Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x

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

For the quarterly period ended June 30, 2014

OR

 

¨

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

For the transition period from              to             

Commission File No. 1-13300

 

 

CAPITAL ONE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   54-1719854

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

1680 Capital One Drive,

McLean, Virginia

  22102
(Address of Principal Executive Offices)   (Zip Code)

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

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

(Not applicable)

 

 

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

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

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

Non-accelerated filer

 

¨

  

Smaller reporting company

 

¨

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

As of July 31, 2014, there were 561,318,773 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page

PART I—FINANCIAL INFORMATION

  1

Item 1.

  

Financial Statements

  71
  

Consolidated Statements of Income

  72
  

Consolidated Statements of Comprehensive Income

  73
  

Consolidated Balance Sheets

  74
  

Consolidated Statements of Changes in Stockholders’ Equity

  75
  

Consolidated Statements of Cash Flows

  76
  

Notes to Consolidated Financial Statements

  77
  

Note 1—Summary of Significant Accounting Policies

  77
  

Note 2—Discontinued Operations

  80
  

Note 3—Investment Securities

  80
  

Note 4—Loans

  88
  

Note 5—Allowance for Loan and Lease Losses

  111
  

Note 6—Variable Interest Entities and Securitizations

  114
  

Note 7—Goodwill and Other Intangible Assets

  119
  

Note 8—Deposits and Borrowings

  120
  

Note 9—Derivative Instruments and Hedging Activities

  122
  

Note 10—Accumulated Other Comprehensive Income

  129
  

Note 11—Earnings Per Common Share

  132
  

Note 12—Fair Value of Financial Instruments

  133
  

Note 13—Business Segments

  147
  

Note 14—Commitments, Contingencies, Guarantees, and Others

  150

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)   1
  

Summary of Selected Financial Data

  2
  

Introduction

  5
  

Executive Summary and Business Outlook

  7
  

Critical Accounting Policies and Estimates

  10
  

Accounting Changes and Developments

  11
  

Consolidated Results of Operations

  11
  

Business Segment Financial Performance

  18
  

Consolidated Balance Sheets Analysis

  31
  

Off-Balance Sheet Arrangements and Variable Interest Entities

  35
  

Capital Management

  35
  

Risk Management

  40
  

Credit Risk Profile

  41
  

Liquidity Risk Profile

  53
  

Market Risk Profile

  57
  

Supervision and Regulation

  59
  

Forward-Looking Statements

  60
  

Supplemental Tables

  62
  

Glossary and Acronyms

  64

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

  162

Item 4.

  

Controls and Procedures

  162

 

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Table of Contents

PART II—OTHER INFORMATION

  163

Item 1.

  

Legal Proceedings

  163

Item 1A.

  

Risk Factors

  163

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  163

Item 3.

  

Defaults upon Senior Securities

  163

Item 4.

  

Mine Safety Disclosures

  163

Item 5.

  

Other Information

  163

Item 6.

  

Exhibits

  163

SIGNATURES

  164

EXHIBIT INDEX

  165

 

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INDEX OF MD&A TABLES AND SUPPLEMENTAL TABLES

 

Table    Description   Page
  

MD&A Tables:

 
1    Consolidated Financial Highlights (Unaudited)   3
2    Business Segment Results   6
3    Average Balances, Net Interest Income and Net Interest Yield   12
4    Rate/Volume Analysis of Net Interest Income   14
5    Non-Interest Income   15
6    Non-Interest Expense   16
7    Credit Card Business Results   19
7.1    Domestic Card Business Results   21
7.2    International Card Business Results   23
8    Consumer Banking Business Results   25
9    Commercial Banking Business Results   28
10    Other Results   30
11    Investment Securities   32
12    Non-Agency Investment Securities Credit Ratings   33
13    Net Loans Held for Investment   33
14    Changes in Representation and Warranty Reserve   35
15    Capital Ratios   37
16    Estimated Common Equity Tier 1 Ratio under Fully Phased-In Basel III Standardized Approach   39
17    Loan Portfolio Composition   42
18    30+ Day Delinquencies   44
19    Aging and Geography of 30+ Day Delinquent Loans   45
20    90+ Day Delinquent Loans Accruing Interest   45
21    Nonperforming Loans and Other Nonperforming Assets   46
22    Net Charge-Offs   47
23    Loan Modifications and Restructurings   49
24    Allowance for Loan and Lease Losses Activity   51
25    Allocation of the Allowance for Loan and Lease Losses   52
26    Liquidity Reserves   53
27    Deposit Composition and Average Deposit Rates   54
28    Short-Term Borrowings   55
29    Contractual Maturity Profile of Outstanding Debt   56
30    Senior Unsecured Debt Credit Ratings   57
31    Interest Rate Sensitivity Analysis   59
   Supplemental Tables:  
A    Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures   62

 

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Table of Contents

PART I—FINANCIAL INFORMATION

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

 

 

This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “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 2013 Annual Report on Form 10-K (“2013 Form 10-K”). Unless otherwise specified, references to notes to our consolidated financial statements refer to the notes to our unaudited consolidated financial statements as of June 30, 2014 included in this Report.

 

 

Management monitors a variety of key indicators to evaluate our business results and financial condition. The following MD&A is intended to provide the reader with an understanding of our results of operations, financial condition and liquidity by focusing on changes from year to year in certain key measures used by management to evaluate performance, such as profitability, growth and credit quality metrics. MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements and related notes in this Report and the more detailed information contained in our 2013 Form 10-K.

 

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 SUMMARY OF SELECTED FINANCIAL DATA

 

The following table presents selected consolidated financial data from our results of operations for the second quarter and first six months of 2014 and 2013, and selected comparative balance sheet data as of June 30, 2014 and December 31, 2013. We also provide selected key metrics we use in evaluating our performance. Certain prior period amounts have been recast to conform to the current period presentation. The comparability of our results of operations between reported periods is impacted by the following transactions completed in 2013:

 

 

On November 1, 2013, we completed the acquisition of Beech Street Capital, a privately-held, national originator and servicer of Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Federal Housing Administration (“FHA”) multifamily commercial real estate loans.

 

 

On September 6, 2013, we completed the sale of the Best Buy private label and co-branded credit card portfolio to Citibank, N.A (“Portfolio Sale”). Pursuant to the agreement we received $6.4 billion for the net portfolio assets.

In 2012, we completed the acquisitions of (i) substantially all of the assets and assumed liabilities of HSBC’s credit card and private-label credit card business in the United States (other than the HSBC Bank USA, National Association consumer credit card program and certain other retained assets and liabilities) (the “2012 U.S. card acquisition”); and (ii) substantially all of the ING Direct business in the United States (“ING Direct”) from ING Groep N.V., ING Bank N.V., ING Direct N.V. and ING Direct Bancorp (the “ING Direct acquisition”).

We use the term “Acquired Loans” to refer to a limited portion of the credit card loans acquired in the 2012 U.S. card acquisition and the substantial majority of consumer and commercial loans acquired in the ING Direct and Chevy Chase Bank, F.S.B. (“CCB”) acquisitions, which were recorded at fair value at acquisition and subsequently accounted for based on expected cash flows to be collected (under the accounting standard formerly known as “Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” commonly referred to as “SOP 03-3”). The difference between the fair value at acquisition and expected cash flows represents the accretable yield, which is recognized in interest income over the life of the loans. The difference between the contractual payments on the loans and expected cash flows represents the nonaccretable difference or the amount of principal and interest not considered collectible, which incorporates future expected credit losses over the life of the loans. Decreases in expected cash flows resulting from further credit deterioration will generally result in an impairment charge recognized in our provision for credit losses and an increase in the allowance for loan and lease losses. Charge-offs are not recorded until the expected credit losses within the nonaccretable difference is depleted. In addition, Acquired Loans are not initially classified as delinquent or nonperforming as we expect to collect our net investment in these loans and the nonaccretable difference is expected to absorb the majority of the losses associated with these loans. The accounting and classification of these loans may significantly alter some of our reported credit quality metrics. We therefore supplement certain reported credit quality metrics with metrics adjusted to exclude the impact of these Acquired Loans. The period-end carrying value of Acquired Loans accounted for subsequent to acquisition based on expected cash flows to be collected was $26.0 billion and $28.6 billion as of June 30, 2014 and December 31, 2013, respectively. For additional information, see “MD&A—Credit Risk Profile” and “Note 4—Loans.”

 

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Table 1: Consolidated Financial Highlights (Unaudited)(1)

 

    Three Months Ended June 30,         Six Months Ended June 30,      

 (Dollars in millions, except per share data and as noted)

  2014     2013       Change           2014     2013       Change        

 Income statement

               
 Net interest income    $     4,315           $     4,553          (5 ) %       $     8,665           $     9,123          (5 ) %   
 Non-interest income     1,153            1,085          6          2,173            2,066          5     
 

 

 

   

 

 

       

 

 

   

 

 

     
 Total net revenue(2)     5,468            5,638          (3       10,838            11,189          (3  
 Provision for credit losses     704            762          (8       1,439            1,647          (13  
 Non-interest expense:                

Marketing

    335            330          2          660            647          2     

Amortization of intangibles

    136            167          (19       279            344          (19  

Acquisition-related

    18            50          (64       41            96          (57  

Operating expenses

    2,490            2,471          1          4,931            4,922              
 

 

 

   

 

 

       

 

 

   

 

 

     
 Total non-interest expense     2,979            3,018          (1       5,911            6,009          (2  
 

 

 

   

 

 

       

 

 

   

 

 

     
 Income from continuing operations before income taxes     1,785            1,858          (4       3,488            3,533          (1  
 Income tax provision     581            631          (8       1,160            1,172          (1  
 

 

 

   

 

 

       

 

 

   

 

 

     
 Income from continuing operations, net of tax     1,204            1,227          (2       2,328            2,361          (1  
 Income (loss) from discontinued operations, net of tax     (10)           (119)         (92       20            (197)         **     
 

 

 

   

 

 

       

 

 

   

 

 

     
 Net income     1,194            1,108          8          2,348            2,164          9     
 Dividends and undistributed earnings allocated to participating  securities     (4)           (4)                  (9)           (9)             
 Preferred stock dividends     (13)           (13)                  (26)           (26)             
 

 

 

   

 

 

       

 

 

   

 

 

     
 Net income available to common shareholders    $ 1,177           $ 1,091          8         $ 2,313           $ 2,129          9     

 

 

 

 

   

 

 

       

 

 

   

 

 

     

 Common share statistics

               
 Earnings per common share:                

Basic earnings per common share

   $ 2.07           $ 1.88          10         $ 4.06           $ 3.66          11     

Diluted earnings per common share

    2.04            1.85          10          4.00            3.62          10     
 Weighted average common shares outstanding:                

Basic

    567.5            581.5          (2       569.2            581.0          (2  

Diluted

    577.6            588.8          (2       578.9            587.9          (2  
 Dividends per common share     0.30            0.30                   0.60            0.35          71     

 Average balances

               
 Loans held for investment(3)   $ 194,996          $ 190,562           2        $ 194,362          $ 193,265           1     
 Interest-earning assets     263,570            266,544           (1       263,119            269,008           (2  
 Total assets     294,744            297,748           (1       294,498            300,290           (2  
 Interest-bearing deposits     182,053            189,311           (4       182,431            189,958           (4  
 Total deposits     206,315            210,650           (2       206,080            211,100           (2  
 Borrowings     35,658            36,915           (3       35,817            39,232           (9  
 Common equity     42,797            40,637           5          42,408            40,335           5     

 Total stockholders’ equity

    43,767            41,490           5          43,320            41,188           5     

 Selected performance metrics

               
 Purchase volume(4)   $ 56,358          $ 50,788           11        $ 103,792          $ 95,886           8     
 Total net revenue margin(5)     8.30%        8.46%        (16 ) bps        8.24%        8.32%        (8 ) bps   
 Net interest margin(6)     6.55            6.83           (28       6.59            6.78           (19  
 Return on average assets     1.63            1.65           (2       1.58            1.57           1     
 Return on average tangible assets(7)     1.73            1.74           (1       1.67            1.66           1     
 Return on average common equity(8)     11.09            11.91           (82       10.81            11.53           (72  
 Return on average tangible common equity(9)     17.47            19.62           (215       17.15            19.18           (203  
 Equity-to-assets ratio     14.85            13.93           92          14.71            13.72           99     
 Non-interest expense as a % of average loans held for  investment     6.11            6.33           (22       6.08            6.22           (14  
 Efficiency ratio(10)     54.48            53.53           95          54.54            53.70           84     
 Effective income tax rate from continuing operations     32.5            34.0           (150       33.3            33.2           10     
 Net charge-offs   $ 812          $ 969           (16 ) %      $ 1,743          $ 2,048           (15 ) %   
 Net charge-off rate(11)     1.67%        2.03%        (36 ) bps        1.79%        2.12%        (33 ) bps   
 Net charge-off rate (excluding Acquired Loans)     1.93            2.46           (53       2.08            2.58           (50  

 

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 (Dollars in millions except per share data as noted)

  June 30,
2014
    December 31,
2013
    Change

 Balance sheet (period end)

       
 Loans held for investment(3)   $ 198,528          $ 197,199            
 Interest-earning assets     266,720            265,170               
 Total assets     298,317            296,933           —      
 Interest-bearing deposits     180,970            181,880           (1  
 Total deposits     205,890            204,523               
 Borrowings     39,114            40,654           (4  
 Common equity     42,477            40,779               

 Total stockholders’ equity

    43,815            41,632               

 Credit quality metrics (period end)

       
 Allowance for loan and lease losses   $ 3,998          $ 4,315           (7  
 Allowance as a % of loans held for investment (“allowance coverage ratio”)     2.01%        2.19%        (18 ) bps   
 Allowance as a % of loans held for investment (excluding Acquired Loans)     2.30            2.54           (24  
 30+ day performing delinquency rate     2.24            2.63           (39  
 30+ day performing delinquency rate (excluding Acquired Loans)     2.58            3.08           (50  
 30+ day delinquency rate     2.53            2.96           (43  
 30+ day delinquency rate (excluding Acquired Loans)     2.91            3.46           (55  
 Capital ratios(12)        
 Common equity Tier 1 capital ratio     12.72%        N/A           **     
 Tier 1 common ratio     N/A            12.19%        **     
 Tier 1 risk-based capital ratio     13.31            12.57           74  bps   
 Total risk-based capital ratio     15.36            14.69           67     
 Tier 1 leverage ratio     10.70            10.06           64     
 Tangible common equity (“TCE”) ratio(13)     9.52            8.89           63     
 Associates        
 Employees (in thousands), period end(14)     44.6            45.4           (2 ) %   

 

 

 **

Change is not meaningful.

 

(1) 

We adopted ASU 2014-01 “Accounting for Investments in Qualified Affordable Housing Projects” (Investments in Qualified Affordable Housing Projects) as of January 1, 2014. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior period results and related metrics have been recast to conform to this presentation.

 

(2) 

Total net revenue was reduced by $153 million and $316 million in the second quarter and first six months of 2014, respectively, and by $192 million and $457 million in the second quarter and first six months of 2013, respectively, for the estimated uncollectible amount of billed finance charges and fees.

 

(3) 

Loans held for investment includes loans acquired in the CCB, ING Direct and 2012 U.S. card acquisitions. See “Note 4—Loans” for additional information on Acquired Loans.

 

(4) 

Consists of credit card purchase transactions, net of returns, for the period for both loans classified as held for investment and loans classified as held for sale. Excludes cash advance and balance transfer transactions.

 

(5) 

Calculated based on annualized total net revenue for the period divided by average interest-earning assets for the period.

 

(6) 

Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.

 

(7) 

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—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information.

 

(8) 

Calculated based on the annualized sum of (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.

 

(9) 

Calculated based on the annualized sum of (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 tangible common equity. Our calculation of return on average tangible common equity may not be comparable to similarly titled measures reported by other companies. See “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information.

 

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(10) 

Calculated based on non-interest expense for the period divided by total net revenue for the period.

 

(11) 

Calculated based on annualized net charge-offs for the period divided by average loans held for investment for the period.

 

(12) 

Beginning on January 1, 2014, we calculate our regulatory capital under Basel III Standardized Approach subject to transition provisions. Prior to the first quarter of 2014, we calculated regulatory capital measures under Basel I. See “MD&A—Capital Management” and “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information, including the calculation of each of these ratios.

 

(13) 

TCE ratio is a non-GAAP measure calculated based on tangible common equity divided by tangible assets. See “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for the calculation of this measure and reconciliation to the comparative GAAP measure.

 

(14) 

Effective Q2 2014, we changed our presentation from total full-time equivalent employees to total employees. All prior periods have been recast to conform to the current presentation. During this change, we determined that we had previously understated the total number of full-time equivalent employees by approximately 7%.

 

 

 INTRODUCTION

 

General

We are a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company”) offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of June 30, 2014, 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 “Glossary and Acronyms” section and should be read in conjunction with the consolidated financial statements included in this Report.

We had total loans held for investment of $198.5 billion, deposits of $205.9 billion and stockholders’ equity of $43.8 billion as of June 30, 2014, compared with total loans held for investment of $197.2 billion, deposits of $204.5 billion and stockholders’ equity of $41.6 billion as of December 31, 2013.

Our consolidated total net revenues are derived primarily from lending to consumer and commercial customers net of funding costs associated with interest on customer deposits, short-term borrowings and long-term debt. We also earn non-interest income which primarily consists of interchange income net of reward expenses, service charges and other customer-related fees. Our expenses primarily consist of the provision for credit losses, operating expenses (including salaries and associate benefits, occupancy and equipment costs, professional services, communication and data processing expenses and other miscellaneous expenses), marketing expenses and income taxes.

Our principal operations are currently 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 and asset/liability management by our centralized Corporate Treasury group, are included in the Other category.

 

   

Credit Card: Consists of our domestic consumer and small business card lending, national closed-end installment lending and the international card lending businesses in Canada and the United Kingdom.

 

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Consumer Banking: Consists of our branch-based lending and deposit gathering activities for consumers and small businesses, national deposit gathering, national auto lending and consumer home loans lending and servicing activities.

 

   

Commercial Banking: Consists of our lending, deposit gathering 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 $10 million and $1 billion.

Table 2 summarizes our business segment results, which we report based on income from continuing operations, net of tax, for the second quarter and first six months of 2014 and 2013. We provide information on the allocation methodologies used to derive our business segment results in “Note 19—Business Segments” in our 2013 Form 10-K. We also provide a reconciliation of our total business segment results to our results based on the accounting principles generally accepted in the U.S. (“U.S. GAAP”) results in “Note 13—Business Segments” of this Report.

Table 2: Business Segment Results(1)

 

    Three Months Ended June 30,  
    2014     2013  
    Total Net Revenue(2)     Net Income(3)     Total Net Revenue(2)     Net Income (Loss)(3)  

 (Dollars in millions)

  Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
 
 Credit Card     $     3,300                  61%        $ 668                  55%        $     3,636                 65%        $ 719                 58%   
 Consumer Banking     1,601          29            334          28            1,667         30           444         36      
 Commercial Banking(4)     545          10            171          14            495         8           181         15      
 Other(5)     22          —            31          3            (160)        (3)          (117)        (9)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total from continuing operations

    $ 5,468          100%        $     1,204          100%        $ 5,638         100%        $     1,227         100%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Six Months Ended June 30,  
    2014     2013  
    Total Net Revenue(2)     Net Income(3)     Total Net Revenue(2)     Net Income (Loss)(3)  

 (Dollars in millions)

  Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
 
 Credit Card     $ 6,610                 61%        $ 1,336                  57%        $ 7,287                 65%        $ 1,405                 59%   
 Consumer Banking     3,184         29            664          29            3,326         30           827         35      
 Commercial Banking(4)     1,053         10            308          13            980         9           374         16      
 Other(5)     (9)        —            20          1            (404)        (4)          (245)        (10)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total from continuing operations

    $   10,838         100%        $     2,328          100%        $   11,189         100%        $     2,361         100%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

 

(2) 

Total net revenue consists of net interest income and non-interest income.

 

(3) 

Net income for our business segments is reported based on income from continuing operations, net of tax.

 

(4) 

On investments that generate tax-exempt income or tax credits, we make certain reclassifications to our Commercial Banking business results to present revenues on a taxable-equivalent basis.

 

(5) 

Includes the residual impact of the allocation of certain items, our centralized Corporate Treasury group activities, as well as other items as described in “Note 19—Business Segments” in our 2013 Form 10-K.

 

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 EXECUTIVE SUMMARY AND BUSINESS OUTLOOK

 

We reported net income of $1.2 billion ($2.04 per diluted common share) on total net revenue of $5.5 billion and net income of $2.3 billion ($4.00 per diluted common share) on total net revenue of $10.8 billion for the second quarter and first six months of 2014, respectively. In comparison, we reported net income of $1.1 billion ($1.85 per diluted common share) on total net revenue of $5.6 billion and net income of $2.2 billion ($3.62 per diluted common share) on total net revenue of $11.2 billion for the second quarter and first six months of 2013, respectively.

Beginning on January 1, 2014, we calculate our regulatory capital under the Basel III Standardized Approach subject to transition provisions. Our common equity Tier 1 capital ratio, as calculated under the Basel III Standardized Approach including transition provisions, was 12.72% as of June 30, 2014. Our Tier 1 common ratio, as calculated under Basel I, was 12.19% as of December 31, 2013. These numbers are not directly comparable due to methodological differences in the calculation of the ratios.

On March 26, 2014, we announced that our Board of Directors had authorized the repurchase of up to $2.5 billion of shares of our common stock (“2014 Stock Repurchase Program”). Through the end of the second quarter of 2014, we have repurchased approximately $1 billion of common stock and expect to complete the 2014 Stock Repurchase Program by the first quarter of 2015. See “Capital Management” below for additional information.

Below are additional highlights of our performance in the second quarter and first six months of 2014. These highlights generally are based on a comparison between the results of the second quarter and first six months of 2014 and 2013, except as otherwise noted. The changes in our financial condition and credit performance are generally based on our financial condition and credit performance as of June 30, 2014, compared with our financial condition and credit performance as of December 31, 2013. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary and Business Outlook.”

Total Company

 

 

Earnings: Our net income increased by $86 million in the second quarter of 2014, or 8%, to $1.2 billion compared to $1.1 billion in the second quarter of 2013, and our net income increased by $184 million in the first six months of 2014, or 9%, to $2.3 billion, compared to $2.2 billion for the first six months of 2013. Significant drivers of the increase in earnings in the second quarter and first six months of 2014 were a decrease in the provision for credit losses due to lower charge-offs; and a pre-tax benefit for mortgage representation and warranty losses of $18 million and $51 million for the second quarter and first six months of 2014, respectively, compared to a pre-tax provision for mortgage representation and warranty losses of $183 million and $280 million for the second quarter and first six months of 2013 respectively. These items were partially offset by a decrease in net interest income attributable to lower average interest-earning assets and lower yields in the Credit Card business.

 

 

Loans Held for Investment: Period-end loans held for investment increased by $1.3 billion, or 1%, in the first six months of 2014, to $198.5 billion as of June 30, 2014, from $197.2 billion as of December 31, 2013. The increase was due to commercial and industrial and commercial and multifamily real estate loan growth in our Commercial Banking business, and continued strong auto loan originations outpacing the run-off of the acquired home loans portfolio in our Consumer Banking business. Overall, there was a decline in our credit card loan portfolio primarily due to seasonality in the first quarter, partially offset by loan growth in the second quarter in our Credit Card business.

 

 

Charge-off and Delinquency Statistics: Our net charge-off rate decreased by 36 basis points to 1.67% in the second quarter of 2014, compared to 2.03% in the second quarter of 2013, and our net charge-off rate decreased by 33 basis points in the first six months of 2014, to 1.79%, compared to 2.12% for the first six months of 2013. The decrease in our reported net charge-offs and net charge-off rates were largely due to the improvement in delinquencies and run-off of portfolios with higher credit risk. Our reported 30+ day

 

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delinquency rate declined to 2.53% as of June 30, 2014, from 2.96% as of December 31, 2013, and 2.71% as of June 30, 2013. The decrease from year end was primarily due to seasonality and strong credit performance. We provide additional information on our credit quality metrics below under “Business Segment Financial Performance” and “Credit Risk Profile.”

 

 

Allowance for Loan and Lease Losses: We reduced our allowance for loan and lease losses by $317 million to $4.0 billion as of June 30, 2014, from $4.3 billion as of December 31, 2013. The decrease in the allowance for loan and lease losses was mainly due to improvements in delinquency inventories coupled with an improved credit outlook. The allowance coverage ratio declined to 2.01% as of June 30, 2014, from 2.19% as of December 31, 2013.

 

 

Representation and Warranty Reserve: The representation and warranty reserve decreased by $160 million to $1.0 billion as of June 30, 2014, from $1.2 billion as of December 31, 2013. We recorded a benefit for mortgage representation and warranty losses of $51 million (which includes benefits of $36 million and $15 million in discontinued operations and continuing operations, respectively) in the first six months of 2014. The decrease in representation and warranty reserve was primarily driven by legal developments.

Business Segment Financial Performance

 

 

Credit Card: Our Credit Card business generated net income from continuing operations of $668 million and $1.3 billion in the second quarter and first six months of 2014, respectively, compared with net income from continuing operations of $719 million and $1.4 billion in the second quarter and first six months of 2013, respectively. The decreases in net income for these periods were driven by a decrease in net interest income primarily due to the Portfolio Sale in the third quarter of 2013 and the run-off of certain credit card loans acquired in the 2012 U.S. card acquisition, partially offset by (i) a reduction in the provision for credit losses as a result of lower charge-offs on the underlying loan portfolio; (ii) lower acquisition-related costs; and (iii) lower operating expenses attributable to the Portfolio Sale and operating efficiency. Period-end loans held for investment in our Credit Card business decreased by $2.3 billion to $79.0 billion as of June 30, 2014 from $81.3 billion as of December 31, 2013. The decrease was largely due to seasonal decreases in the first quarter of 2014 partially offset by growth in the second quarter of 2014.

 

 

Consumer Banking: Our Consumer Banking business generated net income from continuing operations of $334 million and $664 million in the second quarter and first six months of 2014, respectively, compared with net income from continuing operations of $444 million and $827 million in the second quarter and first six months of 2013, respectively. The decreases in net income in these periods were primarily attributable to a higher provision for loan and lease losses, net interest margin compression in both retail banking and the auto loans portfolio, partially offset by growth in the auto loans portfolio. Period-end loans held for investment in our Consumer Banking business increased by $300 million to $71.1 billion as of June 30, 2014, from $70.8 billion as of December 31, 2013, due to growth in our auto loans portfolio outpacing the run-off in our home loans portfolio.

 

 

Commercial Banking: Our Commercial Banking business generated net income from continuing operations of $171 million and $308 million in the second quarter and first six months of 2014, respectively, compared with net income from continuing operations of $181 million and $374 million in the second quarter and first six months of 2013, respectively. The decreases in net income for these periods were primarily due to a higher provision for credit losses, reflecting a lower allowance release. We recorded a provision for credit losses of $12 million and $52 million in the second quarter and first six months of 2014, respectively, compared to a benefit of $14 million and $49 million in the second quarter and first six months of 2013, respectively. Higher revenue due to growth in commercial loans was offset by rate spread compression and increased operating expenses associated with continued investments in business growth and the Beech Street Capital acquisition. Period-end loans held for investment in our Commercial Banking business increased by $3.3 billion to $48.3 billion as of June 30, 2014, from $45.0 billion as of December 31, 2013. The increase was driven by strong loan originations in the commercial and industrial and commercial and multifamily real estate businesses.

 

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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 I—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2013 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: (i) any change in current dividend or repurchase strategies; (ii) the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; or (iii) any changes in laws, regulations or regulatory interpretations, in each case after the date as of which such statements are made. See “Forward-Looking Statements” in this Report for more information on forward-looking statements included in this Report and “Item 1A. Risk Factors” in our 2013 Form 10-K for factors that could materially influence our results.

Total Company Expectations

We continue to expect 2014 pre-provision earnings, excluding non-recurring items, of approximately $10 billion. In addition, we expect modest changes in the components of pre-provision earnings with higher revenue offsetting higher expenses relative to our initial expectations for 2014. We expect an increase in marketing in the second half of 2014, driven by both expected seasonal trends and because of the success and continuing opportunities we see to grow customer relationships, purchase volume, and loans. Although we had a release of allowance in the second quarter, we believe that we are less likely to see allowance releases going forward as we return to growth and considering charge-offs are below historical averages. Actual results are expected to vary from these expectations within a reasonable margin of error.

We expect that pre-provision earnings will rise in 2015, with growth in average loans driving increased revenues, partially offset by higher non-interest expense, as we continue to invest to sustain growth and returns. Although it will vary from quarter to quarter, we expect the full-year 2015 efficiency ratio to be between 53% and 54%, excluding non-recurring items.

We believe our actions have created a balance sheet with strong capital and liquidity. The Federal Reserve did not object to our capital plan submitted in the 2014 CCAR cycle. Pursuant to the capital plan, we expect to maintain our quarterly dividend of $0.30 per share, subject to approval by the Board of Directors. In addition, the Board of Directors authorized the establishment of a share repurchase program to repurchase of up to $2.5 billion of shares of our common stock through the end of the first quarter of 2015. Under this program, we repurchased approximately $1 billion of our shares in the second quarter, and we expect to repurchase an additional $1.5 billion over the next three quarters.

The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, our capital position and amount of retained earnings. Our 2014 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. See “MD&A—Capital Management—Capital Planning and Regulatory Stress Testing” for more information.

Business Segment Expectations

Credit Card: We returned to year-over-year growth in the Domestic Card portfolio in the second quarter. Our estimate of the run-off of acquired card loans is now substantially less than $1 billion for 2014 and we no longer

 

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expect it to be a significant offset to growth. Overall, we believe that our Domestic Card portfolio continues to be well-positioned and will continue to deliver strong, sustainable and resilient returns and generate capital on a strong trajectory.

Consumer Banking: In our Consumer Banking business, we expect auto credit losses will gradually increase from the historic lows of the past few years and that auto margins and returns will continue to decline, but remain within ranges that support an attractive business. We expect home loans run-off of approximately $6 billion in 2014 based on our current view of interest rates. In addition, we expect the impacts of the prolonged low interest rate environment to continue to pressure the economics of our retail banking deposit businesses, even if rates rise in 2014.

Commercial Banking: In our Commercial Banking business, charge-offs, non-performing loans and criticized loans are at exceptionally low levels and we expect strong credit performance to continue in 2014. As competition continues to increase, it is likely that the pace of the growth in our Commercial Banking business will moderate over time. We continue to expect our focused and specialized approach to deliver strong results in 2014.

 

 

 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 reported amount of assets, liabilities, income and expenses in 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 2013 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 reported results of operations or financial condition. These critical accounting policies govern:

 

 

Loan loss reserves

 

 

Asset impairment

 

 

Fair value of financial instruments

 

 

Representation and warranty reserves

 

 

Customer rewards reserves

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them, as necessary, based on changing conditions. Management has discussed our critical accounting policies and estimates with the Audit Committee of the Board of Directors.

We provide additional information on our critical accounting policies and estimates under “MD&A—Critical Accounting Policies and Estimates” in our 2013 Form 10-K.

 

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 ACCOUNTING CHANGES AND DEVELOPMENTS

 

Accounting for Investments in Qualified Affordable Housing Projects

In January 2014, the Financial Accounting Standards Board (“FASB”) issued guidance permitting an entity to account for Investments in Qualified Affordable Housing Projects using the proportional amortization method, if certain criteria are met. The proportional method amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is recognized as a component of income taxes attributable to continuing operations. Historically, these investments were under the equity method of accounting and the passive losses related to the investments were recognized within non-interest expense. Prior period results and related metrics have been recast. See “Note 1—Summary of Significant Accounting Policies” for more information.

 

 

 CONSOLIDATED RESULTS OF OPERATIONS

 

The section below provides a comparative discussion of our consolidated financial performance for the second quarter and first six months of 2014 and 2013. Following this section, we provide a discussion of our business segment results. You should read this section together with our “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 and applicable 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 and interest-bearing liabilities include interest-bearing deposits, senior and subordinated notes, securitized debt obligations and other borrowings. We include in interest income any past due fees on loans that we deem collectible. Our net interest margin based on our consolidated results represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities, including the notional impact of non-interest bearing funding. We expect net interest income and our net interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities.

Table 3 below presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balances, interest income earned, interest expense incurred, average yield and rate for the second quarter and first six months of 2014 and 2013.

 

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Table 3: Average Balances, Net Interest Income and Net Interest Yield(1)

 

    Three Months Ended June 30,  
    2014     2013  

 (Dollars in millions)

  Average
Balance
    Interest
Income/
Expense(2)(3)
    Yield/
Rate
    Average
Balance
    Interest
Income/
Expense(2)(3)
    Yield/
Rate
 
 Assets:            
 Interest-earning assets:            
 Loans:            

Credit card:

           

Domestic credit card

   $ 69,366          $ 2,419           13.95%       $ 76,125          $ 2,782           14.62%    

International credit card

    7,621           318           16.69            7,980           323           16.19       
 

 

 

   

 

 

     

 

 

   

 

 

   

Total credit card

    76,987           2,737           14.22            84,105           3,105           14.77       

Consumer banking

    71,049           1,103           6.21            73,065           1,093           5.98       

Commercial banking

    47,152           412           3.50            39,530           379           3.84       

Other

    134           27           80.60            174           19           43.68       
 

 

 

   

 

 

     

 

 

   

 

 

   
 Total loans, including loans held for sale     195,322           4,279           8.76            196,874           4,596           9.34       
 Investment securities     62,518           409           2.62            63,907           391           2.45       

 Cash equivalents and other interest-earning assets

    5,730           24           1.68            5,763           23           1.60       
 

 

 

   

 

 

     

 

 

   

 

 

   
 Total interest-earning assets    $ 263,570          $ 4,712           7.15           $ 266,544          $ 5,010           7.52       
 

 

 

   

 

 

     

 

 

   

 

 

   
 Cash and due from banks     2,871               2,677          
 Allowance for loan and lease losses     (4,099)              (4,604)         
 Premises and equipment, net     3,808               3,784          
 Other assets     28,594               29,347          
 

 

 

       

 

 

     
 Total assets    $ 294,744              $ 297,748          
 

 

 

       

 

 

     
 Liabilities and stockholders’ equity:            
 Interest-bearing liabilities:            

Deposits

   $ 182,053          $ 272           0.60           $ 189,311          $ 318           0.67       

Securitized debt obligations

    10,731           39           1.45            10,942           45           1.65       

Senior and subordinated notes

    16,004           78           1.95            12,692           82           2.58       

Other borrowings

    8,923           8           0.36            13,281           12           0.36       
 

 

 

   

 

 

     

 

 

   

 

 

   
 Total interest-bearing liabilities    $ 217,711          $ 397           0.73           $ 226,226          $ 457           0.81       
 

 

 

   

 

 

     

 

 

   

 

 

   
 Non-interest bearing deposits     24,262               21,339          
 Other liabilities     9,004               8,693          
 

 

 

       

 

 

     
 Total liabilities     250,977               256,258          
 Stockholders’ equity     43,767               41,490          
 

 

 

       

 

 

     
 Total liabilities and stockholders’ equity    $   294,744              $   297,748          
 

 

 

     

 

 

   

 

 

     

 

 

 
 Net interest income/spread      $         4,315           6.42             $         4,553           6.71       
   

 

 

   

 

 

     

 

 

   

 

 

 
 Impact of non-interest bearing funding         0.13                0.12       
     

 

 

       

 

 

 
 Net interest margin             6.55%                6.83%    
     

 

 

       

 

 

 

 

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    Six Months Ended June 30,  
    2014     2013  

 (Dollars in millions)

  Average
Balance
    Interest
Income/
Expense(2)(3)
    Yield/
Rate
    Average
Balance
    Interest
Income/
Expense(2)(3)
    Yield/
Rate
 
 Assets:            
 Interest-earning assets:            
 Loans:            

Credit card:

           

Domestic credit card

   $ 69,582         $ 4,896          14.07%       $ 77,547         $ 5,598          14.44%   

International credit card

    7,655          638          16.67            8,108          652          16.08       
 

 

 

   

 

 

     

 

 

   

 

 

   

Total credit card

    77,237          5,534          14.33            85,655          6,250          14.59       

Consumer banking

    70,943          2,197          6.19            73,756          2,195          5.95       

Commercial banking

    46,361          807          3.48            39,058          756          3.87       

Other

    133          48          72.18            179          44          49.16       
 

 

 

   

 

 

     

 

 

   

 

 

   
 Total loans, including loans held for sale     194,674          8,586          8.82            198,648          9,245          9.31       
 Investment securities     62,322          825          2.65            63,930          765          2.39       

 Cash equivalents and other interest-earning assets

    6,123          54          1.76            6,430          51          1.59       
 

 

 

   

 

 

     

 

 

   

 

 

   
 Total interest-earning assets    $   263,119         $       9,465          7.19           $   269,008         $     10,061          7.48       
 

 

 

   

 

 

     

 

 

   

 

 

   
 Cash and due from banks     2,849              2,475         
 Allowance for loan and lease losses     (4,202)             (4,778)        
 Premises and equipment, net     3,823              3,733         
 Other assets     28,909              29,852         
 

 

 

       

 

 

     
 Total assets    $ 294,498             $ 300,290         
 

 

 

       

 

 

     
 Liabilities and stockholders’ equity:            
 Interest-bearing liabilities:            

Deposits

   $ 182,431         $ 548          0.60           $ 189,958         $ 644          0.68       

Securitized debt obligations

    10,576          77          1.46            11,348          101          1.78       

Senior and subordinated notes

    15,088          155          2.05            12,340          164          2.66       

Other borrowings

    10,153          20          0.39            15,544          29          0.37       
 

 

 

   

 

 

     

 

 

   

 

 

   
 Total interest-bearing liabilities    $ 218,248         $ 800          0.73           $ 229,190         $ 938          0.82       
 

 

 

   

 

 

     

 

 

   

 

 

   
 Non-interest bearing deposits     23,649              21,142         
 Other liabilities     9,281              8,770         
 

 

 

       

 

 

     
 Total liabilities     251,178              259,102         
 Stockholders’ equity     43,320              41,188         
 

 

 

       

 

 

     
 Total liabilities and stockholders’ equity    $ 294,498             $ 300,290         
 

 

 

       

 

 

     
 Net interest income/spread      $ 8,665          6.46             $ 9,123          6.66       
   

 

 

       

 

 

   
 Impact of non-interest bearing funding         0.13                0.12       
     

 

 

       

 

 

 
 Net interest margin             6.59%                6.78%   
     

 

 

       

 

 

 

 

 

  (1) 

In the first quarter of 2014, we adopted the proportional amortization method of accounting for investments in qualified affordable housing projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

 

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  (2) 

Past due fees included in interest income totaled approximately $336 million and $695 million in the second quarter and first six months of 2014, respectively, and $464 million and $944 million in the second quarter and first six months of 2013, respectively.

 

  (3) 

Interest income and interest expense and the calculation of average yields on interest-earning assets and average rates on interest-bearing liabilities include the impact of hedge accounting.

Net interest income decreased by $238 million, or 5%, from the second quarter of 2013 to $4.3 billion in the second quarter of 2014 primarily driven by a decrease in average interest-earning assets in our Credit Card business, partially offset by lower funding costs. Net interest income of $8.7 billion in the first six months of 2014, decreased by $458 million, or 5%, from the first six months of 2013, primarily driven by a decrease in average interest-earning assets, partially offset by lower funding costs and higher yields in investment securities.

 

 

Average Interest-Earning Assets: The decrease in average interest-earning assets in the second quarter of 2014, compared to the second quarter of 2013, and in the first six months of 2014, compared to the first six months of 2013, was primarily driven by the Portfolio Sale in the third quarter of 2013, the run-off in our acquired home loans portfolio within our Consumer Banking business, and the run-off of certain receivables acquired in the 2012 U.S. card acquisition, partially offset by continued strong growth in commercial and auto loans. The decrease in average investment securities was due to sales and paydowns outpacing purchases.

 

 

Net Interest Margin: The decrease in our net interest margin in the second quarter of 2014, compared to the second quarter of 2013, and in the first six months of 2014, compared to the first six months of 2013, was primarily due to lower yields on our credit card and commercial loan portfolios, partially offset by a reduction in our cost of funds and higher yields in our investment securities.

Table 4 displays the change in our net interest income between periods and the extent to which the variance is attributable to: (i) changes in the volume of our interest-earning assets and interest-bearing liabilities; or (ii) changes in the interest rates related to these assets and liabilities.

Table 4: Rate/Volume Analysis of Net Interest Income(1)

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2014 vs 2013     2014 vs. 2013  

 (Dollars in millions)

  Total
 Variance 
     Volume       Rate      Total
 Variance 
     Volume      Rate  
 Interest income:            
 Loans:            

Credit card

   $     (368)       $     (256)       $     (112)       $     (716)       $     (605)       $     (111)   

Consumer banking

    10         (30)        40                (84)        86    

Commercial banking

    33         66         (33)        51         127         (76)   

Other

           (4)        12                (11)        15    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total loans, including loans held for sale     (317)        (224)        (93)        (659)        (573)        (86)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Investment securities     18         (8)        26         60         (19)        79    
 Cash equivalents and other interest-earning assets            —                       (2)          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total interest income     (298)        (232)        (66)        (596)        (594)        (2)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Interest expense:            

Deposits

    (46)        (12)        (34)        (96)        (25)        (71)   

Securitized debt obligations

    (6)        —         (6)        (24)        (6)        (18)   

Senior and subordinated notes

    (4)        16         (20)        (9)        28         (37)   

Other borrowings

    (4)        (4)        —         (9)        (10)          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total interest expense     (60)        —         (60)        (138)        (13)        (125)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Net interest income    $ (238)       $ (232)       $ (6)       $ (458)       $ (581)       $ 123    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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  (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.

Non-Interest Income

Non-interest income primarily consists of interchange income net of rewards expense, service charges and other customer-related fees, and other non-interest income. Other non-interest income includes the pre-tax provision for mortgage representation and warranty losses related to continuing operations. It also includes gains and losses from the sale of investment securities, gains and losses on derivatives not accounted for in hedge accounting relationships, as well as hedge ineffectiveness.

Table 5 displays the components of non-interest income for the second quarter and first six months of 2014 and 2013.

Table 5: Non-Interest Income

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 

 (Dollars in millions)

  2014     2013     2014     2013  
 Service charges and other customer-related fees     $ 460         $ 534         $ 934         $     1,084    
 Interchange fees, net     535         486         975         931    
 Net other-than-temporary impairment     (1)        (4)        (6)        (29)   
 Other non-interest income:        

Benefit for mortgage representation and warranty losses(1)

    29                15         14    

Net (losses) gains from the sale of investment securities

    (1)               12           

Net fair value gains (losses) on free-standing derivatives(2)

    13                26         (3)   

Other

    118         62         217         66    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total other non-interest income     159         69         270         80    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total non-interest income     $     1,153         $     1,085         $     2,173         $ 2,066    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (1) 

Represents the benefit for mortgage representation and warranty losses recorded in continuing operations. For the total impact to the provision for mortgage representation and warranty losses, including the portion recognized on our consolidated statements of income as a component of discontinued operations, see “MD&A—Consolidated Balance Sheets Analysis—Table 14: Changes in Representation and Warranty Reserve.”

 

  (2) 

Excludes changes in cumulative credit risk valuation adjustments related to derivatives in a gain position. Credit risk valuation adjustments for derivative assets totaled $5 million and $7 million as of June 30, 2014 and December 31, 2013, respectively. See “Note 9—Derivative Instruments and Hedging Activities” for additional information.

Non-interest income increased by $68 million, or 6%, to $1.2 billion in the second quarter of 2014, from $1.1 billion in second quarter of 2013. Non-interest income increased by $107 million, or 5%, to $2.2 billion in the first six months of 2014, from $2.1 billion in the first six months of 2013. The main drivers for the increases in non-interest income were (i) an increase in interchange fees, net due to strong purchase volume in our credit card loan portfolio; and (ii) an increase in the benefit for mortgage representation and warranty losses resulting from legal developments. These were partially offset by a decrease in service charges and other customer-related fees in our Credit Card business reflecting our strategic choice to discontinue certain card-related fees.

 

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Provision for Credit Losses

Our provision for credit losses in each period is driven by charge-offs, changes to the allowance for loan and lease losses and changes to the reserve for unfunded lending commitments. We recorded a provision for credit losses of $704 million and $1.4 billion in the second quarter and first six months of 2014, respectively, compared with $762 million and $1.6 billion in the second quarter and first six months of 2013, respectively.

The decreases in the provision for credit losses of $58 million and $208 million in the second quarter and first six months of 2014, respectively, were driven by lower charge-offs partially offset by a lower release of the allowance for loan and lease losses. The decrease in our reported net charge-offs was largely due to credit improvement of the underlying portfolio. The decrease in our allowance for loan and lease losses was attributable to an overall improved credit outlook coupled with improvements in delinquency inventories.

We provide additional information on the provision for credit losses and changes in the allowance for loan and lease losses within “Credit Risk Profile—Summary of Allowance for Loan and Lease Losses,” “Note 4—Loans” and “Note 5—Allowance for Loan and Lease Losses.” For information on the allowance methodology for each of our loan categories, see “Note 1—Summary of Significant Accounting Policies” in our 2013 Form 10-K.

Non-Interest Expense

Non-interest expense consists of ongoing operating costs, such as salaries and associate benefits, occupancy and equipment costs, professional services, communications and data processing expenses and other miscellaneous expenses, as well as marketing costs, merger-related expenses and amortization of intangibles. Table 6 displays the components of non-interest expense for the second quarter and first six months of 2014 and 2013.

Table 6: Non-Interest Expense(1)(2)

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 

 (Dollars in millions)

      2014             2013             2014             2013      
 Salaries and associate benefits    $ 1,125        $ 1,118        $ 2,286        $ 2,213    
 Occupancy and equipment     447         371         852         728    
 Marketing     335         330         660         647    
 Professional services     296         340         583         662    
 Communications and data processing     203         236         399         452    
 Amortization of intangibles     136         167         279         344    
 Other non-interest expense:        

Collections

    98         119         197         248    

Fraud losses

    57         53         130         105    

Bankcard, regulatory and other fee assessments

    114         142         227         280    

Other

    168         142         298         330    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Other non-interest expense     437         456         852         963    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total non-interest expense    $ 2,979        $ 3,018        $ 5,911        $ 6,009    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

(1) 

In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

 

(2) 

Includes acquisition-related costs of $18 million and $41 million in the second quarter and first six months of 2014, respectively as compared with $50 million and $96 million in the second quarter and first six months of 2013, respectively. These amounts are comprised of transaction costs, legal and other professional or consulting fees, restructuring costs, and integration expense.

 

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Non-interest expense decreased by $39 million, or 1%, to $3.0 billion in the second quarter of 2014, from $3.0 billion in the second quarter of 2013. Non-interest expense decreased by $98 million, or 2%, to $5.9 billion in the first six months of 2014, from $6.0 billion in the first six months of 2013. The decrease reflects a reduction in acquisition-related costs and a decline in amortization of intangibles. These were partially offset by (i) higher operating expenses attributable to growth in our auto loans portfolio; (ii) the change to include auto repossession-related expenses as a component of operating expenses (prior to January 1, 2014 these costs were reported as a component of net charge-offs); and (iii) higher operating expenses attributable to growth in our Commercial Banking business, partially offset by lower bankcard, regulatory and other fee assessments and communication and data processing expenses.

Income Taxes

We recorded income tax provisions of $581 million (32.5% effective income tax rate) and $1.2 billion (33.3% effective income tax rate) in the second quarter and first six months of 2014, respectively, compared to income tax provisions of $631 million (34.0% effective income tax rate) and $1.2 billion (33.2% effective income tax rate) in the second quarter and first six months of 2013, respectively. The decrease in our effective income tax rate in the second quarter of 2014 from the second quarter of 2013, was primarily attributable to increased tax credits and tax exempt income, as well as a reduction in unfavorable net discrete tax expense. The slight increase in our effective income tax rate in the first six months of 2014 from the first six months of 2013 was primarily attributable to increased discrete tax expense in the first six months of 2014 over the first six months of 2013, partially offset by increased tax credits and tax exempt income. Our effective income tax rate, excluding the impact of discrete tax items discussed above, was 32.5% in both the second quarter and first six months of 2014, and 33.5%, and 33.1% in the second quarter and first six months of 2013, respectively.

We provide additional information on items affecting our income taxes and effective tax rate in our 2013 Form 10-K in “Note 17—Income Taxes.”

Income (Loss) from Discontinued Operations, Net of Tax

Income (loss) from discontinued operations reflects ongoing costs, which primarily consist of mortgage loan repurchase representation and warranty charges, related to the mortgage origination operations of GreenPoint’s wholesale mortgage banking unit that we closed in 2007. Loss from discontinued operations, net of tax, was $10 million and income from discontinued operations, net of tax, was $20 million as of the second quarter and first six months of 2014, respectively, compared to losses of $119 million and $197 million in the second quarter and first six months of 2013, respectively. The pre-tax portion of the provision for mortgage representation and warranty losses recognized on our consolidated statements of income as a component of discontinued operations was a provision of $11 million ($7 million net of tax) and a benefit of $36 million ($23 million net of tax) in the second quarter and first six months of 2014, respectively, and provisions of $187 million ($117 million net of tax) and $294 million ($184 million net of tax) in the second quarter and first six months of 2013, respectively.

We provide additional information on the provision for mortgage representation and warranty losses and the related reserve for potential representation and warranty claims in “Consolidated Balance Sheets Analysis—Potential Mortgage Representation and Warranty Liabilities” and “Note 14—Commitments, Contingencies, Guarantees, and Others.”

 

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 BUSINESS SEGMENT FINANCIAL PERFORMANCE

 

Our principal operations are currently organized into three major business segments, which are defined based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group, are included in the “Other” category.

The results of our individual businesses, which we report on a continuing operations basis, reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 19—Business Segments” in our 2013 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 service companies. In addition, our individual business segment results should not be used as a substitute for comparable results determined in accordance with U.S. GAAP.

Below we summarize our business segment results for the second quarter and first six months of 2014 and 2013 and provide a comparative discussion of these results. We also discuss changes in our financial condition and credit performance statistics as of June 30, 2014, compared with December 31, 2013. We provide a reconciliation of our total business segment results to our reported consolidated results in “Note 13—Business Segments.” Additionally, we provide information on the outlook for each of our business segments as described above under “Executive Summary and Business Outlook.”

Credit Card Business

The primary sources of revenue for our Credit Card business are interest income, fees collected from customers and interchange fees. Expenses primarily consist of the provision for credit losses, operating costs such as salaries and associate benefits, occupancy and equipment, professional services, communications and data processing expenses and marketing expenses. Rewards costs are generally netted against interchange fees.

Our Credit Card business generated net income from continuing operations of $668 million and $1.3 billion in the second quarter and first six months of 2014, respectively, compared with net income from continuing operations of $719 million and $1.4 billion in the second quarter and first six months of 2013, respectively.

Table 7 summarizes the financial results of our Credit Card business, which is comprised of Domestic Card and International Card, and displays selected key metrics for the periods indicated.

 

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Table 7: Credit Card Business Results

 

    Three Months Ended June 30,     Six Months Ended June 30,  

 (Dollars in millions)

  2014     2013       Change       2014     2013       Change    
 Selected income statement data:            
 Net interest income    $ 2,461          $ 2,804           (12)  %     $ 4,986          $ 5,634           (12)  % 
 Non-interest income     839           832                  1,624           1,653           (2)   
 

 

 

   

 

 

     

 

 

   

 

 

   
 Total net revenue(1)     3,300           3,636           (9)        6,610           7,287           (9)   
 Provision for credit losses     549           713           (23)        1,107           1,456           (24)   
 Non-interest expense     1,719           1,819           (5)        3,445           3,667           (6)   
 

 

 

   

 

 

     

 

 

   

 

 

   

 Income from continuing operations before income taxes

    1,032           1,104           (7)        2,058           2,164           (5)   
 Income tax provision     364           385           (5)        722           759           (5)   
 

 

 

   

 

 

     

 

 

   

 

 

   
 Income from continuing operations, net of tax    $ 668          $ 719           (7)       $ 1,336          $ 1,405           (5)   
 

 

 

   

 

 

     

 

 

   

 

 

   
 Selected performance metrics:            
 Average loans held for investment(2)    $ 76,997          $ 77,946           (1)       $ 77,248          $ 80,435           (4)   
 Average yield on loans held for investment(3)     14.22%        15.94%        (172)  bps      14.33%        15.54%        (121)  bps 
 Total net revenue margin(4)     17.14           18.66           (152)        17.11           18.12           (101)   
 Net charge-offs    $ 685          $ 850           (19)  %     $ 1,465          $ 1,772           (17)  % 
 Net charge-off rate     3.56%        4.36%        (80)  bps      3.79%        4.41%        (62)  bps 

 Card loan premium amortization and other intangible accretion(5)

   $ 31          $ 57           (46)  %     $ 68          $ 114           (40)  % 
 PCCR intangible amortization     94           110           (15)        192           226           (15)   
 Purchase volume(6)     56,358           50,788           11         103,792           95,886             

 

 

 

 

   

 

 

   

 

 

       

 (Dollars in millions)

  June 30,
2014
    December 31,
2013
    Change                    
 Selected period-end data:            
 Loans held for investment(2)    $     79,018          $ 81,305           (3)  %       
 30+ day performing delinquency rate     2.89%        3.46%        (57)  bps       
 30+ day delinquency rate     2.97           3.54           (57)         
 Nonperforming loan rate     0.10           0.11           (1)         
 Allowance for loan and lease losses    $ 2,858          $ 3,214           (11)  %       
 Allowance coverage ratio(7)     3.62%        3.95%        (33)  bps       

 

 

 

  (1) 

We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in revenue and is not included in our net charge-offs. Total net revenue was reduced by $153 million and $316 million in the second quarter and first six months of 2014, respectively, and by $192 million and $457 million in the second quarter and first six months of 2013, respectively, for the estimated uncollectible amount of billed finance charges and fees. The finance charge and fee reserve totaled $182 million and $190 million as of June 30, 2014 and December 31, 2013, respectively.

