COF-09.30.2014-10Q
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
_______________________________

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
 
ý
  
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  ý
As of October 31, 2014, there were 555,970,573 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________


TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
i
Capital One Financial Corporation (COF)

 
 
 
 

 
ii
Capital One Financial Corporation (COF)

INDEX OF MD&A TABLES AND SUPPLEMENTAL TABLES
 
 
 
MD&A Tables:
Page
1
2
3
4
5
6
7
7.1
7.2
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
 
 
 
Supplemental Tables:
 
A

 
iii
Capital One Financial Corporation (COF)

Table of Contents

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

This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “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 September 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.
SUMMARY OF SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data from our results of operations for the third quarter and first nine months of 2014 and 2013, and selected comparative balance sheet data as of September 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 (the “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 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. 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 September 30,
 
Nine Months Ended September 30,
(Dollars in millions, except per share data and as noted)
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Income statement
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
4,497

 
$
4,560

 
(1
)
%
 
$
13,162

 
$
13,683

 
(4
)
%
Non-interest income
 
1,142

 
1,091

 
5

 
 
3,315

 
3,157

 
5

 
Total net revenue(2)
 
5,639

 
5,651

 
—

  
 
16,477

 
16,840

 
(2
)
  
Provision for credit losses
 
993

 
849

 
17

  
 
2,432

 
2,496

 
(3
)
  
Non-interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketing
 
392

 
299

 
31

 
 
1,052

 
946

 
11

 
Amortization of intangibles
 
130

 
161

 
(19
)
 
 
409

 
505

 
(19
)
 
Acquisition-related
 
13

 
37

 
(65
)
 
 
54

 
133

 
(59
)
 
Operating expenses
 
2,450

 
2,612

 
(6
)
 
 
7,381

 
7,534

 
(2
)
 
Total non-interest expense
 
2,985

 
3,109

 
(4
)
  
 
8,896

 
9,118

 
(2
)
  
Income from continuing operations before income taxes
 
1,661

 
1,693

 
(2
)
 
 
5,149

 
5,226

 
(1
)
 
Income tax provision
 
536

 
575

 
(7
)
 
 
1,696

 
1,747

 
(3
)
 
Income from continuing operations, net of tax
 
1,125

 
1,118

 
1

 
 
3,453

 
3,479

 
(1
)
 
Loss from discontinued operations, net of tax
 
(44
)
 
(13
)
 
238

 
 
(24
)
 
(210
)
 
(89
)
 
Net income
 
1,081

 
1,105

 
(2
)
 
 
3,429

 
3,269

 
5

 
Dividends and undistributed earnings allocated to participating securities
 
(5
)
 
(5
)
 
—

 
 
(14
)
 
(14
)
 
—

 
Preferred stock dividends
 
(20
)
 
(13
)
 
54

 
 
(46
)
 
(39
)
 
18

 
Net income available to common shareholders
 
$
1,056

 
$
1,087

 
(3
)
 
 
$
3,369

 
$
3,216

 
5

 
Common share statistics
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
1.89

 
$
1.87

 
1

 
 
$
5.95

 
$
5.53

 
8

 
Diluted earnings per common share
 
1.86

 
1.84

 
1

 
 
5.86

 
5.46

 
7

 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
559.9

 
582.3

 
(4
)
 
 
566.1

 
581.4

 
(3
)
 
Diluted
 
567.9

 
591.1

 
(4
)
 
 
575.2

 
589.0

 
(2
)
 
Dividends per common share
 
$
0.30

 
$
0.30

 
—

 
 
$
0.90

 
$
0.65

 
38

 
Average balances
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment(3)
 
$
199,422

 
$
191,135

 
4

 
 
$
196,068

 
$
192,547

 
2

 
Interest-earning assets
 
268,890

 
264,796

 
2

  
 
265,065

 
267,590

 
(1
)
  
Total assets
 
299,523

 
294,919

 
2

  
 
296,175

 
298,347

 
(1
)
  
Interest-bearing deposits
 
179,928

 
186,752

 
(4
)
  
