans held for investment primarily due to expected seasonal paydowns in our domestic credit card loan portfolio and run-off of our acquired home loan portfolio, partially offset by growth in our auto and commercial loan portfolios. |
Total liabilities decreased by $9.0 billion to $300.5 billion as of March 31, 2017 from December 31, 2016 primarily driven by:
• | a decrease in other debt primarily attributable to a decrease in our FHLB advances outstanding, partially offset by an increase in our senior and subordinated notes. |
Stockholders’ equity increased by $526 million to $48.0 billion as of March 31, 2017 from December 31, 2016 primarily due to:
• | our net income of $810 million in the first quarter of 2017. |
This increase was partially offset by:
• | $250 million of dividend payments to our common and preferred stockholders; and |
• | $218 million of share repurchases. |
The following is a discussion of material changes in the major components of our assets and liabilities during the first quarter of 2017. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to ensure the adequacy of capital while managing the liquidity requirements of the Company and our customers and our market risk exposure in accordance with our risk appetite.
Investment Securities
Our investment portfolio consists primarily of the following: U.S. Treasury securities; U.S. government-sponsored enterprise or agency (“Agency”) and non-agency residential mortgage-backed securities (“RMBS”); Agency and non-agency commercial mortgage-backed securities (“CMBS”); other asset-backed securities (“ABS”); and other securities. The carrying value of our investments in U.S. Treasury and Agency securities represented 91% of our total investment securities as of both March 31, 2017 and December 31, 2016.
The fair value of our available for sale securities portfolio was $41.3 billion as of March 31, 2017, an increase of $523 million from December 31, 2016. The fair value of our held to maturity securities portfolio was $26.7 billion as of March 31, 2017, an increase of $461 million from December 31, 2016. The increase in the fair value of both of these portfolios was primarily driven by purchases outpacing sales and paydowns.
Gross unrealized gains on our available for sale securities portfolio increased slightly to $550 million as of March 31, 2017 compared to $539 million as of December 31, 2016 and gross unrealized losses on this portfolio decreased to $501 million as of March 31, 2017 compared to $535 million as of December 31, 2016. Of the $501 million gross unrealized losses as of March 31, 2017, $104 million was related to securities that had been in a loss position for 12 months or longer.
14 | Capital One Financial Corporation (COF) |
Table 6 presents the amortized cost, carrying value and fair value for the major categories of our investment securities portfolio as of March 31, 2017 and December 31, 2016.
Table 6: Investment Securities
__________
March 31, 2017 | December 31, 2016 | |||||||||||||||
(Dollars in millions) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
Investment securities available for sale: | ||||||||||||||||
U.S. Treasury securities | $ | 5,195 | $ | 5,170 | $ | 5,103 | $ | 5,065 | ||||||||
RMBS: | ||||||||||||||||
Agency(1) | 27,289 | 26,992 | 26,830 | 26,527 | ||||||||||||
Non-agency | 2,264 | 2,647 | 2,349 | 2,722 | ||||||||||||
Total RMBS | 29,553 | 29,639 | 29,179 | 29,249 | ||||||||||||
CMBS: | ||||||||||||||||
Agency(1) | 3,159 | 3,132 | 3,335 | 3,304 | ||||||||||||
Non-agency | 1,712 | 1,730 | 1,676 | 1,684 | ||||||||||||
Total CMBS | 4,871 | 4,862 | 5,011 | 4,988 | ||||||||||||
Other ABS(2) | 688 | 688 | 714 | 714 | ||||||||||||
Other securities(3) | 904 | 901 | 726 | 721 | ||||||||||||
Total investment securities available for sale | $ | 41,211 | $ | 41,260 | $ | 40,733 | $ | 40,737 | ||||||||
(Dollars in millions) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
Investment securities held to maturity: | ||||||||||||||||
U.S. Treasury securities | $ | 199 | $ | 199 | $ | 199 | $ | 199 | ||||||||
Agency RMBS | 22,486 | 22,932 | 22,125 | 22,573 | ||||||||||||
Agency CMBS | 3,485 | 3,526 | 3,388 | 3,424 | ||||||||||||
Total investment securities held to maturity | $ | 26,170 | $ | 26,657 | $ | 25,712 | $ | 26,196 |
(1) | Includes securities guaranteed by Government National Mortgage Association (“Ginnie Mae”) and securities issued by Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”). |
(2) | ABS collateralized by credit card loans constituted approximately 54% and 57% of the other ABS portfolio as of March 31, 2017 and December 31, 2016, respectively, and ABS collateralized by auto dealer floor plan inventory loans and leases constituted approximately 24% and 23% of the other ABS portfolio as of March 31, 2017 and December 31, 2016, respectively. |
(3) | Includes supranational bonds, foreign government bonds, mutual funds and equity investments. |
Credit Ratings
Our portfolio of investment securities continues to be concentrated in securities that generally have high credit ratings and low credit risk, such as securities issued and guaranteed by the U.S. Treasury and Agencies. As of March 31, 2017 and December 31, 2016, approximately 96% and 95% of our total investment securities portfolio was rated AA+ or its equivalent, or better, respectively, while approximately 4% was below investment grade, as of both March 31, 2017 and December 31, 2016. We categorize the credit ratings of our investment securities based on the lowest credit rating as issued by the following rating agencies: Standard & Poor’s Ratings Services (“S&P”), Moody’s Investors Service (“Moody’s”) and Fitch Ratings (“Fitch”).
Table 7 provides information on the credit ratings of our non-agency RMBS, non-agency CMBS, other ABS and other securities in our portfolio as of March 31, 2017 and December 31, 2016.
15 | Capital One Financial Corporation (COF) |
Table 7: Non-Agency Investment Securities Credit Ratings
__________
March 31, 2017 | December 31, 2016 | ||||||||||||||||||||
(Dollars in millions) | Fair Value | AAA | Other Investment Grade | Below Investment Grade(1) | Fair Value | AAA | Other Investment Grade | Below Investment Grade(1) | |||||||||||||
Non-agency RMBS | $ | 2,647 | — | 2% | 98% | $ | 2,722 | — | 3% | 97% | |||||||||||
Non-agency CMBS | 1,730 | 100 | % | — | — | 1,684 | 100% | — | — | ||||||||||||
Other ABS | 688 | 99 | 1 | — | 714 | 99 | 1 | — | |||||||||||||
Other securities | 901 | 72 | 18 | 10 | 721 | 62 | 25 | 13 |
(1) | Includes investment securities that were not rated. |
For additional information on our investment securities, see “Note 3—Investment Securities.”
Loans Held for Investment
Total loans held for investment (“HFI”) consists of both unsecuritized loans and loans held in our consolidated trusts. Table 8 summarizes the carrying value of our portfolio of loans held for investment by portfolio segment, net of the allowance for loan and lease losses, as of March 31, 2017 and December 31, 2016.
Table 8: Loans Held for Investment
March 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
(Dollars in millions) | Loans | Allowance | Net Loans | Loans | Allowance | Net Loans | ||||||||||||||||||
Credit Card | $ | 99,213 | $ | 5,058 | $ | 94,155 | $ | 105,552 | $ | 4,606 | $ | 100,946 | ||||||||||||
Consumer Banking | 73,982 | 1,163 | 72,819 | 73,054 | 1,102 | 71,952 | ||||||||||||||||||
Commercial Banking | 67,320 | 761 | 66,559 | 66,916 | 793 | 66,123 | ||||||||||||||||||
Other | 73 | 2 | 71 | 64 | 2 | 62 | ||||||||||||||||||
Total | $ | 240,588 | $ | 6,984 | $ | 233,604 | $ | 245,586 | $ | 6,503 | $ | 239,083 |
Loans held for investment decreased by $5.0 billion to $240.6 billion as of March 31, 2017 from December 31, 2016 primarily due to expected seasonal paydowns in our domestic credit card loan portfolio and run-off of our acquired home loan portfolio, partially offset by growth in our auto and commercial loan portfolios.