 

  (2) 

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

 

  (3) 

Calculated by dividing annualized interest income for the period by average loans held for investment during the period for the specified loan category. Annualized interest income also includes interest income on loans held for sale. The transfer of the Best Buy loan portfolio from loans held for investment to loans held for sale resulted in an increase in the average yield for the total Credit Card business of 152 and 124 basis points in the second quarter and first six months of 2013, respectively.

 

  (4) 

Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period for the specified loan category. Annualized interest income also includes interest income on loans held for sale. The transfer of the Best Buy loan portfolio from loans held for investment to loans held for sale resulted in an increase in the net revenue margin for the total Credit Card business of 169 and 139 basis points in the second quarter and first six months of 2013, respectively.

 

  (5) 

Represents the net reduction in interest income attributable to the amortization of premiums on purchased loans accounted for based on contractual cash flows and the accretion of other intangibles associated with the 2012 U.S. card acquisition.

 

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  (6) 

Consists of credit card purchase transactions, net of returns for the period for both loans classified as held for investment and loans classified as held for sale. Excludes cash advance and balance transfer transactions.

 

  (7) 

Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.

Key factors affecting the results of our Credit Card business for the second quarter and first six months of 2014, compared with the second quarter and first six months of 2013, and changes in financial condition and credit performance between June 30, 2014 and December 31, 2013 include the following:

 

 

Net Interest Income: Net interest income decreased by $343 million, or 12%, in the second quarter of 2014 from the second quarter of 2013, to $2.5 billion, and by $648 million, or 12%, in the first six months of 2014 from the first six months of 2013, to $5.0 billion. The decrease in net interest income was primarily driven by the Portfolio Sale in the third quarter of 2013 and the run-off of certain credit card loans acquired in the 2012 U.S. card acquisition.

 

 

Non-Interest Income: Non-interest income increased by $7 million, or 1%, in the second quarter of 2014 from the second quarter of 2013, to $839 million, and decreased by $29 million, or 2%, in the first six months of 2014 from the first six months of 2013, to $1.6 billion. The decrease in the first six months of 2014 compared to the first six months of 2013 was largely due to a reduction in customer fees, partially offset by increased interchange fees, net driven by higher purchase volume.

 

 

Provision for Credit Losses: The provision for credit losses decreased by $164 million, or 23%, in the second quarter of 2014 from the second quarter of 2013, to $549 million, and by $349 million, or 24%, in the first six months of 2014 from the first six months of 2013, to $1.1 billion. The decrease was driven by lower charge-offs in the second quarter and first six months of 2014 attributable to lower delinquencies in the underlying loan portfolio.

 

 

Non-Interest Expense: Non-interest expense decreased by $100 million, or 5%, in the second quarter of 2014 from the second quarter of 2013, to $1.7 billion, and by $222 million, or 6%, in the first six months of 2014 from the first six months of 2013, to $3.4 billion. The decrease was largely due to lower acquisition-related costs and operating expenses associated with the Portfolio Sale in the third quarter of 2013, as well as operating efficiencies. Non-interest expense also included PCCR intangible amortization of $192 million in the first six months of 2014, compared with $226 million in the first six months of 2013.

 

 

Loans Held for Investment: Period-end loans held for investment decreased by $2.3 billion, or 3%, to $79.0 billion as of June 30, 2014, from $81.3 billion as of December 31, 2013. The decrease was largely due to expected seasonal decreases in the first quarter 2014 and the run-off of certain credit card loans acquired in the 2012 U.S. card acquisition, partially offset by growth in the credit card loan portfolio in the second quarter of 2014.

 

 

Charge-off and Delinquency Statistics: Our reported net charge-off rate decreased to 3.56% and 3.79% in the second quarter and first six months of 2014, respectively, from 4.36% and 4.41% in the second quarter and first six months of 2013, respectively. The decrease was largely due to continued economic improvement and portfolio seasoning. The 30+ day delinquency rate decreased to 2.97% as of June 30, 2014, from 3.54% as of December 31, 2013 primarily due to seasonality and strong credit performance.

Domestic Card Business

Domestic Card generated net income from continuing operations of $607 million and $1.2 billion in the second quarter and first six months of 2014, respectively, compared with net income from continuing operations of $638 million and $1.3 billion in the second quarter and first six months of 2013, respectively. Domestic Card accounted for 90% of total net revenues in the second quarter and first six months of 2014 and 2013, for our Credit Card business.

 

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Table 7.1 summarizes the financial results for Domestic Card and displays selected key metrics for the periods indicated.

Table 7.1: Domestic Card Business Results

 

     Three Months Ended June 30,     Six Months Ended June 30,  

 (Dollars in millions)

   2014      2013        Change       2014      2013        Change    
 Selected income statement data:                 
 Net interest income     $ 2,193           $ 2,536            (14)  %     $ 4,448           $ 5,092            (13)  % 
 Non-interest income      768            737                   1,470            1,461              
  

 

 

    

 

 

      

 

 

    

 

 

    
 Total net revenue      2,961            3,273            (10)        5,918            6,553            (10)   
 Provision for credit losses      504            647            (22)        990            1,294            (23)   
 Non-interest expense      1,513            1,635            (7)        3,058            3,268            (6)   
  

 

 

    

 

 

      

 

 

    

 

 

    

 Income from continuing operations before income taxes

     944            991            (5)        1,870            1,991            (6)   
 Income tax provision      337            353            (5)        668            709            (6)   
  

 

 

    

 

 

      

 

 

    

 

 

    

 Income from continuing operations, net of tax

    $ 607           $ 638            (5)       $ 1,202           $ 1,282            (6)   
  

 

 

    

 

 

      

 

 

    

 

 

    
 Selected performance metrics:                 
 Average loans held for investment(1)     $ 69,376           $ 69,966            (1)       $     69,592           $     72,327            (4)   

 Average yield on loans held for investment(2)

     13.95%         15.91%         (196)  bps      14.07%         15.48%         (141)  bps 
 Total net revenue margin(3)      17.07            18.71            (164)        17.01            18.12            (111)   
 Net charge-offs     $ 610           $ 749            (19)  %     $ 1,310           $ 1,576            (17)  % 
 Net charge-off rate      3.52%         4.28%         (76)  bps      3.77%         4.36%         (59)  bps 

 Card loan premium amortization and other intangible accretion(4)

    $ 31           $ 57            (46)  %     $ 68           $ 114            (40)  % 
 PCCR intangible amortization      94           $ 110            (15)        192            226            (15)   
 Purchase volume(5)      52,653            47,273            11         96,792            89,104              

 

  

 

 

    

 

 

    

 

 

         

 (Dollars in millions)

   June 30,
2014
     December 31,
2013
     Change               
 Selected period-end data:              
 Loans held for investment(1)     $     71,165           $ 73,255            (3)  %      
 30+ day delinquency rate      2.83%         3.43%         (60)  bps      
 Allowance for loan and lease losses     $ 2,516           $ 2,836            (11)  %      
 Allowance coverage ratio(6)      3.54%         3.87%         (33)  bps      

 

 

  (1) 

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

 

  (2) 

Calculated by dividing annualized interest income for the period by average loans held for investment during the period for the specified loan category. Annualized interest income includes interest income on loans held for sale. The transfer of the Best Buy loan portfolio from loans held for investment to loans held for sale resulted in an increase in the average yield for the Domestic Card business of 168 and 136 basis points in the second quarter and first six months of 2013, respectively.

 

  (3) 

Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period. Annualized interest income includes interest income on loans held for sale. The transfer of the Best Buy loan portfolio from loans held for investment to loans held for sale resulted in an increase in the net revenue margin for the Domestic Card business of 188 and 154 basis points in the second quarter and first six months of 2013, respectively.

 

  (4) 

Represents the net reduction in interest income attributable to the amortization of premiums on purchased loans accounted for based on contractual cash flows and the accretion of other intangibles associated with the 2012 U.S. card acquisition.

 

  (5) 

Consists of domestic card purchase transactions, net of returns, for the period for both loans classified as held for investment and loans classified as held for sale. Excludes cash advance and balance transfer transactions.

 

  (6) 

Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.

 

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Because our Domestic Card business accounts for the substantial majority of our Credit Card business, the key factors driving the results for this division are similar to the key factors affecting our total Credit Card business. The primary drivers of the decline in net income for our Domestic Card business in the second quarter and first six months of 2014, compared with the second quarter and first six months of 2013, were declines in revenue primarily driven by the Portfolio Sale in the third quarter of 2013 and the run-off of certain credit card loans acquired in the 2012 U.S. card acquisition, partially offset by a lower provision for credit losses, lower acquisition-related costs, as well as lower operating expenses attributable to the Portfolio Sale in 2013 and operating efficiencies.

The decrease in period-end loans held for investment was due to the expected seasonal decreases in the first quarter of 2014 and the run-off of certain credit card loans acquired in the 2012 U.S. card acquisition, partially offset by the growth in the credit card loan portfolio in the second quarter of 2014.

International Card Business

International Card generated net income from continuing operations of $61 million and $134 million in the second quarter and first six months of 2014, respectively, compared with net income from continuing operations of $81 million and $123 million in the second quarter and first six months of 2013, respectively. International Card accounted for 10% of total net revenues in the second quarter and first six months of 2014 and 2013, for our Credit Card business.

Table 7.2 summarizes the financial results for International Card and displays selected key metrics for the periods indicated.

 

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Table 7.2: International Card Business Results

 

    Three Months Ended June 30,         Six Months Ended June 30,      

 (Dollars in millions)

  2014     2013       Change           2014     2013       Change        
 Selected income statement data:                
 Net interest income    $ 268           $ 268            —       %    $ 538           $ 542            (1)      %
 Non-interest income.     71            95            (25)          154            192            (20)     
 

 

 

   

 

 

       

 

 

   

 

 

     
 Total net revenue     339            363            (7)          692            734            (6)     
 Provision for credit losses     45            66            (32)          117            162            (28)     
 Non-interest expense     206            184            12           387            399            (3)     
 

 

 

   

 

 

       

 

 

   

 

 

     

 Income from continuing operations before income taxes

    88            113            (22)          188            173                
 Income tax provision     27            32            (16)          54            50                
 

 

 

   

 

 

       

 

 

   

 

 

     

 Income from continuing operations, net of tax

   $ 61           $ 81            (25)         $ 134           $ 123                
 

 

 

   

 

 

       

 

 

   

 

 

     
 Selected performance metrics:                

 Average loans held for investment(1)

   $ 7,621           $ 7,980            (4)         $     7,656           $     8,108            (6)     

 Average yield on loans held for investment(2)

    16.74%        16.19%        55       bps     16.69%        16.08%        61       bps
 Total net revenue margin(3)     17.76            18.20            (44)          18.07            18.11            (4)     
 Net charge-offs.    $ 75           $ 101            (26)      %    $ 155           $ 196            (21)      %
 Net charge-off rate     3.93%        5.08%        (115)      bps     4.05%        4.83%        (78)      bps
 Purchase volume(4)    $ 3,705           $     3,515                 %    $ 7,000           $     6,782                 %

 (Dollars in millions)

  June 30,
2014
    December 31,
2013
    Change          
 Selected period-end data:          
 Loans held for investment(1)    $     7,853           $     8,050            (2)      %  

 30+ day performing delinquency rate

    3.40%        3.71%        (31)      bps  
 30+ day delinquency rate     4.20            4.56            (36)       
 Nonperforming loan rate     1.03            1.10            (7)       

 Allowance for loan and lease losses

   $ 342           $ 378            (10)      %  
 Allowance coverage ratio(5)     4.36%        4.70%        (34)      bps  

 

 

  (1) 

Period-end loans held for investment and average loans held for investment include accrued finance charges and fees, net of the uncollectible amount.

  (2) 

Calculated by dividing annualized interest income for the period by average loans held for investment during the period.

  (3) 

Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period.

  (4) 

Consists of international card purchase transactions, net of returns for the period. Excludes cash advance and balance transfer transactions.

  (5) 

Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.

The decrease in net income in the second quarter of 2014 compared to the second quarter of 2013 was primarily due to a build of $37 million in our U.K. cross sell reserves in the second quarter of 2014 related to the number of customer claims declining at a slower pace than we previously expected. The cross sell provision is split evenly and recorded in revenue and in non-interest expense.

 

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The increase in net income in the first six months of 2014 compared to the first six months of 2013 was primarily due to a reduction in the provision for credit losses attributable to lower net charge-offs, reflecting the improvement in the credit environment in Canada and the U.K. These were partially offset by the U.K. cross sell reserve build.

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 customer fees. Expenses primarily consist of the provision for credit losses, ongoing operating costs, such as salaries and associate benefits, occupancy and equipment costs, professional services, communications and data processing expenses, as well as marketing expenses.

Our Consumer Banking business generated net income from continuing operations of $334 million and $664 million in the second quarter and first six months of 2014, respectively, compared with net income from continuing operations of $444 million and $827 million in the second quarter and first six months of 2013, respectively.

Table 8 summarizes the financial results of our Consumer Banking business and displays selected key metrics for the periods indicated.

 

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Table 8: Consumer Banking Business Results

 

    Three Months Ended June 30,         Six Months Ended June 30,      

 (Dollars in millions)

  2014     2013       Change           2014     2013       Change        
 Selected income statement data:                
 Net interest income    $ 1,431          $ 1,478           (3)      %    $ 2,864         $ 2,956           (3)      %
 Non-interest income     170           189           (10)          320           370           (14)     
 

 

 

   

 

 

       

 

 

   

 

 

     
 Total net revenue     1,601           1,667           (4)          3,184           3,326           (4)     
 Provision for credit losses     143           67           113           283           242           17      
 Non-interest expense     938           910                    1,868           1,800               
 

 

 

   

 

 

       

 

 

   

 

 

     

 Income from continuing operations before income taxes

    520           690           (25)          1,033           1,284           (20)     
 Income tax provision     186           246           (24)          369           457           (19)     
 

 

 

   

 

 

       

 

 

   

 

 

     

 Income from continuing operations, net of tax

   $ 334          $ 444           (25)         $ 664          $ 827           (20)     
 

 

 

   

 

 

       

 

 

   

 

 

     
 Selected performance metrics:                

 Average loans held for investment:(1)

               

Auto

   $ 33,972          $ 28,677           18          $ 33,184          $ 28,080           18      

Home loan

    33,299           40,532           (18)          33,969           41,771           (19)     

Retail banking

    3,613           3,721           (3)          3,621           3,753           (4)     
 

 

 

   

 

 

       

 

 

   

 

 

     
 Total consumer banking    $ 70,884          $ 72,930           (3)         $ 70,774          $ 73,604           (4)     
 

 

 

   

 

 

       

 

 

   

 

 

     

 Average yield on loans held for investment(2)

    6.22%        5.99%        23       bps     6.20%        5.96%        24       bps
 Average deposits    $     169,694          $     170,733           (1)      %    $     169,188          $     170,910           (1)      %
 Average deposit interest rate     0.57%        0.64%        (7)      bps     0.57%        0.64%        (7)      bps
 Core deposit intangible amortization    $ 28          $ 35           (20)      %    $ 58          $ 72           (19)      %
 Net charge-offs     122           110           11           270           253               
 Net charge-off rate     0.69%        0.60%             bps     0.76%        0.69%             bps

 Net charge-off rate (excluding Acquired Loans)

    1.09           1.08                    1.23           1.27           (4)     
 Auto loan originations    $ 5,376          $ 4,525           19       %    $ 10,103          $ 8,314           22       %

 (Dollars in millions)

  June 30,
2014
    December 31,
2013
      Change            
 Selected period-end data:          

 Loans held for investment:(1)

         

Auto

   $ 34,792          $ 31,857                %  

Home loan

    32,644           35,282           (7)       

Retail banking

    3,626           3,623           —        
 

 

 

   

 

 

       
 Total consumer banking    $ 71,062          $ 70,762           —        
 

 

 

   

 

 

       
 30+ day performing delinquency rate     2.91%        3.20%        (29)      bps  

 30+ day performing delinquency rate (excluding Acquired Loans)(3)

    4.56           5.32           (76)       
 30+ day delinquency rate     3.49           3.89           (40)       

 30+ day delinquency rate (excluding Acquired Loans)(3)

    5.47           6.47           (100)       
 Nonperforming loans rate     0.75           0.86           (11)       

 Nonperforming loans rate (excluding Acquired Loans)(3) .

    1.17           1.44           (27)       
 Nonperforming asset rate(4)     1.01           1.12           (11)       

 Nonperforming asset rate (excluding Acquired Loans)(3)

    1.57           1.86           (29)       
 Allowance for loan and lease losses    $ 765          $ 752                %  
 Allowance coverage ratio(5)     1.08%        1.06%             bps  
 Deposits    $ 169,153          $ 167,652                %  
 Loans serviced for others     6,944           7,665           (9)       

 

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  (1) 

Includes Acquired Loans with carrying values of $25.8 billion and $28.2 billion as of June 30, 2014 and December 31, 2013, respectively. The average balance of Consumer Banking loans held for investment, excluding Acquired Loans, was $44.7 billion and $40.2 billion in the second quarter of 2014 and 2013, respectively, and $43.9 billion and $39.7 billion in the first six months of 2014 and 2013, respectively.

  (2) 

Calculated by dividing annualized interest income for the period by average loans held for investment during the period.

  (3) 

Calculation of ratio adjusted to exclude the impact from Acquired Loans. See “Credit Risk Profile” and “Note 4—Loans” for additional information on the impact of Acquired Loans on our credit quality metrics.

  (4) 

Calculated by dividing nonperforming assets as of the end of the period by the sum of period-end loans held for investment, foreclosed properties, and other foreclosed assets.

  (5) 

Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.

Key factors affecting the results of our Consumer Banking business for the second quarter and first six months of 2014, compared with the second quarter and first six months of 2013, and changes in financial condition and credit performance between June 30, 2014 and December 31, 2013 include the following:

 

 

Net Interest Income: Net interest income decreased by $47 million, or 3%, in the second quarter of 2014 from the second quarter of 2013, to $1.4 billion, and by $92 million, or 3%, in the first six months of 2014 from the first six months of 2013, to $2.9 billion. The decrease in net interest income was primarily attributable to compression in deposit spreads in retail banking and lower net interest income due to the run-off in the acquired home loans portfolio, partially offset by higher net interest income generated by growth in our auto loans portfolio.

Consumer Banking yields increased in both the second quarter and first six months of 2014 to 6.2%, as compared to 6.0% in both the second quarter and first six months of 2013. This increase was driven by changes in the product mix in Consumer Banking as a result of growth in our auto loans portfolio and the run-off of the acquired home loans portfolio. While the shift to auto loans drove an increase in the total Consumer Banking yield, the average yield on auto loans decreased to 8.8% in the second quarter of 2014 as compared to 10.0% in the second quarter of 2013, and decreased to 8.9% in the first six months of 2014, as compared to 10.1% in the first six months of 2013. This decrease was primarily attributable to a shift in the credit quality mix of our auto loans portfolio and increased competition in the auto business. The average yield on home loans was 3.7% in both the second quarter and the first six months of 2014, compared to 3.2% in both the second quarter and the first six months of 2013. The higher yield in the home loans portfolio was driven by an increase in expected cash flows as a result of credit improvement on the acquired portfolios.

 

 

Non-Interest Income: Non-interest income decreased by $19 million, or 10%, in the second quarter of 2014 from the second quarter of 2013, to $170 million, and by $50 million, or 14%, in the first six months of 2014 from the first six months of 2013, to $320 million, primarily driven by a higher provision for representation and warranty losses in our home loans portfolio related to our continuing operations in the first quarter of 2014 and a gain on the sale of certain of our mortgage servicing rights (“MSR”) in the second quarter of 2013.

 

 

Provision for Credit Losses: The provision for credit losses increased by $76 million, or 113%, in the second quarter of 2014 from the second quarter of 2013, to $143 million, driven by a larger allowance build due to the growth in our auto loans portfolio and smaller allowance releases attributable to our home loans portfolio. The provision for credit losses increased by $41 million, or 17%, in the first six months of 2014 from the first six months of 2013, to $283 million, driven by higher charge-offs and smaller allowance releases.

 

 

Non-Interest Expense: Non-interest expense increased by $28 million, or 3%, in the second quarter of 2014 from the second quarter of 2013, to $938 million and by $68 million, or 4%, in the first six months of 2014 from the first six months of 2013, to $1.9 billion. The increase was largely due to the growth in our auto loans portfolio and to a smaller degree, the change to include the auto repossession-related expenses as a component of operating expenses. Prior to January 1, 2014, these costs were reported as a component of net charge-offs.

 

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Loans Held for Investment: Period-end loans held for investment increased by $300 million, or less than 1%, in the first six months of 2014 to $71.1 billion as of June 30, 2014 from $70.8 billion as of December 31, 2013, primarily due to the growth in the auto loans portfolio, partially offset by the run-off of our acquired home loans portfolio.

 

 

Deposits: Period-end deposits increased by $1.5 billion, or 1%, in the first six months of 2014 to $169.2 billion as of June 30, 2014, from $167.7 billion as of December 31, 2013, driven by deposit growth in our Consumer Banking business.

 

 

Charge-off and Delinquency Statistics: The reported net charge-off rate increased by 9 basis points to 0.69% in the second quarter of 2014 from 0.60% in the second quarter of 2013, and increased by 7 basis points to 0.76% in the first six months of 2014 from 0.69% in the first six months of 2013. The 30+ day delinquency rate decreased to 3.49% as of June 30, 2014, from 3.89% as of December 31, 2013. The increase in the net charge-off rate reflected a mix shift toward auto loans (which typically carry higher charge-off rates than our home loans portfolio), as home loans run off.

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. Because we have some investments that generate tax-exempt income or tax credits, we make certain reclassifications to our Commercial Banking business results to present revenues on a taxable-equivalent basis. Expenses primarily consist of the provision for credit losses, ongoing operating costs, such as salaries and associate benefits, occupancy, equipment, professional services, communications and data processing expenses, as well as marketing expenses.

On January 1, 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. The proportional amortization method amortizes the cost of the investment over the period in which we will receive tax credits and other tax benefits, and the resulting amortization is recognized as a component of income taxes attributable to continuing operations. Historically, these investments were accounted for under the equity method of accounting and the passive losses related to the investments were recognized within non-interest expense. See “Note 1—Summary of Significant Accounting Policies” for more information.

Our Commercial Banking business generated net income from continuing operations of $171 million and $308 million in the second quarter and first six months of 2014, respectively, compared with net income from continuing operations of $181 million and $374 million in the second quarter and first six months of 2013, respectively.

Table 9 summarizes the financial results of our Commercial Banking business and displays selected key metrics for the periods indicated.

 

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Table 9: Commercial Banking Business Results(1)

 

    Three Months Ended June 30,         Six Months Ended June 30,      

 (Dollars in millions)

      2014         2013       Change               2014             2013           Change        
 Selected income statement data:                
 Net interest income    $ 436           $ 402                %    $ 857           $ 803                %
 Non-interest income     109            93           17           196            177           11      
 

 

 

   

 

 

       

 

 

   

 

 

     
 Total net revenue(2)     545            495           10           1,053            980               
 Provision (benefit) for credit losses     12            (14)           **           52            (49)           **      
 Non-interest expense     267            228           17           522            449           16      
 

 

 

   

 

 

       

 

 

   

 

 

     

 Income from continuing operations before income taxes

    266            281           (5)          479            580           (17)     
 Income tax provision     95            100           (5)          171            206           (17)     
 

 

 

   

 

 

       

 

 

   

 

 

     

 Income from continuing operations, net of tax

   $ 171           $ 181           (6)         $ 308           $ 374           (18)     
 

 

 

   

 

 

       

 

 

   

 

 

     
 Selected performance metrics:                

 Average loans held for investment(3):

               

Commercial and multifamily real estate

   $ 21,484           $ 18,084           19          $ 21,224           $ 17,771           19      

Commercial and industrial

    24,611            20,332           21           24,079            20,142           20      
 

 

 

   

 

 

       

 

 

   

 

 

     

Total commercial lending

    46,095            38,416           20           45,303            37,913           19      

Small-ticket commercial real estate

    896            1,096           (18)          914            1,134           (19)     
 

 

 

   

 

 

       

 

 

   

 

 

     
 Total commercial banking    $ 46,991           $ 39,512           19          $ 46,217           $ 39,047           18      
 

 

 

   

 

 

       

 

 

   

 

 

     

 Average yield on loans held for investment(2)

    3.50%        3.84%        (34)      bps     3.48%        3.87%        (39)      bps
 Average deposits    $ 31,238           $ 30,746                %    $     31,431           $     30,542                %
 Average deposit interest rate     0.24%        0.26%        (2)      bps     0.24%        0.27%        (3)      bps
 Core deposit intangible amortization    $ 5           $ 8           (38)      %    $ 11           $ 15           (27)      %
 Net charge-offs     3            4           (25)          7            11           (36)     
 Net charge-off rate     0.03%        0.04%        (1)      bps     0.03%        0.06%        (3)      bps

 (Dollars in millions)

  June 30,
2014
      December 31,  
2013
    Change          
 Selected period-end data:          
 Loans held for investment(3):          

Commercial and multifamily real estate

   $ 22,040           $ 20,750                %  

Commercial and industrial

    25,402            23,309                 
 

 

 

   

 

 

       

Total commercial lending

    47,442            44,059                 

Small-ticket commercial real estate

    879            952           (8)       
 

 

 

   

 

 

       
 Total commercial banking    $ 48,321           $     45,011                 
 

 

 

   

 

 

       

 Nonperforming loans rate

    0.38%        0.33%             bps  
 Nonperforming asset rate(4)     0.41            0.37                 
 Allowance for loan and lease losses    $ 368           $ 338                %  

 Allowance coverage ratio(5)

    0.76%        0.75%             bps  
 Deposits    $     31,440           $ 30,567                %  
 Loans serviced for others     11,411            10,786                 

 

 

  **

Change is not meaningful.

 

     (1)

In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

 

     (2)

The 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. Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately equal to our federal statutory tax rate of 35%.

 

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  (3) 

Includes Acquired Loans with carrying value of $217 million and $262 million as of June 30, 2014 and December 31, 2013, respectively. The average balance of commercial banking loans held for investment, excluding Acquired Loans, was $46.8 billion and $39.2 billion in the second quarter of 2014 and 2013, respectively, and $46.0 billion and $38.7 billion in the first six months of 2014 and 2013, respectively.

 

  (4) 

Calculated by dividing nonperforming assets as of the end of the period by the sum of period-end loans held for investment, foreclosed properties, and other foreclosed assets.

 

  (5) 

Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.

Key factors affecting the results of our Commercial Banking business for the second quarter and first six months of 2014, compared with the second quarter and first six months of 2013, and changes in financial condition and credit performance between June 30, 2014 and December 31, 2013 include the following:

 

 

Net Interest Income: Net interest income increased by $34 million, or 8%, in the second quarter of 2014 from the second quarter of 2013, to $436 million, and by $54 million, or 7%, in the first six months of 2014 from the first six months of 2013, to $857 million. The increase was driven by growth in commercial loans, partially offset by lower loan yields driven by market and competitive pressures.

 

 

Non-Interest Income: Non-interest income increased by $16 million, or 17%, in the second quarter of 2014 from the second quarter of 2013, to $109 million, and by $19 million, or 11%, in the first six months of 2014 from the first six months of 2013, to $196 million, primarily driven by increased revenue related to fee-based services and products and the Beech Street Capital acquisition.

 

 

Provision for Credit Losses: The provision for credit losses increased by $26 million in the second quarter of 2014 to $12 million from a benefit of $14 million in the second quarter of 2013, and by $101 million in the first six months of 2014 to $52 million from a benefit of $49 million in the first six months of 2013. The increase was primarily driven by growth in the portfolio. The increase in allowance for loan and lease losses and reserve for unfunded lending commitments was $9 million and $45 million in the second quarter and first six months of 2014, respectively, compared with a release of $20 million and $60 million in the second quarter and first six months of 2013, respectively.

 

 

Non-Interest Expense: Non-interest expense increased by $39 million, or 17%, in the second quarter of 2014 from the second quarter of 2013, to $267 million, and by $73 million, or 16%, in the first six months of 2014 from the first six months of 2013, to $522 million, driven by operating expenses associated with continued investments in business growth and the Beech Street Capital acquisition.

 

 

Loans Held for Investment: Period-end loans held for investment increased by $3.3 billion, or 7%, to $48.3 billion as of June 30, 2014 from $45.0 billion as of December 31, 2013. The increase was driven by loan growth in the commercial and industrial and commercial and multifamily real estate businesses.

 

 

Deposits: Period-end deposits increased by $873 million, or 3%, to $31.4 billion as of June 30, 2014, from $30.6 billion as of December 31, 2013, driven by our strategy to deepen and expand relationships with commercial customers.

 

 

Charge-off Statistics: The net charge-off rate was 0.03% in both the second quarter and first six months of 2014, compared to 0.04% and 0.06% in the second quarter and first six months of 2013, respectively. The nonperforming loans rate increased to 0.38% as of June 30, 2014, from 0.33% as of December 31, 2013. The continued strength in the credit metrics in our Commercial Banking business reflects stable credit trends and underlying collateral values.

Other Category

Other includes unallocated amounts related to our centralized Corporate Treasury group activities, such as management of our corporate investment portfolio and asset/liability management, gains and losses on our

 

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investment securities portfolio and certain trading activities. Other also includes foreign exchange-rate fluctuations related to the revaluation of foreign currency-denominated investments; certain gains and losses on the sale and securitization of loans; unallocated corporate expenses that do not directly support the operations of the business segments or for which the business segments are not considered financially accountable in evaluating their performance, such as certain acquisition and restructuring charges; a portion of the provision for representation and warranty losses related to continuing operations; certain material items that are non-recurring in nature; and offsets related to certain line-item reclassifications.

Net profit from continuing operations recorded in Other was $31 million and $20 million in the second quarter and first six months of 2014, respectively, compared with a net loss from continuing operations of $117 million and $245 million in the second quarter and first six months of 2013, respectively. The shift from a net loss to a net profit was primarily due to higher net interest income driven by higher interest rates, lower funding costs, the continued run-off of higher rate brokered deposits, as well as the absence of the one-time charge associated with our redemption of trust preferred securities in January 2013.

Table 10 summarizes the financial results of our Other category for the periods indicated.

Table 10: Other Results(1)

 

    Three Months Ended June 30,     Six Months Ended June 30,  

 (Dollars in millions)

      2014             2013             Change           2014         2013         Change    
 Selected income statement data:            
 Net interest expense(2)    $ (13)       $ (131)        (90)%       $ (42)       $ (270)        (84)%   
 Non-interest income     35         (29)        **          33         (134)        **     
 

 

 

   

 

 

     

 

 

   

 

 

   
 Total net revenue (loss)     22         (160)        **          (9)        (404)        (98)       
 Provision (benefit) for credit losses     —         (4)        **          (3)        (2)        50        
 Non-interest expense     55         61         (10)            76         93         (18)       
 

 

 

   

 

 

     

 

 

   

 

 

   
 Loss from continuing operations before income taxes     (33)        (217)        (85)            (82)        (495)        (83)       
 Income tax benefit     (64)        (100)        (36)            (102)        (250)        (59)       
 

 

 

   

 

 

     

 

 

   

 

 

   
 Profit (loss) from continuing operations, net of tax    $ 31        $ (117)        **         $ 20        $     (245)        **     
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

  **

Change is not meaningful.

 

  (1) 

In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

 

  (2) 

Some of our tax-related commercial investments generate tax-exempt income or tax credits, accordingly we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, with offsetting reclassifications within the Other category, calculated assuming an effective tax rate approximately equal to our federal statutory tax rate of 35%.

 

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 CONSOLIDATED BALANCE SHEETS ANALYSIS

 

Total assets of $298.3 billion as of June 30, 2014, increased by $1.4 billion, from $296.9 billion, as of December 31, 2013. Total liabilities of $254.5 billion as of June 30, 2014, decreased by $799 million, from $255.3 billion as of December 31, 2013. Stockholders’ equity increased by $2.2 billion, to $43.8 billion as of June 30, 2014. The increase in stockholders’ equity was primarily attributable to our net income of $2.3 billion for the first six months of 2014.

Following is a discussion of material changes in the major components of our assets and liabilities during the first six months of 2014. 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 our liquidity requirements for the Company and our customers and our market risk exposure in accordance with our risk appetite.

Investment Securities

Our investment portfolio consists primarily of the following: U.S. Treasury debt, U.S. Agency debt and corporate debt securities guaranteed by U.S. government agencies; Agency and non-agency residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”); other asset-backed securities (“ABS”) and other investments. The carrying value of our investments in U.S. Treasury, Agency securities and other securities guaranteed by the U.S. government or agencies of the U.S. government represented 79% and 77% of our total investment securities portfolio as of June 30, 2014 and December 31, 2013, respectively.

Our investment portfolio includes securities available for sale and held to maturity. We classify securities as available for sale or held to maturity based on our investment strategy and management’s assessment of our intent and ability to hold the securities until maturity. We report securities available for sale on our consolidated balance sheets at fair value with unrealized gains and losses recorded, net of tax, as a component of accumulated other comprehensive income (“AOCI”). We report securities held to maturity on our consolidated balance sheets at carrying value. Carrying value generally equals amortized cost. For securities transferred from available for sale to held to maturity, carrying value also includes unrealized gains and losses recognized in AOCI at the date of transfer. Such unrealized gains or losses are accreted over the remaining life of the security with no impact on future net income.

During the first six months of 2014, the fair value of our investment portfolio increased by $1.5 billion, or 3% from $61.0 billion as of December 31, 2013, to $62.5 billion as of June 30, 2014. This increase was primarily driven by lower interest rates.

We had gross unrealized gains of $965 million and gross unrealized losses of $299 million on available-for sale investment securities as of June 30, 2014, compared with gross unrealized gains of $799 million and gross unrealized losses of $631 million as of December 31, 2013. The decrease in gross unrealized losses in the first six months of 2014 was primarily driven by lower interest rates in the second quarter of 2014. Of the $299 million in gross unrealized losses as of June 30, 2014, $276 million was related to securities that had been in a loss position for more than 12 months.

Table 11 presents the amortized cost, carrying value and fair value for the major categories of our portfolio of investment securities as of June 30, 2014 and December 31, 2013.

 

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Table 11: Investment Securities

 

    June 30, 2014     December 31, 2013  

 (Dollars in millions)

    Amortized  
Cost
    Fair
    Value    
      Amortized  
Cost
    Fair
    Value    
 
 Investment securities available for sale        
 U.S. Treasury debt obligations    $ 1,221        $ 1,223        $ 831        $ 833    
 U.S. Agency debt obligations                            
 Corporate debt securities guaranteed by U.S. government agencies     1,120         1,092         1,282         1,234    
 RMBS:        

Agency

    21,779         21,948         21,572         21,479    

Non-agency

    3,077         3,579         3,165         3,600    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total RMBS     24,856         25,527         24,737         25,079    
 

 

 

   

 

 

   

 

 

   

 

 

 
 CMBS:        

Agency

    4,041         4,012         4,262         4,198    

Non-agency

    1,803         1,808         1,854         1,808    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total CMBS     5,844         5,820         6,116         6,006    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Other ABS(1)     5,972         6,022         7,123         7,136    
 Other securities(2)     1,433         1,428         1,542         1,511    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total investment securities available for sale    $ 40,447        $     41,113        $ 41,632        $     41,800    
 

 

 

   

 

 

   

 

 

   

 

 

 

 (Dollars in millions)

  Carrying
Value
    Fair Value     Carrying
Value
    Fair
Value
 
 Investment securities held to maturity        
 Agency RMBS    $ 18,852        $ 19,498        $ 17,443        $ 17,485    
 Agency CMBS     1,836         1,907         1,689         1,700    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total investment securities held to maturity    $ 20,688        $     21,405        $ 19,132        $     19,185    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (1) 

ABS collateralized by credit card loans constituted approximately 65% of the other ABS portfolio as of both June 30, 2014, and December 31, 2013, respectively, and ABS collateralized by auto dealer floor plan inventory loans and leases constituted approximately 13% and 15% of the other ABS portfolio as of June 30, 2014, and December 31, 2013, respectively. Approximately 89% of the securities in our other asset-backed security portfolio were rated AAA or its equivalent as of June 30, 2014, compared with 87% as of December 31, 2013.

 

  (2) 

Includes foreign government/agency bonds, covered bonds, corporate securities, municipal securities and equity investments primarily related to activities under the Community Reinvestment Act (“CRA”).

We provide information on OTTI recognized in earnings on our investment securities above under “Consolidated Results of OperationsNon-Interest Income.”

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 other government sponsored enterprises or agencies. Approximately 91% and 92% of our total investment securities portfolio was rated AA+ or its equivalent, or better as of June 30, 2014 and December 31, 2013, respectively, while approximately 6% and 5% was below investment grade as of June 30, 2014 and December 31, 2013, respectively. We categorize the credit ratings of our investment securities based on the lowest credit rating as issued by the following rating agencies: Standard & Poor’s Ratings Services (“S&P”), Moody’s Investors Service (“Moody’s”) and Fitch Ratings (“Fitch”).

 

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Table 12 provides information on the credit ratings of our non-agency RMBS, non-agency CMBS, other asset-backed securities and other securities in our portfolio as of June 30, 2014 and December 31, 2013.

Table 12: Non-Agency Investment Securities Credit Ratings

 

    June 30, 2014     December 31, 2013  

 (Dollars in millions)

  Amortized
Cost
        AAA         Other
  Investment  
Grade
    Below
Investment
Grade or Not
Rated
    Amortized
Cost
        AAA         Other
Investment
Grade
    Below
Investment
Grade or Not
Rated
 
 Non-agency RMBS    $ 3,077          —%        4%        96%       $     3,165          —%        4%        96%   
 Non-agency CMBS     1,803          96            —            4            1,854          99           1           —      

 Other asset-backed securities

    5,972          89            10            1            7,123          87           12           1      
 Other securities(1)     1,433          3            89            8            1,542          9           82           9      

 

 

  (1) 

Includes foreign government/agency bonds, covered bonds, corporate securities, municipal securities and equity investments primarily related to activities under the CRA.

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

Loans Held for Investment

Total loans held for investment (“HFI”) consists of unrestricted loans and restricted loans held in our securitization trusts. Table 13 summarizes our portfolio of loans held for investment by business segment, net of the allowance for loan and lease losses, as of June 30, 2014 and December 31, 2013.

Table 13: Net Loans Held for Investment

 

    June 30, 2014     December 31, 2013  

 (Dollars in millions)

      Loans           Allowance         Net Loans           Loans           Allowance         Net Loans    
 Credit Card.    $ 79,018         $ 2,858         $ 76,160         $ 81,305         $ 3,214         $ 78,091     
 Consumer Banking.     71,062          765          70,297          70,762          752          70,010     
 Commercial Banking     48,321          368          47,953          45,011          338          44,673     
 Other     127          7          120          121          11          110     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $     198,528         $         3,998         $     194,530         $     197,199         $         4,315         $     192,884     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end loans held for investment increased by $1.3 billion, or 1%, in the first six months of 2014. The increase was due to commercial and industrial and commercial and multifamily real estate loan growth in our Commercial Banking business, and continued strong auto loan originations outpacing the run-off of the acquired home loans portfolio in our Consumer Banking business. Overall, there was a decline in our credit card loan portfolio primarily due to seasonality in the first quarter, partially offset by loan growth in the second quarter in our Credit Card business.

We provide additional information on the composition of our loan portfolio and credit quality below in “Credit Risk Profile” and in “Note 4—Loans.”

Loans Held for Sale

Loans held for sale, which are carried at lower of cost or fair value, increased to $709 million as of June 30, 2014, from $218 million as of December 31, 2013. The increase was primarily driven by higher originations and timing of sales of loans.

 

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Customer Deposits

Our customer deposits represent our largest source of funding for our operations, providing a consistent source of low-cost funds. Total customer deposits increased by $1.4 billion to $205.9 billion as of June 30, 2014, from $204.5 billion as of December 31, 2013. The increase in deposits was driven by growth in our Consumer and Commercial Banking businesses, which reflected our focus on deepening deposit relationships with existing customers and our continued marketing strategy to attract new business. We provide information on the composition of our deposits, average outstanding balances, interest expense and yield below in “Liquidity Risk Profile.”

Securitized Debt Obligations

Securitization debt obligations decreased by $279 million during the first six months of 2014, to $10.0 billion as of June 30, 2014, from $10.3 billion as of December 31, 2013. The decrease was driven by maturities of $2.8 billion, partially offset by the issuances of $2.5 billion of credit card securitization debt during the first six months of 2014. We provide additional information on our borrowings below in “Liquidity Risk Profile.”

Other Debt

Other debt, which consists primarily of federal funds purchased and securities loaned or sold under agreements to repurchase, senior and subordinated notes and Federal Home Loan Banks (“FHLB”) advances, totaled $29.1 billion as of June 30, 2014, of which $10.5 billion represented short-term borrowings and $18.6 billion represented long-term debt. Other debt totaled $30.4 billion as of December 31, 2013, of which $16.2 billion represented short-term borrowings and $14.2 billion represented long-term debt.

The decrease in other debt of $1.3 billion in the first six months of 2014 was primarily attributable to net maturities of $5.9 billion of FHLB advances and the maturity of $1.4 billion unsecured senior notes, partially offset by the issuance of $4.8 billion of unsecured senior notes as well as a $1.1 billion increase in federal funds purchased and securities loaned or sold under agreements to repurchase. We provide additional information on our borrowings below in “Liquidity Risk Profile” and in “Note 8—Deposits and Borrowings.”

Potential Mortgage Representation and Warranty Liabilities

We acquired three subsidiaries that originated residential mortgage loans and sold these loans to various purchasers, including purchasers who created securitization trusts. These subsidiaries are Capital One Home Loans, LLC, which was acquired in February 2005; GreenPoint, which was acquired in December 2006 as part of the North Fork acquisition; and CCB, which was acquired in February 2009 and subsequently merged into CONA.

We have established representation and warranty reserves for losses associated with the mortgage loans sold by each subsidiary that we consider to be both probable and reasonably estimable, including both litigation and non-litigation liabilities. These reserves are reported on our consolidated balance sheets as a component of other liabilities. The reserve setting process relies heavily on estimates, which are inherently uncertain, and requires the application of judgment. We evaluate these estimates on a quarterly basis. We build our representation and warranty reserves through the provision for mortgage representation and warranty losses, which we report on our consolidated statements of income as a component of non-interest income for loans originated and sold by CCB and Capital One Home Loans, LLC and as a component of discontinued operations for loans originated and sold by GreenPoint. In establishing the representation and warranty reserves, we consider a variety of factors depending on the category of purchaser. The aggregate reserves for all three subsidiaries totaled $1.0 billion as of June 30, 2014, compared with $1.2 billion as of December 31, 2013.

 

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The table below summarizes changes in our representation and warranty reserves in the second quarter and first six months of 2014 and 2013.

Table 14: Changes in Representation and Warranty Reserve

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 

 (Dollars in millions)

       2014               2013               2014               2013       
 Representation and warranty repurchase reserve, beginning of period(1)    $ 1,128        $ 994        $ 1,172        $ 899    
 Provision (benefit) for mortgage representation and warranty losses:        

Recorded in continuing operations

    (29)        (4)        (15)        (14)   

Recorded in discontinued operations

    11         187         (36)        294    
 

 

 

   

 

 

   

 

 

   

 

 

 

 Total provision (benefit) for mortgage representation and warranty losses

    (18)        183         (51)        280    
 Net realized losses     (98)        (21)        (109)        (23)   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Representation and warranty repurchase reserve, end of period(1)    $ 1,012        $ 1,156        $ 1,012        $ 1,156    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (1) 

Reported on our consolidated balance sheets as a component of other liabilities.

As part of our business planning processes, we have considered various outcomes relating to the potential future representation and warranty liabilities of our subsidiaries that are possible but do not rise to the level of being both probable and reasonably estimable outcomes justifying an incremental accrual under applicable accounting standards. Our current best estimate of reasonably possible future losses from representation and warranty claims beyond what was in our reserve as of June 30, 2014, is approximately $2.5 billion, a decline from our estimate of $2.6 billion as of December 31, 2013.

We provide additional information related to the representation and warranty reserve, including factors that may impact the adequacy of the reserves and the ultimate amount of losses incurred by our subsidiaries, in “Note 14—Commitments, Contingencies, Guarantees, and Others.”

 

 

 OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

 

In the ordinary course of business, we are involved in various types of arrangements with limited liability companies, partnerships or trusts that often involve special purpose entities and variable interest entities (“VIE”). Some of these arrangements are not recorded on our consolidated balance sheets or may be recorded in amounts different from the full contract or notional amount of the arrangements, depending on the nature or structure of, and accounting required to be applied to, the arrangement. These arrangements may expose us to potential losses in excess of the amounts recorded on our consolidated balance sheets. Our involvement in these arrangements can take many forms, including securitization and servicing activities, the purchase or sale of mortgage-backed or other asset-backed securities in connection with our home loans portfolio and loans to VIEs that hold debt, equity, real estate or other assets.

Our continuing involvement in unconsolidated VIEs primarily consists of certain mortgage loan trusts and community reinvestment and development entities. The carrying amount of assets and liabilities of these unconsolidated VIEs was $3.4 billion and $464 million, respectively, as of June 30, 2014, and our maximum exposure to loss was $4.0 billion as of June 30, 2014. We provide a discussion of our activities related to these VIEs in “Note 6—Variable Interest Entities and Securitizations.”

 

 

 CAPITAL MANAGEMENT

 

The level and composition of our equity capital are determined by multiple factors, including our consolidated regulatory capital requirements and internal risk-based capital assessments such as internal stress testing and

 

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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

Bank holding companies and national banks are subject to capital adequacy standards adopted by the Federal Reserve and the OCC, respectively. The capital adequacy standards set forth minimum risk-based and leverage capital requirements that are based on quantitative and qualitative measures of assets and off-balance sheet items. National banks, as insured depository institutions, are also subject to Prompt Corrective Action (“PCA”) capital regulations, which require the U.S. federal banking agencies to take “prompt corrective action” for banks that do not meet established minimum capital requirements.

In July 2013, the Federal Reserve, the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Issuance Corporation (“FDIC”) (collectively, the U.S. federal banking agencies) finalized a new capital rule (the “Final Rule”) that implements the Basel III capital accord developed by the Basel Committee on Banking Supervision (“Basel Committee”) and certain Dodd-Frank Act capital provisions and updates the PCA capital requirements. Prior to being revised in the Final Rule, the minimum risk-based capital requirements adopted by the U.S. federal banking agencies followed the Basel I framework, originally promulgated pursuant to the Basel Committee’s Basel I accord, and the advanced approaches capital rules (“Advanced Approaches”), based upon the framework originally promulgated as a result of the Basel II accord. The Final Rule amended both the Basel I and Advanced Approaches frameworks, establishing a new common equity Tier 1 capital requirement and setting higher minimum capital ratio requirements. The Company refers 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, the Company met one of the two independent eligibility criteria set by banking regulators for becoming subject to the Advanced Approaches capital rules. As a result, the Company has undertaken a multi-year process of implementing the Advanced Approaches regime for calculating risk-weighted assets and regulatory capital levels. Certain provisions of the Final Rule began to take effect on January 1, 2014 for Advanced Approaches banking organizations, including the Company. The Company will be subject to a parallel run under Advanced Approaches, expected to begin January 1, 2015, during which it will calculate capital ratios under both the Basel III Standardized Approach and the Basel III Advanced Approaches, though it will continue to use the Basel III Standardized Approach for purposes of meeting regulatory capital requirements. By rule, the parallel run must last at least four consecutive quarters. Therefore, the first quarter of 2016 is the earliest possible date on which the Company would use the Basel III Advanced Approaches framework in calculating its regulatory capital and risk-weighted assets for purposes of risk-based capital requirements. Consistent with the experience of other U.S. banks, it is possible that our parallel run will last longer than the four quarter minimum. Under the Dodd-Frank Act and the Final Rule, organizations subject to Basel III Advanced Approaches may not hold less capital than would be required under the Basel III Standardized Approach. Therefore, even after we exit parallel run, we will continue to calculate regulatory capital and risk-weighted assets under the Basel III Standardized Approach.

As of January 1, 2014, the new minimum risk-based and leverage capital requirements for Advanced Approaches banking organizations include a common equity Tier 1 capital ratio of at least 4.0%, a Tier 1 risk-based capital ratio of at least 5.5%, a total risk-based capital ratio of at least 8.0%, and a Tier 1 leverage capital ratio of at least 4.0%. On January 1, 2015, the minimum risk-based capital ratio requirements will increase to 4.5% for the common equity Tier 1 capital ratio and to 6.0% for the Tier 1 risk-based capital ratio. The minimum requirements for the total risk-based capital ratio and the Tier 1 leverage capital ratio will not change from 2014 to 2015.

Insured depository institutions also are subject to PCA capital regulations. Under current PCA regulations, an insured depository institution is considered to be well-capitalized if it maintains a Tier 1 risk-based capital ratio of at least 6.0%, a total risk-based capital ratio of at least 10.0%, a Tier 1 leverage capital ratio of at least 5.0%, and is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued

 

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by its regulator. While the Final Rule increases some of the thresholds for the PCA capital categories and adds the new common equity Tier 1 capital ratio to the PCA regulations, those changes are not effective until January 1, 2015. Beginning on January 1, 2015, the well-capitalized level for the Tier 1 risk-based capital ratio will increase to 8.0%, and the well-capitalized level for the common equity Tier 1 capital ratio will be established at 6.5%. The well-capitalized levels for the total risk-based capital ratio and the Tier 1 leverage capital ratio will not change.

Prior to 2014, we also disclosed a Tier 1 common capital ratio for our bank holding company, which is a regulatory capital measure widely used by investors, analysts, rating agencies and bank regulatory agencies to assess the capital position of financial services companies. There was no mandated minimum or well-capitalized standard for the Tier 1 common capital ratio.

We disclose a non-GAAP tangible common equity ratio (“TCE ratio”) in “MD&A—Summary of Selected Financial Data.” While the TCE ratio is a capital measure widely used by investors, analysts, rating agencies, and bank regulatory agencies to assess the capital position of financial services companies, it may not be comparable to similarly titled measures reported by other companies. We provide information on the calculation of this ratio in “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures.”

Table 15 provides a comparison of our regulatory capital ratios under the U.S. federal banking agencies’ capital adequacy standards as of June 30, 2014 and December 31, 2013. Under the Final Rule, beginning on January 1, 2014, as an Advanced Approaches banking organization that has yet to enter or exit parallel run, we began using the Basel III Standardized Approach for calculating our regulatory capital, subject to applicable transition provisions. In 2014, however, we will continue to use Basel I for calculating our risk-weighted assets in our regulatory capital ratios, as required under the Final Rule. Beginning on January  1, 2015, we will use the Basel III Standardized Approach for calculating our risk-weighted assets in our regulatory capital ratios.

Table 15: Capital Ratios(1)(2)

 

    June 30, 2014     December 31, 2013  
       Capital  
Ratio
    Minimum
Capital
  Adequacy  
    Well-
  Capitalized  
      Capital  
Ratio
       Minimum   
Capital
Adequacy
    Well-
  Capitalized  
 

 Capital One Financial Corp:

           
 Common equity Tier 1 capital(3)             12.72%                4.00%                 N/A                     N/A                   N/A                   N/A      
 Tier 1 common(4)             N/A                    N/A                     N/A                     12.19%                N/A                   N/A      
 Tier 1 risk-based capital(5)             13.31%                5.50%                 6.00%                 12.57                   4.00%                6.00%   
 Total risk-based capital(6)             15.36                    8.00                     10.00                     14.69                   8.00                   10.00      
 Tier 1 leverage(7)             10.70                    4.00                     N/A                     10.06                   4.00                   N/A      

 Capital One Bank (USA), N.A.:

           
 Common equity Tier 1 capital(3)             11.70%                4.00%                 N/A                     N/A                   N/A                   N/A      
 Tier 1 risk-based capital(5)             11.70                    5.50                     6.00%                 11.47%                4.00%                6.00%   
 Total risk-based capital(6)             15.16                    8.00                     10.00                     14.90                   8.00                   10.00      
 Tier 1 leverage(7)             10.11                    4.00                     5.00                     10.21                   4.00                   5.00      

 Capital One, N.A.:

           
 Common equity Tier 1 capital(3)             13.09%                4.00%                 N/A                     N/A                   N/A                   N/A      
 Tier 1 risk-based capital(5)             13.09                    5.50                     6.00%                 12.67%                4.00%                6.00%   
 Total risk-based capital(6)             14.14                    8.00                     10.00                     13.76                   8.00                   10.00      
 Tier 1 leverage(7)             9.42                    4.00                     5.00                     8.96                   4.00                   5.00      

 

 

  (1) 

In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

 

 

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  (2) 

Capital ratios are calculated based on the Basel I capital framework as of December 31, 2013 and are calculated based on the Basel III Standardized Approach framework, subject to applicable transition provisions, as of June 30, 2014. Capital ratios that are not applicable are denoted by “N/A.” See “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information.