 
181,587

 
188,877

 
(4
)
  
Total deposits
 
205,199

 
208,340

 
(2
)
  
 
205,783

 
210,170

 
(2
)
  
Borrowings
 
40,314

 
36,355

 
11

  
 
37,332

 
38,261

 
(2
)
  
Common equity
 
43,489

 
40,332

 
8

 
 
42,772

 
40,335

 
6

 
Total stockholders’ equity
 
44,827

 
41,185

 
9

 
 
43,828

 
41,188

 
6

 
Selected performance metrics
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Purchase volume(4)
 
$
57,474

 
$
50,943

 
13

 
 
$
161,266

 
$
146,829

 
10

 
Total net revenue margin(5)
 
8.39
%
 
8.54
%
 
(15
)
bps 
 
8.29
%
 
8.39
%
 
(10
)
bps 
Net interest margin(6)
 
6.69

 
6.89

 
(20
)
  
 
6.62

 
6.82

 
(20
)
  
Return on average assets
 
1.50

 
1.52

 
(2
)
 
 
1.55

 
1.55

 
—

 
Return on average tangible assets(7)
 
1.58

 
1.60

 
(2
)
 
 
1.64

 
1.64

 
—

 
Return on average common equity(8)
 
10.12

 
10.91

 
(79
)
 
 
10.58

 
11.33

 
(75
)
 
Return on average tangible common equity(9)
 
15.73

 
17.96

 
(223
)
 
 
16.66

 
18.75

 
(209
)
 
Equity-to-assets ratio
 
14.97

 
13.96

 
101

 
 
14.80

 
13.81

 
99

 
Non-interest expense as a % of average loans held for investment
 
5.99

 
6.51

 
(52
)
 
 
6.05

 
6.31

 
(26
)
 
Efficiency ratio(10)
 
52.93

 
55.02

 
(209
)
  
 
53.99

 
54.14

 
(15
)
  

 
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Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions, except per share data and as noted)
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Effective income tax rate from continuing operations
 
32.3

 
34.0

 
(170
)
  
 
32.9

 
33.4

 
(50
)
  
Net charge-offs
 
$
756

 
$
917

 
(18
)
%
 
$
2,499

 
$
2,965

 
(16
)
%
Net charge-off rate(11)
 
1.52
%
 
1.92
%
 
(40
)
bps 
 
1.70
%
 
2.05
%
 
(35
)
bps 
Net charge-off rate (excluding Acquired Loans)
 
1.73

 
2.29

 
(56
)
 
 
1.96

 
2.48

 
(52
)
 
 
 
September 30,
 
December 31,
 
 
(Dollars in millions except per share data as noted)
 
2014
 
2013
 
Change
Balance sheet (period end)
 
 
 
 
 
 
 
Loans held for investment(3)
 
$
201,592

 
$
197,199

 
2

%
Interest-earning assets
 
270,001

 
265,170

 
2

 
Total assets
 
300,202

 
296,933

 
1

 
Interest-bearing deposits
 
178,876

 
181,880

 
(2
)
 
Total deposits
 
204,264

 
204,523

 
—

 
Borrowings
 
42,243

 
40,654

 
4

 
Common equity
 
42,682

 
40,779

 
5

 
Total stockholders’ equity
 
44,018

 
41,632

 
6

 
Credit quality metrics (period end)
 
 
 
 
 
 
 
Allowance for loan and lease losses
 
$
4,212

 
$
4,315

 
(2
)
 
Allowance as a % of loans held for investment (“allowance coverage ratio”)
 
2.09
%
 
2.19
%
 
(10
)
bps 
Allowance as a % of loans held for investment (excluding Acquired Loans)
 
2.37

 
2.54

 
(17
)
 
30+ day performing delinquency rate
 
2.46

 
2.63

 
(17
)
 
30+ day performing delinquency rate (excluding Acquired Loans)
 
2.81

 
3.08

 
(27
)
 
30+ day delinquency rate
 
2.76

 
2.96

 
(20
)
 
30+ day delinquency rate (excluding Acquired Loans)
 
