10-Q 1 cof-06302018x10q.htm 10-Q Document
 
 

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 June 30, 2018
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No ý
As of June 30, 2018, there were 478,425,026 shares of the registrant’s Common Stock outstanding.
 
 


TABLE OF CONTENTS
 
 
Page
Item 1.
 
 
 
 
 
 
 
Note 1—Summary of Significant Accounting Policies
 
Note 2—Business Developments and Discontinued Operations
 
Note 3—Investment Securities
 
Note 4—Loans
 
Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments
 
Note 6—Variable Interest Entities and Securitizations
 
Note 7—Goodwill and Intangible Assets
 
Note 8—Deposits and Borrowings
 
Note 9—Derivative Instruments and Hedging Activities
 
Note 10—Stockholders’ Equity
 
Note 11—Earnings Per Common Share
 
Note 12—Fair Value Measurement
 
Note 13—Business Segments and Revenue from Contracts with Customers
 
Note 14—Commitments, Contingencies, Guarantees and Others
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
 
 
Summary of Selected Financial Data
 
Executive Summary and Business Outlook
 
Consolidated Results of Operations
 
Consolidated Balance Sheets Analysis
 
 
Business Segment Financial Performance
 
 
Accounting Changes and Developments
 
Capital Management
 
Risk Management
 
Credit Risk Profile
 
Liquidity Risk Profile
 
Market Risk Profile
 
Supervision and Regulation
 
 
Supplemental Table
 
Glossary and Acronyms
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
 
 
 

 
 
i
Capital One Financial Corporation (COF)


 
 
ii
Capital One Financial Corporation (COF)

INDEX OF MD&A AND SUPPLEMENTAL TABLES
MD&A Tables:
Page
1
Consolidated Financial Highlights
2
Average Balances, Net Interest Income and Net Interest Margin
3
Rate/Volume Analysis of Net Interest Income
4
Non-Interest Income
5
Non-Interest Expense
6
Investment Securities
7
Non-Agency Investment Securities Credit Ratings
8
Loans Held for Investment
9
Funding Sources Composition
10
Business Segment Results
11
Credit Card Business Results
11.1
Domestic Card Business Results
12
Consumer Banking Business Results
13
Commercial Banking Business Results
14
Other Category Results
15
Capital Ratios under Basel III
16
Preferred Stock Dividends Paid Per Share
17
Loans Held for Investment Portfolio Composition
18
Commercial Loans by Industry
19
Credit Score Distribution
20
30+ Day Delinquencies
21
Aging and Geography of 30+ Day Delinquent Loans
22
90+ Day Delinquent Loans Accruing Interest
23
Nonperforming Loans and Other Nonperforming Assets
24
Net Charge-Offs (Recoveries)
25
Troubled Debt Restructurings
26
Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity
27
Allowance Coverage Ratios
28
Liquidity Reserves
29
Deposits Composition and Average Deposits Interest Rates
30
Long-Term Funding
31
Senior Unsecured Long-Term Debt Credit Ratings
32
Interest Rate Sensitivity Analysis
 
 
 
 
A
Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures

 
 
iii
Capital One Financial Corporation (COF)

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

This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “MD&A—Forward-Looking Statements” for more information on the forward-looking statements in this Quarterly Report on Form 10-Q (“this Report”). Our actual results may differ materially from those included in these forward-looking statements due to a variety of factors including, but not limited to, those described in “Part II—Item 1A. Risk Factors” in this Report and in “Part I—Item 1A. Risk Factors” in our 2017 Annual Report on Form 10-K (“2017 Form 10-K”). Unless otherwise specified, references to notes to our consolidated financial statements refer to the notes to our unaudited consolidated financial statements as of June 30, 2018 included in this Report.
 
Management monitors a variety of key indicators to evaluate our business results and financial condition. The following MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and related notes in this Report and the more detailed information contained in our 2017 Form 10-K.
INTRODUCTION
We are a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company”) offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of June 30, 2018, our principal subsidiaries included:
•
Capital One Bank (USA), National Association (“COBNA”), which offers credit and debit card products, other lending products and deposit products; and
•
Capital One, National Association (“CONA”), which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.
The Company is hereafter collectively referred to as “we,” “us” or “our.” COBNA and CONA are collectively referred to as the “Banks.” Certain business terms used in this document are defined in the “MD&A—Glossary and Acronyms” and should be read in conjunction with the consolidated financial statements included in this Report.
Our consolidated total net revenues are derived primarily from lending to consumer and commercial customers net of funding costs associated with interest on deposits, short-term borrowings and long-term debt. We also earn non-interest income which primarily consists of interchange income net of reward expenses, and service charges and other customer-related fees. Our expenses primarily consist of the provision for credit losses, operating expenses, marketing expenses and income taxes.
Our principal operations are organized for management reporting purposes into three major business segments, which are defined primarily based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio, asset/liability management by our centralized Corporate Treasury group and residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments, are included in the Other category.
•
Credit Card: Consists of our domestic consumer and small business card lending, and international card businesses in Canada and the United Kingdom (“U.K.”).
•
Consumer Banking: Consists of our branch-based lending and deposit gathering activities for consumers and small businesses, national deposit gathering and national auto lending.

 
 
1
Capital One Financial Corporation (COF)

•
Commercial Banking: Consists of our lending, deposit gathering, capital markets and treasury management services to commercial real estate and commercial and industrial customers. Our commercial and industrial customers typically include companies with annual revenues between $20 million and $2 billion.
Business Developments
We regularly explore and evaluate opportunities to acquire financial services and financial assets, including credit card and other loan portfolios, and enter into strategic partnerships as part of our growth strategy. We also explore opportunities to acquire digital companies and related assets to improve our information technology infrastructure and to deliver on our digital strategy. In addition, we regularly consider the potential disposition of certain of our assets, branches, partnership agreements or lines of business. We may issue equity or debt, including through one or more public offerings, to fund our acquisitions.
On July 26, 2018, we announced that we entered into a new, long-term credit card program agreement with Walmart Inc. (“Walmart”). Under the terms of the agreement, we will become the exclusive issuer of Walmart’s private label and co-branded credit card program in the U.S. beginning August 1, 2019.
In the fourth quarter of 2017, we announced our decision to cease new originations of residential mortgage and home equity loan products within our Consumer Banking business. In the first quarter of 2018, we sold the substantial majority of the mortgage servicing rights related to loans serviced for others. In the second quarter of 2018, we sold the substantial majority of our consumer home loan portfolio and the related servicing. We also transferred the remaining portfolio to loans held for sale as of June 30, 2018.
On September 25, 2017, we completed the acquisition from Synovus Bank of credit card assets and related liabilities of World’s Foremost Bank, a wholly-owned subsidiary of Cabela’s Incorporated (“Cabela’s acquisition”). The Cabela’s acquisition added approximately $5.7 billion to our domestic credit card loans held for investment portfolio as of the acquisition date.

 
 
2
Capital One Financial Corporation (COF)

SUMMARY OF SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data and performance from our results of operations for the second quarter and first six months of 2018 and 2017 and selected comparative balance sheet data as of June 30, 2018 and December 31, 2017. We also provide selected key metrics we use in evaluating our performance, including certain metrics that are computed using non-GAAP measures. We believe these non-GAAP metrics provide useful insight to investors and users of our financial information in assessing the results of the Company.
Table 1: Consolidated Financial Highlights
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except per share data and as noted)
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Income statement
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
5,551

 
$
5,473

 
1
 %
 
$
11,269

 
$
10,947

 
3
 %
Non-interest income
 
1,641

 
1,231

 
33

 
2,832

 
2,292

 
24

Total net revenue
 
7,192

 
6,704

 
7

 
14,101

 
13,239

 
7

Provision for credit losses
 
1,276

 
1,800

 
(29
)
 
2,950

 
3,792

 
(22
)
Non-interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Marketing
 
425

 
435

 
(2
)
 
839

 
831

 
1

Operating expenses
 
2,999

 
2,979

 
1

 
6,158

 
6,017

 
2

Total non-interest expense
 
3,424

 
3,414

 
—

 
6,997

 
6,848

 
2

Income from continuing operations before income taxes
 
2,492

 
1,490

 
67

 
4,154

 
2,599

 
60

Income tax provision
 
575

 
443

 
30

 
894

 
757

 
18

Income from continuing operations, net of tax
 
1,917

 
1,047

 
83

 
3,260

 
1,842

 
77

Income (loss) from discontinued operations, net of tax
 
(11
)
 
(11
)
 
—

 
(8
)
 
4

 
**

Net income
 
1,906

 
1,036

 
84

 
3,252

 
1,846

 
76

Dividends and undistributed earnings allocated to participating securities
 
(12
)
 
(8
)
 
50

 
(23
)
 
(13
)
 
77

Preferred stock dividends
 
(80
)
 
(80
)
 
—

 
(132
)
 
(133
)
 
(1
)
Net income available to common stockholders
 
$
1,814

 
$
948

 
91

 
$
3,097

 
$
1,700

 
82

Common share statistics
 
 
 
 
 
 
 
 
 
 
 
 

Basic earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
3.76

 
$
1.98

 
90
 %
 
$
6.39

 
$
3.51

 
82
 %
Income (loss) from discontinued operations
 
(0.02
)
 
(0.02
)
 
—

 
(0.02
)
 
0.01

 
**

Net income per basic common share
 
$
3.74

 
$
1.96

 
91

 
$
6.37

 
$
3.52

 
81

Diluted earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
3.73

 
$
1.96

 
90

 
$
6.35

 
$
3.48

 
82

Income (loss) from discontinued operations
 
(0.02
)
 
(0.02
)
 
—

 
(0.02
)
 
0.01

 
**

Net income per diluted common share
 
$
3.71

 
$
1.94

 
91

 
$
6.33

 
$
3.49

 
81

Weighted-average common shares outstanding (in millions):
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
485.1

 
484.0

 
—

 
485.9

 
483.1

 
1
 %
Diluted
 
488.3

 
488.1

 
—

 
489.6

 
487.7

 
—

Common shares outstanding (period-end, in millions)
 
478.4

 
483.7

 
(1
)%
 
478.4

 
483.7

 
(1
)
Dividends declared and paid per common share
 
$
0.40

 
$
0.40

 
—

 
$
0.80

 
$
0.80

 
—

Tangible book value per common share (period-end)(1)
 
63.86

 
60.94

 
5

 
63.86

 
60.94

 
5

Balance sheet (average balances)
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment
 
$
240,758

 
$
242,241

 
(1
)%
 
$
245,218

 
$
241,875

 
1
 %
Interest-earning assets
 
333,495

 
318,078

 
5

 
331,850

 
318,215

 
4

Total assets
 
363,929

 
349,891

 
4

 
362,988

 
350,761

 
3

Interest-bearing deposits
 
223,079

 
214,412

 
4

 
221,384

 
213,696

 
4

Total deposits
 
248,790

 
240,550

 
3

 
247,040

 
239,555

 
3

Borrowings
 
52,333

 
48,838

 
7

 
53,454

 
51,085

 
5

Common equity
 
45,466

 
44,645

 
2

 
45,070

 
44,241

 
2

Total stockholders’ equity
 
49,827

 
49,005

 
2

 
49,431

 
48,602

 
2


 
 
