Edgar Filing: CAPITAL ONE FINANCIAL CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

10-Q

______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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, 2016

¨ 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.

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 29, 2016, there were 512,099,463 shares of the registrant’s Common Stock outstanding.

TABLE OF CONTENTS



		Page
PART I—FINANCIAL INFORMATION		1
Item 1.	Financial Statements	61
	Consolidated Statements of Income	62
	Consolidated Statements of Comprehensive Income	63
	Consolidated Balance Sheets	64
	Consolidated Statements of Changes in Stockholders’ Equity	65
	Consolidated Statements of Cash Flows	66
	Notes to Consolidated Financial Statements	67
	Note 1—Summary of Significant Accounting Policies	67
	Note 2—Discontinued Operations	68
	Note 3—Investment Securities	69
	Note 4—Loans	76
	Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments	90
	Note 6—Variable Interest Entities and Securitizations	93
	Note 7—Goodwill and Intangible Assets	98
	Note 8—Deposits and Borrowings	100
	Note 9—Derivative Instruments and Hedging Activities	103
	Note 10—Stockholders’ Equity	108
	Note 11—Earnings Per Common Share	111
	Note 12—Fair Value Measurement	112
	Note 13—Business Segments	120
	Note 14—Commitments, Contingencies, Guarantees and Others	122
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)	1
	Introduction	1
	Summary of Selected Financial Data	3
	Executive Summary and Business Outlook	5
	Critical Accounting Policies and Estimates	8
	Accounting Changes and Developments	8
	Consolidated Results of Operations	9
	Business Segment Financial Performance	14
	Consolidated Balance Sheets Analysis	24
	Off-Balance Sheet Arrangements and Variable Interest Entities	28
	Capital Management	28
	Risk Management	32
	Credit Risk Profile	32
	Liquidity Risk Profile	44
	Market Risk Profile	48
	Supervision and Regulation	50
	Forward-Looking Statements	51
	Supplemental Table	53
	Glossary and Acronyms	55



	i	Capital One Financial Corporation (COF)



Item 3.	Quantitative and Qualitative Disclosures About Market Risk	130
Item 4.	Controls and Procedures	130

PART II—OTHER INFORMATION		131
Item 1.	Legal Proceedings	131
Item 1A.	Risk Factors	131
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	131
Item 3.	Defaults Upon Senior Securities	131
Item 4.	Mine Safety Disclosures	131
Item 5.	Other Information	131
Item 6.	Exhibits	131

SIGNATURES		132
EXHIBIT INDEX		133



	ii	Capital One Financial Corporation (COF)

INDEX OF MD&A AND SUPPLEMENTAL TABLES



MD&A Tables:		Page
1	Consolidated Financial Highlights (Unaudited)	3
2	Business Segment Results	6
3	Average Balances, Net Interest Income and Net Interest Margin	10
4	Rate/Volume Analysis of Net Interest Income	11
5	Non-Interest Income	11
6	Non-Interest Expense	12
7	Credit Card Business Results	14
7.1	Domestic Card Business Results	16
7.2	International Card Business Results	18
8	Consumer Banking Business Results	19
9	Commercial Banking Business Results	21
10	Other Category Results	23
11	Investment Securities	25
12	Non-Agency Investment Securities Credit Ratings	25
13	Loans Held for Investment	26
14	Changes in Representation and Warranty Reserve	27
15	Capital Ratios Under Basel III	28
16	Estimated Common Equity Tier 1 Capital Ratio under Fully Phased-In Basel III Standardized Approach	30
17	Loans Held for Investment Portfolio Composition	33
18	Commercial Loans by Industry	34
19	Home Loans—Risk Profile by Lien Priority	34
20	Sensitivity Analysis—PCI Home Loans	35
21	Credit Score Distribution	35
22	30+ Day Delinquencies	36
23	Aging and Geography of 30+ Day Delinquent Loans	37
24	90+ Day Delinquent Loans Accruing Interest	38
25	Nonperforming Loans and Other Nonperforming Assets	38
26	Net Charge-Offs (Recoveries)	40
27	Troubled Debt Restructurings	41
28	Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity	43
29	Allowance Coverage Ratios	44
30	Liquidity Reserves	44
31	Deposit Composition and Average Deposit Rates	45
32	Contractual Maturity Profile of Outstanding Debt	47
33	Senior Unsecured Debt Credit Ratings	47
34	Interest Rate Sensitivity Analysis	50

Supplemental Table:
A	Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures	53



	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 2015 Annual Report on Form 10-K (“2015 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, 2016 included in this Report.

Management monitors a variety of key indicators to evaluate our business results and financial condition. The following MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements and related notes in this Report and the more detailed information contained in our 2015 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, 2016, our principal subsidiaries included:


•	Capital One Bank (USA), National Association (“COBNA”), which offers credit and debit card products, other lending products and deposit products; and


•	Capital One, National Association (“CONA”), which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.

The Company is hereafter collectively referred to as “we,” “us” or “our.” COBNA and CONA are collectively referred to as the “Banks.” Certain business terms used in this document are defined in the “MD&A—Glossary and Acronyms” and should be read in conjunction with the consolidated financial statements included in this Report.

Our consolidated total net revenues are derived primarily from lending to consumer and commercial customers net of funding costs associated with interest on deposits, short-term borrowings and long-term debt. We also earn non-interest income which primarily consists of interchange income net of rewards expenses and service charges and other customer-related fees. Our expenses primarily consist of the provision for credit losses, operating expenses (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.”).


•	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.



	1	Capital One Financial Corporation (COF)

Table of Contents


•	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 and financial assets, including credit card and other loan portfolios, and enter into strategic partnerships as part of our growth strategy. We also explore opportunities to acquire digital companies and related assets to improve our information technology infrastructure and to deliver on our digital strategy. We also regularly consider the potential disposition of certain of our assets, branches, partnership agreements or lines of businesses. We may issue equity or debt in connection with acquisitions, including public offerings, to fund such acquisitions.

