CAPITAL ONE FINANCIAL CORP - Quarter Report: 2018 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________

FORM 10-Q

____________________________________

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File No. 1-13300

____________________________________

CAPITAL ONE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

____________________________________



Delaware		54-1719854
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
1680 Capital One Drive, McLean, Virginia		22102
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (703) 720-1000

(Former name, former address and former fiscal year, if changed since last report)

(Not applicable)

____________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No ý

As of April 30, 2018, there were 486,434,139 shares of the registrant’s Common Stock outstanding.

TABLE OF CONTENTS



		Page
PART I—FINANCIAL INFORMATION		1
Item 1.	Financial Statements and Supplementary Data	57
	Consolidated Statements of Income	58
	Consolidated Statements of Comprehensive Income	59
	Consolidated Balance Sheets	60
	Consolidated Statements of Changes in Stockholders’ Equity	61
	Consolidated Statements of Cash Flows	62
	Notes to Consolidated Financial Statements	63
	Note 1—Summary of Significant Accounting Policies	63
	Note 2—Business Developments and Discontinued Operations	67
	Note 3—Investment Securities	68
	Note 4—Loans	74
	Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments	89
	Note 6—Variable Interest Entities and Securitizations	92
	Note 7—Goodwill and Intangible Assets	97
	Note 8—Deposits and Borrowings	99
	Note 9—Derivative Instruments and Hedging Activities	100
	Note 10—Stockholders’ Equity	107
	Note 11—Earnings Per Common Share	110
	Note 12—Fair Value Measurement	111
	Note 13—Business Segments and Revenue from Contracts with Customers	118
	Note 14—Commitments, Contingencies, Guarantees and Others	121
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)	1
	Introduction	1
	Summary of Selected Financial Data	3
	Executive Summary and Business Outlook	5
	Consolidated Results of Operations	7
	Consolidated Balance Sheets Analysis	11
	Off-Balance Sheet Arrangements	13
	Business Segment Financial Performance	14
	Critical Accounting Policies and Estimates	23
	Accounting Changes and Developments	24
	Capital Management	24
	Risk Management	27
	Credit Risk Profile	28
	Liquidity Risk Profile	39
	Market Risk Profile	42
	Supervision and Regulation	46
	Forward-Looking Statements	47
	Supplemental Table	49
	Glossary and Acronyms	51
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	125




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Item 4.	Controls and Procedures	125

PART II—OTHER INFORMATION		126
Item 1.	Legal Proceedings	126
Item 1A.	Risk Factors	126
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	126
Item 3.	Defaults Upon Senior Securities	126
Item 4.	Mine Safety Disclosures	126
Item 5.	Other Information	126
Item 6.	Exhibits	126

EXHIBIT INDEX		127
SIGNATURES		128




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INDEX OF MD&A AND SUPPLEMENTAL TABLES



MD&A Tables:		Page
1	Consolidated Financial Highlights	3
2	Average Balances, Net Interest Income and Net Interest Margin	8
3	Rate/Volume Analysis of Net Interest Income	9
4	Non-Interest Income	10
5	Non-Interest Expense	11
6	Investment Securities	12
7	Non-Agency Investment Securities Credit Ratings	12
8	Loans Held for Investment	13
9	Business Segment Results	14
10	Credit Card Business Results	15
10.1	Domestic Card Business Results	16
11	Consumer Banking Business Results	18
12	Commercial Banking Business Results	20
13	Other Category Results	22
14	Capital Ratios under Basel III	25
15	Preferred Stock Dividends Paid Per Share	26
16	Loans Held for Investment Portfolio Composition	28
17	Commercial Loans by Industry	29
18	Home Loans—Risk Profile by Lien Priority	30
19	Credit Score Distribution	31
20	30+ Day Delinquencies	31
21	Aging and Geography of 30+ Day Delinquent Loans	33
22	90+ Day Delinquent Loans Accruing Interest	33
23	Nonperforming Loans and Other Nonperforming Assets	33
24	Net Charge-Offs (Recoveries)	35
25	Troubled Debt Restructurings	35
26	Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity	38
27	Allowance Coverage Ratios	39
28	Liquidity Reserves	39
29	Deposits Composition and Average Deposits Interest Rates	40
30	Long-Term Funding	41
31	Senior Unsecured Long-Term Debt Credit Ratings	41
32	Interest Rate Sensitivity Analysis	45

Supplemental Table:
A	Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures	49




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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 2017 Annual Report on Form 10-K (“2017 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, 2018 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 audited consolidated financial statements and related notes in this Report and the more detailed information contained in our 2017 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, 2018, 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 reward expenses, and service charges and other customer-related fees. Our non-interest expenses primarily consist of the provision for credit losses, operating expenses, marketing expenses and income taxes.

Our principal operations are organized for management reporting purposes into three primary business segments, which are defined primarily 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, asset/liability management by our centralized Corporate Treasury group and residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments, 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, national auto lending and our consumer home loan portfolio and associated servicing activities.




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•	Commercial Banking: Consists of our lending, deposit gathering, capital markets and treasury management services to commercial real estate and commercial and industrial customers. Our commercial and industrial customers typically include companies with annual revenues between $20 million and $2 billion.

Business Developments

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. In addition, we regularly consider the potential disposition of certain of our assets, branches, partnership agreements or lines of business. We may issue equity or debt, including public offerings, to fund our acquisitions.

On November 7, 2017, we announced our decision to cease new originations of residential mortgage and home equity loan products within our Consumer Banking business. In the first quarter of 2018, we sold the substantial majority of the mortgage servicing rights related to loans serviced for others. We continue to service our existing home loan portfolio.

On September 25, 2017, we completed the acquisition from Synovus Bank of credit card assets and related liabilities of World’s Foremost Bank, a wholly-owned subsidiary of Cabela’s Incorporated (“Cabela’s acquisition”). The Cabela’s acquisition added approximately $5.7 billion to our domestic credit card loans held for investment portfolio as of the acquisition date.




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SUMMARY OF SELECTED FINANCIAL DATA

The following table presents selected consolidated financial data and performance from our results of operations for the first quarters of 2018 and 2017 and selected comparative balance sheet data as of March 31, 2018 and December 31, 2017. 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)	2018			2017			Change
Income statement
Net interest income	$	5,718		$	5,474		4	%
Non-interest income	1,191			1,061			12
Total net revenue	6,909			6,535			6
Provision for credit losses	1,674			1,992			(16	)
Non-interest expense:
Marketing	414			396			5
Operating expenses	3,159			3,038			4
Total non-interest expense	3,573			3,434			4
Income from continuing operations before income taxes	1,662			1,109			50
Income tax provision	319			314			2
Income from continuing operations, net of tax	1,343			795			69
Income from discontinued operations, net of tax	3			15			(80	)
Net income	1,346			810			66
Dividends and undistributed earnings allocated to participating securities	(10		)	(5		)	100
Preferred stock dividends	(52		)	(53		)	(2	)
Net income available to common stockholders	$	1,284		$	752		71
Common share statistics
Basic earnings per common share:
Net income from continuing operations	$	2.63		$	1.53		72	%
Income from discontinued operations	0.01			0.03			(67	)
Net income per basic common share	$	2.64		$	1.56		69
Diluted earnings per common share:
Net income from continuing operations	$	2.61		$	1.51		73
Income from discontinued operations	0.01			0.03			(67	)
Net income per diluted common share	$	2.62		$	1.54		70
Weighted-average common shares outstanding (in millions):
Basic	486.9			482.3			1	%
Diluted	490.8			487.9			1
Common shares outstanding (period-end, in millions)	485.9			482.8			1
Dividends declared and paid per common share	$	0.40		$	0.40		—
Tangible book value per common share (period-end)⁽¹⁾	61.29			58.66			4
Balance sheet (average balances)
Loans held for investment	$	249,726		$	241,505		3	%
Interest-earning assets	330,183			318,358			4
Total assets	362,049			351,641			3
Interest-bearing deposits	219,670			212,973			3
Total deposits	245,270			238,550			3
Borrowings	54,588			53,357			2
Common equity	44,670			43,833			2
Total stockholders’ equity	49,031			48,193			2