We provide additional information on the composition of our loan portfolio and credit quality below in “MD&A—Credit Risk Profile,” “MD&A—Consolidated Results of Operations” and “Note 4—Loans.”
Deposits
Our deposits represent our largest source of funding for our operations and provide a consistent source of low-cost funds. Total deposits increased by $4.4 billion to $241.2 billion as of March 31, 2017 from December 31, 2016 primarily driven by growth in our Consumer Banking business. We provide information on the composition of our deposits, average outstanding balances, interest expense and yield in “MD&A—Liquidity Risk Profile.”
Securitized Debt Obligations
Securitized debt obligations decreased to $18.5 billion as of March 31, 2017, from $18.8 billion as of December 31, 2016, as debt maturities exceeded issuances during the first quarter of 2017. We provide additional information on our borrowings in “MD&A—Liquidity Risk Profile” and in “Note 8—Deposits and Borrowings.”
16 | Capital One Financial Corporation (COF) |
Other Debt
Other debt, which consists primarily of federal funds purchased and securities loaned or sold under agreements to repurchase, senior and subordinated notes, and Federal Home Loan Banks (“FHLB”) advances, totaled $29.9 billion as of March 31, 2017, of which $28.9 billion represented long-term debt and the remainder represented short-term borrowings. Other debt totaled $41.6 billion as of December 31, 2016, of which $40.6 billion represented long-term debt and the remainder represented short-term borrowings.
The decrease in other debt of $11.7 billion in the first quarter of 2017 was primarily attributable to a decrease in our FHLB advances outstanding, partially offset by an increase in our senior and subordinated notes. We provide additional information on our borrowings in “MD&A—Liquidity Risk Profile” and in “Note 8—Deposits and Borrowings.”
Mortgage Representation and Warranty Reserve
We acquired three subsidiaries that originated residential mortgage loans and sold these loans to various purchasers, including purchasers who created securitization trusts. These subsidiaries are Capital One Home Loans, LLC, which was acquired in February 2005; GreenPoint, which was acquired in December 2006 as part of the North Fork acquisition; and Chevy Chase Bank, F.S.B. (“CCB”), which was acquired in February 2009 and subsequently merged into CONA.
We have established representation and warranty reserves for losses associated with the mortgage loans sold by each subsidiary that we consider to be both probable and reasonably estimable, including both litigation and non-litigation liabilities. These reserves are reported on our consolidated balance sheets as a component of other liabilities. The reserve setting process relies heavily on estimates, which are inherently uncertain, and requires judgment. We evaluate these estimates on a quarterly basis. We build our representation and warranty reserves through the provision for mortgage representation and warranty losses, which we report in our consolidated statements of income as a component of non-interest income for loans originated and sold by CCB and Capital One Home Loans, LLC and as a component of discontinued operations for loans originated and sold by GreenPoint. The aggregate reserve for all three entities decreased to $516 million as of March 31, 2017, compared to $630 million as of December 31, 2016 primarily due to favorable legal developments.
As part of our business planning processes, we have considered various outcomes relating to the future representation and warranty liabilities of our subsidiaries that are possible but do not rise to the level of being both probable and reasonably estimable outcomes justifying an incremental reserve under applicable accounting standards. Our current best estimate of reasonably possible future losses from representation and warranty claims beyond what was in our reserve as of March 31, 2017 is approximately $1.4 billion, a decrease from our estimate of $1.5 billion as of December 31, 2016.
We provide additional information related to the representation and warranty reserve, including factors that may impact the adequacy of the reserve and the ultimate amount of losses incurred by our subsidiaries, in “Note 14—Commitments, Contingencies, Guarantees and Others.”
OFF-BALANCE SHEET ARRANGEMENTS |
In the ordinary course of business, we engage in certain activities that are not reflected on our consolidated balance sheets, generally referred to as off-balance sheet arrangements. These activities typically involve transactions with unconsolidated variable interest entities (“VIEs”) as well as other arrangements, such as letter of credits, loan commitments and guarantees, to meet the financing needs of our customers and support their ongoing operations. We provide additional information regarding these types of activities in the “MD&A—Liquidity Risk Profile” as well as “Note 6—Variable Interest Entities and Securitizations” and “Note 14—Commitments, Contingencies, Guarantees and Others.”
17 | Capital One Financial Corporation (COF) |
BUSINESS SEGMENT FINANCIAL PERFORMANCE |
Our principal operations are currently organized into three major business segments, which are defined based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group, are included in the Other category.
The results of our individual businesses, which we report on a continuing operations basis, reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 18—Business Segments” in our 2016 Form 10-K.
We refer to the business segment results derived from our internal management accounting and reporting process as our “managed” presentation, which differs in some cases from our reported results prepared based on U.S. GAAP. There is no comprehensive authoritative body of guidance for management accounting equivalent to U.S. GAAP; therefore, the managed presentation of our business segment results may not be comparable to similar information provided by other financial services companies. In addition, our individual business segment results should not be used as a substitute for comparable results determined in accordance with U.S. GAAP.
Below we summarize our business segment results for the first quarters of 2017 and 2016 and provide a comparative discussion of these results, as well as changes in our financial condition and credit performance metrics as of March 31, 2017 compared to December 31, 2016. We provide a reconciliation of our total business segment results to our reported consolidated results in “Note 13—Business Segments.” Additionally, we provide information on the outlook for each of our business segments as described above under “MD&A—Executive Summary and Business Outlook.”
Business Segment Financial Performance
Table 9 summarizes our business segment results, which we report based on revenue and income from continuing operations, for
the first quarters of 2017 and 2016. We provide information on the allocation methodologies used to derive our business segment results in “Note 18—Business Segments” in our 2016 Form 10-K. We also provide a reconciliation of our total business segment results to our consolidated U.S. GAAP results in “Note 13—Business Segments” of this Report.
Table 9: Business Segment Results
Three Months Ended March 31, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Total Net Revenue(1) | Net Income(2) | Total Net Revenue(1) | Net Income(2) | |||||||||||||||||||||
(Dollars in millions) | Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||||||
Credit Card | $ | 4,084 | 63% | $ | 271 | 34% | $ | 3,880 | 62% | $ | 609 | 60% | ||||||||||||
Consumer Banking | 1,712 | 26 | 248 | 31 | 1,611 | 26 | 249 | 24 | ||||||||||||||||
Commercial Banking(3) | 724 | 11 | 213 | 27 | 655 | 11 | 67 | 7 | ||||||||||||||||
Other(4) | 15 | — | 63 | 8 | 74 | 1 | 93 | 9 | ||||||||||||||||
Total | $ | 6,535 | 100% | $ | 795 | 100% | $ | 6,220 | 100% | $ | 1,018 | 100% |
__________
(1) | Total net revenue consists of net interest income and non-interest income. |
(2) | Net income for our business segments and the Other category is based on income (loss) from continuing operations, net of tax. |
(3) | Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately equal to our federal statutory tax rate of 35% with offsetting reclassifications to the Other category. |
(4) | The Other category includes the residual impact of the allocation of our centralized Corporate Treasury group activities, unallocated corporate expenses that do not directly support the operations of the business segments and other items as described in “Note 18—Business Segments” in our 2016 Form 10-K. |
Credit Card Business
The primary sources of revenue for our Credit Card business are interest income, net interchange income and fees collected from customers. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses.
Our Credit Card business generated net income from continuing operations of $271 million and $609 million in the first quarters of 2017 and 2016, respectively.
Table 10 summarizes the financial results of our Credit Card business and displays selected key metrics for the periods indicated.