On December 1, 2015, we completed the acquisition of the Healthcare Financial Services business of General Electric Capital Corporation (“HFS acquisition”). As part of this acquisition, we recorded approximately $9.2 billion in assets, including $8.3 billion of loans. See “Note 2—Business Developments” in our 2015 Form 10-K for additional information.

We had no significant acquisitions or dispositions in the first quarter of 2016.



	2	Capital One Financial Corporation (COF)

Table of Contents

SUMMARY OF SELECTED FINANCIAL DATA

The following table presents selected consolidated financial data from our results of operations for the first quarters of 2016 and 2015 and selected comparative balance sheet data as of March 31, 2016 and December 31, 2015. We also provide selected key metrics we use in evaluating our performance.

Table 1: Consolidated Financial Highlights (Unaudited)



	Three Months Ended March 31,
(Dollars in millions, except per share data and as noted)	2016			2015			Change
Income statement
Net interest income	$	5,056		$	4,576		10%
Non-interest income	1,164			1,071			9
Total net revenue	6,220			5,647			10
Provision for credit losses	1,527			935			63
Non-interest expense:
Marketing	428			375			14
Amortization of intangibles	101			110			(8	)
Operating expenses	2,694			2,564			5
Total non-interest expense	3,223			3,049			6
Income from continuing operations before income taxes	1,470			1,663			(12	)
Income tax provision	452			529			(15	)
Income from continuing operations, net of tax	1,018			1,134			(10	)
Income (loss) from discontinued operations, net of tax	(5		)	19			**
Net income	1,013			1,153			(12	)
Dividends and undistributed earnings allocated to participating securities	(6		)	(6		)	—
Preferred stock dividends	(37		)	(32		)	16
Net income available to common stockholders	$	970		$	1,115		(13	)
Common share statistics
Basic earnings per common share:
Net income from continuing operations	$	1.86		$	2.00		(7)%
Income (loss) from discontinued operations	(0.01		)	0.03			**
Net income per basic common share	$	1.85		$	2.03		(9	)
Diluted earnings per common share:
Net income from continuing operations	$	1.85		$	1.97		(6	)
Income (loss) from discontinued operations	(0.01		)	0.03			**
Net income per diluted common share	$	1.84		$	2.00		(8	)
Weighted-average common shares outstanding (in millions):
Basic	523.5			550.2			(5	)
Diluted	528.0			557.2			(5	)
Common shares outstanding (period end, in millions)	514.5			548.0			(6	)
Dividends paid per common share	$	0.40		$	0.30		33
Tangible book value per common share (period end)	55.94			52.19			7
Balance sheet (average balances)
Loans held for investment	$	226,736		$	205,194		10%
Interest-earning assets	299,456			278,427			8
Total assets	331,919			309,401			7
Interest-bearing deposits	194,125			182,998			6
Total deposits	219,180			207,851			5
Borrowings	53,761			46,082			17
Common equity	45,782			44,575			3
Total stockholders’ equity	49,078			46,397			6



	3	Capital One Financial Corporation (COF)

Table of Contents



	Three Months Ended March 31,
(Dollars in millions, except per share data and as noted)	2016		2015		Change
Selected performance metrics
Purchase volume⁽¹⁾	$	68,189	$	57,383	19%
Total net revenue margin⁽²⁾	8.31%		8.11%		20	bps
Net interest margin⁽³⁾	6.75		6.57		18
Return on average assets	1.23		1.47		(24	)
Return on average tangible assets⁽⁴⁾	1.29		1.54		(25	)
Return on average common equity⁽⁵⁾	8.52		9.84		(132	)
Return on average tangible common equity (“TCE”)⁽⁶⁾	12.94		15.00		(206	)
Equity-to-assets ratio⁽⁷⁾	14.79		15.00		(21	)
Non-interest expense as a percentage of average loans held for investment⁽⁸⁾	5.69		5.94		(25	)
Efficiency ratio⁽⁹⁾	51.82		53.99		(217	)
Effective income tax rate from continuing operations	30.7		31.8		(110	)
Net charge-offs	$	1,178	$	881	34%
Net charge-off rate⁽¹⁰⁾	2.08%		1.72%		36	bps



(Dollars in millions, except as noted)	March 31, 2016		December 31, 2015		Change
Balance sheet (period end)
Loans held for investment	$	227,613	$	229,851	(1)%
Interest-earning assets	298,348		302,007		(1	)
Total assets	330,346		334,048		(1	)
Interest-bearing deposits	196,597		191,874		2
Total deposits	221,779		217,721		2
Borrowings	50,497		59,115		(15	)
Common equity	44,411		43,990		1
Total stockholders’ equity	47,707		47,284		1
Credit quality metrics (period end)
Allowance for loan and lease losses	$	5,416	$	5,130	6%
Allowance as a percentage of loans held for investment (“allowance coverage ratio”)	2.38%		2.23%		15	bps
30+ day performing delinquency rate	2.33		2.69		(36	)
30+ day delinquency rate	2.64		3.00		(36	)
Capital ratios
Common equity Tier 1 capital ratio	11.1%		11.1%		—
Tier 1 capital ratio	12.4		12.4		—
Total capital ratio	14.6		14.6		—
Tier 1 leverage ratio	10.2		10.6		(40	)bps
Tangible common equity ratio⁽¹¹⁾	9.1		8.9		20
Supplementary leverage ratio⁽¹²⁾	8.9		9.2		(30	)
Other
Employees (in thousands), period end	45.8		45.4		1%

__________


**	Change is not meaningful.


⁽¹⁾	Includes 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.


⁽²⁾	Calculated based on annualized total net revenue for the period divided by average interest-earning assets for the period.