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	Three Months Ended March 31,
(Dollars in millions, except per share data and as noted)	2018			2017			Change

Selected performance metrics
Purchase volume⁽²⁾	$	86,545		$	73,197		18	%
Total net revenue margin⁽³⁾	8.37		%	8.21		%	16	bps
Net interest margin⁽⁴⁾	6.93			6.88			5
Return on average assets	1.48			0.90			58
Return on average tangible assets⁽⁵⁾	1.55			0.95			60
Return on average common equity⁽⁶⁾	11.47			6.73			474
Return on average tangible common equity (“TCE”)⁽⁷⁾	17.32			10.37			695
Equity-to-assets ratio⁽⁸⁾	13.54			13.71			(17	)
Non-interest expense as a percentage of average loans held for investment	5.72			5.69			3
Efficiency ratio⁽⁹⁾	51.72			52.55			(83	)
Effective income tax rate from continuing operations	19.2			28.3			**
Net charge-offs	$	1,618		$	1,510		7	%
Net charge-off rate⁽¹⁰⁾	2.59		%	2.50		%	9	bps



(Dollars in millions, except as noted)	March 31, 2018			December 31, 2017			Change
Balance sheet (period-end)
Loans held for investment	$	248,256		$	254,473		(2	)%
Interest-earning assets	332,251			334,124			(1	)
Total assets	362,857			365,693			(1	)
Interest-bearing deposits	224,671			217,298			3
Total deposits	250,847			243,702			3
Borrowings	50,693			60,281			(16	)
Common equity	44,842			44,370			1
Total stockholders’ equity	49,203			48,730			1
Credit quality metrics
Allowance for loan and lease losses	$	7,567		$	7,502		1	%
Allowance as a percentage of loans held for investment (“allowance coverage ratio”)	3.05		%	2.95		%	10	bps
30+ day performing delinquency rate	2.72			3.23			(51	)
30+ day delinquency rate	2.91			3.48			(57	)
Capital ratios
Common equity Tier 1 capital⁽¹¹⁾	10.5		%	10.3		%	20	bps
Tier 1 capital⁽¹¹⁾	12.0			11.8			20
Total capital⁽¹¹⁾	14.5			14.4			10
Tier 1 leverage⁽¹¹⁾	10.1			9.9			20
Tangible common equity⁽¹²⁾	8.6			8.3			30
Supplementary leverage⁽¹¹⁾	8.6			8.4			20
Other
Employees (period end, in thousands)	47.9			49.3			(3	)%

__________


⁽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 in our Credit Card business, and 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.




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⁽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.

⁽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⁾	Efficiency ratio is calculated based on non-interest expense for the period divided by total net revenue for the period.


⁽¹⁰⁾	Net charge-off rate is calculated by dividing annualized net charge-offs by average loans held for investment for the period for each loan category.


⁽¹¹⁾	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


⁽¹²⁾	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.


**	Not meaningful.

EXECUTIVE SUMMARY AND BUSINESS OUTLOOK

Financial Highlights

We reported net income of $1.3 billion ($2.62 per diluted common share) on total net revenue of $6.9 billion for the first quarter of 2018. In comparison, 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.

Our common equity Tier 1 capital ratio as calculated under the Basel III Standardized Approach, including transition provisions, was 10.5% and 10.3% as of March 31, 2018 and December 31, 2017, respectively. See “MD&A—Capital Management” below for additional information.

On June 28, 2017, we announced that our Board of Directors authorized the repurchase of up to $1.85 billion of shares of our common stock from the third quarter of 2017 through the end of the second quarter of 2018. In December 2017, the Board of Directors reduced the authorized repurchases of our common stock to up to $1.0 billion for the remaining 2017 Comprehensive Capital Analysis and Review (“CCAR”) period, which ends June 30, 2018 (“2017 Stock Repurchase Program”). In the first quarter of 2018, we repurchased approximately $200 million of our common stock. See “MD&A—Capital Management—Dividend Policy and Stock Purchases” for additional information.

Below are additional highlights of our performance in the first quarter of 2018. These highlights are generally based on a comparison between the results of the first quarters of 2018 and 2017, 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, 2018 compared to our financial condition and credit performance as of December 31, 2017. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary and Business Outlook.”




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Total Company Performance


•	Earnings: Our net income increased by $536 million to $1.3 billion in the first quarter of 2018 compared to the first quarter of 2017. The increase was primarily driven by:


◦	higher interest income due to growth in our domestic credit card and auto loan portfolios, as well as higher yields as a result of higher interest rates; and


◦	lower provision for credit losses primarily driven by a smaller allowance build in our domestic credit card loan portfolio.

These drivers were partially offset by higher interest expense due to the net effect of higher interest rates.


•	Loans Held for Investment:


◦	Period-end loans held for investment decreased by $6.2 billion to $248.3 billion as of March 31, 2018 from December 31, 2017 primarily driven by 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 commercial and auto loan portfolios.


◦	Average loans held for investment increased by $8.2 billion to $249.7 billion in the first quarter of 2018 compared to the first quarter of 2017 primarily driven by growth in our domestic credit card loan portfolio, largely driven by loans obtained in the Cabela’s acquisition, and growth in our auto loan portfolio, partially offset by run-off of our acquired home loan portfolio.


•	Net Charge-Off and Delinquency Metrics: Our net charge-off rate increased by 9 basis points to 2.59% in the first quarter of 2018 compared to the first quarter of 2017 primarily driven by higher charge-offs due to growth and seasoning of recent domestic credit card loan originations, partially offset by loan growth.

Our 30+ day delinquency rate decreased by 57 basis points to 2.91% as of March 31, 2018 from December 31, 2017 primarily due to seasonally lower delinquency inventories in our auto and domestic credit card loan portfolios.


•	Allowance for Loan and Lease Losses: Our allowance for loan and lease losses was substantially flat at $7.6 billion as of March 31, 2018 compared to December 31, 2017.

The allowance coverage ratio increased by 10 basis points to 3.05% as of March 31, 2018 from December 31, 2017 primarily driven by expected seasonal paydowns in our domestic credit card loan 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 “Part II—Item 7. MD&A” in our 2017 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 2017 Form 10-K for factors that could materially influence our results.




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Total Company Expectations

We expect that our current trajectory and the effects of the Tax Act will enable us to accelerate full-year earnings per share growth in 2018 compared to full-year earnings per share growth in 2017, excluding adjusting items and assuming no substantial adverse change in the broader economic or credit cycles. We expect that a majority of the benefit from the Tax Act will be reflected in our earnings this year. Over time, we expect that marketplace dynamics will consume a portion of the Tax Act benefits through increasing competition, including higher levels of marketing and lower prices.

