COF-03.31.2015-10Q
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
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 March 31, 2015
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 April 30, 2015, there were 546,424,370 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________


TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
i
Capital One Financial Corporation (COF)

Item 3.
Item 4.
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 

 
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
Commercial Loans by Industry
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
 
 
 
Supplemental Table:
 
A

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

This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “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 2014 Annual Report on Form 10-K (“2014 Form 10-K”). Unless otherwise specified, references to notes to our consolidated financial statements refer to the notes to our unaudited consolidated financial statements as of March 31, 2015 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 2014 Form 10-K.
INTRODUCTION
We are a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company”) offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of March 31, 2015, 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 $204.0 billion, deposits of $210.4 billion and stockholders’ equity of $45.7 billion as of March 31, 2015, compared with total loans held for investment of $208.3 billion, deposits of $205.5 billion and stockholders’ equity of $45.1 billion as of December 31, 2014.
Our consolidated total net revenues are derived primarily from lending to consumer and commercial customers net of funding costs associated with interest on deposits, short-term borrowings and long-term debt. We also earn non-interest income which primarily consists of interchange income net of rewards expenses and service charges and other customer-related fees. Our expenses primarily consist of the provision for credit losses, operating expenses (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 major business segments, which are defined based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group, are included in the Other category.
•
Credit Card: Consists of our domestic consumer and small business card lending, national closed-end installment lending and the international card lending businesses in Canada and the United Kingdom (“U.K.”).

 
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•
Consumer Banking: Consists of our branch-based lending and deposit gathering activities for consumers and small businesses and national deposit gathering, auto lending and consumer home loan lending and servicing activities.
•
Commercial Banking: Consists of our lending, deposit gathering and servicing activities provided to commercial real estate and commercial and industrial customers. Our commercial and industrial customers typically include companies with annual revenues between $10 million and $1 billion.
Recent Acquisitions and Dispositions
We regularly explore and evaluate opportunities to acquire financial services companies and financial assets, including credit card and other loan portfolios, and enter into strategic partnerships as part of our growth strategy. We also explore opportunities to acquire digital companies and related assets to improve our information technology infrastructure and to deliver on our digital strategy. We also regularly consider the potential disposition of certain assets, branches, partnership agreements or lines of business. We may issue equity or debt in connection with acquisitions, including public offerings, to fund such acquisitions. We did not have any significant acquisitions or dispositions in 2014 or the first quarter of 2015.


 
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SUMMARY OF SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data from our results of operations for the first quarters of 2015 and 2014 and selected comparative balance sheet data as of March 31, 2015 and December 31, 2014. 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.
Table 1: Consolidated Financial Highlights (Unaudited)(1)  
 
 
Three Months Ended March 31,
(Dollars in millions, except as noted)
 
2015
 
2014
 
Change
Income statement
 
 
 
 
 
 
Net interest income
 
$
4,576

 
$
4,350

 
5%

Non-interest income
 
1,071

 
1,020

 
5

Total net revenue
 
5,647

 
5,370

 
5

Provision for credit losses
 
935

 
735

 
27

Non-interest expense:
 
 
 
 
 
 
Marketing
 
375

 
325

 
15

Amortization of intangibles
 
110

 
143

 
(23
)
Acquisition-related
 
7

 
23

 
(70
)
Operating expenses
 
2,557

 
2,441

 
5

Total non-interest expense
 
3,049

 
2,932

 
4

Income from continuing operations before income taxes
 
1,663

 
1,703

 
(2
)
Income tax provision
 
529

 
579

 
(9
)
Income from continuing operations, net of tax
 
1,134

 
1,124

 
1

Income from discontinued operations, net of tax
 
19

 
30

 
(37
)
Net income
 
1,153

 
1,154

 
—

Dividends and undistributed earnings allocated to participating securities
 
(6
)
 
(5
)
 
20

Preferred stock dividends
 
(32
)
 
(13
)
 
146

Net income available to common stockholders
 
$
1,115

 
$
1,136

 
(2
)
Common share statistics
 
 

 
 

 
 

Basic earnings per common share:
 
 
 
 
 
 
Net income from continuing operations
 
$
2.00

 
$
1.94

 
3%

Income from discontinued operations
 
0.03

 
0.05

 
(40
)
Net income per basic common share
 
$
2.03

 
$
1.99

 
2

Diluted earnings per common share:
 
 
 
 
 
 
Net income from continuing operations
 
$
1.97

 
$
1.91

 
3

Income from discontinued operations
 
0.03

 
0.05

 
(40
)
Net income per diluted common share
 
$
2.00

 
$
1.96

 
2

Weighted average common shares outstanding:
 
 
 
 
 
 
Basic
 
550.2

 
571.0

 
(4
)
Diluted
 
557.2

 
580.3

 
(4
)
Dividends paid per common share
 
$
0.30

 
$
0.30

 
—

Balance sheet (average balances)
 
 
 
 
 
 
Loans held for investment
 
$
205,194

 
$
193,722

 
6%

Interest-earning assets
 
278,427

 
262,659

 
6

Total assets
 
309,401

 
293,551

 
5

Interest-bearing deposits
 
182,998

 
184,183

 
(1
)
Total deposits
 
207,851

 
205,842

 
1

Borrowings
 
46,082

 
35,978

 
28

Common equity
 
44,575

 
42,006

 
6

Total stockholders’ equity
 
46,397

 
42,859

 
8

 
 
 
 
 
 
 

 
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Three Months Ended March 31,
(Dollars in millions, except as noted)
 
2015
 
2014
 
Change
Selected performance metrics
 
 

 
 

 
 

Purchase volume(2)
 
$
57,383

 
$
47,434

 
21%

Total net revenue margin(3)
 
8.11
%
 
8.18
%
 
(7
)bps
Net interest margin(4)
 