⁽³⁾	Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.


⁽⁴⁾	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.


⁽⁵⁾	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.

⁽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 tangible common equity (“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.



	4	Capital One Financial Corporation (COF)

Table of Contents


⁽⁷⁾	Calculated based on average stockholders’ equity for the period divided by average total assets for the period.


⁽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⁾	The tangible common equity 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 U.S. GAAP measure.


⁽¹²⁾	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 $1.0 billion ($1.84 per diluted common share) on total net revenue of $6.2 billion for the first quarter of 2016. In comparison, 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.

Our common equity Tier 1 capital ratio, as calculated under the Basel III Standardized Approach, including transition provisions, was 11.1% as of both March 31, 2016 and December 31, 2015. See “MD&A—Capital Management” below for additional information.

On March 11, 2015, we announced that our Board of Directors authorized the repurchase of up to $3.125 billion of shares of our common stock (“2015 Stock Repurchase Program”). On February 17, 2016, we announced that our Board of Directors had authorized the repurchase of up to an additional $300 million of shares of common stock through the end of the second quarter of 2016 under the 2015 Stock Repurchase Program. Through the end of the first quarter of 2016, we repurchased approximately $2.8 billion of shares of common stock as part of this program, including completion of the previously announced incremental $300 million in share repurchases, and expect to complete the 2015 Stock Repurchase Program by the end of the second quarter of 2016. See “MD&A—Capital Management” below for additional information.

Below are additional highlights of our performance in the first quarter of 2016. These highlights are generally based on a comparison between the results of the first quarters of 2016 and 2015, 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, 2016, compared to our financial condition and credit performance as of December 31, 2015. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary and Business Outlook.”

Total Company Performance

•

Earnings: Our net income decreased by $140 million to $1.0 billion in the first quarter of 2016 compared to the first quarter of 2015. The decrease in net income from continuing operations in the first quarter of 2016 was driven by (i) an increase in the provision for credit losses in our domestic credit card loan portfolio due to higher charge-offs and an allowance build in the first quarter of 2016 compared to a release in the first quarter of 2015, and in our commercial loan portfolio due to a larger build in both the allowance for loan and lease losses and the reserve for unfunded lending commitments as a result of continued adverse industry conditions impacting our oil and gas portfolio; and (ii) an increase in non-interest expense driven by higher operating and marketing expenses associated with loan growth and continued technology and infrastructure investments. These expenses were partially offset by (i) higher interest income due to growth in our credit card 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 net interchange fees, partially offset by lower service charges and other customer-related fees primarily due to the continued run-off of our legacy payment protection products in our Domestic Card business, which we exited during the first quarter of 2016.

•

Loans Held for Investment: Period-end loans held for investment decreased by $2.2 billion to $227.6 billion as of March 31, 2016 from December 31, 2015 driven by seasonal paydowns in our credit card loan portfolio and the planned run-off of our acquired home loan portfolio, partially offset by growth in our auto and commercial loan portfolios. Average loans held for investment increased by $21.5 billion to $226.7 billion in the first quarter of 2016 compared to the first quarter of 2015 primarily driven by continued growth in our credit card, auto and commercial loan portfolios, including loans acquired from the HFS acquisition, partially offset by the planned run-off of our acquired home loan portfolio.



	5	Capital One Financial Corporation (COF)

Table of Contents

•

Net Charge-off and Delinquency Statistics: Our net charge-off rate increased by 36 basis points to 2.08% in the first quarter of 2016 compared to the first quarter of 2015 primarily due to seasoning of recent credit card loan originations and rising losses in our oil and gas and taxi medallion lending portfolios within our Commercial Banking business. Our 30+ day delinquency rate decreased by 36 basis points to 2.64% as of March 31, 2016, from December 31, 2015, primarily due to seasonally lower delinquency inventories, partially offset by seasoning of recent credit card loan originations and adverse market conditions impacting our oil and gas and taxi medallion lending portfolios. 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 $286 million to $5.4 billion as of March 31, 2016 from December 31, 2015. The increase in the allowance for loan and lease losses was primarily driven by continued adverse industry conditions impacting our oil and gas portfolio in our Commercial Banking business as well as continued domestic credit card loan growth and portfolio seasoning. These factors also contributed to a higher allowance coverage ratio, which increased by 15 basis points to 2.38% as of March 31, 2016 from December 31, 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 2016 and 2015. We provide information on the allocation methodologies used to derive our business segment results in “Note 20—Business Segments” in our 2015 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,
	2016						2015
	Total Net Revenue (Loss)⁽¹⁾			Net Income⁽²⁾			Total Net Revenue (Loss)⁽¹⁾				Net Income⁽²⁾
(Dollars in millions)	Amount		% of Total	Amount		% of Total	Amount			% of Total	Amount		% of Total
Credit Card	$	3,880	62%	$	609	60%	$	3,482		62%	$	668	59%
Consumer Banking	1,611		26	249		24	1,592			28	266		23
Commercial Banking⁽³⁾	655		11	67		7	575			10	155		14
Other⁽⁴⁾	74		1	93		9	(2		)	—	45		4
Total from continuing operations	$	6,220	100%	$	1,018	100%	$	5,647		100%	$	1,134	100%

__________


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


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

⁽³⁾

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


⁽⁴⁾	Includes the residual impact of the allocation of our centralized Corporate Treasury group activities, unallocated corporate expenses that do not directly support the operations of the business segments and other items as described in “Note 20—Business Segments” in our 2015 Form 10-K.