We expect our annual effective income tax rate in 2018 to be around 20%, plus or minus a reasonable margin of volatility.

We expect that marketing expense in 2018 will be higher than 2017.

While our efficiency ratio may vary in any given year, over the long term, we believe that we will be able to achieve gradual improvement in our efficiency ratio driven by growth and digital productivity gains. Our long-term improvements in total efficiency ratio will largely come from an improving operating efficiency ratio.

We believe that our common equity Tier 1 capital ratio on a fully phased-in basis will trend up to around 11%.

On June 28, 2017, we announced that our Board of Directors authorized the repurchase of up to $1.85 billion of shares of our common stock from the third quarter of 2017 through the end of the second quarter of 2018 as part of the 2017 Stock Repurchase Program. In December 2017, the Board of Directors reduced the authorized repurchases of our common stock to up to $1.0 billion for the remaining 2017 CCAR period, which ends June 30, 2018. In the first quarter of 2018, we repurchased approximately $200 million of our common stock. We do not expect to use any of the remaining authorization for the 2017 CCAR period. See “MD&A—Capital Management—Dividend Policy and Stock Purchases” for more information.

Business Segment Expectations

Consumer Banking: In our Consumer Banking business, we expect further increases in average deposit interest rates driven by higher market rates and increasing competition for deposits. We expect that the charge-off rate in our auto finance business will increase gradually.

CONSOLIDATED RESULTS OF OPERATIONS

The section below provides a comparative discussion of our consolidated financial performance for the first quarters of 2018 and 2017. 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.




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Table 2 below presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balance, interest income earned, interest expense incurred and average yield for the first quarters of 2018 and 2017.

Table 2: Average Balances, Net Interest Income and Net Interest Margin



	Three Months Ended March 31,
	2018								2017
(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	$	109,502		$	4,173		15.24	%	$	101,169		$	3,790	14.98	%
Consumer banking	75,104			1,286			6.85		73,510			1,190		6.48
Commercial banking⁽²⁾	65,975			683			4.14		67,503			615		3.64
Other⁽²⁾⁽³⁾	325			(8		)	(9.85	)	67			31		185.07
Total loans, including loans held for sale	250,906			6,134			9.78		242,249			5,626		9.29
Investment securities	69,576			452			2.60		68,418			416		2.43
Cash equivalents and other interest-earning assets	9,701			51			2.10		7,691			28		1.46
Total interest-earning assets	330,183			6,637			8.04		318,358			6,070		7.63
Cash and due from banks	3,826								3,487
Allowance for loan and lease losses	(7,503		)						(6,513		)
Premises and equipment, net	4,139								3,797
Other assets	31,404								32,512
Total assets	$	362,049							$	351,641
Liabilities and stockholders’ equity:
Interest-bearing liabilities:⁽³⁾
Deposits	$	219,670		$	539		0.98	%	$	212,973		$	353	0.66	%
Securitized debt obligations	19,698			107			2.17		17,176			69		1.61
Senior and subordinated notes	30,430			251			3.30		24,804			149		2.40
Other borrowings and liabilities	6,849			22			1.28		12,356			25		0.81
Total interest-bearing liabilities	276,647			919			1.33		$	267,309		596		0.89
Non-interest-bearing deposits	25,600								25,577
Other liabilities	10,771								10,562
Total liabilities	313,018								303,448
Stockholders’ equity	49,031								48,193
Total liabilities and stockholders’ equity	$	362,049							$	351,641
Net interest income/spread				$	5,718		6.71					$	5,474	6.74
Impact of non-interest-bearing funding							0.22							0.14
Net interest margin							6.93	%						6.88	%

__________


⁽¹⁾	Past due fees included in interest income totaled approximately $403 million and $384 million in the first quarters of 2018 and 2017, respectively.

⁽²⁾

Some of our commercial loans generate tax-exempt income. Accordingly, we present our Commercial Banking interest income and yields on a taxable-equivalent basis, calculated using the federal statutory rate (21% and 35% for the first quarters of 2018 and 2017, respectively) and state taxes where applicable, with offsetting reductions to the Other category. Taxable-equivalent adjustments included in the interest income and yield computations for our Commercial banking loans totaled approximately $20 million and $32 million in the first quarters of 2018 and 2017, respectively, with corresponding reductions to Other.

⁽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. In the first quarter of 2018, we adopted Accounting Standards Update (“ASU”) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. As a result, interest income and interest expense amounts shown above for the three months ended March 31, 2018 include $1 million and $30 million, respectively, related to hedge ineffectiveness that would previously have been included in other non-interest income.




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Net interest income increased by $244 million to $5.7 billion in the first quarter of 2018 compared to the first quarter of 2017, and net interest margin increased by 5 basis points to 6.93% in the first quarter of 2018 compared to the first quarter of 2017. These increases were primarily driven by:


•	growth in our domestic credit card and auto loan portfolios; and


•	higher yields as a result of higher interest rates.

These drivers were partially offset by higher interest expense due to the net effect of higher interest rates.

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,
	2018 vs. 2017
(Dollars in millions)	Total Variance			Volume			Rate
Interest income:
Loans:
Credit card	$	383		$	317		$	66
Consumer banking	96			26			70
Commercial banking⁽²⁾	68			(14		)	82
Other⁽²⁾	(39		)	(6		)	(33		)
Total loans, including loans held for sale	508			323			185
Investment securities	36			7			29
Cash equivalents and other interest-earning assets	23			8			15
Total interest income	567			338			229
Interest expense:
Deposits	186			11			175
Securitized debt obligations	38			11			27
Senior and subordinated notes	102			38			64
Other borrowings and liabilities	(3		)	(11		)	8
Total interest expense	323			49			274
Net interest income	$	244		$	289		$	(45	)

__________

⁽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 commercial loans generate tax-exempt income. Accordingly, we present our Commercial Banking interest income and yields on a taxable-equivalent basis, calculated using the federal statutory rate (21% and 35% for the first quarters of 2018 and 2017, respectively) and state taxes where applicable, with offsetting reductions to the Other category.




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Non-Interest Income

Table 4 displays the components of non-interest income for the first quarters of 2018 and 2017.

Table 4: Non-Interest Income



	Three Months Ended March 31,
(Dollars in millions)	2018		2017
Interchange fees, net	$	643	$	570
Service charges and other customer-related fees	432		371
Net securities gains	8		—
Other non-interest income:
Mortgage banking revenue	38		69
Treasury and other investment income	8		14
Other	62		37
Total other non-interest income	108		120
Total non-interest income	$	1,191	$	1,061

Non-interest income increased by $130 million to $1.2 billion in the first quarter of 2018 compared to the first quarter of 2017 primarily driven by:


•	an increase in net interchange fees largely due to higher purchase volume; and


•	the absence of a build in our U.K. payment protection insurance customer refund reserve (“U.K. PPI reserve”) in the first quarter of 2018.

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 the reserve for unfunded lending commitments. We recorded a provision for credit losses of $1.7 billion and $2.0 billion in the first quarters of 2018 and 2017, respectively. The provision for credit losses as a percentage of net interest income was 29.3% and 36.4% in the first quarters of 2018 and 2017, respectively.

Our provision for credit losses decreased by $318 million in the first quarter of 2018 compared to the first quarter of 2017 primarily driven by a smaller allowance build in our domestic credit card loan portfolio as a result of moderating impacts from growth and seasoning.