6.57

 
6.62

 
(5
)
Return on average assets
 
1.47

 
1.53

 
(6
)
Return on average tangible assets(5)
 
1.54

 
1.62

 
(8
)
Return on average common equity(6)
 
9.84

 
10.53

 
(69
)
Return on average tangible common equity(7)
 
15.00

 
16.83

 
(183
)
Equity-to-assets ratio
 
15.00

 
14.60

 
40

Non-interest expense as a % of average loans held for investment(8)
 
5.94

 
6.05

 
(11
)
Efficiency ratio(9)
 
53.99

 
54.60

 
(61
)
Effective income tax rate from continuing operations
 
31.8

 
34.0

 
(220
)
Net charge-offs
 
$
881

 
$
931

 
(5)%

Net charge-off rate(10)
 
1.72
%
 
1.92
%
 
(20
)bps
Net charge-off rate (excluding Acquired Loans)(11)
 
1.93

 
2.24

 
(31
)
(Dollars in millions, except as noted)

March 31, 2015
 
December 31, 2014
 
Change
Balance sheet (period end)
 
 
 
 
 
 
Loans held for investment
 
$
203,978

 
$
208,316

 
(2)%

Interest-earning assets
 
275,837

 
277,849

 
(1
)
Total assets
 
306,224

 
308,167

 
(1
)
Interest-bearing deposits
 
185,208

 
180,467

 
3

Total deposits
 
210,440

 
205,548

 
2

Borrowings
 
41,029

 
48,457

 
(15
)
Common equity
 
43,908

 
43,231

 
2

Total stockholders’ equity
 
45,730

 
45,053

 
2

Credit quality metrics (period end)
 
 
 
 
 
 
Allowance for loan and lease losses
 
$
4,405

 
$
4,383

 
1%

Allowance as a % of loans held for investment (“allowance coverage ratio”)
 
2.16
%
 
2.10
%
 
6
bps
Allowance as a % of loans held for investment (excluding Acquired Loans)(11)
 
2.41

 
2.36

 
5

30+ day performing delinquency rate
 
2.32

 
2.62

 
(30
)
30+ day performing delinquency rate (excluding Acquired Loans)(11)
 
2.61

 
2.95

 
(34
)
30+ day delinquency rate
 
2.58

 
2.91

 
(33
)
30+ day delinquency rate (excluding Acquired Loans)(11)
 
2.90

 
3.28

 
(38
)
Capital ratios
 
 

 
 
 
 
Common equity Tier 1 capital ratio
 
12.46
%
 
12.46
%
 
—

Tier 1 risk-based capital ratio
 
13.22

 
13.23

 
(1
)
Total risk-based capital ratio
 
15.07

 
15.14

 
(7
)
Tier 1 leverage ratio
 
10.66

 
10.77

 
(11
)
Tangible common equity (“TCE”) ratio(12)
 
9.83

 
9.49

 
34

Supplementary leverage ratio(13)
 
9.22

 
N/A

 
**

Others
 
 
 
 
 
 
Employees (in thousands), period end
 
47.0

 
46.0

 
2%

__________
** Change is not meaningful
(1) 
As of January 1, 2015, we changed our accounting principle to move from a gross basis of presentation to a net basis, for presenting qualifying derivative assets and liabilities, as well as the related right to reclaim cash collateral or obligation to return cash collateral. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior period results, excluding regulatory ratios, have been recast to conform to this presentation.
(2) 
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.
(3) 
Calculated based on annualized total net revenue for the period divided by average interest-earning assets for the period.
(4) 
Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.

 
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(5) 
Calculated based on annualized income from continuing operations, net of tax, for the period divided by average tangible assets for the period. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information.
(6) 
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.
(7) 
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 TCE. Our calculation of return on average TCE may not be comparable to similarly titled measures reported by other companies. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information.
(8) 
Calculated based on annualized non-interest expense for the period divided by average loans held for investment for the period.
(9) 
Calculated based on non-interest expense for the period divided by total net revenue for the period.
(10) 
Calculated based on annualized net charge-offs for the period divided by average loans held for investment for the period.
(11) 
Calculation of ratio adjusted to exclude Acquired Loans. See “MD&A—Glossary and Acronyms” for the definition of Acquired Loans.
(12) 
The TCE ratio is a non-GAAP measure calculated as TCE divided by tangible assets. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for the calculation of this measure and reconciliation to the comparative GAAP measure.
(13) 
Supplementary leverage ratio is a regulatory capital measure calculated based on Tier 1 capital under the Basel III Standardized Approach divided by total leverage exposure. See “MD&A—Capital Management” for additional information.
EXECUTIVE SUMMARY AND BUSINESS OUTLOOK
We reported net income of $1.2 billion ($2.00 per diluted common share) on total net revenue of $5.6 billion for the first quarter of 2015. In comparison, we reported net income of $1.2 billion ($1.96 per diluted common share) on total net revenue of $5.4 billion for the first quarter of 2014.
Our common equity Tier 1 capital ratio, as calculated under the Basel III Standardized Approach, including transition provisions, was 12.46% as of both March 31, 2015 and December 31, 2014. We formally entered parallel run for Basel III Advanced Approaches on January 1, 2015. See “Capital Management” below for additional information.
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 (the “2014 Stock Repurchase Program”). As of March 31, 2015, we completed the 2014 Stock Repurchase Program. Additionally, on March 11, 2015, we announced that our Board of Directors had authorized the repurchase of up to $3.125 billion of shares of our common stock (the “2015 Stock Repurchase Program”) beginning in the second quarter of 2015 through the end of the second quarter of 2016. The Board of Directors also authorized an increase in the quarterly dividend on our common stock from the current level of $0.30 per share to $0.40 per share. See “Capital Management” below for additional information.
Below are additional highlights of our performance in the first quarter of 2015. These highlights generally are based on a comparison between the results of the first quarters of 2015 and 2014, except as otherwise noted. The changes in our financial condition and credit performance are generally based on our financial condition and credit performance as of March 31, 2015 compared to our financial condition and credit performance as of December 31, 2014. 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 remained flat at $1.2 billion in the first quarter of 2015 compared to the first quarter of 2014 as the increase in net income from continuing operations was offset by the decrease in net income from discontinued operations. The increase in net income from continuing operations was driven by (i) an increase in interest income due to growth in our credit card, auto and commercial loan portfolios partially offset by the planned run-off of our acquired home loan portfolio; and (ii) an increase in non-interest income primarily attributable to higher interchange fees partially offset by lower service charges and other customer-related fees in our Credit Card business. These increases were partially offset by (i) an increase in provision for credit losses due to the change from an allowance release in the first quarter of 2014 to an allowance build in the first quarter of 2015; and (ii) an increase in non-interest expense driven by higher operating and marketing expenses associated with loan growth. The decrease in net income from discontinued operations was due to a smaller release in representation and warranty reserve in the first quarter of 2015.
•
Loans Held for Investment: Period-end loans held for investment decreased by $4.3 billion, or 2%, to $204.0 billion as of March 31, 2015 from December 31, 2014, driven by seasonal paydowns in our credit card loan portfolio in our Credit Card business and the planned run-off of our acquired home loan portfolio partially offset by growth in the auto loan portfolio in our Consumer Banking business. Average loans held for investment increased by $11.5 billion, or 6%, to $205.2 billion in the first quarter of 2015, compared to the first quarter 2014, primarily due to continued strong auto loan originations