Table 10: Credit Card Business Results
__________
Three Months Ended March 31, | |||||||||||
(Dollars in millions, except as noted) | 2017 | 2016 | Change | ||||||||
Selected income statement data: | |||||||||||
Net interest income | $ | 3,346 | $ | 3,033 | 10% | ||||||
Non-interest income | 738 | 847 | (13 | ) | |||||||
Total net revenue(1) | 4,084 | 3,880 | 5 | ||||||||
Provision for credit losses | 1,717 | 1,071 | 60 | ||||||||
Non-interest expense | 1,929 | 1,863 | 4 | ||||||||
Income from continuing operations before income taxes | 438 | 946 | (54 | ) | |||||||
Income tax provision | 167 | 337 | (50 | ) | |||||||
Income from continuing operations, net of tax | $ | 271 | $ | 609 | (56 | ) | |||||
Selected performance metrics: | |||||||||||
Average loans held for investment(2) | $ | 101,169 | $ | 92,987 | 9 | ||||||
Average yield on loans held for investment(3) | 14.99% | 14.60% | 39 | bps | |||||||
Total net revenue margin(4) | 16.14 | 16.69 | (55 | ) | |||||||
Net charge-offs | $ | 1,271 | $ | 950 | 34% | ||||||
Net charge-off rate | 5.02% | 4.09% | 93 | bps | |||||||
Purchased credit card relationship (“PCCR”) intangible amortization | $ | 44 | $ | 70 | (37)% | ||||||
Purchase volume(5) | 73,197 | 68,189 | 7 | ||||||||
(Dollars in millions, except as noted) | March 31, 2017 | December 31, 2016 | Change | ||||||||
Selected period-end data: | |||||||||||
Loans held for investment(2) | $ | 99,213 | $ | 105,552 | (6)% | ||||||
30+ day performing delinquency rate | 3.68% | 3.91% | (23 | )bps | |||||||
30+ day delinquency rate | 3.71 | 3.94 | (23 | ) | |||||||
Nonperforming loan rate | 0.04 | 0.04 | — | ||||||||
Allowance for loan and lease losses | $ | 5,058 | $ | 4,606 | 10% | ||||||
Allowance coverage ratio(6) | 5.10% | 4.36% | 74 | bps |
(1) | We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in revenue and is not included in our net charge-offs. Total net revenue was reduced by $321 million and $228 million in the first quarters of 2017 and 2016, respectively, for the estimated uncollectible amount of billed finance charges and fees and related losses. The finance charge and fee reserve totaled $398 million and $402 million as of March 31, 2017 and December 31, 2016, respectively. |
(2) | Period-end loans held for investment and average loans held for investment include billed finance charges and fees, net of the estimated uncollectible amount. |
(3) | Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment. |
18 | Capital One Financial Corporation (COF) |
(4) | Total net revenue margin is calculated by dividing annualized total net revenue for the period by average loans held for investment during the period. Interest income also includes interest income on loans held for sale. |
(5) | Purchase volume consists of purchase transactions, net of returns, for the period for loans both classified as held for investment and held for sale. Excludes cash advance and balance transfer transactions. |
(6) | Allowance coverage ratio is calculated by dividing the period-end allowance for loan and lease losses by period-end loans held for investment. |
Key factors affecting the results of our Credit Card business for the first quarter of 2017 compared to the first quarter of 2016, and changes in financial condition and credit performance between March 31, 2017 and December 31, 2016 include the following:
• | Net Interest Income: Net interest income increased by $313 million to $3.3 billion in the first quarter of 2017 primarily driven by loan growth and higher net interest margins in our Domestic Card business. |
• | Non-Interest Income: Non-interest income decreased by $109 million to $738 million in the first quarter of 2017 primarily driven by: |
◦ | higher rewards expense from the continued expansion of our rewards franchise; |
◦ | a build in our U.K. PPI Reserve in the first quarter of 2017 compared to the absence of a build in the first quarter of 2016; and |
◦ | lower service charges and other customer-related fees primarily due to the exit of our legacy payment protection products in our Domestic Card business during the first quarter of 2016. |
These decreases were partially offset by:
◦ | an increase in gross interchange fees driven by higher purchase volume. |
• | Provision for Credit Losses: The provision for credit losses increased by $646 million to $1.7 billion in the first quarter of 2017 primarily driven by: |
◦ | a larger allowance build in our domestic credit card loan portfolio due to increasing loss expectations on recent originations; and |
◦ | higher charge-offs due to seasoning of recent growth. |
• | Non-Interest Expense: Non-interest expense increased by $66 million to $1.9 billion in the first quarter of 2017 primarily driven by: |
◦ | higher operating expenses associated with loan growth and continued investments in technology; and |
◦ | higher other non-interest expense primarily driven by a build in our U.K. PPI Reserve in the first quarter of 2017 compared to the absence of a build in the first quarter of 2016. |
These increases were partially offset by:
◦ | lower marketing expenses and operating efficiencies. |
• | Loans Held for Investment: Period-end loans held for investment decreased by $6.3 billion to $99.2 billion as of March 31, 2017 from December 31, 2016 primarily due to expected seasonal paydowns. Average loans held for investment increased by $8.2 billion to $101.2 billion in the first quarter of 2017 compared to the first quarter of 2016, primarily due to growth in our domestic credit card loan portfolio. |
• | Net Charge-Off and Delinquency Metrics: The net charge-off rate increased by 93 basis points to 5.02% in the first quarter of 2017 compared to the first quarter of 2016 primarily driven by growth and seasoning of recent domestic credit card loan originations, partially offset by growth in our domestic credit card loan portfolio. The 30+ day delinquency rate decreased by 23 basis points to 3.71% as of March 31, 2017 from December 31, 2016 primarily due to seasonally lower delinquency inventories, partially offset by seasonally lower loan balances in our domestic credit card loan portfolio. |
19 | Capital One Financial Corporation (COF) |
Domestic Card Business
Domestic Card generated net income from continuing operations of $278 million and $564 million in the first quarters of 2017 and 2016, respectively. In the first quarters of 2017 and 2016, Domestic Card accounted for greater than 90% of both total net revenues and net income of our Credit Card business.
Table 10.1 summarizes the financial results for Domestic Card and displays selected key metrics for the periods indicated.