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 2017 Form 10-K.




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Non-Interest Expense

Table 5 displays the components of non-interest expense for the first quarters of 2018 and 2017.

Table 5: Non-Interest Expense



	Three Months Ended March 31,
(Dollars in millions)	2018		2017
Salaries and associate benefits	$	1,520	$	1,471
Occupancy and equipment	490		471
Marketing	414		396
Professional services	210		247
Communications and data processing	306		288
Amortization of intangibles	44		62
Other non-interest expense:
Bankcard, regulatory and other fee assessments	169		136
Collections	108		85
Fraud losses	97		78
Other	215		200
Total other non-interest expense	589		499
Total non-interest expense	$	3,573	$	3,434

Non-interest expense increased by $139 million to $3.6 billion in the first quarter of 2018 compared to the first quarter of 2017 primarily due to higher operating expenses associated with loan growth, as well as continued investments in technology and infrastructure.

Income Taxes

We recorded income tax provisions of $319 million (19.2% effective income tax rate) and $314 million (28.3% effective income tax rate) in the first quarters of 2018 and 2017, respectively.

The decrease in our effective income tax rate in the first quarter of 2018 compared to the first quarter of 2017 was primarily due to the federal statutory tax rate decrease from 35% to 21% as a result of the Tax Act, partially offset by increased non-deductible expenses and other impacts of the Tax Act, as well as lower discrete tax benefits.

We provide additional information on items affecting our income taxes and effective tax rate in “Note 16—Income Taxes” in our 2017 Form 10-K.

CONSOLIDATED BALANCE SHEETS ANALYSIS

Total assets decreased by $2.8 billion to $362.9 billion as of March 31, 2018 from December 31, 2017 primarily attributable to a decrease in loans held for investment driven by 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 commercial and auto loan portfolios, as well as an increase in investment securities.

Total liabilities decreased by $3.3 billion to $313.7 billion as of March 31, 2018 from December 31, 2017 primarily driven by:


•	a decrease in our Federal Home Loan Banks (“FHLB”) advances outstanding, which is included in other debt; and


•	a decrease in our securitized debt obligations.

These drivers were partially offset by an increase in our deposits.

Stockholders’ equity increased by $473 million to $49.2 billion as of March 31, 2018 from December 31, 2017 primarily due to our net income of $1.3 billion in the first quarter of 2018. This driver was partially offset by:


•	higher unrealized losses on our cash flow hedges and available for sale securities included in other comprehensive losses; and


•	treasury stock purchases and dividend payments to our stockholders.

The following is a discussion of material changes in the major components of our assets and liabilities during the first quarter of 2018. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to ensure the adequacy of capital while managing the liquidity requirements of the Company, our customers and our market risk exposure in accordance with our risk appetite.

Investment Securities

Our investment securities 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 commercial mortgage-backed securities (“CMBS”); other asset-backed securities (“ABS”); and other securities. Agency securities include Government National Mortgage Association (“Ginnie Mae”) guaranteed securities, Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) issued securities. The carrying value of our investments in U.S. Treasury and Agency securities represented 95% of our total investment securities as of both March 31, 2018 and December 31, 2017.

The fair value of our available for sale securities portfolio was $47.2 billion as of March 31, 2018, an increase of $9.5 billion from December 31, 2017 primarily due to a one-time transfer of held to maturity securities to available for sale as a result of our adoption of ASU No. 2017-12. The fair value of our held to maturity securities portfolio was $22.8 billion as of March 31, 2018, a decrease of $6.6 billion from December 31, 2017 primarily driven by the one-time transfer, partially offset by purchases.




	11	Capital One Financial Corporation (COF)

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Table 6 presents the amortized cost, carrying value and fair value for the major categories of our investment securities portfolio as of March 31, 2018 and December 31, 2017.

Table 6: Investment Securities



	March 31, 2018				December 31, 2017
(Dollars in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investment securities available for sale:
U.S. Treasury securities	$	5,246	$	5,251	$	5,168	$	5,171
RMBS:
Agency	34,770		33,741		26,013		25,678
Non-agency	1,648		2,026		1,722		2,114
Total RMBS	36,418		35,767		27,735		27,792
Agency CMBS	4,553		4,460		3,209		3,175
Other ABS	332		330		513		512
Other securities⁽¹⁾	1,350		1,347		1,003		1,005
Total investment securities available for sale	$	47,899	$	47,155	$	37,628	$	37,655

(Dollars in millions)	Carrying Value		Fair Value		Carrying Value		Fair Value
Investment securities held to maturity:
U.S. Treasury securities	$	200	$	200	$	200	$	200
Agency RMBS	19,937		19,772		24,980		25,395
Agency CMBS	2,938		2,869		3,804		3,842
Total investment securities held to maturity	$	23,075	$	22,841	$	28,984	$	29,437

__________


⁽¹⁾	Includes supranational bonds and foreign government bonds. In 2017, other securities also included mutual funds and other 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. Approximately 97% and 96% of our total investment securities portfolio was rated AA+ or its equivalent, or better, as of March 31, 2018 and December 31, 2017, respectively, while approximately 3% was below investment grade as of both March 31, 2018 and December 31, 2017. We categorize the credit ratings of our investment securities based on the lower of credit ratings issued by Standard & Poor’s Ratings Services (“S&P”) and Moody’s Investors Service (“Moody’s”).

Table 7 provides information on the credit ratings of our non-agency RMBS, other ABS and other securities in our portfolio as of March 31, 2018 and December 31, 2017.

Table 7: Non-Agency Investment Securities Credit Ratings



	March 31, 2018								December 31, 2017
(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	$	2,026	—		3	%	97	%	$	2,114	—		3	%	97	%
Other ABS	330		100	%	—		—		512		100	%	—		—
Other securities	1,347		87		13		—		1,005		71		19		10

__________


⁽¹⁾	Includes investment securities that were not rated.

For additional information on our investment securities, see “Note 3—Investment Securities.”




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Loans Held for Investment

Total loans held for investment 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, the allowance for loan and lease losses, and net loan balances as of March 31, 2018 and December 31, 2017.

Table 8: Loans Held for Investment



	March 31, 2018						December 31, 2017
(Dollars in millions)	Loans		Allowance		Net Loans		Loans		Allowance		Net Loans
Credit Card	$	107,576	$	5,726	$	101,850	$	114,762	$	5,648	$	109,114
Consumer Banking	74,674		1,253		73,421		75,078		1,242		73,836
Commercial Banking	65,953		587		65,366		64,575		611		63,964
Other	53		1		52		58		1		57
Total	$	248,256	$	7,567	$	240,689	$	254,473	$	7,502	$	246,971

Loans held for investment decreased by $6.2 billion to $248.3 billion as of March 31, 2018 from December 31, 2017 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 commercial and auto 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 $7.1 billion to $250.8 billion as of March 31, 2018 from December 31, 2017. 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 $18.7 billion as of March 31, 2018 from $20.0 billion as of December 31, 2017 primarily driven by maturities. We provide additional information on our borrowings in “MD&A—Liquidity Risk Profile” and in “Note 8—Deposits and Borrowings.”

Other Debt

Other debt, which consists primarily of federal funds purchased and securities loaned or sold under agreements to repurchase, senior and subordinated notes, and FHLB advances, totaled $32.0 billion as of March 31, 2018, of which $31.4 billion represented long-term debt and the remainder represented short-term borrowings. Other debt totaled $40.3 billion as of December 31, 2017, of which $39.7 billion represented long-term debt and the remainder represented short-term borrowings.