 

  (3) 

Common equity Tier 1 capital ratio is a regulatory capital measure under Basel III calculated based on common equity Tier 1 capital divided by risk-weighted assets.

 

  (4) 

Tier 1 common capital ratio is a regulatory capital measure under Basel I calculated based on Tier 1 common capital divided by Basel I risk-weighted assets.

 

  (5) 

Tier 1 risk-based capital ratio is a regulatory capital measure calculated based on Tier 1 capital divided by risk-weighted assets.

 

  (6) 

Total risk-based capital ratio is a regulatory capital measure calculated based on total risk-based capital divided by risk-weighted assets.

 

  (7) 

Tier 1 leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by average assets, after certain adjustments.

Our common equity Tier 1 capital ratio, as calculated under the Basel III Standardized Approach, subject to transition provisions, was 12.72% as of June 30, 2014. Our Tier 1 common capital ratio, as calculated under Basel I, was 12.19% as of December 31, 2013. These numbers are not directly comparable due to methodological differences in the calculation of the ratios and the transition requirements under the Final Rule. For purposes of our capital plan, for which we received the Federal Reserve’s non-objection on March 26, 2014, we were assessed on our ability throughout the 2014 CCAR Cycle to maintain, among other measures, a Tier 1 common ratio of 5.0% on a pro forma basis under expected and stressful conditions. We estimate that our Tier 1 common ratio, as calculated under Basel I, was approximately 12.7% as of June 30, 2014. Capital One Financial Corporation exceeded U.S. federal banking agencies’ minimum capital requirements and the Banks exceeded minimum regulatory requirements and were “well-capitalized” under PCA requirements as of June 30, 2014 and December 31, 2013.

As described above, we are currently using the Basel III Standardized Approach for calculating our regulatory capital, subject to transition provisions. The Basel III Standardized Approach common equity Tier 1 capital requirement under the Final Rule includes additional adjustments and deductions not included in the Tier 1 common capital requirement calculated under Basel I, such as the inclusion of the unrealized gains and losses on available-for-sale investment securities included in AOCI and adjustments related to intangibles. These adjustments are phased-in at 20% for 2014, 40% for 2015, 60% for 2016, 80% for 2017 and at 100% for 2018. Also as described above, we will continue to use Basel I for calculating our risk-weighted assets in our risk-based regulatory capital ratios in 2014. However, beginning on January 1, 2015, we will use the Basel III Standardized Approach for calculating our risk-weighted assets in our risk-based regulatory capital ratios.

The following table compares our common equity Tier 1 capital and risk-weighted assets as of June 30, 2014, calculated based on the Final Rule, subject to applicable transition provisions, to our estimated common equity Tier 1 capital and risk-weighted assets as of June 30, 2014, calculated under the Basel III Standardized Approach, as it applies when fully phased-in. See the table and notes below for further discussion on our interpretations, expectations and assumptions used in calculating this ratio.

 

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Table 16: Estimated Common Equity Tier 1 Ratio under Fully Phased-In Basel III Standardized Approach

 

 (Dollars in millions)

     
 Common Equity Tier 1 Capital under Basel III Standardized as of June 30, 2014    $             28,774        

Adjustments related to AOCI(1)

    (378)       

Adjustments related to intangibles(1)

    (1,157)       

Other adjustments(1)

    (1)       
 

 

 

 
 Estimated Common Equity Tier 1 Capital under Fully Phased-In Basel III Standardized    $ 27,238        
 

 

 

 
 Risk-weighted assets under Basel I    $ 226,172        

Adjustments for Basel III Standardized(2)

    8,017        
 

 

 

 
 Estimated risk-weighted assets under Basel III Standardized    $ 234,189        
 

 

 

 
 Estimated Common Equity Tier 1 Capital Ratio under Fully Phased-In Basel III  Standardized(3)     11.6%   

 

 

 

  (1) 

Assumes adjustments are fully phased-in.

 

  (2) 

Adjustments to the Basel I approach to calculating risk-weighted assets include higher risk weights for exposures 90 days or more past due or in nonaccrual, high volatility commercial real estate, securitization exposures and corresponding adjustments to PCCR intangibles, deferred tax assets and certain other assets in the calculation of common equity Tier 1 capital under the Basel III Standardized Approach.

 

  (3) 

Calculated by dividing estimated common equity Tier 1 capital under the fully phased-in Basel III Standardized Approach by estimated risk-weighted assets under the Basel III Standardized Approach.

Under the Final Rule, when we complete our parallel run for the Advanced Approaches, our minimum risk-based capital requirement will be the greater requirement of the Basel III Standardized Approach and the Basel III Advanced Approaches. See “Supervision and Regulation—Basel III and U.S. Capital Rules” in our 2013 Annual Report on Form 10-K for additional information. Based on our business mix, we anticipate that we will need to hold more regulatory capital under the Basel III Advanced Approaches than under Basel I or the Basel III Standardized Approach to meet our minimum required regulatory capital ratios.

Capital Planning and Regulatory Stress Testing

In November 2011, the Federal Reserve finalized capital planning rules applicable to large bank holding companies like us. Under these rules, bank holding companies with consolidated assets of $50 billion or more must submit capital plans to the Federal Reserve on an annual basis that contains a description of all planned capital actions, including dividends or stock repurchases, over a nine-quarter planning horizon beginning with the fourth quarter of the calendar year prior to the submission of the capital plan (“CCAR cycle”). The bank holding company may take the capital actions in its capital plan if the Federal Reserve provides a non-objection to the plan. The Federal Reserve’s objection or non-objection applies specifically to capital actions during the four quarters beginning with the second quarter of the second calendar year in the planning horizon. The purpose of the rules is to ensure that large bank holding companies have robust, forward-looking capital planning processes that account for their unique risks and capital needs to continue operations through times of economic and financial stress. On June 12, 2014, the Federal Reserve and OCC proposed changes to their regulations governing the CCAR and stress testing processes. For additional information on the Proposed Rules, see “MD&A—Supervision and Regulation.”

As a result of the Federal Reserve’s non-objection to our 2014 capital plan, we expect to maintain our quarterly dividend of $0.30 per share, subject to approval by our Board of Directors. In addition, our Board of Directors has authorized the repurchase of up to $2.5 billion of shares of common stock through the end of the first quarter of 2015.

 

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Equity Offerings and Transactions

On June 12, 2014, the Company issued and sold 20,000,000 depositary shares (“Depositary Shares”), each representing a 1/40th interest in a share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, $0.01 par value, with a liquidation preference of $25 per Depositary Share (equivalent to $1,000 per share of Series C Preferred Stock) (the “Series C Preferred Stock”). Dividends will accrue on the Series C Preferred Stock at a rate of 6.25% per annum, payable quarterly in arrears. The net proceeds of the offering of the 20,000,000 Depositary Shares were approximately $484 million, after deducting underwriting commissions and offering expenses. Under the terms of the Series C Preferred Stock, the ability of the Company to pay dividends on, make distributions with respect to, or to repurchase, redeem or acquire its common stock or any preferred stock ranking on parity with or junior to the Series C Preferred Stock, is subject to restrictions in the event that the Company does not declare and either pay or set aside a sum sufficient for payment of dividends on the Series C Preferred Stock for the immediately preceding dividend period.

Dividend Policy and Stock Purchases

We paid common stock dividends of $0.30 per share in the second quarter of 2014. During the second quarter, we also paid preferred stock dividends of $15.00 per share on the outstanding shares of our 6.00% fixed rate non-cumulative perpetual preferred stock, Series B (the “Series B Preferred Stock”).

On July 31, 2014, our Board of Directors declared a quarterly dividend of $0.30 per share, payable August 21, 2014 and quarterly dividends on our Series B Preferred Stock and Series C Preferred Stock payable on September 2nd. Based on these declarations, the company will pay approximately $169 million in common equity dividends and approximately $20 million in total preferred dividends in Q3 2014.

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, 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 bank holding company. Funds available for dividend payments from COBNA and CONA were $1.3 billion and $210 million, respectively, as of June 30, 2014. There can be no assurance that we will declare and pay any dividends. For additional information on dividends, see “Part I-Item 1. Business—Supervision and Regulation—Dividends, Stock Purchases and Transfer of Funds” in our 2013 Form 10-K.

As disclosed in “Capital Planning and Regulatory Stress Testing” above, we plan to repurchase up to $2.5 billion of common stock within the CCAR 2014 cycle, through the 2014 Stock Repurchase Program approved by our Board of Directors. Through the end of the second quarter of 2014, we have repurchased approximately $1.0 billion of shares as a part of this program.

The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, our capital position and amount of retained earnings. Our share 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 stock repurchases, see “Part I—Item 1. Business—Supervision and Regulation—Dividends, Stock Repurchases and Transfer of Funds” in our 2013 Form 10-K.

 

 

  RISK MANAGEMENT

 

Overview

We use a risk framework to manage risk. We execute against our risk management framework with the “Three Lines of Defense” risk management model to demonstrate and structure the roles, responsibilities and

 

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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, and for mitigating our overall risk exposure. The “Second Line of Defense” provides oversight of first line risk taking and management, and is comprised of our risk management organization and other staff control functions. The second line assists in determining risk capacity, risk appetite, and the strategies, policies and structure for managing risks. The second line is both an “expert advisor” to the first line and an “effective challenger” of first line risk activities. The “Third Line of Defense” is comprised of our internal audit and credit review functions. The third line provides independent and objective assurance to senior management and to the Board of Directors that first and second line risk management and internal control systems and its governance processes are well-designed and working as intended. Our risk framework, which is built around governance, processes and people, consists of the following eight key elements:

 

   

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

 

   

Enable with 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 2013 Form 10-K.

 

 

  CREDIT RISK PROFILE

 

Our loan portfolio accounts for the substantial majority of our credit risk exposure. These activities are also 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, foreign exchange transactions, and customer overdrafts. We provide additional information on credit risk related to our investment securities portfolio under “Consolidated Balance Sheets Analysis—Investment Securities” and credit risk related to derivative transactions in “Note 9—Derivative Instruments and Hedging Activities.”

Loan Portfolio Composition

We provide a variety of lending products. Our primary products include credit cards, auto loans, home loans and commercial loans. 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 2013 Form 10-K.

Our total loan portfolio consists of loans held for investment, including restricted loans (underlying our consolidated securitization trusts), and loans held for sale. Table 17 presents the composition of our portfolio of loans held for investment, by portofilio segment, as of June 30, 2014 and December 31, 2013. Table 17 and the

 

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credit metrics presented in this section exclude loans held for sale, which are carried at lower of cost or fair value and totaled $709 million and $218 million as of June 30, 2014, and December 31, 2013, respectively.

Table 17: Loan Portfolio Composition

 

    June 30, 2014     December 31, 2013  

 (Dollars in millions)

  Loans     Acquired
Loans
    Total     % of
Total
    Loans     Acquired
Loans
    Total     % of
Total
 
 Credit Card:                

Domestic credit card(1)

   $ 71,128        $ 37        $ 71,165         35.8%       $ 73,192        $ 63        $ 73,255         37.1%   

International credit card

    7,853         —         7,853         4.0            8,050         —         8,050         4.1       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total credit card     78,981         37         79,018         39.8            81,242         63         81,305         41.2       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Consumer Banking:                

Auto

    34,790                34,792         17.5            31,852                31,857         16.2       

Home loan

    6,930         25,714         32,644         16.5            7,098         28,184         35,282         17.9       

Retail banking

    3,577         49         3,626         1.8            3,587         36         3,623         1.8       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total consumer banking     45,297         25,765         71,062         35.8            42,537         28,225         70,762         35.9       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Commercial Banking:(2)                

Commercial and multifamily real estate

    21,975         65         22,040         11.1            20,666         84         20,750         10.5       

Commercial and industrial

    25,250         152         25,402         12.8            23,131         178         23,309         11.8       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

    47,225         217         47,442         23.9            43,797         262         44,059         22.3       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Small-ticket commercial real estate

    879         —         879         0.4            952         —         952         0.5       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total commercial banking     48,104         217         48,321         24.3            44,749         262         45,011         22.8       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Other:                

Other loans

    127        —         127         0.1            121         —         121         0.1       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total loans held for investment    $ 172,509        $   26,019        $ 198,528             100.0%       $ 168,649        $   28,550        $ 197,199             100.0%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) 

Includes installment loans of $205 million and $323 million as of June 30, 2014 and December 31, 2013, respectively.

 

  (2) 

Includes construction loans and land development loans totaling $2.1 billion and $2.0 billion as of June 30, 2014 and December 31, 2013, respectively.

Credit Risk Measurement

We closely monitor economic conditions and loan performance trends to assess and manage our exposure to credit risk. Key metrics we track in evaluating the credit quality of our loan portfolio include delinquency and nonperforming asset rates, as well as charge-off rates and our internal risk ratings of larger balance commercial loans. Trends in delinquency rates are a primary indicator of credit risk within our consumer loan portfolios, as changes in delinquency rates provide an early warning of changes in credit losses. The primary indicator of credit risk in our commercial loan portfolios is risk ratings. Because we generally classify loans that have been delinquent for an extended period of time and other loans with significant risk of loss as nonperforming, the level of nonperforming assets represents another indicator of the potential for future credit losses. In addition to delinquency rates, the geographic distribution of our loans provides insight as to the credit quality of the portfolio based on regional economic conditions.

We use borrower credit scores in underwriting for most consumer loans. We do not use credit scores as a primary indicator of credit quality because product differences, loan structure and other factors drive large differences in credit quality for a given credit score. We continuously adjust our management of credit lines and collection strategies based on customer behavior and risk profile changes. Based on our most recent data, we estimate that approximately one-third of our Domestic Card portfolio had credit scores equal to or below 660 or no score, based on loan balances as of June 30, 2014, consistent with the proportion of the Domestic Card portfolio with credit scores equal to or below 660 or no score as of December 31, 2013.

 

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We present information in the section below on the credit performance of our loan portfolio, including the key metrics we use in tracking changes in the credit quality of our loan portfolio. We also present adjusted credit quality metrics excluding impact from Acquired Loans.

See “Note 4—Loans” in this Report for additional credit quality information. See “Note 1—Summary of Significant Accounting Policies” in our 2013 Form 10-K for information on our accounting policies for delinquent, nonperforming loans, charge-offs and troubled debt restructurings (“TDRs”) for each of our loan categories.

Delinquency Rates

We consider the entire balance of an account to be delinquent if the minimum required payment is not received by the first statement cycle date equal to or following the due date specified on the customer’s billing statement. Our 30+ day delinquency metrics include all loans held for investment that are 30 or more days past due, whereas our 30+ day performing delinquency metrics include loans that are 30 or more days past due but currently classified as performing and accruing interest. The 30+ day delinquency and 30+ day performing delinquency metrics are generally the same for credit card loans, as we continue to classify the substantial majority of credit card loans as performing until the account is charged-off, typically when the account is 180 days past due. See “Note 1—Summary of Significant Accounting Policies” in our 2013 Form 10-K for information on our policies for classifying loans as nonperforming for each of our loan categories.

Table 18 presents our 30+ day performing and total 30+ day delinquency rates, by portfolio segment, as of June 30, 2014 and December 31, 2013. It also presents the adjusted rates, which exclude Acquired Loans from the denominator as they are accounted for based on cash flows expected to be collected over the life of the loans.

 

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Table 18: 30+ Day Delinquencies

 

    June 30, 2014     December 31, 2013  
    30+ Day Performing     30+ Day Total     30+ Day Performing     30+ Day Total  

 (Dollars in millions)

  Amount     Rate(1)     Adjusted
Rate(2)
    Amount     Rate(1)     Adjusted
Rate(2)
    Amount     Rate(1)     Adjusted
Rate(2)
    Amount     Rate(1)     Adjusted
Rate(2)
 

 Credit Card:

                       

 Domestic credit card

   $ 2,013         2.83%        2.83%       $ 2,013         2.83%        2.83%       $ 2,514         3.43%        3.43%       $ 2,514         3.43%        3.43%   
 International credit card     267         3.40            3.40            330         4.20            4.20            299         3.71            3.71            367         4.56            4.56       
 

 

 

       

 

 

       

 

 

       

 

 

     

 Total credit card

    2,280         2.89            2.89            2,343         2.97            2.97            2,813         3.46            3.46            2,881         3.54            3.55       
 

 

 

       

 

 

       

 

 

       

 

 

     

 Consumer Banking:

                       

 Auto

    2,006         5.77            5.77            2,156         6.20            6.20            2,181         6.85            6.85            2,375         7.46            7.46       

 Home loan

    42         0.13            0.61            287         0.88            4.14            55         0.16            0.78            323         0.91            4.55       

 Retail banking

    17         0.48            0.48            36         0.98            1.00            25         0.69            0.70            52         1.44            1.46       
 

 

 

       

 

 

       

 

 

       

 

 

     
 Total consumer banking     2,065         2.91            4.56            2,479         3.49            5.47            2,261         3.20            5.32            2,750         3.89            6.47       
 

 

 

       

 

 

       

 

 

       

 

 

     

 Commercial Banking:

                       

 Commercial and multifamily real estate

    61         0.27            0.27            95         0.43            0.43            29         0.14            0.14            64         0.31            0.31       
 Commercial and industrial     36         0.14            0.14            82         0.32            0.32            73         0.31            0.32            108         0.46            0.47       
 

 

 

       

 

 

       

 

 

       

 

 

     

 Total commercial lending

    97         0.20            0.20            177         0.37            0.38            102         0.23            0.23            172         0.39            0.39       
 

 

 

       

 

 

       

 

 

       

 

 

     

 Small-ticket commercial real estate

           0.15            0.15            12         1.30            1.30                   0.79            0.79            11         1.17            1.17       
 

 

 

       

 

 

       

 

 

       

 

 

     
 Total commercial banking     98         0.20            0.20            189         0.39            0.39            110         0.24            0.25            183         0.41            0.41       
 

 

 

       

 

 

       

 

 

       

 

 

     

 Other:

                       

 Other loans

           2.91            2.91            16         12.43            12.43                   3.32            3.32            19         15.72            15.72       
 

 

 

       

 

 

       

 

 

       

 

 

     

 Total

   $     4,447         2.24            2.58           $     5,027         2.53            2.91           $     5,188         2.63            3.08           $     5,833         2.96            3.46       
 

 

 

       

 

 

       

 

 

       

 

 

     

 

  (1) 

Calculated by loan category by dividing 30+ day delinquent loans as of the end of the period by period-end loans held for investment for the specified loan category, including Acquired Loans as applicable.

 

  (2) 

Calculated by excluding Acquired Loans from denominator.

 

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Table 19 presents an aging of 30+ day delinquent loans included in the above table.

Table 19: Aging and Geography of 30+ Day Delinquent Loans

 

    June 30, 2014     December 31, 2013  

 (Dollars in millions)

  Amount     % of
Total Loans(1)
    Amount     % of
Total Loans(1)
 
 Total loan portfolio    $ 198,528         100.00%       $ 197,199         100.00%   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Delinquency status:        

30 – 59 days

   $ 2,380         1.20          $ 2,617         1.33      

60 – 89 days

    1,154         0.58           1,344         0.68      

90 + days

    1,493         0.75           1,872         0.95      
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $ 5,027         2.53%       $ 5,833         2.96%   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Geographic region:        

Domestic

   $ 4,697         2.36%       $ 5,466         2.77%   

International

    330         0.17           367         0.19      
 

 

 

   

 

 

   

 

 

   

 

 

 

 Total

   $ 5,027                   2.53%       $ 5,833                   2.96%   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) 

Calculated by dividing loans in each delinquency status category or geographic region as of the end of the period by the total loans held for investment, including Acquired Loans accounted for based on expected cash flows.

Table 20 summarizes loans that were 90 days or more past due as to interest or principal and still accruing interest as of June 30, 2014 and December 31, 2013. These loans consist primarily of credit card accounts between 90 days and 179 days past due. As permitted by regulatory guidance issued by the Federal Financial Institutions Examination Council (“FFIEC”), we generally continue to accrue interest and fees on domestic credit card loans through the date of charge-off, which is typically in the period the account becomes 180 days past due. While domestic credit card loans typically remain on accrual status until the loan is charged-off, we reduce the balance of our credit card receivables by the amount of finance charges and fees billed but not expected to be collected and exclude this amount from revenue.

Table 20: 90+ Day Delinquent Loans Accruing Interest

 

    June 30, 2014     December 31, 2013  

 (Dollars in millions)

  Amount     % of
Total Loans(1)
    Amount     % of
Total Loans(1)
 
 Loan category:        

Credit card

   $ 964         1.22%       $ 1,283         1.58%   

Consumer banking

           0.00                   0.00      

Commercial banking

           0.01                   0.01      
 

 

 

     

 

 

   
 Total    $ 970         0.49           $ 1,291         0.65      
 

 

 

     

 

 

   
 Geographic region:        

Domestic

   $ 889         0.47           $ 1,195         0.63      

International

    81         1.04            96         1.19      
 

 

 

     

 

 

   
 Total    $                 970         0.49           $                 1,291         0.65      
 

 

 

     

 

 

   

 

  (1) 

Delinquency rates are calculated for each loan category by dividing 90+ day delinquent loans accruing interest by period-end loans held for investment for the specified loan category.

Nonperforming Loans and Nonperforming Assets

Nonperforming assets consist of nonperforming loans, foreclosed property and repossessed assets and the net realizable value of auto loans that have been charged-off as a result of a bankruptcy. Nonperforming loans

 

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generally include loans that have been placed on nonaccrual status and certain restructured loans whose contractual terms have been modified in a manner that grants a concession to a borrower experiencing financial difficulty. In addition, we separately track and report Acquired Loans accounted for based on expected cash flows and disclose our delinquency and nonperforming loan rates with and without these Acquired Loans. See “Note 1—Summary of Significant Accounting Policies” in our 2013 Form 10-K for information on our policies for classifying loans as nonperforming for each of our loan categories.

Table 21 presents comparative information on nonperforming loans, by portfolio segment, and other nonperforming assets, as of June 30, 2014 and December  31, 2013. We do not classify loans held for sale as nonperforming, as they are recorded at the lower of cost or fair value.

Table 21: Nonperforming Loans and Other Nonperforming Assets(1)

 

    June 30, 2014     December 31, 2013  

 (Dollars in millions)

  Amount     % of Total
Loans HFI
    Amount     % of Total
Loans HFI
 
 Nonperforming loans held for investment:        
 Credit Card:        

International credit card

   $ 81         1.03%       $ 88         1.10%   
 

 

 

     

 

 

   
 Total credit card     81         0.10            88         0.11      
 

 

 

     

 

 

   
 Consumer Banking:        

Auto

    151         0.43            194         0.61      

Home loan(2)

    351         1.07            376         1.06      

Retail banking

    29         0.79            41         1.13      
 

 

 

     

 

 

   
Total consumer banking(2)     531         0.75            611         0.86      
 

 

 

     

 

 

   
 Commercial Banking:        

Commercial and multifamily real estate

    64         0.29            52         0.25      

Commercial and industrial

    105         0.41            93         0.40      
 

 

 

     

 

 

   

Total commercial lending

    169         0.36            145         0.33      

Small-ticket commercial real estate

    12         1.40                   0.41      
 

 

 

     

 

 

   
 Total commercial banking     181         0.38            149         0.33      
 

 

 

     

 

 

   
 Other:        

Other loans

    16         12.74            19         15.83      
 

 

 

     

 

 

   
 Total nonperforming loans held for investment(2)(3)    $ 809         0.41           $ 867         0.44      
 

 

 

     

 

 

   
 Other nonperforming assets(4):        

Foreclosed property(5)

   $ 117         0.06          $ 113         0.06      

Other assets(6)

    158         0.08            160         0.08      
 

 

 

     

 

 

   
 Total other nonperforming assets     275         0.14            273         0.14      
 

 

 

     

 

 

   
 Total nonperforming assets(7)    $     1,084                 0.55           $     1,140                 0.58      
 

 

 

     

 

 

   

 

  (1) 

We recognized interest income for loans classified as nonperforming of $12 million and $17 million in the first six months of 2014 and 2013, respectively. Interest income foregone related to nonperforming loans was $29 million and $34 million in the first six months of 2014 and 2013, respectively. Foregone interest income represents the amount of interest income that would have been recorded during the period for nonperforming loans as of the end of the period had the loans performed according to their contractual terms.

 

  (2) 

The nonperforming loan ratio, excluding Acquired Loans’ impact for our home loans portfolio, total consumer banking, and total nonperforming loans held for investment was 5.06%, 1.17%, and 0.47%, respectively, as of June 30, 2014, compared with 5.29%, 1.44%, and 0.51%, respectively, as of December 31, 2013.

 

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  (3) 

Nonperforming loans as a percentage of total loans held for investment, excluding the impact of domestic credit card loans, was 0.63% and 0.70% as of June 30, 2014 and December 31, 2013, respectively.

 

  (4) 

The denominator used in calculating the nonperforming asset ratios consists of total loans held for investment and other nonperforming assets.

 

  (5) 

Includes foreclosed properties related to Acquired Loans of $71 million and $68 million as of June 30, 2014 and December 31, 2013, respectively.

 

  (6) 

Includes the net realizable value of auto loans that have been charged-off as a result of a bankruptcy and repossessed assets obtained in satisfaction of auto loans. Both of these amounts are included in other assets.

 

  (7) 

The nonperforming asset ratio, excluding the impact of Acquired Loans was 0.59% and 0.63% as of June 30, 2014 and December 31, 2013, respectively.

Net Charge-Offs

Net charge-offs consist of the unpaid principal balance of loans held for investment that we determine are uncollectible, net of recovered amounts. We exclude accrued and unpaid finance charges and fees and fraud losses from charge-offs. Charge-offs are recorded as a reduction to the allowance for loan and lease losses and subsequent recoveries of previously charged-off amounts are credited to the allowance for loan and lease losses. Costs incurred to recover charged-off loans are recorded as collection expense and included on our consolidated statements of income as a component of other non-interest expense. Our charge-off time frame for loans varies based on the loan type. See “Note 1—Summary of Significant Accounting Policies—Loans” in our 2013 Form 10-K for information on our charge-off policy for each of our loan categories.

Table 22 presents our net charge-off amounts and rates, by portfolio segment, in the second quarter and first six months of 2014 and 2013.

Table 22: Net Charge-Offs

 

    Three Months Ended June 30,  
    2014      2013  

 (Dollars in millions)

      Amount           Rate(1)         Adjusted  
Rate(2)
         Amount           Rate(1)         Adjusted  
Rate(2)
 
 Credit Card:             

Domestic credit card

   $ 610          3.52%        3.52%        $ 749          4.28%        4.29%   

International credit card

    75          3.93            3.93             101          5.08            5.08      
 

 

 

        

 

 

     
 Total credit card     685          3.56            3.56             850          4.36            4.37      
 

 

 

        

 

 

     
 Consumer Banking:             

Auto

    111          1.31            1.31             92          1.28            1.28      

Home loan

    5          0.05            0.25             4          0.03            0.16      

Retail banking

    6          0.70            0.71             14          1.50            1.52      
 

 

 

        

 

 

     
Total consumer banking     122          0.69            1.09             110          0.60            1.08      
 

 

 

        

 

 

     
 Commercial Banking:             

Commercial and multifamily real estate

    (1)         0.00            0.00             1          0.04            0.04      

Commercial and industrial

    2          0.04            0.04             2          0.03            0.03      
 

 

 

        

 

 

     

Total commercial lending

    1          0.02            0.02             3          0.03            0.03      
 

 

 

        

 

 

     

Small-ticket commercial real estate

    2          0.61            0.61             1          0.45            0.45      
 

 

 

        

 

 

     
 Total commercial banking     3          0.03            0.03             4          0.04            0.04      
 

 

 

        

 

 

     
 Other:             

 Other loans

    2          2.18            2.18             5          13.10            16.65      
 

 

 

        

 

 

     
 Total net charge-offs    $ 812          1.67            1.93            $ 969          2.03            2.46      
 

 

 

        

 

 

     
 Average loans held for investment    $ 194,996              $ 190,562         
 Average loans held for investment (excluding  Acquired Loans)     168,505               157,418         

 

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    Six Months Ended June 30,  
    2014      2013  

 (Dollars in millions)

      Amount           Rate(1)        Adjusted 
Rate(2)
         Amount           Rate(1)        Adjusted 
Rate(2)
 
 Credit Card:             

Domestic credit card

   $ 1,310          3.77%        3.77%        $ 1,576          4.36%        4.37%   

International credit card

    155          4.05            4.05             196          4.83            4.83      
 

 

 

        

 

 

     
 Total credit card     1,465          3.79            3.80             1,772          4.41            4.41      
 

 

 

        

 

 

     
 Consumer Banking:             

Auto

    245          1.48            1.48             214          1.52            1.52      

Home loan

    10          0.06            0.27             8          0.04            0.19      

Retail banking

    15          0.82            0.83             31          1.68            1.69      
 

 

 

        

 

 

     
 Total consumer banking     270          0.76            1.23             253          0.69            1.27      
 

 

 

        

 

 

     
 Commercial Banking:             

Commercial and multifamily real estate

    0          0.00            0.00             2          0.03            0.03      

Commercial and industrial

    4          0.03            0.03             4          0.04            0.04      
 

 

 

        

 

 

     

Total commercial lending

    4          0.02            0.02             6          0.03            0.03      

Small-ticket commercial real estate

    3          0.64            0.64             5          0.94            0.94      
 

 

 

        

 

 

     
 Total commercial banking     7          0.03            0.03             11          0.06            0.06      
 

 

 

        

 

 

     
 Other:             

Other loans

    1          0.77            0.77             12          13.83            17.58      
 

 

 

        

 

 

     
 Total net charge-offs    $ 1,743          1.79            2.08            $ 2,048          2.12            2.58      
 

 

 

        

 

 

     
 Average loans held for investment    $   194,362              $   193,265         

 Average loans held for investment (excluding Acquired Loans)

    167,237               158,840         

 

 

  (1) 

Calculated for each loan category by dividing annualized net charge-offs for the period by average loans held for investment during the period.

 

  (2) 

Calculated by excluding Acquired Loans from the denominator.

Loan Modifications and Restructurings

As part of our loss mitigation efforts, we may provide short-term (three to twelve months) or long-term (greater than twelve months) modifications to a borrower experiencing financial difficulty to improve long-term collectability of the loan and to avoid the need for foreclosure or repossession of collateral.

Table 23 presents the total TDR loan balances as of June 30, 2014 and December 31, 2013. It excludes loan modifications that do not meet the definition of a TDR and Acquired Loans accounted for based on expected cash flows, which we track and report separately.

 

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Table 23: Loan Modifications and Restructurings

 

    June 30, 2014     December 31, 2013  

 (Dollars in millions)

  Amount     % of Total
  Modifications  
    Amount     % of Total
  Modifications  
 
 Modified and restructured loans:        

Credit card(1)

   $ 728          43.8%       $ 780          46.4%   

Auto

    375          22.6            355          21.1      

Home loan

    240          14.4            244          14.5      

Retail banking

    53          3.2            64          3.8      

Commercial banking

    265          16.0            238          14.2      
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $ 1,661          100.0%       $ 1,681          100.0%   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Status of modified and restructured loans:        

Performing

   $ 1,240          74.7%       $ 1,250          74.4%   

Nonperforming

    421          25.3            431          25.6      
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $           1,661          100.0%       $           1,681          100.0%   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) 

Amount reported reflects the total outstanding customer balance, which consists of unpaid principal balance, accrued interest and fees.

The majority of our credit card TDR loan modifications involve reducing the interest rate on the account and placing the customer on a fixed payment plan not exceeding 60 months. We determine the effective interest rate for purposes of measuring impairment on modified loans that involve a reduction and are considered to be a TDR based on the interest rate in effect immediately prior to the loan entering the modification program. In some cases, the interest rate on a credit card account is automatically increased due to non-payment, late payment or similar events. In all cases, we cancel the customer’s available line of credit on the credit card. If the customer does not comply with the modified payment terms, then the credit card loan agreement may revert to its original payment terms, with the amount of any loan outstanding reflected in the appropriate delinquency category. The loan amount may then be charged-off in accordance with our standard charge-off policy.

Within the Consumer Banking business, the majority of our modified loans receive an extension, while a portion receive an interest rate reduction or principal reduction. Their impairment is determined using the present value of expected cash flows, or a collateral evaluation for auto and home loans that were charged down to fair value. In the Commercial Banking business, the majority of modified loans receive an extension, with a portion of these loans receiving an interest rate reduction. The impairment on modified commercial loans is generally determined based on the underlying collateral value. We provide additional information on modified loans accounted for as TDRs, including the performance of those loans subsequent to modification, in “Note 4—Loans.”

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due from the borrower in accordance with the original contractual terms of the loan. Generally, we report loans as impaired based on the method for measuring impairment in accordance with applicable accounting guidance. Loans defined as individually impaired include larger balance commercial nonperforming loans and TDR loans. Loans held for sale are not reported as impaired, as these loans are recorded at lower of cost or fair value. Impaired loans also exclude Acquired Loans accounted for based on expected cash flows because this accounting methodology takes into consideration future credit losses expected to be incurred, as discussed above under “Summary of Selected Financial Data.”

Impaired loans, including TDRs, totaled $2.0 billion as of June 30, 2014, compared with $1.9 billion as of December 31, 2013. TDRs accounted for $1.7 billion of impaired loans as of both June 30, 2014 and December 31, 2013. We provide additional information on our impaired loans, including the allowance for loan and lease losses established for these loans, in “Note 4—Loans” and “Note 5—Allowance for Loan and Lease Losses.”

 

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Allowance for Loan and Lease Losses

Our allowance for loan and lease losses represents management’s best estimate of incurred loan and lease credit losses inherent in our held for investment portfolio as of each balance sheet date. The allowance for loan and lease losses is increased through the provision for credit losses and reduced by net charge-offs. We provide additional information on the methodologies and key assumptions used in determining our allowance for loan and lease losses in “Note 1—Summary of Significant Accounting Policies” in our 2013 Form 10-K.

Our allowance for loan and lease losses decreased by $317 million to $4.0 billion as of June 30, 2014, from $4.3 billion as of December 31, 2013, attributable to continued improvement in delinquency inventories, lower charge-offs in new originations and improved credit outlook. These were partially offset by a modest provision for allowance for loan and lease losses related to growth in the auto loans portfolio.

Table 24 presents changes in our allowance for loan and lease losses for the second quarter and first six months of 2014 and 2013, and details the provision for credit losses recognized on our consolidated statements of income, and charge-offs and recoveries by portfolio segment.

 

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Table 24: Allowance for Loan and Lease Losses Activity

 

      Three Months Ended June 30,         Six Months Ended June 30,    

 (Dollars in millions)

      2014             2013             2014             2013      
 Balance at beginning of period, as reported    $     4,098          $     4,606          $     4,315          $     5,156      
 Provision for credit losses(1)     701           778           1,424           1,613      
 Charge-offs:        
 Credit Card:        

Domestic credit card

    (867)          (1,033)          (1,831)          (2,152)     

International credit card

    (128)          (148)          (259)          (291)     
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total credit card     (995)          (1,181)          (2,090)          (2,443)     
 

 

 

   

 

 

   

 

 

   

 

 

 
 Consumer Banking:        

Auto

    (183)          (153)          (388)          (335)     

Home loan

    (8)          (5)          (19)          (12)     

Retail banking

    (14)          (19)          (29)          (44)     
 

 

 

   

 

 

   

 

 

   

 

 

 
Total consumer banking     (205)          (177)          (436)          (391)     
 

 

 

   

 

 

   

 

 

   

 

 

 
 Commercial Banking:        

Commercial and multifamily real estate

    —           (2)          (2)          (4)     

Commercial and industrial

    (6)          (6)          (10)          (10)     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

    (6)          (8)          (12)          (14)     

Small-ticket commercial real estate

    (2)          (6)          (3)          (12)     
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total commercial banking     (8)          (14)          (15)          (26)     
 Other loans     (4)          (7)          (6)          (15)     
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total charge-offs     (1,212)          (1,379)          (2,547)          (2,875)     
 

 

 

   

 

 

   

 

 

   

 

 

 
 Recoveries:        
 Credit Card:        

Domestic credit card

    257           284           521           576      

International credit card

    53           47           104           95      
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total credit card     310           331           625           671      
 

 

 

   

 

 

   

 

 

   

 

 

 
 Consumer Banking:        

Auto

    72           61           143           121      

Home loan

    3           1           9           4      

Retail banking

    8           5           14           13      
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total consumer banking     83           67           166           138      
 

 

 

   

 

 

   

 

 

   

 

 

 
 Commercial Banking:        

Commercial and multifamily real estate

    1           1           2           2      

Commercial and industrial

    4           4           6           6      
 

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

    5           5           8           8      

Small-ticket commercial real estate

    —           5           —           7      
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total commercial banking     5           10           8           15      
 

 

 

   

 

 

   

 

 

   

 

 

 
 Other:        

Other loans

    2           2           5           3      
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total recoveries     400           410           804           827      
 

 

 

   

 

 

   

 

 

   

 

 

 
 Net charge-offs     (812)          (969)          (1,743)          (2,048)     
 Other changes(2)     11           (8)          2           (314)     
 

 

 

   

 

 

   

 

 

   

 

 

 
 Balance at end of period    $         3,998          $         4,407          $         3,998          $         4,407      
 

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan and lease losses as a percentage of loans held for investment

        2.01%        2.30%   

 

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  (1) 

The total provision for credit losses reported on our consolidated statements of income consists of a provision for loan and lease losses and a provision for unfunded lending commitments. The table above only presents the provision for loan and lease losses, and does not include the provision for unfunded lending commitments of $3 million and $15 million in the second quarter and first six months of 2014, respectively, and a benefit of $16 million and a provision of $34 million in the second quarter and first six months of 2013, respectively.

 

  (2) 

Primarily represents foreign currency translation adjustments and the net impact of loan transfers and sales. In the first quarter of 2013, the allowance of loan and lease losses was reduced by $289 million attributable to the transfer of the Best Buy portfolio from HFI to HFS, which was subsequently sold in the third quarter of 2013.

Table 25 presents an allocation of our allowance for loan and lease losses by portfolio segment as of June 30, 2014 and December 31, 2013.

Table 25: Allocation of the Allowance for Loan and Lease Losses

 

    June 30, 2014     December 31, 2013  
          % of Total           % of Total  

 (Dollars in millions)

  Amount       Loans HFI       Amount       Loans HFI    
 Credit Card:        

Domestic credit card

     $      2,516          3.54%         $      2,836          3.87%   

International credit card

    342          4.36            378          4.70      
 

 

 

     

 

 

   
 Total credit card     2,858          3.62            3,214          3.95      
 

 

 

     

 

 

   
 Consumer Banking:        

Auto

    642          1.85            606          1.90      

Home loan(1)

    67          0.21            83          0.24      

Retail banking

    56          1.54            63          1.74      
 

 

 

     

 

 

   
 Total consumer banking(1)     765          1.08            752          1.06      
 

 

 

     

 

 

   
 Commercial Banking:        

Commercial and multifamily real estate

    157          0.71            143          0.69      

Commercial and industrial

    193          0.76            166          0.71      
 

 

 

     

 

 

   

Total commercial lending

    350          0.74            309          0.70      

Small-ticket commercial real estate

    18          2.10            29          3.05      
 

 

 

     

 

 

   
 Total commercial banking     368          0.76            338          0.75      
 

 

 

     

 

 

   
 Other:        

Other loans

    7          4.89            11          9.09      
 

 

 

     

 

 

   
 Total allowance for loan and lease losses      $      3,998          2.01             $      4,315          2.19      
 

 

 

     

 

 

   
 Total allowance coverage ratios:        
 Period-end loans held for investment      $  198,528          2.01             $  197,199          2.19      
 Period-end loans held for investment (excluding Acquired Loans)     172,509          2.30            168,649          2.54      
 Nonperforming loans(2)     809          494.36            867          497.69      
 Allowance coverage ratios by loan category(3):        
 Credit card (30+ day delinquent loans)     2,343          121.99            2,881          111.56      
 Consumer banking (30+ day delinquent loans)     2,479          30.89            2,750          27.35      
 Commercial banking (nonperforming loans)     181          202.76            149          226.85      

 

 

  (1) 

The coverage ratio, excluding Acquired Loans’ impact for home loan and total consumer banking was 0.53%, and 1.62%, respectively, as of June 30, 2014, compared with 0.64% and 1.68%, respectively, as of December 31, 2013.

 

  (2) 

Our policy is generally not to classify domestic credit card loans as nonperforming and we generally accrue interest on domestic credit card loans through the date of charge-off. The allowance for loan and lease losses as a percentage of nonperforming loans, excluding the allowance for loan and lease losses related to our domestic credit card loans, was 183.28% as of June 30, 2014, and 170.59% as of December 31, 2013.

 

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  (3) 

Calculated based on the total allowance for loan and lease losses divided by the outstanding balance of loans within the specified loan category.

 

 

 LIQUIDITY RISK PROFILE

 

We have established liquidity guidelines that are intended to ensure we have sufficient asset-based liquidity to withstand the potential impact of deposit attrition or diminished liquidity in the funding markets. Our guidelines include maintaining an adequate liquidity reserve to cover our funding requirements as well as any potential deposit run-off and maintaining diversified funding sources to avoid over-dependence on volatile, less reliable funding markets. Our liquidity reserves consist of readily-marketable or pledgable assets which can be used as a source of liquidity, if needed.

Table 26 below presents the composition of our liquidity reserves as of June 30, 2014 and December 31, 2013.

Table 26: Liquidity Reserves

 

 (Dollars in millions)

        June 30, 2014             December 31, 2013    
 Cash and cash equivalents    $         6,732        $         6,291    

Investment securities available for sale, at fair value

    41,113         41,800    

Investment securities held to maturity, at fair value

    21,405         19,185    
 

 

 

   

 

 

 
 Total investment securities portfolio(1)(2)     62,518         60,985    
 FHLB borrowing capacity secured by loans     30,245         28,623    
 Outstanding FHLB advances and letters of credit secured by loans     (5,198)        (8,917)   
 Outstanding FHLB advances and letters of credit secured by securities     (5,704)        (7,808)   
 Securities encumbered for Public Funds and others     (11,250)        (9,491)   
 

 

 

   

 

 

 
 Total liquidity reserves    $       77,343        $       69,683    
 

 

 

   

 

 

 

 

 

  (1) 

The weighted average life of our securities was approximately 6.1 years and 6.3 years as of June 30, 2014, and December 31, 2013, respectively.

 

  (2) 

We pledged securities available for sale with a fair value of $7.5 billion and $10.7 billion as of June 30, 2014 and December 31, 2013, respectively. We also pledged securities held to maturity with a carrying value of $11.9 billion and $8.2 billion as of June 30, 2014 and December 31, 2013, respectively.

Our liquidity reserves increased by $7.7 billion, or 11%, in the first six months of 2014, to $77.3 billion as of June 30, 2014, from $69.7 billion as of December 31, 2013. This increase was primarily attributable to lower short-term FHLB advances as we experienced an increase in consumer deposits and also issued new senior note and card securitization funding in the first six months of 2014. See “MD&A—Risk Management” in our 2013 Form 10-K for additional information on our management of liquidity risk.

Funding

The Company’s primary source of funding comes from customer deposits. In addition to customer deposits, the Company raises funding through the purchase of Federal Funds, the issuance of brokered deposits, FHLB advances secured by certain portions of our loan and securities portfolios, the issuance of senior and subordinated notes, loan securitization transactions and other various types of borrowings. A key objective in our use of these markets is to ensure we maintain access to a diversified mix of wholesale funding sources.

Customer Deposits

Our customer deposits provide a stable and relatively low cost of funds and are our largest source of funding. Table 27 provides a comparison of the composition of our customer deposits, average balances, interest expense and average deposit rates for the first six months of 2014 and full year 2013.

 

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Table 27: Deposit Composition and Average Deposit Rates

 

     Six Months Ended June 30, 2014  

 (Dollars in millions)

   Period End
Balance
     Average
Balance
     Interest
Expense
     % of
Average
Deposits
     Average
Deposit
Rate
 
 Non-interest bearing checking accounts     $     24,920         $ 23,649          N/A          11.5%         N/A       
 Interest-bearing checking accounts(1)      41,420          43,099         $     106          20.9             0.49%   
 Saving deposits(2)      130,370          129,615          373          62.9             0.58       
 Time deposits less than $100,000      5,677          5,911          39          2.9             1.30       
  

 

 

    

 

 

    

 

 

    

 

 

    

Total core deposits

     202,387          202,274          518          98.2             0.51       
 Time deposits of $100,000 or more      2,594          2,702          28          1.3             2.09       
 Foreign time deposits(3)      909          1,104                  0.5             0.33       
  

 

 

    

 

 

    

 

 

    

 

 

    
 Total customer deposits     $     205,890         $     206,080         $         548                100.0%         0.53       
  

 

 

    

 

 

    

 

 

    

 

 

    
     Twelve Months Ended December 31, 2013  

 (Dollars in millions)

   Period End
Balance
     Average
Balance
     Interest
Expense
     % of
Average
Deposits
     Average
Deposit
Rate
 
 Non-interest bearing checking accounts     $     22,643         $     21,345          N/A          10.2%         N/A       
 Interest-bearing checking accounts(1)      43,880          43,823         $      254          21.0             0.58%   
 Saving deposits(2)      127,667          129,373          714          61.8             0.55      
 Time deposits less than $100,000      6,299          8,955          161          4.3             1.80      
  

 

 

    

 

 

    

 

 

    

 

 

    

Total core deposits

     200,489          203,496          1,129          97.3             0.55      
 Time deposits of $100,000 or more      2,852          3,938          108          1.9             2.74      
 Foreign time deposits(3)      1,182          1,611                  0.8             0.25      
  

 

 

    

 

 

    

 

 

    

 

 

    
 Total customer deposits     $     204,523         $     209,045         $     1,241                100.0%         0.59      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  (1) 

Includes Negotiable Order of Withdrawal (“NOW”) accounts.

 

  (2) 

Includes Money Market Deposit Accounts (“MMDA”).

 

  (3) 

Substantially all of our foreign time deposits are greater than $100,000 as of both June 30, 2014, and December 31, 2013.

Total deposits increased by $1.4 billion during the first six months of 2014, to $205.9 billion as of June 30, 2014, from $204.5 billion as of December 31, 2013, driven by growth in our Consumer and Commercial Banking businesses, which reflected our focus on deepening deposit relationships with existing customers and our continued marketing strategy to attract new business. Our deposits include brokered deposits, which we obtained through the use of third-party intermediaries. Those brokered deposits are reported in savings deposits and time deposits in the above table and totaled $4.9 billion and $6.0 billion as of June 30, 2014 and December 31, 2013, respectively.

FDIC limits the use of brokered deposits to “well-capitalized” insured depository institutions and, with a waiver from the FDIC, to “adequately capitalized” institutions. COBNA and CONA were “well-capitalized,” as defined under the federal banking regulatory guidelines, as of both June 30, 2014 and December 31, 2013, and therefore were permitted to maintain brokered deposits.

Short-term Borrowings and Long-term Debt

We access the capital markets to meet our funding needs through the issuance of senior and subordinated notes, loan securitization transactions, and federal funds purchased and securities loaned or sold under agreements to repurchase. We participate in the federal funds market regularly to take advantage of attractive offers and to keep a visible presence in the market, which is intended to ensure that we are able to access the federal funds market in

 

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a time of need. In addition, we may utilize short-term as well as long-term FHLB advances for our funding needs. FHLB advances are secured by our investment securities, residential home loans, multifamily loans, commercial real estate loans and home equity lines of credit.

Our short-term borrowings include those borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. The short-term borrowings, which consist of federal funds purchased and securities loaned or sold under agreements to repurchase, and short-term FHLB advances, decreased by $5.7 billion in the first six months of 2014, from $16.2 billion as of December 31, 2013, to $10.5 billion as of June 30, 2014. This decrease reflects $21.6 billion in payoffs of FHLB advances, partially offset by $15.8 billion in new advances in the first six months of 2014.

Our long-term debt, which consists of securitized debt obligations, senior and subordinated notes, and long-term FHLB advances, increased by $4.2 billion in the first six months of 2014, from $24.4 billion as of December 31, 2013, to $28.6 billion as of June 30, 2014. The increase was primarily attributable to new senior note issuances of $4.8 billion, card securitization issuances of $2.5 billion and long-term FHLB advances of $1.0 billion, partially offset by $4.2 billion of maturities.

Table 28 provides the average balances and average interest rates of our short-term borrowings for the second quarter and first six months of 2014 and 2013. This table also presents the period-end balances, weighted average interest rates and the maximum month-end outstanding amounts of our short-borrowings as of June 30, 2014 and December 31, 2013.

Table 28: Short-Term Borrowings

 

    Three Months Ended June 30,  
    2014      2013  

 (Dollars in millions)

  Average
Balance
    Average
Interest
Rate
     Average
Balance
    Average
Interest
Rate
 
 Federal funds purchased and repurchase agreements    $       1,978         0.08%        $         1,461         0.10%   
 FHLB advances     5,859         0.20             10,395         0.23      
 

 

 

      

 

 

   
 Total short-term borrowings    $       7,837         0.17            $       11,856         0.21      
 

 

 

      

 

 

   

 

    Six Months Ended June 30,  
    2014      2013  

 (Dollars in millions)

  Average
Balance
    Average
Interest
Rate
     Average
Balance
    Average
Interest
Rate
 
 Federal funds purchased and repurchase agreements    $     1,732         0.08%        $       1,286         0.11%   
 FHLB advances     7,376         0.23             13,007         0.25      
 

 

 

      

 

 

   
 Total short-term borrowings    $     9,108         0.20            $     14,293         0.24      
 

 

 

      

 

 

   

 

    June 30, 2014     December 31, 2013  

 (Dollars in millions)

  Outstanding
Amount
    Weighted
Average

Interest
Rate
    Maximum
Month-End
Outstanding
Amount
    Outstanding
Amount
    Weighted
Average

Interest
Rate
    Maximum
Month-End
Outstanding
Amount
 
 Federal funds purchased and repurchase  agreements    $     2,030         0.06%       $ 2,325        $ 915         0.06%       $     2,258    
 FHLB advances     8,450         0.21            12,500         15,300         0.25            16,600    
 

 

 

       

 

 

     
 Total short-term borrowings    $     10,480         0.18             $     16,215         0.24         
 

 

 

       

 

 

     

 

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Table 29 displays the maturity profile, based on contractual maturities, of our short-term borrowings and long-term debt including securitization debt obligations, senior and subordinated notes and other borrowings as of June 30, 2014, and the outstanding balances as of December 31, 2013.

Table 29: Contractual Maturity Profile of Outstanding Debt

 

    June 30, 2014        

 (Dollars in millions)

  Up to
1 Year
    > 1 Year
 to 2 Years 
    > 2 Years
 to 3 Years 
    > 3 Years
 to 4 Years 
    > 4 Years
 to 5 Years 
     > 5 Years      Total      December 
31, 2013
 
 Short-term borrowings:                

Federal funds purchased and securities loaned or sold under agreements to repurchase

   $ 2,030           $ —           $ —           $ —           $ —           $ —           $ 2,030           $ 915       
 FHLB advances     8,450            —            —            —            —            —            8,450            15,300       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total short-term borrowings

    10,480            —            —            —            —            —            10,480            16,215       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Long-term debt:                

Securitized debt obligations

    399            2,354            4,981            1,613            588            75            10,010            10,289       

Senior and subordinated notes:

               

Unsecured senior debt

    2,642            1,250            2,974            1,221            3,102            2,824            14,013            10,464       

Unsecured subordinated debt

    —            —            1,102            —            —            1,513            2,615            2,670       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total senior and subordinated notes

    2,642            1,250            4,076            1,221            3,102            4,337            16,628            13,134       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other long-term borrowings:

               

FHLB advances

    1,938            7            32            12            5            2            1,996            1,016       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total long-term debt(1)

    4,979            3,611            9,089            2,846            3,695            4,414            28,634            24,439       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total short-term borrowings and long-term debt

   $   15,459           $   3,611           $   9,089           $   2,846           $   3,695           $   4,414           $   39,114           $   40,654       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Percentage of total     40%        9%        23%        7%        10%        11%        100%     

 

 

 

  (1) 

Includes unamortized discounts, premiums and other cost basis adjustments, which together result in a net reduction of $232 million and $236 million as of June 30, 2014 and December 31, 2013, respectively.

We provide additional information on our short-term borrowings and long-term debt above under “Consolidated Balance Sheets Analysis—Securitized Debt Obligations,” “Consolidated Balance Sheet Analysis—Other Debt” and in “Note 8—Deposits and Borrowings.”

Borrowing Capacity

Under our shelf registration statement filed with the U.S. Securities and Exchange Commission on April 30, 2012, from time to time, we may offer and sell an indeterminate aggregate amount of senior or subordinated debt securities, preferred stock, depository shares, common stock, purchase contracts, warrants and units. There is no limit under this shelf registration statement to the amount or number of such securities that we may offer and sell, subject to market conditions. Our current shelf registration statement will expire three years from the filing date.

In addition to our issuance capacity under the shelf registration statement, we also have access to FHLB advances with a maximum borrowing capacity of $37.7 billion as of June 30, 2014. This borrowing capacity was secured by posting $30.2 billion of loans and $7.5 billion of securities as collateral. As of June 30, 2014, we had outstanding FHLB advances and letters of credit of $10.9 billion and $26.9 billion still available to us to borrow under this program. The

 

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ability to draw down funding is based on membership status and the amount is dependent upon the Banks’ ability to post collateral. Our FHLB membership is secured by our investment in FHLB stock of $500 million and $774 million as of June 30, 2014 and December 31, 2013, respectively, which are determined in part based on our outstanding advances. We also have access to the Federal Reserve Discount Window but did not utilize this funding source during 2014 or 2013.