Table 10.1: Domestic Card Business Results
__________
Three Months Ended March 31, | |||||||||||
(Dollars in millions, except as noted) | 2017 | 2016 | Change | ||||||||
Selected income statement data: | |||||||||||
Net interest income | $ | 3,093 | $ | 2,756 | 12% | ||||||
Non-interest income | 699 | 774 | (10 | ) | |||||||
Total net revenue(1) | 3,792 | 3,530 | 7 | ||||||||
Provision for credit losses | 1,637 | 972 | 68 | ||||||||
Non-interest expense | 1,717 | 1,671 | 3 | ||||||||
Income from continuing operations before income taxes | 438 | 887 | (51 | ) | |||||||
Income tax provision | 160 | 323 | (50 | ) | |||||||
Income from continuing operations, net of tax | $ | 278 | $ | 564 | (51 | ) | |||||
Selected performance metrics: | |||||||||||
Average loans held for investment(2) | $ | 93,034 | $ | 85,148 | 9 | ||||||
Average yield on loans held for investment(3) | 15.01% | 14.43% | 58 | bps | |||||||
Total net revenue margin(4) | 16.30 | 16.58 | (28 | ) | |||||||
Net charge-offs | $ | 1,196 | $ | 887 | 35% | ||||||
Net charge-off rate | 5.14% | 4.16% | 98 | bps | |||||||
PCCR intangible amortization | $ | 44 | $ | 70 | (37)% | ||||||
Purchase volume(5) | 66,950 | 62,617 | 7 | ||||||||
(Dollars in millions, except as noted) | March 31, 2017 | December 31, 2016 | Change | ||||||||
Selected period-end data: | |||||||||||
Loans held for investment(2) | $ | 91,092 | $ | 97,120 | (6)% | ||||||
30+ day delinquency rate | 3.71% | 3.95% | (24 | )bps | |||||||
Allowance for loan and lease losses | $ | 4,670 | $ | 4,229 | 10% | ||||||
Allowance coverage ratio(6) | 5.13% | 4.35% | 78 | bps |
(1) | We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in revenue and is not included in our net charge-offs. |
(2) | Period-end loans held for investment and average loans held for investment include billed finance charges and fees, net of the estimated uncollectible amount. |
(3) | Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment. |
(4) | Total net revenue margin is calculated by dividing annualized total net revenue for the period by average loans held for investment during the period. |
(5) | Purchase volume consists of purchase transactions, net of returns, for the period for loans both classified as held for investment and held for sale. Excludes cash advance and balance transfer transactions. |
(6) | Allowance coverage ratio is calculated by dividing the period-end allowance for loan and lease losses by period-end loans held for investment. |
Because our Domestic Card business accounts for the substantial majority of our Credit Card business, the key factors driving the results are similar to the key factors affecting our total Credit Card business. Net income for our Domestic Card business decreased in the first quarter of 2017 compared to the first quarter of 2016 primarily driven by:
20 | Capital One Financial Corporation (COF) |
• | higher provision for credit losses; |
• | lower non-interest income; and |
• | higher operating expenses associated with loan growth. |
These drivers were partially offset by:
• | higher net interest income resulting from loan growth and higher net interest margins; and |
• | lower marketing expenses and operating efficiencies. |
Consumer Banking Business
The primary sources of revenue for our Consumer Banking business are net interest income from loans and deposits and non-interest income from service charges and customer-related fees. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses.
Our Consumer Banking business generated net income from continuing operations of $248 million and $249 million in the first quarters of 2017 and 2016, respectively.
Table 11 summarizes the financial results of our Consumer Banking business and displays selected key metrics for the periods indicated.
21 | Capital One Financial Corporation (COF) |
Table 11: Consumer Banking Business Results
__________
Three Months Ended March 31, | |||||||||||
(Dollars in millions, except as noted) | 2017 | 2016 | Change | ||||||||
Selected income statement data: | |||||||||||
Net interest income | $ | 1,517 | $ | 1,420 | 7% | ||||||
Non-interest income | 195 | 191 | 2 | ||||||||
Total net revenue | 1,712 | 1,611 | 6 | ||||||||
Provision for credit losses | 279 | 230 | 21 | ||||||||
Non-interest expense | 1,042 | 990 | 5 | ||||||||
Income from continuing operations before income taxes | 391 | 391 | — | ||||||||
Income tax provision | 143 | 142 | 1 | ||||||||
Income from continuing operations, net of tax | $ | 248 | $ | 249 | — | ||||||
Selected performance metrics: | |||||||||||
Average loans held for investment:(1) | |||||||||||
Auto | $ | 48,673 | $ | 41,962 | 16 | ||||||
Home loan | 21,149 | 24,781 | (15 | ) | |||||||
Retail banking | 3,509 | 3,553 | (1 | ) | |||||||
Total consumer banking | $ | 73,331 | $ | 70,296 | 4 | ||||||
Average yield on loans held for investment(2) | 6.48% | 6.18% | 30 | bps | |||||||
Average deposits | $ | 183,936 | $ | 174,254 | 6% | ||||||
Average deposits interest rate | 0.57% | 0.54% | 3 | bps | |||||||
Net charge-offs | $ | 218 | $ | 183 | 19% | ||||||
Net charge-off rate | 1.19% | 1.04% | 15 | bps | |||||||
Net charge-off rate (excluding PCI loans)(3) | 1.46 | 1.40 | 6 | ||||||||
Auto loan originations | $ | 7,025 | $ | 5,844 | 20% | ||||||
(Dollars in millions, except as noted) | March 31, 2017 | December 31, 2016 | Change | ||||||||
Selected period-end data: | |||||||||||
Loans held for investment:(1) | |||||||||||
Auto | $ | 49,771 | $ | 47,916 | 4% | ||||||
Home loan | 20,738 | 21,584 | (4 | ) | |||||||
Retail banking | 3,473 | 3,554 | (2 | ) | |||||||
Total consumer banking | $ | 73,982 | $ | 73,054 | 1 | ||||||
30+ day performing delinquency rate | 3.45% | 4.10% | (65 | )bps | |||||||
30+ day performing delinquency rate (excluding PCI loans)(3) | 4.23 | 5.12 | (89 | ) | |||||||
30+ day delinquency rate | 3.93 | 4.67 | (74 | ) | |||||||
30+ day delinquency rate (excluding PCI loans)(3) | 4.80 | 5.82 | (102 | ) | |||||||
Nonperforming loan rate | 0.64 | 0.72 | (8 | ) | |||||||
Nonperforming loan rate (excluding PCI loans)(3) | 0.78 | 0.90 | (12 | ) | |||||||
Nonperforming asset rate(4) | 0.92 | 1.09 | (17 | ) | |||||||
Nonperforming asset rate (excluding PCI loans)(3)(4) | 1.12 | 1.36 | (24 | ) | |||||||
Allowance for loan and lease losses | $ | 1,163 | $ | 1,102 | 6% | ||||||
Allowance coverage ratio(5)(6) | 1.57% | 1.51% | 6 | bps | |||||||
Deposits | $ | 188,216 | $ | 181,917 | 3% | ||||||
Loans serviced for others | 8,462 | 8,258 | 2 |
(1) | Average consumer banking loans held for investment includes purchased credit-impaired loans (“PCI loans”) of $13.8 billion and $18.0 billion in the first quarters of 2017 and 2016, respectively. Period-end consumer banking loans held for investment includes PCI loans with carrying values of $13.5 billion and $14.5 billion as of March 31, 2017 and December 31, 2016, respectively. See “MD&A—Glossary and Acronyms” for the definition of “PCI loans.” |
22 | Capital One Financial Corporation (COF) |
(2) | 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. |
(3) | See “MD&A—Credit Risk Profile” and “Note 1—Summary of Significant Accounting Policies” in our 2016 Form 10-K for additional information on the impact of PCI loans on our credit quality metrics. |
(4) | Nonperforming assets consist of nonperforming loans, real estate owned (“REO”) and other foreclosed assets. The total nonperforming asset rate is calculated based on total nonperforming assets divided by the combined period-end total loans held for investment, REO and other foreclosed assets. |
(5) | Allowance coverage ratio is calculated by dividing the period-end allowance for loan and lease losses by period-end loans held for investment. |
(6) | Excluding the impact of the PCI home loan amounts in footnote 1 above, the allowance coverage ratios for our home loan portfolio and total consumer banking were 0.42% and 1.87%, respectively, as of March 31, 2017, compared to 0.51% and 1.83%, respectively, as of December 31, 2016. |
Key factors affecting the results of our Consumer Banking business for the first quarter of 2017 compared to the first quarter of 2016, and changes in financial condition and credit performance between March 31, 2017 and December 31, 2016 include the following:
• | Net Interest Income: Net interest income increased by $97 million to $1.5 billion in the first quarter of 2017 primarily driven by growth in our auto loan portfolio, partially offset by higher interest expense in our retail banking business due to higher deposit volumes and higher interest rates, as well as margin compression in our auto loan portfolio. |
◦ | Consumer Banking loan yield increased by 30 basis points to 6.5% in the first quarter of 2017 compared to the first quarter of 2016. The increase was primarily driven by changes in the product mix in Consumer Banking as a result of run-off of our acquired home loan portfolio and growth in our auto loan portfolio, partially offset by margin compression in our auto loan portfolio. |
◦ | Average yield on auto loans decreased by 16 basis points to 7.6% in the first quarter of 2017 primarily attributable to margin compression and changes in the product mix in our auto loan portfolio. |
◦ | Average yield on our home loan portfolio increased by 49 basis points to 4.2% in the first quarter of 2017 primarily as a result of higher yield on our acquired home loan portfolio. |
• | Non-Interest Income: Non-interest income was substantially flat at $195 million in the first quarter of 2017 as a mortgage representation and warranty reserve release in the first quarter of 2017 had a similar impact as the customer rewards reserve release within our retail banking business in the first quarter of 2016 related to the discontinuation of certain debit card and deposit products. |