3.14

 
3.46

 
(32
)
 
Capital ratios(12)
 
 

 
 
 
 

 
Common equity Tier 1 capital ratio
 
12.73
%
 
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
 
15.24

 
14.69

 
55

  
Tier 1 leverage ratio
 
10.64

 
10.06

 
58

 
Tangible common equity (“TCE”) ratio(13)
 
9.56

 
8.89

 
67

  
Associates
 
 
 
 
 
 
 
Employees (in thousands), period end(14)
 
44.9

 
45.4

 
(1
)
%
__________
**
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 $164 million and $480 million in the third quarter and first nine months of 2014, respectively, and by $154 million and $611 million in the third quarter and first nine 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.

 
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(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.
(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) 
In the second quarter of 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 September 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 $201.6 billion, deposits of $204.3 billion and stockholders’ equity of $44.0 billion as of September 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 deposits, short-term borrowings and long-term debt. We also earn non-interest income which primarily consists of interchange income net of reward expenses and service charges and other customer-related fees. Our 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.
•
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.

 
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•
Commercial Banking: Consists of our lending, deposit gathering and servicing activities provided to commercial real estate and commercial and industrial customers. Our commercial and industrial customers typically include companies with annual revenues between $10 million and $1 billion.
Table 2 summarizes our business segment results, which we report based on income from continuing operations, net of tax, for the third quarter and first nine 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 September 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
 
$
3,473

 
62
%
 
$
624

 
55
%
 
$
3,591

 
64
 %
 
$
694

 
62
 %
Consumer Banking
 
1,604

 
28

 
289

 
26

 
1,665

 
29

 
345

 
31

Commercial Banking(4)
 
561

 
10

 
182

 
16

 
511

 
9

 
162

 
14

Other(5)
 
1

 
—

 
30

 
3

 
(116
)
 
(2
)
 
(83
)
 
(7
)
Total from continuing operations
 
$
5,639

 
100
%
 
$
1,125

 
100
%
 
$
5,651

 
100
 %
 
$
1,118

 
100
 %
 
 
Nine Months Ended September 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
 
$
10,083

 
61
 %
 
$
1,960

 
57
%
 
$
10,878

 
64
 %
 
$
2,099

 
60
 %
Consumer Banking
 
4,788

 
29

 
953

 
28

 
4,991

 
30

 
1,172

 
34

Commercial Banking(4)
 
1,614

 
10

 
490

 
14

 
1,491

 
9

 
536

 
15

Other(5)
 
(8
)
 
—

 
50

 
1

 
(520
)
 
(3
)
 
(328
)
 
(9
)
Total from continuing operations
 
$
16,477

 
100
 %
 
$
3,453

 
100
%
 
$
16,840

 
100
 %
 
$
3,479

 
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.
EXECUTIVE SUMMARY AND BUSINESS OUTLOOK
We reported net income of $1.1 billion ($1.86 per diluted common share) on total net revenue of $5.6 billion and net income of $3.4 billion ($5.86 per diluted common share) on total net revenue of $16.5 billion for the third quarter and first nine months of 2014, respectively. In comparison, we reported net income of $1.1 billion ($1.84 per diluted common share) on total net revenue of $5.7 billion and net income of $3.3 billion ($5.46 per diluted common share) on total net revenue of $16.8 billion for the third quarter and first nine 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