Credit Ratings

Our credit ratings have a significant impact on our ability to access capital markets and our non-deposit borrowing costs. Rating agencies base their ratings on numerous factors, including liquidity, capital adequacy, asset quality, quality of earnings and the probability of systemic support. Significant changes in these factors could result in different ratings. Such ratings help to support our cost effective unsecured funding as part of our overall financing programs. Table 30 provides a summary of the credit ratings for the senior unsecured debt of Capital One Financial Corporation, COBNA and CONA as of June 30, 2014 and December 31, 2013.

Table 30: Senior Unsecured Debt Credit Ratings

 

    June 30, 2014     December 31, 2013  

 

  Capital One
Financial
Corporation
    Capital One
Bank (USA),
N.A.
    Capital One,
N.A.
    Capital One
Financial
Corporation
    Capital One
Bank (USA),
N.A.
    Capital One,
N.A.
 
 Moody’s     Baa1          A3          A3          Baa1          A3          A3     
 S&P     BBB          BBB+          BBB+          BBB          BBB+          BBB+     
 Fitch     A-          A-          A-          A-          A-          A-     

As of July 31, 2014, Moody’s, S&P and Fitch have us on a stable outlook.

 

 

 MARKET RISK PROFILE

 

Market risk is inherent in the financial instruments associated with our operations and activities, including loans, deposits, securities, short-term borrowings, long-term debt and derivatives. Below we provide additional information about our primary sources of market risk, our market risk management strategies and the measures we use to evaluate our market risk exposure.

Primary Market Risk Exposures

Our primary source of market risk is interest rate risk. We also have exposure to foreign exchange risk.

Interest Rate Risk

Interest rate risk, which represents exposure to instruments whose yield or price varies with the level or volatility of interest rates, is our most significant source of market risk exposure. Banks are inevitably exposed to interest rate risk due to differences in the timing between the maturities or repricing of assets and liabilities.

Foreign Exchange Risk

Foreign exchange risk represents exposure to changes in the values of current holdings and future cash flows denominated in other currencies. Changes in foreign exchange rates affect the reported earnings of our foreign operations and the value of non-dollar denominated equity invested in those foreign operations. We measure our earnings exposure using a stress-based simulation of foreign exchange rates. As of June 30, 2014, our pre-tax earnings exposure to volatility of foreign exchange rates was minimal. The impact of changes in foreign exchange rates on our non-dollar equity invested overseas, measured on a quarterly basis, manifests itself in our AOCI and capital ratios.

 

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Market Risk Management

We employ several techniques to manage our interest rate and foreign exchange risk, which include, but are not limited to, altering the duration and re-pricing characteristics of our various assets and liabilities through interest rate derivatives or mitigating the foreign exchange exposure of certain non-dollar denominated transactions through foreign exchange derivatives. We execute our derivative contracts in both over-the-counter and exchange-traded derivative markets. Although the majority of our derivatives are interest rate swaps, we also use a variety of other derivative instruments, including caps, floors, options, futures and forward contracts, to manage both our interest rate and foreign currency risk. The outstanding notional amount of our derivative contracts totaled $73.2 billion as of June 30, 2014, compared with $63.4 billion as of December 31, 2013.

Market Risk Measurement

We have prescribed risk management policies and limits established by our Market and Liquidity Risk Policy and approved by the Board of Directors. Our objective is to manage our asset/liability risk position and exposure to market risk in accordance with these policies and prescribed limits based on prevailing market conditions and long-term expectations. Because no single measure can reflect all aspects of market risk, we use various industry standard market risk measurement techniques and analyses to measure, assess and manage the impact of changes in interest rates on our net interest income and our economic value of equity and foreign exchange rates on our non-dollar denominated earnings. We provide additional information below in “Economic Value of Equity.”

We consider the impact on both net interest income and economic value of equity in measuring and managing our interest rate risk. Because the federal funds rate was lowered to near zero in December 2008 and since then has remained in a target range of 0% to 0.25%, we use a 50 basis point decrease as our declining interest rate scenario, since a scenario where interest rates would decline by 200 basis points is not plausible. In scenarios where a 50 basis point decline would result in a rate less than 0%, we assume a rate of 0%. Below we discuss the assumptions used in calculating each of these measures.

Net Interest Income Sensitivity

This sensitivity measure estimates the impact on our projected 12-month base-line interest rate sensitive revenue resulting from movements in interest rates. Interest rate sensitive revenue consists of net interest income and certain components of other non-interest income significantly impacted by movements in interest rates, including changes in the fair value of mortgage servicing rights and free-standing interest rate swaps. In addition to our existing assets and liabilities, we incorporate expected future business growth assumptions, such as loan and deposit growth and pricing, and plans for projected changes in our funding mix in our baseline forecast. In measuring the sensitivity of interest rate movements on our projected interest rate sensitive revenue, we assume an instantaneous plus 200 basis point and minus 50 basis point shock, with the lower rate scenario limited to zero as described above.

Economic Value of Equity

Our economic value of equity sensitivity measure estimates the impact on the net present value of our assets and liabilities, including derivative hedging activity, resulting from movements in interest rates. Our economic value of equity sensitivity measures are calculated based on our existing assets and liabilities, including derivatives, and do not incorporate business growth assumptions or projected plans for funding mix changes. In measuring the sensitivity of interest rate movements on our economic value of equity, we assume a hypothetical instantaneous parallel shift in the level of interest rates of plus 200 basis points and minus 50 basis points to spot rates, with the lower rate scenario limited to zero as described above.

Table 31 shows the estimated percentage impact on our projected base-line interest rate sensitive revenue and economic value of equity, calculated under the hypothetical interest rate scenarios described above, as of June 30, 2014 and December 31, 2013. In addition to these industry standard measures, we will continue to factor into our internal interest rate risk management decisions the potential impact of alternative interest rate scenarios, such as stressed rate shocks as well as steepening and flattening yield curve scenarios.

 

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Table 31: Interest Rate Sensitivity Analysis

 

 

  June 30, 2014       December 31, 2013    
 Impact on projected base-line net interest income:    

+200 basis points

    4.4%        4.9%   

–50 basis points

    (1.9)           (1.5)      
 Impact on economic value of equity:    

+200 basis points

    (4.3)           (5.7)      

–50 basis points

    (0.7)           0.3       

Our projected net interest income and economic value of equity sensitivity measures were within our prescribed policy limits as of June 30, 2014 and December 31, 2013.

Limitations of Market Risk Measures

The interest rate risk models that we use in deriving these measures incorporate contractual information, internally-developed assumptions and proprietary modeling methodologies, which project borrower and depositor behavior patterns in certain interest rate environments. Other market inputs, such as interest rates, market prices and interest rate volatility, are also critical components of our interest rate risk measures. We regularly evaluate, update and enhance these assumptions, models and analytical tools as we believe appropriate to reflect our best assessment of the market environment and the expected behavior patterns of our existing assets and liabilities.

There are inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. The above sensitivity analysis contemplates only certain movements in interest rates and is performed at a particular point in time based on the existing balance sheet and, in some cases, expected future business growth and funding mix assumptions. The strategic actions that management may take to manage our balance sheet may differ significantly from our projections, which could cause our actual earnings and economic value of equity sensitivities to differ substantially from the above sensitivity analysis.

 

 

 SUPERVISION AND REGULATION

 

On June 12, 2014, the Federal Reserve and OCC released notices of proposed rulemakings that would incorporate changes to their capital plan and stress testing regulations, respectively (the “Proposed Rules”). These proposals would change the annual capital plan and stress test cycle start date from October 1 to January 1, effective for the cycle beginning January 1, 2016. In order to provide a transition to the proposed timing, the Federal Reserve’s decision on a bank holding company’s (“BHC”) 2015 capital plan submission would cover a five-quarter period—from the second quarter of 2015 through the second quarter of 2016. Subsequent submissions each would cover a four-quarter period. The change in the start date of the annual cycle impacts the as-of dates for data used to project results as well as the dates that stress test results must be submitted to the regulators and disclosed to the public. The proposals also provide a one-year deferral on the use of advanced approaches methodology and will not require banking institutions—even those that have exited the parallel run—to use the advanced approaches methodology to estimate their capital ratios for the 2015 capital plan and stress test cycles. In addition, among other proposed changes, the Federal Reserve’s proposal would provide for the Federal Reserve to shift its focus from annual capital issuances and distributions to quarterly capital issuances and distributions by establishing a new requirement that—to the extent a BHC does not issue the amount of regulatory capital projected in its capital plan in any given quarter—the BHC must adjust its capital issuances or distributions as required by the proposal such that the net amounts of a BHC’s actual capital issuances and capital distributions in a calendar quarter cannot be less than the net amounts of capital issuances and capital distributions projected in the BHC’s capital plan for that calendar quarter. The Proposed Rules currently are in a public comment period and are subject to change.

We provide additional information on our Supervision and Regulation in our 2013 Form 10-K under “Part I—Item 1—Business —Supervision and Regulation” and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 under “Part I—Item 2—Management Discussion and Analysis of Financial Condition and Results of Operations—Supervision and Regulation.”

 

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 FORWARD-LOOKING STATEMENTS

 

From time to time, we have made and will make forward-looking statements, including those that discuss, among other things, strategies, goals, outlook or other non-historical matters; projections, revenues, income, returns, expenses, capital measures, accruals for claims in litigation and for other claims against us, earnings per share or other financial measures for us; future financial and operating results; our plans, objectives, expectations and intentions; and the assumptions that underlie these matters.

To the extent that any such information is forward-looking, it is intended to fit within the safe harbor for forward-looking information provided by the Private Securities Litigation Reform Act of 1995.

Numerous factors could cause our actual results to differ materially from those described in such forward-looking statements, including, among other things:

 

   

general economic and business conditions in the U.S., the U.K., Canada or our local markets, including conditions affecting employment levels, interest rates, consumer income and confidence, spending and savings that may affect consumer bankruptcies, defaults, charge-offs and deposit activity;

 

   

an increase or decrease in credit losses (including increases due to a worsening of general economic conditions in the credit environment);

 

   

financial, legal, regulatory, tax or accounting changes or actions, including the impact of the Dodd-Frank Act and the regulations promulgated thereunder and regulations governing bank capital and liquidity standards, including Basel-related initiatives and potential changes to financial accounting and reporting standards;

 

   

developments, changes or actions relating to any litigation matter involving us;

 

   

the inability to sustain revenue and earnings growth;

 

   

increases or decreases in interest rates;

 

   

our ability to access the capital markets at attractive rates and terms to capitalize and fund our operations and future growth;

 

   

the success of our marketing efforts in attracting and retaining customers;

 

   

increases or decreases in our aggregate loan balances or the number of customers and the growth rate and composition thereof, including increases or decreases resulting from factors such as shifting product mix, amount of actual marketing expenses we incur and attrition of loan balances;

 

   

the level of future repurchase or indemnification requests we may receive, the actual future performance of mortgage loans relating to such requests, the success rates of claimants against us, any developments in litigation and the actual recoveries we may make on any collateral relating to claims against us;

 

   

the amount and rate of deposit growth;

 

   

changes in the reputation of, or expectations regarding, the financial services industry or us with respect to practices, products or financial condition;

 

   

any significant disruption in our operations or technology platform;

 

   

our ability to maintain a compliance infrastructure suitable for the nature of our business;

 

   

our ability to control costs;

 

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the amount of, and rate of growth in, our expenses as our business develops or changes or as it expands into new market areas;

 

   

our ability to execute on our strategic and operational plans;

 

   

any significant disruption of, or loss of public confidence in, the United States Mail service affecting our response rates and consumer payments;

 

   

any significant disruption of, or loss of public confidence in, the internet affecting the ability of our customers to access their accounts and conduct banking transactions;

 

   

our ability to recruit and retain experienced personnel to assist in the management and operations of new products and services;

 

   

changes in the labor and employment markets;

 

   

fraud or misconduct by our customers, employees or business partners;

 

   

competition from providers of products and services that compete with our businesses; and

 

   

other risk factors listed from time to time in reports that we file with the SEC.

Any forward-looking statements made by us or on our behalf speak only as of the date they are made or as of the date indicated, and we do not undertake any obligation to update forward-looking statements as a result of new information, future events or otherwise. You should carefully consider the factors discussed above in evaluating these forward-looking statements. For additional information on factors that could materially influence forward-looking statements included in this Report, see the risk factors set forth under “Part II—Item 1A. Risk Factors” in this report and in “Part I—Item 1A. Risk Factors” in our 2013 Form 10-K.

 

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 SUPPLEMENTAL TABLES

 

Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures(1)

 

  (Dollars in millions)

   June 30, 2014       December 31, 2013    
  Tangible Common Equity (Quarterly Average)     
  Average stockholders’ equity      $ 43,767            $ 42,355       
  Adjustments:     

Average goodwill and other intangible assets(2)

     (15,615)           (15,847)      

Noncumulative perpetual preferred stock(3)

     (970)           (853)      
  

 

 

   

 

 

 
  Average tangible common equity      $ 27,182            $ 25,655       
  

 

 

   

 

 

 
  Tangible Common Equity (Period End)     
  End of period stockholders’ equity      $ 43,815            $ 41,632       
  Adjustments:     

Goodwill and other intangible assets(2)

     (15,564)           (15,784)      

Noncumulative perpetual preferred stock(3)

     (1,338)           (853)      
  

 

 

   

 

 

 
  Tangible common equity      $ 26,913            $ 24,995       
  

 

 

   

 

 

 
  Tangible Assets (Quarterly Average)     
  Average assets      $ 294,744            $ 294,040       
  Adjustments: Average goodwill and other intangible assets(2)      (15,615)           (15,847)      
  

 

 

   

 

 

 
  Average tangible assets      $ 279,129            $ 278,193       
  

 

 

   

 

 

 
  Tangible Assets (Period End)     
  End of period assets      $ 298,317            $ 296,933       
  Adjustments: Goodwill and other intangible assets(2)      (15,564)           (15,784)      
  

 

 

   

 

 

 
  Tangible assets      $         282,753            $ 281,149       
  

 

 

   

 

 

 
  Non-GAAP TCE ratio     
  TCE ratio(4)      9.52%        8.89%   

 

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  Regulatory Capital Ratios Under Basel III Standardized Approach(5)

     June 30, 2014    
  Common equity excluding AOCI      $ 42,848       
  Adjustments:   

AOCI(6)(7)

     6       

Goodwill(2)

     (13,811)      

Intangible Assets(2)(7)

     (289)      

Other

     20       
  

 

 

 
  Common equity Tier 1 capital      28,774       
  Adjustments:   

Tier 1 capital instruments(3)

     1,338       

Additional Tier 1 capital adjustments

     (1)      
  

 

 

 
  Tier 1 capital      30,111       
  

 

 

 
  Adjustments:   

Tier 2 capital instruments(3)

     1,779       

Qualifying allowance for loan and lease losses

     2,850       

Additional Tier 2 capital adjustments

     3       
  

 

 

 
  Tier 2 capital      4,632       
  

 

 

 
  Total risk-based capital(8)      $ 34,743       
  

 

 

 
  Risk-weighted assets(9)      $ 226,172       
  Average assets for the leverage ratio      281,345       

 

  Regulatory Capital Ratios Under Basel I(5)

   December 31, 2013  
  Total stockholders’ equity      $ 41,632      
  Adjustments:   

Net unrealized losses on investment securities available for sale recorded in AOCI(6)

     791      

Net losses on cash flow hedges recorded in AOCI(6)

     136      

Disallowed goodwill and other intangible assets(2)

     (14,326)     

Disallowed deferred tax assets

     —      

Noncumulative perpetual preferred stock(3)

     (853)     

Other

     (5)     
  

 

 

 
  Tier 1 common capital      27,375      
  Adjustments:   

Noncumulative perpetual preferred stock(3)

     853      

Tier 1 restricted core capital items

     2      
  

 

 

 
  Tier 1 capital      28,230      
  

 

 

 
  Adjustments:   

Long-term debt qualifying as Tier 2 capital

     1,914      

Qualifying allowance for loan and lease losses

     2,833      

Other Tier 2 components

     10      
  

 

 

 
  Tier 2 capital      4,757      
  

 

 

 
  Total risk-based capital(8)      $ 32,987      
  

 

 

 
  Risk-weighted assets      $ 224,556      
  Average assets for the leverage ratio      280,574      

 

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       June 30, 2014          December 31, 2013    
  Common equity Tier 1 capital ratio(10)      12.72%         N/A       
  Tier 1 common ratio(11)      N/A             12.19       
  Tier 1 risk-based capital ratio(12)      13.31             12.57       
  Total risk-based capital ratio(13)      15.36             14.69       
  Tier 1 leverage ratio (14)      10.70             10.06       

 

 

 

  (1) 

In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

 

  (2) 

Includes impact of related deferred taxes.

 

  (3) 

Includes related surplus.

 

  (4) 

TCE ratio is a non-GAAP measure calculated based on tangible common equity divided by tangible assets.

 

  (5) 

Beginning on January 1, 2014, we calculate our regulatory capital under the Basel III Standardized Approach subject to transition provisions. Prior to January 1, 2014, we calculated regulatory capital under Basel I.

 

  (6) 

Amounts presented are net of tax.

 

  (7) 

Amounts based on transition provisions for regulatory capital deductions and adjustments of 20% for 2014.

 

  (8) 

Total risk-based capital equals the sum of Tier 1 capital and Tier 2 capital.

 

  (9) 

Risk-weighted assets continue to be calculated based on Basel I in 2014

 

  (10) 

Common equity Tier 1 capital ratio is a regulatory capital measure calculated based on common equity Tier 1 capital divided by risk-weighted assets.

 

  (11) 

Tier 1 common capital ratio is a regulatory capital measure under Basel I calculated based on Tier 1 common capital divided by Basel I risk-weighted assets.

 

  (12) 

Tier 1 risk-based capital ratio is a regulatory capital measure calculated based on Tier 1 capital divided by risk-weighted assets.

 

  (13) 

Total risk-based capital ratio is a regulatory capital measure calculated based on total risk-based capital divided by risk-weighted assets.

 

  (14) 

Tier 1 leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by average assets, after certain adjustments.

 

 

 Glossary and Acronyms

 

2012 U.S. card acquisition: On May 1, 2012, pursuant to the agreement with HSBC Finance Corporation, HSBC USA Inc. and HSBC Technology and Services (USA) Inc. (collectively, “HSBC”), we closed the acquisition of substantially all of the assets and assumed liabilities of HSBC’s credit card and private label credit card business in the United States (other than the HSBC Bank USA, consumer credit card program and certain other retained assets and liabilities).

Acquired Loans: A limited portion of the credit card loans acquired in the 2012 U.S. card acquisition and the substantial majority of consumer and commercial loans acquired in the ING Direct and Chevy Chase Bank acquisitions, which were recorded at fair value at acquisition and subsequently accounted for based on expected cash flows to be collected (under the accounting standard formerly known as “Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” commonly referred to as “SOP 03-3”). The difference between the fair value at acquisition and expected cash flows represents the accretable yield, which is recognized into interest income over the life of the loans. The difference between the contractual payments on the loans and expected cash flows represents the nonaccretable difference or the amount of principal and interest not considered collectible, which incorporates future expected credit losses over the life of the loans. Decreases in expected cash flows resulting from further credit deterioration will generally result in an impairment charge recognized in our provision for credit losses and an increase in the allowance for loan and lease losses. Charge-offs are not recorded until the expected credit losses within the nonaccretable difference is depleted. In addition, Acquired Loans are not classified as delinquent or nonperforming as we expect to collect our net investment in these loans and the nonaccretable difference will absorb the majority of the losses associated with these loans.

Annual Report: References to our “2013 Form 10-K” or “2013 Annual Report” are to our “Annual Report” on Form 10-K for the fiscal year ended December 31, 2013.

 

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Banks: Refers to COBNA and CONA.

Basel Committee: The Basel Committee on Banking Supervision.

Benefit Obligation and Projected Benefit Obligation: Benefit Obligation refers to the total of the projected benefit obligation for pension plans and the accumulated postretirement benefit obligations. Projected Benefit Obligation represents the actuarial present value of all benefits accrued on employee service rendered prior to the calculation date, including allowance for future salary increases if the pension benefit is based on future compensation levels.

BHC Act: The Bank Holding Company Act of 1956, as amended (12 U.S.C. § 1842).

Capital One: Capital One Financial Corporation and its subsidiaries.

Carrying Value (with respect to loans): The amount at which a loan is recorded on the balance sheet. For loans recorded at amortized cost, carrying value is the unpaid principal balance net of unamortized deferred loan origination fees and costs, and unamortized purchase premium or discount. For loans that are or have been on nonaccrual status, the carrying value is also reduced by any net charge-offs that have been recorded and the amount of interest payments applied as a reduction of principal under the cost recovery method. For credit card loans, the carrying value also includes interest that has been billed to the customer. For loans classified as held for sale, carrying value is the lower of carrying value as described in the sentences above, or fair value. For Acquired Loans, the carrying value equals fair value upon acquisition adjusted for subsequent cash collections and yield accreted to date.

CCB: Chevy Chase Bank, F.S.B., which was acquired by the Company on February 27, 2009.

COBNA: Capital One Bank (USA), National Association, one of our fully owned subsidiaries, which offers credit and debit card products, other lending products and deposit products.

Collective trusts: An investment fund formed from the pooling of investments by investors.

Common Equity Tier 1 Capital: Common Equity, related surplus, and retained earnings less accumulated other comprehensive income net of applicable phase-ins, less goodwill and intangibles net of associated deferred tax liabilities and applicable phase-ins, less other deductions, as defined by regulators.

Company: Capital One Financial Corporation and its subsidiaries.

CONA: Capital One, National Association, one of our fully owned subsidiaries, which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.

Credit derivatives: Contractual agreements that provide insurance against a credit event of one or more referenced credits. Such events include bankruptcy, insolvency and failure to meet payment obligations when due.

Credit risk: Credit risk is the risk of loss from an obligor’s failure to meet the terms of any contract or otherwise fail to perform as agreed.

Derivative: A contract or agreement whose value is derived from changes in interest rates, foreign exchange rates, prices of securities or commodities, credit worthiness for credit default swaps or financial or commodity indices.

Discontinued operations: The operating results of a component of an entity, as defined by ASC 205, that are removed from continuing operations when that component has been disposed of or it is management’s intention to sell the component.

Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”): Regulatory reform legislation signed into law on July 21, 2010. This law broadly affects the financial services industry and contains numerous provisions aimed at strengthening the sound operation of the financial services sector.

Exchange Act: The Securities Exchange Act of 1934.

 

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eXtensible Business Reporting Language (“XBRL”): A language for the electronic communication of business and financial data.

Federal Reserve: Board of Governors of the Federal Reserve System.

Final Rule: A new capital rule finalized by the Federal Reserve, the OCC and the FDIC (collectively, the U.S. federal banking agencies) that implements the Basel III capital accord developed by the Basel Committee on Banking Supervision and incorporates certain Dodd-Frank Act capital provisions and updates to the PCA capital requirements.

Foreign currency swaps: An agreement to exchange contractual amounts of one currency for another currency at one or more future dates. home

Foreign exchange contracts: Contracts that provide for the future receipt or delivery of foreign currency at previously agreed-upon terms.

Forward rate agreements: Contracts to exchange payments on a specified future date, based on a market change in interest rates from trade date to contract settlement date.

GreenPoint: Refers to our wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc. (“GreenPoint”), which was closed in 2007.

GSE or Agency: A government-sponsored enterprise or agency is a financial services corporation created by the United States Congress. Examples of U.S. government agencies include Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), Government National Mortgage Association (Ginnie Mae) and the Federal Home Loan Banks.

Impairment: The condition when the carrying amount of an asset exceeds or is expected to exceed its fair value.

Impaired loans: A loan is considered impaired when, based on current information and events, it is probable that we will not be able to collect all amounts due from the borrower in accordance with the original contractual terms of the loan.

Inactive Insured Securitizations: Securitizations as to which the monoline bond insurers have not made repurchase requests or loan file requests to one of our subsidiaries.

ING Direct acquisition: On February 17, 2012, we completed the acquisition of substantially all of the ING Direct business in the United States (“ING Direct”) from ING Groep N.V., ING Bank N.V., ING Direct N.V. and ING Direct Bancorp.

Insured Securitizations: Securitizations supported by bond insurance.

Interest rate sensitivity: The exposure to interest rate movements.

Interest rate swaps: Contracts in which a series of interest rate flows in a single currency are exchanged over a prescribed period. Interest rate swaps are the most common type of derivative contract that we use in our asset/liability management activities.

Investment grade: Represents Moody’s long-term rating of Baa3 or better; and/or a Standard & Poor’s, Fitch or DBRS long-term rating of BBB- or better; or if unrated, an equivalent rating using our internal risk ratings. Instruments that fall below these levels are considered to be non-investment grade.

Investments in Qualified Affordable Housing Projects: Capital One invests in private investment funds that make equity investments in multifamily affordable housing properties, that provide affordable housing tax credits for these investments. The activities of these entities are financed with a combination of invested equity capital and debt.

Investor Entities: Entities that invest in community development entities (“CDE”) that provide debt financing to businesses and non-profit entities in low-income and rural communities.

Leverage ratio (Basel I guideline): Tier 1 capital divided by average assets after certain adjustments, as defined by the regulators.

 

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Liquidity risk: Liquidity risk is the risk that the Company will not be able to meet its future financial obligations as they come due, or invest in future asset growth because of an inability to obtain funds at a reasonable price within a reasonable time period

Loan-to-value (“LTV”) ratio: The relationship expressed as a percentage, between the principal amount of a loan and the appraised value of the collateral (i.e., residential real estate, autos, etc.) securing the loan.

Managed basis: A non-GAAP presentation of financial results that includes reclassifications to present revenue on a fully taxable-equivalent basis. Management uses this non-GAAP financial measure at the segment level, because it believes this provides information to enable investors to understand the underlying operational performance and trends of the particular business segment and facilitates a comparison of the business segment with the performance of competitors.

Market risk: Market risk is the risk that an institution’s earnings or the economic value of equity could be adversely impacted by changes in interest rates, foreign exchange rates, or other market factors.

Master netting agreement: An agreement between two counterparties that have multiple contracts with each other that provides for the net settlement of all contracts through a single payment in the event of default or termination of any one contract.

Mortgage-Backed Security (“MBS”): An asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans.

Mortgage Servicing Rights (“MSR”): The right to service a mortgage loan when the underlying loan is sold or securitized. Servicing includes collections for principal, interest and escrow payments from borrowers and accounting for and remitting principal and interest payments to investors.

Net interest margin: The result of dividing net interest revenue by average interest-earning assets.

Nonperforming loans and leases: Loans and leases that have been placed on non-accrual status.

Operational risk: The risk of loss, capital impairment, adverse customer experience, or reputational impact resulting from failure to comply with policies and procedures, failed internal processes or systems, or from external events.

Option-ARM Loans: The option-ARM real estate loan product is an adjustable-rate mortgage loan that provides the borrower with the option each month to make a fully amortizing, interest-only or minimum payment.

Other-than-temporary impairment (“OTTI”): An impairment charge taken on a security whose fair value has fallen below the carrying value on the balance sheet and its value is not expected to recover through the holding period of the security.

Patriot Act: The USA PATRIOT Act of 2001 (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism).

Portfolio Sale: The sale of the Best Buy private label and co-branded credit card portfolio to Citibank, N.A., which was completed on September 6, 2013.

Proxy Statement: Capital One’s Proxy Statement for the 2014 Annual Stockholders Meeting.

Public Fund deposits: Deposits that are derived from a variety of political subdivisions such as school districts and municipalities.

Purchase volume: Dollar amount of customer purchases, net of returns.

Rating Agency: An independent agency that assesses the credit quality and likelihood of default of an issue or issuer and assigns a rating to that issue or issuer.

Repurchase Agreement: An instrument used to raise short term funds whereby securities are sold with an agreement for the seller to buy back the securities at a later date.

Restructuring charges: Charges typically from the consolidation and/or relocation of operations.

 

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Return on assets: Calculated based on annualized income from continuing operations, net of tax, for the period divided by average total assets for the period.

Return on common equity: Calculated based on the annualized sum of (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.

Return on tangible common equity: Calculated based on the annualized sum of (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 tangible common equity. Our calculation of return on average tangible common equity may not be comparable to similarly titled measures reported by other companies.

Risk-weighted assets: Risk-weighted assets consist of on- and off-balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default. In 2014, the calculation of risk weighted assets is based on the general risk-based approach, as defined by regulators.

Securitized Debt Obligations: A type of asset-backed security and structured credit product constructed from a portfolio of fixed-income assets.

SOP 03-3: Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.

Small-ticket commercial real estate: Our small-ticket commercial real estate portfolio is predominantly low, or no documentation loans, with balances generally less than $2 million. This portfolio was originated on a national basis through a broker network, and is in a run-off mode.

Subprime: For purposes of lending in our Credit Card business we generally consider FICO scores of 660 or below, or other equivalent risk scores, to be subprime. For purposes of auto lending in our Consumer Banking business we generally consider borrowers FICO scores of 620 or below to be subprime.

Tangible common equity (“TCE”): Common equity less goodwill and intangible assets adjusted for deferred tax liabilities associated with non-tax deductible intangible assets and tax deductible goodwill.

Tier 1 Common Capital: Tier 1 capital less preferred stock, qualifying trust preferred securities, hybrid securities and qualifying noncontrolling interest in subsidiaries under Basel I.

Troubled debt restructuring (“TDR”): A TDR is deemed to occur when the Company modifies the contractual terms of a loan agreement by granting a concession to a borrower that is experiencing financial difficulty.

U. S. federal banking agencies: The Federal Reserve, the OCC and the FDIC.

U. S. GAAP: Accounting principles generally accepted in the United States of America. Accounting rules and conventions defining acceptable practices in preparing financial statements in the U.S.

Unfunded commitments: Legally binding agreements to provide a defined level of financing until a specified future date.

Variable Interest Entity (“VIE”): An entity that: (1) lacks enough equity investment at risk to permit the entity to finance its activities without additional financial support from other parties; (2) has equity owners that lack the right to make significant decisions affecting the entity’s operations; and/or (3) has equity owners that do not have an obligation to absorb or the right to receive the entity’s losses or return.

 

 

 Acronyms

 

ABS: Asset-backed securities

AOCI: Accumulated other comprehensive income

ARM: Adjustable rate mortgage

 

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Bps: Basis points

CCAR: Comprehensive Capital Analysis and Review

CDE: Community development entities

CFPB: Consumer Financial Protection Bureau

CFTC: Commodity Futures Trading Commission

CMBS: Commercial mortgage-backed securities

COEP: Capital One (Europe) plc

COF: Capital One Financial Corporation

COSO: Committee of Sponsoring Organizations of the Treadway Commission

CRA: Community Reinvestment Act

DUS: Delegated underwriter and servicing

Fannie Mae: Federal National Mortgage Association

FASB: Financial Accounting Standards Board

FCA: U.K. Financial Conduct Authority

FDIC: Federal Deposit Issuance Corporation

FDICIA: The Federal Deposit Insurance Corporation Improvement Act of 1991

FFIEC: Federal Financial Institutions Examination Council

FHA: Federal Housing Administration

FHLB: Federal Home Loan Banks

FIRREA: Financial Institutions Reform, Recovery, and Enforcement Act

Fitch: Fitch Ratings

Freddie Mac: Federal Home Loan Mortgage Corporation

FTE: Fully taxable-equivalent

FVC: Fair Value Committee

GDP: Gross domestic product

Ginnie Mae: Government National Mortgage Association

GSE or Agencies: Government Sponsored Enterprise

HBC: Hudson Bay Company

HELOCs: Home Equity Lines of Credit

HFI: Held for Investment

HSBC: HSBC Finance Corporation, HSBC USA Inc. and HSBC Technology and Services (USA) Inc.

LIBOR: London Interbank Offered Rate

Moody’s: Moody’s Investors Service

NOW: Negotiable order of withdrawal

OCC: Office of the Comptroller of the Currency

OIS: Overnight Indexed Swap

OTC: Over-the-counter

PCA: Prompt corrective action

PCCR: Purchased credit card relationship

 

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RMBS: Residential mortgage-backed securities

S&P: Standard & Poor’s

SCRA: Servicemembers Civil Relief Act

SEC: U.S. Securities and Exchange Commission

TAV: Trade Analytics and Valuation team

TCE: Tangible Common Equity

TILA: Truth in Lending Act

UCL: Unfair Competition Law

VAC: Valuations Advisory Committee

 

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Item 1. Financial Statements and Notes

 

    Page
Financial Statements   71

Consolidated Statements of Income

  72

Consolidated Statements of Comprehensive Income

  73

Consolidated Balance Sheets

  74

Consolidated Statements of Changes in Stockholders’ Equity

  75

Consolidated Statements of Cash Flows

  76
Notes to Consolidated Financial Statements   77

Note   1 — Summary of Significant Accounting Policies

  77

Note   2 — Discontinued Operations

  80

Note   3 — Investment Securities

  80

Note   4 — Loans

  88

Note   5 — Allowance for Loan and Lease Losses

  111

Note   6 — Variable Interest Entities and Securitizations

  114

Note   7 — Goodwill and Other Intangible Assets

  119

Note   8 — Deposits and Borrowings

  120

Note   9 — Derivative Instruments and Hedging Activities

  122

Note 10 — Accumulated Other Comprehensive Income

  129

Note 11 — Earnings Per Common Share

  132

Note 12 — Fair Value of Financial Instruments

  133

Note 13 — Business Segments

  147

Note 14 — Commitments, Contingencies, Guarantees, and Others

  150

 

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CAPITAL ONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 

 (Dollars in millions, except per share-related data)

      2014             2013             2014             2013      
 Interest income:        

Loans, including loans held for sale

   $     4,279        $     4,596        $     8,586        $     9,245    

Investment securities

    409         391         825         765    

Other

    24         23         54         51    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total interest income     4,712         5,010         9,465         10,061    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Interest expense:        

Deposits

    272         318         548         644    

Securitized debt obligations

    39         45         77         101    

Senior and subordinated notes

    78         82         155         164    

Other borrowings

           12         20         29    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total interest expense     397         457         800         938    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Net interest income     4,315         4,553         8,665         9,123    

Provision for credit losses

    704         762         1,439         1,647    
 

 

 

   

 

 

   

 

 

   

 

 

 

 Net interest income after provision for credit losses

    3,611         3,791         7,226         7,476    
 

 

 

   

 

 

   

 

 

   

 

 

 

 Non-interest income:

       

Service charges and other customer-related fees

    460         534         934         1,084    

Interchange fees, net

    535         486         975         931    

Total other-than-temporary impairment

    (3)        (12)        (6)        (18)   

Less: Portion of other-than-temporary impairment recorded in AOCI

                         (11)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairment recognized in earnings

    (1)        (4)        (6)        (29)   

Other

    159         69         270         80    
 

 

 

   

 

 

   

 

 

   

 

 

 

 Total non-interest income

    1,153         1,085         2,173         2,066    
 

 

 

   

 

 

   

 

 

   

 

 

 

 Non-interest expense:

       

Salaries and associate benefits

    1,125         1,118         2,286         2,213    

Occupancy and equipment

    447         371         852         728    

Marketing

    335         330         660         647    

Professional services

    296         340         583         662    

Communications and data processing

    203         236         399         452    

Amortization of intangibles

    136         167         279         344    

Other

    437         456         852         963    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total non-interest expense     2,979         3,018         5,911         6,009    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Income from continuing operations before income taxes     1,785         1,858         3,488         3,533    
 Income tax provision     581         631         1,160         1,172    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Income from continuing operations, net of tax     1,204         1,227         2,328         2,361    
 Income (loss) from discontinued operations, net of tax     (10)        (119)        20         (197)   
 

 

 

   

 

 

   

 

 

   

 

 

 

 Net income

    1,194         1,108         2,348         2,164    
 Dividends and undistributed earnings allocated to participating securities     (4)        (4)        (9)        (9)   
 Preferred stock dividends     (13)        (13)        (26)        (26)   
 

 

 

   

 

 

   

 

 

   

 

 

 

 Net income available to common stockholders

   $ 1,177        $ 1,091        $ 2,313        $ 2,129    
 

 

 

   

 

 

   

 

 

   

 

 

 

 Basic earnings per common share:

       
 Net income from continuing operations    $ 2.09        $ 2.08        $ 4.03        $ 4.00    
 Income (loss) from discontinued operations     (0.02)        (0.20)        0.03         (0.34)   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Net income per basic common share    $ 2.07        $ 1.88        $ 4.06        $ 3.66    
 

 

 

   

 

 

   

 

 

   

 

 

 

 Diluted earnings per common share:

       
 Net income from continuing operations    $ 2.06        $ 2.05        $ 3.97        $ 3.96    
 Income (loss) from discontinued operations     (0.02)        (0.20)        0.03         (0.34)   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Net income per diluted common share    $ 2.04        $ 1.85        $ 4.00        $ 3.62    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Dividends paid per common share    $ 0.30        $ 0.30        $ 0.60        $ 0.35    

See Notes to Consolidated Financial Statements.

 

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CAPITAL ONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

  (Dollars in millions)

       2014              2013              2014              2013      
  Net income      $     1,194          $     1,108          $     2,348          $     2,164    
  Other comprehensive income (loss) before taxes:            

Net unrealized gains (losses) on securities available for sale

     269          (1,747)         498          (1,956)   

Net unrealized gains on securities held to maturity

     33                  61            

Net unrealized gains (losses) on cash flow hedges

     114          (258)         144          (279)   

Foreign currency translation adjustments

     79          (18)         66          (143)   

Other

     (3)                 (4)           
  

 

 

    

 

 

    

 

 

    

 

 

 
  Other comprehensive income (loss) before taxes      492          (2,020)         765          (2,371)   
  Income tax provision (benefit) related to other comprehensive income      153          (755)         264          (840)   
  

 

 

    

 

 

    

 

 

    

 

 

 
  Other comprehensive income (loss), net of tax      339          (1,265)         501          (1,531)   
  

 

 

    

 

 

    

 

 

    

 

 

 
  Comprehensive income (loss)      $     1,533          $ (157)         $ 2,849          $ 633    
  

 

 

    

 

 

    

 

 

    

 

 

 

See Notes to Consolidated Financial Statements.

 

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CAPITAL ONE FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 (Dollars in millions, except per share data)

   June 30,
2014
     December 31,
2013
 
 Assets:      
 Cash and cash equivalents:      

Cash and due from banks

    $ 3,598         $ 2,821    

Interest-bearing deposits with banks

     2,954          3,131    

Federal funds sold and securities purchased under agreements to resell

     180          339    
  

 

 

    

 

 

 
 Total cash and cash equivalents      6,732          6,291    
 Restricted cash for securitization investors      361          874    
 Securities available for sale, at fair value      41,113          41,800    
 Securities held to maturity, at carrying value      20,688          19,132    
 Loans held for investment:      

Unsecuritized loans held for investment

     161,224          157,651    

Restricted loans for securitization investors

     37,304          39,548    
  

 

 

    

 

 

 
 Total loans held for investment      198,528          197,199    

Allowance for loan and lease losses

     (3,998)         (4,315)   
  

 

 

    

 

 

 
 Net loans held for investment      194,530          192,884    
 Loans held for sale, at lower of cost or fair value      709          218    
 Premises and equipment, net      3,764          3,839    
 Interest receivable      1,473          1,418    
 Goodwill      13,977          13,978    
 Other assets      14,970          16,499    
  

 

 

    

 

 

 
 Total assets     $ 298,317         $ 296,933    
  

 

 

    

 

 

 
     
 Liabilities:      
 Interest payable     $ 309         $ 307    
 Customer deposits:      

Non-interest bearing deposits

     24,920          22,643    

Interest-bearing deposits

     180,970          181,880    
  

 

 

    

 

 

 
 Total customer deposits      205,890          204,523    
 Securitized debt obligations      10,010          10,289    
 Other debt:      

Federal funds purchased and securities loaned or sold under agreements to repurchase

     2,030          915    

Senior and subordinated notes

     16,628          13,134    

Other borrowings

     10,446          16,316    
  

 

 

    

 

 

 
 Total other debt      29,104          30,365    
 Other liabilities      9,189          9,817    
  

 

 

    

 

 

 
 Total liabilities      254,502          255,301    
  

 

 

    

 

 

 
 Commitments, contingencies and guarantees (see Note 14)      
 Stockholders’ equity:      

 Preferred stock (par value $.01 per share; 50,000,000 shares authorized; 1,375,000 and 875,000 shares issued and outstanding as of June 30, 2014, and December 31, 2013, respectively)

               

 Common stock (par value $.01 per share; 1,000,000,000 shares authorized; 638,961,478 and 637,151,800 shares issued as of June 30, 2014, and December 31, 2013, respectively, and 561,849,971 and 572,675,375 shares outstanding as of June 30, 2014, and December 31, 2013, respectively)

               

 Additional paid-in capital, net

     27,210          26,526    
 Retained earnings      22,270          20,292    
 Accumulated other comprehensive income      (371)         (872)   

 Treasury stock at cost (par value $.01 per share; 77,111,507 and 64,476,425 shares as of June 30, 2014, and December 31, 2013, respectively)

     (5,300)         (4,320)   
  

 

 

    

 

 

 
 Total stockholders’ equity      43,815          41,632    
  

 

 

    

 

 

 
 Total liabilities and stockholders’ equity     $     298,317         $     296,933    
  

 

 

    

 

 

 

See Notes to Consolidated Financial Statements.

 

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CAPITAL ONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

    Preferred Stock     Common Stock     Additional
Paid-In
Capital
    Retained
  Earnings(1)  
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total
Stockholders’
Equity
 
 (Dollars in millions, except per share data)   Shares       Amount       Shares       Amount              

 Balance as of December 31, 2013

    875,000       $        637,151,800       $       $ 26,526        $ 20,292        $ (872)       $ (4,320)       $ 41,632    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Comprehensive income

              2,348         501           2,849    

 Cash dividends—common stock $0.60 per share

              (344)            (344)   

 Cash dividends—preferred stock 6% per annum

              (26)            (26)   

 Purchases of treasury stock

                  (980)        (980)   

 Issuances of common stock and restricted stock, net of forfeitures

        841,187                51               51    

 Exercise of stock options and warrants, tax benefits of exercises and restricted stock vesting

        968,491                70               70    

 Issuances of preferred stock (Series C)

    500,000                    485               485    

 Compensation expense for restricted stock awards and stock options

            78               78    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Balance as of June 30, 2014

      1,375,000        $         0           638,961,478        $         6        $     27,210        $     22,270        $ (371)       $   (5,300)       $     43,815    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (1) 

Retained earnings as of December 31, 2013 includes the cumulative impact of $112 million resulting from the adoption of ASU 2014-01 “Accounting For Investments in Qualified Affordable Housing Projects.” See “Note 1—Summary of Significant Accounting Policies” for additional information.

See Notes to Consolidated Financial Statements.

 

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CAPITAL ONE FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

       Six Months Ended June 30,    

 (Dollars in millions)

           2014                     2013          

 Operating activities:

    

 Income from continuing operations, net of tax

    $ 2,328        $ 2,361    

 Income (loss) from discontinued operations, net of tax

     20         (197)   
  

 

 

   

 

 

 

 Net income

     2,348         2,164    
  

 

 

   

 

 

 

 Adjustments to reconcile net income to cash provided by operating activities:

    

Provision for credit losses

     1,439         1,647    

Depreciation and amortization, net

     1,017         1,152    

Net gain on sales of securities available for sale

     (12)        (4)   

Impairment losses on securities available for sale

            29    

Loans held for sale:

    

Originations and purchases

     (1,920)        (552)   

Gain on sales

     (20)        (18)   

Proceeds from sales and paydowns

     1,449         625    

Stock plan compensation expense

     137         112    

Changes in operating assets and liabilities:

    

(Increase) decrease in interest receivable

     (55)        240    

Decrease in other assets

     1,227         320    

Increase (decrease) in interest payable

            (126)   

Decrease in other liabilities

     (668)        (378)   

 Net cash used by discontinued operations

     (30)        (287)   
  

 

 

   

 

 

 

 Net cash provided by operating activities

     4,920         4,924    
  

 

 

   

 

 

 

 Investing activities:

    

Purchases of securities

     (7,907)        (10,502)   

Proceeds from paydowns and maturities of securities

     3,976         8,486    

Proceeds from sales of securities

     3,559         1,320    

Net (increase) decrease in loans held for investment

     (4,047)        4,705    

Principal recoveries of loans previously charged off

     802         827    

Purchases of premises and equipment

     (250)        (450)   
  

 

 

   

 

 

 

 Net cash provided (used) by investing activities

     (3,867)        4,386    
  

 

 

   

 

 

 

 Financing activities:

    

Decrease in restricted cash for securitization investors

     513         51    

Net increase (decrease) in deposits

     1,363         (2,628)   

Issuance of securitized debt obligations

     2,446         1,450    

Maturities and paydowns of securitized debt obligations

     (2,791)        (2,017)   

Issuance of senior and subordinated notes and junior subordinated debentures

     4,731         934    

Redemption of junior subordinated debentures

            (3,641)   

Maturities and redemptions of senior and subordinate notes

     (1,374)        (500)   

Net decrease in other borrowings

     (4,755)        (9,191)   

Net proceeds from issuances of common stock

     51         44    

Net proceeds from issuances of preferred stock

     484           

Proceeds from share-based payment activities

     70         44    

Dividends paid on common stock

     (344)        (206)   

Dividends paid on preferred stock

     (26)        (26)   

Purchases of treasury stock

     (980)        (29)   
  

 

 

   

 

 

 

 Net cash used in financing activities

     (612)        (15,715)   
  

 

 

   

 

 

 

 Decrease in cash and cash equivalents

     441         (6,405)   

 Cash and cash equivalents at beginning of the period.

     6,291         11,058    
  

 

 

   

 

 

 

 Cash and cash equivalents at end of the period

    $     6,732        $     4,653    
  

 

 

   

 

 

 

 Supplemental cash flow information:

    

 Non-cash items:

    

Net transfers from loans held for investment to loans held for sale

    $ 22        $ 6,820    

Net debt exchange of senior and subordinated notes

            1,968    

 Interest paid

     798         1,064    

 Income tax paid

     884         646    

See Notes to Consolidated Financial Statements.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The Company

Capital One Financial Corporation, a Delaware Corporation established in 1995 and headquartered in McLean, Virginia, is a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company”) offers a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of June 30, 2014, 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 and its subsidiaries are hereafter collectively referred to as “we,” “us” or “our.” COBNA and CONA are collectively referred to as the “Banks.”

We also offer products outside of the United States principally through Capital One (Europe) plc (“COEP”), an indirect subsidiary of COBNA organized and located in the U.K., and through a branch of COBNA in Canada. COEP has authority, among other things, to provide credit card loans. Our branch of COBNA in Canada also has the authority to provide credit card loans.

Our principal operations are currently 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. We provide details on our business segments, the integration of recent acquisitions into our business segments and the allocation methodologies and accounting policies used to derive our business segment results in “Note 13—Business Segments.”

Basis of Presentation and Use of Estimates

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP” ). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported on the consolidated financial statements and related disclosures. These estimates are based on information available as of the date of the consolidated financial statements. While management makes its best judgment, actual amounts or results could differ from these estimates. Certain prior period amounts have been reclassified to conform to the current period presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of Capital One Financial Corporation and all other entities in which we have a controlling financial interest. We determine whether we have a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a Variable Interest Entity (“VIE” ). All significant intercompany account balances and transactions have been eliminated.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

New Accounting Standards Adopted

Accounting for Investments in Qualified Affordable Housing Projects

In January 2014, the Financial Accounting Standard Board (“FASB”) issued guidance permitting an entity to account for Investments in Qualified Affordable Housing Projects using the proportional amortization method if certain criteria are met. The proportional amortization method amortizes the cost of the investment over the period in which the investor receives tax credits and other tax benefits, and the resulting amortization is recognized as a component of income tax expense attributable to continuing operations. Historically, these investments were under the equity method of accounting and the passive losses related to the investments were recognized within non-interest expense. We adopted this guidance in the first quarter of 2014 with retrospective application. As a result, total assets, total liabilities, and retained earnings were reduced by $115 million, $3 million and $112 million from $297.0 billion, $255.3 billion and $20.4 billion, respectively, as of December 31, 2013. In addition, net income was reduced by $9 million from $1.1 billion for the three months ended June 30, 2013 and by $19 million from $2.2 billion for the first six months ended June 30, 2013.

During the second quarter and first six months of 2014, we recognized amortization of $72 million and $144 million, respectively and tax credits of $88 million and $178 million, respectively, associated with these investments within income taxes. The carrying value of our investments in these qualified affordable housing projects was $2.9 billion and $2.8 billion as of June 30, 2014 and December 31, 2013, respectively. We are periodically required to provide additional financial or other support during the period of the investments. We recorded a liability of $1.1 billion for the unfunded commitments as of June 30, 2014, which are expected to be paid during the years from 2014 to 2017.

Obligations Resulting from Joint and Several Liability Arrangements

In February 2013, the FASB issued guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation, within the scope of this guidance, is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance clarifies that an entity shall measure the obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amounts of the obligations as well as other information about those obligations. The guidance is effective for annual and interim periods beginning after December 15, 2013. The adoption of this guidance in the first quarter of 2014 did not have a significant impact on our financial condition, results of operations or liquidity as the guidance is consistent with our current practice.

Recently Issued but Not Yet Adopted Accounting Standards

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

In June 2014, the FASB issued guidance clarifying that a performance target contained within a share-based payment award that affects vesting and can be achieved after the requisite service period has been completed is to be accounted for as a performance condition. Accordingly, the grantor of such awards would recognize compensation cost in the period in which it becomes probable that the performance target will be achieved. The amount of the compensation cost recognized should represent the cost attributable to the requisite service period fulfilled. The guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. Entities may elect to adopt the guidance on either a prospective or modified retrospective basis. We do not expect our adoption of this guidance in the first quarter of 2015 to have a significant impact on our financial condition, results of operations or liquidity as the guidance is consistent with our current practice.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Accounting for Repurchase Transactions

In June 2014, the FASB issued guidance that requires repurchase-to-maturity transactions to be accounted for as secured borrowings rather than sales. New disclosures for certain transactions accounted for as secured borrowings and transfers accounted for as sales when the transferor retains substantially all of the exposure to the economic return on the transferred financial assets will also be required. We do not expect our adoption of the accounting guidance in the first quarter of 2015 to have a significant impact on our financial condition, results of operations or liquidity as the guidance is consistent with our current practice. The new disclosures will be provided beginning in the second quarter of 2015.

Revenue from Contracts with Customers

In May 2014, the FASB issued revised guidance for the recognition, measurement, and disclosure of revenue from contracts with customers. The guidance is applicable to all entities and, once effective, will replace significant portions of existing industry and transaction-specific revenue recognition rules with a more principles-based recognition model. Most revenue associated with financial instruments, including interest and loan origination fees, is outside the scope of the guidance. Gains and losses on investment securities, derivatives and sales of financial instruments are similarly excluded from the scope. The guidance is effective for annual and interim periods beginning after December 15, 2016, with early adoption prohibited. Entities can elect to adopt the guidance either on a full or modified retrospective basis. Full retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the earliest comparative period presented. Modified retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance. We are currently evaluating the guidance to identify which of our revenue streams are within its scope and determine which transition method we plan to elect. Accordingly, we cannot yet quantify the impact our adoption of this guidance will have in the first quarter of 2017.

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

In April 2014, the FASB issued guidance changing the criteria for reporting discontinued operations. As a result of the change, only those disposals of components of an entity that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results will be reported as discontinued operations. Expanded disclosures of discontinued operations and disposals of individually significant components of an entity that do not currently qualify for discontinued operations reporting will be required. The guidance is effective for disposals or classifications as held for sale of components of an entity that occur within annual and interim periods beginning after December 15, 2014, with early adoption permitted in certain circumstances. Our adoption of this guidance in the first quarter of 2015 will not impact what we currently report as discontinued operations due to the prospective transition provisions.

Reclassification of Collateralized Mortgage Loan Upon Foreclosure

In January 2014, the FASB issued guidance clarifying when an entity should reclassify a consumer mortgage loan collateralized by residential real estate to foreclosed property. Reclassification should occur when the creditor obtains legal title to the residential real estate property or when the borrower conveys all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. An entity should not wait until a redemption period, if any, has expired to reclassify a consumer mortgage loan to foreclosed property. The guidance is effective for annual and interim periods beginning after December 15, 2014, with early adoption permitted. We do not expect our adoption of this guidance in the first quarter of 2015 to have a significant impact on our financial condition, results of operations or liquidity as the guidance is materially consistent with our current practice.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

 

 NOTE 2—DISCONTINUED OPERATIONS

 

Shutdown of Mortgage Origination Operations of our Wholesale Mortgage Banking Unit

In the third quarter of 2007, we closed the mortgage origination operations of our wholesale mortgage banking unit, GreenPoint, which we acquired in December 2006 as part of the North Fork acquisition. The results of the wholesale banking unit have been accounted for as a discontinued operation and are therefore not included in our results from continuing operations for the three and six months ended June 30, 2014 and 2013. We have no significant continuing involvement in these operations.