3
Capital One Financial Corporation (COF)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except per share data and as noted)
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Selected performance metrics
 
 
 
 
 
 
 
 
 
 
 
 

Purchase volume(2)
 
$
97,392

 
$
83,079

 
17
 %
 
$
183,937

 
$
156,276

 
18
 %
Total net revenue margin(3)
 
8.63
%
 
8.43
%
 
20
bps
 
8.50
%
 
8.32
%
 
18
bps
Net interest margin(4)
 
6.66

 
6.88

 
(22
)
 
6.79

 
6.88

 
(9
)
Return on average assets
 
2.11

 
1.20

 
91

 
1.80

 
1.05

 
75

Return on average tangible assets(5)
 
2.20

 
1.25

 
95

 
1.87

 
1.10

 
77

Return on average common equity(6)
 
16.06

 
8.59

 
7
 %
 
13.78

 
7.67

 
6
 %
Return on average tangible common equity (“TCE”)(7)
 
23.99

 
13.09

 
11

 
20.70

 
11.75

 
9

Equity-to-assets ratio(8)
 
13.69

 
14.01

 
(32
)bps
 
13.62

 
13.86

 
(24
)bps
Non-interest expense as a percentage of average loans held for investment
 
5.69

 
5.64

 
5

 
5.71

 
5.66

 
5

Efficiency ratio(9)
 
47.61

 
50.92

 
(3
)%
 
49.62

 
51.73

 
(2
)%
Operating efficiency ratio(10)
 
41.70

 
44.44

 
(3
)
 
43.67

 
45.45

 
(2
)
Effective income tax rate from continuing operations
 
23.1

 
29.7

 
(7
)
 
21.5

 
29.1

 
(8
)
Net charge-offs
 
$
1,459

 
$
1,618

 
(10
)
 
$
3,077

 
$
3,128

 
(2
)
Net charge-off rate(11)
 
2.42
%
 
2.67
%
 
(25
)bps
 
2.51
%
 
2.59
%
 
(8
)bps
(Dollars in millions, except as noted)

June 30, 2018
 
December 31, 2017
 
Change
Balance sheet (period-end)
 
 
 
 
 
 
Loans held for investment
 
$
236,124

 
$
254,473

 
(7
)%
Interest-earning assets
 
332,167

 
334,124

 
(1
)
Total assets
 
363,989

 
365,693

 
—

Interest-bearing deposits
 
222,605

 
217,298

 
2

Total deposits
 
248,225

 
243,702

 
2

Borrowings
 
53,310

 
60,281

 
(12
)
Common equity
 
45,566

 
44,370

 
3

Total stockholders’ equity
 
49,926

 
48,730

 
2

Credit quality metrics
 
 
 
 
 


Allowance for loan and lease losses
 
$
7,368

 
$
7,502

 
(2
)%
Allowance as a percentage of loans held for investment (“allowance coverage ratio”)
 
3.12
%
 
2.95
%
 
17
bps
30+ day performing delinquency rate
 
2.88

 
3.23

 
(35
)
30+ day delinquency rate
 
3.05

 
3.48

 
(43
)
Capital ratios
 
 
 
 
 


Common equity Tier 1 capital(12)
 
11.1
%
 
10.3
%
 
80
bps
Tier 1 capital(12)
 
12.6

 
11.8

 
80

Total capital(12)
 
15.1

 
14.4

 
70

Tier 1 leverage(12)
 
10.3

 
9.9

 
40

Tangible common equity(13)
 
8.8

 
8.3

 
50

Supplementary leverage(12)
 
8.8

 
8.4

 
40

Other
 
 
 
 
 


Employees (period end, in thousands)
 
47.8

 
49.3

 
(3
)%
__________
(1) 
Tangible book value per common share is a non-GAAP measure calculated based on tangible common equity divided by common shares outstanding. See “MD&A—Table A —Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information on non-GAAP measures.
(2) 
Purchase volume consists of purchase transactions, net of returns, for the period in our Credit Card business, and excludes cash advance and balance transfer transactions.
(3) 
Total net revenue margin is calculated based on annualized total net revenue for the period divided by average interest-earning assets for the period.
(4) 
Net interest margin is calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.
(5) 
Return on average tangible assets is a non-GAAP measure calculated based on annualized income from continuing operations, net of tax, for the period divided by average tangible assets for the period. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information on non-GAAP measures.

 
 
4
Capital One Financial Corporation (COF)

(6) 
Return on average common equity is calculated based on annualized (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average common equity. Our calculation of return on average common equity may not be comparable to similarly-titled measures reported by other companies.
(7) 
Return on average tangible common equity is a non-GAAP measure calculated based on annualized (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average TCE. Our calculation of return on average TCE may not be comparable to similarly-titled measures reported by other companies. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information on non-GAAP measures.
(8) 
Equity-to-assets ratio is calculated based on average stockholders’ equity for the period divided by average total assets for the period.
(9) 
Efficiency ratio is calculated based on non-interest expense for the period divided by total net revenue for the period.
(10) 
Operating efficiency ratio is calculated based on operating expense for the period divided by total net revenue for the period.
(11) 
Net charge-off rate is calculated by dividing annualized net charge-offs by average loans held for investment for the period for each loan category.
(12) 
Capital ratios are calculated based on the Basel III Standardized Approach framework, subject to applicable transition provision. See “MD&A—Capital Management” for additional information
(13) 
Tangible common equity ratio is a non-GAAP measure calculated based on TCE divided by tangible assets. See “MD&A—Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for the calculation of this measure and reconciliation to the comparative U.S. GAAP measure.
** Not meaningful.
EXECUTIVE SUMMARY AND BUSINESS OUTLOOK
Financial Highlights
We reported net income of $1.9 billion ($3.71 per diluted common share) on total net revenue of $7.2 billion and net income of $3.3 billion ($6.33 per diluted common share) on total net revenue of $14.1 billion for the second quarter and first six months of 2018, respectively. In comparison, we reported net income of $1.0 billion ($1.94 per diluted common share) on total net revenue of $6.7 billion and net income of $1.8 billion ($3.49 per diluted common share) on total net revenue of $13.2 billion for the second quarter and first six months of 2017, respectively.
Our common equity Tier 1 capital ratio as calculated under the Basel III Standardized Approach, including transition provisions, was 11.1% and 10.3% as of June 30, 2018 and December 31, 2017, respectively. See “MD&A—Capital Management” below for additional information.
In the second quarter of 2018, we sold the substantial majority of our consumer home loan portfolio and the related servicing. We also transferred the remaining portfolio of $398 million to loans held for sale as of June 30, 2018. These actions resulted in a net gain of $400 million, including a benefit for credit losses of $46 million, which is reflected in the Other category.
On June 28, 2017, we announced that our Board of Directors authorized the repurchase of up to $1.85 billion of shares of our common stock from the third quarter of 2017 through the end of the second quarter of 2018. In December 2017, the Board of Directors reduced the authorized repurchases of our common stock to up to $1.0 billion for the remaining 2017 Comprehensive Capital Analysis and Review (“CCAR”) period, which ended June 30, 2018 (“2017 Stock Repurchase Program”). Through the end of the second quarter of 2018, we repurchased approximately $1.0 billion of shares of our common stock under the 2017 Stock Repurchase Program. Additionally, on June 28, 2018, we announced that our Board of Directors authorized the repurchase of up to $1.2 billion of shares of our common stock (“2018 Stock Repurchase Program”) beginning the third quarter of 2018 through the end of the second quarter of 2019. See “MD&A—Capital Management—Dividend Policy and Stock Purchases” for additional information.
Below are additional highlights of our performance in the second quarter and first six months of 2018. These highlights are generally based on a comparison between the results of the second quarter and first six months of 2018 and 2017, except as otherwise noted. The changes in our financial condition and credit performance are generally based on our financial condition and credit performance as of June 30, 2018 compared to our financial condition and credit performance as of December 31, 2017. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary and Business Outlook.”

 
 
5
Capital One Financial Corporation (COF)

Total Company Performance
•
Earnings: Our net income increased by $870 million to $1.9 billion in the second quarter of 2018 and increased by $1.4 billion to $3.3 billion in the first six months of 2018 primarily driven by:
◦
lower provision for credit losses driven by the allowance releases in our domestic credit card and auto loan portfolios largely due to improvements in credit trends and lower charge-offs mainly due to elevated charge-offs in the second quarter of 2017 in our oil and gas and taxi medallion lending portfolios;
◦
higher non-interest income largely driven by the net gain from the sale of the substantial majority of our consumer home loan portfolio; and
◦
higher net interest income due to growth in our domestic credit card and auto loan portfolios and higher yields on interest earning assets as a result of higher interest rates, partially offset by higher interest expense due to the net effect of higher interest rates.
•
Loans Held for Investment:
◦
Period-end loans held for investment decreased by $18.3 billion to $236.1 billion as of June 30, 2018 from December 31, 2017 primarily driven by the sale of the substantial majority of our consumer home loan portfolio and the transfer of the remaining portfolio to loans held for sale, as well as seasonal paydowns in our domestic credit card loan portfolio, partially offset by growth in our commercial and auto loan portfolios.
◦
Average loans held for investment decreased by $1.5 billion to $240.8 billion in the second quarter of 2018 compared to the second quarter of 2017 primarily due to growth in our domestic credit card loan portfolio, mainly due to loans obtained in the Cabela’s acquisition, and growth in our auto loan portfolio being more than offset by the impact of the sale of the substantial majority of our consumer home loan portfolio and the transfer of the remaining portfolio to loans held for sale. These same factors drove average loans held for investment to increase by $3.3 billion to $245.2 billion in the first six months of 2018 compared to the first six months of 2017 as the growth in our domestic credit card and auto loan portfolios more than offset the impact of the sale of the substantial majority of our consumer home loan portfolio and the transfer of the remaining portfolio to loans held for sale.
•
Net Charge-Off and Delinquency Metrics: Our net charge-off rate decreased by 25 basis points to 2.42% in the second quarter of 2018 compared to the second quarter of 2017 and decreased by 8 basis points to 2.51% in the first six months of 2018 compared to the first six months of 2017 primarily driven by elevated charge-offs in the second quarter of 2017 in our oil and gas and taxi medallion lending portfolios.
Our 30+ day delinquency rate decreased by 43 basis points to 3.05% as of June 30, 2018 from December 31, 2017 primarily due to seasonally lower delinquency inventories in our domestic credit card and auto loan portfolios, partially offset by the sale of the substantial majority of our consumer home loan portfolio.
•
Allowance for Loan and Lease Losses: Our allowance for loan and lease losses decreased by $134 million to $7.4 billion as of June 30, 2018 from December 31, 2017 primarily driven by an allowance release in our auto loan portfolio largely due to improvements in credit trends and an allowance release due to the sale of the substantial majority of our consumer home loan portfolio.
The allowance coverage ratio increased by 17 basis points to 3.12% as of June 30, 2018 from December 31, 2017 primarily driven by lower loan balances largely due to the sale of the substantial majority of our consumer home loan portfolio and seasonal paydowns in our domestic credit card loan portfolio, partially offset by allowance releases in our auto and domestic credit card loan portfolios.