 
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outpacing the planned run-off of the acquired home loan portfolio in our Consumer Banking business and growth in our commercial and credit card loan portfolios.
•
Net Charge-off and Delinquency Statistics: Our net charge-off rate decreased by 20 basis points to 1.72% in the first quarter of 2015 compared to the first quarter of 2014, primarily driven by lower charge-offs in our Credit Card business and average loan growth. The overall low net charge-off rates compared to our historical levels were largely due to continued economic improvement and portfolio seasoning. Our 30+ day delinquency rate declined to 2.58% as of March 31, 2015 from 2.91% as of December 31, 2014, primarily due to seasonally lower delinquency inventories. 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 increased by $22 million to $4.4 billion as of March 31, 2015 from December 31, 2014. The increase in the allowance for loan and lease losses was primarily driven by portfolio-specific risks in our commercial loan portfolio in our Commercial Banking business and loan growth in our auto loan portfolio in our Consumer Banking business, partially offset by an allowance release as credit improved in our credit card loan portfolio in our Credit Card business. The allowance coverage ratio increased by 6 basis points to 2.16% as of March 31, 2015 from December 31, 2014.
•
Representation and Warranty Reserve: The mortgage representation and warranty reserve decreased by $58 million to $673 million as of March 31, 2015 from December 31, 2014. The decrease in the representation and warranty reserve was primarily driven by claims paid and legal developments, which includes settlements. We recorded a net benefit for mortgage representation and warranty losses of $18 million (which includes a provision of $1 million before taxes in continuing operations and a benefit of $19 million before taxes in discontinued operations) in the first quarter of 2015.
Business Segment Financial Performance
Table 2 summarizes our business segment results, which we report based on revenue and income from continuing operations, net of tax, for the first quarters of 2015 and 2014. We provide information on the allocation methodologies used to derive our business segment results under “Note 19—Business Segments” in our 2014 Form 10-K. We also provide a reconciliation of our total business segment results to our consolidated generally accepted accounting principles in the United States of America (“U.S. GAAP”) results in “Note 13—Business Segments” of this Report.    
Table 2: Business Segment Results
 
 
Three Months Ended March 31,
 
 
2015
 
2014
 
 
Total Net Revenue(1)
 
Net Income (Loss)(2)
 
Total Net Revenue(1)
 
Net Income (Loss)(2)
(Dollars in millions)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Credit Card
 
$
3,482

 
62
 %
 
$
668

 
59
%
 
$
3,310

 
62
 %
 
$
668

 
60
 %
Consumer Banking
 
1,592

 
28

 
266

 
23

 
1,583

 
30

 
330

 
29

Commercial Banking(3)
 
575

 
10

 
155

 
14

 
508

 
9

 
137

 
12

Other(4)
 
(2
)
 
—

 
45

 
4

 
(31
)
 
(1
)
 
(11
)
 
(1
)
Total from continuing operations
 
$
5,647

 
100
 %
 
$
1,134

 
100
%
 
$
5,370

 
100
 %
 
$
1,124

 
100
 %
__________
(1) 
Total net revenue consists of net interest income and non-interest income.
(2) 
Net income (loss) for our business segments is based on income (loss) from continuing operations, net of tax.
(3) 
Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately equal to our federal statutory tax rate of 35% with offsetting reclassifications within the Other category.
(4) 
Includes the residual impact of the allocation of our centralized Corporate Treasury group activities, unallocated corporate expense that do not directly support the operations of the business segments, and other items as described in “Note 19—Business Segments” in our 2014 Form 10-K.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
•
Credit Card: Net income from continuing operations in our Credit Card business was flat at $668 million in the first quarter of 2015, compared to the first quarter of 2014, due to higher net interest income primarily driven by loan growth and higher non-interest income attributable to interchange fees, offset by lower service charges and customer-related fees, higher