The following table summarizes the results from discontinued operations related to the closure of the mortgage origination operations of our wholesale mortgage banking unit:

Table 2.1: Results of Discontinued Operations

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 

 (Dollars in millions)

      2014             2013             2014             2013      
 Non-interest income (expense), net    $ (15)       $ (190)       $ 32         $ (315)   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Income (loss) from discontinued operations before taxes     (15)        (190)        32          (315)   
 Income tax provision (benefit)     (5)        (71)        12          (118)   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Income (loss) from discontinued operations    $ (10)       $ (119)       $ 20         $ (197)   
 

 

 

   

 

 

   

 

 

   

 

 

 

The discontinued mortgage origination operations of our wholesale mortgage banking unit had remaining assets of $352 million and $370 million as of June 30, 2014 and December 31, 2013, respectively. Liabilities, which primarily consisted of reserves for representations and warranties on loans previously sold to third parties, totaled $912 million and $960 million as of June 30, 2014 and December 31, 2013, respectively.

 

 

 NOTE 3—INVESTMENT SECURITIES

 

Our investment portfolio consists primarily of the following: U.S. Treasury debt, U.S. agency debt and corporate debt securities guaranteed by U.S. government agencies; Agency and non-agency residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”); other asset-backed securities (“ABS”), and other investments. The U.S. government agencies include Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Government National Mortgage Association (“Ginnie Mae”). The carrying value of our investments in U.S. Treasury, Agency securities and other securities guaranteed by the U.S. government or agencies of the U.S. government represents 79% and 77% of our total investment securities as of June 30, 2014 and December 31, 2013, respectively.

Our investment portfolio includes securities available for sale and securities held to maturity. We classify securities as available for sale or held to maturity based on our investment strategy and management’s assessment of our intent and ability to hold the securities until maturity.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

The table below presents the overview of our investment portfolio at June 30, 2014 and December 31, 2013.

Table 3.1 Overview of Investment Portfolio

 

 (Dollars in millions)

       June 30, 2014           December 31, 2013   
 Securities available for sale, at fair value    $ 41,113         $ 41,800     
 Securities held to maturity, at carrying value     20,688          19,132     
 

 

 

   

 

 

 
 Total investments    $ 61,801         $ 60,932     
 

 

 

   

 

 

 

The table below presents the amortized cost, gross unrealized gains and losses, and fair value of securities available for sale at June 30, 2014 and December 31, 2013.

Table 3.2 Investment Securities Available for Sale

 

    June 30, 2014  

 (Dollars in millions)

  Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses(1)
    Fair
Value
 
 Investment securities available for sale:        
 U.S. Treasury debt obligations    $ 1,221        $      $       $ 1,223    
 U.S. Agency debt obligations                            
 Corporate debt securities guaranteed by U.S. government  agencies     1,120                (29)        1,092    
 Residential mortgage-backed securities (“RMBS”):        

Agency

    21,779         309         (140)        21,948    

Non-agency

    3,077         512         (10)        3,579    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total RMBS     24,856         821         (150)        25,527    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Commercial mortgage-backed securities (“CMBS”):        

Agency

    4,041         32         (61)        4,012    

Non-agency

    1,803         28         (23)        1,808    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total CMBS     5,844         60         (84)        5,820    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Other assets backed securities (“ABS”)(2)     5,972         65         (15)        6,022    
 Other securities(3)     1,433         16         (21)        1,428    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total investment securities available for sale    $      40,447        $ 965       $ (299)       $      41,113    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    December 31, 2013  

 (Dollars in millions)

  Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses(1)
    Fair
Value
 
 Investment securities available for sale:        
 U.S. Treasury debt obligations    $ 831        $      $       $ 833    
 U.S. Agency debt obligations                            
 Corporate debt securities guaranteed by U.S. government agencies     1,282                (49)        1,234    
 RMBS:        

Agency

    21,572         239         (332)        21,479    

Non-agency

    3,165         450         (15)        3,600    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total RMBS     24,737         689         (347)        25,079    
 

 

 

   

 

 

   

 

 

   

 

 

 
 CMBS:        

Agency

    4,262         20         (84)        4,198    

Non-agency

    1,854         14         (60)        1,808    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total CMBS     6,116         34         (144)        6,006    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Other ABS(2)     7,123         49         (36)        7,136    
 Other securities(3)     1,542         24         (55)        1,511    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total investment securities available for sale    $     41,632        $ 799        $ (631)       $     41,800    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (1)

Includes $8 million and $12 million as of June 30, 2014 and December 31, 2013, respectively, attributable to securities for which OTTI has been recognized. Substantially all of this amount is related to non-agency RMBS.

 

  (2)

ABS collateralized by credit card loans constituted approximately 65% of the other ABS portfolio both as of June 30, 2014, and December 31, 2013, and ABS collateralized by auto dealer floor plan inventory loans and leases constituted approximately 13% and 15% of the other ABS portfolio as of June 30, 2014 and December 31, 2013, respectively. Approximately 89% of the securities in our other ABS portfolio were rated AAA or its equivalent as of June 30, 2014, compared with 87% as of December 31, 2013.

 

  (3)

Includes foreign government/agency bonds, covered bonds, corporate securities, municipal securities and equity investments primarily related to activities under the Community Reinvestment Act (“CRA”).

The table below presents the carrying value, gross unrealized gains and losses, and fair value of securities held to maturity at June 30, 2014 and December 31, 2013.

Table 3.3 Investment Securities Held to Maturity

 

    June 30, 2014  

 (Dollars in millions)

  Amortized
Cost
    Unrealized
Losses
Recorded
in AOCI(1)
    Carrying
Value
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair
Value
 
 Agency RMBS    $ 20,100        $ (1,248)       $ 18,852        $ 649        $ (3)       $ 19,498    
 Agency CMBS     1,962         (126)        1,836         75         (4)        1,907    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total investment securities held to maturity    $     22,062        $    (1,374)       $     20,688        $ 724        $ (7)       $   21,405    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    December 31, 2013  

 (Dollars in millions)

  Amortized
Cost
    Unrealized
Losses
Recorded
in AOCI(1)
    Carrying
Value
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair
Value
 
 Agency RMBS    $ 18,746        $ (1,303)       $ 17,443        $ 72        $ (30)       $ 17,485    
 Agency CMBS     1,821         (132)        1,689         16         (5)        1,700    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total investment securities held to maturity    $   20,567        $   (1,435)       $ 19,132        $ 88        $ (35)       $   19,185    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1)

Represents the unrealized holding gain or loss at the date of transfer from available for sale to held to maturity, net of any accretion.

Investment Securities in a Gross Unrealized Loss Position

The table below provides, by major security type, information about our securities available for sale in a gross unrealized loss position and the length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2014 and December 31, 2013.

Table 3.4: Securities in Unrealized Loss Position

 

    June 30, 2014  
    Less than 12 Months     12 Months or Longer     Total  

 (Dollars in millions)

  Fair Value     Gross
Unrealized
Losses
    Fair Value     Gross
Unrealized
Losses
    Fair Value     Gross
Unrealized
Losses
 
 Investment securities available for sale:            

 Corporate debt securities guaranteed by U.S. government agencies

   $ 151        $ (2)       $ 838        $ (27)       $ 989        $ (29)   
 RMBS:            

Agency

    3,224         (14)        5,138         (127)        8,362         (141)   

Non-agency

    149         (2)        231         (8)        380         (10)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total RMBS     3,373         (16)        5,369         (135)        8,742         (151)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 CMBS:            

Agency

    572         (5)        2,087         (56)        2,659         (61)   

Non-agency

    111                754         (23)        865         (23)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total CMBS     683         (5)        2,841         (79)        3,524         (84)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Other ABS     90                825         (14)        915         (14)   
 Other securities     115                718         (21)        833         (21)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total investment securities available for sale in a gross unrealized loss position

   $ 4,412        $ (23)       $ 10,591        $ (276)       $ 15,003        $ (299)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    December 31, 2013  
    Less than 12 Months     12 Months or Longer     Total  

 (Dollars in millions)

  Fair Value     Gross
Unrealized
Losses
    Fair Value     Gross
Unrealized
Losses
    Fair Value     Gross
Unrealized
Losses
 
 Investment securities available for sale:            

 Corporate debt securities guaranteed by U.S. government agencies

   $ 1,143        $ (47)       $ 46        $ (2)       $ 1,189        $ (49)   
 RMBS:            

Agency

    9,769         (263)        1,770         (69)        11,539         (332)   

Non-agency

    454         (10)        56         (5)        510         (15)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total RMBS     10,223         (273)        1,826         (74)        12,049         (347)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 CMBS:            

Agency

    2,842         (74)        256         (10)        3,098         (84)   

Non-agency

    952         (43)        183         (17)        1,135         (60)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total CMBS     3,794         (117)        439         (27)        4,233         (144)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Other ABS     2,528         (34)        392         (2)        2,920         (36)   
 Other securities     1,149         (51)        57         (4)        1,206         (55)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total investment securities available for sale in a gross unrealized loss position

   $   18,837        $ (522)       $ 2,760        $ (109)       $ 21,597        $ (631)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2014, the amortized cost of approximately 600 securities available for sale exceeded their fair value by $299 million, of which $276 million related to investment securities that had been in a loss position for 12 months or longer. Our investments in non-agency RMBS and CMBS, non-agency ABS, and other securities accounted for $68 million, or 23%, of total gross unrealized losses on securities available for sale as of June 30, 2014.

As of June 30, 2014, the carrying value of approximately 20 securities held to maturity exceeded their fair value by $7 million. Substantially all of these unrecognized losses relate to securities held to maturity that have been in a loss position for less than 12 months as of June 30, 2014.

Maturities and Yields of Investment Securities

The following tables summarize the remaining scheduled contractual maturities, assuming no prepayments, of our investment securities as of June 30, 2014:

Table 3.5: Contractual Maturities of Securities Available for Sale

 

    June 30, 2014  

 (Dollars in millions)

    Amortized Cost            Fair Value       
 Due in 1 year or less    $ 2,117        $ 2,120    
 Due after 1 year through 5 years     5,033         5,059    
 Due after 5 years through 10 years     3,835         3,824    
 Due after 10 years(1)     29,462         30,110    
 

 

 

   

 

 

 
 Total    $ 40,447        $ 41,113    
 

 

 

   

 

 

 

 

 

  (1) 

Investments with no stated maturities, which consist of equity securities, are included with contractual maturities due after 10 years.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Table 3.6: Contractual Maturities of Securities Held to Maturity

 

    June 30, 2014  

(Dollars in millions)

    Carrying Value            Fair Value       
 Due after 5 years through 10 years    $ 1,140        $ 1,207    
 Due after 10 years     19,548         20,198    
 

 

 

   

 

 

 
 Total    $ 20,688        $ 21,405    
 

 

 

   

 

 

 

Because borrowers may have the right to call or prepay certain obligations, the expected maturities of our securities are likely to differ from the scheduled contractual maturities presented above. The table below summarizes, by major security type, the expected maturities and weighted average yields of our investment securities as of June 30, 2014.

Table 3.7: Expected Maturities and Weighted Average Yields of Securities

 

    June 30, 2014  

 (Dollars in millions)

  Due in 1 Year
or Less
    Due > 1 Year
through
5 Years
    Due > 5 Years
through
10 Years
    Due > 10
Years
    Total  
 Fair value of securities available for sale:          
 U.S. Treasury debt obligations    $ 656           $ 567           $ 0           $ 0           $ 1,223       
 U.S. Agency debt obligations     1            0            0            0            1       

 Corporate debt securities guaranteed by U.S. government agencies

    0            207            872            13            1,092       
 RMBS:          

Agency

    193            9,888            11,867            0            21,948       

Non-agency

    21            940            1,998            620            3,579       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total RMBS     214            10,828            13,865            620            25,527       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 CMBS:          

Agency

    400            2,838            774            0            4,012       

Non-agency

    84            477            1,227            20            1,808       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total CMBS     484            3,315            2,001            20            5,820       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Other ABS     1,949            3,375            601            97            6,022       
 Other securities     59            521            752            96            1,428       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total securities available for sale    $ 3,363           $ 18,813           $ 18,091           $ 846           $ 41,113       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Amortized cost of securities available for sale

   $ 3,361           $ 18,579           $ 17,788           $ 719           $ 40,447       

 Weighted average yield for securities available for sale(1)

    1.12%        2.21%        3.08%        7.50%        2.59%   
 Carrying value of securities held to maturity:          
 Agency RMBS    $ 0           $ 109           $ 15,530           $ 3,213           $ 18,852       
 Agency CMBS     0            396            1,364            76            1,836       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total securities held for maturity    $ 0           $ 505           $ 16,894           $ 3,289           $ 20,688       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Fair value of securities held to maturity    $ 0           $ 505           $ 17,462           $     3,438           $   21,405       

 Weighted average yield for securities held to maturity(1)

    0.00%        2.31%        2.73%        3.14%        2.79%   

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

 

  (1) 

Average yield is calculated based on the amortized cost of each security. Effective in the second quarter of 2014, we began reporting the effective yield for the investment securities. Prior to second quarter of 2014, we reported the purchase yield for the investment securities. The impact of this change on prior periods is not material.

Other-Than-Temporary Impairment

We evaluate all securities in an unrealized loss position at least on a quarterly basis, and more often as market conditions require, to assess whether the impairment is other-than-temporary. Our Other-Than-Temporary Impairment (“OTTI”) assessment is based on a discounted cash flow analysis which requires careful use of judgments and assumptions. A number of qualitative and quantitative criteria may be considered in our assessment as applicable, including the size and the nature of the portfolio; historical and projected performance such as prepayment, default and loss severity for the RMBS portfolio; recent credit events specific to the issuer and/or industry to which the issuer belongs; the payment structure of the security; external credit ratings of the issuer and any failure or delay of the issuer to make scheduled interest or principal payments; the value of underlying collateral; our intent and ability to hold the security for the long term; and current and projected market and macro-economic conditions.

For a debt security that has experienced a decline in the fair value below amortized cost basis, we recognize OTTI in earnings if we have the intent to sell the security, or if we believe it is more likely than not that we will be required to sell the security in the near term. For those securities that we do not intend to sell or expect to be required to sell, an analysis is performed to determine if any of the impairment is due to credit or whether it is due to other factors, such as interest rates. Credit-related impairment is recognized in earnings, with the remaining unrealized non-credit related impairment recorded in accumulated other comprehensive income (“AOCI”). We determine the credit component based on the difference between the security’s amortized cost basis and the present value of its expected cash flows, discounted based on the effective yield.

The table below presents the accumulative credit loss and activities for the three and six months ended June 30, 2014 and 2013, related to the credit component of OTTI recognized in earnings on debt securities:

Table 3.8 Credit Impairment Rollforward

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 

 (Dollars in millions)

        2014                 2013                2014               2013       
 Credit loss component, beginning of period    $ 165        $ 145        $ 160        $ 120    
 Additions:        

Initial credit impairment

                         11    

Subsequent credit impairment

                         18    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total additions                          29    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Reduction due to payoffs, disposals, transfers & other     (1)        —         (1)        —    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Credit loss component, end of period    $ 165        $ 149        $ 165        $ 149    
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross unrealized losses on our investment securities have generally decreased since December 31, 2013. We believe the unrealized losses related to investment securities for which we have not recognized credit impairment are primarily attributable to changes in market interest rates. In addition, we do not intend to sell these securities with unrealized losses, and we believe it is not likely that we will be required to sell these securities prior to recovery of their amortized cost. Except for the securities reported in the table above for which credit losses have been recognized in earnings, we believe the securities with an unrealized loss in AOCI are not other than temporarily impaired as of June 30, 2014.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Realized Gains and Losses on Securities

The following table presents the gross realized gains and losses on the sale and redemption of securities available for sale recognized in earnings for the three and six months ended June 30, 2014 and 2013. The gross realized investment losses presented below exclude credit losses recognized in earnings attributable to OTTI. We also present the proceeds from the sale of securities available for sale for the periods presented. We did not sell any investment securities that are held to maturity.

Table 3.9: Realized Gains and Losses on Securities Available for Sale

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 

 (Dollars in millions)

        2014                 2013                2014               2013       
 Gross realized investment gains    $       $       $ 34        $   
 Gross realized investment losses     (3)        (2)        (22)        (3)   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Net realized gains (losses)    $ (1)       $       $ 12        $   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total proceeds from sales    $ 583        $ 600        $ 3,559        $ 1,320    

Securities Pledged and Received

As part of our liquidity management strategy, we pledge securities to secure borrowings from counterparties including the Federal Home Loan Banks (“FHLB”) and the Federal Reserve Bank. We also pledge securities to secure trust and public deposits and for other purposes as required or permitted by law. We pledged securities available for sale with a fair value of $7.5 billion and $10.7 billion as of June 30, 2014 and December 31, 2013, respectively. We pledged securities held to maturity with a carrying value of $11.9 billion and $8.2 billion as of June 30, 2014 and December 31, 2013, respectively. Of the total securities pledged as collateral, we have encumbered $17.0 billion and $17.3 billion as of June 30, 2014 and December 31, 2013, respectively, primarily related to FHLB transactions and Public Fund deposits. We accepted pledges of securities with a fair value of $11 million and $53 million as of June 30, 2014 and December 31, 2013, respectively, primarily related to our derivative transactions.

Securities Acquired

Our investment portfolio includes certain acquired debt securities that were deemed to be credit impaired at acquisition date. These securities are accounted for in accordance with accounting guidance for purchased credit-impaired debt securities.

Outstanding Balance and Carrying Value of Acquired Securities

The table below presents the outstanding contractual balance and the carrying value of the acquired credit-impaired debt securities as of June 30, 2014 and December 31, 2013.

Table 3.10: Outstanding Balance and Carrying Value of Acquired Securities

 

 (Dollars in millions)

       June 30, 2014           December 31, 2013   
 Contractual principal and interest     $ 4,483         $ 4,700    
 Carrying value      2,959          2,896    
 Amortized cost      2,425          2,432    

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Changes in Accretable Yield of Acquired Securities

The following table presents changes in the accretable yield related to the acquired credit-impaired debt securities:

Table 3.11: Changes in Accretable Yield of Acquired Securities

 

 (Dollars in millions)

  Acquired
Credit-Impaired
Securities
 
 Accretable yield as of December 31, 2012    $ 1,512    
 Additions from new acquisitions     88    
 Accretion recognized in earnings     (247)   
 Reduction due to payoffs, disposals, transfers & other     (2)   
 Net reclassifications (to) from nonaccretable difference     72    
 

 

 

 
 Accretable yield as of December 31, 2013    $ 1,423    
 

 

 

 
 Additions from new acquisitions     26    
 Accretion recognized in earnings     (122)   
 Reduction due to payoffs, disposals, transfers & other     (2)   
 Net reclassifications (to) from nonaccretable difference     22    
 

 

 

 
 Accretable yield as of June 30, 2014    $ 1,347    
 

 

 

 

 

 

 NOTE 4—LOANS

 

Loan Portfolio Composition

Our total loan portfolio consists of loans held for investment, including restricted loans underlying our consolidated securitization trusts, and loans held for sale. Our loan portfolio, by segment, consists of credit card, consumer banking and commercial banking loans. Credit card loans consist of domestic and international credit card loans. Consumer banking loans consist of auto, home, and retail banking loans. Commercial banking loans consist of commercial and multifamily real estate, commercial and industrial, and small-ticket commercial real estate loans.

Loans Acquired in Business Acquisitions

Loans Acquired and Accounted for Based on Expected Cash Flows

Our portfolio of loans held for investment includes loans acquired in the Chevy Chase Bank (“CCB”), ING Direct and 2012 U.S. card acquisitions. These loans were recorded at fair value at the date of each acquisition.

Acquired Loans accounted for based on expected cash flows to be collected was $26.0 billion as of June 30, 2014, compared with $28.6 billion as of December 31, 2013.

We regularly update our estimate of the amount of expected principal and interest to be collected from these loans and evaluate the results for each accounting pool that was established at acquisition based on loans with common risk characteristics. Probable decreases in expected cash flows would trigger the recognition of a loan loss through our provision for credit losses. Probable and significant increases in expected cash flows would first reverse any previously recorded allowance for loan and lease losses established subsequent to acquisition, with any remaining increase in expected cash flows recognized prospectively in interest income over the remaining estimated life of the underlying loans.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Loans Acquired and Accounted for Based on Contractual Cash Flows

The substantial majority of the loans purchased in the 2012 U.S. card acquisition had existing revolving privileges, therefore they were excluded from the Acquired Loans above and accounted for based on contractual cash flows at acquisition. After the acquisition date, these loans were accounted for using the same methodology utilized for our existing credit card portfolio prior to the 2012 U.S. card acquisition. See “Note 1—Summary of Significant Accounting Policies” in our 2013 Form 10-K for additional information on accounting guidance for these loans.

Table 4.1 below presents the composition of our portfolio of loans held for investment, which includes restricted loans for securitization investors, as of June 30, 2014 and December 31, 2013.

Table 4.1: Loan Portfolio Composition

 

 (Dollars in millions)

       June 30, 2014            December 31, 2013    
 Credit Card:    

Domestic credit card(1)

   $ 71,165        $ 73,255    

International credit card

    7,853         8,050    
 

 

 

   

 

 

 
 Total credit card     79,018         81,305    
 

 

 

   

 

 

 
 Consumer Banking:    

Auto

    34,792         31,857    

Home loan

    32,644         35,282    

Retail banking

    3,626         3,623    
 

 

 

   

 

 

 
 Total consumer banking     71,062         70,762    
 

 

 

   

 

 

 
 Commercial Banking:(2)    

Commercial and multifamily real estate

    22,040         20,750    

Commercial and industrial

    25,402         23,309    
 

 

 

   

 

 

 

Total commercial lending

    47,442         44,059    

Small-ticket commercial real estate

    879         952    
 

 

 

   

 

 

 
 Total commercial banking     48,321         45,011    
 

 

 

   

 

 

 
 Other:    

Other loans

    127         121    
 

 

 

   

 

 

 
 Total loans    $ 198,528        $ 197,199    
 

 

 

   

 

 

 

 

  (1)

Includes installment loans related to domestic card loans of $205 million and $323 million as of June 30, 2014 and December 31, 2013, respectively.

 

  (2)

Includes construction loans and land development loans totaling $2.1 billion and $2.0 billion as of June 30, 2014 and December 31, 2013, respectively.

We had total loans held for sale of $709 million and $218 million as of June 30, 2014 and December 31, 2013, respectively.

Credit Quality

We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Trends in delinquency ratios are an indicator, among other considerations, of credit risk within our

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

loan portfolios. The level of nonperforming loans represents another indicator of the potential for future credit losses. Accordingly, key metrics we track and use in evaluating the credit quality of our loan portfolio include delinquency and nonperforming loan rates, as well as charge-off rates and our internal risk ratings of larger balance commercial loans.

The following table summarizes the payment status of our loan portfolio, including an aging of delinquent loans, loans 90 days or more past due that continue to accrue interest and loans classified as nonperforming. We present the information below on the credit performance of our loan portfolio, by major portfolio segment, including key metrics that we use in tracking changes in the credit quality of each of our loan portfolios. The delinquency aging includes all past due loans, both performing and nonperforming, as of June 30, 2014 and December 31, 2013.

Table 4.2: Credit Quality

 

    June 30, 2014  

 (Dollars in millions)

  Current     30-59 Days     60-89 Days     > 90 Days     Total
Delinquent
Loans
    Acquired
Loans
    Total
Loans
    > 90 Days
and
Accruing(1)
    Non-
performing
Loans(1)
 
 Credit Card:                  

Domestic credit card

   $ 69,115           $ 691           $ 439           $ 883           $ 2,013           $ 37           $ 71,165           $ 883           $ 0       

International credit card

    7,523            131            75            124            330            0            7,853            81            81       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total credit card     76,638            822            514            1,007            2,343            37            79,018            964            81       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Consumer Banking:                  

Auto

    32,634            1,411            594            151            2,156            2            34,792            0            151       

Home loan

    6,643            44            24            219            287            25,714            32,644            0            351       

Retail banking

    3,541            14            5            17            36            49            3,626            1            29       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total consumer  banking     42,818            1,469            623            387            2,479            25,765            71,062            1            531       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Commercial Banking:                  

Commercial and multifamily real estate

    21,880            52            10            33            95            65            22,040            1            64       

Commercial and industrial

    25,168            32            3            47            82            152            25,402            4            105       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

    47,048            84            13            80            177            217            47,442            5            169       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Small-ticket commercial real estate

    867            2            2            8            12            0            879            0            12       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total commercial banking

    47,915            86            15            88            189            217            48,321            5            181       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Other:                  

 Other loans

    111            3            2            11            16            0            127            0            16       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $  167,482           $  2,380           $  1,154           $  1,493           $ 5,027           $  26,019           $  198,528           $ 970           $ 809       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 % of Total loans     84.36%        1.20%        0.58%        0.75%        2.53%        13.11%        100.00%        0.49%        0.41%   

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    December 31, 2013  

 (Dollars in millions)

  Current     30-59
Days
    60-89
Days
    > 90 Days     Total
Delinquent
Loans
    Acquired
Loans
    Total Loans     > 90 Days
and
Accruing(1)
    Non-
performing
Loans(1)
 
 Credit Card:                  

Domestic credit card

   $ 70,678           $ 778           $ 549           $ 1,187           $ 2,514           $ 63           $ 73,255           $ 1,187           $ 0       

International credit card

    7,683            141            85            141            367            0            8,050            96            88       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total credit card     78,361            919            634            1,328            2,881            63            81,305            1,283            88       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Consumer Banking:                  

Auto

    29,477            1,519            662            194            2,375            5            31,857            0            194       

Home loan

    6,775            60            24            239            323            28,184            35,282            0            376       

Retail banking

    3,535            21            8            23            52            36            3,623            2            41       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total consumer banking     39,787            1,600            694            456            2,750            28,225            70,762            2            611       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Commercial Banking:                  

Commercial and multifamily real estate

    20,602            17            11            36            64            84            20,750            2            52       

Commercial and  industrial

    23,023            69            1            38            108            178            23,309            4            93       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total commercial lending     43,625            86            12            74            172            262            44,059            6            145       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Small-ticket commercial  real estate .

    941            8            2            1            11            0            952            0            4       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total commercial banking     44,566            94            14            75            183            262            45,011            6            149       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Other:                  

Other loans

    102            4            2            13            19            0            121            0            19       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $  162,816           $  2,617           $  1,344           $  1,872           $ 5,833           $  28,550           $  197,199           $ 1,291           $ 867       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 % of Total loans     82.56%        1.33%        0.68%        0.95%        2.96%        14.48%        100.00%        0.65%        0.44%   

 

  (1) 

Nonperforming loans generally include loans that have been placed on nonaccrual status. Acquired Loans are excluded from loans reported as 90 days and accruing interest as well as nonperforming loans.

Credit Card

Our credit card loan portfolio is generally highly diversified across millions of accounts and multiple geographies without significant individual exposures. We therefore generally manage credit risk on a portfolio basis. The risk in our credit card portfolio is correlated with broad economic trends, such as unemployment rates, gross domestic product (“GDP”), and home values, as well as customer liquidity, which can have a material effect on credit performance. The primary factors we assess in monitoring the credit quality and risk of our credit card portfolio are delinquency and charge-off trends, including an analysis of the migration of loans between delinquency categories over time. The table below displays the geographic profile of our credit card loan portfolio and delinquency statistics as of June 30, 2014 and December 31, 2013. We also present the delinquency rates of our credit card loan portfolio and comparative net charge-offs for the three and six months ended June 30, 2014 and 2013.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Table 4.3: Credit Card: Risk Profile by Geographic Region and Delinquency Status

 

     June 30, 2014  

 (Dollars in millions)

   Loans      % of
    Total(1)    
     Acquired
Loans
     % of
    Total(1)    
     Total      % of
    Total(1)    
 
 Domestic credit card:                  

California

    $ 7,784          9.9%        $         0.0%        $ 7,788          9.9%   

New York

     5,114          6.5                     0.0             5,118          6.5       

Texas

     4,874          6.2                     0.0             4,877          6.2       

Florida

     4,251          5.4                     0.0             4,253          5.4       

Illinois

     3,460          4.4                     0.0             3,462          4.4       

Pennsylvania

     3,274          4.1                     0.0             3,276          4.1       

Ohio

     2,820          3.6                     0.0             2,822          3.6       

New Jersey

     2,630          3.3                     0.0             2,631          3.3       

Michigan

     2,483          3.1                     0.0             2,484          3.1       

Other

     34,438          43.5             16          0.1             34,454          43.6       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
 Total domestic credit card      71,128          90.0             37          0.1             71,165          90.1       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
 International credit card:                  

Canada

     4,257          5.4                     0.0             4,257          5.4       

United Kingdom

     3,596          4.5                     0.0             3,596          4.5       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
 Total international credit card      7,853          9.9                     0.0             7,853          9.9       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
 Total credit card     $   78,981          99.9%        $ 37          0.1%        $   79,018          100.0%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2013  

 (Dollars in millions)

   Loans      % of
    Total(1)    
     Acquired
Loans
     % of
    Total(1)    
     Total      % of
    Total(1)    
 
 Domestic credit card:                  

California

    $ 7,934          9.8%        $         0.0%        $ 7,940          9.8%   

New York

     5,271          6.5                    0.0            5,277          6.5      

Texas

     4,989          6.1                    0.0            4,993          6.1      

Florida

     4,321          5.3                    0.0            4,325          5.3      

Illinois

     3,600          4.4                    0.0            3,603          4.4      

Pennsylvania

     3,439          4.2                    0.0            3,442          4.2      

Ohio

     2,963          3.6                    0.0            2,965          3.6      

New Jersey

     2,734          3.4                    0.0            2,736          3.4      

Michigan

     2,593          3.2                    0.0            2,595          3.2      

Other

     35,348          43.5            31          0.1            35,379          43.6      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
 Total domestic credit card      73,192          90.0            63          0.1            73,255          90.1      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
 International credit card:                  

Canada

     4,503          5.5                    0.0            4,503          5.5      

United Kingdom

     3,547          4.4                    0.0            3,547          4.4      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
 Total international credit card      8,050          9.9                    0.0            8,050          9.9      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
 Total credit card     $   81,242          99.9%        $ 63          0.1%        $   81,305          100.0%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    June 30, 2014     December 31, 2013  

 (Dollars in millions)

      Total           % of Total(2)           Total           % of Total(2)    
 Selected credit metrics:        
 30+ day delinquencies    $ 2,343         2.97%       $ 2,881         3.54%   
 90+ day delinquencies     1,007         1.27           1,328         1.63      

 

 

  (1)

Percentages by geographic region within the domestic and international credit card portfolios are calculated based on the total held for investment credit card loans as of the end of the reported period.

 

  (2)

Calculated by dividing delinquent credit card loans by the total balance of credit card loans held for investment as of the end of the reported period.

Table 4.4: Credit Card: Net Charge-offs

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2014      2013      2014      2013  

 (Dollars in millions)

   Amount      Rate(1)      Amount      Rate(1)      Amount      Rate(1)      Amount      Rate(1)  
 Net charge-offs:                        

Domestic credit card

    $ 610          3.52%        $ 749          4.28%        $     1,310          3.77%        $     1,576          4.36%   

International credit card

     75          3.93            101          5.08            155          4.05            196          4.83      
  

 

 

       

 

 

       

 

 

       

 

 

    
 Total credit card     $ 685          3.56           $ 850          4.36           $ 1,465          3.79           $ 1,772          4.41      
  

 

 

       

 

 

       

 

 

       

 

 

    

 

  (1)

Calculated for each loan category by dividing annualized net charge-offs for the period by average loans held for investment during the period.

Consumer Banking

Our consumer banking loan portfolio consists of auto, home loan and retail banking loans. Similar to our credit card loan portfolio, the risk in our consumer banking loan portfolio is correlated with broad economic trends, such as unemployment rates, GDP, and home values, as well as customer liquidity, all of which can have a material effect on credit performance. Delinquency, nonperforming loans and charge-off trends are key factors we assess in monitoring the credit quality and risk of our consumer banking loan portfolio. The table below displays the geographic profile of our consumer banking loan portfolio. We also present the delinquency and nonperforming loan rates of our consumer banking loan portfolio, excluding Acquired Loans’ impact, as of June 30, 2014 and December 31, 2013, and net charge-offs for the three and six months ended June 30, 2014 and 2013.

 

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Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Table 4.5: Consumer Banking: Risk Profile by Geographic Region, Delinquency Status and Performing Status

 

    June 30, 2014  
    Loans     Acquired Loans     Total  

 (Dollars in millions)

  Loans     % of
Total(1)
    Loans     % of
Total(1)
    Loans     % of
Total(1)
 
 Auto:            

Texas

   $ 5,015         7.1%       $        0.0%       $ 5,015         7.1%   

California

    3,735         5.3                   0.0            3,735         5.3       

Florida

    2,359         3.3                   0.0            2,359         3.3       

Georgia

    1,882         2.6                   0.0            1,882         2.6       

Louisiana

    1,729         2.4                   0.0            1,729         2.4       

Illinois

    1,463         2.1                   0.0            1,463         2.1       

Ohio

    1,421         2.0                   0.0            1,421         2.0       

Other

    17,186         24.2                   0.0            17,188         24.2       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total auto     34,790         49.0                   0.0            34,792         49.0       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Home loan:            

California

    978         1.4            6,568         9.2            7,546         10.6       

New York

    1,434         2.0            1,169         1.7            2,603         3.7       

Illinois

    86         0.1            1,980         2.8            2,066         2.9       

Maryland

    432         0.6            1,385         2.0            1,817         2.6       

New Jersey

    354         0.5            1,308         1.8            1,662         2.3       

Virginia

    369         0.5            1,260         1.8            1,629         2.3       

Florida

    170         0.2            1,342         1.9            1,512         2.1       

Other

    3,107         4.4            10,702         15.0            13,809         19.4       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total home loan     6,930         9.7            25,714         36.2            32,644         45.9       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Retail banking:            

Louisiana

    1,178         1.6                   0.0            1,178         1.6       

New York

    872         1.2                   0.0            872         1.2       

Texas

    760         1.1                   0.0            760         1.1       

New Jersey

    261         0.3                   0.0            261         0.3       

Maryland

    139         0.2            21         0.1            160         0.3       

Virginia

    107         0.2            19         0.0            126         0.2       

California

    42         0.1                   0.0            42         0.1       

Other

    218         0.3                   0.0            227         0.3       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total retail banking     3,577         5.0            49         0.1            3,626         5.1       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total consumer banking    $  45,297             63.7%       $  25,765             36.3%       $  71,062             100.0%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    June 30, 2014  
    Auto     Home Loan     Retail Banking     Total Consumer
Banking
 

 (Dollars in millions)

    Amount         Adjusted  
Rate(2)
      Amount         Adjusted  
Rate(2)
      Amount         Adjusted  
Rate(2)
      Amount         Adjusted  
Rate(2)
 
 Credit performance:                
 30+ day delinquencies    $   2,156         6.20%       $ 287         4.14%       $ 36         1.00%       $   2,479         5.47%   
 90+ day delinquencies     151         0.43            219         3.16            17         0.48            387         0.85       
 Nonperforming loans     151         0.43            351         5.06            29         0.80            531         1.17       

 

    December 31, 2013  
    Loans     Acquired Loans     Total  

 (Dollars in millions)

  Loans     % of
Total(1)
    Loans     % of
Total(1)
    Loans     % of
Total(1)
 
 Auto:            

Texas

   $ 4,736         6.7%       $        0.0%       $ 4,736         6.7%   

California

    3,297         4.7                   0.0            3,297         4.7       

Florida

    2,076         2.9                   0.0            2,076         2.9       

Georgia

    1,709         2.4                   0.0            1,709         2.4       

Louisiana

    1,677         2.4                   0.0            1,677         2.4       

Illinois

    1,291         1.8                   0.0            1,291         1.8       

Ohio

    1,267         1.8                   0.0            1,267         1.8       

Other

    15,799         22.3                   0.0            15,804         22.3       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total auto     31,852         45.0                   0.0            31,857         45.0       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Home loan:            

California

    1,010         1.5            7,153         10.1            8,163         11.6       

New York

    1,502         2.1            1,265         1.8            2,767         3.9       

Illinois

    88         0.1            2,183         3.1            2,271         3.2       

Maryland

    418         0.6            1,495         2.1            1,913         2.7       

New Jersey

    362         0.5            1,409         2.0            1,771         2.5       

Virginia

    351         0.5            1,367         1.9            1,718         2.4       

Florida

    177         0.3            1,477         2.1            1,654         2.4       

Other

    3,190         4.5            11,835         16.7            15,025         21.2       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total home loan     7,098         10.1            28,184         39.8            35,282         49.9       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Retail banking:            

Louisiana

    1,234         1.7                   0.0            1,234         1.7       

New York

    859         1.2                   0.0            859         1.2       

Texas

    772         1.1                   0.0            772         1.1       

New Jersey

    280         0.4                   0.0            280         0.4       

Maryland

    125         0.1            17         0.1            142         0.2       

Virginia

    96         0.1            12         0.0            108         0.1       

California

    37         0.1                   0.0            37         0.1       

Other

    184         0.3                   0.0            191         0.3       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total retail banking     3,587         5.0            36         0.1            3,623         5.1       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total consumer banking    $  42,537             60.1           $  28,225             39.9%       $  70,762             100.0%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    December 31, 2013  
    Auto     Home Loan     Retail Banking     Total Consumer
Banking
 

 (Dollars in millions)

   Amount       Adjusted 
Rate(2)
     Amount       Adjusted 
Rate(2)
     Amount       Adjusted 
Rate(2)
     Amount       Adjusted 
Rate(2)
 
 Credit performance:                
 30+ day delinquencies    $   2,375         7.46%       $     323         4.55%       $       52         1.46%       $     2,750         6.47%   
 90+ day delinquencies     194         0.61            239         3.37            23         0.66            456         1.07       
 Nonperforming loans     194         0.61            376         5.29            41         1.15            611         1.44       

 

 

 

  (1)

Percentages by geographic region are calculated based on the total held-for-investment consumer banking loans as of the end of the reported period.

 

  (2)

Credit performance statistics exclude Acquired Loans, which were recorded at fair value at acquisition.

Table 4.6: Consumer Banking: Net Charge-offs

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2014     2013     2014     2013  

 (Dollars in millions)

   Amount      Rate(1)      Amount      Rate(1)      Amount      Rate(1)      Amount      Rate(1)  
 Net charge-offs:                

Auto

   $ 111         1.31%       $ 92         1.28%       $ 245         1.48%       $ 214         1.52%   

Home loan

           0.05                   0.03            10         0.06                   0.04       

Retail banking

           0.70            14         1.50            15         0.82            31         1.68       
 

 

 

     

 

 

     

 

 

     

 

 

   
 Total consumer banking    $     122             0.69           $     110             0.60           $     270             0.76           $     253             0.69       
 

 

 

     

 

 

     

 

 

     

 

 

   

 

 

  (1)

Calculated for each loan category by dividing annualized net charge-offs for the period by average loans held for investment during the period.

Home Loan

Our home loans portfolio consists of both first-lien and second-lien residential mortgage loans. In evaluating the credit quality and risk of our home loans portfolio, we continually monitor a variety of mortgage loan characteristics that may affect the default experience on our overall home loans portfolio, such as vintage, geographic concentrations, lien priority and product type. Certain loan concentrations have experienced higher delinquency rates as a result of the significant decline in home prices since the home price peak in 2006 and the rise in unemployment. These loan concentrations include loans originated between 2006 and 2008 in an environment of decreasing home sales, broadly declining home prices and more relaxed underwriting standards. The following table presents the distribution of our home loans portfolio as of June 30, 2014 and December 31, 2013, based on selected key risk characteristics.

 

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Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Table 4.7: Home Loan: Risk Profile by Vintage, Geography, Lien Priority and Interest Rate Type

 

    June 30, 2014  
    Loans     Acquired Loans     Total Home Loans  

 (Dollars in millions)

  Amount     % of
Total(1)
    Amount     % of
Total(1)
    Amount     % of
Total(1)
 
 Origination year:(2)            

< = 2005

   $ 2,638         8.1%       $ 3,774         11.6%       $ 6,412         19.7%   

2006

    483         1.5            2,402         7.3            2,885         8.8       

2007

    340         1.0            5,058         15.5            5,398         16.5       

2008

    198         0.6            3,850         11.8            4,048         12.4       

2009

    114         0.3            2,284         7.0            2,398         7.3       

2010

    126         0.4            3,612         11.1            3,738         11.5       

2011

    239         0.7            4,015         12.3            4,254         13.0       

2012

    1,774         5.5            609         1.8            2,383         7.3       

2013

    689         2.1            89         0.3            778         2.4       

2014

    329         1.0            21         0.1            350         1.1       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $ 6,930         21.2%       $ 25,714         78.8%       $ 32,644         100.0%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Geographic concentration:(3)            

California

   $ 978         3.0%       $ 6,568         20.1%      $ 7,546         23.1%   

New York

    1,434         4.4            1,169         3.6            2,603         8.0       

Illinois

    86         0.2            1,980         6.1            2,066         6.3       

Maryland

    432         1.3            1,385         4.3            1,817         5.6       

New Jersey

    354         1.1            1,308         4.0            1,662         5.1       

Virginia

    369         1.1            1,260         3.9            1,629         5.0       

Florida

    170         0.5            1,342         4.1            1,512         4.6       

Arizona

    90         0.3            1,319         4.0            1,409         4.3       

Washington

    98         0.3            1,177         3.6            1,275         3.9       

Louisiana

    1,230         3.8            43         0.1            1,273         3.9       

Other

    1,689         5.2            8,163         25.0            9,852         30.2       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $ 6,930         21.2%       $ 25,714         78.8%       $ 32,644         100.0%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Lien type:            

1st lien

   $ 5,880         18.0%       $ 25,327         77.6%       $ 31,207         95.6%   

2nd lien

    1,050         3.2            387         1.2            1,437         4.4       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $ 6,930         21.2%       $ 25,714         78.8%       $ 32,644         100.0%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Interest rate type:            

Fixed rate

   $ 2,473         7.6%       $ 3,159         9.7%       $ 5,632         17.3%   

Adjustable rate

    4,457         13.6            22,555         69.1            27,012         82.7       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $   6,930             21.2%       $   25,714             78.8%       $   32,644             100.0%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

     December 31, 2013  
     Loans          Acquired Loans              Total Home Loans      

 (Dollars in millions)

     Amount        % of
  Total(1)  
       Amount        % of
  Total(1)  
       Amount        % of
  Total(1)  
 
 Origination year:(2)                  

< = 2005

    $   2,868           8.1%        $ 4,025           11.4%        $ 6,893           19.5%   

2006

     521           1.5             2,465           7.0             2,986           8.5       

2007

     363           1.0             5,276           14.9             5,639           15.9       

2008

     212           0.6             4,084           11.6             4,296           12.2       

2009

     129           0.4             2,531           7.2             2,660           7.6       

2010

     142           0.4             4,251           12.1             4,393           12.5       

2011

     259           0.7             4,655           13.2             4,914           13.9       

2012

     1,918           5.4             805           2.3             2,723           7.7       

2013

     686           2.0             92           0.2             778           2.2       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
 Total     $ 7,098           20.1%        $  28,184           79.9%        $  35,282           100.0%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
 Geographic concentration:(3)                  

California

    $ 1,010           2.9%        $ 7,153           20.3%        $ 8,163           23.2%   

New York

     1,502           4.2             1,265           3.6             2,767           7.8       

Illinois

     88           0.2             2,183           6.2             2,271           6.4       

Maryland

     418           1.2             1,495           4.2             1,913           5.4       

New Jersey

     362           1.0             1,409           4.0             1,771           5.0       

Virginia

     351           1.0             1,367           3.9             1,718           4.9       

Florida

     177           0.5             1,477           4.2             1,654           4.7       

Arizona

     91           0.3             1,439           4.1             1,530           4.4       

Washington

     100           0.3             1,302           3.7             1,402           4.0       

Louisiana

     1,282           3.6             47           0.1             1,329           3.7       

Other

     1,717           4.9             9,047           25.6             10,764           30.5       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
 Total     $ 7,098           20.1%        $ 28,184           79.9%        $ 35,282           100.0%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
 Lien type:                  

1st lien

    $ 6,020           17.1%        $ 27,768           78.7%        $ 33,788           95.8%   

2nd lien

     1,078           3.0             416           1.2             1,494           4.2       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
 Total     $ 7,098           20.1%        $ 28,184           79.9%        $ 35,282           100.0%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
 Interest rate type:                  

Fixed rate

    $ 2,478           7.0%        $ 3,434           9.7%        $ 5,912           16.7%   

Adjustable rate

     4,620           13.1             24,750           70.2             29,370           83.3       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
 Total     $ 7,098           20.1%        $ 28,184           79.9%        $ 35,282           100.0%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

  (1)

Percentages within each risk category are calculated based on total home loans held for investment.

 

  (2)

The Acquired Loans origination balances in the years subsequent to 2012 are related to refinancing of previously acquired home loans.

 

  (3)

Represents the ten states in which we have the highest concentration of home loans.

 

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Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Commercial Banking

We evaluate the credit risk of commercial loans individually and use a risk-rating system to determine the credit quality of our commercial loans. We assign internal risk ratings to loans based on relevant information about the ability of borrowers to service their debt. In determining the risk rating of a particular loan, among the factors considered are the borrower’s current financial condition, historical credit performance, projected future credit performance, prospects for support from financially responsible guarantors, the estimated realizable value of any collateral and current economic trends. The ratings scale based on our internal risk-rating system is as follows:

 

 

Noncriticized: Loans that have not been designated as criticized, frequently referred to as “pass” loans.

 

 

Criticized performing: Loans in which the financial condition of the obligor is stressed, affecting earnings, cash flows or collateral values. The borrower currently has adequate capacity to meet near-term obligations; however, the stress, left unabated, may result in deterioration of the repayment prospects at some future date.

 

 

Criticized nonperforming: Loans that are not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Loans classified as criticized nonperforming have a well-defined weakness, or weaknesses, which jeopardize the repayment of the debt. These loans are characterized by the distinct possibility that we will sustain a credit loss if the deficiencies are not corrected and are generally placed on nonaccrual status.

We use our internal risk-rating system for regulatory reporting, determining the frequency of review of the credit exposures and evaluation and determination of the allowance for loan and lease losses for commercial loans. Loans of $1 million or more designated as criticized performing and criticized nonperforming are reviewed quarterly by management for further deterioration or improvement to determine if they are appropriately classified/graded and whether impairment exists. Noncriticized loans greater than $1 million are specifically reviewed, at least annually, to determine the appropriate loan grading. In addition, during the renewal process of any loan or if a loan becomes past due, we evaluate the risk rating.

 

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Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

The following table presents the geographic distribution and internal risk ratings of our commercial loan portfolio as of June 30, 2014 and December 31, 2013.

Table 4.8: Commercial Banking: Risk Profile by Geographic Region and Internal Risk Rating

 

    June 30, 2014  

 (Dollars in millions)

  Commercial
and
Multifamily
Real Estate
    % of
Total(1)
    Commercial
and
Industrial
    % of
Total(1)
    Small-ticket
Commercial
Real Estate
    % of
Total(1)
    Total
Commercial
Banking
    % of
Total(1)
 

Geographic concentration:(2)

               

Loans:

               

Northeast

   $ 14,833          67.3%       $ 6,206          24.4%       $ 542          61.7%       $ 21,581          44.7%   

Mid-Atlantic

    2,275          10.3            1,673          6.6            31          3.5            3,979          8.2       

South

    3,019          13.7            11,768          46.3            55          6.2            14,842          30.8       

Other

    1,848          8.4            5,603          22.1            251          28.6            7,702          15.9       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Loans     21,975          99.7            25,250          99.4            879          100.0            48,104          99.6       
 Acquired Loans     65          0.3            152          0.6            0          0.0            217          0.4       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $ 22,040          100.0%       $ 25,402          100.0%       $ 879          100.0%       $ 48,321          100.0%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Internal risk rating:(3)

               
 Loans:                

Noncriticized

   $ 21,568          97.8%       $ 24,255          95.5%       $ 866          98.5%      $ 46,689          96.6%   

Criticized performing

    343          1.6            890          3.5            1          0.1            1,234          2.6       

Criticized nonperforming

    64          0.3            105          0.4            12          1.4            181          0.4       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Loans     21,975          99.7            25,250          99.4            879          100.0            48,104          99.6       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquired Loans:

               

Noncriticized

    58          0.3            134          0.5            0          0.0            192          0.4       

Criticized performing

    7          0.0            18          0.1            0          0.0            25          0.0       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Acquired Loans

    65          0.3            152          0.6            0          0.0            217          0.4       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $ 22,040          100.0%       $ 25,402          100.0%       $ 879          100.0%       $ 48,321          100.0%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    December 31, 2013  

 (Dollars in millions)

  Commercial
and
Multifamily
Real Estate
    % of
Total(1)
    Commercial
and
Industrial
    % of
Total(1)
    Small-ticket
Commercial
Real Estate
    % of
Total(1)
    Total
Commercial
Banking
    % of
Total(1)
 
 Geographic concentration:(2)                
 Loans:                

Northeast

   $ 14,543          70.1%       $ 5,800          24.9%       $ 582          61.3%       $ 20,925          46.4%   

Mid-Atlantic

    2,130          10.3            1,432          6.1            33          3.4            3,595          8.0       

South

    2,539          12.2            10,940          46.9            58          6.0            13,537          30.1       

Other

    1,454          7.0            4,959          21.3            279          29.3            6,692          14.9       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Loans     20,666          99.6            23,131          99.2            952          100.0            44,749          99.4       
 Acquired Loans     84          0.4            178          0.8            0          0.0            262          0.6       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $   20,750          100.0%       $   23,309          100.0%       $   952          100.0%       $   45,011            100.0%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Internal risk rating:(3)                
 Loans:                

Noncriticized

   $ 20,204          97.4%       $ 22,448          96.3%       $ 941          98.9%       $ 43,593          96.9%   

Criticized performing

    409          2.0            590          2.5            8          0.8            1,007          2.2       

Criticized nonperforming

    53          0.2            93          0.4            3          0.3            149          0.3       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Loans     20,666          99.6            23,131          99.2            952          100.0            44,749          99.4       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Acquired Loans:                

Noncriticized

    72          0.3            158          0.7            0          0.0            230          0.5       

Criticized performing

    12          0.1            20          0.1            0          0.0            32          0.1       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Acquired Loans     84          0.4            178          0.8            0          0.0            262          0.6       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $ 20,750            100.0%       $ 23,309            100.0%       $ 952            100.0%       $ 45,011          100.0%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (1)

Percentages calculated based on total held-for-investment commercial loans in each respective loan category as of the end of the reported period.

 

  (2)

Northeast consists of CT, ME, MA, NH, NJ, NY, PA and VT. Mid-Atlantic consists of DE, DC, MD, VA and WV. South consists of AL, AR, FL, GA, KY, LA, MS, MO, NC, SC, TN and TX.

 

  (3)

Criticized exposures correspond to the “Special Mention,” “Substandard” and “Doubtful” asset categories defined by banking regulatory authorities.

 

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Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Impaired Loans

The following table presents information about our impaired loans, excluding Acquired Loans’ impact, which are reported separately as of June 30, 2014 and December 31, 2013, and for the three and six months ended June 30, 2014 and 2013:

Table 4.9: Impaired Loans(1)

 

    June 30, 2014  

 (Dollars in millions)

  With an
Allowance
    Without
an
Allowance
    Total
Recorded
Investment
    Related
Allowance
    Net
Recorded
Investment
    Unpaid
Principal
Balance
 
 Credit Card:            

Domestic credit card

   $ 563         $ 0         $ 563         $ 136         $ 427         $ 549     

International credit card

    165          0          165          87          78          158     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total credit card(2)     728          0          728          223          505          707     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Consumer Banking:            

Auto(3)

    185          190          375          17          358          617     

Home loan

    240          164          404          18          386          531     

Retail banking

    53          15          68          7          61          73     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total consumer banking     478          369          847          42          805          1,221     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Commercial Banking:            

Commercial and multifamily real estate

    169          32          201          22          179          225     

Commercial and industrial

    117          65          182          10          172          208     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

    286          97          383          32          351          433     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Small-ticket commercial real estate

    4          9          13          0          13          18     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total commercial banking     290          106          396          32          364          451     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $ 1,496         $ 475         $ 1,971         $ 297         $ 1,674         $   2,379     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

     Three Months Ended
June 30, 2014
     Six Months Ended
June 30, 2014
 

 (Dollars in millions)

   Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 
 Credit Card:            

Domestic credit card

    $ 573          $ 15          $ 585          $ 30     

International credit card

     165           3           167           6     
  

 

 

    

 

 

    

 

 

    

 

 

 
 Total credit card(2)      738           18           752           36     
  

 

 

    

 

 

    

 

 

    

 

 

 
 Consumer Banking:            

Auto(3)

     373           17           367           34     

Home loan

     408           2           404           3     

Retail banking

     77           0           81           1     
  

 

 

    

 

 

    

 

 

    

 

 

 
 Total consumer banking      858           19           852           38     
  

 

 

    

 

 

    

 

 

    

 

 

 
 Commercial Banking:            

Commercial and multifamily real estate

     200           1           180           3     

Commercial and industrial

     178           1           180           2     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial lending

     378           2           360           5     
  

 

 

    

 

 

    

 

 

    

 

 

 

Small-ticket commercial real estate

     11           0           9           0     
  

 

 

    

 

 

    

 

 

    

 

 

 
 Total commercial banking      389           2           369           5     
  

 

 

    

 

 

    

 

 

    

 

 

 
 Total     $   1,985          $   39          $   1,973          $   79     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

    December 31, 2013  

 (Dollars in millions)

  With an
Allowance
    Without
an
Allowance
    Total
Recorded
Investment
    Related
Allowance
    Net
Recorded
Investment
    Unpaid
Principal
Balance
 
 Credit Card:            

Domestic credit card

   $ 609         $ 0         $ 609         $ 154         $ 455         $ 593     

International credit card

    171          0          171          107          64          164     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total credit card(2)     780          0          780          261          519          757     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Consumer Banking:            

Auto(3)

    169          186          355          16          340          590     

Home loan

    244          150          394          18          375          561     

Retail banking

    46          40          86          10          76          105     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total consumer banking     459          376          835          44          791          1,256     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Commercial Banking:            

Commercial and multifamily real estate

    89          49          138          13          125          162     

Commercial and industrial

    94          91          185          12          173          220     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

    183          140          323          25          298          382     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Small-ticket commercial real estate

    2          4          6          0          6          7     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total commercial banking     185          144          329          25          304          389     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $ 1,424         $ 520         $ 1,944         $ 330         $ 1,614         $   2,402     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    Three Months Ended
June 30, 2013
    Six Months Ended
June 30, 2013
 

(Dollars in millions)

  Average
Recorded
Investment
    Interest
Income
Recognized
    Average
Recorded
Investment
    Interest
Income
Recognized
 
Credit Card:        

Domestic credit card

  $ 649        $ 16        $ 667        $ 33     

International credit card

    173          3          170          6     
 

 

 

   

 

 

   

 

 

   

 

 

 
Total credit card(2)     822          19          837          39     
 

 

 

   

 

 

   

 

 

   

 

 

 
Consumer Banking:        

Auto(3)

    327          15          327          30     

Home loan

    188          2          172          4     

Retail banking

    94          0          95          1     
 

 

 

   

 

 

   

 

 

   

 

 

 
Total consumer banking     609          17          594          35     
 

 

 

   

 

 

   

 

 

   

 

 

 
Commercial Banking:        

Commercial and multifamily real estate

    239          2          259          3     

Commercial and industrial

    230          1          234          2     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

    469          3          493          5     
 

 

 

   

 

 

   

 

 

   

 

 

 

Small-ticket commercial real estate

    16          0          20          0     
 

 

 

   

 

 

   

 

 

   

 

 

 
Total commercial banking     485          3          513          5     
 

 

 

   

 

 

   

 

 

   

 

 

 
Total   $   1,916        $   39        $ 1,944        $   79     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (1)

Impaired loans above include TDRs, all commercial NPL’s, and home loans NPL’s with a specific impairment.