 
 
6
Capital One Financial Corporation (COF)

Business Outlook
We discuss below our current expectations regarding our total company performance and the performance of our business segments over the near-term based on market conditions, the regulatory environment and our business strategies as of the time we filed this Report. The statements contained in this section are based on our current expectations regarding our outlook for our financial results and business strategies. Our expectations take into account, and should be read in conjunction with, our expectations regarding economic trends and analysis of our business as discussed in “Part I—Item 1. Business” and “Part II—Item 7. MD&A” in our 2017 Form 10-K. Certain statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those in our forward-looking statements. Except as otherwise disclosed, forward-looking statements do not reflect:
•
any change in current dividend or repurchase strategies;
•
the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; or
•
any changes in laws, regulations or regulatory interpretations, in each case after the date as of which such statements are made.
See “MD&A—Forward-Looking Statements” in this Report for more information on the forward-looking statements and “Part I—Item 1A. Risk Factors” in our 2017 Form 10-K for factors that could materially influence our results.
Total Company Expectations
We continue to expect our 2018 corporate annual effective tax rate to be around 20% before discrete items.
After two years of significant improvement, we expect our annual 2018 operating efficiency ratio, net of adjusting items, will be roughly flat compared to our 2017 operating efficiency ratio, net of adjusting items. While efficiency ratio can vary in any given year, over the long term, we continue to believe that we will be able to achieve gradual efficiency improvement driven by growth and digital productivity gains. We expect our long-term improvements in total efficiency ratio will mostly come from an improving operating efficiency ratio.
We continue to expect marketing expense in 2018 will be higher than 2017, with essentially all of the increase coming in the second half of the year.
We believe the increases in deposit costs will continue, which will be a headwind to net interest margin going forward.
Business Segment Expectations
Consumer Banking: In our Consumer Banking business, we expect further increases in average deposit costs driven by higher market rates and increasing competition for deposits, as well as changing product mix as our national banking growth strategy continues to gain traction.
Over the longer term, we continue to expect that the charge-off rate in our auto finance business will increase gradually.
CONSOLIDATED RESULTS OF OPERATIONS
The section below provides a comparative discussion of our consolidated financial performance for the second quarter and first six months of 2018 and 2017. We provide a discussion of our business segment results in the following section, “MD&A—Business Segment Financial Performance.” You should read this section together with our “MD&A—Executive Summary and Business Outlook,” where we discuss trends and other factors that we expect will affect our future results of operations.
Net Interest Income
Net interest income represents the difference between the interest income, including certain fees, earned on our interest-earning assets and the interest expense on our interest-bearing liabilities. Interest-earning assets include loans, investment securities and

 
 
7
Capital One Financial Corporation (COF)

other interest-earning assets, while our interest-bearing liabilities include interest-bearing deposits, securitized debt obligations, senior and subordinated notes, other borrowings, and other interest-bearing liabilities. 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.

 
 
8
Capital One Financial Corporation (COF)

Table 2 below presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balance, interest income earned, interest expense incurred and average yield for the second quarter and first six months of 2018 and 2017. Nonperforming loans are included in the average loan balances below.
Table 2: Average Balances, Net Interest Income and Net Interest Margin
 
 
Three Months Ended June 30,
 
 
2018
 
2017
(Dollars in millions)
 
Average
Balance
 
Interest
Income/
Expense(3)
 
Average Yield/
Rate(3)
 
Average
Balance
 
Interest
Income/
Expense(3)
 
Average Yield/
Rate(3)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:(1)
 
 
 
 
 
 
 
 
 
 
 
 
Credit card
 
$
107,893

 
$
4,062

 
15.06
 %
 
$
100,043

 
$
3,787

 
15.14
%
Consumer banking
 
66,692

 
1,218

 
7.31

 
74,644

 
1,223

 
6.55

Commercial banking(2)
 
67,198

 
744

 
4.43

 
68,220

 
647

 
3.79

Other(2)
 
260

 
(35
)
 
(53.85
)
 
60

 
12

 
80.00

Total loans, including loans held for sale
 
242,043

 
5,989

 
9.90

 
242,967

 
5,669

 
9.33

Investment securities
 
79,829

 
539

 
2.70

 
68,857

 
433

 
2.52

Cash equivalents and other interest-earning assets
 
11,623

 
68

 
2.34

 
6,254

 
26

 
1.66

Total interest-earning assets
 
333,495

 
6,596

 
7.91

 
318,078

 
6,128

 
7.71

Cash and due from banks
 
3,596

 
 
 
 
 
3,314

 
 
 
 
Allowance for loan and lease losses
 
(7,536
)
 
 
 
 
 
(6,982
)
 
 
 
 
Premises and equipment, net
 
4,145

 
 
 
 
 
3,855

 
 
 
 
Other assets
 
30,229

 
 
 
 
 
31,626

 
 
 
 
Total assets
 
$
363,929

 
 
 
 
 
$
349,891

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
223,079

 
$
622

 
1.12
 %
 
$
214,412

 
$
382

 
0.71
%
Securitized debt obligations
 
19,147

 
124

 
2.59

 
18,400

 
82

 
1.78

Senior and subordinated notes
 
32,250

 
289

 
3.58

 
27,821

 
179

 
2.57

Other borrowings and liabilities
 
4,132

 
10

 
0.97

 
3,656

 
12

 
1.31

Total interest-bearing liabilities
 
278,608

 
1,045

 
1.50

 
$
264,289

 
655

 
0.99

Non-interest-bearing deposits
 
25,711

 
 
 
 
 
26,138

 
 
 
 
Other liabilities
 
9,783

 
 
 
 
 
10,459

 
 
 
 
Total liabilities
 
314,102

 
 
 
 
 
300,886

 
 
 
 
Stockholders’ equity
 
49,827

 
 
 
 
 
49,005

 
 
 
 
Total liabilities and stockholders’ equity
 
$
363,929

 
 
 
 
 
$
349,891

 
 
 
 
Net interest income/spread
 
$
5,551

 
6.41

 
 
 
$
5,473

 
6.72

Impact of non-interest-bearing funding
 
0.25

 
 
 
 
 
0.16

Net interest margin
 
6.66
 %
 
 
 
 
 
6.88
%

 
 
9
Capital One Financial Corporation (COF)

 
 
Six Months Ended June 30,
 
 
2018
 
2017
(Dollars in millions)
 
Average
Balance
 
Interest
Income/
Expense(3)
 
Average Yield/
Rate(3)
 
Average
Balance
 
Interest
Income/
Expense(3)
 
Average Yield/
Rate(3)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:(1)
 
 
 
 
 
 
 
 
 
 
 
 
Credit card
 
$
108,693

 
$
8,235

 
15.15
 %
 
$
100,603

 
$
7,577

 
15.06
%
Consumer banking
 
70,875

 
2,504

 
7.07

 
74,081

 
2,413

 
6.51

Commercial banking(2)
 
66,590

 
1,427

 
4.29

 
67,863

 
1,262

 
3.72

Other(2)
 
293

 
(43
)
 
(29.35
)
 
63

 
43

 
136.51

Total loans, including loans held for sale
 
246,451

 
12,123

 
9.84

 
242,610

 
11,295

 
9.31

Investment securities
 
74,731

 
991

 
2.65

 
68,637

 
849

 
2.47

Cash equivalents and other interest-earning assets
 
10,668

 
119

 
2.23

 
6,968

 
54

 
1.55

Total interest-earning assets
 
331,850

 
13,233

 
7.98

 
318,215

 
12,198

 
7.67

Cash and due from banks
 
3,704

 
 
 
 
 
3,400

 
 
 
 
Allowance for loan and lease losses
 
(7,520
)
 
 
 
 
 
(6,749
)
 
 
 
 
Premises and equipment, net
 
4,142

 
 
 
 
 
3,826

 
 
 
 
Other assets
 
30,812

 
 
 
 
 
32,069

 
 
 
 
Total assets
 
$
362,988

 
 
 
 
 
$
350,761

 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
221,384

 
$
1,161

 
1.05
 %
 
$
213,696

 
$
735

 
0.69
%
Securitized debt obligations
 
19,421

 
231

 
2.38

 
17,791

 
151

 
1.70

Senior and subordinated notes
 
31,345

 
540

 
3.45

 
26,321

 
328

 
2.49

Other borrowings and liabilities
 
5,483

 
32

 
1.17

 
7,981

 
37

 
0.93

Total interest-bearing liabilities
 
277,633

 
1,964

 
1.41

 
265,789

 
1,251

 
0.94

Non-interest-bearing deposits
 
25,656

 
 
 
 
 
25,859

 
 
 
 
Other liabilities
 
10,268

 
 
 
 
 
10,511

 
 
 
 
Total liabilities
 
313,557

 
 
 
 
 
302,159

 
 
 
 
Stockholders’ equity
 
49,431

 
 
 
 
 
48,602

 
 
 
 
Total liabilities and stockholders’ equity
 
$
362,988

 
 
 
 
 
$
350,761

 
 
 
 
Net interest income/spread
 
$
11,269

 
6.57

 
 
 
$
10,947

 
6.73

Impact of non-interest-bearing funding
 
0.22

 
 
 
 
 
0.15

Net interest margin
 
6.79
 %
 
 
 
 
 
6.88
%
__________
(1) 
Past due fees included in interest income totaled approximately $387 million and $790 million in the second quarter and first six months of 2018, respectively, and $382 million and $766 million in the second quarter and first six months of 2017, respectively.
(2) 
Some of our commercial loans generate tax-exempt income. Accordingly, we present our Commercial Banking interest income and yields on a taxable-equivalent basis, calculated using the federal statutory rate (21% and 35% for all periods presented in 2018 and 2017, respectively) and state taxes where applicable, with offsetting reductions to the Other category. Taxable-equivalent adjustments included in the interest income and yield computations for our Commercial banking loans totaled approximately $21 million and $41 million in the second quarter and first six months of 2018, respectively, and $32 million and $64 million in the second quarter and first six months of 2017, respectively, with corresponding reductions to Other category.
(3) 
Interest income and interest expense and the calculation of average yields on interest-earning assets and average rates on interest-bearing liabilities include the impact of hedge accounting. In the first quarter of 2018, we adopted Accounting Standards Update (“ASU”) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. As a result, interest income and interest expense amounts shown above for the three months ended June 30, 2018 include $2 million and $16 million, respectively, and for the six months ended June 30, 2018 include $3 million and $46 million, respectively, related to hedge ineffectiveness that would previously have been included in other non-interest income.