• | Provision for Credit Losses: The provision for credit losses increased by $49 million to $279 million in the first quarter of 2017 primarily driven by: |
◦ | higher charge-offs due to growth and seasoning in our auto loan portfolio; and |
◦ | a larger allowance build in our auto loan portfolio due to higher loss rates associated with growth, as well as further expected declines in used car auction prices. |
• | Non-Interest Expense: Non-interest expense increased by $52 million to $1.0 billion in the first quarter of 2017 primarily due to higher operating expenses driven by growth in our auto loan portfolio. |
• | Loans Held for Investment: Period-end loans held for investment increased by $928 million to $74.0 billion as of March 31, 2017 from December 31, 2016, and average loans held for investment increased by $3.0 billion to $73.3 billion in the first quarter of 2017 compared to the first quarter of 2016. The increases were primarily due to growth in our auto loan portfolio, partially offset by run-off of our acquired home loan portfolio. |
• | Deposits: Period-end deposits increased by $6.3 billion to $188.2 billion as of March 31, 2017 from December 31, 2016 as a result of strong growth in our deposit products that are sold directly to both existing and new customers. |
• | Net Charge-Off and Delinquency Metrics: The net charge-off rate increased by 15 basis points to 1.19% in the first quarter of 2017 compared to the first quarter of 2016. The increase reflects the greater portion of auto loans in our total consumer banking loan portfolio, which generally have higher charge-off rates than other products within this portfolio. The 30+ day delinquency rate decreased by 74 basis points to 3.93% as of March 31, 2017 from December 31, 2016 primarily attributable to seasonally lower auto delinquency inventories. |
23 | Capital One Financial Corporation (COF) |
Commercial Banking Business
The primary sources of revenue for our Commercial Banking business are net interest income from loans and deposits and non-interest income from customer fees and other transactions. Because we have some investments that generate tax-exempt income or tax credits, we make certain reclassifications to our Commercial Banking business results to present revenues on a taxable-equivalent basis. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses.
Our Commercial Banking business generated net income from continuing operations of $213 million and $67 million in the first quarters of 2017 and 2016, respectively. Table 12 summarizes the financial results of our Commercial Banking business and displays selected key metrics for the periods indicated.
24 | Capital One Financial Corporation (COF) |
Table 12: Commercial Banking Business Results
__________
Three Months Ended March 31, | |||||||||||
(Dollars in millions, except as noted) | 2017 | 2016 | Change | ||||||||
Selected income statement data: | |||||||||||
Net interest income | $ | 566 | $ | 537 | 5% | ||||||
Non-interest income | 158 | 118 | 34 | ||||||||
Total net revenue(1) | 724 | 655 | 11 | ||||||||
Provision (benefit) for credit losses(2) | (2 | ) | 228 | ** | |||||||
Non-interest expense | 391 | 322 | 21 | ||||||||
Income from continuing operations before income taxes | 335 | 105 | 219 | ||||||||
Income tax provision | 122 | 38 | 221 | ||||||||
Income from continuing operations, net of tax | $ | 213 | $ | 67 | 218 | ||||||
Selected performance metrics: | |||||||||||
Average loans held for investment:(3) | |||||||||||
Commercial and multifamily real estate | $ | 26,587 | $ | 25,015 | 6 | ||||||
Commercial and industrial | 39,877 | 37,762 | 6 | ||||||||
Total commercial lending | 66,464 | 62,777 | 6 | ||||||||
Small-ticket commercial real estate | 474 | 598 | (21 | ) | |||||||
Total commercial banking | $ | 66,938 | $ | 63,375 | 6 | ||||||
Average yield on loans held for investment(1)(4) | 3.65% | 3.38 | % | 27 | bps | ||||||
Average deposits | $ | 34,219 | $ | 34,076 | — | ||||||
Average deposits interest rate | 0.31% | 0.27% | 4 | bps | |||||||
Net charge-offs | $ | 23 | $ | 46 | (50)% | ||||||
Net charge-off rate | 0.14% | 0.29% | (15 | )bps | |||||||
(Dollars in millions, except as noted) | March 31, 2017 | December 31, 2016 | Change | ||||||||
Selected period-end data: | |||||||||||
Loans held for investment:(3) | |||||||||||
Commercial and multifamily real estate | $ | 27,218 | $ | 26,609 | 2% | ||||||
Commercial and industrial | 39,638 | 39,824 | — | ||||||||
Total commercial lending | 66,856 | 66,433 | 1 | ||||||||
Small-ticket commercial real estate | 464 | 483 | (4 | ) | |||||||
Total commercial banking | $ | 67,320 | $ | 66,916 | 1 | ||||||
Nonperforming loan rate | 1.25% | 1.53% | (28 | )bps | |||||||
Nonperforming asset rate(5) | 1.27 | 1.54 | (27 | ) | |||||||
Allowance for loan and lease losses(2) | $ | 761 | $ | 793 | (4)% | ||||||
Allowance coverage ratio(6) | 1.13% | 1.19% | (6 | )bps | |||||||
Deposits | $ | 33,735 | $ | 33,866 | — | ||||||
Loans serviced for others(7) | 23,557 | 22,321 | 6% |
(1) | 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. |
(2) | The provision for losses on unfunded lending commitments is included in the provision for credit losses in our consolidated statements of income and the related reserve for unfunded lending commitments is included in other liabilities on our consolidated balance sheets. Our reserve for unfunded lending commitments totaled $133 million and $129 million as of March 31, 2017 and December 31, 2016, respectively. |
(3) | Average commercial banking loans held for investment includes PCI loans of $607 million and $926 million in the first quarters of 2017 and 2016, respectively. Period-end commercial banking loans held for investment includes PCI loans with carrying values of $594 million and $613 million as of March 31, 2017 and December 31, 2016, respectively. See “MD&A—Glossary and Acronyms” for the definition of “PCI loans.” |
25 | Capital One Financial Corporation (COF) |
(4) | 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. |
(5) | Nonperforming assets consist of nonperforming loans, real estate owned (“REO”) and other foreclosed assets. The total nonperforming asset rate is calculated based on total nonperforming assets divided by the combined period-end total loans held for investment, REO and other foreclosed assets. |
(6) | Allowance coverage ratio is calculated by dividing the period-end allowance for loan and lease losses by period-end loans held for investment. |
(7) | Loans serviced for others represents our portfolio of loans serviced for third parties related to our multifamily finance business. |
** | Change is not meaningful. |
Key factors affecting the results of our Commercial Banking business for the first quarter of 2017 compared to the first quarter of 2016, and changes in financial condition and credit performance between March 31, 2017 and December 31, 2016 include the following:
• | Net Interest Income: Net interest income increased by $29 million to $566 million in the first quarter of 2017 primarily driven by loan growth and higher yields as a result of higher interest rates. |
• | Non-Interest Income: Non-interest income increased by $40 million to $158 million in the first quarter of 2017 primarily driven by higher revenue in our capital markets and agency businesses. |
• | Provision for Credit Losses: The provision for credit losses decreased by $230 million primarily due to an allowance release in the first quarter of 2017 compared to a build in the first quarter of 2016, as well as lower charge-offs. The decreases reflect lower exposure in our oil and gas and taxi medallion lending portfolios. |
• | Non-Interest Expense: Non-interest expense increased by $69 million to $391 million in the first quarter of 2017 driven by higher operating expenses associated with loan growth and continued investments in technology. |
• | Loans Held for Investment: Period-end loans held for investment increased by $404 million to $67.3 billion as of March 31, 2017 from December 31, 2016, and average loans held for investment increased by $3.6 billion to $66.9 billion in the first quarter of 2017 compared to the first quarter of 2016, both driven by growth in our commercial loan portfolios. |
• | Deposits: Period-end deposits were stable at $33.7 billion as of March 31, 2017. |
• | Net Charge-Off and Nonperforming Metrics: The net charge-off rate decreased by 15 basis points to 0.14% in the first quarter of 2017 compared to the first quarter of 2016 driven by lower charge-offs in our oil and gas and taxi medallion lending portfolios. The nonperforming loan rate decreased by 28 basis points to 1.25% as of March 31, 2017 from December 31, 2016, reflecting improved portfolio performance in our oil and gas portfolio. |
Other Category
Other includes unallocated amounts related to our centralized Corporate Treasury group activities, such as management of our corporate investment portfolio, asset/liability management and certain capital management activities. Other also includes:
• | foreign exchange-rate fluctuations on foreign currency-denominated balances; |
• | unallocated corporate expenses that do not directly support the operations of the business segments or for which the business segments are not considered financially accountable in evaluating their performance, such as certain acquisition and restructuring charges; |
• | a portion of the net benefit (provision) for representation and warranty losses related to continuing operations; and |
• | offsets related to certain line-item reclassifications. |
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Table 13 summarizes the financial results of our Other category for the periods indicated.