 
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provisions, was 12.73% as of September 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”). During the second and third quarters of 2014, we have repurchased approximately $1.5 billion of common stock and expect to complete the 2014 Stock Repurchase Program by the end of the first quarter of 2015. See “Capital Management” below for additional information.
Below are additional highlights of our performance in the third quarter and first nine months of 2014. These highlights generally are based on a comparison between the results of the third quarter and first nine 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 September 30, 2014, compared to 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 decreased by $24 million in the third quarter of 2014, or 2%, to $1.1 billion, and our net income increased by $160 million in the first nine months of 2014, or 5%, to $3.4 billion, compared to $3.3 billion for the first nine months of 2013. The increase in net income for the first nine months of 2014 was driven by (i) a net provision of $19 million for mortgage representation and warranty losses (which includes a benefit of $15 million before taxes in continuing operations and a provision of $34 million before taxes in discontinued operations) for the first nine months of 2014, compared to a net provision of $276 million (which includes a benefit of $27 million before taxes in continuing operations and a provision of $303 million before taxes in discontinued operations) for the first nine months of 2013; (ii) lower non-interest expenses due to lower amortization of intangibles, acquisition-related costs and the provision for litigation matters; (iii) a decrease in interest expense due to lower funding costs; and (iv) a decrease in provision for credit losses driven by a lower net charge-offs partially offset by a lower release in the allowance for loan and lease losses. These items were partially offset by a decrease in net interest income attributable to lower average interest-earning assets partly due to the Portfolio Sale.
•
Loans Held for Investment: Period-end loans held for investment increased by $4.4 billion, or 2%, in the first nine months of 2014, to $201.6 billion as of September 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 loan portfolio in our Consumer Banking business. Overall, there was a decline in our credit card loan portfolio primarily due to seasonality, partially offset by loan growth in the second and third quarters of 2014.
•
Net Charge-off and Delinquency Statistics: Our net charge-off rate decreased by 40 basis points to 1.52% in the third quarter of 2014, compared to 1.92% in the third quarter of 2013, and our net charge-off rate decreased by 35 basis points in the first nine months of 2014, to 1.70%, compared to 2.05% for the first nine months of 2013. The extremely low net charge-off rate in the third quarter 2014, based on our historical trends, was largely due to continued economic improvement and portfolio seasoning. Our reported 30+ day delinquency rate declined to 2.76% as of September 30, 2014, from 2.96% as of December 31, 2013, and 2.88% as of September 30, 2013. The decrease from December 31, 2013 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: Our allowance for loan and lease losses decreased by $103 million from $4.3 billion as of December 31, 2013 and increased by $214 million, from $4.0 billion as of June 30, 2014, to $4.2 billion as of September 30, 2014. The allowance coverage ratio declined to 2.09% as of September 30, 2014, from 2.19% as of December 31, 2013. The release in allowance for loan and lease losses in the first and second quarters of 2014 was mainly due to credit improvements, partially offset by a build in the third quarter of 2014 driven by loan growth and higher delinquency inventories increasing our loss expectations.
•
Representation and Warranty Reserve: The mortgage representation and warranty reserve decreased by $92 million to $1.1 billion as of September 30, 2014, from $1.2 billion as of December 31, 2013. We recorded a net provision for mortgage representation and warranty losses of $19 million (which includes a benefit of $15 million before taxes in continuing operations and provision of $34 million before taxes in discontinued operations) in the first nine months of 2014. The decrease in representation and warranty reserve was primarily driven by claims paid and legal developments.