The decrease in other debt of $8.2 billion in the first quarter of 2018 was primarily attributable to a decrease in our FHLB advances outstanding. We provide additional information on our borrowings in “MD&A—Liquidity Risk Profile” and in “Note 8—Deposits and Borrowings.”

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 letters of credit, 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 “Note 6—Variable Interest Entities and Securitizations” and “Note 14—Commitments, Contingencies, Guarantees and Others.”




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BUSINESS SEGMENT FINANCIAL PERFORMANCE

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 2017 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 2018 and 2017 and provide a comparative discussion of these results, as well as changes in our financial condition and credit performance metrics as of March 31, 2018 compared to December 31, 2017. We provide a reconciliation of our total business segment results to our reported consolidated results in “Note 13—Business Segments and Revenue from Contracts with Customers.” 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 net income from continuing operations, for the first quarters of 2018 and 2017. We provide information on the allocation methodologies used to derive our business segment results in “Note 18—Business Segments” in our 2017 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 and Revenue from Contracts with Customers” of this Report.

Table 9: Business Segment Results



	Three Months Ended March 31,
	2018										2017
	Total Net Revenue⁽¹⁾					Net Income (Loss)⁽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	$	4,415		64	%	$	707		52	%	$	4,084	63	%	$	271	34	%
Consumer Banking	1,789			26		426			32		1,712		26		248		31
Commercial Banking⁽³⁾⁽⁴⁾	723			10		256			19		724		11		213		27
Other⁽³⁾⁽⁴⁾	(18		)	—		(46		)	(3	)	15		—		63		8
Total	$	6,909		100	%	$	1,343		100	%	$	6,535	100	%	$	795	100	%




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__________


⁽¹⁾	Total net revenue consists of net interest income and non-interest income.


⁽²⁾	Net income (loss) for our business segments and the Other category is based on income (loss) from continuing operations, net of tax.


⁽³⁾	Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate (21% and 35% for the first quarters of 2018 and 2017, respectively) and state taxes where applicable, with offsetting reductions to the Other category.

⁽⁴⁾

In the first quarter of 2018, we made a change in how revenue is measured in our Commercial Banking business to include the tax benefits of losses on certain tax-advantaged investments. These tax benefits are included in revenue on a taxable-equivalent basis within our Commercial Banking business, with an offsetting reduction to the Other category. In addition, all revenue presented on a taxable-equivalent basis in our Commercial Banking business was impacted by the reduction of the federal tax rate set forth in the Tax Act. The net impact of the measurement change and the reduction of the federal tax rate was a decrease of $28 million in revenue in our Commercial Banking business in the first quarter of 2018, with an offsetting impact to the Other category.

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 $707 million and $271 million in the first quarters of 2018 and 2017, 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)	2018			2017			Change
Selected income statement data:
Net interest income	$	3,558		$	3,346		6	%
Non-interest income	857			738			16
Total net revenue⁽¹⁾	4,415			4,084			8
Provision for credit losses	1,456			1,717			(15	)
Non-interest expense	2,039			1,929			6
Income from continuing operations before income taxes	920			438			110
Income tax provision	213			167			28
Income from continuing operations, net of tax	$	707		$	271		161
Selected performance metrics:
Average loans held for investment⁽²⁾	$	109,502		$	101,169		8
Average yield on loans held for investment⁽³⁾	15.24		%	14.99		%	25	bps
Total net revenue margin⁽⁴⁾	16.13			16.14			(1	)
Net charge-offs	$	1,377		$	1,271		8	%
Net charge-off rate	5.03		%	5.02		%	1	bps
Purchase volume⁽⁵⁾	$	86,545		$	73,197		18	%

(Dollars in millions, except as noted)	March 31, 2018			December 31, 2017			Change
Selected period-end data:
Loans held for investment⁽²⁾	$	107,576		$	114,762		(6	)%
30+ day performing delinquency rate	3.58		%	3.98		%	(40	)bps
30+ day delinquency rate	3.59			3.99			(40	)
Nonperforming loan rate⁽⁶⁾	0.02			0.02			—
Allowance for loan and lease losses	$	5,726		$	5,648		1	%
Allowance coverage ratio	5.32		%	4.92		%	40	bps




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__________

⁽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 $335 million and $321 million in the first quarters of 2018 and 2017, respectively, for the estimated uncollectible amount of billed finance charges and fees and related losses. The finance charge and fee reserve totaled $446 million and $491 million as of March 31, 2018 and December 31, 2017, respectively.


⁽²⁾	Period-end loans held for investment and average loans held for investment include billed finance charges and fees, net of the estimated uncollectible amount.


⁽³⁾	Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.


⁽⁴⁾	Total net revenue margin is calculated by dividing annualized total net revenue for the period by average loans held for investment during the period. Interest income also includes interest income on loans held for sale.


⁽⁵⁾	Purchase volume consists of purchase transactions, net of returns, for the period, and excludes cash advance and balance transfer transactions.


⁽⁶⁾	Within our credit card loan portfolio, only certain loans in our international card businesses are classified as nonperforming. See “MD&A—Nonperforming Loans and Other Nonperforming Assets” for additional information.

Key factors affecting the results of our Credit Card business for the first quarter of 2018 compared to the first quarter of 2017, and changes in financial condition and credit performance between March 31, 2018 and December 31, 2017 include the following:


•	Net Interest Income: Net interest income increased by $212 million to $3.6 billion in the first quarter of 2018 primarily driven by loan growth in our Domestic Card business, including loans obtained in the Cabela’s acquisition.


•	Non-Interest Income: Non-interest income increased by $119 million to $857 million in the first quarter of 2018 primarily driven by:


◦	an increase in net interchange fees primarily due to higher purchase volume; and


◦	the absence of a build in our U.K. PPI Reserve in the first quarter of 2018.


•	Provision for Credit Losses: The provision for credit losses decreased by $261 million to $1.5 billion in the first quarter of 2018 primarily driven by a smaller allowance build in our domestic credit card loan portfolio as a result of moderating impacts from growth and seasoning, partially offset by higher charge-offs.


•	Non-Interest Expense: Non-interest expense increased by $110 million to $2.0 billion in the first quarter of 2018, primarily driven by higher operating expenses associated with loan growth and continued investments in technology and infrastructure, as well as costs associated with the acquired Cabela’s portfolio.

•

Loans Held for Investment: Period-end loans held for investment decreased by $7.2 billion to $107.6 billion as of March 31, 2018 from December 31, 2017 primarily due to expected seasonal paydowns. Average loans held for investment increased by $8.3 billion to $109.5 billion in the first quarter of 2018 compared to the first quarter of 2017 primarily due to growth in our domestic credit card loan portfolio largely driven by loans obtained in the Cabela’s acquisition.


•	Net Charge-Off and Delinquency Metrics: The net charge-off rate increased by 1 basis point to 5.03% in the first quarter of 2018 compared to the first quarter of 2017 primarily driven by higher charge-offs due to growth and seasoning of recent domestic credit card loan originations, partially offset by loan growth.

The 30+ day delinquency rate decreased by 40 basis points to 3.59% as of March 31, 2018 from December 31, 2017 primarily driven by lower delinquency inventories partially offset by lower loan balances, both driven by expected seasonal trends in our domestic credit card loan portfolio.