Table 13: Other Category Results
__________
Three Months Ended March 31, | |||||||||||
(Dollars in millions) | 2017 | 2016 | Change | ||||||||
Selected income statement data: | |||||||||||
Net interest income | $ | 45 | $ | 66 | (32)% | ||||||
Non-interest income | (30 | ) | 8 | ** | |||||||
Total net revenue(1) | 15 | 74 | (80 | ) | |||||||
Provision (benefit) for credit losses | (2 | ) | (2 | ) | — | ||||||
Non-interest expense | 72 | 48 | 50 | ||||||||
Income from continuing operations before income taxes | (55 | ) | 28 | ** | |||||||
Income tax provision (benefit) | (118 | ) | (65 | ) | 82 | ||||||
Income from continuing operations, net of tax | $ | 63 | $ | 93 | (32 | ) |
(1) | 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. |
** | Change is not meaningful. |
Net income from continuing operations recorded in the Other category was $63 million in the first quarter of 2017 compared to $93 million in the first quarter of 2016. The decrease in the first quarter of 2017 was primarily driven by:
• | lower non-interest income primarily due to rate-driven hedge ineffectiveness losses in the first quarter of 2017 compared to gains in the first quarter of 2016; |
• | higher non-interest expense from restructuring charges for severance and related benefits pursuant to our ongoing benefit programs as a result of the realignment of our workforce, as well as higher bank optimization charges; and |
• | lower net interest income due to higher funding needs to support balance sheet growth. |
These drivers were partially offset by:
• | an increased income tax benefit as a result of lower income before taxes and increased discrete tax benefits related to the adoption of Accounting Standards Update (“ASU”) 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES |
The preparation of financial statements in accordance with U.S. GAAP requires management to make a number of judgments, estimates and assumptions that affect the amount of assets, liabilities, income and expenses on the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies under “Note 1—Summary of Significant Accounting Policies” in our 2016 Form 10-K.
We have identified the following accounting policies as critical because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on our results of operations or financial condition. These critical accounting policies govern:
• | Loan loss reserves |
• | Asset impairment |
• | Fair value of financial instruments |
• | Representation and warranty reserves |
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• | Customer rewards reserve |
We evaluate our critical accounting estimates and judgments on an ongoing basis and update them, as necessary, based on changing conditions. Management has discussed our critical accounting policies and estimates with the Audit Committee of the Board of Directors. There have been no changes to our critical accounting policies and estimates since the 2016 Form 10-K.
We provide additional information on our critical accounting policies and estimates under “MD&A—Critical Accounting Policies and Estimates” in our 2016 Form 10-K.
ACCOUNTING CHANGES AND DEVELOPMENTS |
See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted in 2017, as well as recently issued accounting standards not yet required to be adopted and the expected impact of these changes in accounting standards.
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CAPITAL MANAGEMENT |
The level and composition of our capital are determined by multiple factors, including our consolidated regulatory capital requirements and internal risk-based capital assessments such as internal stress testing and economic capital. The level and composition of our capital may also be influenced by rating agency guidelines, subsidiary capital requirements, the business environment, conditions in the financial markets and assessments of potential future losses due to adverse changes in our business and market environments.
Capital Standards and Prompt Corrective Action
We are subject to capital adequacy standards adopted by the Federal Reserve, Office of the Comptroller of the Currency (“OCC”) and FDIC (collectively, the “Federal Banking Agencies”), including the capital rules that implemented the Basel III capital framework (“Basel III Capital Rule”) developed by the Basel Committee on Banking Supervision (“Basel Committee”). Moreover, the Banks, as insured depository institutions, are subject to prompt corrective action (“PCA”) capital regulations.
In July 2013, the Federal Banking Agencies adopted the Basel III Capital Rule, which, in addition to implementing the Basel III capital framework, also implemented certain Dodd-Frank Act and other capital provisions, and updated the PCA capital framework to reflect the new regulatory capital minimums. The Basel III Capital Rule amended both the Basel I and Basel II Advanced Approaches frameworks, established a new common equity Tier 1 capital requirement and set higher minimum capital ratio requirements. We refer to the amended Basel I framework as the “Basel III Standardized Approach,” and the amended Advanced Approaches framework as the “Basel III Advanced Approaches.”
At the end of 2012, we met one of the two independent eligibility criteria set by banking regulators for becoming subject to the Advanced Approaches capital rules. As a result, we have undertaken a multi-year process of implementing the Advanced Approaches regime for calculating risk-weighted assets and regulatory capital levels. We entered parallel run under Advanced Approaches on January 1, 2015, during which we are required to calculate capital ratios under both the Basel III Standardized Approach and the Basel III Advanced Approaches, though we continue to use the Standardized Approach for purposes of meeting regulatory capital requirements.
The Basel Committee has proposed, but has not finalized, changes to the Basel III capital framework. There is uncertainty around any final changes that the Basel Committee might adopt, which of those changes thereafter may be adopted in the United States, and how those changes may impact the Basel III Standardized Approach and the Basel III Advanced Approaches.
The Market Risk Rule supplements both the Basel III Standardized Approach and the Basel III Advanced Approaches by requiring institutions subject to the Market Risk Rule to adjust their risk-based capital ratios to reflect the market risk in their trading portfolios. The Market Risk Rule applies to institutions with aggregate trading assets and liabilities equal to the lesser of (i) 10% or more of total assets or (ii) $1 billion or more. See “MD&A—Market Risk Profile” below for additional information. We began reporting risk-based capital ratios including market risk-weighted assets for the Company and CONA pursuant to the Market Risk Rule for positions covered by such rule in the third quarter of 2016. This change did not have a material impact on the risk-based capital ratios of these two entities. As of March 31, 2017, COBNA is not subject to the Market Risk Rule.
For additional information about the capital adequacy guidelines we are subject to, see “Part I—Item 1. Business—Supervision and Regulation” in our 2016 Form 10-K.
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Table 14 provides a comparison of our regulatory capital ratios under the Basel III Standardized Approach subject to transition provisions, the regulatory minimum capital adequacy ratios and the PCA well-capitalized level for each ratio (where applicable)as of March 31, 2017 and December 31, 2016.