 
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Business Segment Financial Performance
•
Credit Card: Our Credit Card business generated net income from continuing operations of $624 million and $2.0 billion in the third quarter and first nine months of 2014, respectively, compared with net income from continuing operations of $694 million and $2.1 billion in the third quarter and first nine months of 2013, respectively. The decreases in net income for the third quarter of 2014 compared to the third quarter of 2013, was due to lower net revenue driven by the Portfolio Sale in the third quarter of 2013 and higher provision for credit losses due to a build in the allowance for loan and lease losses driven by loan growth partially offset by lower net charge-offs. These drivers were partially offset by a lower provision for litigation matters and operating efficiencies. The decrease in net income for the first nine months of 2014 compared to the first nine months of 2013 was driven by lower net revenue associated with the Portfolio Sale in the third quarter of 2013, partially offset by a lower provision for credit losses driven by lower net charge-offs and lower non-interest expenses. Period-end loans held for investment in our Credit Card business decreased by $674 million to $80.6 billion as of September 30, 2014 from $81.3 billion as of December 31, 2013. The decrease was largely due to seasonality, partially offset by growth in the domestic card loan portfolio in the second and third quarters of 2014.
•
Consumer Banking: Our Consumer Banking business generated net income from continuing operations of $289 million and $953 million in the third quarter and first nine months of 2014, respectively, compared with net income from continuing operations of $345 million and $1.2 billion in the third quarter and first nine months of 2013, respectively. The decrease in net income for these periods was primarily attributable to compression in deposit spreads in retail banking, partially offset by higher net interest income generated by growth in our auto loans. Period-end loans held for investment in our Consumer Banking business increased by $299 million to $71.1 billion as of September 30, 2014, from $70.8 billion as of December 31, 2013, due to growth in our auto loan portfolio outpacing the run-off in our acquired home loan portfolio.
•
Commercial Banking: Our Commercial Banking business generated net income from continuing operations of $182 million and $490 million in the third quarter and first nine months of 2014, respectively, compared with net income from continuing operations of $162 million and $536 million in the third quarter and first nine months of 2013, respectively. The increase in net income for the third quarter 2014 compared to the third quarter 2013 was primarily driven by higher net revenue related to growth in our commercial loan portfolio, partially offset by increases in operating expenses associated with continued investments in business growth and the Beech Street Capital acquisition. The decrease in net income for the first nine months of 2014 compared to the first nine months of 2013 was primarily due to a higher provision for credit losses, reflecting an allowance build in the first nine months of 2014 compared to an allowance release in the first nine months of 2013. Period-end loans held for investment in our Commercial Banking business increased by $4.8 billion to $49.8 billion as of September 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.
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. On a quarterly basis, we expect both operating expenses and marketing to increase in the fourth quarter of 2014. On an annual basis, we expect operating expenses and marketing to be higher in 2015 than 2014. Both the quarterly and annual expectations are driven by loan

 
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growth, as well as investments to drive future growth, be a digital leader and keep pace with rising industry regulatory requirements. We expect that future card growth will likely drive allowance builds in coming quarters.
We expect growth in full-year revenues in 2015, driven by strong growth in average loans. While the efficiency ratio will vary from quarter to quarter, we expect the full-year 2015 efficiency ratio to be between 53% and 54%, excluding non-recurring items.
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 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 $1.5 billion of our shares in the second and third quarters of 2014, and we expect to repurchase an additional $1.0 billion over the next two 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 our 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: In our Domestic Card business, we expect increases in the net charge-off rate in the fourth quarter of 2014 and first quarter of 2015 primarily driven by seasonality. Longer term, we expect loan growth to impact the Domestic Card net charge-off rate in 2015. While this impact on the net charge-off rate will be modest at first, we expect it to grow throughout 2015. Overall, we expect the quarterly Domestic Card net charge-off rate throughout 2015 to be in the mid-to-high three percent range. We also expect allowance additions resulting primarily from future loan growth. We believe that our Domestic Card business continues to be well-positioned and will continue to deliver strong and resilient returns.
Consumer Banking: In our Consumer Banking business, we expect auto returns will continue to decline, but remain within ranges that support an attractive business. In addition, we expect the impact of the prolonged low interest rate environment to continue to pressure the returns of our retail banking business, even if rates rise in 2015.
Commercial Banking: In our Commercial Banking business, competition continues to increase, pressuring margins and returns. As competition continues to increase, we expect the pace of the growth in our Commercial Banking business will be slower in 2015 and closer to overall industry growth rates. We continue to expect our focused and specialized approach to deliver strong results in 2015.
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

 
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We evaluate our critical accounting estimates and judgments on an ongoing basis and update them, as necessary, based on changing conditions. Management has discussed each of these critical accounting policies, related estimates and judgments 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.
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 third quarter and first nine 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, including certain fees, earned on our interest-earning assets and the interest expense on our interest-bearing liabilities. Interest-earning assets include loans, investment securities and other interest-earning assets and interest-bearing liabilities include interest-bearing deposits, securitized debt obligations, senior and subordinated notes, and other borrowings. Generally, we include in interest income any past due fees on loans that we deem collectible. Our net interest margin, based on our consolidated results, represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities, including the notional impact of non-interest bearing funding. We expect net interest income and our net interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities.