Domestic Card Business

Domestic Card generated net income from continuing operations of $607 million and $278 million in the first quarters of 2018 and 2017, respectively. In the first quarters of 2018 and 2017, Domestic Card accounted for greater than 90% of total net revenue of our Credit Card business.




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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)	2018			2017			Change
Selected income statement data:
Net interest income	$	3,229		$	3,093		4	%
Non-interest income	774			699			11
Total net revenue⁽¹⁾	4,003			3,792			6
Provision for credit losses	1,380			1,637			(16	)
Non-interest expense	1,832			1,717			7
Income from continuing operations before income taxes	791			438			81
Income tax provision	184			160			15
Income from continuing operations, net of tax	$	607		$	278		118
Selected performance metrics:
Average loans held for investment⁽²⁾	$	100,450		$	93,034		8
Average yield on loans held for investment⁽³⁾	15.10		%	15.01		%	9	bps
Total net revenue margin⁽⁴⁾	15.94			16.30			(36	)
Net charge-offs	$	1,321		$	1,196		10	%
Net charge-off rate	5.26		%	5.14		%	12	bps
Purchase volume⁽⁵⁾	$	79,194		$	66,950		18	%

(Dollars in millions, except as noted)	March 31, 2018			December 31, 2017			Change
Selected period-end data:
Loans held for investment⁽²⁾	$	98,535		$	105,293		(6	)%
30+ day delinquency rate	3.57		%	4.01		%	(44	)bps
Allowance for loan and lease losses	$	5,332		$	5,273		1	%
Allowance coverage ratio	5.41		%	5.01		%	40	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, and excludes cash advance and balance transfer transactions.

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 increased in the first quarter of 2018 compared to the first quarter of 2017 primarily driven by:


•	lower provision for credit losses;


•	higher net interest income primarily driven by loan growth; and


•	higher non-interest income driven by an increase in net interchange fees primarily due to higher purchase volume.

These drivers were partially offset by higher non-interest expense.




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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 $426 million and $248 million in the first quarters of 2018 and 2017, respectively.

Table 11 summarizes the financial results of our Consumer Banking business and displays selected key metrics for the periods indicated.

Table 11: Consumer Banking Business Results



	Three Months Ended March 31,
(Dollars in millions, except as noted)	2018			2017			Change
Selected income statement data:
Net interest income	$	1,615		$	1,517		6	%
Non-interest income	174			195			(11	)
Total net revenue	1,789			1,712			4
Provision for credit losses	233			279			(16	)
Non-interest expense	1,000			1,042			(4	)
Income from continuing operations before income taxes	556			391			42
Income tax provision	130			143			(9	)
Income from continuing operations, net of tax	$	426		$	248		72
Selected performance metrics:
Average loans held for investment:⁽¹⁾
Auto	$	54,344		$	48,673		12
Home loan	17,224			21,149			(19	)
Retail banking	3,429			3,509			(2	)
Total consumer banking	$	74,997		$	73,331		2
Average yield on loans held for investment⁽²⁾	6.86		%	6.48		%	38	bps
Average deposits	$	187,785		$	183,936		2	%
Average deposits interest rate	0.80		%	0.57		%	23	bps
Net charge-offs	$	223		$	218		2	%
Net charge-off rate	1.19		%	1.19		%	—
Net charge-off rate (excluding PCI loans)	1.36			1.46			(10	)bps
Auto loan originations	$	6,707		$	7,025		(5	)%




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(Dollars in millions, except as noted)	March 31, 2018			December 31, 2017			Change
Selected period-end data:
Loans held for investment:⁽¹⁾
Auto	$	54,811		$	53,991		2	%
Home loan	16,630			17,633			(6	)
Retail banking	3,233			3,454			(6	)
Total consumer banking	$	74,674		$	75,078		(1	)
30+ day performing delinquency rate	3.86		%	4.76		%	(90	)bps
30+ day performing delinquency rate (excluding PCI loans)	4.42			5.52			(110	)
30+ day delinquency rate	4.27			5.34			(107	)
30+ day delinquency rate (excluding PCI loans)	4.89			6.19			(130	)
Nonperforming loan rate	0.61			0.78			(17	)
Nonperforming loan rate (excluding PCI loans)	0.69			0.91			(22	)
Nonperforming asset rate⁽³⁾	0.70			0.91			(21	)
Nonperforming asset rate (excluding PCI loans)⁽³⁾	0.80			1.06			(26	)
Allowance for loan and lease losses	$	1,253		$	1,242		1	%
Allowance coverage ratio⁽⁴⁾	1.68		%	1.65		%	3	bps
Deposits	$	193,073		$	185,842		4	%

__________


⁽¹⁾	Average consumer banking loans held for investment includes purchased credit-impaired loans (“PCI loans”) of $9.8 billion and $13.8 billion in the first quarters of 2018 and 2017, respectively. Period-end consumer banking loans held for investment includes PCI loans with carrying values of $9.5 billion and $10.3 billion as of March 31, 2018 and December 31, 2017, respectively.


⁽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⁾	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.


⁽⁴⁾	Excluding the impact of the PCI loan amounts in footnote 1 above, the allowance coverage ratio for our total consumer banking portfolio was 1.88% and 1.87% as of March 31, 2018 and December 31, 2017, respectively.

Key factors affecting the results of our Consumer Banking business for the first quarter of 2018 compared to the first quarter of 2017, and changes in financial condition and credit performance between March 31, 2018 and December 31, 2017 include the following:


•	Net Interest Income: Net interest income increased by $98 million to $1.6 billion in the first quarter of 2018 primarily driven by:


◦	growth in our auto loan portfolio, as well as higher loan yields as a result of higher interest rates; and


◦	higher deposit volumes and margins in our retail banking business.

Consumer Banking loan yield increased by 38 basis points to 6.86% in the first quarter of 2018 compared to the first quarter of 2017 primarily driven by:


◦	changes in the product mix in Consumer Banking as a result of growth in our auto loan portfolio and run-off of our acquired home loan portfolio; and


◦	higher yields as a result of higher interest rates.


•	Non-Interest Income: Non-interest income decreased by $21 million to $174 million in the first quarter of 2018 primarily driven by a mortgage representation and warranty reserve release in the first quarter of 2017.


•	Provision for Credit Losses: The provision for credit losses decreased by $46 million to $233 million in the first quarter of 2018 primarily driven by a smaller allowance build in our auto loan portfolio.




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•	Non-Interest Expense: Non-interest expense was substantially flat at $1.0 billion in the first quarter of 2018 primarily driven by:


◦	lower operating expenses due to our decision to cease new originations of home loan lending products in the fourth quarter of 2017; and


◦	operating efficiencies in our retail banking business.

These drivers were largely offset by higher operating expenses driven by growth in our auto loan portfolio.

•

Loans Held for Investment: Period-end loans held for investment decreased by $404 million to $74.7 billion as of March 31, 2018 from December 31, 2017 driven by continued home loans run-off, offset by growth in our auto loan portfolio. Average loans held for investment increased by $1.7 billion to $75.0 billion in the first quarter of 2018 compared to the first quarter of 2017 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 $7.2 billion to $193.1 billion as of March 31, 2018 from December 31, 2017.


•	Net Charge-Off and Delinquency Metrics: The net charge-off rate was unchanged at 1.19% in the first quarter of 2018.