 

  (2) 

Credit card loans include finance charges and fees.

 

  (3)

Although auto loans from loan recovery inventory are not reported in our loans held for investment, they are included as impaired loans above since they are reported as TDRs.

Troubled debt restructuring (TDR) loans accounted for $1.7 billion of impaired loans as of both June 30, 2014 and December 31, 2013. Consumer TDR loans classified as performing totaled $1.0 billion and $1.1 billion as of June 30, 2014 and December 31, 2013, respectively. Commercial TDR loans classified as performing totaled $214 million and $180 million as of June 30, 2014 and December 31, 2013, respectively.

 

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Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

As part of our loan modifications to borrowers experiencing financial difficulty, we may provide multiple concessions to minimize our economic loss and improve long-term loan performance and collectability. The following tables present the types, amounts and financial effects of loans modified and accounted for as troubled debt restructurings during the period:

Table 4.10: Troubled Debt Restructurings

 

          Three Months Ended June 30, 2014  
          Reduced Interest Rate     Term Extension     Balance Reduction  

 (Dollars in millions)

  Total
Loans
 Modified(1) 
    % of
TDR
 Activity(2)(3) 
    Average
Rate

 Reduction(4) 
    % of
TDR
 Activity(3)(5) 
    Average
Term
Extension

  (Months)(6)  
    % of
TDR
 Activity(3)(7) 
    Gross
Balance

 Reduction(8) 
 
 Credit Card:              

Domestic credit card

   $ 64           100%        11.54%        0%               0%       $   

International credit card

    38           100            25.46            0                   0              
 

 

 

             

 

 

 
 Total credit card     102           100            16.83            0                   0              
 

 

 

             

 

 

 
 Consumer Banking:              

Auto

    69           32            1.45            58                   41            25    

Home loan

    11           38            2.32            33            164         4              

Retail banking

    2           5            7.57            95            10         0              
 

 

 

             

 

 

 
 Total consumer banking     82           32            1.62            56            22         34            25    
 

 

 

             

 

 

 
 Commercial Banking:              

Commercial and multifamily real estate

    4           0            0.00            0                   100              

Commercial and industrial

    12           0            0.00            57            11         0              
 

 

 

             

 

 

 

Total commercial lending

    16           0            0.00            42            11         26              

Small-ticket commercial real estate

    1           0            0.00            0                   0              
 

 

 

             

 

 

 
 Total commercial banking     17           0            0.00            39            11         24              
 

 

 

             

 

 

 
 Total    $ 201           64            13.73            26            20         16           $ 27    
 

 

 

             

 

 

 

 

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Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

          Six Months Ended June 30, 2014  
          Reduced Interest Rate     Term Extension     Balance Reduction  

 (Dollars in millions)

  Total
Loans
 Modified(1) 
    % of
TDR
 Activity(2)(3) 
    Average
Rate
  Reduction(4)  
    % of
TDR
 Activity(3)(5) 
    Average
Term
Extension
 (Months)(6) 
    % of
TDR
 Activity(3)(7) 
    Gross
Balance
  Reduction(8)  
 
 Credit Card:              

Domestic credit card

   $ 131         100%        11.52%        0%               0%       $   

International credit card

    81         100            25.33            0                   0              
 

 

 

             

 

 

 
 Total credit card     212         100            16.83            0                   0              
 

 

 

             

 

 

 
 Consumer Banking:              

Auto

    146         36            1.02            63                   36            47    

Home loan

    19         30            2.04            32            153         8              

Retail banking

           7            5.07            71                   0              
 

 

 

             

 

 

 
 Total consumer banking     173         34            1.16            60            18         31            48    
 

 

 

             

 

 

 
 Commercial Banking:              

Commercial and multifamily real estate

    66         31            1.28            94                   6              

Commercial and industrial

    13         0            0.00            58            11         0              
 

 

 

             

 

 

 

Total commercial lending

    79         26            1.10            88                   5              

Small-ticket commercial real estate

           0            0.00            0                   0              
 

 

 

             

 

 

 
 Total commercial banking     80         26            1.08            87                   5              
 

 

 

             

 

 

 
 Total    $ 465         63            12.55            37            14         13           $ 50    
 

 

 

             

 

 

 

 

  106   Capital One Financial Corporation (COF)


Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

          Three Months Ended June 30, 2013  
          Reduced Interest Rate     Term Extension     Balance Reduction  

 (Dollars in millions)

  Total
Loans
 Modified(1) 
    % of
TDR
 Activity(2)(3) 
    Average
Rate

 Reduction(4) 
    % of
TDR
 Activity(3)(5) 
    Average
Term
Extension

 (Months)(6) 
    % of
TDR
 Activity(3)(7) 
    Gross
Balance
 Reduction(8) 
 
 Credit Card:              

Domestic credit card

   $ 78         100%        12.23%        0%               0%       $   

International credit card

    47         100           24.92           0                  0             
 

 

 

             

 

 

 
 Total credit card     125         100           17.05           0                  0             
 

 

 

             

 

 

 
 Consumer Banking:              

Auto

    61         29           1.71           52                  47           25    

Home loan

    57         12           2.77           5           101         24             

Retail banking

    13         6           3.90           65                  0             
 

 

 

             

 

 

 
 Total consumer banking     131         19           2.07           33           15         32           27    
 

 

 

             

 

 

 
 Commercial Banking:              

Commercial and multifamily real estate

    15         0           0.00           75                  0             

Commercial and industrial

    15         0           0.00           34                  2             
 

 

 

             

 

 

 

Total commercial lending

    30         0           0.00           55                  1             

Small-ticket commercial real estate

           0           0.00           0                  0             
 

 

 

             

 

 

 
 Total commercial banking     30         0           0.00           55                  1             
 

 

 

             

 

 

 
 Total    $ 286         52           14.56           21           12         15          $ 27    
 

 

 

             

 

 

 

 

  107   Capital One Financial Corporation (COF)


Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

          Six Months Ended June 30, 2013  
          Reduced Interest Rate     Term Extension     Balance Reduction  

 (Dollars in millions)

  Total
Loans
 Modified(1) 
    % of
TDR
 Activity(2)(3) 
    Average
Rate
 Reduction(4) 
    % of
TDR
 Activity(3)(5) 
    Average
Term
Extension
 (Months)(6) 
    % of
TDR
 Activity(3)(7) 
    Gross
Balance
 Reduction(8) 
 
 Credit Card:              

Domestic credit card

   $ 154         100%        12.25%        0%               0%       $   

International credit card

    98         100           24.72           0                  0             
 

 

 

             

 

 

 
 Total credit card     252         100           17.11           0                  0             
 

 

 

             

 

 

 
 Consumer Banking:              

Auto

    123         30           1.83           54                  45           50    

Home loan

    68         20           2.80           12           122         23             

Retail banking

    19         5           3.56           61                  0             
 

 

 

             

 

 

 
 Total consumer banking     210         25           2.11           41           19         34           53    
 

 

 

             

 

 

 
 Commercial Banking:              

Commercial and multifamily real estate

    32         0           0.00           88                  0             

Commercial and industrial

    16         0           0.00           38                  1             
 

 

 

             

 

 

 

Total commercial lending

    48         0           0.00           71                  0             

Small-ticket commercial real estate

           0           0.00           0                  0             
 

 

 

             

 

 

 
 Total commercial banking     49         0           0.00           70                  0             
 

 

 

             

 

 

 
 Total    $ 511         60           14.55           24           16         14          $ 53    
 

 

 

             

 

 

 

 

 

 

  (1)

Represents total loans modified and accounted for as a TDR during the period. Paydowns, charge-offs and any other changes in the loan carrying value subsequent to the loan entering TDR status are not reflected.

 

  (2)

Represents percentage of loans modified and accounted for as a TDR during the period that were granted a reduced interest rate.

 

  (3)

Due to multiple concessions granted to some troubled borrowers, percentages may total more than 100% for certain loan types.

 

  (4)

Represents weighted average interest rate reduction for those loans that received an interest rate concession.

 

  (5)

Represents percentage of loans modified and accounted for as a TDR during the period that were granted a maturity date extension.

 

  (6)

Represents weighted average change in maturity date for those loans that received a maturity date extension.

 

  (7)

Represents percentage of loans modified and accounted for as a TDR during the period that were granted forgiveness or forbearance of a portion of their balance.

 

  (8)

Total amount represents the gross balance forgiven. For loans modified in bankruptcy, the gross balance reduction represents collateral value write downs associated with the discharge of the borrower’s obligations.

 

  108   Capital One Financial Corporation (COF)


Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

TDR—Subsequent Defaults of Completed TDR Modifications

The following table presents the type, number and amount of loans accounted for as TDRs that experienced a default during the period and had completed a modification event in the twelve months prior to the default. A default occurs if the loan is either 90 days or more delinquent, has been charged-off as of the end of the period presented, or has been reclassified from accrual to nonaccrual status.

Table 4.11: TDR—Subsequent Defaults

 

    Three Months Ended
June 30, 2014
    Six Months Ended
June 30, 2014
 

 (Dollars in millions)

  Number of
  Contracts  
    Total
     Loans     
    Number of
  Contracts  
    Total
     Loans     
 
 Credit Card:        

Domestic credit card

    9,559        $ 15         20,620        $ 31    

International credit card(1)

    9,883         30         20,404         60    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total credit card     19,442         45         41,024         91    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Consumer Banking:        

Auto

    1,651         18         2,973         31    

Home loan

                  10           

Retail banking

    15                40           
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total consumer banking     1,670         20         3,023         42    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Commercial Banking:        

Commercial and multifamily real estate

                           

Commercial and industrial

                           
 

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

                           

Small-ticket commercial real estate

                           
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total commercial banking                   14         10    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total     21,116        $ 67         44,061        $ 143    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

  109   Capital One Financial Corporation (COF)


Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    Three Months Ended
June 30, 2013
    Six Months Ended
June 30, 2013
 

 (Dollars in millions)

  Number of
  Contracts  
    Total
     Loans     
    Number of
  Contracts  
    Total
     Loans     
 
 Credit Card:        

Domestic credit card

    8,042        $ 16         18,843        $ 37    

International credit card(1)

    11,935         34         23,128         68    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total credit card     19,977         50         41,971         105    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Consumer Banking:        

Auto

    2,193         16         4,857         32    

Home loan

                  18           

Retail banking

    24                58           
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total consumer banking     2,224         17         4,933         35    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Commercial Banking:        

Commercial and multifamily real estate

                         11    

Commercial and industrial

                           
 

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial lending

           10         14         19    

Small-ticket commercial real estate

                           
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total commercial banking            10         15         19    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total     22,208        $ 77         46,919        $ 159    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

  (1) 

The regulatory regime in the U.K. requires U.K. credit card businesses to accept payment plan proposals even when the proposed payments are less than the contractual minimum amount. As a result, loans entering long-term TDR payment programs in the U.K. typically continue to age and ultimately charge-off even when fully in compliance with the TDR program terms.

Acquired Loans Accounted for Based on Expected Cash Flows

Outstanding Balance and Carrying Value of Acquired Loans

The table below presents the outstanding contractual balance and the carrying value of loans from the CCB, ING Direct and 2012 U.S. card acquisitions accounted for based on expected cash flows as of June 30, 2014 and December 31, 2013. The table displays separately loans considered credit-impaired at acquisition and loans not considered credit-impaired at acquisition.

Table 4.12: Acquired Loans Accounted for Based on Expected Cash Flows

 

    June 30, 2014     December 31, 2013  

 (Dollars in millions)

  Total     Impaired
Loans
    Non-
Impaired
Loans
    Total     Impaired
Loans
    Non-
Impaired
Loans
 
 Contractual balance    $     27,981        $     4,659        $     23,322        $     30,565        $     5,016        $     25,549    
 Carrying value(1)     26,044         3,058         22,986         28,580         3,285         25,295    

 

 

 

  (1)

Includes $32 million and $38 million of allowance for loan and lease losses for these loans as of June 30, 2014 and December 31, 2013, respectively.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Changes in Accretable Yield

The following table presents changes in the accretable yield on loans related to the CCB, ING Direct, and 2012 U.S. card acquisitions:

Table 4.13: Changes in Accretable Yield on Acquired Loans

 

(Dollars in millions)

  Total
    Loans    
     Impaired 
Loans
    Non-
  Impaired  
Loans
 
Accretable yield as of December 31, 2012    $ 6,208        $ 1,899        $ 4,309    
Accretion recognized in earnings     (1,182)        (427)        (755)   
Reclassifications from nonaccretable difference for loans with improving cash flows(1)     1,005         629         376    
Increases (reductions) in accretable yield for non-credit related changes in expected cash flows(2)     389         13         376    
 

 

 

   

 

 

   

 

 

 
Accretable yield as of December 31, 2013    $ 6,420        $ 2,114        $ 4,306    
 

 

 

   

 

 

   

 

 

 
Accretion recognized in earnings     (552)        (207)        (345)   
Reclassifications from nonaccretable difference for loans with improving cash flows(1)     96         82         14    
Increases (reductions) in accretable yield for non-credit related changes in expected cash flows(2)     (304)        (274)        (30)   
 

 

 

   

 

 

   

 

 

 
Accretable yield as of June 30, 2014    $ 5,660        $ 1,715        $ 3,945    
 

 

 

   

 

 

   

 

 

 

 

 

  (1)

Represents increases in accretable yields for those pools that are driven primarily by improved credit performance.

 

  (2)

Represents changes in accretable yields for those pools that are driven primarily by changes in actual and estimated prepayments.

Unfunded Lending Commitments

We manage the potential risk in credit commitments by limiting the total amount of arrangements, both by individual customer and in total, by monitoring the size and maturity structure of these portfolios and by applying the same credit standards for all of our credit activities. Unused credit card lines available to our customers totaled $285.8 billion and $276.7 billion as of June 30, 2014 and December 31, 2013, respectively. While these amounts represented the total available unused credit card lines, we have not experienced and do not anticipate that all of our customers will access their entire available line at any given point in time.

In addition to available unused credit card lines, we enter into commitments to extend credit that are legally binding conditional agreements having fixed expirations or termination dates and specified interest rates and purposes. These commitments generally require customers to maintain certain credit standards. Collateral requirements and loan-to-value (“LTV”) ratios are the same as those for funded transactions and are established based on management’s credit assessment of the customer. These commitments may expire without being drawn upon; therefore, the total commitment amount does not necessarily represent future funding requirements. The outstanding unfunded commitments to extend credit, other than credit card lines, were approximately $22.8 billion and $20.9 billion as of June 30, 2014 and December 31, 2013, respectively.

 

 

 NOTE 5—ALLOWANCE FOR LOAN AND LEASE LOSSES

 

Our allowance for loan and lease losses represents management’s best estimate of incurred loan and lease losses inherent in our held for investment portfolio as of each balance sheet date. In addition to the allowance for loan and lease losses, we also estimate probable losses related to unfunded lending commitments, such as letters of credit, financial guarantees, and binding unfunded loan commitments. The provision for unfunded lending commitments is included in the provision for credit losses on our consolidated statements of income and the related reserve for unfunded lending commitments is included in other liabilities on our consolidated balance sheets.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

See “Note 1—Summary of Significant Accounting Policies” of our 2013 Form 10-K for further discussion on the methodologies and policies for determining our allowance for loan and lease losses for each of our loan portfolio segments.

Allowance for Loan and Lease Losses Activity

The allowance for loan and lease losses is increased through the provision for credit losses and reduced by net charge-offs. The provision for credit losses, which is charged to earnings, reflects credit losses we believe have been incurred and will eventually be reflected over time in our charge-offs. Charge-offs of uncollectible amounts are deducted from the allowance for loan and lease losses and subsequent recoveries are included. The table below summarizes changes in the allowance for loan and lease losses, by portfolio segment, for the three and six months ended June 30, 2014 and 2013:

Table 5.1: Allowance for Loan and Lease Losses

 

 (Dollars in millions)

  Three Months Ended June 30, 2014  
  Credit
Card
    Consumer Banking     Commercial
Banking
    Other(1)     Total
Allowance
    Unfunded
Lending
Commitments

Reserve
    Combined
Allowance
&
Unfunded
Reserve
 
    Auto     Home
Loan
    Retail
Banking
    Total
Consumer
Banking
           

 Balance as of March 31, 2014

   $     2,984         $ 608         $     72         $ 64         $ 744         $   362         $   8         $   4,098         $ 99         $     4,197     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Provision for credit losses

    549          145          0          (2)         143          9          0          701          3          704     

 Charge-offs

    (995)         (183)         (8)         (14)         (205)         (8)         (4)         (1,212)         0          (1,212)    

 Recoveries

    310          72          3          8          83          5          2          400          0          400     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Net charge-offs

    (685)         (111)         (5)         (6)         (122)        (3)         (2)         (812)         0          (812)    

 Other changes(2)

    10          0          0          0          0          0          1          11          0          11     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Balance as of June 30, 2014

   $   2,858         $ 642         $ 67         $ 56         $ 765         $ 368         $ 7         $ 3,998         $   102         $ 4,100     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

 

Six Months Ended June 30, 2014

 
          Consumer Banking                       Unfunded
Lending
Commitments
Reserve
    Combined
Allowance
&
Unfunded
Reserve
 

 (Dollars in millions)

  Credit
Card
    Auto     Home
Loan
    Retail
Banking
    Total
Consumer
Banking
    Commercial
Banking
    Other(1)     Total
Allowance
     

 Balance as of December 31, 2013

   $     3,214         $ 606         $ 83         $ 63         $ 752         $   338         $ 11         $   4,315         $ 87         $     4,402     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Provision for credit losses

    1,107          281          (6)         8          283          37          (3)         1,424          15          1,439     

 Charge-offs

    (2,090)         (388)         (19)         (29)         (436)         (15)         (6)         (2,547)         0          (2,547)    

 Recoveries

    625          143          9          14          166          8          5          804          0          804     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Net charge-offs

    (1,465)         (245)         (10)         (15)         (270)         (7)         (1)         (1,743)         0          (1,743)    

 Other changes(2)

    2          0          0          0          0          0          0          2          0          2     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Balance as of June 30, 2014

   $ 2,858         $ 642         $ 67         $ 56         $ 765         $ 368         $ 7         $ 3,998         $ 102         $ 4,100     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

 

Three Months Ended June 30, 2013

 
          Consumer Banking                       Unfunded
Lending
Commitments
Reserve
    Combined
Allowance
&
Unfunded
Reserve
 

 (Dollars in millions)

  Credit
Card
    Auto     Home
Loan
    Retail
Banking
    Total
Consumer
Banking
    Commercial
Banking
    Other(1)     Total
Allowance
     

 Balance as of March 31, 2013

   $     3,494        $ 528         $ 103         $ 112         $ 743         $   342         $ 27         $   4,606         $ 85         $     4,691     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Provision for credit losses

    713          101          (20)         (12)         69          1          (5)         778          (16)         762     

 Charge-offs

    (1,181)         (153)         (5)         (19)         (177)         (14)         (7)         (1,379)         0          (1,379)    

 Recoveries

    331          61          1          5          67          10          2          410          0          410     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Net charge-offs

    (850)         (92)         (4)         (14)         (110)         (4)         (5)         (969)         0          (969)    

 Other change(2)

    (8)         0          0          0          0          (1)         1          (8)         0          (8)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Balance as of June 30, 2013

   $ 3,349        $ 537         $ 79         $ 86         $ 702         $ 338         $ 18         $ 4,407         $ 69         $ 4,476     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    Six Months Ended June 30, 2013  
          Consumer Banking                       Unfunded
Lending
Commitments
Reserve
    Combined
Allowance
&
Unfunded
Reserve
 

 (Dollars in millions)

  Credit
Card
    Auto     Home
Loan
    Retail
Banking
    Total
Consumer
Banking
    Commercial
Banking
    Other(1)     Total
Allowance
     

 Balance as of December 31, 2012

   $     3,979         $ 486         $ 113         $ 112         $ 711         $   433         $ 33         $   5,156         $ 35         $     5,191     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Provision for credit losses

    1,456          265          (26)         5          244          (84)         (3)         1,613          34          1,647     

 Charge-offs

    (2,443)        (335)         (12)         (44)         (391)         (26)         (15)         (2,875)         0          (2,875)    

 Recoveries

    671          121          4          13          138          15          3          827          0          827     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Net charge-offs

    (1,772)         (214)         (8)         (31)         (253)         (11)         (12)         (2,048)         0          (2,048)    

 Other changes(2)

    (314)         0          0          0          0          0          0          (314)         0          (314)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Balance as of June 30, 2013

   $ 3,349         $ 537         $ 79         $ 86         $ 702         $ 338         $ 18         $ 4,407         $ 69         $ 4,476     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

  (1) 

Other consists of our discontinued GreenPoint mortgage operations loan portfolio and our community redevelopment loan portfolio.

 

  (2) 

Primarily represents foreign currency translation adjustments and the net impact of loan transfers and sales. In the first quarter of 2013, the allowance of loan and lease losses was reduced by $289 million attributable to the transfer of the Best Buy portfolio from loans held for investment to loans held for sale, which was subsequently sold in the third quarter of 2013.

Components of Allowance for Loan and Lease Losses by Impairment Methodology

The table below presents the components of our allowance for loan and lease losses, by portfolio segment and impairment methodology, and the recorded investment of the related loans as of June 30, 2014 and December 31, 2013:

Table 5.2: Components of Allowance for Loan and Lease Losses by Impairment Methodology

 

    June 30, 2014  
  Credit
Card
    Consumer Banking     Total
Consumer
Banking
    Commercial
Banking
    Other     Total  

 (Dollars in millions)

    Auto     Home
Loan
    Retail
Banking
         

 Allowance for loan and lease losses by impairment methodology:

               

 Collectively evaluated(1)

   $ 2,635           $ 625           $ 17           $ 49           $ 691           $ 336           $ 7           $ 3,669       

 Asset-specific(2)

    223            17            18            7            42            32            0            297       

 Acquired Loans(3)

    0            0            32            0            32            0            0            32       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total allowance for loan and lease losses

   $ 2,858           $ 642           $ 67           $ 56           $ 765           $ 368           $ 7           $ 3,998       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Loans held for investment by impairment methodology:

               

 Collectively evaluated(1)

   $ 78,253           $ 34,605           $ 6,526           $ 3,509           $ 44,640           $ 47,708           $ 127           $ 170,728       

 Asset-specific(2)

    728            185            404            68            657            396            0            1,781       

 Acquired Loans(3)

    37            2            25,714            49            25,765            217            0            26,019       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total loans held for investment

   $   79,018           $   34,792           $   32,644           $   3,626           $   71,062           $   48,321           $   127           $   198,528       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Allowance as a percentage of period-end loans held for investment

    3.62%        1.85%        0.21%        1.54%        1.08%        0.76%        4.89%        2.01%   

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

 (Dollars in millions)

  December 31, 2013  
  Credit
Card
    Consumer Banking     Total
Consumer
Banking
                   
    Auto     Home
Loan
    Retail
Banking
      Commercial
Banking
    Other     Total  

 Allowance for loan and lease losses by impairment methodology:

               

 Collectively evaluated(1)

   $ 2,953           $ 590           $ 27           $ 53           $ 670           $ 313           $ 11           $ 3,947       

 Asset-specific(2)

    261            16            18            10            44            25            0            330       

 Acquired Loans(3)

    0            0            38            0            38            0            0            38       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total allowance for loan and lease losses

   $ 3,214           $ 606           $ 83           $ 63           $ 752           $ 338           $ 11           $ 4,315       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Loans held for investment by impairment methodology:

               

 Collectively evaluated(1)

   $ 80,462           $ 31,683           $ 6,704           $ 3,501           $ 41,888           $ 44,420           $ 121           $ 166,891       

 Asset-specific(2)

    780            169            394            86            649            329            0            1,758       

 Acquired Loans(3)

    63            5            28,184            36            28,225            262            0            28,550       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total loans held for investment

   $   81,305           $   31,857           $   35,282           $   3,623           $   70,762           $   45,011           $   121           $   197,199       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Allowance as a percentage of period-end loans held for investment

    3.95%         1.90%         0.24%         1.74%         1.06%         0.75%         9.09%         2.19%    

 

 

 

  (1) 

The component of the allowance for loan and lease losses for credit card and other consumer loans that we collectively evaluate for impairment is based on a statistical calculation supplemented by management judgment and interpretation. The component of the allowance for loan and lease losses for commercial loans, which we collectively evaluate for impairment, is based on historical loss experience for loans with similar characteristics and consideration of credit quality supplemented by management judgment and interpretation.

 

  (2) 

The asset-specific component of the allowance for loan and lease losses for smaller-balance impaired loans is calculated on a pool basis using historical loss experience for the respective class of assets. The asset-specific component of the allowance for loan and lease losses for larger-balance commercial loans is individually calculated for each loan.

 

  (3) 

The Acquired Loans component of the allowance for loan and lease losses is accounted for based on expected cash flows. See “Note 4—Loans” for details on these loans.

 

 

 NOTE 6—VARIABLE INTEREST ENTITIES AND SECURITIZATIONS

 

In the normal course of business, we enter into various types of transactions with entities that are considered to be VIEs. Our primary involvement with VIEs has been related to our securitization transactions in which we transferred assets from our balance sheet to securitization trusts. We have primarily securitized credit card loans and home loans, which have provided a source of funding for us and enabled us to transfer a certain portion of the economic risk of the loans or debt securities to third parties.

The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE. The majority of the VIEs in which we are involved have been consolidated in our financial statements.

Summary of Consolidated and Unconsolidated VIEs

The table below presents a summary of VIEs, aggregated based on VIEs with similar characteristics, in which we had continuing involvement or held a variable interest as of June 30, 2014 and December 31, 2013. We separately present information for consolidated and unconsolidated VIEs.

For consolidated VIEs, we present the carrying amount of assets and liabilities reflected on our consolidated balance sheets. The assets of consolidated VIEs primarily consist of cash and loans, which we report on our consolidated balance sheets under restricted cash and restricted loans, respectively, for securitization investors. The assets of a particular VIE are the primary source of funds to settle its obligations. The creditors of the VIEs typically do not have recourse to the general credit of the company. The liabilities primarily consist of debt securities issued by the VIEs, which we report under securitized debt obligations. For unconsolidated VIEs, we present the carrying amount of assets and liabilities reflected on our consolidated balance sheets and our

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

maximum exposure to loss. Our maximum exposure to loss is estimated based on the unlikely event that all of the assets in the VIEs become worthless and we are required to meet our maximum remaining funding obligations.

Table 6.1: Carrying Amount of Consolidated and Unconsolidated VIEs(1)

 

    June 30, 2014  
    Consolidated      Unconsolidated  

 (Dollars in millions)

  Carrying
Amount

of Assets
    Carrying
Amount of
Liabilities
     Carrying
Amount

of Assets
    Carrying
Amount of
Liabilities
    Maximum
Exposure to
Loss
 
 Securitization-related VIEs:           

Credit card loan securitizations(2)

   $     37,665         $     12,434          $ 0         $ 0         $ 0     

Home loan securitizations(3)

    0          0           195          32          850     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
 Total securitization-related VIEs     37,665          12,434           195          32          850     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
 Other VIEs:           

Affordable housing entities

    0          0           3,109          432          3,109     

Entities that provide capital to low-income and rural communities

    390          99           1          0          1     

Other

    7          0           85          0          85     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
 Total other VIEs.     397          99           3,195          432          3,195     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
 Total VIEs    $   38,062         $ 12,533          $     3,390         $     464         $     4,045     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

    December 31, 2013  
    Consolidated      Unconsolidated  

 (Dollars in millions)

  Carrying
Amount

of Assets
    Carrying
Amount of
Liabilities
     Carrying
Amount

of Assets
    Carrying
Amount of
Liabilities
    Maximum
Exposure to
Loss
 
 Securitization-related VIEs:           

Credit card loan securitizations(2)

   $ 40,422         $ 12,671          $ 0         $ 0         $ 0     

Home loan securitizations(3)

    0          0           199          15          702     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
 Total securitization-related VIEs     40,422          12,671           199          15          702     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
 Other VIEs:           

Affordable housing entities

    0          0           2,969          463          2,969     

Entities that provide capital to low-income and rural communities

    389          98           1          0          1     

Other

    1          1           95          0          95     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
 Total other VIEs.     390          99           3,065          463          3,065     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
 Total VIEs    $     40,812         $     12,770          $     3,264         $     478         $     3,767     
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

 

 

  (1)

In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

 

  (2)

Represents the gross assets and liabilities owned by the VIE, which includes seller’s interest and retained and repurchased notes held by other related parties.

 

  (3)

The carrying amount of assets of unconsolidated securitization-related VIEs consists of retained interests associated with the securitization of option-adjustable rate mortgage loans (“option-ARM”) and letters of credit related to manufactured housing securitizations. These are reported on our consolidated balance sheets under other assets. The carrying amount of liabilities of unconsolidated securitization-related VIEs is comprised of obligations on certain swap agreements associated with the securitization of manufactured housing loans and other obligations. These are reported on our consolidated balance sheets under other liabilities.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Securitization-Related VIEs

In a securitization transaction, assets from our balance sheet are transferred to a trust we establish, which typically meets the definition of a VIE. Our continuing involvement in the majority of our securitization transactions consists primarily of holding certain retained interests and acting as the primary servicer. We have the option to repurchase receivables from the trust if the outstanding balance of the receivables falls to a level where the cost exceeds the benefits of servicing such receivables. In some cases, we are contractually required to exercise the repurchase option if the primary servicer fails to do so. We also may have exposure associated with contractual obligations to repurchase previously transferred loans due to breaches of representations and warranties. See “Note 14—Commitments, Contingencies, Guarantees, and Others” for information related to reserves we have established for our potential mortgage representation and warranty exposure.

The table below presents the securitization-related VIEs in which we had continuing involvement as of June 30, 2014 and December 31, 2013:

Table 6.2: Continuing Involvement in Securitization-Related VIEs

 

     Non-Mortgage      Mortgage  

 (Dollars in millions)

   Credit
Card
     Option
ARM
     GreenPoint
HELOCs
     GreenPoint
Manufactured
Housing
 
 June 30, 2014:            
 Securities held by third-party investors.    $ 10,010          $ 2,189          $ 108          $ 939      
 Receivables in the trust      37,304            2,264            105            945      
 Cash balance of spread or reserve accounts      0            8            0            145      
 Retained interests      Yes            Yes            Yes            Yes      
 Servicing retained      Yes            Yes(1)         No            No(2)   
 Amortization event(3)      No            No            No            No      
 December 31, 2013:            
 Securities held by third-party investors.    $ 10,289          $ 2,320          $ 122          $ 994      
 Receivables in the trust      39,548            2,399            116            1,000      
 Cash balance of spread or reserve accounts      3            8            N/A            144      
 Retained interests      Yes            Yes            Yes            Yes      
 Servicing retained      Yes            Yes(1)         Yes(1)         No(2)   
 Amortization event(3)      No            No            No            No      

 

 

 

  (1) 

We retained servicing of the outstanding balance for a portion of securitized mortgage receivables.

 

  (2) 

The core servicing activities for the manufactured housing securitizations are completed by a third party.

 

  (3)

Amortization events vary according to each specific trust agreement but generally are triggered by declines in performance or credit metrics such as charge-off rates or delinquency rates below certain predetermined thresholds. Generally, the occurrence of an amortization event changes the sequencing and amount of trust-related cash flows to the benefit of senior noteholders.

Non-Mortgage Securitizations

As of June 30, 2014 and December 31, 2013, we were deemed to be the primary beneficiary of all of our non-mortgage securitization trusts. Accordingly, all of these trusts have been consolidated in our financial statements.

 

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Mortgage Securitizations

Option-ARM Loans

We had previously securitized option-ARM mortgage loans by transferring the mortgage loans to securitization trusts that had issued mortgage-backed securities to investors. The outstanding balance of debt securities held by third-party investors related to our mortgage loan securitization trusts was $2.2 billion and $2.3 billion as of June 30, 2014 and December 31, 2013, respectively.

We continue to service a portion of the outstanding balance of securitized mortgage receivables. We also retain rights to future cash flows arising from the receivables, the most significant being certificated interest-only bonds issued by the trusts. We generally estimate the fair value of these retained interests based on the estimated present value of expected future cash flows from securitized and sold receivables, using our best estimates of the key assumptions which include credit losses, prepayment speeds and discount rates commensurate with the risks involved. For the trusts that we continue to service, we do not consolidate these entities because we do not have the right to receive benefits that could potentially be significant nor the obligation to absorb losses that could potentially be significant to the trusts. For the remaining trusts, for which we no longer service the underlying mortgage loans, we do not consolidate these entities because we do not have the power to direct the activities that most significantly impact the economic performance of the trusts.

In connection with the securitization of certain option-ARM loans, a third party is obligated to advance a portion of any “negative amortization” resulting from monthly payments that are less than the interest accrued for that payment period. We have an agreement in place with the third party that mirrors this advance requirement. The amount advanced is tracked through mortgage-backed securities retained as part of the securitization transaction. As advances occur, we record an asset in the form of negative amortization bonds, which are held at fair value in other assets on our consolidated balance sheets. Our maximum exposure is affected by rate caps and monthly payment change caps, but the funding obligation cannot exceed the difference between the original loan balance multiplied by a preset negative amortization cap and the current unpaid principal balance. We have also entered into certain derivative contracts related to the securitization activities. These are classified as free standing derivatives, with fair value adjustments recorded in non-interest income. See “Note 9—Derivative Instruments and Hedging Activities” for further details on these derivatives.

GreenPoint Mortgage Home Equity Lines of Credit (“HELOCs”)

Our discontinued wholesale mortgage banking unit, GreenPoint, previously sold home equity lines of credit in whole loan sales and subsequently acquired residual interests in certain trusts which securitized some of those loans. As the residual interest holder, GreenPoint is required to fund advances on the home equity lines of credit when certain performance triggers are met due to deterioration in asset performance. We have funded cumulative advances of $29 million as of both June 30, 2014 and December 31, 2013. These advances are generally expensed as funded due to the low likelihood of recovery. We also have unfunded commitments of $7 million related to those interests for our non-consolidated VIEs as of both June 30, 2014 and December 31, 2013.

GreenPoint Mortgage Manufactured Housing

We retain the primary obligation for certain provisions of corporate guarantees, recourse sales and clean-up calls related to the discontinued manufactured housing operations of GreenPoint Credit LLC, which was sold to a third party in 2004. Although we are the primary obligor, recourse obligations related to aforementioned whole loan sales, commitments to exercise mandatory clean-up calls on certain securitization transactions and servicing were transferred to a third party in the sale transaction. We do not consolidate the trusts used for the securitization of manufactured housing loans because we do not have the power to direct the activities that most significantly impact the economic performance of the trusts since we no longer service the loans.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

We were required to fund letters of credit in 2004 to cover losses and are obligated to fund future amounts under swap agreements for certain transactions. We have the right to receive any funds remaining in the letters of credit after the securities are released.

The unpaid principal balance of manufactured housing securitization transactions where we are the residual interest holder was $945 million and $1.0 billion as of June 30, 2014 and December 31, 2013, respectively. In the event the third-party servicer does not fulfill on its obligation to exercise the clean-up calls on certain transactions, the obligation reverts to us and we would assume approximately $420 million of loans receivable upon our execution of the clean-up call with the requirement to absorb any losses on the loans receivable.

We monitor the underlying assets for trends in delinquencies and related losses and review the purchaser’s financial strength as well as servicing performance. These factors are considered in assessing the adequacy of the liabilities established for these obligations and the valuations of the assets.

Other VIEs

Affordable Housing Entities

As part of our community reinvestment initiatives, we invest in private investment funds that make equity investments in multi-family affordable housing properties. We receive affordable housing tax credits for these investments. The activities of these entities are financed with a combination of invested equity capital and debt. For those investment funds considered to be VIEs, we are not required to consolidate them if we do not have the power to direct the activities that most significantly impact the economic performance of those entities. We record our interests in these unconsolidated VIEs in loans held for investment, other assets and other liabilities on our consolidated balance sheets. Our interests consisted of assets of approximately $3.1 billion and $3.0 billion as of June 30, 2014 and December 31, 2013, respectively. Our maximum exposure to these entities is limited to our variable interests in the entities and was $3.1 billion as of June 30, 2014. The creditors of the VIEs have no recourse to our general credit and we do not provide additional financial or other support other than during the period that we are contractually required to provide. The total assets of the unconsolidated VIE investment funds were $9.8 billion as of both June 30, 2014 and December 31, 2013.

Entities that Provide Capital to Low-Income and Rural Communities

We hold variable interests in entities (“Investor Entities”) that invest in community development entities (“CDEs”) that provide debt financing to businesses and non-profit entities in low-income and rural communities. Variable interests in the CDEs held by the consolidated Investor Entities are also our variable interests. The activities of the Investor Entities are financed with a combination of invested equity capital and debt. The activities of the CDEs are financed solely with invested equity capital. We receive federal and state tax credits for these investments. We consolidate the VIEs in which we have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or right to receive benefits that could be potentially significant to the VIE. We have also consolidated other investments and CDEs that we do not consider VIEs. The assets of the VIEs that we consolidated as of June 30, 2014 and December 31, 2013 totaled approximately $390 million and $389 million, respectively, and are reflected on our consolidated balance sheets in cash, loans held for investment, interest receivable and other assets. The liabilities are reflected in other liabilities. The creditors of the VIEs have no recourse to our general credit. We have not provided additional financial or other support other than during the period that we are contractually required to provide.

Other

Other VIEs primarily includes a variable interest that we hold in a trust that has a royalty interest in certain oil and gas properties. The activities of the trust are financed solely with debt. The total assets of the trust were

 

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$180 million and $204 million as of June 30, 2014 and December 31, 2013, respectively. We were not required to consolidate the trust because we do not have the power to direct the activities of the trust that most significantly impact the trust’s economic performance. Our retained interest in the trust, which totaled approximately $83 million and $93 million as of June 30, 2014 and December 31, 2013, respectively, is reflected on our consolidated balance sheets under loans held for investment. Our maximum exposure to this entity is limited to our variable interest of $83 million as of June 30, 2014. The creditors of the trust have no recourse to our general credit. We have not provided additional financial or other support other than during the period that we are contractually required to provide.

 

 

NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS

 

The table below displays the components of goodwill, other intangible assets and mortgage serving rights (“MSRs”) as of June 30, 2014 and December 31, 2013. Goodwill is presented separately on our consolidated balance sheets. Other intangible assets and MSRs are included in other assets on our consolidated balance sheets.

Table 7.1: Components of Goodwill and Other Intangible Assets

 

    June 30, 2014     December 31, 2013  

 (Dollars in millions)

  Carrying
Amount of
Assets(1)
    Accumulated
Amortization(1)
    Net
Carrying
Amount
    Carrying
Amount of
Assets(1)
    Accumulated
Amortization(1)
    Net
Carrying
Amount
 
 Goodwill    $ 13,977        N/A      $ 13,977       $ 13,978        N/A       $ 13,978    
 Other intangible assets:            

Purchased credit card relationship intangibles (“PCCR”)

    2,125       $ (976     1,149        2,125       $ (784     1,341    

Core deposit intangibles

    1,771        (1,509     262        1,771        (1,440     331    

Other(2)

    307        (148     159        316        (139     177    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total other intangible assets     4,203        (2,633     1,570        4,212        (2,363     1,849    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total goodwill and other intangible assets    $ 18,180       $ (2,633    $ 15,547       $ 18,190       $ (2,363    $ 15,827    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 MSRs:            

Consumer MSRs(3)

   $ 57        N/A       $ 57       $ 73        N/A       $ 73    

Commercial MSRs(4)

    142       $ (13     129        135       $ (3     132    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total MSRs    $ 199       $ (13    $ 186       $ 208       $ (3    $ 205    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

  (1) 

Certain intangible assets that were fully amortized in prior periods were removed from our balance sheet.

 

  (2) 

Primarily consists of brokerage relationship intangibles, partnership and other contract intangibles and trademark/name intangibles. Also includes certain indefinite-lived intangibles of $4 million as of both June 30, 2014 and December 31, 2013.

 

  (3) 

Represent MSRs related to our consumer business that are carried at fair value on our consolidated financial statements.

 

  (4) 

Represent MSRs related to our commercial business that are subsequently measured under the amortization method and periodically assessed for impairment. None of these MSRs were impaired and no valuation allowance was recorded as of June 30, 2014 and December 31, 2013.

Amortization expense for amortized intangible assets, which is presented separately on our consolidated statements of income, totaled $136 million and $279 million for the three and six months ended June 30, 2014, respectively, and $167 million and $344 million for the three and six months ended June 30, 2013, respectively.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Goodwill

The following table presents goodwill attributable to each of our business segments as of June 30, 2014 and December 31, 2013.

Table 7.2: Goodwill Attributable to Business Segments

 

 (Dollars in millions)

  Credit
Card
    Consumer
Banking
     Commercial 
Banking
    Total  
 Balance as of December 31, 2013    $ 5,005         $ 4,585          $ 4,388          $ 13,978      
 Acquisitions     0          0           0           0      
 Other adjustments     4          (1)          (4)          (1)     
 

 

 

   

 

 

   

 

 

   

 

 

 
 Balance as of June 30, 2014    $     5,009         $     4,584          $ 4,384          $     13,977      
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 NOTE 8—DEPOSITS AND BORROWINGS

 

Customer Deposits

Our customer deposits, which are our largest source of funding for our operations and asset growth, consist of non-interest bearing and interest-bearing deposits, including demand, money market, certificates of deposits, negotiable order of withdrawal (“NOW”) and savings accounts.

Securitized and Unsecured Debt Obligations

We use a variety of funding sources other than customer deposits, including short-term borrowings, the issuance of senior and subordinated notes and other borrowings, and securitization transactions. In addition, we utilize FHLB advances, which are secured by certain portions of our loan and investment securities portfolios, for our funding needs. The securitization debt obligations are separately presented on our consolidated balance sheets, while federal funds purchased and securities loaned or sold under agreements to repurchase, senior and subordinated notes and other borrowings, including FHLB advances, are included in other debt on our consolidated balance sheets.

Securitized Debt Obligations

Our outstanding borrowings due to securitization investors were $10.0 billion and $10.3 billion of June 30, 2014 and December 31, 2013, respectively. During the six months ended June 30, 2014, $2.5 billion of new debt was issued to third-party investors from the credit card securitization trusts offset by $2.8 billion of debt maturities.

Senior and Subordinated Notes

As of June 30, 2014, we had $16.6 billion of senior and subordinated notes outstanding, net of fair value hedging losses of $121 million. As of December 31, 2013, we had $13.1 billion of senior and subordinated notes outstanding, net of fair value hedging losses of $8 million. During the first six months of 2014, we issued $4.8 billion of long-term senior unsecured debt, comprised of $250 million of floating rate notes and $4.5 billion of fixed rate notes. During the first six months of 2014, $1.4 billion of outstanding unsecured notes matured. See “Note 9—Derivative Instruments and Hedging Activities” for information about our fair value hedging activities.

FHLB Advances and Other

In addition to the issuance capacity under the registration statement, we also have access to funding through the FHLB system and the Federal Reserve Discount Window. Our FHLB and Federal Reserve memberships require us to hold FHLB and Federal Reserve stock which totaled $1.7 billion and $1.9 billion as of June 30, 2014 and December 31, 2013, respectively, and are included in other assets on our consolidated balance sheets.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

We had outstanding FHLB advances and lines of credit, which were secured by our investment securities, residential home loans, multifamily loans, commercial real estate loans and home equity lines of credit, totaling $10.4 billion and $16.3 billion as of June 30, 2014 and December 31, 2013, respectively. We did not access the Federal Reserve Discount Window during 2014 or 2013.

Composition of Customer Deposits, Short-term Borrowings and Long-term Debt

The table below summarizes the components of our deposits, short-term borrowings and long-term debt as of June 30, 2014 and December 31, 2013. Our total short-term borrowings consist of federal funds purchased and securities loaned and sold under agreements to repurchase and other short-term borrowings with an original contractual maturity of one year or less. Our long-term debt consists of borrowings with an original contractual maturity of greater than one year. The amounts presented for outstanding borrowings include unamortized debt premiums and discounts, net of fair value hedge accounting adjustments.

Table 8.1: Components of Customer Deposits, Short-term Borrowings and Long-term Debt

 

 (Dollars in millions)

  June 30,
2014
     December 31,
2013
 
 Deposits:     

Non-interest bearing deposits

   $ 24,920          $ 22,643     

Interest-bearing deposits.

    180,970           181,880     
 

 

 

    

 

 

 
 Total deposits.    $ 205,890          $ 204,523     
 

 

 

    

 

 

 
 Short-term borrowings:     

Federal funds purchased and securities loaned or sold under agreements to repurchase.

   $ 2,030          $ 915     

FHLB advances

    8,450           15,300     
 

 

 

    

 

 

 
 Total short-term borrowings    $       10,480          $       16,215     
 

 

 

    

 

 

 

 

    June 30, 2014      December 31,
2013
 

 (Dollars in millions)

        Maturity      
Date
        Interest      
Rate
  Weighted
Average
  Interest Rate  
      Outstanding  
Amount
    
 Long-term debt:           
 Securitized debt obligations(1)   2014 - 2025   0.19 - 5.75%     1.42%       $ 10,010          $ 10,289     
 Senior and subordinated notes:           

Fixed unsecured senior debt(1)

  2014 - 2024   1.00 - 6.75%     2.82%        12,883           9,612     

Floating unsecured senior debt

  2014 - 2017   0.68 - 1.38%     0.90%        1,130           852     
       

 

 

    

 

 

 
 Total unsecured senior debt         2.66%        14,013           10,464     

Fixed unsecured subordinated debt(1)

  2016 - 2023   3.38 - 8.80%     4.97%        2,615           2,670     
       

 

 

    

 

 

 
 Total senior and subordinated notes           16,628           13,134     
 Other long-term borrowings:           

FHLB advances

  2014 - 2023   0.26 - 6.88%     0.44%        1,996           1,016     
       

 

 

    

 

 

 
 Total long-term debt           28,634           24,439     
       

 

 

    

 

 

 

 Total short-term borrowings and long-term debt

         $ 39,114          $ 40,654     
       

 

 

    

 

 

 

 

 

 

  (1)

Outstanding amount includes the impact from hedge accounting.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Components of Interest Expense

The following table displays interest expense attributable to short-term borrowings and long-term debt for the three and six months ended June 30, 2014 and 2013:

Table 8.2: Components of Interest Expense on Short-term Borrowings and Long-term Debt

 

    Three Months Ended
June 30,
     Six Months Ended
June 30,
 

 (Dollars in millions)

      2014             2013              2014             2013      
 Short-term borrowings:         

Federal funds purchased and securities loaned or sold under agreements to repurchase

   $       $        $       $   

FHLB advances

                          16    
 

 

 

   

 

 

    

 

 

   

 

 

 
 Total short-term borrowings                    10         17    
 

 

 

   

 

 

    

 

 

   

 

 

 
 Long-term debt:         

Securitized debt obligations(1)

    39         45          77         101    

Senior and subordinated notes(1)

    78         82          155         164    

Other long-term borrowings

                   10         12    
 

 

 

   

 

 

    

 

 

   

 

 

 
 Total long-term debt     121         133          242         277    
 

 

 

   

 

 

    

 

 

   

 

 

 
 Total interest expense    $ 125        $ 139         $ 252        $ 294    
 

 

 

   

 

 

    

 

 

   

 

 

 

 

 

  (1) 

Interest expense includes the impact from hedge accounting.

 

 

 NOTE 9—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

Use of Derivatives

We manage our asset and liability position and market risk exposure in accordance with prescribed risk management policies and limits established by our Market and Liquidity Risk Policy which is approved by our Board of Directors. Our primary market risk stems from the impact on our earnings and economic value of equity from changes in interest rates, and to a lesser extent, changes in foreign exchange rates. We employ several techniques to manage our interest rate sensitivity, which include changing the duration and re-pricing characteristics of various assets and liabilities by using interest rate derivatives. Our current asset and liability management policy also includes the use of derivatives to hedge foreign currency denominated transactions to limit our earnings exposure to foreign exchange risk. We execute our derivative contracts in both the over-the-counter (“OTC”) and exchange-traded derivative markets. The majority of our derivatives are interest rate swaps. In addition, we may use a variety of other derivative instruments, including caps, floors, options, futures and forward contracts, to manage our interest rate and foreign exchange risk. We also offer various derivatives to our customers as part of our Commercial Banking business but usually offset our exposure through derivative transactions with other counterparties.

Accounting for Derivatives

Our derivatives are designated as either qualifying accounting hedges or free-standing derivatives. Free-standing derivatives consist of customer-accommodation derivatives and economic hedges that do not qualify for hedge accounting. Qualifying accounting hedges are designated as fair value hedges or cash flow hedges.

 

 

Fair Value Hedges: We designate derivatives as fair value hedges to manage our exposure to changes in the fair value of certain financial assets and liabilities, which fluctuate in value as a result of movements in

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

 

interest rates. Changes in the fair value of derivatives designated as fair value hedges are recorded in earnings together with offsetting changes in the fair value of the hedged item and any resulting ineffectiveness. Our fair value hedges consist of interest rate swaps that are intended to modify our exposure to interest rate risk on various fixed-rate assets and liabilities.

 

 

Cash Flow Hedges: We designate derivatives as cash flow hedges to manage our exposure to variability in cash flows related to forecasted transactions. Changes in the fair value of derivatives designated as cash flow hedges are recorded as a component of AOCI, to the extent that the hedge relationships are effective, and amounts are reclassified from AOCI to earnings as the forecasted transactions occur. To the extent that any ineffectiveness exists in the hedge relationships, the amounts are recorded in current period earnings. Our cash flow hedges consist of interest rate swaps that are intended to hedge the variability in interest payments on some of our variable-rate assets through 2019. These hedges have the effect of converting some of our variable-rate assets to a fixed rate. We also have entered into forward foreign currency derivative contracts to hedge our exposure to variability in cash flows related to foreign currency denominated intercompany borrowings.

 

 

Free-Standing Derivatives: We use free-standing derivatives to hedge the risk of changes in the fair value of residential MSRs, mortgage loan origination and purchase commitments and other interests held. We also categorize our customer accommodation derivatives and the related offsetting contracts as free-standing derivatives. Changes in the fair value of free-standing derivatives are recorded in earnings as a component of other non-interest income.

Balance Sheet Presentation

The following table summarizes the notional and fair values of our derivative instruments reported on our consolidated balance sheets as of June 30, 2014 and December 31, 2013. The fair value amounts are segregated by derivatives that are designated as accounting hedges and those that are not, and are further segregated by type of contract within those two categories.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Table 9.1: Derivative Assets and Liabilities at Fair Value

 

    June 30, 2014     December 31, 2013  
    Notional or
Contractual

Amount
    Derivative     Notional or
Contractual

Amount
    Derivatives  

 (Dollars in millions)

        Assets           Liabilities             Assets           Liabilities    

Derivatives designated as accounting hedges:

           
 Interest rate contracts:            

Fair value hedges

   $ 19,871         $ 271         $ 69         $ 15,695         $ 289         $ 223     

Cash flow hedges

    16,925          49          49          12,825          0          149     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total interest rate contracts     36,796          320          118          28,520          289          372     
 Foreign exchange contracts:            

Cash flow hedges

    5,104          0          147          4,806          49          53     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives designated as accounting hedges

    41,900          320          265          33,326          338          425     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives not designated as accounting hedges:

           
 Interest rate contracts covering:            

MSRs(1)

    733          5          1          353          0          7     

Customer accommodation

    26,869          369          190          25,365          405          209     

Other interest rate exposures(2)

    2,967          32          20          1,864          29          17     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total interest rate contracts     30,569          406          211          27,582          434          233     
 Foreign exchange contracts     212          22          0          1,422          184          37     
 Other contracts     522          0          12          1,094          3          15     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives not designated as accounting hedges

    31,303          428          223          30,098          621          285     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total derivatives    $ 73,203         $ 748         $ 488         $ 63,424         $ 959         $ 710     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

  (1) 

MSRs include interest rate swaps and To Be Announced contracts used to hedge our MSR portfolio.