Table 14: Capital Ratios under Basel III(1)(2)
__________
March 31, 2017 | December 31, 2016 | ||||||||||||
Capital Ratio | Minimum Capital Adequacy | Well- Capitalized | Capital Ratio | Minimum Capital Adequacy | Well- Capitalized | ||||||||
Capital One Financial Corp: | |||||||||||||
Common equity Tier 1 capital(3) | 10.4 | % | 4.5% | N/A | 10.1% | 4.5% | N/A | ||||||
Tier 1 capital(4) | 12.0 | 6.0 | 6.0% | 11.6 | 6.0 | 6.0% | |||||||
Total capital(5) | 14.7 | 8.0 | 10.0 | 14.3 | 8.0 | 10.0 | |||||||
Tier 1 leverage(6) | 9.9 | 4.0 | N/A | 9.9 | 4.0 | N/A | |||||||
Supplementary leverage(7) | 8.6 | N/A | N/A | 8.6 | N/A | N/A | |||||||
Capital One Bank (USA), N.A.: | |||||||||||||
Common equity Tier 1 capital(3) | 13.1% | 4.5% | 6.5% | 12.0% | 4.5% | 6.5% | |||||||
Tier 1 capital(4) | 13.1 | 6.0 | 8.0 | 12.0 | 6.0 | 8.0 | |||||||
Total capital(5) | 16.0 | 8.0 | 10.0 | 14.8 | 8.0 | 10.0 | |||||||
Tier 1 leverage(6) | 10.9 | 4.0 | 5.0 | 10.8 | 4.0 | 5.0 | |||||||
Supplementary leverage(7) | 9.1 | N/A | N/A | 8.9 | N/A | N/A | |||||||
Capital One, N.A.: | |||||||||||||
Common equity Tier 1 capital(3) | 11.8% | 4.5% | 6.5% | 10.6% | 4.5% | 6.5% | |||||||
Tier 1 capital(4) | 11.8 | 6.0 | 8.0 | 10.6 | 6.0 | 8.0 | |||||||
Total capital(5) | 13.1 | 8.0 | 10.0 | 11.8 | 8.0 | 10.0 | |||||||
Tier 1 leverage(6) | 8.5 | 4.0 | 5.0 | 7.7 | 4.0 | 5.0 | |||||||
Supplementary leverage(7) | 7.7 | N/A | N/A | 6.9 | N/A | N/A |
(1) | Capital ratios are calculated based on the Basel III Standardized Approach framework, subject to applicable transition provisions, such as the inclusion of the unrealized gains and losses on securities available for sale included in accumulated other comprehensive income (“AOCI”) and adjustments related to intangible assets other than goodwill. The inclusion of AOCI and the adjustments related to intangible assets are phased-in at 60% for 2016, 80% for 2017 and 100% for 2018. |
(2) | Ratios as of March 31, 2017 are preliminary. As we continue to validate our data, the calculations are subject to change until we file our March 31, 2017 Form FR Y-9C—Consolidated Financial Statements for Holding Companies and Call Reports. |
(3) | Common equity Tier 1 capital ratio is a regulatory capital measure calculated based on common equity Tier 1 capital divided by risk-weighted assets. |
(4) | Tier 1 capital ratio is a regulatory capital measure calculated based on Tier 1 capital divided by risk-weighted assets. |
(5) | Total capital ratio is a regulatory capital measure calculated based on total capital divided by risk-weighted assets. |
(6) | Tier 1 leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by adjusted average assets. |
(7) | Supplementary leverage ratio (“SLR”) is a regulatory capital measure calculated based on Tier 1 capital divided by total leverage exposure. |
In addition to the above statutory capital ratios, we also disclose a non-GAAP TCE ratio in “MD&A—Summary of Selected Financial Data.” This capital measure is not necessarily comparable to similarly-titled capital measures reported by other companies. We provide information on the calculation of this ratio in “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures.”
The Company exceeded the minimum capital requirements and each of the Banks exceeded the minimum regulatory requirements and were well capitalized under PCA requirements as of both March 31, 2017 and December 31, 2016.
The Basel III Capital Rule requires banks to maintain a capital conservation buffer of 2.5% above the regulatory minimum ratios composed of common equity Tier 1 capital. The capital conservation buffer is being phased in over a transition period that commenced on January 1, 2016 and will be fully phased in on January 1, 2019. The capital conservation buffer is 1.25% in 2017.
For banks subject to the Advanced Approaches, including the Company and the Banks, the capital conservation buffer may be supplemented by an incremental countercyclical capital buffer of up to 2.5% (once fully phased-in) composed of common equity
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Tier 1 capital and set at the discretion of the Federal Banking Agencies. As of March 31, 2017, the countercyclical capital buffer is zero percent in the United States. A determination to increase the countercyclical capital buffer generally would be effective twelve months after the announcement of such an increase, unless the Federal Banking Agencies set an earlier effective date. The countercyclical capital buffer, if set to an amount greater than zero percent, would be subject to the same transition period as the capital conservation buffer, which commenced on January 1, 2016.
For 2017, the minimum capital requirement plus capital conservation buffer and countercyclical capital buffer for common equity Tier 1 capital, Tier 1 capital and total capital ratios is 5.75%, 7.25% and 9.25%, respectively, for the Company and the Banks. A common equity Tier 1 capital ratio, Tier 1 capital ratio, or total capital ratio below the applicable regulatory minimum ratio plus the applicable capital conservation buffer and the applicable countercyclical buffer (if set to an amount greater than zero percent) might restrict a bank’s ability to distribute capital and make discretionary bonus payments. As of March 31, 2017, the Company and each of the Banks are all above the applicable combined thresholds.
Additionally, banks designated as global systemically important banks (“G-SIBs”) are subject to an additional regulatory capital surcharge above the combined capital conservation and countercyclical capital buffers established by the Basel III Capital Rule. We are currently not designated as a G-SIB and therefore not subject to this surcharge.
The following table compares our common equity Tier 1 capital and risk-weighted assets as of March 31, 2017, subject to applicable transition provisions, to our estimated fully phased-in common equity Tier 1 capital and risk-weighted assets, as it applies for Advanced Approaches banks such as ourselves that have not yet exited parallel run. Our estimated common equity Tier 1 capital, risk-weighted assets and common equity Tier 1 capital ratio under the fully phased-in Basel III Standardized Approach are non-GAAP financial measures that we believe provide useful information in evaluating compliance with regulatory capital requirements that are not effective yet. They are calculated based on our interpretations, expectations and assumptions of relevant regulations, as well as interpretations provided by our regulators, and are subject to change based on changes to future regulations and interpretations. As we continue to engage with our regulators, there could be further changes to the calculation.