The 30+ day delinquency rate decreased by 107 basis points to 4.27% as of March 31, 2018 from December 31, 2017 primarily attributable to seasonally lower auto delinquency inventories.

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 our Commercial Banking business has loans and investments that generate tax-exempt income, tax credits or other tax benefits, we present the 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 $256 million and $213 million in the first quarters of 2018 and 2017, respectively.




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Table 12 summarizes the financial results of our Commercial Banking business and displays selected key metrics for the periods indicated.

Table 12: Commercial Banking Business Results



	Three Months Ended March 31,
(Dollars in millions, except as noted)	2018			2017			Change
Selected income statement data:
Net interest income	$	536		$	566		(5	)%
Non-interest income	187			158			18
Total net revenue⁽¹⁾⁽²⁾	723			724			—
Benefit for credit losses⁽³⁾	(14		)	(2		)	**
Non-interest expense	403			391			3
Income from continuing operations before income taxes	334			335			—
Income tax provision	78			122			(36	)
Income from continuing operations, net of tax	$	256		$	213		20
Selected performance metrics:
Average loans held for investment:
Commercial and multifamily real estate	$	26,542		$	26,587		—
Commercial and industrial	38,246			39,877			(4	)
Total commercial lending	64,788			66,464			(3	)
Small-ticket commercial real estate	393			474			(17	)
Total commercial banking	$	65,181		$	66,938		(3	)
Average yield on loans held for investment⁽¹⁾⁽⁴⁾	4.16		%	3.65		%	51	bps
Average deposits	$	34,057		$	34,219		—
Average deposits interest rate	0.52		%	0.31		%	21
Net charge-offs	$	19		$	23		(17	)%
Net charge-off rate	0.11		%	0.14		%	(3	)bps

(Dollars in millions, except as noted)	March 31, 2018			December 31, 2017			Change
Selected period-end data:
Loans held for investment:
Commercial and multifamily real estate	$	27,360		$	26,150		5	%
Commercial and industrial	38,208			38,025			—
Total commercial lending	65,568			64,175			2
Small-ticket commercial real estate	385			400			(4	)
Total commercial banking	$	65,953		$	64,575		2
Nonperforming loan rate	0.47		%	0.44		%	3	bps
Nonperforming asset rate⁽⁵⁾	0.49			0.52			(3	)
Allowance for loan and lease losses⁽³⁾	$	587		$	611		(4	)%
Allowance coverage ratio	0.89		%	0.95		%	(6	)bps
Deposits	$	34,449		$	33,938		2	%
Loans serviced for others	28,327			27,764			2

__________


⁽¹⁾	Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate (21% and 35% for the first quarters of 2018 and 2017, respectively) and state taxes where applicable, with offsetting reductions to the Other category.

⁽²⁾




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impacted by the reduction of the federal tax rate set forth in the Tax Act. The net impact of the measurement change and the reduction of the federal tax rate was a decrease of $28 million in revenue in our Commercial Banking business in the first quarter of 2018, with an offsetting impact to the Other category.

⁽³⁾

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 $108 million and $117 million as of March 31, 2018 and December 31, 2017, respectively.


⁽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, 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.


**	Not meaningful.

Key factors affecting the results of our Commercial Banking business for the first quarter of 2018 compared to the first quarter of 2017, and changes in financial condition and credit performance between March 31, 2018 and December 31, 2017 include the following:


•	Net Interest Income: Net interest income decreased by $30 million to $536 million in the first quarter of 2018 primarily driven by the impact of the reduction of the federal tax rate set forth in the Tax Act on revenue presented on a taxable-equivalent basis, partially offset by the change to include the tax benefit of losses on certain tax-advantaged investments.


•	Non-Interest Income: Non-interest income increased by $29 million to $187 million in the first quarter of 2018 primarily driven by:


◦	higher service charges and other customer-related fees as a result of increased activity across a broad range of products and services provided to our commercial customers; and


◦	sale activities in certain of our commercial and industrial loan portfolios.


•	Provision (Benefit) for Credit Losses: The benefit for credit losses was substantially flat at $14 million in the first quarter of 2018.


•	Non-Interest Expense: Non-interest expense was substantially flat at $403 million in the first quarter of 2018.


•	Loans Held for Investment: Period-end loans held for investment increased by $1.4 billion to $66.0 billion as of March 31, 2018 from December 31, 2017 primarily driven by growth in our commercial and multifamily real estate loan portfolios.

Average loans held for investment decreased by $1.8 billion to $65.2 billion in the first quarter of 2018 compared to the first quarter of 2017 primarily due to:


◦	paydowns in our commercial and industrial loan portfolios; and


◦	charge-offs in and the subsequent sale of the substantial majority of our taxi medallion lending portfolio.


•	Deposits: Period-end deposits increased by $511 million to $34.4 billion as of March 31, 2018 from December 31, 2017.


•	Net Charge-Off and Nonperforming Metrics: The net charge-off rate remained substantially flat at 0.11% in the first quarter of 2018, and the nonperforming loan rate remained substantially flat at 0.47% as of March 31, 2018.

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 restructuring charges;


•	offsets related to certain line-item reclassifications; and


•	residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments.




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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)	2018			2017			Change
Selected income statement data:
Net interest income	$	9		$	45		(80	)%
Non-interest income	(27		)	(30		)	(10	)
Total net revenue⁽¹⁾⁽²⁾	(18		)	15			**
Benefit for credit losses	(1		)	(2		)	(50	)
Non-interest expense	131			72			82
Loss from continuing operations before income taxes	(148		)	(55		)	169
Income tax benefit	(102		)	(118		)	(14	)
Income (loss) from continuing operations, net of tax	$	(46	)	$	63		**

__________


⁽¹⁾	Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate (21% and 35% for the first quarters of 2018 and 2017, respectively) and state taxes where applicable, with offsetting reductions to the Other category.

⁽²⁾


**	Not meaningful.

Net loss from continuing operations recorded in the Other category was $46 million in the first quarter of 2018 compared to net income of $63 million in the first quarter of 2017. The loss in the first quarter of 2018 was primarily driven by higher interest expense due to the net effect of higher interest rates and higher communications and data processing expenses associated with continued investments in technology and infrastructure.

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 2017 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


•	Customer rewards reserve

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them, as necessary, based on changing conditions. There have been no changes to our critical accounting policies and estimates described in our 2017 Form 10-K under “MD&A—Critical Accounting Policies and Estimates.”




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ACCOUNTING CHANGES AND DEVELOPMENTS

See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted in 2018, as well as recently issued accounting standards not yet required to be adopted and the expected impact of these changes in accounting standards.

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 Federal Deposit Insurance Corporation (“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 III Capital Rule also introduced the supplementary leverage ratio for all Advanced Approaches banking organizations with a minimum requirement of 3.0%. The supplementary leverage ratio compares Tier 1 capital to total leverage exposure, which includes all on-balance sheet assets and certain off-balance sheet exposures, including derivatives and unused commitments. Given that we are in our Basel III Advanced Approaches parallel run, we calculate the ratio based on Tier 1 capital under the Standardized Approach. The minimum requirement for the supplementary leverage ratio became effective as of January 1, 2018. As an Advanced Approaches banking organization, however, we were required to calculate and publicly disclose our supplementary leverage ratio beginning in the first quarter of 2015.

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 generally 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. As of March 31, 2018, the Company and CONA are subject to the Market Risk Rule. See “MD&A—Market Risk Profile” below for additional information.