 

  (2)

Other interest rate exposures include mortgage related derivatives.

Offsetting of Financial Assets and Liabilities

We execute the majority of our derivative transactions and repurchase agreements under master netting arrangements. Under our existing enforceable master netting arrangements, we generally have the right to offset exposure with the same counterparty. In addition, either counterparty can generally request the net settlement of all contracts through a single payment upon default on, or termination of, any one contract.

We present all of our derivative assets and liabilities and repurchase agreements on a gross basis on our consolidated balance sheets. The following table presents as of June 30, 2014 and December 31, 2013, the gross and net fair values of our derivative assets and liabilities and repurchase agreements, as well as the related offsetting amount permitted under the accounting standards for offsetting assets and liabilities. Under the accounting standard, gross positive fair values could be offset against gross negative fair values by counterparty pursuant to legally enforceable master netting agreements, if the netting presentation method is elected. The table also includes cash and non-cash collateral received or pledged associated with such arrangements. The collateral amount related to repurchase agreements is limited to the outstanding balance, thus instance of overcollateralization is not shown.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Table 9.2: Offsetting of Financial Assets and Financial Liabilities

 

                      Offsetting Amounts Not
Netted
       

 (Dollars in millions)

  Gross
  Amounts  
    Offsetting
  Amounts  
    Net Amounts
  as Recognized  
    Financial
  Instruments  
    Collateral
  Received(1)  
    Net
  Exposure  
 
 As of June 30, 2014            

Derivatives assets

  $     748      $     0      $     748      $     (222)      $     (410)      $     116  (2) 
 As of December 31, 2013            

Derivatives assets

  $ 959      $ 0      $ 959      $ (262)      $ (450)      $ 247  (2) 
                     

 

Offsetting Amounts Not
Netted

       

 (Dollars in millions)

  Gross
  Amounts  
    Offsetting
  Amounts  
    Net Amounts
  as Recognized  
    Financial
  Instruments  
    Collateral
  Pledged  
    Net
  Exposure  
 
 As of June 30, 2014            

Derivatives liabilities

  $ 488      $ 0      $ 488      $ (222   $ (203 ) (1)    $ 63   

Repurchase agreements

    882        0        882        0        (882     0   
 As of December 31, 2013            

Derivatives liabilities

  $ 710      $ 0      $ 710      $ (262   $ (371 ) (1)    $ 77   

Repurchase agreements

    907        0        907        0        (907     0   

 

 

  (1) 

When we receive or pledge collateral, we factor in accrued interest when calculating net positions with counterparties.

 

  (2) 

The majority of the net position relates to customer-accommodation derivatives. Customer-accommodation derivatives are cross-collateralized by the associated commercial loans and we do not require additional collateral on these transactions.

Credit Risk-Related Contingency Features and Collateral

Certain of our derivative contracts include provisions requiring that our debt maintain a credit rating of investment grade or above by each of the major credit rating agencies. In the event of a downgrade of our debt credit rating below investment grade, some of our derivative counterparties would have the right to terminate the derivative contract and close out the existing positions, or demand immediate and ongoing full overnight collateralization on derivative instruments in a net liability position. Certain of our derivative contracts may also allow, in the event of a downgrade of our debt credit rating of any kind, our derivative counterparties to demand additional collateralization on such derivative instruments in a net liability position. We have posted $203 million and $371 million as collateral for this exposure in the normal course of business as of June 30, 2014 and December 31, 2013, respectively. If our debt credit rating had fallen below investment grade, we would have been required to post an additional variation margin, which represents the impact of daily position mark-to-market calculations, of less than $1 million as of both June 30, 2014 and December 31, 2013. In addition, we would have been required to post independent margin of $57 million and $58 million as of June 30, 2014 and December 31, 2013, respectively, in compliance with the terms of certain of our swap agreements. The fair value of derivative instruments with credit-risk-related contingent features in a net liability position was less than $1 million and $1 million as of June 30, 2014 and December 31, 2013, respectively.

Derivative Counterparty Credit Risk

Derivative instruments contain an element of credit risk that arises from the potential failure of a counterparty to perform according to the contractual terms of the contract. Our exposure to derivative counterparty credit risk, at any point in time, is represented by the fair value of derivatives in a gain position, or derivative assets, assuming no recoveries of underlying collateral. To mitigate the risk of counterparty default, we maintain collateral agreements with certain derivative counterparties. These agreements typically require both parties to maintain

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

collateral in the event the fair values of derivative financial instruments exceed established thresholds. We received cash collateral from derivatives counterparties totaling $399 million and $397 million as of June 30, 2014 and December 31, 2013, respectively. We also received securities from derivatives counterparties totaling $11 million and $53 million as of June 30, 2014 and December 31, 2013, respectively, which we have the ability to re-pledge.

We record counterparty credit risk valuation adjustments on our derivative assets to properly reflect the credit quality of the counterparty. We consider collateral and legally enforceable master netting agreements that mitigate our credit exposure to each counterparty in determining the counterparty credit risk valuation adjustment, which may be adjusted in future periods due to changes in the fair value of the derivative contract, collateral and creditworthiness of the counterparty. The cumulative counterparty credit risk valuation adjustment recorded on our consolidated balance sheets as a reduction in the derivative asset balance was $5 million and $7 million as of June 30, 2014 and December 31, 2013, respectively. We also adjust the fair value of our derivative liabilities to reflect the impact of our credit quality. We calculate this adjustment by comparing the spreads on our credit default swaps to the discount benchmark curve. The cumulative credit risk valuation adjustment related to our credit quality recorded on our consolidated balance sheets as a reduction in the derivative liability balance was $1 million and $6 million as of June 30, 2014 and December 31, 2013, respectively.

During the second quarter of 2013, it became mandatory for Capital One to clear certain categories of derivative transactions through a central clearinghouse. We anticipate our cleared derivatives notional and margin amounts outstanding to grow in the future and expect our bilateral over-the-counter derivatives portfolio to shrink as additional categories of derivatives are mandated for clearing by the Commodity Futures Trading Commission (“CFTC”). As a result, over time, our counterparty credit risk is expected to shift from our bilateral counterparties and consolidate at central clearinghouses.

Income Statement Presentation and AOCI

The following tables summarize the impact of derivatives and the related hedged items on our consolidated statements of income and AOCI.

Fair Value Hedges and Free-Standing Derivatives

The net gains (losses) recognized in earnings related to derivatives in fair value hedging relationships and free-standing derivatives are presented below for the three and six months ended June 30, 2014 and 2013:

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Table 9.3: Gains and Losses on Fair Value Hedges and Free-Standing Derivatives

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 

 (Dollars in millions)

      2014             2013             2014             2013      
 Derivatives designated as accounting hedges(1):        
 Fair value interest rate contracts:        

Gains (losses) recognized in earnings on derivatives

   $     105        $ (317)       $     136        $ (412)   

Gains (losses) recognized in earnings on hedged items

    (92)            300         (115)            390    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Net fair value hedge ineffectiveness gains (losses)     13         (17)        21         (22)   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Derivatives not designated as accounting hedges(1):        
 Interest rate contracts covering:        

MSRs

           (8)        13         (8)   

Customer accommodation

           16                25    

Other interest rate exposures

           (8)               (9)   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total interest rate contracts     13                24           
 Foreign exchange contracts            (2)               (4)   
 Other contracts                          (7)   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total gains (losses) on derivatives not designated as accounting hedges     13                26         (3)   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Net derivative gains (losses) recognized in earnings    $ 26        $ (15)       $ 47        $ (25)   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (1) 

Amounts are recorded on our consolidated statements of income in other non-interest income.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Cash Flow Hedges

The table below shows the net gains (losses) related to derivatives designated as cash flow hedges for the three and six months ended June 30, 2014 and 2013:

Table 9.4: Gains and Losses on Derivatives Designated as Cash Flow Hedges

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

 (Dollars in millions)

       2014             2013              2014             2013      
 Gains (losses) recorded in AOCI:          
 Cash flow hedges:          

Interest rate contracts

    $     101        $ (146)        $     146        $ (147)   

Foreign exchange contracts

     (6)        (5)         (11)        (10)   
  

 

 

   

 

 

    

 

 

   

 

 

 
 Net derivative gains (losses) recognized in AOCI     $ 95        $ (151)        $ 135        $ (157)   
  

 

 

   

 

 

    

 

 

   

 

 

 
 Gains (losses) recorded in earnings:          
 Cash flow hedges:          

Gains (losses) reclassified from AOCI into earnings:

         

Interest rate contracts(1)

    $ 30        $       14         $ 56        $       26    

Foreign exchange contracts(2)

     (6)        (4)         (11)        (9)   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

     24         10          45         17    
  

 

 

   

 

 

    

 

 

   

 

 

 
Gains (losses) recognized in earnings due to ineffectiveness:          

Interest rate contracts(2)

            (1)                (1)   
  

 

 

   

 

 

    

 

 

   

 

 

 
 Net derivative gains recognized in earnings     $ 24        $        $ 46        $ 16    
  

 

 

   

 

 

    

 

 

   

 

 

 

 

 

  (1) 

Amounts reclassified are recorded on our consolidated statements of income in interest income or interest expense.

 

  (2) 

Amounts reclassified are recorded on our consolidated statements of income in other non-interest income.

We expect to reclassify net after-tax losses of $108 million recorded in AOCI as of June 30, 2014, related to derivatives designated as cash flow hedges to earnings over the next 12 months, which we expect to offset against the cash flows associated with the hedged forecasted transactions. The maximum length of time over which forecasted transactions were hedged was five years as of June 30, 2014. The amount we expect to reclassify into earnings may change as a result of changes in market conditions and ongoing actions taken as part of our overall risk management strategy.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

 

 NOTE 10—ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The following table presents the components of accumulated other comprehensive income as of June 30, 2014 and December 31, 2013, as well as the current period activity related to our other comprehensive income. AOCI is presented net of deferred tax of $280 million and $544 million as of June 30, 2014 and December 31, 2013, respectively.

Table 10.1: Accumulated Other Comprehensive Income

 

    Three Months Ended June 30, 2014  

 (Dollars in millions)

  Securities
Available
for Sale
    Securities
Held to
Maturity(1)
    Cash
Flow
Hedges
    Foreign
Currency
Translation
Adjustments
    Other     Total  
 AOCI as of March 31, 2014    $ 250        $ (884)       $ (91)       $ 27        $ (12)       $ (710)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Other comprehensive income (loss) before
 reclassifications
    169                      95         79                 3             346    
 Net realized (gains) losses reclassified from AOCI into
 earnings
           21         (24)               (4)        (7)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Net other comprehensive income (loss)     169         21         71         79         (1)        339    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 AOCI as of June 30, 2014    $ 419        $ (863)       $ (20)       $ 106        $ (13)       $ (371)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Six Months Ended June 30, 2014  

 (Dollars in millions)

  Securities
Available
for Sale
    Securities
Held to
Maturity(1)
    Cash
Flow
Hedges
    Foreign
Currency
Translation
Adjustments
    Other     Total  
 AOCI as of December 31, 2013    $ 106        $ (897)       $ (110)       $ 40        $ (11)       $ (872)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Other comprehensive income (loss) before
 reclassifications
    321                    135         66                 3             525    
 Net realized (gains) losses reclassified from AOCI into
 earnings
    (8)        34         (45)               (5)        (24)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Net other comprehensive income (loss)     313         34         90         66         (2)        501    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 AOCI as of June 30, 2014    $ 419        $ (863)       $ (20)       $ 106        $ (13)       $ (371)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Three Months Ended June 30, 2013  

 (Dollars in millions)

  Securities
Available
for Sale
    Securities
Held to
Maturity(1)
    Cash
Flow
Hedges
    Foreign
Currency
Translation
Adjustments
    Other     Total  
 AOCI as of March 31, 2013    $ 573        $       $       32        $ (93)       $ (39)       $ 473    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Other comprehensive income (loss) before
 reclassifications
    (1,089)               (151)        (18)               (1,253)   
 Net realized (gains) losses reclassified from AOCI into
 earnings
    (1)               (10)               (1)        (12)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Net other comprehensive income (loss)       (1,090)               (161)        (18)                4         (1,265)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 AOCI as of June 30, 2013    $ (517)       $       $ (129)       $ (111)       $ (35)       $ (792)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    Six Months Ended June 30, 2013  

 (Dollars in millions)

  Securities
Available
for Sale
    Securities
Held to
Maturity(1)
    Cash
Flow
Hedges
    Foreign
Currency
Translation
Adjustments
    Other     Total  
 AOCI as of December 31, 2012    $ 703        $       $       45        $ 32        $ (41)       $     739    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Other comprehensive income (loss) before reclassifications

    (1,218)               (157)        (143)               (1,513)   

 Net realized (gains) losses reclassified from AOCI into earnings

    (2)               (17)                      (18)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Net other comprehensive income (loss)         (1,220)               (174)        (143)                6         (1,531)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 AOCI as of June 30, 2013    $ (517)       $       $ (129)       $ (111)       $ (35)       $ (792)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (1) 

In the third quarter of 2013, we transferred securities with a fair value of $18.3 billion on the date of transfer, from securities available for sale to securities held to maturity. The securities included net pre-tax unrealized losses of $1.5 billion at the date of transfer. The amortization of unrealized holding gains or losses reported in AOCI for securities held to maturity will be offset by the amortization of the premium or discount created from the transfer into securities held to maturity, which occurred at fair value.

Table 10.2: Reclassifications from AOCI

 

        Amount Reclassified from AOCI  

 (Dollars in millions)

  Three Months Ended
June 30,
     Six Months Ended
June 30,
 
 AOCI Components   Affected Income Statement Line Item       2014             2013          2014     2013  

 Securities available for sale:

          
  Non-interest income - Other    $ (1)       $        $ 12        $   
  Income tax provision (benefit)     (1)                         
   

 

 

   

 

 

    

 

 

   

 

 

 
  Net income                             

 Securities held to maturity(1):

          
  Non-interest income - Other     (33)                (61)          
  Income tax provision (benefit)     (12)                (27)          
   

 

 

   

 

 

    

 

 

   

 

 

 
  Net income     (21)                (34)          
 Cash flow hedges:           

Interest rate contracts:

          
  Interest income (expense) - Other     48         22          90         42    

Foreign exchange contracts:

          
  Non-interest income - Other     (10)        (6)         (18)        (14)   
   

 

 

   

 

 

    

 

 

   

 

 

 
      38         16          72         28    
  Income tax provision (benefit)     14                 27         11    
   

 

 

   

 

 

    

 

 

   

 

 

 
  Net income     24         10          45         17    
   

 

 

   

 

 

    

 

 

   

 

 

 

 Other:

          
  Various                           (1)   
  Income tax provision (benefit)                             
   

 

 

   

 

 

    

 

 

   

 

 

 
  Net income                           (1)   
   

 

 

   

 

 

    

 

 

   

 

 

 

 Total reclassifications

     $         7        $       12         $       24        $       18    
   

 

 

   

 

 

    

 

 

   

 

 

 

 

 

  (1) 

The amortization of unrealized holding gains or losses reported in AOCI for securities held to maturity will be offset by the amortization of the premium or discount created from the transfer into securities held to maturity, which occurred at fair value.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

The table below summarizes other comprehensive income activity and the related tax impact for the three and six months ended June 30, 2014 and 2013:

Table 10.3: Other Comprehensive Income

 

    Three Months Ended June 30,  
    2014      2013  

 (Dollars in millions)

  Before
Tax
    Provision
(Benefit)
    After
Tax
     Before
Tax
    Provision
(Benefit)
    After
Tax
 
 Other comprehensive income:             

 Net unrealized gains (losses) on securities available for sale

   $     269        $ 100        $     169         $  (1,747)       $     (657)       $  (1,090)   

 Net unrealized gains (losses) on securities transferred to held to maturity

    33         12         21                          
 Net unrealized gains (losses) on cash flow hedges     114         43         71          (258)        (97)        (161)   
 Foreign currency translation adjustments     79                79          (18)               (18)   
 Other     (3)        (2)        (1)                (1)          
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
 Other comprehensive income (loss)    $ 492        $ 153        $ 339         $ (2,020)       $ (755)       $ (1,265)   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

    Six Months Ended June 30,  
    2014      2013  

 (Dollars in millions)

  Before
Tax
    Provision
(Benefit)
    After
Tax
     Before
Tax
    Provision
(Benefit)
    After
Tax
 
 Other comprehensive income:             

 Net unrealized gains (losses) on securities available for sale

   $     498        $ 185        $     313         $  (1,956)       $     (736)       $  (1,220)   

 Net unrealized gains (losses) on securities transferred to held to maturity

    61         27         34                          
 Net unrealized gains (losses) on cash flow hedges     144         54         90          (279)        (105)        (174)   
 Foreign currency translation adjustments     66                66          (143)               (143)   
 Other     (4)        (2)        (2)                         
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
 Other comprehensive income (loss)    $ 765        $ 264        $ 501         $ (2,371)       $ (840)       $  (1,531)   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

 

 NOTE 11—EARNINGS PER COMMON SHARE

 

The following table sets forth the computation of basic and diluted earnings per common share:

Table 11.1: Computation of Basic and Diluted Earnings per Common Share

 

    Three Months Ended
June 30,
     Six Months Ended
June 30,
 

 (Dollars and shares in millions, except per share data)

      2014             2013              2014             2013      
 Basic earnings         
 Income from continuing operations, net of tax    $     1,204        $     1,227         $     2,328        $     2,361    
 Income (loss) from discontinued operations, net of tax     (10)        (119)         20         (197)   
 

 

 

   

 

 

    

 

 

   

 

 

 
 Net income     1,194         1,108          2,348         2,164    

Dividends and undistributed earnings allocated to participating securities(1)

    (4)        (4)         (9)        (9)   
 Preferred stock dividends     (13)        (13)         (26)        (26)   
 

 

 

   

 

 

    

 

 

   

 

 

 
 Net income available to common stockholders    $ 1,177        $ 1,091         $ 2,313        $ 2,129    
 

 

 

   

 

 

    

 

 

   

 

 

 
 Net income from continuing operations per share    $ 2.09        $ 2.08         $ 4.03        $ 4.00    
 Income (loss) from discontinued operations per share     (0.02)        (0.20)         0.03         (0.34)   
 

 

 

   

 

 

    

 

 

   

 

 

 
 Net income per share    $ 2.07        $ 1.88         $ 4.06        $ 3.66    
 

 

 

   

 

 

    

 

 

   

 

 

 
 Total weighted-average basic shares outstanding     567.5         581.5          569.2         581.0    

 

    Three Months Ended
June 30,
     Six Months Ended
June 30,
 

 (Dollars and shares in millions, except per share data)

      2014             2013              2014             2013      
 Diluted earnings(2)         
 Net income available to common stockholders    $     1,177        $     1,091         $     2,313        $     2,129    
 

 

 

   

 

 

    

 

 

   

 

 

 
 Net income from continuing operations per share    $ 2.06        $ 2.05         $ 3.97        $ 3.96    
 Income (loss) from discontinued operations per share     (0.02)        (0.20)         0.03         (0.34)   
 

 

 

   

 

 

    

 

 

   

 

 

 
 Net income per share    $ 2.04        $ 1.85         $ 4.00        $ 3.62    
 

 

 

   

 

 

    

 

 

   

 

 

 
 Total weighted-average basic shares outstanding     567.5         581.5          569.2         581.0    
 Effect of dilutive securities:         

Stock options

    2.7         2.1          2.6         2.0    

Other contingently issuable shares

    1.6         1.6          1.5         1.5    

Warrants

    5.8         3.6          5.6         3.4    
 

 

 

   

 

 

    

 

 

   

 

 

 
 Total effect of dilutive securities     10.1         7.3          9.7         6.9    
 

 

 

   

 

 

    

 

 

   

 

 

 
 Total weighted-average diluted shares outstanding     577.6         588.8          578.9         587.9    
 

 

 

   

 

 

    

 

 

   

 

 

 

 

 

  (1) 

Includes undistributed earnings allocated to participating securities using the two-class method under the accounting guidance for computing earnings per share.

 

  (2) 

Excluded from the computation of diluted earnings per share was 3 million shares related to options with exercise prices ranging from $70.96 to $88.81 and 4 million shares related to options with exercise prices ranging from $70.96 to $88.81, for the three and six months ended June 30, 2014, respectively, and 5 million shares related to options with exercise prices ranging from $56.32 to $88.81 and 6 million shares related to options with exercise prices ranging from $56.28 to $88.81, for the three and six months ended June 30, 2013, respectively, because their inclusion would be anti-dilutive.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

 

 NOTE 12—FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date (also referred to as an exit price). The fair value accounting guidance provides a three-level fair value hierarchy for classifying financial instruments. This hierarchy is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. Fair value measurement of a financial asset or liability is assigned to a level based on the lowest level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are described below:

 

Level 1:

  

Valuation is based on quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2:

  

Valuation is based on observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities, quoted prices in markets that are not active, or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities.

Level 3:

  

Valuation is generated from techniques that use significant assumptions not observable in the market. Valuation techniques include pricing models, discounted cash flow methodologies or similar techniques.

The accounting guidance for fair value measurements requires that we maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The accounting guidance provides for the irrevocable option to elect, on a contract-by-contract basis, to measure certain financial assets and liabilities at fair value at inception of the contract and record any subsequent changes in fair value in earnings. We have not made any material fair value option elections as of or for the periods disclosed herein.

Fair Value Governance and Control

We have a governance framework and a number of key controls that are intended to ensure that our fair value measurements are appropriate and reliable. Our governance framework provides for independent oversight and segregation of duties. Our control processes include review and approval of new transaction types, price verification and review of valuation judgments, methods, models, process controls and results. Groups independent from our trading and investing functions, including our Corporate Valuations Group (“CVG”), Fair Value Committee (“FVC”) and Model Validation Group (“MVG”), participate in the review and validation process. The fair valuation governance process is set up in a manner that allows the Chairperson of the FVC to escalate valuation disputes that cannot be resolved at the FVC to a more senior committee called the Valuations Advisory Committee (“VAC”) for resolution. The VAC is chaired by the Chief Financial Officer and includes other members of senior management.

The CVG performs periodic independent verification of fair value measurements to determine if assigned fair values are reasonable. For example, in cases where we rely on third-party pricing services to obtain fair value measures, we analyze pricing variances among different pricing sources and validate the final price used by comparing the information to additional sources, including dealer pricing indications in transaction results and other internal sources, where necessary. Additional validation procedures performed by the CVG include reviewing (either directly or indirectly through the reasonableness of assigned fair values) valuation inputs and assumptions and monitoring acceptable variances between recommended prices and validation prices. The CVG and the Trade Analytics and Valuation (“TAV”) team perform due diligence reviews of the third-party pricing services by comparing their prices to those from other sources and reviewing other control documentation. Additionally, when necessary, the CVG and TAV challenge prices from third-party vendors to ensure reasonableness of prices through a pricing challenge process. This may include a request for transparency of the assumptions used by the third party.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

The FVC, which includes representation from our Risk Management and Finance divisions, is a forum for discussing fair market valuations, inputs, assumptions, methodologies, variance thresholds, valuation control environments and material risks or concerns related to fair market valuations. Additionally, the FVC is empowered to resolve valuation disputes between the primary valuation providers and the CVG. It provides guidance and oversight to ensure an appropriate valuation control environment. The FVC regularly reviews and approves our valuation methodologies to ensure that our methodologies and practices are consistent with industry standards and adhere to regulatory and accounting guidance. The Chief Financial Officer determines when material issues or concerns regarding valuations shall be raised to the Audit Committee or other delegated committee of the Board of Directors.

We have a model policy, established by an independent Model Risk Office, which governs the validation of models and related supporting documentation to ensure the appropriate use of models for pricing. The MVG is part of the Model Risk Office and validates all models and provides ongoing monitoring of their performance, including the validation and monitoring of the performance of all valuation models.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table displays our assets and liabilities measured on our consolidated balance sheets at fair value on a recurring basis as of June 30, 2014 and December 31, 2013:

Table 12.1: Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

    June 30, 2014  
    Fair Value Measurements Using        

 (Dollars in millions)

    Level 1         Level 2         Level 3       Total  
 Assets        
 Securities available for sale:        

U.S. Treasury debt obligations

   $ 1,223        $       $       $ 1,223    

U.S. Agency debt obligations

                           

Corporate debt securities guaranteed by U.S. government agencies

           353         739         1,092    

RMBS

           24,691         836         25,527    

CMBS

           5,371         449         5,820    

Other ABS

           5,847         175         6,022    

Other securities

    119         1,289         20         1,428    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total securities available for sale     1,342         37,552         2,219         41,113    
 Other assets:        

Consumer MSRs

                  57         57    

Derivative assets(1)

           694         50         748    

Retained interests in securitizations

                  195         195    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total assets    $     1,346        $     38,246        $     2,521        $     42,113    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Liabilities        
 Other liabilities:        

Derivative liabilities(1)

   $       $ 447        $ 37        $ 488    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total liabilities    $       $ 447        $ 37        $ 488    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    December 31, 2013  
    Fair Value Measurements Using        

 (Dollars in millions)

    Level 1         Level 2         Level 3       Total  
 Assets        
 Securities available for sale:        

U.S. Treasury debt obligations

   $ 833        $       $       $ 833    

U.S. Agency debt obligations

                           

Corporate debt securities guaranteed by U.S. government agencies

           307         927         1,234    

RMBS

           23,775         1,304         25,079    

CMBS

           5,267         739         6,006    

Other ABS

           6,793         343         7,136    

Other securities

    127         1,367         17         1,511    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total securities available for sale     960         37,510         3,330         41,800    
 Other assets:        

Consumer MSRs

                  69         73    

Derivative assets(1)

           906         50         959    

Retained interests in securitizations

                  199         199    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total assets    $        963        $     38,420        $     3,648        $     43,031    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Liabilities        
 Other liabilities:        

Derivative liabilities(1)

   $       $ 668        $ 38        $ 710    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total liabilities    $       $ 668        $ 38        $ 710    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

  (1) 

Does not reflect $4 million and $1 million recognized as a net valuation allowance on derivative assets and liabilities for non-performance risk as of June 30, 2014 and December 31, 2013, respectively. Non-performance risk is reflected in other assets/liabilities on the balance sheet and offset through the income statement in other income.

The determination of the classification of financial instruments in the fair value hierarchy is performed at the end of each reporting period. We consider all available information, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs. Based upon the specific facts and circumstances of each instrument or instrument category, judgments are made regarding the significance of the unobservable inputs to the instruments’ fair value measurement in its entirety. If unobservable inputs are considered significant, the instrument is classified as Level 3. The process for determining fair value using unobservable inputs is generally more subjective and involves a high degree of management judgment and assumptions. During the three and six months ended June 30, 2014 we had minimal movements between Levels 1 and 2.

Level 3 Recurring Fair Value Rollforward

The tables below present a reconciliation for all assets and liabilities measured and recognized at fair value on a recurring basis using significant unobservable inputs (Level 3). When assets and liabilities are transferred between levels, we recognize the transfer as of the end of the period.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Table 12.2: Level 3 Recurring Fair Value Rollforward

 

    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Three Months Ended June 30, 2014
 
          Total Gains or
(Losses)
(Realized/Unrealized)
     Purchases       Sales       Issuances       Settlements       Transfers 
Into

Level 3(2)
     Transfers 
Out of

Level 3(2)
     Balance, 
June 30,
2014
    Net Unrealized
Gains (Losses)
Included in Net

 Income Related to 
Assets and
Liabilities
Still Held as of
June 30, 2014(3)
 

 (Dollars in millions)

   Balance, 
April 1,
2014
     Included 
in Net
Income(1)
     Included 
in
OCI
                 

 Assets:

                     

 Securities available for sale:

                     

 Corporate debt securities guaranteed by U.S. government agencies

   $ 752       $       $       $       $       $       $ (18)       $       $       $ 739        $   

 RMBS

    1,727         17                94                       (98)        63         (975)        836         17    

 CMBS

    495                                            (19)        28         (58)        449           

 Other ABS

    226                                            (1)               (59)        175           

 Other securities

    17                                                                 20           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total securities available for sale

    3,217         18         24         94                       (136)        94         (1,092)        2,219         18    

 Other assets:

                     

 Consumer MSRs

    61         (6)                                    (1)                      57         (6)   

 Derivative assets

    48                                            (3)               (3)        50           

 Retained interest in securitizations

    197         (2)                                                         195         (2)   

 Liabilities:

                     

 Other liabilities:

                     

 Derivative liabilities

    36                                            (3)               (1)        37           

 

    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

Three Months Ended June 30, 2013

 
          Total Gains or
(Losses)
 (Realized/Unrealized) 
     Purchases       Sales       Issuances       Settlements       Transfers 
Into
Level 3(2)
     Transfers 
Out of
Level 3(2)
    Balance,
 June 30, 
2013
    Net Unrealized
Gains (Losses)
Included in Net
 Income Related to 
Assets and

Liabilities
Still Held as of
June 30, 2013(3)
 

 (Dollars in millions)

   Balance, 
April 1,
2013
    Included
in Net
 Income(1) 
     Included 
in
OCI
                 

 Assets:

                     

 Securities available for sale:

                     

 Corporate debt securities guaranteed by U.S. government agencies

   $ 768        $       $ (36)       $ 123        $       $       $ (18)       $ 39        $ (44)       $ 832        $   

 RMBS

    1,490         (1)               94                       (89)        260         (227)        1,535         (1)   

 CMBS

    704                (40)        166           (10)               (8)        71         (422)        461           

 Other ABS

    71                (3)        40                       (1)               (6)        109           

 Other securities

    16                                                                 16           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total securities available for sale

    3,049         (1     (71)        423         (10)               (116)        378         (699)        2,953         (1)   

 Other assets:

                     

 Consumer MSRs

    58         28                                     (2)               (26)        61         28    

 Derivative assets

    83         (7)                                    (6)               (1)        72         (7)   

 Retained interest in securitizations

    201         (3)                                                         198         (3)   

 Liabilities:

                     

 Other liabilities:

                     

 Derivative liabilities

    42         (4)                                    (5)                      42         (4)   

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

Six Months Ended June 30, 2014

 
          Total Gains or
(Losses)
 (Realized/Unrealized) 
     Purchases       Sales       Issuances       Settlements       Transfers 
Into
Level 3(2)
     Transfers 
Out of
Level 3(2)
    Balance,
 June 30, 
2014
    Net Unrealized
Gains (Losses)
Included in Net
 Income Related to 
Assets and
Liabilities
Still Held as of
June 30, 2014(3)
 

(Dollars in millions)

  Balance,
 January 1, 
2014
     Included 
Net in
Income(1)
     Included 
in
OCI
                 

 Assets:

                     

 Securities available for sale:

                     

 Corporate debt securities guaranteed by U.S. government agencies

  $ 927       $      $ 15       $      $ (112)      $      $ (39)      $ 64       $ (116)      $ 739       $   

 RMBS

    1,304         37         36         980                       (132)        120         (1,509)        836         37    

 CMBS

    739                       34                       (30)        66         (365)        449           

 Other ABS

    343                10                              (2)        43         (222)        175           

 Other securities

    17                                                                 20           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total securities available for sale

    3,330         40         66         1,014         (112)               (203)        296         (2,212)        2,219         40    

 Other assets:

                     

 Consumer MSRs

    69         (17)                                    (2)                      57         (17)   

 Derivative assets

    50                                            (6)               (4)        50           

 Retained interest in securitizations

    199         (4)                                                         195         (4)   

 Liabilities:

                     

 Other liabilities:

                     

 Derivative liabilities .

    38                                            (8)               (1)        37           

 

    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

Six Months Ended June 30, 2013

 
          Total Gains or
(Losses)
 (Realized/Unrealized)
     Purchases       Sales       Issuances       Settlements       Transfers 
Into
Level 3(2)
     Transfers 
Out of
Level 3(2)
    Balance,
 June 30, 
2013
    Net Unrealized
Gains (Losses)
 Included in Net 
 Income Related  to 
Assets and
Liabilities
Still Held as of
June 30, 2013(3)
 

 (Dollars in millions)

  Balance,
 January 1, 
2013
    Included
in Net
 Income(1) 
     Included 
in
OCI
                 

 Assets:

                     

 Securities available for sale:

                     

 Corporate debt securities guaranteed by U.S. government agencies

   $ 650        $       $ (35)        $ 211        $       $       $ (28)       $ 78        $ (44)       $ 832        $   

 RMBS

    1,335         (10)        84         192                       (145)        529         (450)        1,535         (10)   

 CMBS

    587                (47)        547         (10)               (27)        120         (709)        461           

 Other ABS

    102         (1)               40         (41)               (2)        14         (9)        109         (1)   

 Other securities

    15                                                                 16           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total securities available for sale

    2,689         (11)               990         (51)               (202)        742         (1,212)        2,953         (11)   

 Other assets:

                     

 Consumer MSRs

    55         30                                     (3)               (26)        61         30    

 Derivative assets

    90         (7)                                    (12)               (3)        72         (7)   

 Retained interest in securitization

    204         (6)                                                         198         (6)   

 Liabilities:

                     

 Other liabilities:

                     

 Derivative liabilities

    38         11                              10         (16)               (1)        42         11    

 

 

 

  (1)

Gains (losses) related to Level 3 mortgage servicing rights and Level 3 derivative assets and derivative liabilities are reported in other non-interest income, which is a component of non-interest income. Gains (losses) related to Level 3 retained interests in securitizations are reported in servicing and securitizations income, which is a component of non-interest income.

 

  (2) 

The transfers out of Level 3 for the three and six months ended June 30, 2014 and 2013 were primarily driven by greater consistency among multiple pricing sources. The transfers into Level 3 were primarily driven by less consistency among vendor pricing on individual securities.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

  (3) 

The amount presented for unrealized gains (losses) for assets still held as of the reporting date primarily represents impairments for securities available for sale, accretion on certain fixed maturity securities, change in fair value of derivative instruments and mortgage servicing rights transaction. Impairment is reported in total other-than-temporary impairment as a component of non-interest income.

Significant Level 3 Fair Value Asset and Liability Input Sensitivity

Changes in unobservable inputs may have a significant impact on fair value. Certain of these unobservable inputs will, in isolation, have a directionally consistent impact on the fair value of the instrument for a given change in that input. Alternatively, the fair value of the instrument may move in an opposite direction for a given change in another input. In general, an increase in the discount rate, default rates, loss severity and credit spreads, in isolation, would result in a decrease in the fair value measurement. In addition, an increase in default rates would generally be accompanied by a decrease in recovery rates, slower prepayment rates and an increase in liquidity spreads.

Techniques and Inputs for Level 3 Fair Value Measurements

The following table presents the significant unobservable inputs relied upon to determine the fair values of our recurring Level 3 financial instruments. We utilize multiple third-party pricing services to obtain fair value measures for our securities. Several of our third-party pricing services are only able to provide unobservable input information for a limited number of securities due to software licensing restrictions. Other third-party pricing services are able to provide unobservable input information for all securities for which they provide a valuation. As a result, the unobservable input information for the securities available for sale presented below represents a composite summary of all information we are able to obtain for a majority of our securities. The unobservable input information for all other Level 3 financial instruments is based on the assumptions used in our internal valuation models.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Table 12.3: Quantitative Information about Level 3 Fair Value Measurements

 

Quantitative Information about Level 3 Fair Value Measurements

 

 (Dollars in millions)

  Fair Value at
June 30,
2014
    Significant
Valuation
Techniques
 

Significant

Unobservable

Inputs

  Range     Weighted
Average
 
 Assets:          
 Securities available for sale:          
 RMBS    $ 836        Discounted cash flows 

 (3rd party pricing)

 

 Yield

 Constant prepayment rate 

 Default rate

 Loss severity

   

 

 

 

 1-24%

 0-20%

 0-14%

 0-75%

  

  

  

  

   

 

 

 

 5%

 3%

 7%

 49%

  

  

  

  

 CMBS    $ 449        Discounted cash flows 

 (3rd party pricing)

 

 Yield

 Constant prepayment rate 

   

 

 

 

 

 0-4%

 0-100%

 2-7%

 1-3%

 3-12%

  

  

  

  

  

   

 

 

 

 

 2%

 9%

 4%

 2%

 10%

  

  

  

  

  

 Other ABS    $ 175        Discounted cash flows 

 (3rd party pricing)

 

 Yield

 Constant prepayment rate 

 Default rate 

 Loss severity 

     42-88%         71%   

 U.S. government guaranteed debt and other securities

   $ 759        Discounted cash flows 

 (3rd party pricing)

   Yield       0-4%         2%   
 Other assets:          
 Consumer MSRs    $ 57        Discounted cash flows   

 Total prepayment rate

 Discount rate

 Servicing cost ($ per loan) 

   

 

 $

 8-28%

 9-21%

60.40-$185.22    

  

  

  

   

 

 $

 11%

 13%

76.16    

  

  

  

 Derivative assets    $ 50        Discounted cash flows     Swap rates       3%         3%   

 Retained interests in securitization(1)

   $ 195        Discounted cash flows   

 Life of receivables (months) 

 Constant prepayment rate

 Discount rate

 Default rate

 Loss severity

   

 

 

 

 

 30-89    

 1-9%

 4-14%

 2-7%

 18-99%

  

  

  

  

  

     N/A       
 Liabilities:          
 Other liabilities:          
 Derivative liabilities    $ 37        Discounted cash flows    Swap rates      3%         3%   

 

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Table of Contents

CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    Quantitative Information about Level 3 Fair Value Measurements  

 (Dollars in millions)

   Fair Value at 
 December 31, 
2013
   

 Significant Valuation 

Techniques

 

Significant

Unobservable

Inputs

  Range      Weighted 
Average
 
 Assets:          
 Securities available for sale:          
 RMBS    $ 1,304      

 Discounted cash flows 

 (3rd party pricing)

 

 Yield

 Constant prepayment rate 

 Default rate

 Loss severity

   

 

 

 

 0-23%

 0-21%

 0-18%

 0-95%

  

  

  

  

   

 

 

 

 5%

 5%

 8%

 49%

  

  

  

  

 CMBS    $ 739      

 Discounted cash flows 

 (3rd party pricing)

 

 Yield

 Constant prepayment rate

   

 

 1-4%

 0-20%

  

  

   

 

 2%

 3%

  

  

 Other ABS    $ 343      

 Discounted cash flows

 (3rd party pricing)

 

 Yield

 Constant prepayment rate

 Default rate

 Loss severity

   

 

 

 

 1-8%

 1-6%

 1-19%

 44-80%

  

  

  

  

   

 

 

 

 3%

 2%

 12%

 69%

  

  

  

  

 U.S. government guaranteed debt and other securities

   $ 944      

 Discounted cash flows

 (3rd party pricing)

   Yield      0-3%         2%   
 Other assets:          
 Consumer MSRs    $ 69        Discounted cash flows  

 Total prepayment rate

 Discount rate

 Servicing cost ($per loan)

   

 

 $

 9-32%

 10-17%

81.39-$393.52   

  

  

  

   

 

 $

 14%

 11%

89.32   

  

  

  

 Derivative assets    $ 50        Discounted cash flows     Swap rates      3-4%         4%   

 Retained interests in securitization(1)

   $ 199        Discounted cash flows  

 Life of receivables (months) 

 Constant prepayment rate

 Discount rate

 Default rate

 Loss severity

   

 

 

 

 

 34-101   

 2-7%

 5-14%

 2-7%

 15-89%

  

  

  

  

  

     N/A      
 Liabilities:          
 Other liabilities:          
 Derivative liabilities    $ 38        Discounted cash flows     Swap rates      3-4%         4%   

 

 

 

  (1) 

Due to the nature of the various mortgage securitization structures in which we have retained interests, it is not meaningful to present a consolidated weighted average for the significant unobservable inputs.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We are required to measure and recognize certain other assets at fair value on a nonrecurring basis in the consolidated balance sheets. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when we evaluate for impairment). The following table presents the carrying amount of the assets measured at fair value on a nonrecurring basis and still held as of June 30, 2014 and December 31, 2013, and for which a nonrecurring fair value measurement was recorded during the six and twelve months then ended:

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Table 12.4: Nonrecurring Fair Value Measurements Related to Assets Still Held at Period End

 

    June 30, 2014  
    Estimated Fair Value Hierarchy        

 (Dollars in millions)

  Level 1     Level 2     Level 3     Total  
 Assets:        
 Loans held for investment    $       $       $ 87        $ 87    
 Loans held for sale            31                31    
 Other assets(1)                   48         48    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $       $ 31        $ 135        $       166    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

    December 31, 2013  
    Estimated Fair Value Hierarchy        

 (Dollars in millions)

  Level 1     Level 2     Level 3     Total  
 Assets:        
 Loans held for investment    $       $       $ 84        $ 84    
 Loans held for sale            145                145    
 Other assets(1)                   64         64    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $       $ 145        $ 148        $       293    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

  (1)

Includes foreclosed property and repossessed assets of $36 million and long-lived assets held for sale of $12 million as of June 30, 2014. Comparatively, includes foreclosed property and repossessed assets of $42 million and long-lived assets held for sale of $22 million as of December 31, 2013.

In the above table, loans held for investment primarily include nonperforming loans for which specific reserves or charge-offs have been recognized. These loans are classified as Level 3 as they are valued based in part on the estimated fair value of the underlying collateral and the non-recoverable rate, which is considered to be a significant unobservable input. Collateral fair value sources include the appraisal value obtained from independent appraisers, broker pricing opinions, or other available market information. The non-recoverable rate ranged from 0% to 15%, with a weighted average of 10%, and from 0% to 42%, with a weighted average of 13% as of June 30, 2014 and December 31, 2013, respectively. The fair value of the other assets classified as Level 3 is determined based on appraisal value or listing price which involves significant judgment; the significant unobservable inputs and related quantitative information are not meaningful to disclose as they vary significantly across properties and collateral.

The following table presents total nonrecurring fair value measurements for the period, included in earnings, attributable to the change in fair value relating to assets that are still held at June 30, 2014 and 2013.

Table 12.5: Nonrecurring Fair Value Measurements Included in Earnings Related to Assets Still Held at Period End

 

    Total Gains (Losses)  
      Six Months Ended June 30,    

 (Dollars in millions)

  2014     2013  
 Assets:    
 Loans held for investment    $ (23)       $ (17)   
 Loans held for sale(1)            (15)   
 Other assets(2)     (5)        (11)   
 

 

 

   

 

 

 
 Total    $ (28)       $ (43)   
 

 

 

   

 

 

 

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

 

 

  (1)

The fair value and related losses include a portion related to the Best Buy portfolio.

 

  (2)

Includes the gains and losses related to foreclosed property and repossessed assets and long-lived assets held for sale.

Fair Value of Financial Instruments

The following reflects the fair value of financial instruments, whether or not recognized on the consolidated balance sheets at fair value, as of June 30, 2014 and December 31, 2013:

Table 12.6: Fair Value of Financial Instruments

 

    June 30, 2014     Estimated Fair Value Hierarchy  

 (Dollars in millions)

  Carrying
   Amount   
    Estimated
  Fair Value  
      Level 1         Level 2         Level 3    
 Financial assets:          
 Cash and cash equivalents   $ 6,732      $ 6,732          $ 6,732          $ 0      $ 0   
 Restricted cash for securitization investors     361        361        361        0        0   
 Securities available for sale     41,113        41,113        1,342        37,552        2,219   
 Securities held to maturity     20,688        21,405        0        21,020        385   
 Net loans held for investment     194,530        199,138        0        0        199,138   
 Loans held for sale     709        715        0        715        0   
 Interest receivable     1,473        1,473        0        1,473        0   
 Derivative assets     748        748        4        694        50   
 Retained interests in securitizations     195        195        0        0        195   
 Financial liabilities:          
 Non-interest bearing deposits   $ 24,920      $ 24,920          $     24,920          $ 0      $ 0   
 Interest-bearing deposits         180,970            175,307        0            12,401            162,906   
 Securitized debt obligations     10,010        10,172        0        10,163        9   
 Senior and subordinated notes     16,628        17,279        0        17,279        0   

 Federal funds purchased and securities loaned or sold under agreements to repurchase

    2,030        2,030        2,030        0        0   
 Other borrowings     10,446        10,453        0        10,453        0   
 Interest payable     309        309        0        309        0   
 Derivative liabilities     488        488        4        447        37   

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    December 31, 2013     Estimated Fair Value Hierarchy  

(Dollars in millions)

  Carrying
   Amount   
    Estimated
  Fair Value  
      Level 1         Level 2         Level 3    
Financial assets:          
Cash and cash equivalents   $ 6,291      $ 6,291      $ 6,291      $ 0      $ 0   
Restricted cash for securitization investors     874        874        874        0        0   
Securities available for sale     41,800        41,800        960        37,510        3,330   
Securities held to maturity     19,132        19,185        0        18,895        290   
Net loans held for investment     192,884        198,138        0        0        198,138   
Loans held for sale     218        219        0        219        0   
Interest receivable     1,418        1,418        0        1,418        0   
Derivatives assets     959        959        3        906        50   
Retained interests in securitizations     199        199        0        0        199   
Financial liabilities:          
Non-interest bearing deposits   $ 22,643      $ 22,643      $     22,643      $ 0      $ 0   
Interest-bearing deposits     181,880        175,516        0            14,346            161,170   
Securitized debt obligations     10,289        11,081        0        10,835        246   
Senior and subordinated notes     13,134        13,715        0        13,715        0   
Federal funds purchased and securities loaned or sold under agreements to repurchase     915        915        915        0        0   
Other borrowings     16,316        16,324        0        16,324        0   
Interest payable     307        307        0        307        0   
Derivatives liabilities     710        710        4        668        38   

The following describes the valuation techniques used in estimating the fair value of our financial instruments as of June 30, 2014 and December 31, 2013. We applied the fair value provisions to the financial instruments not recognized on the consolidated balance sheets at fair value, which include securities held to maturity, loans held for investment, interest receivable, interest-bearing deposits, securitized debt obligations, other borrowings and senior and subordinated notes. The provisions requiring us to maximize the use of observable inputs and to measure fair value using a notion of exit price were factored into our selection of inputs for our established valuation techniques.

Cash and Cash Equivalents

The carrying amounts of cash and due from banks, federal funds sold and securities purchased under agreements to resell and interest-bearing deposits with banks approximate fair value.

Restricted Cash for Securitization Investors

The carrying amounts of restricted cash for securitization investors approximate their fair value due to their relatively short-term nature.

Investment Securities

Quoted prices in active markets are used to measure the fair value of U.S. Treasury debt obligations. For other investment categories, we utilize multiple third-party pricing services to obtain fair value measurements for the large majority of our securities. A pricing service may be considered as the primary pricing provider for certain types of securities, and the designation of the primary pricing provider may vary depending on the type of securities. The determination of the primary pricing provider is based on our experience and validation benchmark of the pricing service’s performance in terms of providing fair value measurements for the various types of securities.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Certain securities are classified as Level 2 and 3, the majority of which are collateralized mortgage obligations and mortgage-backed securities. Level 2 and 3 classifications indicate that significant valuation assumptions are not consistently observable in the market. When significant assumptions are not consistently observable, fair values are derived using the best available data.

Such data may include quotes provided by a dealer, the use of external pricing services, independent pricing models, or other model-based valuation techniques such as calculation of the present values of future cash flows incorporating assumptions such as benchmark yields, spreads, prepayment speeds, credit ratings, and losses. The techniques used by the pricing services utilize observable market data to the extent available. Pricing models may be used, which can vary by asset class and may incorporate available trade, bid and other market information. Across asset classes, information such as trader/dealer input, credit spreads, forward curves, and prepayment speeds are used to help determine appropriate valuations. Because many fixed income securities do not trade on a daily basis, the evaluated pricing applications may apply available information through processes such as benchmarking curves, like securities, sector groupings, and matrix pricing to prepare valuations. In addition, model processes are used by the pricing services to develop prepayment and interest rate scenarios.

We validate the pricing obtained from the primary pricing providers through comparison of pricing to additional sources, including other pricing services, dealer pricing indications in transaction results, and other internal sources. Pricing variances among different pricing sources are analyzed and validated. Additionally, on an on-going basis, we may select a sample of securities and test the third-party valuation by obtaining more detailed information about the pricing methodology, sources of information, and assumptions used to value the securities.

The significant unobservable inputs used in the fair value measurement of our residential, asset-backed and commercial securities include yield, prepayment rate, default rate and loss severity in the event of default. Significant increases or decreases in any of those inputs in isolation or combination would result in a significant change in fair value measurement. Generally, an increase in the yield assumption will result in a decrease in fair value measurement, however, an increase or decrease in prepayment rate, default rate or loss severity may have a different impact on the fair value given various characteristics of the security including the capital structure of the deal, credit enhancement for the security or other factors.

Net Loans Held For Investment

Loans held for investment that are individually impaired are carried at the lower of cost or fair value of the underlying collateral, less the estimated cost to sell. The fair values of credit card loans, installment loans, auto loans, home loans and commercial loans are estimated using a discounted cash flow method, which is a form of the income approach. Discount rates are determined considering rates at which similar portfolios of loans would be made under current conditions and considering liquidity spreads applicable to each loan portfolio based on the secondary market. The fair value of credit card loans excludes any value related to customer account relationships. For those loans held for investment that are recorded at fair value within our consolidated balance sheets on a nonrecurring basis, the fair value is determined using appraisal values that are obtained from independent appraisers, broker pricing opinions or other available market information, adjusted for the estimated costs to transact the sale.

Due to the use of significant unobservable inputs, loans held for investment are classified as Level 3 under the fair value hierarchy. Fair value adjustments for individually impaired collateralized loans held for investment are recorded in provision for credit losses on the consolidated statements of income.

Loans Held For Sale

Loans held for sale are carried at the lower of aggregate cost, net of deferred fees and deferred origination costs, or fair value. We originate loans with the intent to sell to government sponsored enterprises as part of a delegated underwriting and servicing (“DUS”) program. For DUS commercial loans, we believe the fair value

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

approximates par value as this is the contractual price we receive from the purchaser. For all other loans classified as held for sale, the fair value is determined using a discounted cash flow model or current secondary market prices for loan pools with similar characteristics. Loans held for sale that are valued at par or using a discounted cash flow model are classified as Level 2. Fair value adjustments to loans held for sale are recorded in other non-interest income on our consolidated statements of income.

Interest Receivable

The carrying amount of interest receivable approximates the fair value of this asset due to its relatively short-term nature.

Derivative Assets and Liabilities

We use both exchange-traded derivatives and OTC derivatives to manage our interest rate and foreign currency risk exposure. Quoted market prices are available and used for our exchange-traded derivatives, which we classify as Level 1. However, substantially all of our derivatives are traded in OTC markets where quoted market prices are not always readily available. Therefore, we value most OTC derivatives using valuation techniques, which include internally-developed models. We primarily rely on market observable inputs for our models, such as interest rate yield curves, credit curves, option volatility and currency rates, that vary depending on the type of derivative and nature of the underlying rate, price or index upon which the derivative’s value is based. Where model inputs can be observed in a liquid market and the model does not require significant judgment, such derivatives are typically classified as Level 2 of the fair value hierarchy. When instruments are traded in less liquid markets and significant inputs are unobservable, such as interest rate swaps whose remaining terms do not correlate with market observable interest rate yield curves, the derivatives are classified as Level 3.

The impact of counterparty non-performance risk is considered when measuring the fair value of derivative assets. These derivatives are included in other assets on the balance sheet.

We validate the pricing obtained from the internal models through comparison of pricing to additional sources, including external valuation agents and other internal sources. Pricing variances among different pricing sources are analyzed and validated.

Mortgage Servicing Rights

We record consumer MSRs at fair value on a recurring basis, while commercial MSRs are subsequently measured at amortized cost with impairment recognized as a reduction in other non-interest income. MSRs do not trade in an active market with readily observable prices. Accordingly, we determine the fair value of MSRs using a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, contractual servicing fee income, ancillary income and late fees. Fair value measurements of MSRs use significant unobservable inputs and, accordingly, are classified as Level 3.

Retained Interests in Securitizations

We have retained interests in various mortgage securitization deals from previous acquisitions. Our retained interest includes rights to future cash flows arising from the receivables, the most significant being certificated interest-only bonds issued by the trust. We record our interest in these deals at fair value using valuation models to calculate the present value of future income. The model incorporates various assumptions that market participants use in estimating future income including weighted-average life, constant prepayment rate, discount rate, default rate and severity.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Other Assets

Included in other assets are foreclosed property, other repossessed assets and long-lived assets held for sale. Foreclosed property and other repossessed assets are carried at the lower of the carrying amount or fair value less costs to sell. The fair value is determined based on the appraisal value or listing price of the property or collateral provided by independent appraisers, and is adjusted for the estimated costs to transact the sale. Due to the use of significant unobservable inputs, foreclosed property is classified as Level 3 under the fair value hierarchy. Fair value adjustments for foreclosed property are recorded in other non-interest expense on the consolidated statements of income. Foreclosed property and repossessed assets, which we report on our consolidated balance sheets under other assets, totaled $117 million and $158 million, respectively, as of June 30, 2014, compared with $113 million and $160 million, respectively, as of December 31, 2013.