 
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Table 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 third quarter and first nine months of 2014 and 2013.
Table 3: Average Balances, Net Interest Income and Net Interest Yield(1) 
 
 
Three Months Ended September 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
 
$
71,776

 
$
2,594

 
14.46
%
 
$
74,421

 
$
2,738

 
14.72
%
International credit card
 
7,710

 
317

 
16.45

 
7,782

 
318

 
16.35

Total credit card
 
79,486

 
2,911

 
14.65

 
82,203

 
3,056

 
14.87

Consumer banking
 
71,237

 
1,100

 
6.18

 
71,886

 
1,112

 
6.19

Commercial banking
 
49,218

 
417

 
3.39

 
41,584

 
402

 
3.87

Other
 
125

 
35

 
112.00

 
166

 
9

 
21.69

Total loans, including loans held for sale
 
200,066

 
4,463

 
8.92

 
195,839

 
4,579

 
9.35

Investment securities
 
62,582

 
398

 
2.54

 
63,317

 
396

 
2.50

Cash equivalents and other interest-earning assets
 
6,242

 
26

 
1.67

 
5,640

 
23

 
1.63

Total interest-earning assets
 
$
268,890

 
$
4,887

 
7.27

 
$
264,796

 
$
4,998

 
7.55

Cash and due from banks
 
2,907

 
 
 
 
 
2,553

 
 
 
 
Allowance for loan and lease losses
 
(3,995
)
 
 
 
 
 
(4,408
)
 
 
 
 
Premises and equipment, net
 
3,778

 
 
 
 
 
3,784

 
 
 
 
Other assets
 
27,943

 
 
 
 
 
28,194

 
 
 
 
Total assets
 
$
299,523

 
 
 
 
 
$
294,919

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
179,928

 
$
271

 
0.60

 
$
186,752

 
$
309

 
0.66

Securitized debt obligations
 
10,110

 
32

 
1.27

 
10,243

 
42

 
1.64

Senior and subordinated notes
 
17,267

 
71

 
1.64

 
12,314

 
76

 
2.47

Other borrowings
 
12,937

 
16

 
0.49

 
13,798

 
11

 
0.32

Total interest-bearing liabilities
 
$
220,242

 
$
390

 
0.71

 
$
223,107

 
$
438

 
0.79

Non-interest bearing deposits
 
25,271

 
 
 
 
 
21,588

 
 
 
 
Other liabilities
 
9,183

 
 
 
 
 
9,039

 
 
 
 
Total liabilities
 
254,696

 
 
 
 
 
253,734

 
 
 
 
Stockholders’ equity
 
44,827

 
 
 
 
 
41,185

 
 
 
 
Total liabilities and stockholders’ equity
 
$
299,523

 
 
 
 
 
$
294,919

 
 
 
 
Net interest income/spread
 
 
 
$
4,497

 
6.56

 
 
 
$
4,560

 
6.76

Impact of non-interest bearing funding
 
 
 
 
 
0.13

 
 
 
 
 
0.13

Net interest margin
 
 
 
 
 
6.69
%
 
 
 
 
 
6.89
%

 
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Nine Months Ended September 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
 
$
70,321

 
$
7,491

 
14.20
%
 
$
76,493

 
$
8,336

 
14.53
%
International credit card
 
7,674

 
954

 
16.58

 
7,998

 
970

 
16.17

Total credit card
 
77,995

 
8,445

 
14.44

 
84,491

 
9,306

 
14.69

Consumer banking
 
71,042

 
3,297

 
6.19

 
73,127

 
3,309

 
6.03

Commercial banking
 
47,324

 
1,224

 
3.45

 
39,909

 
1,158

 
3.87

Other
 
131

 
83

 
84.48

 
174

 
51

 
39.08

Total loans, including loans held for sale
 
196,492

 
13,049

 
8.85

 
197,701

 
13,824

 
9.32

Investment securities
 
62,411

 
1,223

 
2.61

 
63,725

 
1,161

 
2.43

Cash equivalents and other interest-earning assets
 
6,162

 
80

 
1.73

 
6,164

 
74

 
1.60

Total interest-earning assets
 
$
265,065

 
$
14,352

 
7.22

 
$
267,590

 
$
15,059

 
7.50

Cash and due from banks
 
2,853

 
 