In October 2017, the Federal Banking Agencies proposed certain limited changes to the Basel III Capital Rule. There is uncertainty regarding how any of the proposed changes may impact the Basel III Standardized Approach and the Basel III Advanced Approaches. Additionally, in December 2017, the Basel Committee finalized certain modifications to the international Basel III capital standards, which would require rulemaking in the United States prior to becoming effective for United States banking organizations. There




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is uncertainty around which of those changes may be adopted in the United States and how those changes may impact the United States capital framework.

Table 14 provides a comparison of our regulatory capital ratios under the Basel III Standardized Approach subject to the applicable transition provisions, the regulatory minimum capital adequacy ratios and the PCA well-capitalized level for each ratio, where applicable, as of March 31, 2018 and December 31, 2017.

Table 14: Capital Ratios under Basel III⁽¹⁾⁽²⁾



	March 31, 2018						December 31, 2017
	Capital Ratio		Minimum Capital Adequacy		Well- Capitalized		Capital Ratio		Minimum Capital Adequacy		Well- Capitalized
Capital One Financial Corp:
Common equity Tier 1 capital⁽³⁾	10.5	%	4.5	%	N/A		10.3	%	4.5	%	N/A
Tier 1 capital⁽⁴⁾	12.0		6.0		6.0	%	11.8		6.0		6.0	%
Total capital⁽⁵⁾	14.5		8.0		10.0		14.4		8.0		10.0
Tier 1 leverage⁽⁶⁾	10.1		4.0		N/A		9.9		4.0		N/A
Supplementary leverage⁽⁷⁾	8.6		3.0		N/A		8.4		N/A		N/A
COBNA:
Common equity Tier 1 capital⁽³⁾	15.2		4.5		6.5		14.3		4.5		6.5
Tier 1 capital⁽⁴⁾	15.2		6.0		8.0		14.3		6.0		8.0
Total capital⁽⁵⁾	17.6		8.0		10.0		16.9		8.0		10.0
Tier 1 leverage⁽⁶⁾	13.3		4.0		5.0		12.7		4.0		5.0
Supplementary leverage⁽⁷⁾	10.8		3.0		N/A		10.4		N/A		N/A
CONA:
Common equity Tier 1 capital⁽³⁾	12.3		4.5		6.5		12.2		4.5		6.5
Tier 1 capital⁽⁴⁾	12.3		6.0		8.0		12.2		6.0		8.0
Total capital⁽⁵⁾	13.6		8.0		10.0		13.4		8.0		10.0
Tier 1 leverage⁽⁶⁾	8.9		4.0		5.0		8.6		4.0		5.0
Supplementary leverage⁽⁷⁾	7.9		3.0		N/A		7.7		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 80% for 2017 and 100% for 2018. Capital requirements that are not applicable are denoted by “N/A.”


⁽²⁾	Ratios as of March 31, 2018 are preliminary. As we continue to validate our data, the calculations are subject to change until we file our March 31, 2018 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 is a regulatory capital measure calculated based on Tier 1 capital divided by total leverage exposure.

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, 2018 and December 31, 2017.

The Basel III Capital Rule requires banks to maintain a capital conservation buffer, composed of common equity Tier 1 capital, of 2.5% above the regulatory minimum ratios. 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 1.875% in 2018.




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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 Tier 1 capital and set at the discretion of the Federal Banking Agencies. As of March 31, 2018, 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 2018, 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 6.375%, 7.875% and 9.875%, 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, 2018, the Company and each of the Banks were 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.

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 2017 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 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, 2018, we submitted our capital plan to the Federal Reserve as part of the 2018 CCAR cycle. The stress testing results are expected to be released by the Federal Reserve before June 30, 2018.

On December 24, 2017, using data as of June 30, 2017, we resubmitted our capital plan for the 2017 CCAR cycle. In connection with this resubmission, the Board of Directors reduced the authorized repurchases of our common stock to up to $1.0 billion for the remaining 2017 CCAR period, which ends June 30, 2018. On March 9, 2018, we received a non-objection from the Federal Reserve to our resubmitted capital plan for the 2017 CCAR process. 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 2017 Form 10-K.

Dividend Policy and Stock Purchases

We declared and paid common stock dividends of $0.40 per share in the first quarter of 2018. The following table summarizes the dividends declared and paid per share on our various preferred stock series in the first quarter of 2018.




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Table 15: Preferred Stock Dividends Paid Per Share

Series

Description

Issuance Date

Per Annum Dividend Rate

Dividend Frequency

2018

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

15.00

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, 2018, funds available for dividend payments from COBNA and CONA were $2.3 billion and $968 million, respectively. There can be no assurance that we will declare and pay any dividends to stockholders.

Consistent with our 2017 Stock Repurchase Program, our Board of Directors authorized the repurchase of up to $1.85 billion of shares of common stock beginning in the third quarter of 2017 through the end of the second quarter of 2018. In December 2017, the Board of Directors reduced the authorized repurchases of our common stock to up to $1.0 billion for the remainder of the 2017 Stock Repurchase Program. In the first quarter of 2018, we repurchased approximately $200 million of our common stock.

The timing and exact amount of any future common stock repurchases will depend on various factors, including regulatory approval, 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 “Part I—Item 1. Business—Supervision and Regulation—Dividends, Stock Repurchases and Transfer of Funds” in our 2017 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




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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 2017 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 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.”

Loans Held for Investment Portfolio Composition

We provide a variety of lending products. Our primary products include credit cards, auto loans, home loans and commercial lending products. For information on our lending policies and procedures, including our underwriting criteria for our primary loan products, see “MD&A—Credit Risk Profile” in our 2017 Form 10-K.

Our loan portfolio consists of loans held for investment, including loans held in our consolidated trusts, and loans held for sale. Table 16 presents the composition of our portfolio of loans held for investment, including PCI loans, by portfolio segment as of March 31, 2018 and December 31, 2017. Table 16 and the credit metrics presented in this section exclude loans held for sale, which are carried at lower of cost or fair value and totaled $1.5 billion and $971 million as of March 31, 2018 and December 31, 2017, respectively.




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Table 16: Loans Held for Investment Portfolio Composition



	March 31, 2018				December 31, 2017
(Dollars in millions)	Loans		% of Total		Loans		% of Total
Credit Card:
Domestic credit card	$	98,535	39.7	%	$	105,293	41.4	%
International card businesses	9,041		3.6		9,469		3.7
Total credit card	107,576		43.3		114,762		45.1
Consumer Banking:
Auto	54,811		22.1		53,991		21.2
Home loan	16,630		6.7		17,633		6.9
Retail banking	3,233		1.3		3,454		1.4
Total consumer banking	74,674		30.1		75,078		29.5
Commercial Banking:
Commercial and multifamily real estate	27,360		11.0		26,150		10.3
Commercial and industrial	38,208		15.4		38,025		14.9
Total commercial lending	65,568		26.4		64,175		25.2
Small-ticket commercial real estate	385		0.2		400		0.2
Total commercial banking	65,953		26.6		64,575		25.4
Other loans	53		—		58		—
Total loans held for investment	$	248,256	100.0	%	$	254,473	100.0	%

Commercial Loans

Table 17 summarizes our commercial loans held for investment portfolio by industry classification as of March 31, 2018 and December 31, 2017. Industry classifications below are based on our interpretation of the North American Industry Classification System codes as they pertain to each individual loan.

Table 17: Commercial Loans by Industry