 
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provision for credit losses and higher non-interest expense. Period-end loans held for investment in our Credit Card business decreased by $4.1 billion to $81.8 billion as of March 31, 2015 from December 31, 2014, primarily due to expected seasonal paydowns.
•
Consumer Banking: Our Consumer Banking business generated net income from continuing operations of $266 million in the first quarter of 2015, compared to net income from continuing operations of $330 million in the first quarter of 2014. The decrease in net income was primarily attributable to an allowance build in the first quarter of 2015 compared to a release in the first quarter of 2014 and higher non-interest expenses largely driven by higher infrastructure spending in our retail banking business and growth in our auto loan portfolio. The decrease was partially offset by higher net interest income generated by growth in our auto loan portfolio partially offset by the planned run-off of the acquired home loan portfolio. Period-end loans held for investment in our Consumer Banking business decreased by $60 million to $71.4 billion as of March 31, 2015 from December 31, 2014, primarily due to the continued run-off of our acquired home loan portfolio mostly offset by growth in the auto loan portfolio.
•
Commercial Banking: Our Commercial Banking business generated net income from continuing operations of $155 million in the first quarter of 2015 compared to net income from continuing operations of $137 million in the first quarter of 2014. The increase in net income was primarily due to higher revenue net of related operating expenses driven by the growth in our average commercial loan portfolio, as well as increased fee-based services and products, partially offset by a larger allowance build. Period-end loans held for investment in our Commercial Banking business decreased by $149 million to $50.7 billion as of March 31, 2015 from December 31, 2014.
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 2014 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 “Part I—Item 1A. Risk Factors” in our 2014 Form 10-K for factors that could materially influence our results.
Total Company Expectations
We delivered attractive risk-adjusted returns in the first quarter of 2015, and we expect that will continue. For full-year 2015, we expect growth in revenues compared to 2014, driven by growth in average loans. We expect the full-year 2015 efficiency ratio to be at the higher end of a range between 53.5% and 54.5%, or possibly modestly above that range, excluding non-recurring items. We are experiencing very strong Domestic Card growth, and we are likely to increase marketing to take advantage of the opportunities we see to help sustain the current trajectory. While growth opportunities would drive long-term value creation, higher marketing and the higher operating expense of additional volumes would put pressure on our efficiency ratio. We also expect that the ratio will vary, perhaps significantly, from quarter to quarter based on factors such as day count, the timing of growth and associated revenues, and the timing of investments throughout the year.
We believe our actions have created a well-positioned balance sheet with strong capital and liquidity. Pursuant to our approved 2015 capital plan, we increased our quarterly common stock dividend from $0.30 per share to $0.40 per share starting in the second quarter of 2015. We also expect to repurchase up to $3.125 billion of shares of our common stock pursuant to the 2015 Stock Repurchase Program beginning in the second quarter of 2015 through the second quarter of 2016. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, opportunities for growth, and our capital position and amount of retained earnings. The 2015 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—Dividend Policy and Stock Purchases” for more information.

 
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Business Segment Expectations
Credit Card: In our Domestic Card business, as first quarter delinquency favorability rolls through to charge-offs, we expect quarterly charge-off rates in the lower end of our previously communicated mid-to-high 3% range, perhaps even getting into the low 3% range at the third quarter seasonal low point. Longer term, as new loan balances season, we expect growth to put upward pressure on the charge-off rate. While this impact on the charge-off rate is modest at first, we expect that the impact will grow throughout 2015 and beyond. We expect growth to drive our quarterly charge-off rate to be in the mid-to-high three percent range in the fourth quarter, and higher from there in 2016. In addition, we expect growth to drive allowance additions going forward. In the near term, we also expect favorable credit to drive lower-than-expected past due fees, putting modest pressure on revenue. We believe that our Credit Card business is well-positioned to deliver growth with attractive and resilient returns.
Consumer Banking: In our Consumer Banking business, we continue to experience a change in product mix as a result of continued growth in auto originations offset by the planned run-off of our acquired home loan portfolio. While our auto business remains well-positioned, we remain cautious and continue to closely monitor pricing, underwriting practices, used vehicle prices and other competitor and market factors. Returns on new auto originations are lower than returns in the overall auto loan portfolio, but remain resilient and within ranges that support an attractive business. We expect to continue to pursue opportunities in our auto business that are consistent with our long-standing focus on resilience, including adding new relationships with well-qualified dealers and gaining a greater share of originations with existing dealers. We expect persistently low interest rates will continue to pressure returns in our deposit businesses, even if rates begin to rise in 2015.
Commercial Banking: Commercial charge-offs, non-performing loans and criticized loans remain strong. While we continue to closely manage credit risk, we do not expect these levels to be sustainable through the cycle. Our Commercial Banking business is well-positioned to navigate a challenging environment, in which intense competition continues to put pressure on growth, margins and returns.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with U.S. GAAP requires management to make a number of judgments, estimates and assumptions that affect the amount of assets, liabilities, income and expenses on the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies under “Note 1—Summary of Significant Accounting Policies” in our 2014 Form 10-K.
We have identified the following accounting policies as critical because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on our results of operations or financial condition. These critical accounting policies govern:
•
Loan loss reserves
•
Asset impairment
•
Fair value of financial instruments
•
Representation and warranty reserves
•
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 2014 Form 10-K.
ACCOUNTING CHANGES AND DEVELOPMENTS
Accounting for Derivative Assets and Liabilities

 
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As of January 1, 2015, we changed our accounting principle to move from a gross basis of presentation to a net basis, for presenting qualifying derivative assets and liabilities, as well as the related fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable), for instruments executed with the same counterparty where a right of setoff exists. This newly adopted policy is preferable as it more accurately reflects the Company’s counterparty credit risk as well as our contractual rights and obligations under these arrangements. Further, this change will align our presentation with that of the majority of our peer institutions. We retrospectively adopted this change in accounting principle and our consolidated balance sheet has been recast for all prior periods presented.
CONSOLIDATED RESULTS OF OPERATIONS
The section below provides a comparative discussion of our consolidated financial performance for the first quarters of 2015 and 2014. 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 foreign exchange 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 first quarters of 2015 and 2014.
Table 3: Average Balances, Net Interest Income and Net Interest Margin(1)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
(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
 