 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
10
Capital One Financial Corporation (COF)

Net interest income increased by $78 million to $5.6 billion in the second quarter of 2018 compared to the second quarter of 2017 and increased by $322 million to $11.3 billion in the first six months of 2018 compared to the first six months of 2017 primarily driven by higher interest income due to growth in our domestic credit card and auto loan portfolios, and higher yields as a result of higher interest rates, partially offset by higher interest expense due to the net effect of higher interest rates.
Net interest margin decreased by 22 basis points to 6.66% in the second quarter of 2018 compared to the second quarter of 2017 and decreased by 9 basis points to 6.79% in the first six months of 2018 compared to the first six months of 2017 primarily driven by higher interest expense due to the net effect of higher interest rates, partially offset by product mix changes and higher yields in our interest-earning assets.
Table 3 displays the change in our net interest income between periods and the extent to which the variance is attributable to:
•
changes in the volume of our interest-earning assets and interest-bearing liabilities; or
•
changes in the interest rates related to these assets and liabilities.
Table 3: Rate/Volume Analysis of Net Interest Income(1)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018 vs. 2017
 
2018 vs. 2017
(Dollars in millions)
 
Total Variance
 
Volume
 
Rate
 
Total Variance
 
Volume
 
Rate
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Loans:(1)
 
 
 
 
 
 
 
 
 
 
 
 
Credit card
 
$
275

 
$
296

 
$
(21
)
 
$
658

 
$
613

 
$
45

Consumer banking
 
(5
)
 
(130
)
 
125

 
91

 
(104
)
 
195

Commercial banking(2)
 
97

 
(10
)
 
107

 
165

 
(24
)
 
189

Other(2)
 
(47
)
 
(27
)
 
(20
)
 
(86
)
 
(34
)
 
(52
)
Total loans, including loans held for sale
 
320

 
129

 
191

 
828

 
451

 
377

Investment securities
 
106

 
72

 
34

 
142

 
78

 
64

Cash equivalents and other interest-earning assets
 
42

 
27

 
15

 
65

 
34

 
31

Total interest income
 
468

 
228

 
240

 
1,035

 
563

 
472

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
240

 
16

 
224

 
426

 
27

 
399

Securitized debt obligations
 
42

 
3

 
39

 
80

 
15

 
65

Senior and subordinated notes
 
110

 
32

 
78

 
212

 
70

 
142

Other borrowings and liabilities
 
(2
)
 
1

 
(3
)
 
(5
)
 
(12
)
 
7

Total interest expense
 
390

 
52

 
338

 
713

 
100

 
613

Net interest income
 
$
78

 
$
176

 
$
(98
)
 
$
322

 
$
463

 
$
(141
)
__________
(1) 
We calculate the change in interest income and interest expense separately for each item. The portion of interest income or interest expense attributable to both volume and rate is allocated proportionately when the calculation results in a positive value. When the portion of interest income or interest expense attributable to both volume and rate results in a negative value, the total amount is allocated to volume or rate, depending on which amount is positive.
(2) 
Some of our commercial loans generate tax-exempt income. Accordingly, we present our Commercial Banking interest income and yields on a taxable-equivalent basis, calculated using the federal statutory rate (21% and 35% for all periods presented in 2018 and 2017, respectively) and state taxes where applicable, with offsetting reductions to the Other category.

 
 
11
Capital One Financial Corporation (COF)

Non-Interest Income
Table 4 displays the components of non-interest income for the second quarter and first six months of 2018 and 2017.
Table 4: Non-Interest Income
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2018
 
2017
 
2018
 
2017
Interchange fees, net
 
$
723

 
$
676

 
$
1,366

 
$
1,246

Service charges and other customer-related fees
 
391

 
418

 
823

 
789

Net securities gains (losses)
 
(1
)
 
(4
)
 
7

 
(4
)
Other non-interest income:
 
 
 
 
 
 
 
 
Mortgage banking revenue
 
440

 
41

 
478

 
110

Treasury and other investment income
 
38

 
36

 
46

 
50

Other
 
50

 
64

 
112

 
101

Total other non-interest income
 
528

 
141

 
636

 
261

Total non-interest income
 
$
1,641

 
$
1,231

 
$
2,832

 
$
2,292

Non-interest income increased by $410 million to $1.6 billion in the second quarter of 2018 compared to the second quarter of 2017 and increased by $540 million to $2.8 billion in the first six months of 2018 compared to the first six months of 2017 primarily driven by:
•
the net gain from the sale of the substantial majority of our consumer home loan portfolio; and
•
an increase in net interchange fees primarily due to higher purchase volume.
Provision for Credit Losses
Our provision for credit losses in each period is driven by net charge-offs and changes to the allowance for loan and lease losses and the reserve for unfunded lending commitments. We recorded a provision for credit losses of $1.3 billion and $3.0 billion in the second quarter and first six months of 2018, respectively, compared to $1.8 billion and $3.8 billion in the second quarter and first six months of 2017, respectively. The provision for credit losses as a percentage of net interest income was 23.0% and 26.2% in the second quarter and first six months of 2018, respectively, compared to 32.9% and 34.6% in the second quarter and first six months of 2017, respectively.
Our provision for credit losses decreased by $524 million in the second quarter of 2018 compared to the second quarter of 2017 and decreased by $842 million in the first six months of 2018 compared to the first six months of 2017 primarily driven by:
•
allowance releases in our domestic credit card and auto loan portfolios largely due to improvements in credit trends; and
•
elevated charge-offs in the second quarter of 2017 in our oil and gas and taxi medallion lending portfolios.
We provide additional information on the provision for credit losses and changes in the allowance for loan and lease losses within “MD&A—Credit Risk Profile,” “Note 4—Loans” and “Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments.” For information on the allowance methodology for each of our loan categories, see “Note 1—Summary of Significant Accounting Policies” in our 2017 Form 10-K.

 
 
12
Capital One Financial Corporation (COF)

Non-Interest Expense
Table 5 displays the components of non-interest expense for the second quarter and first six months of 2018 and 2017.
Table 5: Non-Interest Expense
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2018
 
2017
 
2018
 
2017
Salaries and associate benefits
 
$
1,430

 
$
1,383

 
$
2,950

 
$
2,854

Occupancy and equipment
 
503

 
474

 
993

 
945

Marketing
 
425

 
435

 
839

 
831

Professional services
 
234

 
279

 
444

 
526

Communications and data processing
 
317

 
289

 
623

 
577

Amortization of intangibles
 
43

 
61

 
87

 
123

Other non-interest expense:
 
 
 
 
 
 
 
 
Bankcard, regulatory and other fee assessments
 
65

 
146

 
234

 
282

Collections
 
104

 
88

 
212

 
173

Fraud losses
 
89

 
78

 
186

 
156

Other
 
214

 
181

 
429

 
381

Total other non-interest expense
 
472

 
493

 
1,061

 
992

Total non-interest expense
 
$
3,424

 
$
3,414

 
$
6,997

 
$
6,848

Non-interest expense remained flat at $3.4 billion in the second quarter of 2018.
Non-interest expense increased by $149 million to $7.0 billion in the first six months of 2018 compared to the first six months of 2017 primarily due to:
•
higher operating expenses associated with loan growth, as well as continued investments in technology and infrastructure; and
•
restructuring activities, which primarily consisted of severance and related benefits pursuant to our ongoing benefit programs, that are the result of exiting certain business activities and locations.
These increases were partially offset by lower bankcard, regulatory and other fee assessments.
Income Taxes
We recorded income tax provisions of $575 million (23.1% effective income tax rate) and $894 million (21.5% effective income tax rate) in the second quarter and first six months of 2018, respectively, compared to $443 million (29.7% effective income tax rate) and $757 million (29.1% effective income tax rate) in the second quarter and first six months of 2017, respectively.
The decrease in our effective income tax rate in the second quarter and first six months of 2018 compared to the second quarter and first six months of 2017 was primarily due to the federal statutory tax rate decrease from 35% to 21% as a result of the Tax Act, partially offset by higher income relative to our tax credits and higher discrete tax expense.
We provide additional information on items affecting our income taxes and effective tax rate in “Note 16—Income Taxes” in our 2017 Form 10-K.

 
 
13
Capital One Financial Corporation (COF)

CONSOLIDATED BALANCE SHEETS ANALYSIS
Total assets decreased by $1.7 billion to $364.0 billion as of June 30, 2018 from December 31, 2017 primarily attributable to a decrease in loans held for investment driven by the sale of the substantial majority of our consumer home loan portfolio and expected seasonal paydowns in our domestic credit card loan portfolio, partially offset by an increase in investment securities and growth in our commercial and auto loan portfolios.
Total liabilities decreased by $2.9 billion to $314.1 billion as of June 30, 2018 from December 31, 2017 primarily driven by a decrease in our Federal Home Loan Banks (“FHLB”) advances outstanding, which are included in other debt. This decrease was partially offset by:
•
deposit growth in our Consumer Banking business; and
•
net issuances of senior and subordinated notes.
Stockholders’ equity increased by $1.2 billion to $49.9 billion as of June 30, 2018 from December 31, 2017 primarily due to our net income of $3.3 billion in the first six months of 2018. This driver was partially offset by:
•
treasury stock purchases and dividend payments to our stockholders; and
•
unrealized losses on our available for sale securities and cash flow hedges included in accumulated other comprehensive loss primarily driven by higher interest rates.
The following is a discussion of material changes in the major components of our assets and liabilities during the first six months of 2018. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to ensure the adequacy of capital while managing the liquidity requirements of the Company, our customers and our market risk exposure in accordance with our risk appetite.
Investment Securities
Our investment securities portfolio consists primarily of the following: U.S. Treasury securities; U.S. government-sponsored enterprise or agency (“Agency”) and non-agency residential mortgage-backed securities (“RMBS”); Agency commercial mortgage-backed securities (“CMBS”); other asset-backed securities (“ABS”); and other securities. Agency securities include Government National Mortgage Association (“Ginnie Mae”) guaranteed securities, Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) issued securities. The carrying value of our investments in U.S. Treasury and Agency securities represented 96% and 95% of our total investment securities as of June 30, 2018 and December 31, 2017, respectively.
The fair value of our available for sale securities portfolio increased by $13.0 billion to $50.7 billion as of June 30, 2018 from December 31, 2017 primarily due to a one-time transfer of held to maturity securities to available for sale as a result of our adoption of ASU No. 2017-12. The fair value of our held to maturity securities portfolio increased by $3.7 billion to $33.1 billion as of June 30, 2018 from December 31, 2017 primarily driven by purchases in the second quarter of 2018 as we invested a portion of the proceeds from the sale of the substantial majority of our consumer home loan portfolio into securities, partially offset by the one-time transfer to available for sale.