Credit Card: Our Credit Card business generated net income from continuing operations of $609 million in the first quarter of 2016, compared to net income from continuing operations of $668 million in the first quarter of 2015. The decrease in net income in the first quarter of 2016 was primarily attributable to (i) higher provision for credit losses driven by higher charge-offs and an allowance build, both due to continued loan growth and portfolio seasoning, compared to a release in the first quarter of 2015; and (ii) higher non-interest expense due to higher operating and marketing expenses associated with loan growth. These drivers were partially offset by (i) higher net interest income primarily driven by loan growth; and (ii) higher non-interest income attributable to an increase in net interchange fees, partially offset by a decline in service charges and other customer-related fees primarily due to the continued run-off of our legacy payment protection products in our Domestic Card business, which we exited during the first quarter of 2016. Period-end loans held for investment decreased by $3.4 billion to $92.7 billion as of March 31, 2016 from December 31, 2015, primarily due to expected seasonal paydowns.

Consumer Banking: Our Consumer Banking business generated net income from continuing operations of $249 million in the first quarter of 2016, compared to net income from continuing operations of $266 million in the first quarter of 2015. The decrease in



	6	Capital One Financial Corporation (COF)

Table of Contents

net income in the first quarter of 2016 was primarily attributable to (i) higher provision for credit losses primarily driven by higher charge-offs on auto loans; and (ii) higher non-interest expense largely driven by increased marketing expenses in our retail banking business and higher operating expenses driven by growth in our auto loan portfolio. Period-end loans held for investment were substantially flat, increasing by $219 million, or 0.3%, to $70.6 billion as of March 31, 2016 from December 31, 2015.

Commercial Banking: Our Commercial Banking business generated net income from continuing operations of $67 million in the first quarter of 2016, compared to net income from continuing operations of $155 million in the first quarter of 2015. The decrease in net income in the first quarter of 2016 was primarily attributable to (i) higher provision for credit losses due to a larger build in both the allowance for loan and lease losses and the reserve for unfunded lending commitments as a result of continued adverse industry conditions impacting our oil and gas portfolio; and (ii) higher non-interest expense largely driven by higher operating expenses due to costs associated with the HFS acquisition and continued growth in our Commercial Banking business. These expenses were partially offset by higher net interest income primarily driven by loan growth, including loans acquired in the HFS acquisition, partially offset by spread compression. Period-end loans held for investment increased by $975 million to $64.2 billion as of March 31, 2016 from December 31, 2015, driven by growth across our commercial loan portfolios.

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 2015 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 the forward-looking statements included in this Report and “Part I—Item 1A. Risk Factors” in our 2015 Form 10-K for factors that could materially influence our results.

Total Company Expectations

We delivered revenue growth and attractive risk-adjusted returns in the first quarter of 2016, highlighted by strong growth in our Domestic Card business. We believe we are positioned to deliver attractive shareholder returns over the long term, driven by growth and sustainable returns at the higher end of banks, as well as significant capital distribution, subject to regulatory approval.

Changing customer needs and preferences in our retail deposit businesses are driving changes to the function, format and number of our branches. Like all banks, we have been optimizing the format and number of our branches to better meet our evolving customer needs and expect to accelerate these efforts in 2016. While we are still formulating specific plans and timing, we expect to recognize bank optimization charges of approximately $160 million in the “Other” category during 2016.

In addition to these expected bank optimization costs, we also expect the net impact of FDIC surcharges and premium changes to add about $20 million to quarterly operating expenses beginning in the third quarter of 2016. Including the higher expenses associated with these two items, we still expect some improvement in our full-year 2016 efficiency ratio relative to our full-year 2015 efficiency ratio, with continuing improvement in 2017, excluding adjusting items.

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 through the second quarter of 2016. As we continued to repurchase shares pursuant to this program, we reduced our net share count by 12.8 million shares in the first quarter of 2016 and completed the previously announced incremental $300 million in repurchases. We are on track to complete our remaining CCAR authorization by the end of 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



	7	Capital One Financial Corporation (COF)

Table of Contents

utilizing Rule 10b5-1 programs, and may be suspended at any time. See “MD&A—Capital Management—Dividend Policy and Stock Purchases” for more information.

Business Segment Expectations

Credit Card: In our Domestic Card business, we expect the full-year 2016 charge-off rate to be around four percent, with quarterly seasonal variability. Based on current information and assuming relative stability in consumer behavior, the domestic economy and competitive conditions, we expect full-year 2017 charge-off rate in the low four percent range, with quarterly seasonal variability. Loan growth coupled with our expectations for a rising charge-off rate drove an allowance build in the current quarter, and we expect these same factors to drive allowance additions going forward.

Consumer Banking: In our Consumer Banking business, persistently low interest rates continue to pressure returns in our deposit businesses. We expect the planned run-off in our acquired home loan portfolio, as well as revenue margin compression and gradually rising charge-offs in our auto business, to have a negative effect on Consumer Banking revenues, efficiency ratio and net income in 2016, even as we continue to tightly manage costs.

Commercial Banking: While competition continues to put pressure on loan terms and pricing in our Commercial Banking business, we continue to see good growth opportunities in select specialty industry verticals. Credit pressures continue to be focused in our oil and gas and taxi medallion lending portfolios and we expect that our oil and gas portfolio will continue to present challenges. While our current reserves fully reflect all the information we have today, future developments and continued turmoil in the energy industry could lead to further reserve builds and possibly increasing charge-offs.

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 2015 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. There have been no changes to our critical accounting policies and estimates since the 2015 Form 10-K.

We provide additional information on our critical accounting policies and estimates under “MD&A—Critical Accounting Policies and Estimates” in our 2015 Form 10-K.

ACCOUNTING CHANGES AND DEVELOPMENTS

See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted in 2016, as well as recently issued accounting standards not yet required to be adopted and the expected impact of these changes in accounting standards.



	8	Capital One Financial Corporation (COF)

Table of Contents

CONSOLIDATED RESULTS OF OPERATIONS

The section below provides a comparative discussion of our consolidated financial performance for the first quarters of 2016 and 2015. 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.