$
74,875

 
$
2,660

 
14.21
%
 
$
69,800

 
$
2,478

 
14.20
%
International credit card
 
7,811

 
291

 
14.90

 
7,690

 
319

 
16.59

Total credit card
 
82,686

 
2,951

 
14.28

 
77,490

 
2,797

 
14.44

Consumer banking
 
71,595

 
1,120

 
6.26

 
70,836

 
1,094

 
6.18

Commercial banking
 
51,461

 
415

 
3.23

 
45,561

 
395

 
3.47

Other
 
112

 
54

 
192.86

 
133

 
21

 
63.16

Total loans, including loans held for sale
 
205,854

 
4,540

 
8.82

 
194,020

 
4,307

 
8.88

Investment securities
 
63,181

 
406

 
2.57

 
62,124

 
416

 
2.68

Cash equivalents and other interest-earning assets
 
9,392

 
28

 
1.19

 
6,515

 
30

 
1.84

Total interest-earning assets
 
$
278,427

 
$
4,974

 
7.15

 
$
262,659

 
$
4,753

 
7.24

Cash and due from banks
 
3,099

 
 
 
 
 
2,881

 
 
 
 
Allowance for loan and lease losses
 
(4,371
)
 
 
 
 
 
(4,306
)
 
 
 
 
Premises and equipment, net
 
3,701

 
 
 
 
 
3,838

 
 
 
 
Other assets
 
28,545

 
 
 
 
 
28,479

 
 
 
 
Total assets
 
$
309,401

 
 
 
 
 
$
293,551

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
182,998

 
$
271

 
0.59

 
$
184,183

 
$
276

 
0.60

Securitized debt obligations
 
11,563

 
33

 
1.14

 
10,418

 
38

 
1.46

Senior and subordinated notes
 
20,595

 
79

 
1.53

 
14,162

 
77

 
2.17

Other borrowings and liabilities
 
14,721

 
15

 
0.41

 
11,398

 
12

 
0.42

Total interest-bearing liabilities
 
$
229,877

 
$
398

 
0.69

 
$
220,161

 
$
403

 
0.73

Non-interest bearing deposits
 
24,853

 
 
 
 
 
21,659

 
 
 
 
Other liabilities
 
8,274

 
 
 
 
 
8,872

 
 
 
 
Total liabilities
 
263,004

 
 
 
 
 
250,692

 
 
 
 
Stockholders’ equity
 
46,397

 
 
 
 
 
42,859

 
 
 
 
Total liabilities and stockholders’ equity
 
$
309,401

 
 
 
 
 
$
293,551

 
 
 
 
Net interest income/spread
 
 
 
$
4,576

 
6.46

 
 
 
$
4,350

 
6.51

Impact of non-interest bearing funding
 
 
 
 
 
0.11

 
 
 
 
 
0.11

Net interest margin
 
 
 
 
 
6.57
%
 
 
 
 
 
6.62
%
__________
(1)  
As of January 1, 2015, we changed our accounting principle to move from a gross basis of presentation to a net basis, for presenting qualifying derivative assets and liabilities, as well as the related right to reclaim cash collateral or obligation to return cash collateral. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior period results have been recast to conform to this presentation.
(2)
Past due fees included in interest income totaled approximately $354 million and $359 million in the first quarters of 2015 and 2014, 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 increased by $226 million or 5%, to $4.6 billion in the first quarter of 2015 compared to the first quarter of 2014, primarily driven by higher average interest-earning assets due to continued strong growth in our auto, commercial and credit

 
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card loan portfolios. The net interest margin decreased 5 basis points to 6.57% in the first quarter of 2015 primarily attributable to lower yield on average interest earning assets, partially offset by lower cost of funds.
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 March 31,
 
 
2015 vs. 2014
(Dollars in millions)
 
Total Variance
 
Volume
 
Rate
Interest income:
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
Credit card
 
$
154

 
$
185

 
$
(31
)
Consumer banking
 
26

 
12

 
14

Commercial banking
 
20

 
47

 
(27
)
Other
 
33

 
(3
)
 
36

Total loans, including loans held for sale
 
233

 
241

 
(8
)
Investment securities
 
(10
)
 
7

 
(17
)
Cash equivalents and other interest-earning assets
 
(2
)
 
9

 
(11
)
Total interest income
 
221

 
257

 
(36
)
Interest expense:
 
 
 
 
 
 
Deposits
 
(5
)
 
(2
)
 
(3
)
Securitized debt obligations
 
(5
)
 
3

 
(8
)
Senior and subordinated notes
 
2

 
25

 
(23
)
Other borrowings and liabilities
 
3

 
4

 
(1
)
Total interest expense
 
(5
)
 
30

 
(35
)
Net interest income
 
$
226

 
$
227

 
$
(1
)
__________
(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 net benefit (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, and hedge ineffectiveness, which we generally do not allocate to our business segments because they relate to centralized asset/liability and market risk management activities undertaken by our Corporate Treasury group.

 
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Table 5 displays the components of non-interest income for the first quarters of 2015 and 2014.
Table 5: Non-Interest Income
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2015
 
2014
Service charges and other customer-related fees
 
$
437

 
$
474

Interchange fees, net
 
496

 
440

Net other-than-temporary impairment recognized in earnings
 
(15
)
 
(5
)
Other non-interest income:
 
 
 
 
Provision for mortgage representation and warranty losses(1)
 
(1
)
 
(14
)
Net gains from the sale of investment securities
 
2

 
13

Net fair value gains on free-standing derivatives
 
10

 
13

Other
 
142

 
99

Total other non-interest income
 
153

 
111

Total non-interest income
 
$
1,071

 
$
1,020

__________
(1) 
Represents the provision 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 in 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 first quarter of 2015 compared to the first quarter 2014. The main drivers for the increase in non-interest income include (i) an increase in interchange fees due to strong purchase volume in our Credit Card business; (ii) higher other non-interest income driven by growth in our commercial and multifamily real estate business; and (iii) lower provision for mortgage representation and warranty losses. The increase was partially offset by other customer-related fees in our Credit Card business.
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 $935 million and $735 million in the first quarters of 2015 and 2014, respectively. The provision for credit losses as a percentage of net interest income was 20.4% and 16.9%, in the first quarters of 2015 and 2014, respectively.
The increase in the provision for credit losses of $200 million in the first quarter of 2015 compared to the first quarter of 2014, was primarily due to (i) a smaller release in the allowance for loan and lease losses in our credit card portfolio, partially offset by lower net charge-offs; (ii) a larger allowance build and higher net charge-offs due to the growth in our auto loan portfolio; and (iii) a larger allowance build in our commercial loan portfolio attributable to portfolio-specific risks.
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 2014 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 and amortization of intangibles.