Long-lived assets held for sale are also subject to fair value measurement on a nonrecurring basis, and carried at the lower of their carrying amount or fair value less costs to sell. The fair value is determined based on the appraisal value or listing price of the property or collateral provided by independent appraisers, and is adjusted for the estimated costs to transact the sale. Due to the use of significant unobservable inputs, long-lived assets held for sale are classified as Level 3 under the fair value hierarchy. Fair value adjustments for long-lived assets are recorded in other non-interest expense on the consolidated statements of income.

Non-Interest Bearing Deposits

The carrying amount of non-interest bearing deposits approximates fair value.

Interest-bearing Deposits

The fair value of interest-bearing deposits is determined based on discounted expected cash flows using discount rates consistent with current market rates for similar products with similar remaining terms.

Securitized Debt Obligations

We utilized multiple third-party pricing services to obtain fair value measurements for the large majority of our securitized debt obligations. The techniques used by the pricing services utilize observable market data to the extent available; and pricing models may be used which incorporate available trade, bid and other market information as described in the above section. We used internal pricing models, discounted cash flow models or similar techniques to estimate the fair value of certain securitization trusts where third-party pricing was not available.

Senior and Subordinated Notes

We engage multiple third-party pricing services in order to estimate the fair value of senior and subordinated notes. The pricing service utilizes a pricing model that incorporates available trade, bid and other market information. It also incorporates spread assumptions, volatility assumptions and relevant credit information into the pricing models.

Federal Funds Purchased and Securities Loaned or Sold under Agreements to Repurchase and Other Borrowings

The carrying amount of federal funds purchased and repurchase agreements approximates fair value. The fair value of FHLB advances is determined based on discounted expected cash flows using discount rates consistent with current market rates for FHLB advances with similar remaining terms.

Interest Payable

The carrying amount of interest payable approximates the fair value of this liability due to its relatively short-term nature.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

 

 NOTE 13—BUSINESS SEGMENTS

 

Our principal operations are currently organized into three major business segments, which are defined based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group, are included in the “Other” category.

Basis of Presentation

We report the results of each of our business segments on a continuing operations basis. See “Note 2—Discontinued Operations” for a discussion of discontinued operations. The results of our individual businesses reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources.

Business Segment Reporting Methodology

The results of our business segments are intended to reflect each segment as if it were a stand-alone business. Our internal management and reporting process used to derive our segment results employs various allocation methodologies, including funds transfer pricing, to assign certain balance sheet assets, deposits and other liabilities and their related revenue and expenses directly or indirectly attributable to each business segment. Our funds transfer pricing process provides a funds credit for sources of funds, such as deposits generated by our Consumer Banking and Commercial Banking businesses, and a funds charge for the use of funds by each segment. Due to the integrated nature of our business segments, estimates and judgments have been made in allocating certain revenue and expense items. Transactions between segments are based on specific criteria or approximate third-party rates. We regularly assess the assumptions, methodologies and reporting classifications used for segment reporting, which may result in the implementation of refinements or changes in future periods. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 19—Business Segments” in our 2013 Form 10-K.

Segment Results and Reconciliation

We may periodically change our business segments or reclassify business segment results based on modifications to our management reporting methodologies and changes in organizational alignment.

The following tables present our business segment results for the three and six months ended June 30, 2014 and 2013, selected balance sheet data as of June 30, 2014 and 2013, and a reconciliation of our total business segment results to our reported consolidated income from continuing operations, assets and deposits. Prior period amounts have been recast to conform to the current period.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Table 13.1: Segment Results and Reconciliation

 

    Three Months Ended June 30, 2014  

 (Dollars in millions)

  Credit
Card
    Consumer
Banking
    Commercial
Banking(1)
    Other(1)     Consolidated
Total(1)
 
 Net interest income    $ 2,461         $ 1,431         $ 436         $ (13)        $ 4,315     
 Non-interest income     839          170          109          35          1,153     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total net revenue     3,300          1,601          545          22          5,468     
 Provision for credit losses     549          143          12          0          704     
 Non-interest expense:          

Amortization of intangibles:

         

PCCR intangible amortization

    94          0          0          0          94     

Core deposit intangible amortization

    0          28          5          0          33     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total PCCR and core deposit intangible amortization

    94          28          5          0          127     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other non-interest expense

    1,625          910          262          55          2,852     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total non-interest expense     1,719          938          267          55          2,979     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    1,032          520          266          (33)         1,785     
 Income tax provision (benefit)     364          186          95          (64)         581     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Income from continuing operations, net of tax    $ 668         $ 334         $ 171         $ 31         $ 1,204     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Period-end total loans held for investment    $   79,018         $ 71,062         $ 48,321         $ 127         $   198,528     
 Period-end total customer deposits     0          169,153          31,440          5,297          205,890     

 

    Three Months Ended June 30, 2013  

 (Dollars in millions)

  Credit
Card
    Consumer
Banking
    Commercial
Banking(1)
    Other(1)     Consolidated
Total(1)
 
 Net interest income    $ 2,804         $ 1,478         $ 402         $ (131)        $ 4,553     
 Non-interest income     832          189          93          (29)         1,085     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total net revenue     3,636          1,667          495          (160)         5,638     
 Provision (benefit) for credit losses     713          67          (14)         (4)         762     
 Non-interest expense:          

Amortization of intangibles:

         

PCCR intangible amortization

    110          0          0          0          110     

Core deposit intangible amortization

    0          35          8          0          43     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total PCCR and core deposit intangible amortization

    110          35          8          0          153     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other non-interest expense

    1,709          875          220          61          2,865     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total non-interest expense     1,819          910          228          61          3,018     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    1,104          690          281          (217)         1,858     
 Income tax provision (benefit)     385          246          100          (100)         631     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Income from continuing operations, net of tax    $ 719         $ 444         $ 181         $ (117)        $ 1,227     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Period-end total loans held for investment    $   78,310         $   72,218         $   40,805         $ 179         $   191,512     
 Period-end total customer deposits     0          169,789          30,869          9,207          209,865     

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

    Six Months Ended June 30, 2014  

 (Dollars in millions)

  Credit
Card
    Consumer
Banking
    Commercial
Banking(1)
    Other(1)     Consolidated
Total(1)
 
 Net interest income    $ 4,986         $ 2,864         $ 857         $ (42)        $ 8,665     
 Non-interest income     1,624          320          196          33          2,173     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total net revenue     6,610          3,184          1,053          (9)         10,838     
 Provision (benefit) for credit losses     1,107          283          52          (3)         1,439     
 Non-interest expense:          

Amortization of intangibles:

         

PCCR intangible amortization

    192          0          0          0          192     

Core deposit intangible amortization

    0          58          11          0          69     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total PCCR and core deposit intangible amortization

    192          58          11          0          261     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other non-interest expense

    3,253          1,810          511          76          5,650     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total non-interest expense     3,445          1,868          522          76          5,911     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    2,058          1,033          479          (82)         3,488     
 Income tax provision (benefit)     722          369          171          (102)         1,160     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Income from continuing operations, net of tax    $ 1,336         $ 664         $ 308         $ 20         $ 2,328     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Period-end total loans held for investment    $   79,018         $   71,062         $   48,321         $ 127         $   198,528     
 Period-end total customer deposits     0          169,153          31,440          5,297          205,890     

 

    Six Months Ended June 30, 2013  

 (Dollars in millions)

  Credit
Card
    Consumer
Banking
    Commercial
Banking(1)
    Other(1)     Consolidated
Total(1)
 
 Net interest income    $ 5,634         $ 2,956         $ 803         $ (270)        $ 9,123     
 Non-interest income     1,653          370          177          (134)         2,066     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total net revenue     7,287          3,326          980          (404)         11,189     
 Provision (benefit) for credit losses     1,456          242          (49)         (2)         1,647     
 Non-interest expense:          

Amortization of intangibles:

         

PCCR intangible amortization

    226          0          0          0          226     

Core deposit intangible amortization

    0          72          15          0          87     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total PCCR and core deposit intangible amortization

    226          72          15          0          313     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other non-interest expense

    3,441          1,728          434          93          5,696     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total non-interest expense     3,667          1,800          449          93          6,009     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    2,164          1,284          580          (495)         3,533     
 Income tax provision (benefit)     759          457          206          (250)         1,172     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Income from continuing operations, net of tax    $ 1,405         $ 827         $ 374         $ (245)        $ 2,361     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Period-end total loans held for investment    $   78,310         $ 72,218         $ 40,805         $ 179         $ 191,512     
 Period-end total customer deposits     0            169,789          30,869            9,207          209,865     

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

 

 

  (1)

In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for expanded discussion. Prior periods have been recast to conform to this presentation.

 

 

 NOTE 14—COMMITMENTS, CONTINGENCIES, GUARANTEES, AND OTHERS

 

Guarantees

We have credit exposure on agreements that we entered into to absorb a portion of the risk of loss on certain manufactured housing securitizations issued by GreenPoint Credit LLC in 2000. Our maximum credit exposure related to these agreements totaled $14 million and $16 million as of June 30, 2014 and December 31, 2013, respectively. These agreements are recorded on our consolidated balance sheets as a component of other liabilities. The value of our obligations under these agreements was $13 million and $15 million as of June 30, 2014 and December 31, 2013, respectively.

See “Note 6—Variable Interest Entities and Securitizations” for additional information about our manufactured housing securitization transactions.

Letters of Credit and Loss Sharing Agreements

We issue letters of credit (financial standby, performance standby and commercial) to meet the financing needs of our customers. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party in a borrowing arrangement. Commercial letters of credit are short-term commitments issued primarily to facilitate trade finance activities for customers and are generally collateralized by the goods being shipped to the client. Collateral requirements are similar to those for funded transactions and are established based on management’s credit assessment of the customer. Management conducts regular reviews of all outstanding letters of credit and customer acceptances, and the results of these reviews are considered in assessing the adequacy of our allowance for loan and lease losses.

On November 1, 2013, we acquired Beech Street Capital, a privately-held, DUS lender that originates multifamily commercial loans with the intent to sell to a government-sponsored enterprise (“GSE”). We enter into loss sharing agreements with Fannie Mae upon the sale of the DUS commercial loans. Under these agreements, losses on the covered loans are shared on a pari passu basis over the life of the loans. At inception, we record a liability representing the fair value of our obligation which is subsequently amortized as we are released from risk of payment under the loss sharing agreement. If payment under the loss sharing agreement becomes probable and estimable, an additional liability may be recorded on the consolidated balance sheets and a non-interest expense may be recognized on the consolidated statements of income. The associated MSRs will also be reviewed for impairment annually.

We had standby letters of credit and commercial letters of credit with contractual amounts of $2.1 billion and $2.0 billion as of June 30, 2014 and December 31, 2013, respectively. The carrying value of outstanding letters of credit, which we include in other liabilities on our consolidated balance sheets, was $3 million and $4 million as of June 30, 2014 and December 31, 2013, respectively. These financial guarantees had expiration dates ranging from 2014 to 2025 as of June 30, 2014. The amount of liability recognized on our balance sheet for Fannie Mae and other loss sharing agreements was $33 million and $14 million as of June 30, 2014 and December 31, 2013, respectively. No additional collateral or recourse provisions exist to reduce this exposure.

U.K. Cross Sell

In the U.K., we previously sold payment protection insurance (“PPI”) and other ancillary cross sell products. In response to an elevated level of customer complaints across the industry, heightened media coverage and pressure from consumer advocacy groups, the U.K. Financial Conduct Authority (“FCA”) investigated and raised

 

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concerns about the way some companies have handled complaints related to the sale of these insurance policies. In connection with this matter, we have established a reserve related to U.K. cross sell products, including PPI, which totaled $169 million as of both June 30, 2014 and December 31, 2013. The addition to the reserve this quarter has been offset by utilization through anticipated redress payments in the first half of the year. The increase in the reserve reflects an increased expectation of claims as a result of the rate of decline in the volume of claims being lower than previously expected. While the reserve currently reflects management’s best estimate, there remains uncertainty about the number of customer claims, It is possible that we may further add to reserves if we determine that we need to change the calculation used to determine customer refunds.

Potential Mortgage Representation and Warranty Liabilities

We acquired three subsidiaries that originated residential mortgage loans and sold these loans to various purchasers, including purchasers who created securitization trusts. These subsidiaries are Capital One Home Loans, LLC, which was acquired in February 2005; GreenPoint, which was acquired in December 2006 as part of the North Fork acquisition; and CCB, which was acquired in February 2009 and subsequently merged into CONA (collectively, “the subsidiaries”).

In connection with their sales of mortgage loans, the subsidiaries entered into agreements containing varying representations and warranties about, among other things, the ownership of the loan, the validity of the lien securing the loan, the loan’s compliance with any applicable loan criteria established by the purchaser, including underwriting guidelines and the existence of mortgage insurance, and the loan’s compliance with applicable federal, state and local laws. The representations and warranties do not address the credit performance of the mortgage loans, but mortgage loan performance often influences whether a claim for breach of representation and warranty will be asserted and has an effect on the amount of any loss in the event of a breach of a representation or warranty.

Each of these subsidiaries may be required to repurchase mortgage loans in the event of certain breaches of these representations and warranties. In the event of a repurchase, the subsidiary is typically required to pay the unpaid principal balance of the loan together with interest and certain expenses (including, in certain cases, legal costs incurred by the purchaser and/or others). The subsidiary then recovers the loan or, if the loan has been foreclosed, the underlying collateral. The subsidiary is exposed to any losses on the repurchased loans after giving effect to any recoveries on the collateral. In some instances, rather than repurchase the loans, a subsidiary may agree to make cash payments to make an investor whole on losses or to settle repurchase claims, possibly including claims for attorneys’ fees and interest. In addition, our subsidiaries may be required to indemnify certain purchasers and others against losses they incur as a result of certain breaches of representations and warranties.

These subsidiaries, in total, originated and sold to non-affiliates approximately $111 billion original principal balance of mortgage loans between 2005 and 2008, which are the years (or “vintages”) with respect to which our subsidiaries have received the vast majority of the repurchase requests and other related claims.

The following table presents the original principal balance of mortgage loan originations, by vintage for 2005 through 2008, for the three general categories of purchasers of mortgage loans and the estimated unpaid principal balance as of June 30, 2014 and December 31, 2013:

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Table 14.1: Unpaid Principal Balance of Mortgage Loans Originated and Sold to Third Parties Based on Category of Purchaser

 

    Estimated
Unpaid Principal Balance
    Original Principal Balance  

 (Dollars in billions)

  June 30,
2014
    December 31,
2013
      Total         2008         2007         2006         2005    

Government-sponsored enterprises (“GSEs”)(1)

   $ 3         $ 3         $ 11         $ 1         $ 4         $ 3         $ 3     
 Insured Securitizations     4          5          20          0          2          8          10     
 Uninsured Securitizations and Other     17          18          80          3          15          30          32     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 Total    $     24         $     26         $     111         $     4         $     21         $     41         $     45     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (1) 

GSEs include Fannie Mae and Freddie Mac.

Between 2005 and 2008, our subsidiaries sold an aggregate amount of $11 billion in original principal balance mortgage loans to the GSEs.

Of the $20 billion in original principal balance of mortgage loans sold directly by our subsidiaries to private-label purchasers who placed the loans into securitizations supported by bond insurance (“Insured Securitizations”), approximately 48% of the original principal balance was covered by bond insurance. Further, approximately $16 billion original principal balance was placed in securitizations as to which the monoline bond insurers have made repurchase requests or loan file requests to one of our subsidiaries (“Active Insured Securitizations”) and the remaining approximately $4 billion original principal balance was placed in securitizations as to which the monoline bond insurers have not made repurchase requests or loan file requests to one of our subsidiaries (“Inactive Insured Securitizations”). Insured Securitizations often allow the monoline bond insurer to act independently of the investors. Bond insurers typically have indemnity agreements directly with both the mortgage originators and the securitizers, and they often have super-majority rights within the trust documentation that allow them to direct trustees to pursue mortgage repurchase requests without coordination with other investors.

Because we do not service most of the loans our subsidiaries sold to others, we do not have complete information about the current ownership of a portion of the $80 billion in original principal balance of mortgage loans not sold directly to GSEs or placed in Insured Securitizations. We have determined based on information obtained from third-party databases that about $48 billion original principal balance of these mortgage loans is currently held by private-label publicly issued securitizations not supported by bond insurance (“Uninsured Securitizations”). An additional approximately $22 billion original principal balance of mortgage loans were initially sold to private investors as whole loans. Various known and unknown investors purchased the remaining $10 billion original principal balance of mortgage loans.

With respect to the $111 billion in original principal balance of mortgage loans originated and sold to others between 2005 and 2008, we estimate that approximately $24 billion in unpaid principal balance remains outstanding as of June 30, 2014, of which approximately $5 billion in unpaid principal balance is at least 90 days delinquent. Approximately $21 billion in losses have been realized by third parties. Because we do not service most of the loans we sold to others, we do not have complete information about the underlying credit performance levels for some of these mortgage loans. These amounts reflect our best estimates, including extrapolations of underlying credit performance where necessary. These estimates could change as we get additional data or refine our analysis.

The subsidiaries had open repurchase requests relating to approximately $2.7 billion original principal balance of mortgage loans as of June 30, 2014, compared with $2.8 billion as of December 31, 2013. Currently, repurchase demands predominantly relate to the 2006 and 2007 vintages. We have received relatively few repurchase demands from the 2008 and 2009 vintages, mostly because GreenPoint ceased originating mortgages in August 2007.

 

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The following table presents information on pending repurchase requests by counterparty category and timing of initial repurchase request. The amounts presented are based on original loan principal balances.

Table 14.2: Open Pipeline All Vintages (all entities)(1)

 

 (Dollars in millions) (All amounts are Original Principal Balance)

  GSEs     Insured
Securitizations
    Uninsured
Securitizations
and Other
    Total  
 Open claims as of December 31, 2012    $ 59        $ 1,579        $ 781        $ 2,419    
 Gross new demands received     203         40         391         634    
 Loans repurchased/made whole     (49)        (5)        (27)        (81)   
 Demands rescinded     (124)               (23)        (147)   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Open claims as of December 31, 2013     89         1,614         1,122         2,825    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Gross new demands received     16                738         755    
 Loans repurchased/made whole     (25)               (2)        (27)   
 Demands rescinded     (51)        (745)        (10)        (806)   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Open claims as of June 30, 2014    $         29        $ 870        $ 1,848        $         2,747    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

  (1) 

The open pipeline includes all repurchase requests ever received by our subsidiaries where either the requesting party has not formally rescinded the repurchase request and where our subsidiary has not agreed to either repurchase the loan at issue or make the requesting party whole with respect to its losses. Accordingly, repurchase requests denied by our subsidiaries and not pursued by the counterparty remain in the open pipeline, with the exception of certain aged repurchase requests submitted by parties without contractual standing to pursue such requests, which may be removed from the pipeline. Finally, the amounts reflected in this chart are the original principal balance amounts of the mortgage loans at issue and do not correspond to the losses our subsidiary would incur upon the repurchase of these loans.

The following table summarizes changes in our representation and warranty reserves for the three and six months ended June 30, 2014 and 2013:

Table 14.3: Changes in Representation and Warranty Reserve

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 

 (Dollars in millions)

      2014             2013             2014             2013      
 Representation and warranty repurchase reserve, beginning of period(1)    $ 1,128       $ 994        $ 1,172        $ 899    
 Provision (benefit) for mortgage representation and warranty losses:        

Recorded in continuing operations

    (29)        (4)        (15)        (14)   

Recorded in discontinued operations

    11         187         (36)        294    
 

 

 

   

 

 

   

 

 

   

 

 

 
 Total provision (benefit) for mortgage representation and warranty losses     (18)        183         (51)        280    
 Net realized losses     (98)        (21)        (109)        (23)   
 

 

 

   

 

 

   

 

 

   

 

 

 
 Representation and warranty repurchase reserve, end of period(1)    $     1,012       $     1,156        $     1,012        $     1,156    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

  (1) 

Reported on our consolidated balance sheets as a component of other liabilities.

As indicated in the table below, most of the reserves relate to the $27 billion in original principal balance of mortgage loans sold directly to the GSEs or to the Active Insured Securitizations.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Table 14.4: Allocation of Representation and Warranty Reserves

 

    Reserve Liability        

 (Dollars in millions, except for loans sold)

  June 30, 2014     December 31,
2013
    Loans Sold
2005 to 2008(1)
 
 Selected period-end data:      
 GSEs and Active Insured Securitizations    $ 783        $ 965        $ 27    
 Inactive Insured Securitizations and Others     229         207         84    
 

 

 

   

 

 

   

 

 

 
 Total    $         1,012        $ 1,172        $ 111    
 

 

 

   

 

 

   

 

 

 

 

 

 

  (1)

Reflects, in billions, the total original principal balance of mortgage loans originated by our subsidiaries and sold to third-party investors between 2005 and 2008.

In establishing reserves for the $11 billion original principal balance of GSE loans, we rely on the historical relationship between GSE loan losses and repurchase outcomes for each GSE, adjusted for any settlements, to estimate: (1) the percentage of current and future GSE loan defaults that we anticipate will result in repurchase requests from the GSEs over the lifetime of the GSE loans; and (2) the percentage of those repurchase requests that we anticipate will result in actual repurchases. We rely on estimated collateral valuations and loss forecast models to estimate our lifetime liability on GSE loans. This reserving approach to the GSE loans reflects the historical interaction with the GSEs around repurchase requests and also includes anticipated repurchases resulting from mortgage insurance rescissions. Although our assumed future claims rate considers the most recent claims experience and actual repurchases, an increase in GSE claims and/or repurchases could result in an increase in our reserve. We have entered into and completed repurchase or settlement agreements with respect to the majority of our exposure within this category.

Our reserves also could be impacted by any claims which may be brought by governmental agencies under the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”), the False Claims Act, or other federal or state statutes. For example, GreenPoint and Capital One have received requests for information and/or subpoenas from various governmental regulators and law enforcement authorities, including members of the RMBS Working Group, relating to the origination of loans for sale to the GSEs and to RMBS participants. We are cooperating with these regulators and other authorities in responding to such requests.

For the $16 billion original principal balance in Active Insured Securitizations, our reserving approach reflects our historical interaction with monoline bond insurers around repurchase requests. Typically, monoline bond insurers allege a very high repurchase rate with respect to the mortgage loans in the Active Insured Securitization category. In response to these repurchase requests, our subsidiaries typically request information from the monoline bond insurers demonstrating that the contractual requirements around a valid repurchase request have been satisfied. In response to these requests for supporting documentation, monoline bond insurers typically initiate litigation. Accordingly, our reserves within the Active Insured Securitization category are not based upon the historical repurchase rate with monoline bond insurers, but rather upon the expected resolution of litigation with the monoline bond insurers. Every bond insurer within this category is pursuing a substantially similar litigation strategy either through active or probable litigation. Accordingly, our representation and warranty reserves for this category are litigation reserves.

In establishing litigation reserves for this category, we consider the current and future monoline insurer losses inherent within the securitization and apply legal judgment to the anticipated factual and legal record to estimate the lifetime legal liability for each securitization. We rely on our own past monoline settlement ratios in addition to considering publicly available industry monoline settlement ratios to establish these reserves. Our reserves with respect to the U.S. Bank Litigation, and the DBSP Litigation, in each case as referenced below, are

 

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contained within the Active Insured Securitization reserve category. Further, to the extent we have litigation reserves with respect to indemnification risks from certain representation and warranty lawsuits brought by monoline bond insurers against third-party securitizations sponsors, where one of our subsidiaries provided some or all of the mortgage collateral within the securitization but is not a defendant in the litigation, such reserves are also contained within this category.

For the $4 billion original principal balance of mortgage loans in the Inactive Insured Securitizations category and the $48 billion original principal balance of mortgage loans in the Uninsured Securitizations category, we establish reserves based on an assessment of probable and estimable legal liability, if any, utilizing both our own experience and publicly available industry settlement information to estimate lifetime liability. In contrast with the bond insurers in the Insured Securitizations, investors in Uninsured Securitizations often face a number of legal and logistical hurdles before they can force a securitization trustee to pursue mortgage repurchases, including the need to coordinate with a certain percentage of investors holding the securities and to indemnify the trustee for any litigation it undertakes. Accordingly, we only reserve for such exposures when a trustee or investor with standing brings claims and it is probable we have incurred a loss. Some Uninsured Securitization investors from this category are currently suing investment banks and securitization sponsors under federal and/or state securities laws. Although we face some indirect indemnity risks from these litigations, we generally have not established reserves with respect to these indemnity risks because we do not consider them to be both probable and reasonably estimable liabilities. In addition, to the extent we have litigation reserves with respect to indemnification risks from certain representation and warranty lawsuits brought by parties who purchased loans from our subsidiaries and subsequently re-sold the loans into securitizations, such reserves are also contained within this category.

For the $22 billion original principal balance of mortgage loans sold to private investors as whole loans, we establish reserves by relying on our historical and anticipated claims and repurchase rates to estimate lifetime liability.

The aggregate reserves for all three subsidiaries totaled $1.0 billion as of June 30, 2014, compared with $1.2 billion as of December 31, 2013. We recorded a total benefit for mortgage representation and warranty losses of $51 million in the six months ended June 30, 2014, which was primarily driven by legal developments with respect to probable and estimable losses. During the six months ended June 30, 2014, we had settlements totaling $109 million that were charged against the reserves.

As part of our business planning processes, we have considered various outcomes relating to the potential future representation and warranty liabilities of our subsidiaries that are possible but do not rise to the level of being both probable and reasonably estimable outcomes justifying an incremental accrual under applicable accounting standards. Our current best estimate of reasonably possible future losses from representation and warranty claims beyond what was in our reserve as of June 30, 2014 is approximately $2.5 billion, a decline from our estimate of $2.6 billion at December 31, 2013. The estimate as of June 30, 2014 covers all reasonably possible losses relating to representation and warranty claim activity, including those relating to the U.S. Bank Litigation, the DBSP Litigation, the FHFA Litigation, and the LXS Trust Litigation.

In estimating reasonably possible future losses in excess of our current reserves, we assume a portion of the inactive securitizations become active and for all Insured Securitizations, we assume loss rates on the high end of those observed in monoline settlements or court rulings. For our remaining GSE exposures, Uninsured Securitizations and whole loan exposures, our reasonably possible risk estimates assume lifetime loss rates and claims rates at the highest levels of our past experience and also consider the limited instances of observed settlements. We do not assume claim rates or loss rates for these risk categories will be as high as those assumed for the Active Insured Securitizations, however, based on industry precedent. Should the number of claims or the loss rates on these claims increase significantly, our estimate of reasonably possible risk would increase

 

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materially. We also assume that we will resolve any loan repurchase requests relating to loans originated more than six years ago at a discount as compared to those originated within six years of a repurchase claim because of the pending legal arguments in various matters concerning the applicable statute of limitations.

Notwithstanding our ongoing attempts to estimate a reasonably possible amount of future losses beyond our current accrual levels based on current information, it is possible that actual future losses will exceed both the current accrual level and our current estimate of the amount of reasonably possible losses. Our reserve and reasonably possible estimates involve considerable judgment and reflect that there is still significant uncertainty regarding numerous factors that may impact the ultimate loss levels, including, but not limited to: litigation outcomes; court rulings; governmental enforcement decisions; future repurchase and indemnification claim levels; securitization trustees pursuing mortgage repurchase litigation unilaterally or in coordination with investors; investors successfully pursuing repurchase litigation independently and without the involvement of the trustee as a party; ultimate repurchase and indemnification rates; future mortgage loan performance levels; actual recoveries on the collateral; and macroeconomic conditions (including unemployment levels and housing prices). In light of the significant uncertainty as to the ultimate liability our subsidiaries may incur from these matters, an adverse outcome in one or more of these matters could be material to our results of operations or cash flows for any particular reporting period.

Litigation

In accordance with the current accounting standards for loss contingencies, we establish reserves for litigation related matters when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated. Litigation claims and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. Below we provide a description of potentially material legal proceedings and claims.

For some of the matters disclosed below, we are able to determine estimates of potential future outcomes that are not probable and reasonably estimable outcomes justifying either the establishment of a reserve or an incremental reserve build, but which are reasonably possible outcomes. For other disclosed matters, such an estimate is not possible at this time. For those matters below where an estimate is possible (excluding the reasonably possible future losses relating to the U.S. Bank Litigation, the DBSP Litigation, the FHFA Litigation, and the LXS Trust Litigation, because reasonably possible losses with respect to those litigations are included within the reasonably possible representation and warranty liabilities discussed above) management currently estimates the reasonably possible future losses could be approximately $250 million. Notwithstanding our attempt to estimate a reasonably possible range of loss beyond our current accrual levels for some litigation matters based on current information, it is possible that actual future losses will exceed both the current accrual level and the range of reasonably possible losses disclosed here. Given the inherent uncertainties involved in these matters, and the very large or indeterminate damages sought in some of these matters, there is significant uncertainty as to the ultimate liability we may incur from these litigation matters and an adverse outcome in one or more of these matters could be material to our results of operations or cash flows for any particular reporting period.

Interchange Litigation

In 2005, a number of entities, each purporting to represent a class of retail merchants, filed antitrust lawsuits (the “Interchange Lawsuits”) against MasterCard and Visa and several member banks, including our subsidiaries and us, alleging among other things, that the defendants conspired to fix the level of interchange fees. The complaints seek injunctive relief and civil monetary damages, which could be trebled. Separately, a number of large merchants have asserted similar claims against Visa and MasterCard only. In October 2005, the class and merchant Interchange Lawsuits were consolidated before the U.S. District Court for the Eastern District of New York for certain purposes, including discovery. In July 2012, the parties executed and filed with the court a

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Memorandum of Understanding agreeing to resolve the litigation on certain terms set forth in a settlement agreement attached to the Memorandum. The class settlement provides for, among other things, (i) payments by defendants to the class and individual plaintiffs totaling approximately $6.6 billion; (ii) a distribution to the class merchants of an amount equal to 10 basis points of certain interchange transactions for a period of eight months; and (iii) modifications to certain Visa and MasterCard rules regarding point of sale practices. This agreement is contingent on final court approval of the class settlement. In November 2012, the court granted preliminary approval of the class settlement. In December 2013, the court granted final approval of the proposed class settlement, which was appealed to the Second Circuit Court of Appeals in January 2014. Several merchant plaintiffs have also opted out of the class settlement, some of which have sued MasterCard, Visa and various member banks, including Capital One (collectively “the Opt-Out Plaintiffs”). Relatedly, in December 2013, individual consumer plaintiffs also filed a proposed national class action against a number of banks, including Capital One, alleging that because the banks conspired to fix interchange fees, consumers were forced to pay more for the fees than appropriate. These cases are in their preliminary stages.

As members of Visa, our subsidiary banks have indemnification obligations to Visa with respect to final judgments and settlements, including the Interchange Lawsuits. In the first quarter of 2008, Visa completed an IPO of its stock. With IPO proceeds, Visa established an escrow account for the benefit of member banks to fund certain litigation settlements and claims, including the Interchange Lawsuits. As a result, in the first quarter of 2008, we reduced our Visa-related indemnification liabilities of $91 million recorded in other liabilities with a corresponding reduction of other non-interest expense. We made an election in accordance with the accounting guidance for fair value option for financial assets and liabilities on the indemnification guarantee to Visa, and the fair value of the guarantee as of June 30, 2014 was zero. Separately, in January 2011, we entered into a MasterCard Settlement and Judgment Sharing Agreement, along with other defendant banks, which apportions between MasterCard and its member banks the costs and liabilities of any judgment or settlement arising from the Interchange Lawsuits.

In March 2011, a furniture store owner named Mary Watson filed a proposed class action in the Supreme Court of British Columbia against Visa, MasterCard, and several banks, including Capital One (the “Watson Litigation”). The lawsuit asserts, among other things, that the defendants conspired to fix the merchant discount fees that merchants pay on credit card transactions in violation of Section 45 of the Competition Act and seeks unspecified damages and injunctive relief. In addition, Capital One has been named as a defendant in similar proposed class action claims filed in other jurisdictions in Canada. In March 2014, the court granted a partial motion for class certification, and in April 2014 both plaintiffs and defendants filed a notice to appeal the decision to the Court of Appeal for British Columbia.

Late Fees Litigation

In 2007, a number of individual plaintiffs, each purporting to represent a class of cardholders, filed antitrust lawsuits in the U.S. District Court for the Northern District of California against several issuing banks, including COBNA. These lawsuits allege, among other things, that the defendants conspired to fix the level of late fees and over-limit fees charged to cardholders, and that these fees are excessive. In May 2007, the cases were consolidated for all purposes, and a consolidated amended complaint was filed alleging violations of federal statutes and state law. The amended complaint requests civil monetary damages, which could be trebled, and injunctive relief. In November 2007, the court dismissed the amended complaint. Plaintiffs appealed that order to the Ninth Circuit Court of Appeals. The plaintiffs’ appeal challenges the dismissal of their claims under the National Bank Act, the Depository Institutions Deregulation Act of 1980 and the California Unfair Competition Law (the “UCL”), but not their antitrust conspiracy claims. In January, 2014, the Ninth Circuit affirmed the lower court’s dismissal of the case. In April 2014, plaintiffs filed a Petition for Writ of Certiorari to the United States Supreme Court, which was denied by the Supreme Court in July 2014.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Credit Card Interest Rate Litigation

The Capital One Bank Credit Card Interest Rate Multi-district Litigation matter was created as a result of a June 2010 transfer order issued by the United States Judicial Panel on Multi-district Litigation (“MDL”), which consolidated for pretrial proceedings in the U.S. District Court for the Northern District of Georgia two pending putative class actions against COBNA-Nancy Mancuso, et al. v. Capital One Bank (USA), N.A., et al., (E.D. Virginia); and Kevin S. Barker, et al. v. Capital One Bank (USA), N.A., (N.D. Georgia), A third action, Jennifer L. Kolkowski v. Capital One Bank (USA), N.A., (C.D. California) was subsequently transferred into the MDL. In August 2010, the plaintiffs in the MDL filed a Consolidated Amended Complaint. The Consolidated Amended Complaint alleges in a putative class action that COBNA breached its contractual obligations, and violated the Truth in Lending Act (“TILA”), the California Consumers Legal Remedies Act, the UCL, the California False Advertising Act, the New Jersey Consumer Fraud Act, and the Kansas Consumer Protection Act when it raised interest rates on certain credit card accounts. The MDL plaintiffs seek statutory damages, restitution, attorney’s fees and an injunction against future rate increases. Fact discovery is now closed. In August 2011, Capital One filed a motion for summary judgment, which remains pending with the court. In July 2013, the MDL plaintiffs filed a supplemental opposition to Capital One’s motion for summary judgment. In April 2014, the MDL was reassigned to a new Judge in the U.S. District Court for the Northern District of Georgia. As a result of a settlement in another matter, the California-based UCL and TILA claims in the MDL are extinguished.

Mortgage Repurchase Litigation

In February 2009, GreenPoint was named as a defendant in a lawsuit commenced in the New York County Supreme Court, by U.S. Bank, N. A., Syncora Guarantee Inc. and CIFG Assurance North America, Inc. (the “U.S. Bank Litigation”). Plaintiffs allege, among other things, that GreenPoint breached certain representations and warranties in two contracts pursuant to which GreenPoint sold approximately 30,000 mortgage loans having an aggregate original principal balance of approximately $1.8 billion to a purchaser that ultimately transferred most of these mortgage loans to a securitization trust. Some of the securities issued by the trust were insured by two of the plaintiffs: Syncora and CIFG. Plaintiffs seek unspecified damages and an order compelling GreenPoint to repurchase the entire portfolio of 30,000 mortgage loans based on alleged breaches of representations and warranties relating to a limited sampling of loans in the portfolio, or, alternatively, the repurchase of specific mortgage loans to which the alleged breaches of representations and warranties relate. In March 2010, the court granted GreenPoint’s motion to dismiss with respect to plaintiffs Syncora and CIFG and denied the motion with respect to U.S. Bank. GreenPoint subsequently answered the complaint with respect to U.S. Bank, denying the allegations, and filed a counterclaim against U.S. Bank alleging breach of covenant of good faith and fair dealing. In February 2012, the court denied plaintiffs’ motion for leave to file an amended complaint and dismissed Syncora and CIFG from the case. Syncora and CIFG appealed their dismissal to the New York Supreme Court, Appellate Division, First Department (the “First Department”), which affirmed the dismissal in April 2013. The New York Court of Appeals denied Syncora’s and CIFG’s motion for leave to appeal the First Department’s decision in February 2014.

In September 2010, DB Structured Products, Inc. (“DBSP”) named GreenPoint in a third-party complaint, filed in the New York County Supreme Court, alleging breach of contract and seeking indemnification (the “DBSP Litigation”). In the underlying suit, Assured Guaranty Municipal Corp. (“AGM”) sued DBSP for alleged breaches of representations and warranties made by DBSP with respect to certain residential mortgage loans that collateralize a securitization insured by AGM and sponsored by DBSP. DBSP purchased the HELOC loans from GreenPoint in 2006. The entire securitization, almost all of which is insured by AGM, is comprised of loans with an aggregate original principal balance of approximately $353 million. DBSP asserts that any liability it faces lies with GreenPoint, alleging that DBSP’s representations and warranties to AGM are substantially similar to the representations and warranties made by GreenPoint to DBSP. GreenPoint filed a motion to dismiss the complaint in October 2010, which the court denied in July 2011.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

In October 2012, CONA as successor to CCB, was named as a defendant in a lawsuit filed in the Southern District of New York by Ambac Assurance Corporation and the Segregated Account of Ambac Assurance Corporation (the “Ambac Litigation”). Plaintiffs allege, among other things, that CONA (as successor to CCB) breached certain representations and warranties in contracts relating to six securitizations with an aggregate original principal balance of approximately $5.2 billion which were sponsored by a CCB affiliate in 2006 and 2007 and backed by loans originated by CCB. Almost half of the securities issued by the six trusts are insured by Ambac. Plaintiffs seek unspecified damages, an order compelling CONA to indemnify Ambac for all accrued and future damages based on alleged breaches of representations and warranties relating to a limited sampling of loans in the portfolio, the repurchase of specific mortgage loans to which the alleged breaches of representations and warranties relate, and all related fees, costs, and interest. The parties have resolved the matter and the court entered a stipulation of dismissal with prejudice in June 2014.

In May, June, and July 2012, FHFA (acting as conservator for Freddie Mac) filed three summons with notice in the New York state court against GreenPoint, on behalf of the trustees for three RMBS trusts backed by loans originated by GreenPoint with an aggregate original principal balance of $3.4 billion. In January 2013, the plaintiffs filed an amended consolidated complaint in the name of the three trusts, acting by the respective trustees, alleging breaches of contractual representations and warranties regarding compliance with GreenPoint underwriting guidelines relating to certain loans (the “FHFA Litigation”). Plaintiffs seek specific performance of the repurchase obligations with respect to the loans for which they have provided notice of alleged breaches as well as all other allegedly breaching loans, rescissory damages, indemnification, costs and interest. The court denied GreenPoint’s motion to dismiss in March 2014.

In July 2013, Lehman XS Trust, Series 2006-4N, by its trustee U.S. Bank, N.A. filed a lawsuit in the Southern District of New York against GreenPoint alleging breaches of representations and warranties made in certain loan sale agreements, pursuant to which GreenPoint sold mortgage loans with an original principal balance of $915 million to Lehman Brothers for securitization and sale to investors. The lawsuit (“the LXS Trust Litigation”) seeks specific performance of GreenPoint’s obligation to repurchase certain allegedly breaching loans, or in the alternative, the repurchase of all loans in the trust, the award of rescissory damages, costs, fees and interest. In January 2014, the court granted GreenPoint’s motion to dismiss based on the statute of limitations, ruling that New York’s six-year statute of limitations began running no later than the time of the mortgage securitization. The plaintiff has appealed the dismissal of the complaint.

As noted above in the section entitled Potential Mortgage Representation and Warranty Liabilities, the Company’s subsidiaries establish reserves with respect to representation and warranty litigation matters, where appropriate, within the Company’s overall representation and warranty reserves. Please see above for more details.

New York District Attorney’s Office Investigation

Capital One has received subpoenas and testimony requests from the New York District Attorney’s office with respect to certain check casher clients of the Commercial Banking business and Capital One’s anti-money laundering program. Capital One is cooperating with the investigation.

Checking Account Overdraft Litigation

In May 2010, Capital One Financial Corporation and COBNA were named as defendants in a putative class action named Steen v. Capital One Financial Corporation, et al., filed in the U.S. District Court for the Eastern District of Louisiana. Plaintiff challenges practices relating to fees for overdraft and non-sufficient funds fees on consumer checking accounts. Plaintiff alleges that our methodology for posting transactions to customer accounts was designed to maximize the generation of overdraft fees, supporting claims for breach of contract, breach of

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

the covenant of good faith and fair dealing, unconscionability, conversion, unjust enrichment and violations of state unfair trade practices laws. Plaintiff seeks a range of remedies, including restitution, disgorgement, injunctive relief, punitive damages and attorneys’ fees. In May 2010, the case was transferred to the Southern District of Florida for coordinated pre-trial proceedings as part of a multi-district litigation (MDL) involving numerous defendant banks, captioned In re Checking Account Overdraft Litigation. In January 2011, plaintiffs filed a second amended complaint against CONA in the MDL court. In February 2011, CONA filed a motion to dismiss the second amended complaint. In March 2011, the MDL court granted CONA’s motion to dismiss claims of breach of the covenant of good faith and fair dealing under Texas law, but denied the motion to dismiss in all other respects. In June 2012, the MDL court granted plaintiff’s motion for class certification. The modified scheduling order entered by the MDL court contemplates the conclusion of discovery in the third quarter of 2014 and we anticipate a remand to the Eastern District of Louisiana in the fourth quarter of 2014.

Hawaii, Mississippi, Missouri and New Mexico State Attorney General Payment Protection Matters

In April 2012, the Attorney General of Hawaii filed a lawsuit in First Circuit Court in Hawaii against Capital One Bank (USA) N.A., and Capital One Services, LLC. The case is one of several similar lawsuits filed by the Attorney General of Hawaii against various banks challenging the marketing and sale of payment protection and credit monitoring products. In June 2012, the Attorney General of Mississippi filed substantially similar suits against Capital One and several other banks. In April 2013, the Attorney General of New Mexico also filed substantially similar suits against Capital One and several other banks. All three state attorney general complaints allege that Capital One enrolls customers in such programs without their consent and that Capital One enrolls customers in such programs in circumstances in which the customer is not eligible to receive benefits for the product in question. All suits allege unjust enrichment and violation of Unfair and Deceptive Practices Act statutes. The remedies sought in the lawsuits include an injunction prohibiting the Company from engaging in the alleged violations, restitution for all persons allegedly injured by the complained of practices, civil penalties and costs.

In May 2012, Capital One removed the Hawaii AG case to U.S. District Court, District of Hawaii. In November 2012, the court denied the Hawaii AG’s motion to remand. The Ninth Circuit overturned the District Court’s denial of the AG’s motion to remand in August 2014, and the case will proceed in state court.

In August 2012, Capital One removed the Mississippi AG case to the U.S. District Court, Southern District of Mississippi. In July 2013, the court denied the Mississippi AG’s motion to remand. The Fifth Circuit overturned the District Court’s denial of the AG’s motion to remand in December 2013, and the case will proceed in state court.

In June 2013, Capital One removed the New Mexico AG case to the U.S. District Court, District of New Mexico. In response, the New Mexico AG filed an Amended Complaint in federal court, adding a claim for alleged violations of the Truth in Lending Act. In November 2013, the court granted in part and denied in part Capital One’s motion to dismiss. The court dismissed the state deceptive practices act claim but allowed the New Mexico AG to proceed on its claims under the Truth In Lending Act. In a separate order, the court also granted Capital One’s motion precluding the New Mexico AG from recovery of alleged damages for New Mexico residents who were class members in a prior class action against Capital One.

Relatedly, Capital One has provided information to the Attorney General of Missouri as part of an industry-wide informal inquiry initiated in August 2011, relating to the marketing of payment protection products.

 

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CAPITAL ONE FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

 

Intellectual Ventures Corp., et al.

In June 2013, Intellectual Ventures I, LLC and Intellectual Ventures II, LLC (collectively “IV”) sued Capital One Financial Corp., Capital One Bank (USA), N.A. and Capital One, N.A. (collectively “Capital One”) for patent infringement in the United States District Court for the Eastern District of Virginia. In the Complaint, IV alleges infringement of patents related to various business processes across the Capital One enterprise. IV simultaneously filed patent infringement actions against numerous other financial institutions on the same and other patents in several other federal courts. Capital One’s motion to dismiss was denied without prejudice in August 2013. Capital One filed an answer and counterclaim alleging antitrust violations. In December 2013, the court dismissed Capital One’s counterclaim and decided the parties’ arguments on claim construction. IV agreed to dismiss two patents in suit, and following claim construction, asked for a stipulation of non-infringement for one patent with an opportunity to appeal the court’s decision regarding claim construction. In April 2014, the court granted Capital One’s motion for summary judgment and found that the two remaining patents were either unpatentable or indefinite. In May 2014, IV appealed to the Federal Circuit and Capital One cross-appealed the dismissal of its antitrust claims.

In January 2014, IV filed a second suit against Capital One for patent infringement in the U.S. District Court for the District of Maryland. In the complaint, IV again alleges infringement of patents related to various business practices across the Capital One enterprise. The court denied Capital One’s motion to transfer venue to the Eastern District of Virginia in March 2014. IV voluntarily dismissed one of the patents against Capital one, and the parties are currently engaged in discovery on the remaining patents in suit.

Telephone Consumer Protection Act Litigation

In December 2012, the Capital One Telephone Consumer Protection Act (“TCPA”) Litigation Multi-district Litigation matter was created as a result of a transfer order issued by the United States Judicial Panel on Multi-district Litigation (“TCPA MDL”), which consolidated for pretrial proceedings in the U.S. District Court for the Northern District of Illinois three pending putative class actions-Bridgett Amadeck, et al. v. Capital One Financial Corporation, et al. (W.D. Washington); Nicholas Martin, et al. v. Capital One Bank (USA), N.A., et al. (N.D. Illinois); and Charles C. Patterson v. Capital One Bank (USA), N.A., et al. (N.D. Illinois)-and several individual lawsuits. In February 2013, the putative class action plaintiffs in the TCPA MDL filed a Consolidated Master Class Action Complaint. The Consolidated Master Class Action Complaint and individual lawsuits allege that COBNA and/or entities acting on its behalf violated the TCPA by contacting consumers on their cellular telephones using an automatic telephone dialing system and/or artificial or prerecorded voice without first obtaining prior express consent to do so. The plaintiffs seek statutory damages for alleged negligent and willful violations of the TCPA, attorneys’ fees, costs, and injunctive relief. In June 2014, the parties executed and filed with the court a Memorandum of Understanding agreeing to resolve the litigation for an amount within previously established reserves. In July 2014, the court granted preliminary approval of the class settlement. The court is scheduled to determine whether to provide final approval of the class settlement in the fourth quarter of 2014.

Other Pending and Threatened Litigation

In addition, we are commonly subject to various pending and threatened legal actions relating to the conduct of our normal business activities. In the opinion of management, the ultimate aggregate liability, if any, arising out of all such other pending or threatened legal actions will not be material to our consolidated financial position or our results of operations.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

For a discussion of the quantitative and qualitative disclosures about market risk, see “MD&A—Risk Management—Market Risk Management” and “MD&A—Market Risk Profile.”

Item 4. Controls and Procedures

Overview

We are required under applicable laws and regulations to maintain controls and procedures, which include disclosure controls and procedures as well as internal control over financial reporting, as further described below.

(a) Disclosure Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures refer to controls and other procedures designed to provide reasonable assurance that information required to be disclosed in our financial reports is recorded, processed, summarized and reported within the time periods specified by SEC rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we must apply judgment in evaluating and implementing possible controls and procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”), our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30, 2014, the end of the period covered by this Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2014, at a reasonable level of assurance, in recording, processing, summarizing and reporting information required to be disclosed within the time periods specified by the SEC rules and forms.

(b) Changes in Internal Control Over Financial Reporting

We regularly review our disclosure controls and procedures and make changes intended to ensure the quality of our financial reporting. There were no changes in internal control over financial reporting that occurred in the second quarter of 2014 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

The information required by Item 103 of Regulation S-K is included in “Note 14—Commitments, Contingencies, Guarantees, and Others.”

Item 1A. Risk Factors

We are not aware of any material changes from the risk factors set forth under “Part I—Item 1A. Risk Factors” in our 2013 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents information related to repurchases of shares of our common stock during the second quarter of 2014.

 

 (Dollars and shares in millions except dollars per share)

  Total
Number
of Shares
    Purchased(1)    
    Average
Price Paid
  per Share(2)  
    Total Number of
  Shares Purchased as 
Part of Publicly
Announced

Plans
    Maximum
 Amount That May 
Yet be Purchased
Under the Plan
or Program(2)
 
 April 1-30, 2014     1,431      $ 74.86        1,429      $ 2,393   
 May 1-31, 2014     5,284        75.77        5,280        1,993   
 June 1-30, 2014     5,354        80.68        5,352        1,561   
 

 

 

     

 

 

   
 Total     12,069        77.84        12,061     
 

 

 

     

 

 

   

 

 

  (1) 

Primarily comprised of repurchases under the $2.5 billion common stock repurchase program authorized by our Board of Directors and announced on March 26, 2014, which authorized share repurchases through March 31, 2015. Also includes 1,184, 4,651 and 2,376 shares purchased in April, May and June, respectively, related to stock option exercises and the withholding of shares to cover taxes on restricted stock awards whose restrictions have lapsed.

 

  (2) 

Amounts exclude commission costs.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

An index to exhibits has been filed as part of this report and is incorporated herein by reference.

 

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SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

        CAPITAL ONE FINANCIAL CORPORATION

Date: August 5, 2014

 

By:  

 

    /s/ STEPHEN S. CRAWFORD

   

    Stephen S. Crawford

   

    Chief Financial Officer

 

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EXHIBIT INDEX

CAPITAL ONE FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

DATED JUNE 30, 2014

Commission File No. 1-13300

The following exhibits are incorporated by reference or filed herewith. References to (i) the “2003 Form 10-K” are to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, filed on March 5, 2004; (ii) the “2008 Form 10-K” are to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009 and (iii) the “2011 Form 10-K” are to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed on February 28, 2012.

 

 Exhibit No.

    

 Description

 2.1

    

Stock Purchase Agreement, dated as of December 3, 2008, by and among Capital One Financial Corporation, B.F. Saul Real Estate Investment Trust, Derwood Investment Corporation, and B.F. Saul Company Employee’s Profit Sharing and Retirement Trust (incorporated by reference to Exhibit 2.4 of the 2008 Form 10-K).

 2.2.1

    

Purchase and Sale Agreement, dated as of June 16, 2011, by and among Capital One Financial Corporation, ING Groep N.V., ING Bank N.V., ING Direct N.V. and ING Direct Bancorp (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K, filed on June 22, 2011).

 2.2.2

    

First Amendment to the Purchase and Sale Agreement by and among Capital One Financial Corporation, ING Groep N.V., ING Bank N.V., ING Direct N.V. and ING Direct Bancorp, dated as of February 17, 2012 (incorporated by reference to Exhibit 2.2.2 of the 2011 Form 10-K).

 2.3.1

    

Purchase and Assumption Agreement, dated as of August 10, 2011, by and among Capital One Financial Corporation, HSBC Finance Corporation, HSBC USA Inc. and HSBC Technology and Services (USA) Inc. (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K, filed on August 12, 2011).

 2.3.2

    

Purchaser Transition Services Agreement between HSBC Technology and Services (USA) Inc. and Capital One Services, LLC, dated as of May 1, 2012 (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q for the period ended June 30, 2012).

 3.1

    

Restated Certificate of Incorporation of Capital One Financial Corporation (as amended and restated May 5, 2014) (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8- K, filed on May 5, 2014).

 3.2

    

Amended and Restated Bylaws of Capital One Financial Corporation, dated May 5, 2014 (incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K, filed on May 5, 2014).

 3.3

    

Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B, dated August 16, 2012 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on August 20, 2012).

 3.4

    

Certificate of Designations of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, dated June 11, 2014 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed on June 12, 2014).

 

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 Exhibit No.

    

 Description

 4.1.1

    

Specimen certificate representing the common stock of Capital One Financial Corporation (incorporated by reference to Exhibit 4.1 of the 2003 Form 10-K).

 4.1.2

    

Warrant Agreement, dated December 3, 2009, between Capital One Financial Corporation and Computershare Trust Company, N.A. (incorporated by reference to the Exhibit 4.1 of the Form 8-A, filed on December 4, 2009).

 4.1.3

    

Deposit Agreement, dated August 20, 2012 (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K, filed on August 20, 2012).

 4.2

    

Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt are not filed. The Company agrees to furnish a copy thereof to the SEC upon request.

 12.1*

    

Computation of Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends.

 31.1*

    

Certification of Richard D. Fairbank.

 31.2*

    

Certification of Stephen S. Crawford.

 32.1*

    

Certification** of Richard D. Fairbank.

 32.2*

    

Certification** of Stephen S. Crawford.

 101.INS*

    

XBRL Instance Document.

 101.SCH*

    

XBRL Taxonomy Extension Schema Document.

 101.CAL*

    

XBRL Taxonomy Extension Calculation Linkbase Document.

 101.DEF*

    

XBRL Taxonomy Extension Definition Linkbase Document.

 101.LAB*

    

XBRL Taxonomy Extension Label Linkbase Document.

 101.PRE*

    

XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

*

Indicates a document being filed with this Form 10-Q.

 

**

Information in this Form 10-Q furnished herewith shall not be deemed to be “filed” for the purposes of Section 18 of the 1934 Act or otherwise subject to the liabilities of that section.

 

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