	9	Capital One Financial Corporation (COF)

Table of Contents

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 2016 and 2015.

Table 3: Average Balances, Net Interest Income and Net Interest Margin



	Three Months Ended March 31,
	2016						2015
(Dollars in millions)	Average Balance			Interest Income/ Expense⁽¹⁾⁽²⁾		Average Yield/ Rate	Average Balance			Interest Income/ Expense⁽¹⁾⁽²⁾		Average Yield/ Rate
Assets:
Interest-earning assets:
Loans:
Credit card:
Domestic credit card	$	85,319		$	3,071	14.40%	$	74,875		$	2,660	14.21%
International credit card	7,839			323		16.48	7,811			291		14.90
Total credit card	93,158			3,394		14.57	82,686			2,951		14.28
Consumer banking	70,441			1,088		6.18	71,595			1,120		6.26
Commercial banking⁽³⁾	63,884			539		3.37	51,461			415		3.23
Other	90			64		284.44	112			54		192.86
Total loans, including loans held for sale	227,573			5,085		8.94	205,854			4,540		8.82
Investment securities	65,156			415		2.55	63,181			406		2.57
Cash equivalents and other interest-earning assets	6,727			17		1.01	9,392			28		1.19
Total interest-earning assets	$	299,456		$	5,517	7.37	$	278,427		$	4,974	7.15
Cash and due from banks	3,355						3,099
Allowance for loan and lease losses	(5,131		)				(4,371		)
Premises and equipment, net	3,642						3,701
Other assets	30,597						28,545
Total assets	$	331,919					$	309,401
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Deposits	$	194,125		$	283	0.58	$	182,998		$	271	0.59
Securitized debt obligations	15,361			48		1.25	11,563			33		1.14
Senior and subordinated notes	21,993			106		1.93	20,595			79		1.53
Other borrowings and liabilities	17,176			24		0.56	14,721			15		0.41
Total interest-bearing liabilities	$	248,655		$	461	0.74	$	229,877		$	398	0.69
Non-interest-bearing deposits	25,055						24,853
Other liabilities	9,131						8,274
Total liabilities	282,841						263,004
Stockholders’ equity	49,078						46,397
Total liabilities and stockholders’ equity	$	331,919					$	309,401
Net interest income/spread				$	5,056	6.63				$	4,576	6.46
Impact of non-interest-bearing funding						0.12						0.11
Net interest margin						6.75%						6.57	%

__________


⁽¹⁾	Past due fees included in interest income totaled approximately $351 million and $354 million in the first quarters of 2016 and 2015, respectively.


⁽²⁾	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.

⁽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 rate of 35% with offsetting reclassifications to the Other category.

Net interest income increased by $480 million to $5.1 billion in the first quarter of 2016 compared to the first quarter of 2015 primarily driven by growth in our credit card and commercial loan portfolios and an additional day in the first quarter of 2016.



	10	Capital One Financial Corporation (COF)

Table of Contents

Net interest margin increased by 18 basis points to 6.75% in the first quarter of 2016 compared to the first quarter of 2015, primarily driven by continued growth in our domestic credit card loan portfolio, the planned run-off of the acquired home loan portfolio in our Consumer Banking business and an additional day in the first quarter of 2016, partially offset by declining yields in our auto portfolio.

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,
	2016 vs. 2015
(Dollars in millions)	Total Variance			Volume			Rate
Interest income:
Loans:
Credit card	$	443		$	380		$	63
Consumer banking	(32		)	(18		)	(14		)
Commercial banking⁽²⁾	124			104			20
Other	10			(11		)	21
Total loans, including loans held for sale	545			455			90
Investment securities	9			13			(4		)
Cash equivalents and other interest-earning assets	(11		)	(7		)	(4		)
Total interest income	543			461			82
Interest expense:
Deposits	12			16			(4		)
Securitized debt obligations	15			11			4
Senior and subordinated notes	27			6			21
Other borrowings and liabilities	9			3			6
Total interest expense	63			36			27
Net interest income	$	480		$	425		$	55

__________

⁽¹⁾

We calculate the change in interest income and interest expense separately for each item. The portion of interest income or interest expense attributable to both volume and rate is allocated proportionately when the calculation results in a positive value. When the portion of interest income or interest expense attributable to both volume and rate results in a negative value, the total amount is allocated to volume or rate, depending on which amount is positive.

⁽²⁾

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

Non-Interest Income

Non-interest income primarily consists of interchange 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 for mortgage representation and warranty losses related to continuing operations, gains and losses from the sale of investment securities, gains and losses on derivatives not accounted for in hedge accounting relationships and hedge ineffectiveness.



	11	Capital One Financial Corporation (COF)

Table of Contents

Table 5 displays the components of non-interest income for the first quarters of 2016 and 2015.

Table 5: Non-Interest Income



	Three Months Ended March 31,
(Dollars in millions)	2016			2015
Interchange fees, net	$	596		$	496
Service charges and other customer-related fees	404			437
Net other-than-temporary impairment recognized in earnings	(8		)	(15		)
Other non-interest income:
Benefit (provision) for mortgage representation and warranty losses⁽¹⁾	1			(1		)
Net gains (losses) from the sale of investment securities	—			2
Net fair value gains (losses) on free-standing derivatives	30			10
Other	141			142
Total other non-interest income	172			153
Total non-interest income	$	1,164		$	1,071

__________

⁽¹⁾

Represents the benefit (provision) for mortgage representation and warranty losses recorded in continuing operations. For the total impact to the net benefit 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 $93 million to $1.2 billion in the first quarter of 2016 compared to the first quarter of 2015 primarily driven by an increase in interchange fees due to higher purchase volume in our Credit Card business and a customer rewards liability release within the retail banking business related to the discontinuation of certain debit card and deposit products, partially offset by (i) increased rewards expense due to higher purchase volume and continued expansion of our rewards franchise; and (ii) lower service charges and other customer-related fees primarily due to the continued run-off of our legacy payment protection products in our Domestic Card business, which we exited during the first quarter of 2016.