 
 
 
2,401

 
 
 
 
Allowance for loan and lease losses
 
(4,132
)
 
 
 
 
 
(4,653
)
 
 
 
 
Premises and equipment, net
 
3,808

 
 
 
 
 
3,750

 
 
 
 
Other assets
 
28,581

 
 
 
 
 
29,259

 
 
 
 
Total assets
 
$
296,175

 
 
 
 
 
$
298,347

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
181,587

 
$
819

 
0.60

 
$
188,877

 
$
953

 
0.67

Securitized debt obligations
 
10,419

 
109

 
1.39

 
10,975

 
143

 
1.74

Senior and subordinated notes
 
15,822

 
226

 
1.90

 
12,331

 
240

 
2.60

Other borrowings
 
11,091

 
36

 
0.43

 
14,955

 
40

 
0.36

Total interest-bearing liabilities
 
$
218,919

 
$
1,190

 
0.72

 
$
227,138

 
$
1,376

 
0.81

Non-interest bearing deposits
 
24,196

 
 
 
 
 
21,293

 
 
 
 
Other liabilities
 
9,232

 
 
 
 
 
8,728

 
 
 
 
Total liabilities
 
252,347

 
 
 
 
 
257,159

 
 
 
 
Stockholders’ equity
 
43,828

 
 
 
 
 
41,188

 
 
 
 
Total liabilities and stockholders’ equity
 
$
296,175

 
 
 
 
 
$
298,347

 
 
 
 
Net interest income/spread
 
 
 
$
13,162

 
6.50

 
 
 
$
13,683

 
6.69

Impact of non-interest bearing funding
 
 
 
 
 
0.12

 
 
 
 
 
0.13

Net interest margin
 
 
 
 
 
6.62
%
 
 
 
 
 
6.82
%
__________
(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) 
Past due fees included in interest income totaled approximately $368 million and $1.1 billion in the third quarter and first nine months of 2014, respectively, and $440 million and $1.4 billion in the third quarter and first nine 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.

 
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Net interest income decreased by $63 million, or 1%, from the third quarter of 2013 to $4.5 billion in the third quarter of 2014. Net interest income decreased by $521 million, or 4% from the first nine months of 2013 to $13.2 billion in the first nine months of 2014. These decreases were primarily driven by the Portfolio Sale in 2013, partially offset by growth in lower yielding commercial and auto loans, lower fundings costs and higher yielding investment securities.
•
Average Interest-Earning Assets: The increase in average interest-earning assets in the third quarter of 2014, compared to the third quarter of 2013 was due to continued strong growth in commercial, auto and credit card loans, partially offset by the run-off in our acquired home loan portfolio within our Consumer Banking business and the Portfolio Sale in the third quarter of 2013. The decrease in average interest-earning assets in the first nine months of 2014, compared to the first nine months of 2013, was primarily driven by the Portfolio Sale in the third quarter of 2013, the run-off in our acquired home loan portfolio within our Consumer Banking business, partially offset by continued strong growth in commercial, auto and credit card 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 third quarter of 2014, compared to the third quarter of 2013, and in the first nine months of 2014, compared to the first nine months of 2013, was primarily due to lower average loan yields driven by the Portfolio Sale in 2013 and a shift in the mix of the loan portfolio to lower yielding commercial and auto loans, partially offset by a reduction in our cost of funds and higher yielding 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 September 30,
 
Nine Months Ended September 30,
 
 
2014 vs 2013
 
2014 vs. 2013
(Dollars in millions)
 
Total Variance
 
Volume
 
Rate
 
Total Variance
 
Volume
 
Rate
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Credit card
 
$
(145
)
 
$
(100
)
 
$
(45
)
 
$
(861
)
 
$
(706
)
 
$
(155
)
Consumer banking
 
(12
)
 
(10
)
 
(2
)
 
(12
)
 
(94
)
 