Table 15: Regulatory Capital Reconciliations between Basel III Transition to Fully Phased-in(1)
__________
(Dollars in millions) | March 31, 2017 | |||
Common equity Tier 1 capital under Basel III Standardized Approach | $ | 29,161 | ||
Adjustments related to AOCI(2) | (127 | ) | ||
Adjustments related to intangibles(2) | (116 | ) | ||
Other adjustments(2) | (2 | ) | ||
Estimated common equity Tier 1 capital under fully phased-in Basel III Standardized Approach | $ | 28,916 | ||
Risk-weighted assets under Basel III Standardized Approach(3) | $ | 279,302 | ||
Adjustments for fully phased-in Basel III Standardized Approach(4) | 1,910 | |||
Estimated risk-weighted assets under fully phased-in Basel III Standardized Approach | $ | 281,212 | ||
Estimated common equity Tier 1 capital ratio under fully phased-in Basel III Standardized Approach(5) | 10.3% |
(1) | Estimated common equity Tier 1 capital, risk-weighted assets, and common equity Tier 1 capital ratio under the fully phased-in Basel III Standardized Approach are non-GAAP financial measures. |
(2) | Assumes adjustments are fully phased-in. |
(3) | Includes credit and market risk-weighted assets. |
(4) | Adjustments include higher risk weights for items that are included in capital based on the threshold deduction approach, such as mortgage servicing assets and deferred tax assets. The adjustments also include removal of risk weights for items that are deducted from common equity Tier 1 capital. |
(5) | Calculated by dividing estimated common equity Tier 1 capital by estimated risk-weighted assets, which are both calculated under the Basel III Standardized Approach, as it applies when fully phased-in for Advanced Approaches banks that have not yet exited parallel run. |
Under the Basel III Capital Rule, when we complete our parallel run for the Advanced Approaches, our minimum risk-based capital requirement will be determined by the greater of our risk-weighted assets under the Basel III Standardized Approach and the Basel III Advanced Approaches. See “Part I—Item 1. Business—Supervision and Regulation” in our 2016 Form 10-K for additional information. Once we exit parallel run, based on clarification of the Basel III Capital Rule from our regulators, any amount by which our expected credit losses exceed eligible credit reserves, as each term is defined under the Basel III Capital Rule, will be deducted from our Basel III Standardized Approach numerator, subject to transition provisions. Inclusive of this impact, based on current capital rules and our business mix, we estimate that our Basel III Advanced Approaches ratios will be lower than our Basel
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III Standardized Approach ratios. However, there is uncertainty whether this will remain the case in light of potential changes to the United States capital rules.
Capital Planning and Regulatory Stress Testing
On April 5, 2017, we submitted our capital plan to the Federal Reserve as part of the 2017 Comprehensive Capital Analysis and Review (“CCAR”) cycle. The stress testing results are expected to be released by the Federal Reserve before June 30, 2017.
On June 29, 2016, the Federal Reserve informed us that they had “no objection” to our CCAR 2016 Capital Plan submission. As a result of this non-objection to our capital plan, the Board of Directors authorized the repurchase of up to $2.5 billion of shares of our common stock from the third quarter of 2016 through the end of the second quarter of 2017, in addition to share repurchases related to employee compensation. The Board of Directors also authorized the quarterly dividend on our common stock of $0.40 per share. For the description of the regulatory capital planning rules we are subject to, see “Part I—Item 1. Business—Supervision and Regulation” in our 2016 Form 10-K.
Dividend Policy and Stock Purchases
We paid common stock dividends of $0.40 per share in the first quarter of 2017. The following table summarizes the dividends paid per share on our various preferred stock series in the first quarter of 2017.
Table 16: Preferred Stock Dividends Paid Per Share
Series | Description | Issuance Date | Per Annum Dividend Rate | Dividend Frequency | 2017 | |||||||
Q1 | ||||||||||||
Series B | 6.00% Non-Cumulative | August 20, 2012 | 6.00% | Quarterly | $ | 15.00 | ||||||
Series C | 6.25% Non-Cumulative | June 12, 2014 | 6.25 | Quarterly | 15.63 | |||||||
Series D | 6.70% Non-Cumulative | October 31, 2014 | 6.70 | Quarterly | 16.75 | |||||||
Series E | Fixed-to-Floating Rate Non-Cumulative | May 14, 2015 | 5.55% through 5/31/2020; 3-mo. LIBOR+ 380 bps thereafter | Semi-Annually through 5/31/2020; Quarterly thereafter | — | |||||||
Series F | 6.20% Non-Cumulative | August 24, 2015 | 6.20 | Quarterly | 15.50 | |||||||
Series G | 5.20% Non-Cumulative | July 29, 2016 | 5.20 | Quarterly | 13.00 | |||||||
Series H | 6.00% Non-Cumulative | November 29, 2016 | 6.00 | Quarterly | 15.33 |
The declaration and payment of dividends to our stockholders, as well as the amount thereof, are subject to the discretion of our Board of Directors and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. As a bank holding company (“BHC”), our ability to pay dividends is largely dependent upon the receipt of dividends or other payments from our subsidiaries. Regulatory restrictions exist that limit the ability of the Banks to transfer funds to our BHC. As of March 31, 2017, funds available for dividend payments from COBNA and CONA were $3.7 billion and $926 million, respectively. There can be no assurance that we will declare and pay any dividends to stockholders.
Consistent with our 2016 Stock Repurchase Program, our Board of Directors authorized the repurchase of up to $2.5 billion of shares of common stock beginning in the third quarter of 2016 through the end of the second quarter of 2017. Through the end of the first quarter of 2017, we repurchased approximately $2.2 billion of shares of common stock as part of the 2016 Stock Repurchase Program.
The timing and exact amount of any future common stock repurchases will depend on various factors, including market conditions, opportunities for growth, our capital position and the amount of retained earnings. Our stock repurchase program does not include specific price targets, may be executed through open market purchases or privately negotiated transactions, including utilizing Rule 10b5-1 programs, and may be suspended at any time. For additional information on dividends and stock repurchases, see
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“Part I—Item 1. Business—Supervision and Regulation—Dividends, Stock Repurchases and Transfer of Funds” in our 2016 Form 10-K.
RISK MANAGEMENT |
Risk Framework
We use a risk framework to provide an overall enterprise-wide approach for effectively managing risk. We execute against our risk framework with the “Three Lines of Defense” risk management model to demonstrate and structure the roles, responsibilities and accountabilities in the organization for taking and managing risk.
The “First Line of Defense” is comprised of the business areas that through their day-to-day business activities take risk on our behalf. As the business owner, the first line is responsible for identifying, assessing, managing and controlling that risk. This principle places ultimate accountability for the management of risks and ownership of risk decisions with the CEO and business heads. The “Second Line of Defense” provides oversight of first line risk taking and management, and is primarily comprised of our Risk Management organization. The second line assists in determining risk appetite and the strategies, policies and structures for managing risks. The second line is both an “expert advisor” to the first line and an “effective challenger” of first line risk activities. The “Third Line of Defense” is comprised of our Internal Audit and Credit Review functions. The third line provides independent and objective assurance to senior management and to the Board of Directors that first and second line risk management and internal control systems and its governance processes are well-designed and working as intended.
The risk framework is also used to guide design of risk programs and performance of risk activity within each risk category and across the entire enterprise.
There are eight elements that comprise the risk framework:
• | Establish Governance Processes, Accountabilities and Risk Appetites |
• | Identify and Assess Risks and Ownership |
• | Develop and Operate Controls, Monitoring and Mitigation Plans |
• | Test and Detect Control Gaps and Perform Corrective Action |
• | Escalate Key Risks and Gaps to Executive Management and, when Appropriate, the Board of Directors |
• | Calculate and Allocate Capital in Alignment with Risk Management and Measurement Processes (including Stress Testing) |
• | Support with the Right Culture, Talent and Skills |
• | Enabled by the Right Data, Infrastructure and Programs |
We provide additional discussion of our risk management principles, roles and responsibilities, framework and risk appetite under “MD&A—Risk Management” in our 2016 Form 10-K.
CREDIT RISK PROFILE |
Our loan portfolio accounts for the substantial majority of our credit risk exposure. Our lending activities are governed under our credit policy and are subject to independent review and approval. Below we provide information about the composition of our loan portfolio, key concentrations and credit performance metrics.
We also engage in certain non-lending activities that may give rise to credit and counterparty settlement risk, including the purchase of securities for our investment securities portfolio, entering into derivative transactions to manage our market risk exposure and to accommodate customers, short-term advances on syndication activity (including bridge financing transactions we have underwritten), certain operational cash balances in other financial institutions, foreign exchange transactions and customer
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overdrafts. We provide additional information on credit risk related to our investment securities portfolio under “MD&A—Consolidated Balance Sheets Analysis—Investment Securities” and credit risk related to derivative transactions in “Note 9—Derivative Instruments and Hedging Activities.”