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 $1.5 billion and $935 million in the first quarters of 2016 and 2015, respectively. The provision for credit losses as a percentage of net interest income was 30.2% and 20.4% in the first quarters of 2016 and 2015, respectively.

Our provision for credit losses increased by $592 million in the first quarter of 2016 compared to the first quarter of 2015. The increase was primarily driven by an increase in our domestic credit card loan portfolio due to higher charge-offs and an allowance build in the first quarter of 2016 compared to a release in the first quarter of 2015, and in our commercial loan portfolio due to a larger build in both the allowance for loan and lease losses and the reserve for unfunded lending commitments as a result of continued adverse industry conditions impacting our oil and gas portfolio.

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 and Reserve for Unfunded Lending Commitments.” For information on the allowance methodology for each of our loan categories, see “Note 1—Summary of Significant Accounting Policies” in our 2015 Form 10-K.

Non-Interest Expense

Non-interest expense consists of ongoing operating expenses, such as salaries and associate benefits, occupancy and equipment costs, professional services, communications and data processing expenses and other non-interest expenses, as well as marketing costs and amortization of intangibles.



	12	Capital One Financial Corporation (COF)

Table of Contents

Table 6 displays the components of non-interest expense for the first quarters of 2016 and 2015.

Table 6: Non-Interest Expense



	Three Months Ended March 31,
(Dollars in millions)	2016		2015
Salaries and associate benefits	$	1,270	$	1,211
Occupancy and equipment	458		435
Marketing	428		375
Professional services	278		296
Communications and data processing	243		202
Amortization of intangibles	101		110
Other non-interest expense:
Collections	81		84
Fraud losses	90		67
Bankcard, regulatory and other fee assessments	107		109
Other	167		160
Other non-interest expense	445		420
Total non-interest expense	$	3,223	$	3,049

Non-interest expense increased by $174 million to $3.2 billion in the first quarter of 2016 compared to the first quarter of 2015. The increase was primarily due to higher operating and marketing expenses associated with loan growth and continued technology and infrastructure investments.

Income (Loss) from Discontinued Operations, Net of Tax

Income (loss) from discontinued operations reflects ongoing costs, which primarily consist of mortgage loan repurchase representation and warranty charges, related to the mortgage origination operations of our former wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc. (“GreenPoint”), which was closed in 2007. Loss from discontinued operations, net of tax, was $5 million in the first quarter of 2016, compared to income from discontinued operations of $19 million in the first quarter of 2015. We recorded a provision net of tax for mortgage representation and warranty reserve of $2 million ($3 million before tax) in the first quarter of 2016, compared to a $12 million benefit net of tax ($19 million before tax) in the first quarter of 2015.

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 $452 million (30.7% effective income tax rate) and $529 million (31.8% effective income tax rate) in the first quarters of 2016 and 2015, 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 2016, from the first quarter of 2015, was primarily due to reduced pre-tax earnings, increased tax credits and increased tax-exempt income.

We provide additional information on items affecting our income taxes and effective tax rate under “Note 18—Income Taxes” in our 2015 Form 10-K.



	13	Capital One Financial Corporation (COF)

Table of Contents

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 20—Business Segments” in our 2015 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 2016 and 2015 and provide a comparative discussion of these results. We also discuss changes in our financial condition and credit performance statistics as of March 31, 2016, compared to December 31, 2015. 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, net interchange income and fees collected from customers. Expenses primarily consist of the provision for credit losses, operating costs such as salaries and associate benefits, occupancy and equipment, professional services and communications and data processing expenses, as well as marketing expenses.

Our Credit Card business generated net income from continuing operations of $609 million and $668 million in the first quarters of 2016 and 2015, respectively.



	14	Capital One Financial Corporation (COF)

Table of Contents

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)	2016		2015		Change
Selected income statement data:
Net interest income	$	3,033	$	2,666	14%
Non-interest income	847		816		4
Total net revenue⁽¹⁾	3,880		3,482		11
Provision (benefit) for credit losses	1,071		669		60
Non-interest expense	1,863		1,776		5
Income (loss) from continuing operations before income taxes	946		1,037		(9	)
Income tax provision (benefit)	337		369		(9	)
Income (loss) from continuing operations, net of tax	$	609	$	668	(9	)
Selected performance metrics:
Average loans held for investment⁽²⁾	$	92,987	$	82,581	13
Average yield on loans held for investment⁽³⁾	14.60%		14.30%		30	bps
Total net revenue margin⁽⁴⁾	16.69		16.87		(18	)
Net charge-offs	$	950	$	719	32%
Net charge-off rate	4.09%		3.48%		61	bps
Purchased credit card relationship (“PCCR”) intangible amortization	$	70	$	84	(17)%
Purchase volume⁽⁵⁾	68,189		57,383		19

(Dollars in millions)	March 31, 2016		December 31, 2015		Change
Selected period-end data:
Loans held for investment⁽²⁾	$	92,699	$	96,125	(4)%
30+ day performing delinquency rate	3.11%		3.36%		(25	)bps
30+ day delinquency rate	3.15		3.40		(25	)
Nonperforming loan rate	0.05		0.06		(1	)
Allowance for loan and lease losses	$	3,785	$	3,654	4%
Allowance coverage ratio⁽⁶⁾	4.08%		3.80%		28	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 $228 million and $147 million in the first quarters of 2016 and 2015, respectively, for the estimated uncollectible amount of billed finance charges and fees. The finance charge and fee reserve totaled $264 million and $262 million as of March 31, 2016 and December 31, 2015, 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⁾	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.


⁽⁶⁾	Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.