 
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Table 6 displays the components of non-interest expense for the first quarters of 2015 and 2014.
Table 6: Non-Interest Expense
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2015
 
2014
Salaries and associate benefits
 
$
1,211

 
$
1,161

Occupancy and equipment
 
435

 
405

Marketing
 
375

 
325

Professional services
 
296

 
287

Communications and data processing
 
202

 
196

Amortization of intangibles
 
110

 
143

Other non-interest expense:
 
 
 
 
Collections
 
84

 
99

Fraud losses
 
67

 
73

Bankcard, regulatory and other fee assessments
 
109

 
113

Other
 
160

 
130

Other non-interest expense
 
420

 
415

Total non-interest expense
 
$
3,049

 
$
2,932

Non-interest expense increased by $117 million, or 4%, to $3.0 billion in the first quarter of 2015 compared to the first quarter of 2014, primarily driven by (i) higher expenses related to technology and digital investments; (ii) higher marketing and operating expenses attributable to growth in our auto, commercial and credit card loan portfolios; and (iii) higher provision for litigation matters. These increases were partially offset by a decline in the amortization of intangibles.
Income from Discontinued Operations, Net of Tax
Income from discontinued operations reflects ongoing costs, which primarily consist of mortgage loan repurchase representation and warranty charges, related to the mortgage origination operations of our wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc. (“GreenPoint”), which was closed in 2007. Income from discontinued operations, net of tax, was $19 million in the first quarter of 2015, compared to $30 million in the first quarter of 2014. We recorded a total pre-tax benefit for mortgage representation and warranty reserve of $19 million ($12 million net of tax) in the first quarter of 2015, compared to $47 million ($30 million net of tax) in the first quarter of 2014.
We provide additional information on the net provision for mortgage representation and warranty losses and the related reserve for representation and warranty claims in “Consolidated Balance Sheets Analysis—Mortgage Representation and Warranty Reserve” and “Note 14—Commitments, Contingencies, Guarantees and Others.”
Income Taxes
We recorded income tax provisions of $529 million (31.8% effective income tax rate) and $579 million (34.0% effective income tax rate) in the first quarters of 2015 and 2014, respectively. Our effective tax rate on income from continuing operations varies between periods due, in part, to fluctuations in our pre-tax earnings, which affects the relative tax benefit of tax-exempt income, tax credits and other permanent tax items.
The decrease in our effective income tax rate in the first quarter of 2015, from the first quarter of 2014, was primarily attributable to increased net tax credits and reduced discrete tax expense. We recorded discrete tax expense of $28 million in the first quarter of 2014 for certain state law changes that required a reduction of deferred tax assets and adjustments for the resolution of certain tax issues and audits. In comparison, we recorded net discrete tax expense of $2 million in the first quarter of 2015. Our effective income tax rate, excluding the impact of discrete tax items discussed above, was 31.7% and 32.4% in the first quarters of 2015 and 2014, respectively.
We provide additional information on items affecting our income taxes and effective tax rate under “Note 17—Income Taxes” in our 2014 Form 10-K.

 
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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 2014 Form 10-K.
We refer to the business segment results derived from our internal management accounting and reporting process as our “managed” presentation, which differs in some cases from our reported results prepared based on U.S. GAAP. There is no comprehensive authoritative body of guidance for management accounting equivalent to U.S. GAAP; therefore, the managed presentation of our business segment results may not be comparable to similar information provided by other financial services companies. In addition, our individual business segment results should not be used as a substitute for comparable results determined in accordance with U.S. GAAP.
Below we summarize our business segment results for the first quarters of 2015 and 2014 and provide a comparative discussion of these results. We also discuss changes in our financial condition and credit performance statistics as of March 31, 2015 compared to December 31, 2014. 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 in both the first quarters of 2015 and 2014.

 
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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.
Table 7: Credit Card Business Results
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2015
 
2014
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
2,666

 
$
2,525

 
6
%
Non-interest income
 
816

 
785

 
4

Total net revenue(1)
 
3,482

 
3,310

 
5

Provision for credit losses
 
669

 
558

 
20

Non-interest expense
 
1,776

 
1,726

 
3

Income from continuing operations before income taxes
 
1,037

 
1,026

 
1

Income tax provision
 
369

 
358

 
3

Income from continuing operations, net of tax
 
$
668

 
$
668

 
—

Selected performance metrics:
 
 
 
 
 
 
Average loans held for investment(2)
 
$
82,581

 
$
77,502

 
7

Average yield on loans held for investment(3)
 
14.30
%
 
14.43
%
 
(13
)bps
Total net revenue margin(4)
 
16.87

 
17.08

 
(21
)
Net charge-offs
 
$
719

 
$
780

 
(8)%

Net charge-off rate
 
3.48
%
 
4.02
%
 
(54
)bps
Card loan premium amortization and other intangible accretion(5)
 
$
11

 
$
37

 
(70)%

Purchased credit card relationship (“PCCR”) intangible amortization
 
84

 
98

 
(14
)
Purchase volume(6)
 