 
 
14
Capital One Financial Corporation (COF)

Table 6 presents the amortized cost, carrying value and fair value for the major categories of our investment securities portfolio as of June 30, 2018 and December 31, 2017.
Table 6: Investment Securities
 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Investment securities available for sale:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
8,603

 
$
8,624

 
$
5,168

 
$
5,171

RMBS:
 
 
 
 
 
 
 
 
Agency
 
34,870

 
33,742

 
26,013

 
25,678

Non-agency
 
1,563

 
1,940

 
1,722

 
2,114

Total RMBS
 
36,433

 
35,682

 
27,735

 
27,792

Agency CMBS
 
4,858

 
4,763

 
3,209

 
3,175

Other ABS
 
296

 
294

 
513

 
512

Other securities(1)
 
1,331

 
1,328

 
1,003

 
1,005

Total investment securities available for sale
 
$
51,521

 
$
50,691

 
$
37,628

 
$
37,655

 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Carrying Value
 
Fair
Value
 
Carrying Value
 
Fair
Value
Investment securities held to maturity:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
—

 
—

 
$
200

 
$
200

Agency RMBS
 
$
30,377

 
$
30,108

 
24,980

 
25,395

Agency CMBS
 
3,087

 
2,989

 
3,804

 
3,842

Total investment securities held to maturity
 
$
33,464

 
$
33,097

 
$
28,984

 
$
29,437

__________
(1) 
Includes primarily supranational bonds and foreign government bonds.
Credit Ratings
Our portfolio of investment securities continues to be concentrated in securities that generally have high credit ratings and low credit risk, such as securities issued and guaranteed by the U.S. Treasury and Agencies. We categorize the credit ratings of our investment securities based on the credit ratings issued by Standard & Poor’s Ratings Services (“S&P”) as of June 30, 2018 and the lower of the credit ratings issued by S&P and Moody’s Investors Service (“Moody’s”) as of December 31, 2017.
Approximately 97% and 96% of our total investment securities portfolio was rated AA+ or its equivalent, or better, as of June 30, 2018 and December 31, 2017, respectively, while approximately 2% and 3% was below investment grade as of June 30, 2018 and December 31, 2017, respectively.

 
 
15
Capital One Financial Corporation (COF)

Table 7 provides information on the credit ratings of our non-agency RMBS, other ABS and other securities in our portfolio as of June 30, 2018 and December 31, 2017.
Table 7: Non-Agency Investment Securities Credit Ratings
 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
Fair Value
 
AAA
 
Other
Investment
Grade
 
Below
Investment
Grade/Not Rated(1)
 
Fair Value
 
AAA
 
Other
Investment
Grade
 
Below
Investment
Grade/Not Rated(1)
Non-agency RMBS
 
$
1,940

 
—

 
6
%
 
94
%
 
$
2,114

 
—

 
3
%
 
97
%
Other ABS
 
294

 
59
%
 
—

 
41

 
512

 
100
%
 
—

 
—

Other securities
 
1,328

 
88

 
12

 
—

 
1,005

 
71

 
19

 
10

__________
(1) 
Includes investment securities that were not rated by S&P as of June 30, 2018 and investment securities not rated by S&P or Moody’s as of December 31, 2017. There were no new additions nor downgrades to other ABS in the first six months of 2018.
For additional information on our investment securities, see “Note 3—Investment Securities.”
Loans Held for Investment
Total loans held for investment consist of both unsecuritized loans and loans held in our consolidated trusts. Table 8 summarizes the carrying value of our portfolio of loans held for investment by portfolio segment, the allowance for loan and lease losses, and net loan balances as of June 30, 2018 and December 31, 2017.
Table 8: Loans Held for Investment
 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
Loans
 
Allowance
 
Net Loans
 
Loans
 
Allowance
 
Net Loans
Credit Card
 
$
109,777

 
$
5,624

 
$
104,153

 
$
114,762

 
$
5,648

 
$
109,114

Consumer Banking
 
58,727

 
1,120

 
57,607

 
75,078

 
1,242

 
73,836

Commercial Banking
 
67,609

 
624

 
66,985

 
64,575

 
611

 
63,964

Other
 
11

 
—

 
11

 
58

 
1

 
57

Total
 
$
236,124

 
$
7,368

 
$
228,756

 
$
254,473

 
$
7,502

 
$
246,971

Loans held for investment decreased by $18.3 billion to $236.1 billion as of June 30, 2018 from December 31, 2017 primarily driven by the sale of the substantial majority of our consumer home loan portfolio and the transfer of the remaining portfolio to loans held for sale and expected seasonal paydowns in our domestic credit card loan portfolio, partially offset by growth in our commercial and auto loan portfolios.
We provide additional information on the composition of our loan portfolio and credit quality below in “MD&A—Credit Risk Profile,” “MD&A—Consolidated Results of Operations” and “Note 4—Loans.”
Funding Sources
Our primary source of funding comes from deposits, which provide a stable and relatively low cost of funds. In addition to deposits, we also raise funding through the issuance of securitized debt obligations and other debt. Other debt primarily consists of senior and subordinated notes, FHLB advances secured by certain portions of our loan and securities portfolios, and federal funds purchased and securities loaned or sold under agreements to repurchase.

 
 
16
Capital One Financial Corporation (COF)

Table 9 provides the composition of our primary sources of funding as of June 30, 2018 and December 31, 2017.
Table 9: Funding Sources Composition
 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
Amount
 
% of Total
 
Amount
 
% of Total
Deposits:(1)
 
 
 
 
 
 
 
 
Consumer Banking
 
$
194,962

 
65
%
 
$
185,842

 
61
%
Commercial Banking
 
31,078

 
10

 
33,938

 
11

Other
 
22,185

 
7

 
23,922

 
8

Total deposits
 
248,225

 
82

 
243,702

 
80

Securitized debt obligations
 
19,649

 
7

 
20,010

 
7

Other debt
 
33,661

 
11

 
40,271

 
13

Total funding sources
 
$
301,535

 
100
%
 
$
303,983

 
100
%
__________
(1) 
Includes brokered deposits of $23.3 billion and $25.1 billion as of June 30, 2018 and December 31, 2017, respectively.
Total deposits increased by $4.5 billion to $248.2 billion as of June 30, 2018 from December 31, 2017 primarily driven by growth in our deposit products that are sold to both existing and new customers in our Consumer Banking business.
Securitized debt obligations remained relatively flat at $19.6 billion as of June 30, 2018.
Other debt decreased by $6.6 billion to $33.7 billion as of June 30, 2018 from December 31, 2017 primarily driven by a decrease in our FHLB advances outstanding, partially offset by senior and subordinated notes issuances.
We provide additional information on our funding sources in “MD&A—Liquidity Risk Profile” and in “Note 8—Deposits and Borrowings.”
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, we engage in certain activities that are not reflected on our consolidated balance sheets, generally referred to as off-balance sheet arrangements. These activities typically involve transactions with unconsolidated variable interest entities (“VIEs”) as well as other arrangements, such as letters of credit, loan commitments and guarantees, to meet the financing needs of our customers and support their ongoing operations. We provide additional information regarding these types of activities in “Note 6—Variable Interest Entities and Securitizations” and “Note 14—Commitments, Contingencies, Guarantees and Others.”
BUSINESS SEGMENT FINANCIAL PERFORMANCE
Our principal operations are organized for management reporting purposes into three major business segments, which are defined primarily based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio, asset/liability management by our centralized Corporate Treasury group and residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments, are included in the Other category.
The results of our individual businesses, which we report on a continuing operations basis, reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 18—Business Segments” in our 2017 Form 10-K.

 
 
17
Capital One Financial Corporation (COF)

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.
We summarize our business segment results for the second quarter and first six months of 2018 and 2017 and provide a comparative discussion of these results, as well as changes in our financial condition and credit performance metrics as of June 30, 2018 compared to December 31, 2017. We provide a reconciliation of our total business segment results to our reported consolidated results in “Note 13—Business Segments and Revenue from Contracts with Customers.”
Business Segment Financial Performance
Table 10 summarizes our business segment results, which we report based on revenue and net income from continuing operations, for the second quarter and first six months of 2018 and 2017.
Table 10: Business Segment Results
 
 
Three Months Ended June 30,
 
 
2018
 
2017
 
 
Total Net
Revenue(1)
 
Net Income(2)
 
Total Net
Revenue(1)
 
Net Income(2)
(Dollars in millions)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Credit Card
 
$
4,280

 
59
%
 
$
923

 
48
%
 
$
4,169

 
63
%
 
$
553

 
53
%
Consumer Banking
 
1,784

 
25

 
539

 
28

 
1,761

 
26

 
276

 
26

Commercial Banking(3)(4)
 
758

 
11

 
242

 
13

 
752

 
11

 
146

 
14

Other(3)(4)
 
370

 
5

 
213

 
11

 
22

 
—

 
72

 
7

Total
 
$
7,192

 
100
%
 
$
1,917

 
100
%
 
$
6,704

 
100
%
 
$
1,047

 
100
%
 
 
Six Months Ended June 30,
 
 
2018
 
2017
 
 
Total Net
Revenue(1)
 
Net Income(2)
 
Total Net
Revenue(1)
 
Net Income(2)
(Dollars in millions)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Credit Card
 
$
8,695

 
62
%
 
$
1,630

 
50
%
 
$
8,253

 
63
%
 
$
824

 
45
%
Consumer Banking
 
3,573

 
25

 
965

 
30

 
3,473

 
26

 
524

 
28

Commercial Banking(3)(4)
 
1,481

 
11

 
498

 
15

 
1,476

 
11

 
359

 
20

Other(3)(4)
 
352

 
2

 
167

 
5

 
37

 
—

 
135

 
7

Total
 
$
14,101

 
100
%
 
$
3,260

 
100
%
 
$
13,239

 
100
%
 
$
1,842

 
100
%
________
(1) 
Total net revenue consists of net interest income and non-interest income.
(2) 
Net income for our business segments and the Other category is based on income from continuing operations, net of tax.
(3) 
Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate (21% and 35% for all periods presented in 2018 and 2017, respectively) and state taxes where applicable, with offsetting reductions to the Other category.
(4) 
In the first quarter of 2018, we made a change in how revenue is measured in our Commercial Banking business to include the tax benefits of losses on certain tax-advantaged investments. These tax benefits are included in revenue on a taxable-equivalent basis within our Commercial Banking business, with an offsetting reduction to the Other category. In addition, all revenue presented on a taxable-equivalent basis in our Commercial Banking business was impacted by the reduction of the federal tax rate set forth in the Tax Act. The net impact of the measurement change and the reduction of the federal tax rate was a decrease of $28 million and $56 million in revenue in our Commercial Banking business in the second quarter and first six months of 2018, respectively, with an offsetting impact to the Other category.