	15	Capital One Financial Corporation (COF)

Table of Contents

Key factors affecting the results of our Credit Card business for the first quarter of 2016, compared to the first quarter of 2015, and changes in financial condition and credit performance between March 31, 2016 and December 31, 2015 include the following:


•	Net Interest Income: Net interest income increased by $367 million to $3.0 billion in the first quarter of 2016, primarily driven by loan growth in our Domestic Card business.

•

Non-Interest Income: Non-interest income increased by $31 million to $847 million in the first quarter of 2016. The increase was primarily attributable to an increase in interchange fees driven by higher purchase volume, partially offset by (i) increased rewards expense due to higher purchase volume and continued expansion of our rewards franchise; and (ii) lower service charges and other customer-related fees primarily due to the continued run-off of our legacy payment protection products in our Domestic Card business, which we exited during the first quarter of 2016.


•	Provision for Credit Losses: The provision for credit losses increased by $402 million to $1.1 billion in the first quarter of 2016, primarily driven by higher charge-offs and an allowance build, both due to continued loan growth and portfolio seasoning, compared to a release in the first quarter of 2015.


•	Non-Interest Expense: Non-interest expense increased by $87 million to $1.9 billion in the first quarter of 2016. The increase was due to higher operating and marketing expenses associated with loan growth.

•

Loans Held for Investment: Period-end loans held for investment decreased by $3.4 billion to $92.7 billion as of March 31, 2016 from December 31, 2015, primarily due to expected seasonal paydowns. Average loans held for investment increased by $10.4 billion to $93.0 billion in the first quarter of 2016 compared to the first quarter of 2015, primarily due to loan growth across our domestic and international card loan portfolios, partially offset by the impact of foreign exchange rates in our international card loan portfolio driven by the strengthening of the U.S. dollar in the first quarter of 2016.


•	Net Charge-off and Delinquency Statistics: The net charge-off rate increased by 61 basis points to 4.09% in the first quarter of 2016 compared to the first quarter of 2015, due to the seasoning of our domestic card portfolio growth. The 30+ day delinquency rate decreased by 25 basis points to 3.15% as of March 31, 2016 from December 31, 2015 due to seasonally lower delinquency inventories.

Domestic Card Business

Domestic Card generated net income from continuing operations of $564 million and $621 million in the first quarters of 2016 and 2015, respectively. Domestic Card accounted for 91% of total net revenues and 93% of net income of our Credit Card business in both the first quarters of 2016 and 2015.



	16	Capital One Financial Corporation (COF)

Table of Contents

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)	2016		2015		Change
Selected income statement data:
Net interest income	$	2,756	$	2,421	14%
Non-interest income	774		743		4
Total net revenue⁽¹⁾	3,530		3,164		12
Provision (benefit) for credit losses	972		610		59
Non-interest expense	1,671		1,580		6
Income (loss) from continuing operations before income taxes	887		974		(9	)
Income tax provision (benefit)	323		353		(8	)
Income (loss) from continuing operations, net of tax	$	564	$	621	(9	)
Selected performance metrics:
Average loans held for investment⁽²⁾	$	85,148	$	74,770	14
Average yield on loans held for investment⁽³⁾	14.43%		14.23%		20	bps
Total net revenue margin⁽⁴⁾	16.58		16.93		(35	)
Net charge-offs	$	887	$	664	34%
Net charge-off rate	4.16%		3.55%		61	bps
PCCR intangible amortization	$	70	$	84	(17)%
Purchase volume⁽⁵⁾	62,617		52,025		20

(Dollars in millions)	March 31, 2016		December 31, 2015		Change
Selected period-end data:
Loans held for investment⁽²⁾	$	84,561	$	87,939	(4)%
30+ day delinquency rate	3.09%		3.39%		(30	)bps
Allowance for loan and lease losses	$	3,440	$	3,355	3%
Allowance coverage ratio⁽⁶⁾	4.07%		3.82%		25	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. 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.


⁽⁵⁾	Consists of domestic card purchase transactions, net of returns, for the period for both loans classified as held for investment and loans classified as held for sale. Excludes cash advance and balance transfer transactions.


⁽⁶⁾	Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.

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. Net income for our Domestic Card business decreased in the first quarter of 2016, compared to the first quarter of 2015 due to higher provision for credit losses, operating and marketing expenses associated with continued loan growth, partially offset by higher net interest income resulting from loan growth.



	17	Capital One Financial Corporation (COF)

Table of Contents

International Card Business

International Card generated net income from continuing operations of $45 million and $47 million in the first quarters of 2016 and 2015, respectively. The decrease in net income in the first quarter of 2016 was primarily due to (i) an increase in the provision for credit losses due to higher loss rates; and (ii) the impact of foreign exchange rates driven by the strengthening of the U.S. dollar in the first quarter of 2016. These expenses were largely offset by higher net interest income primarily driven by loan growth and higher loan yield due to changes in the product mix of the portfolio.

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)	2016		2015		Change
Selected income statement data:
Net interest income	$	277	$	245	13%
Non-interest income	73		73		—
Total net revenue	350		318		10
Provision (benefit) for credit losses	99		59		68
Non-interest expense	192		196		(2	)
Income (loss) from continuing operations before income taxes	59		63		(6	)
Income tax provision (benefit)	14		16		(13	)
Income (loss) from continuing operations, net of tax	$	45	$	47	(4	)
Selected performance metrics:
Average loans held for investment⁽¹⁾	$	7,839	$	7,811	—
Average yield on loans held for investment⁽²⁾	16.47%		14.93%		154	bps
Total net revenue margin⁽³⁾	17.85		16.31		154
Net charge-offs	$	63	$	55	15%
Net charge-off rate	3.24%		2.80%		44	bps
Purchase volume⁽⁴⁾	$	5,572	$	5,358	4%

(Dollars in millions)	March 31, 2016		December 31, 2015		Change
Selected period-end data:
Loans held for investment⁽¹⁾	$	8,138	$	8,186	(1)%
30+ day performing delinquency rate	3.32%		2.98%		34	bps
30+ day delinquency rate	3.76		3.46		30
Nonperforming loan rate	0.59		0.65		(6	)
Allowance for loan and lease losses	$	345	$	299	15%
Allowance coverage ratio⁽⁵⁾	4.24%		3.66%		58	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.