57,383

 
47,434

 
21

 
 
 
 
 
 
 
(Dollars in millions)
 
March 31, 2015
 
December 31, 2014
 
Change
Selected period-end data:
 
 
 
 
 
 
Loans held for investment(2)
 
$
81,754

 
$
85,876

 
(5)%

30+ day performing delinquency rate
 
2.91
%
 
3.24
%
 
(33
)bps
30+ day delinquency rate
 
2.97

 
3.30

 
(33
)
Nonperforming loan rate
 
0.08

 
0.08

 
—

Allowance for loan and lease losses
 
$
3,130

 
$
3,204

 
(2)%

Allowance coverage ratio(7)
 
3.83
%
 
3.73
%
 
10
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 $147 million and $163 million in the first quarters of 2015 and 2014, respectively, for the estimated uncollectible amount of billed finance charges and fees. The finance charge and fee reserve totaled $190 million and $216 million as of March 31, 2015 and December 31, 2014, 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. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(4) 
Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period for the specified loan category. Interest income also includes interest income on loans held for sale.
(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.
(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 first quarter of 2015, compared to the first quarter of 2014, and changes in financial condition and credit performance between March 31, 2015 and December 31, 2014 include the following:

 
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•
Net Interest Income: Net interest income increased by $141 million, or 6%, to $2.7 billion in the first quarter of 2015. The increase in net interest income was primarily driven by loan growth in the Domestic Card business.
•
Non-Interest Income: Non-interest income increased by $31 million, or 4%, to $816 million in the first quarter of 2015. The increase was primarily attributable to an increase in interchange fees driven by higher purchase volume, partially offset by a decline in service charges and other customer-related fees in our Credit Card business.
•
Provision for Credit Losses: The provision for credit losses increased by $111 million, or 20%, to $669 million in the first quarter of 2015. The increase was primarily due to a smaller release in the allowance for loan and lease losses in our Domestic Card business, partially offset by lower net charge-offs across the Credit Card business.
•
Non-Interest Expense: Non-interest expense increased by $50 million, or 3%, to $1.8 billion in the first quarter of 2015. The increase was largely due to higher marketing expenses associated with loan growth, partially offset by lower operating expenses and lower PCCR intangible amortization.
•
Loans Held for Investment: Period-end loans held for investment decreased by $4.1 billion, or 5%, to $81.8 billion as of March 31, 2015 from December 31, 2014, primarily due to expected seasonal paydowns. Average loans held for investment increased by $5.1 billion, or 7%, to $82.6 billion in the first quarter of 2015 compared to first quarter of 2014, primarily due to loan growth in the Domestic Card business.
•
Net Charge-off and Delinquency Statistics: Our net charge-off rate decreased by 54 basis points to 3.48% in the first quarter of 2015 compared to the first quarter of 2014 largely due to loan growth, continued economic improvement and portfolio seasoning. The 30+ day delinquency rate decreased 33 basis points to 2.97% as of March 31, 2015 from December 31, 2014 due to seasonally lower delinquency inventories.
Domestic Card Business
Domestic Card generated net income from continuing operations of $621 million and $595 million in the first quarters of 2015 and 2014, respectively. Domestic Card accounted for 91% of total net revenues of our Credit Card business in the first quarter of 2015 compared to 89% in the first quarter of 2014. Income attributable to Domestic Card represented 93% of net income for our Credit Card business in the first quarter of 2015, compared to 89% in the first quarter of 2014.

 
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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 March 31,
(Dollars in millions)
 
2015
 
2014
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
2,421

 
$
2,255

 
7%

Non-interest income
 
743

 
702

 
6

Total net revenue(1)
 
3,164

 
2,957

 
7

Provision for credit losses
 
610

 
486

 
26

Non-interest expense
 
1,580

 
1,545

 
2

Income from continuing operations before income taxes
 
974

 
926

 
5

Income tax provision
 
353

 
331

 
7

Income from continuing operations, net of tax
 
$
621

 
$
595

 
4

Selected performance metrics:
 
 
 
 
 
 
Average loans held for investment(2)
 
$
74,770

 
$
69,810

 
7

Average yield on loans held for investment(3)
 
14.23
%
 
14.19
%
 
4
bps
Total net revenue margin(4)
 
16.93

 
16.94

 
(1
)
Net charge-offs
 
$
664

 
$
700

 
(5)%

Net charge-off rate
 
3.55
%
 
4.01
%
 
(46
)bps
Card loan premium amortization and other intangible accretion(5)
 
$
11

 
$
37

 
(70)%

PCCR intangible amortization
 
84

 
98

 
(14
)
Purchase volume(6)
 
52,025

 
44,139

 
18

 
 
 
 
 
 
 
(Dollars in millions)
 
March 31, 2015
 
December 31, 2014
 
Change
Selected period-end data:
 
 
 
 
 
 
Loans held for investment(2)
 
$
74,131

 
$
77,704

 
(5)%

30+ day delinquency rate
 
2.92
%
 
3.27
%
 
(35
)bps
Allowance for loan and lease losses
 
$
2,824

 
$
2,878

 
(2)%

Allowance coverage ratio(7)
 
3.81
%
 
3.70
%
 
11
bps
__________
(1) 
We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in revenue and is not included in our net charge-offs.
(2) 
Period-end loans held for investment and average loans held for investment include 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. Interest income includes interest income on loans held for sale.
(4) 
Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(5) 
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.
(6) 
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.
(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.
Because our Domestic Card business accounts for the substantial majority of our Credit Card business, the key factors driving the results discussed above are similar to the key factors affecting our total Credit Card business. The primary driver of the increase in net income for our Domestic Card business in the first quarter of 2015, compared to the first quarter of 2014, was higher revenue primarily driven by loan growth partially offset by higher provision for credit losses largely due to a smaller release in the allowance for loan and lease losses.