 
 
18
Capital One Financial Corporation (COF)

Credit Card Business
The primary sources of revenue for our Credit Card business are interest income, net interchange income and fees collected from customers. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses.
Our Credit Card business generated net income from continuing operations of $923 million and $1.6 billion in the second quarter and first six months of 2018, respectively, and $553 million and $824 million in the second quarter and first six months of 2017, respectively.
Table 11 summarizes the financial results of our Credit Card business and displays selected key metrics for the periods indicated.
Table 11: Credit Card Business Results
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except as noted)
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Selected income statement data:
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
3,396

 
$
3,294

 
3
 %
 
$
6,954

 
$
6,640

 
5
 %
Non-interest income
 
884

 
875

 
1

 
1,741

 
1,613

 
8

Total net revenue(1)
 
4,280

 
4,169

 
3

 
8,695

 
8,253

 
5

Provision for credit losses
 
1,171

 
1,397

 
(16
)
 
2,627

 
3,114

 
(16
)
Non-interest expense
 
1,904

 
1,918

 
(1
)
 
3,943

 
3,847

 
2

Income from continuing operations before income taxes
 
1,205

 
854

 
41

 
2,125

 
1,292

 
64

Income tax provision
 
282

 
301

 
(6
)
 
495

 
468

 
6

Income from continuing operations, net of tax
 
$
923

 
$
553

 
67

 
$
1,630

 
$
824

 
98

Selected performance metrics:
 
 
 
 
 
 
 
 
 
 
 
 
Average loans held for investment(2)
 
$
107,893

 
$
100,043

 
8

 
$
108,693

 
$
100,603

 
8

Average yield on loans held for investment(3)
 
15.06
%
 
15.14
%
 
(8
)bps
 
15.15
%
 
15.06
%
 
9
bps
Total net revenue margin(4)
 
15.87

 
16.67

 
(80
)
 
16.00

 
16.41

 
(41
)
Net charge-offs
 
$
1,260

 
$
1,256

 
—

 
$
2,637

 
$
2,527

 
4
 %
Net charge-off rate
 
4.67
%
 
5.02
%
 
(35
)bps
 
4.85
%
 
5.02
%
 
(17
)bps
Purchase volume(5)
 
$
97,392

 
$
83,079

 
17
 %
 
$
183,937

 
$
156,276

 
18
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions, except as noted)
 
June 30,
2018
 
December 31, 2017
 
Change
 
 
 
 
 
 
Selected period-end data:
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment(2)
 
$
109,777

 
$
114,762

 
(4
)%
 
 
 
 
 

30+ day performing delinquency rate
 
3.32
%
 
3.98
%
 
(66
)bps
 
 
 
 
 


30+ day delinquency rate
 
3.33

 
3.99

 
(66
)
 
 
 
 
 

Nonperforming loan rate(6)
 
0.02

 
0.02

 
—

 
 
 
 
 


Allowance for loan and lease losses
 
$
5,624

 
$
5,648

 
—

 
 
 
 
 

Allowance coverage ratio
 
5.12
%
 
4.92
%
 
20
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 $309 million and $644 million in the second quarter and first six months of 2018, respectively, and by $313 million and $634 million in the second quarter and first six months of 2017, respectively, for the estimated uncollectible amount of billed finance charges and fees and related losses. The finance charge and fee reserve totaled $416 million and $491 million as of June 30, 2018 and December 31, 2017, respectively.
(2) 
Period-end loans held for investment and average loans held for investment include billed finance charges and fees, net of the estimated uncollectible amount.
(3) 
Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(4) 
Total net revenue margin is calculated by dividing annualized total net revenue for the period by average loans held for investment during the period. Interest income also includes interest income on loans held for sale.

 
 
19
Capital One Financial Corporation (COF)

(5) 
Purchase volume consists of purchase transactions, net of returns, for the period, and excludes cash advance and balance transfer transactions.
(6) 
Within our credit card loan portfolio, only certain loans in our international card businesses are classified as nonperforming. See “MD&A—Nonperforming Loans and Other Nonperforming Assets” for additional information.
Key factors affecting the results of our Credit Card business for the second quarter and first six months of 2018 compared to the second quarter and first six months of 2017, and changes in financial condition and credit performance between June 30, 2018 and December 31, 2017 include the following:
•
Net Interest Income: Net interest income increased by $102 million to $3.4 billion in the second quarter of 2018 and increased by $314 million to $7.0 billion in the first six months of 2018 primarily driven by loan growth in our Domestic Card business, including loans obtained in the Cabela’s acquisition.
•
Non-Interest Income: Non-interest income was substantially flat at $884 million in the second quarter of 2018 as an increase in net interchange fees primarily due to higher purchase volume was offset by lower service charges and other customer-related fees.
Non-interest income increased by $128 million to $1.7 billion in the first six months of 2018 primarily driven by an increase in net interchange fees due to higher purchase volume.
•
Provision for Credit Losses: The provision for credit losses decreased by $226 million to $1.2 billion in the second quarter of 2018 and decreased by $487 million to $2.6 billion in the first six months of 2018 primarily driven by an allowance release in our domestic credit card loan portfolio largely due to improvements in credit trends .
•
Non-Interest Expense: Non-interest expense was substantially flat at $1.9 billion in the second quarter of 2018.
Non-interest expense increased by $96 million to $3.9 billion in the first six months of 2018 primarily driven by higher operating expenses associated with loan growth and continued investments in technology and infrastructure, as well as costs associated with the acquired Cabela’s portfolio.
•
Loans Held for Investment: Period-end loans held for investment decreased by $5.0 billion to $109.8 billion as of June 30, 2018 from December 31, 2017 primarily due to expected seasonal paydowns in our domestic credit card loan portfolio.
Average loans held for investment increased by $7.9 billion to $107.9 billion in the second quarter of 2018 compared to the second quarter of 2017 and increased by $8.1 billion to $108.7 billion in the first six months of 2018 compared to the first six months of 2017 primarily due to growth in our domestic credit card loan portfolio largely driven by loans obtained in the Cabela’s acquisition.
•
Net Charge-Off and Delinquency Metrics: The net charge-off rate decreased by 35 basis points to 4.67% in the second quarter of 2018 compared to the second quarter of 2017 primarily driven by the loans obtained in the Cabela’s acquisition, which have a lower charge-off rate, and favorability realized from portfolio seasoning.
The net charge-off rate decreased by 17 basis points to 4.85% in the first six months of 2018 compared to the first six months of 2017 primarily driven by the loans obtained in the Cabela’s acquisition, which have a lower charge-off rate.
The 30+ day delinquency rate decreased by 66 basis points to 3.33% as of June 30, 2018 from December 31, 2017 primarily driven by seasonally lower delinquency inventories and improvements in credit trends in our domestic credit card loan portfolio.
Domestic Card Business
Domestic Card generated net income from continuing operations of $881 million and $1.5 billion in the second quarter and first six months of 2018, respectively, compared to net income from continuing operations of $482 million and $760 million in the second quarter and first six months of 2017, respectively. In the second quarter and first six months of 2018 and 2017, Domestic Card accounted for greater than 90% of total net revenue of our Credit Card business.

 
 
20
Capital One Financial Corporation (COF)

Table 11.1 summarizes the financial results for Domestic Card and displays selected key metrics for the periods indicated.
Table 11.1: Domestic Card Business Results
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except as noted)
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Selected income statement data:
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
3,108

 
$
3,011

 
3
 %
 
$
6,337

 
$
6,104

 
4
 %
Non-interest income
 
818

 
802

 
2

 
1,592

 
1,501

 
6

Total net revenue(1)
 
3,926

 
3,813

 
3

 
7,929

 
7,605

 
4

Provision for credit losses
 
1,094

 
1,327

 
(18
)
 
2,474

 
2,964

 
(17
)
Non-interest expense
 
1,683

 
1,727

 
(3
)
 
3,515

 
3,444

 
2

Income from continuing operations before income taxes
 
1,149

 
759

 
51

 
1,940

 
1,197

 
62

Income tax provision
 
268

 
277

 
(3
)
 
452

 
437

 
3

Income from continuing operations, net of tax
 
$
881

 
$
482

 
83

 
$
1,488

 
$
760

 
96

Selected performance metrics:
 
 
 
 
 
 
 
 
 
 
 
 
Average loans held for investment(2)
 
$
98,895

 
$
91,769

 
8

 
$
99,668

 
$
92,398

 
8

Average yield on loans held for investment(3)
 
15.05
%
 
15.07
%
 
(2
)bps
 
15.07
%
 
15.04
%
 
3
bps
Total net revenue margin(4)
 
15.88

 
16.62

 
(74
)
 
15.91

 
16.46

 
(55
)
Net charge-offs
 
$
1,166

 
$
1,172

 
(1
)%
 
$
2,487

 
$
2,368

 
5
 %
Net charge-off rate
 
4.72
%
 
5.11
%
 
(39
)bps
 
4.99
%
 
5.12
%
 
(13
)bps
Purchase volume(5)
 
$
88,941

 
$
75,781

 
17
 %
 
$
168,135

 
$
142,731

 
18
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions, except as noted)
 
June 30,
2018
 
December 31, 2017
 
Change
 
 
 
 
 
 
Selected period-end data:
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment(2)
 
$
100,714

 
$
105,293

 
(4
)%
 
 
 
 
 
 
30+ day delinquency rate
 
3.32
%
 
4.01
%
 
(69
)bps
 
 
 
 
 
 
Allowance for loan and lease losses
 
$
5,260

 
$
5,273

 
—

 
 
 
 
 
 
Allowance coverage ratio
 
5.22
%
 
5.01
%
 
21
bps
 
 
 
 
 
 
__________
(1) 
We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in revenue and is not included in our net charge-offs.
(2) 
Period-end loans held for investment and average loans held for investment include billed finance charges and fees, net of the estimated uncollectible amount.
(3) 
Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(4) 
Total net revenue margin is calculated by dividing annualized total net revenue for the period by average loans held for investment during the period.
(5) 
Purchase volume consists of purchase transactions, net of returns, for the period, and excludes cash advance and balance transfer transactions.
Because our Domestic Card business accounts for the substantial majority of our Credit Card business, the key factors driving the results are similar to the key factors affecting our total Credit Card business. Net income for our Domestic Card business increased in the second quarter of 2018 compared to the second quarter of 2017 primarily driven by:
•
lower provision for credit losses;
•
higher net interest income primarily driven by loan growth; and
•
lower non-interest expense primarily driven by lower fee assessments.