	18	Capital One Financial Corporation (COF)

Table of Contents

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 and communications and data processing expenses, as well as marketing expenses.

Our Consumer Banking business generated net income from continuing operations of $249 million and $266 million in the first quarters of 2016 and 2015, 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)	2016		2015			Change
Selected income statement data:
Net interest income	$	1,420	$	1,434		(1)%
Non-interest income	191		158			21
Total net revenue	1,611		1,592			1
Provision (benefit) for credit losses	230		206			12
Non-interest expense	990		970			2
Income (loss) from continuing operations before income taxes	391		416			(6	)
Income tax provision (benefit)	142		150			(5	)
Income (loss) from continuing operations, net of tax	$	249	$	266		(6	)
Selected performance metrics:
Average loans held for investment:⁽¹⁾
Auto	$	41,962	$	38,387		9
Home loan	24,781		29,493			(16	)
Retail banking	3,553		3,561			—
Total consumer banking	$	70,296	$	71,441		(2	)
Average yield on loans held for investment⁽²⁾	6.18%		6.26		%	(8	)bps
Average deposits	$	174,254	$	169,593		3%
Average deposit interest rate	0.54%		0.57		%	(3	)bps
Core deposit intangible amortization	$	15	$	22		(32)%
Net charge-offs	183		159			15
Net charge-off rate	1.04%		0.89%			15	bps
Net charge-off rate (excluding PCI loans)⁽³⁾	1.40		1.30			10
Auto loan originations	$	5,844	$	5,185		13%



	19	Capital One Financial Corporation (COF)

Table of Contents



(Dollars in millions)	March 31, 2016		December 31, 2015		Change
Selected period-end data:
Loans held for investment:⁽¹⁾
Auto	$	42,714	$	41,549	3%
Home loan	24,343		25,227		(4	)
Retail banking	3,534		3,596		(2	)
Total consumer banking	$	70,591	$	70,372	—
30+ day performing delinquency rate	3.19%		4.05%		(86	)bps
30+ day performing delinquency rate (excluding PCI loans)⁽³⁾	4.25		5.50		(125	)
30+ day delinquency rate	3.67		4.67		(100	)
30+ day delinquency rate (excluding PCI loans)⁽³⁾	4.89		6.34		(145	)
Nonperforming loan rate	0.66		0.79		(13	)
Nonperforming loan rate (excluding PCI loans)⁽³⁾	0.89		1.08		(19	)
Nonperforming asset rate⁽⁴⁾	0.95		1.10		(15	)
Nonperforming asset rate (excluding PCI loans)⁽³⁾⁽⁴⁾	1.27		1.50		(23	)
Allowance for loan and lease losses	$	914	$	868	5%
Allowance coverage ratio⁽⁵⁾⁽⁶⁾	1.29%		1.23%		6	bps
Deposits	$	177,803	$	172,702	3%
Loans serviced for others	7,703		7,530		2

__________

⁽¹⁾

The period-end consumer banking loans held for investment includes purchased credit-impaired loans (“PCI loans”) with carrying values of $17.6 billion and $18.6 billion as of March 31, 2016 and December 31, 2015, respectively. The average balance of consumer banking loans held for investment includes PCI loans of $18.0 billion and $22.6 billion in the first quarters of 2016 and 2015, respectively. See “MD&A—Glossary and Acronyms” for the definition of “PCI loans.”


⁽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⁾	See “MD&A—Credit Risk Profile” and “Note 1—Summary of Significant Accounting Policies” in our 2015 Form 10-K for additional information on the impact of PCI loans on our credit quality metrics.


⁽⁴⁾	Nonperforming assets consist of nonperforming loans, real estate owned (“REO”) and other foreclosed assets. The nonperforming asset rate is calculated based on nonperforming assets as of the end of the period divided by the sum of period-end loans held for investment, foreclosed properties and other foreclosed assets, and is adjusted to exclude the impact of acquired REOs.


⁽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.


⁽⁶⁾	Excluding the impact of PCI home loans, the coverage ratios for our home loan portfolio and total consumer banking were 0.45% and 1.66%, respectively, as of March 31, 2016, compared to 0.50% and 1.60%, respectively, as of December 31, 2015.

Key factors affecting the results of our Consumer Banking business for the first quarter of 2016, compared to the first quarter of 2015, and changes in financial condition and credit performance between March 31, 2016 and December 31, 2015 include the following:


•	Net Interest Income: Net interest income remained flat at $1.4 billion in the first quarter of 2016 compared to the first quarter of 2015, as lower net interest income from our home loan portfolio attributable to the planned run-off of the acquired portfolio and margin compression in auto loans was largely offset by growth in our auto loan portfolio.

Consumer Banking loan yield decreased by 8 basis points to 6.2% in the first quarter of 2016, the decrease was primarily driven by declining yield in our auto loan portfolio, partially offset by changes in the product mix in Consumer Banking as a result of the planned run-off of the acquired home loan portfolio and growth in our auto loan portfolio. Average yield on auto loans decreased by 51 basis points to 7.7% in the first quarter of 2016. This decrease was primarily attributable to two factors: (i) a higher proportion of prime auto loans since the first quarter of 2015; and (ii) continued competition across the auto business. The average yield on the home loan portfolio decreased by 11 basis points to 3.7% in the first quarter of 2016, as a result of lower yield on our acquired home loan portfolio.