82

Commercial banking
 
15

 
65

 
(50
)
 
66

 
192

 
(126
)
Other
 
26

 
(2
)
 
28

 
32

 
(13
)
 
45

Total loans, including loans held for sale
 
(116
)
 
(47
)
 
(69
)
 
(775
)
 
(621
)
 
(154
)
Investment securities
 
2

 
(5
)
 
7

 
62

 
(24
)
 
86

Cash equivalents and other interest-earning assets
 
3

 
2

 
1

 
6

 
—

 
6

Total interest income
 
(111
)
 
(50
)
 
(61
)
 
(707
)
 
(645
)
 
(62
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
(38
)
 
(11
)
 
(27
)
 
(134
)
 
(36
)
 
(98
)
Securitized debt obligations
 
(10
)
 
—

 
(10
)
 
(34
)
 
(7
)
 
(27
)
Senior and subordinated notes
 
(5
)
 
20

 
(25
)
 
(14
)
 
50

 
(64
)
Other borrowings
 
5

 
(1
)
 
6

 
(4
)
 
(10
)
 
6

Total interest expense
 
(48
)
 
8

 
(56
)
 
(186
)
 
(3
)
 
(183
)
Net interest income
 
$
(63
)
 
$
(58
)
 
$
(5
)
 
$
(521
)
 
$
(642
)
 
$
121

__________
(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.

 
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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 net provision (benefit) 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 third quarter and first nine months of 2014 and 2013.
Table 5: Non-Interest Income
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
 
2014
 
2013
 
2014
 
2013
Service charges and other customer-related fees
 
$
471

 
$
530

 
$
1,405

 
$
1,614

Interchange fees, net
 
523

 
476

 
1,498

 
1,407

Net other-than-temporary impairment
 
(9
)
 
(11
)
 
(15
)
 
(40
)
Other non-interest income:
 
 
 
 
 
 
 
 
Benefit for mortgage representation and warranty losses(1)
 
—

 
13

 
15

 
27

Net gains from the sale of investment securities
 
6

 
—

 
18

 
3

Net fair value gains (losses) on free-standing derivatives
 
11

 
(8
)
 
37

 
(11
)
Other
 
140

 
91

 
357

 
157

Total other non-interest income
 
157

 
96

 
427

 
176

Total non-interest income
 
$
1,142

 
$
1,091

 
$
3,315

 
$
3,157

__________
(1) 
Represents the benefit for mortgage representation and warranty losses recorded in continuing operations. For the total impact to the net 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.”
Non-interest income increased by $51 million, or 5%, to $1.1 billion in the third quarter of 2014, and by $158 million, or 5%, to $3.3 billion in the first nine months of 2014, from $3.2 billion in the first nine months of 2013. The main driver for the increases in non-interest income was an increase in interchange fees, net, due to strong purchase volume in our credit card loan portfolio, partially offset by a decline in our service charges and other customer-related fees.
Provision for Credit Losses
Our provision for credit losses in each period is driven by net charge-offs, changes to the allowance for loan and lease losses and changes to the reserve for unfunded lending commitments. We recorded a provision for credit losses of $993 million and $2.4 billion in the third quarter and first nine months of 2014, respectively, compared with $849 million and $2.5 billion in the third quarter and first nine months of 2013, respectively.
The increase in the provision for credit losses of $144 million in the third quarter of 2014 compared to the third quarter of 2013 was primarily driven by an increase in the allowance for loan and lease losses due to higher loan volumes and higher delinquencies in the domestic card loan portfolio, partially offset by lower net charge-offs.
The decrease in the provision for credit losses of $64 million in the first nine months of 2014 compared to the first nine months of 2013, due to lower net charge-offs driven by improved credit, partially offset by a smaller release of our allowance for loan and lease losses.
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.

 
13
Capital One Financial Corporation (COF)

Table of Contents

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, acquisition-related expenses and amortization of intangibles.
Table 6 displays the components of non-interest expense for the third quarter and first nine months of 2014 and 2013.
Table 6: Non-Interest Expense(1)(2)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
 
2014
 
2013