 
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International Card Business
International Card generated net income from continuing operations of $47 million and $73 million in the first quarters of 2015 and 2014, respectively. Income attributable to International Card represented 7% of net income for our Credit Card business in the first quarter of 2015, compared to 11% for the first quarter of 2014. The decrease was primarily due to the impact of foreign exchange rates driven by strengthening of the U.S. dollar and higher operating expenses from new and expanded partnerships in Canada partially offset by lower provision for credit losses due to a renegotiated partnership arrangement with a retail partner.
Table 7.2 summarizes the financial results for International Card and displays selected key metrics for the periods indicated.
Table 7.2: International Card Business Results
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2015
 
2014
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
245

 
$
270

 
(9)%

Non-interest income
 
73

 
83

 
(12
)
Total net revenue
 
318

 
353

 
(10
)
Provision for credit losses
 
59

 
72

 
(18
)
Non-interest expense
 
196

 
181

 
8

Income from continuing operations before income taxes
 
63

 
100

 
(37
)
Income tax provision
 
16

 
27

 
(41
)
Income from continuing operations, net of tax
 
$
47

 
$
73

 
(36
)
Selected performance metrics:
 
 
 
 
 

Average loans held for investment(1)
 
$
7,811

 
$
7,692

 
2

Average yield on loans held for investment(2)
 
14.93
%
 
16.64
%
 
(171
)bps
Total net revenue margin(3)
 
16.31

 
18.38

 
(207
)
Net charge-offs
 
$
55

 
$
80

 
(31)%

Net charge-off rate
 
2.80
%
 
4.17
%
 
(137
)bps
Purchase volume(4)
 
$
5,358

 
$
3,295

 
63
 %
 
 
 
 
 
 
 
(Dollars in millions)
 
March 31, 2015
 
December 31, 2014
 
Change
Selected period-end data:
 
 
 
 
 
 
Loans held for investment(1)
 
$
7,623

 
$
8,172

 
(7)%

30+ day performing delinquency rate
 
2.81
%
 
2.94
%
 
(13
)bps
30+ day delinquency rate
 
3.44

 
3.60

 
(16
)
Nonperforming loan rate
 
0.84

 
0.86

 
(2
)
Allowance for loan and lease losses
 
$
306

 
$
326

 
(6)%

Allowance coverage ratio(5)
 
4.02
%
 
3.99
%
 
3
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. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(3) 
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.

 
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Consumer Banking Business
The primary sources of revenue for our Consumer Banking business are net interest income from loans and deposits and non-interest income from service charges and customer-related fees. Expenses primarily consist of the provision for credit losses, operating costs, 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 $266 million and $330 million in the first quarters of 2015 and 2014, respectively.
Table 8 summarizes the financial results of our Consumer Banking business and displays selected key metrics for the periods indicated.
Table 8: Consumer Banking Business Results
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2015
 
2014
 
Change
Selected income statement data:
 
 
 
 
 
 
Net interest income
 
$
1,434

 
$
1,433

 
—

Non-interest income
 
158

 
150

 
5

Total net revenue
 
1,592

 
1,583

 
1

Provision for credit losses
 
206

 
140

 
47

Non-interest expense
 
970

 
930

 
4

Income from continuing operations before income taxes
 
416

 
513

 
(19
)
Income tax provision
 
150

 
183

 
(18
)
Income from continuing operations, net of tax
 
$
266

 
$
330

 
(19
)
Selected performance metrics:
 
 
 
 
 
 
Average loans held for investment:(1)
 
 
 
 
 
 
Auto
 
$
38,387

 
$
32,387

 
19

Home loan
 
29,493

 
34,646

 
(15
)
Retail banking
 
3,561

 
3,630

 
(2
)
Total consumer banking
 
$
71,441

 
$
70,663

 
1

Average yield on loans held for investment(2)
 
6.26
%
 
6.18
%
 
8
bps
Average deposits
 
$
169,593

 
$
168,676

 
1%

Average deposit interest rate
 
0.57
%
 
0.57
%
 
—

Core deposit intangible amortization
 
$
22

 
$
30

 
(27)%

Net charge-offs
 
159

 
148

 
7

Net charge-off rate
 
0.89
%
 
0.84
%
 
5
bps
Net charge-off rate (excluding Acquired Loans)
 
1.30

  
1.37

 
(7
)
Auto loan originations
 
$
5,185

 
$
4,727

 
10
%
 
 
 
 
 
 
 

 
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Capital One Financial Corporation (COF)

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(Dollars in millions)
 
March 31, 2015
 
December 31, 2014
 
Change
Selected period-end data:
 
 
 
 
 
 
Loans held for investment:(1)
 
 
 
 
 
 
Auto
 
$
38,937

 
$
37,824

 
3
%
Home loan
 
28,905

 
30,035

 
(4
)
Retail banking
 
3,537

 
3,580

 
(1
)
Total consumer banking
 
$
71,379

 
$
71,439

 
—

30+ day performing delinquency rate
 
2.95
%
 
3.60
%
 
(65
)bps
30+ day performing delinquency rate (excluding Acquired Loans)(3)
 
4.27

 
5.34

 
(107
)
30+ day delinquency rate
 
3.46

 
4.23

 
(77
)
30+ day delinquency rate (excluding Acquired Loans)(3)
 
5.02

 
6.28

 
(126
)
Nonperforming loans rate
 
0.67

 
0.77

 
(10
)
Nonperforming loans rate (excluding Acquired Loans)(3)
 
0.98

 
1.14

 
(16
)
Nonperforming asset rate(4)
 
0.95

 
1.06

 
(11
)
Nonperforming asset rate (excluding Acquired Loans)(3)
 
1.37

 
1.57

 
(20
)
Allowance for loan and lease losses
 
$
826

 
$
779

 
6
%
Allowance coverage ratio(5)
 
1.16
%
 
1.09
%
 
7