 
 
21
Capital One Financial Corporation (COF)

Net income for our Domestic Card business increased in the first six months of 2018 compared to the first six months of 2017 primarily driven by:
•
lower provision for credit losses;
•
higher net interest income primarily driven by loan growth, including loans obtained in the Cabela’s acquisition; and
•
higher non-interest income driven by an increase in net interchange fees primarily due to higher purchase volume.
These drivers were partially offset by higher non-interest expense.
Consumer Banking Business
The primary sources of revenue for our Consumer Banking business are net interest income from loans and deposits and non-interest income from service charges and customer-related fees. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses.
Our Consumer Banking business generated net income from continuing operations of $539 million and $965 million in the second quarter and first six months of 2018, respectively, and $276 million and $524 million in the second quarter and first six months of 2017, respectively.
Table 12 summarizes the financial results of our Consumer Banking business and displays selected key metrics for the periods indicated.
Table 12: Consumer Banking Business Results
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except as noted)
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Selected income statement data:
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
1,609

 
$
1,578

 
2
 %
 
$
3,224

 
$
3,095

 
4
 %
Non-interest income
 
175

 
183

 
(4
)
 
349

 
378

 
(8
)
Total net revenue
 
1,784

 
1,761

 
1

 
3,573

 
3,473

 
3

Provision for credit losses
 
118

 
268

 
(56
)
 
351

 
547

 
(36
)
Non-interest expense
 
963

 
1,059

 
(9
)
 
1,963

 
2,101

 
(7
)
Income from continuing operations before income taxes
 
703

 
434

 
62

 
1,259

 
825

 
53

Income tax provision
 
164

 
158

 
4

 
294

 
301

 
(2
)
Income from continuing operations, net of tax
 
$
539

 
$
276

 
95

 
$
965

 
$
524

 
84

Selected performance metrics:
 
 
 
 
 
 
 
 
 
 
 
 
Average loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
$
55,298

 
$
50,803

 
9

 
$
54,824

 
$
49,743

 
10

Home loan(1)
 
8,098

 
20,203

 
(60
)
 
12,635

 
20,674

 
(39
)
Retail banking
 
3,084

 
3,463

 
(11
)
 
3,256

 
3,486

 
(7
)
Total consumer banking
 
$
66,480

 
$
74,469

 
(11
)
 
$
70,715

 
$
73,903

 
(4
)
Average yield on loans held for investment(2)
 
7.32
%
 
6.56
%
 
76
bps
 
7.08
%
 
6.52
%
 
56
bps
Average deposits
 
$
193,278

 
$
186,989

 
3
 %
 
$
190,547

 
$
185,471

 
3
 %
Average deposits interest rate
 
0.88
%
 
0.59
%
 
29
bps
 
0.84
%
 
0.58
%
 
26
bps
Net charge-offs
 
$
198

 
$
232

 
(15
)%
 
$
421

 
$
450

 
(6
)%
Net charge-off rate
 
1.19
%
 
1.25
%
 
(6
)bps
 
1.19
%
 
1.22
%
 
(3
)bps
Auto loan originations
 
$
6,994

 
$
7,453

 
(6
)%
 
$
13,701

 
$
14,478

 
(5
)%

 
 
22
Capital One Financial Corporation (COF)

(Dollars in millions, except as noted)
 
June 30,
2018
 
December 31, 2017
 
Change
 
 
 
 
 
 
Selected period-end data:
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
$
55,781

 
$
53,991

 
3
 %
 
 
 
 
 
 
Home loan(1)
 
—

 
17,633

 
**

 
 
 
 
 
 
Retail banking
 
2,946

 
3,454

 
(15
)
 
 
 
 
 
 
Total consumer banking
 
$
58,727

 
$
75,078

 
(22
)
 
 
 
 
 
 
30+ day performing delinquency rate
 
5.33
%
 
4.76
%
 
57
bps
 
 
 
 
 
 
30+ day delinquency rate
 
5.80

 
5.34

 
46

 
 
 
 
 
 
Nonperforming loan rate
 
0.58

 
0.78

 
(20
)
 
 
 
 
 
 
Nonperforming asset rate(3)
 
0.73

 
0.91

 
(18
)
 
 
 
 
 
 
Allowance for loan and lease losses
 
$
1,120

 
$
1,242

 
(10
)%
 
 
 
 
 
 
Allowance coverage ratio
 
1.91
%
 
1.65
%
 
26
bps
 
 
 
 
 
 
Deposits
 
$
194,962

 
$
185,842

 
5
 %
 
 
 
 
 
 
__________
(1) 
In the second quarter of 2018, we sold the substantial majority of our consumer home loan portfolio and the related servicing. We also transferred the remaining portfolio to loans held for sale as of June 30, 2018. The impact of these actions is reflected in the Other category for the three and six months ended June 30, 2018.
(2) 
Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(3) 
Nonperforming assets consist of nonperforming loans, real estate owned (“REO”) and other foreclosed assets. The total nonperforming asset rate is calculated based on total nonperforming assets divided by the combined period-end total loans held for investment, REO and other foreclosed assets.
**
Not meaningful.
Key factors affecting the results of our Consumer Banking business for the second quarter and first six months of 2018 compared to the second quarter and first six months of 2017, and changes in financial condition and credit performance between June 30, 2018 and December 31, 2017 include the following:
•
Net Interest Income: Net interest income increased by $31 million to $1.6 billion in the second quarter of 2018 and increased by $129 million to $3.2 billion in the first six months of 2018 primarily driven by growth in our auto loan portfolio and higher deposit volumes and margins in our retail banking business, partially offset by the sale of the substantial majority of our consumer home loan portfolio.
Consumer Banking loan yield increased by 76 basis points to 7.32% and increased by 56 basis points to 7.08% in the second quarter and first six months of 2018, respectively, compared to the second quarter and first six months of 2017 primarily driven by:
◦
changes in product mix as a result of the sale of the substantial majority of our consumer home loan portfolio and the transfer of the remaining portfolio to loans held for sale; and
◦
higher yields as a result of higher interest rates.
•
Non-Interest Income: Non-interest income was substantially flat at $175 million in the second quarter of 2018 and $349 million in the first six months of 2018.
•
Provision for Credit Losses: The provision for credit losses decreased by $150 million to $118 million in the second quarter of 2018 and decreased by $196 million to $351 million the first six months of 2018 primarily due to an allowance release in our auto loan portfolio largely due to improvements in credit trends.
•
Non-Interest Expense: Non-interest expense decreased by $96 million to $963 million in the second quarter of 2018 and decreased by $138 million to $2.0 billion the first six months of 2018 primarily driven by:

 
 
23
Capital One Financial Corporation (COF)

•
lower operating expenses due to our decision to cease new originations of home loan lending products in the fourth quarter of 2017 and the sale of the substantial majority of our consumer home loan portfolio in the second quarter of 2018; and
•
operating efficiencies in our retail banking business.
These drivers were largely offset by higher operating expenses driven by growth in our auto loan portfolio.
•
Loans Held for Investment: Period-end loans held for investment decreased by $16.4 billion to $58.7 billion as of June 30, 2018 from December 31, 2017, and average loans held for investment decreased by $8.0 billion to $66.5 billion in the second quarter of 2018 compared to the second quarter of 2017 and decreased by $3.2 billion to $70.7 billion in the first six months of 2018 compared to the first six months of 2017. These decreases were primarily driven by the sale of the substantial majority of our consumer home loan portfolio and the transfer of the remaining portfolio to loans held for sale, partially offset by growth in our auto loan portfolio.
•
Deposits: Period-end deposits increased by $9.1 billion to $195.0 billion as of June 30, 2018 from December 31, 2017 as a result of strong growth in our deposit products that are sold to both existing and new customers.
•
Net Charge-Off and Delinquency Metrics: The net charge-off rate decreased by 6 basis points to 1.19% in the second quarter of 2018 compared to the second quarter of 2017, and decreased by 3 basis points to 1.19% in the first six months of 2018 compared to the first six months of 2017. These decreases were primarily driven by lower charge-offs in our auto loan portfolio, partially offset by lower loan balances due to the sale of the substantial majority of our consumer home loan portfolio.
The 30+ day delinquency rate increased by 46 basis points to 5.80% as of June 30, 2018 from December 31, 2017 primarily driven by lower loan balances due to the sale of the substantial majority of our consumer home loan portfolio, partially offset by seasonally lower delinquency inventories in our auto loan portfolio.
Commercial Banking Business
The primary sources of revenue for our Commercial Banking business are net interest income from loans and deposits and non-interest income from customer fees and other transactions. Because our Commercial Banking business has loans and investments that generate tax-exempt income, tax credits or other tax benefits, we present the revenues on a taxable-equivalent basis. Expenses primarily consist of the provision for credit losses, operating costs and marketing expenses.
Our Commercial Banking business generated net income from continuing operations of $242 million and $498 million in the second quarter and first six months of 2018, respectively, and $146 million and $359 million in the second quarter and first six months of 2017, respectively.

 
 
24
Capital One Financial Corporation (COF)

Table 13 summarizes the financial results of our Commercial Banking business and displays selected key metrics for the periods indicated.
Table 13: Commercial Banking Business Results
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except as noted)
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Selected income statement data:
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
549

 
$
569

 
(4
)%
 
$
1,085

 
$
1,135

 
(4
)%
Non-interest income
 
209

 
183

 
14

 
396

 
341

 
16

Total net revenue(1)(2)
 
758

 
752

 
1

 
1,481

 
1,476

 
—

Provision for credit losses(3)
 
34

 
140

 
(76
)
 
20

 
138

 
(86
)
Non-interest expense
 
409

 
381

 
7

 
812

 
772

 
5

Income from continuing operations before income taxes
 
315

 
231

 
36

 
649

 
566

 
15

Income tax provision
 
73

 
85

 
(14
)
 
151

 
207

 
(27
)
Income from continuing operations, net of tax
 
$
242

 
$
146

 
66

 
$
498

 
$
359

 
39

Selected performance metrics:
 
 
 
 
 
 
 
 
 
 
 
 
Average loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
$
27,302

 
$
27,401

 
—

 
$
26,924

 
$
26,997

 
—

Commercial and industrial
 
38,686

 
39,815

 
(3
)
 
38,467

 
39,845

 
(3
)
Total commercial lending
 
65,988

 
67,216

 
(2
)
 
65,391

 
66,842

 
(2
)
Small-ticket commercial real estate
 
376

 
453

 
(17
)
 
385

 
463

 
(17
)
Total commercial banking
 
$
66,364

 
$
67,669

 
(2
)
 
$
65,776

 
$
67,305

 
(2
)
Average yield on loans held for investment(1)(4)
 
4.43
 %
 
3.81
%
 
62
bps
 
4.30
%
 
3.73
%
 
57
bps
Average deposits
 
$
32,951

 
$
34,263

 
(4
)%
 
$
33,501

 
$
34,241

 
(2
)%
Average deposits interest rate
 
0.65
 %
 
0.36
%
 
29
bps
 
0.59
%
 
0.34
%
 
25
bps
Net charge-offs
 
$
(7
)
 
$
136

 
**

 
$
12

 
$
159

 
(92
)%
Net charge-off rate
 
(0.04
)%
 
0.80
%
 
(84
)bps
 
0.04
%
 
0.47
%
 
(43
)bps
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions, except as noted)
 
June 30,
2018
 
December 31, 2017
 
Change
 
 
 
 
 
 
Selected period-end data:
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
$
28,292

 
$
26,150

 
8
 %
 
 
 
 
 
 
Commercial and industrial
 
38,948

 
38,025

 
2

 
 
 
 
 
 
Total commercial lending
 
67,240

 
64,175

 
5

 
 
 
 
 
 
Small-ticket commercial real estate
 
369

 
400

 
(8
)
 
 
 
 
 
 
Total commercial banking
 
$
67,609

 
$
64,575

 
5

 
 
 
 
 
 
Nonperforming loan rate
 
0.34
 %
 
0.44
%
 
(10
)bps
 
 
 
 
 
 
Nonperforming asset rate(5)
 
0.37

 
0.52

 
(15
)
 
 
 
 
 
 
Allowance for loan and lease losses(3)
 
$
624

 
$
611

 
2
 %
 
 
 
 
 
 
Allowance coverage ratio
 
0.92
 %
 
0.95
%
 
(3
)bps
 
 
 
 
 
 
Deposits
 
$
31,078

 
$
33,938

 
(8
)%
 
 
 
 
 
 
Loans serviced for others
 
30,060

 
27,764

 
8

 
 
 
 
 
 
__________
(1) 
Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate (21% and 35% for all periods presented in 2018 and 2017, respectively) and state taxes where applicable, with offsetting reductions to the Other category.
(2) 
In the first quarter of 2018, we made a change in how revenue is measured in our Commercial Banking business to include the tax benefits of losses on certain tax-advantaged investments. These tax benefits are included in revenue on a taxable-equivalent basis within our Commercial Banking business, with an offsetting reduction to the Other category. In addition, all revenue presented on a taxable-equivalent basis in our Commercial Banking business was impacted by the reduction of the federal tax rate set forth in the Tax Act. The net impact of the measurement change and the reduction of the federal tax rate

 
 
25
Capital One Financial Corporation (COF)

was a decrease of $28 million and $56 million in revenue in our Commercial Banking business in the second quarter and first six months of 2018, respectively, with an offsetting impact to the Other category.
(3) 
The provision for losses on unfunded lending commitments is included in the provision for credit losses in our consolidated statements of income and the related reserve for unfunded lending commitments is included in other liabilities on our consolidated balance sheets. Our reserve for unfunded lending commitments totaled $112 million and $117 million as of June 30, 2018 and December 31, 2017, respectively.
(4) 
Average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Interest income excludes various allocations including funds transfer pricing that assigns certain balance sheet assets, deposits and other liabilities and their related revenue and expenses attributable to each business segment.
(5) 
Nonperforming assets consist of nonperforming loans, REO and other foreclosed assets. The total nonperforming asset rate is calculated based on total nonperforming assets divided by the combined period-end total loans held for investment, REO and other foreclosed assets.
**
Not meaningful.
Key factors affecting the results of our Commercial Banking business for the second quarter and first six months of 2018 compared to the second quarter and first six months of 2017, and changes in financial condition and credit performance between June 30, 2018 and December 31, 2017 include the following:
•
Net Interest Income: Net interest income decreased by $20 million to $549 million in the second quarter of 2018 and decreased by $50 million to $1.1 billion in the first six months of 2018 primarily driven by the impact of the reduction of the federal tax rate set forth in the Tax Act on revenue presented on a taxable-equivalent basis, partially offset by the change to include the tax benefit of losses on certain tax-advantaged investments.
•
Non-Interest Income: Non-interest income increased by $26 million to $209 million in the second quarter of 2018 and increased by $55 million to $396 million in the first six months of 2018 primarily driven by higher revenue in our capital markets and agency businesses.
•
Provision for Credit Losses: The provision for credit losses decreased by $106 million to $34 million in the second quarter of 2018 and decreased by $118 million to $20 million the first six months of 2018 primarily driven by elevated charge-offs in the second quarter of 2017 in our oil and gas and taxi medallion lending portfolios.
•
Non-Interest Expense: Non-interest expense increased by $28 million to $409 million in the second quarter of 2018 and increased by $40 million to $812 million in the first six months of 2018 driven by higher operating expenses associated with continued investments in technology and other business initiatives.
•
Loans Held for Investment: Period-end loans held for investment increased by $3.0 billion to $67.6 billion as of June 30, 2018 from December 31, 2017 primarily driven by growth in our commercial loan portfolios.
Average loans held for investment decreased by $1.3 billion to $66.4 billion in the second quarter of 2018 compared to the second quarter of 2017 and decreased by $1.5 billion to $65.8 billion in the first six months of 2018 compared to the first six months of 2017 primarily due to:
◦
paydowns in our commercial and industrial loan portfolios; and
◦
charge-offs in, and the subsequent sale of, the substantial majority of our taxi medallion lending portfolio.
•
Deposits: Period-end deposits decreased by $2.9 billion to $31.1 billion as of June 30, 2018 from December 31, 2017.
•
Net Charge-Off and Nonperforming Metrics: The net charge-off rate decreased by 84 basis points to a net recovery rate of 0.04% in the second quarter of 2018 compared to the second quarter of 2017 and decreased by 43 basis points to 0.04% in the first six months of 2018 compared to the first six months of 2017 primarily driven by elevated charge-offs in the second quarter of 2017 in our oil and gas and taxi medallion lending portfolios.
The nonperforming loan rate decreased by 10 basis points to 0.34% as of June 30, 2018 from December 31, 2017 primarily driven by paydowns in our oil and gas lending portfolios.

 
 
26
Capital One Financial Corporation (COF)

Other Category
Other includes unallocated amounts related to our centralized Corporate Treasury group activities, such as management of our corporate investment portfolio, asset/liability management and certain capital management activities. Other also includes:
•
foreign exchange-rate fluctuations on foreign currency-denominated balances;
•
unallocated corporate revenue and expenses that do not directly support the operations of the business segments or for which the business segments are not considered financially accountable in evaluating their performance, such as certain restructuring charges;
•
offsets related to certain line-item reclassifications; and
•
residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments.
Table 14 summarizes the financial results of our Other category for the periods indicated.
Table 14: Other Category Results
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Selected income statement data:
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
(3
)
 
$
32

 
**

 
$
6

 
$
77

 
(92
)%
Non-interest income
 
373

 
(10
)
 
**

 
346

 
(40
)
 
**

Total net revenue(1)(2)
 
370

 
22

 
**

 
352

 
37

 
**

Benefit for credit losses
 
(47
)
 
(5
)
 
**

 
(48
)
 
(7
)
 
**

Non-interest expense
 
148

 
56

 
164
%
 
279

 
128

 
118

Income (loss) from continuing operations before income taxes
 
269

 
(29
)
 
**

 
121

 
(84
)
 
**

Income tax provision (benefit)
 
56

 
(101
)
 
**

 
(46
)
 
(219
)
 
(79
)
Income from continuing operations, net of tax
 
$
213

 
$
72

 
196

 
$
167

 
$
135

 
24

__________
(1) 
Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate (21% and 35% for all periods presented in 2018 and 2017, respectively) and state taxes where applicable, with offsetting reductions to the Other category.
(2) 
In the first quarter of 2018, we made a change in how revenue is measured in our Commercial Banking business to include the tax benefits of losses on certain tax-advantaged investments. These tax benefits are included in revenue on a taxable-equivalent basis within our Commercial Banking business, with an offsetting reduction to the Other category. In addition, all revenue presented on a taxable-equivalent basis in our Commercial Banking business was impacted by the reduction of the federal tax rate set forth in the Tax Act. The net impact of the measurement change and the reduction of the federal tax rate was a decrease of $28 million and $56 million in revenue in our Commercial Banking business in the second quarter and first six months of 2018, respectively, with an offsetting impact to the Other category.
**
Not meaningful.
Net income from continuing operations recorded in the Other category was $213 million and $167 million in the second quarter and first six months of 2018, respectively, compared to net income of $72 million and $135 million in the second quarter and first six months of 2017, respectively.
The increase in net income in the second quarter and first six months of 2018 was primarily driven by the net gain of $400 million from the sale of the substantial majority of our consumer home loan portfolio, partially offset by:
•
higher operating expense primarily due to continued investments in technology and infrastructure;
•
higher interest expense due to the net effect of higher interest rates; and
•
restructuring activities, which primarily consisted of severance and related benefits pursuant to our ongoing benefit programs, that are the result of exiting certain business activities and locations.

 
 
27
Capital One Financial Corporation (COF)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with U.S. GAAP requires management to make a number of judgments, estimates and assumptions that affect the amount of assets, liabilities, income and expenses on the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies under “Note 1—Summary of Significant Accounting Policies” in our 2017 Form 10-K.
We have identified the following accounting policies as critical because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on our results of operations or financial condition. These critical accounting policies govern:
•
Loan loss reserves
•
Asset impairment
•
Fair value of financial instruments
•
Customer rewards reserve
We evaluate our critical accounting estimates and judgments on an ongoing basis and update them, as necessary, based on changing conditions. There have been no changes to our critical accounting policies and estimates described in our 2017 Form 10-K under “MD&A—Critical Accounting Policies and Estimates.”
ACCOUNTING CHANGES AND DEVELOPMENTS
See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted in 2018, as well as recently issued accounting standards not yet required to be adopted and the expected impact of these changes in accounting standards.
CAPITAL MANAGEMENT
The level and composition of our capital are determined by multiple factors, including our consolidated regulatory capital requirements and internal risk-based capital assessments such as internal stress testing and economic capital. The level and composition of our capital may also be influenced by rating agency guidelines, subsidiary capital requirements, the business environment, conditions in the financial markets and assessments of potential future losses due to adverse changes in our business and market environments.
Capital Standards and Prompt Corrective Action
We are subject to capital adequacy standards adopted by the Federal Reserve, Office of the Comptroller of the Currency (“OCC”) and Federal Deposit Insurance Corporation (“FDIC”) (collectively, the “Federal Banking Agencies”), including the capital rules that implemented the Basel III capital framework (“Basel III Capital Rule”) developed by the Basel Committee on Banking Supervision (“Basel Committee”). Moreover, the Banks, as insured depository institutions, are subject to prompt corrective action (“PCA”) capital regulations.
In July 2013, the Federal Banking Agencies adopted the Basel III Capital Rule, which, in addition to implementing the Basel III capital framework, also implemented certain Dodd-Frank Act and other capital provisions, and updated the PCA capital framework to reflect the new regulatory capital minimums. The Basel III Capital Rule amended both the Basel I and Basel II Advanced Approaches frameworks, established a new common equity Tier 1 capital requirement and set higher minimum capital ratio requirements. We refer to the amended Basel I framework as the “Basel III Standardized Approach,” and the amended Advanced Approaches framework as the “Basel III Advanced Approaches.”

 
 
28
Capital One Financial Corporation (COF)

At the end of 2012, we met one of the two independent eligibility criteria set by banking regulators for becoming subject to the Advanced Approaches capital rules. As a result, we have undertaken a multi-year process of implementing the Advanced Approaches regime for calculating risk-weighted assets and regulatory capital levels. We entered parallel run under Advanced Approaches on January 1, 2015, during which we are required to calculate capital ratios under both the Basel III Standardized Approach and the Basel III Advanced Approaches, though we continue to use the Standardized Approach for purposes of meeting regulatory capital requirements.
The Basel III Capital Rule also introduced the supplementary leverage ratio for all Advanced Approaches banking organizations with a minimum requirement of 3.0%. The supplementary leverage ratio compares Tier 1 capital to total leverage exposure, which includes all on-balance sheet assets and certain off-balance sheet exposures, including derivatives and unused commitments. Given that we are in our Basel III Advanced Approaches parallel run, we calculate the ratio based on Tier 1 capital under the Standardized Approach. The minimum requirement for the supplementary leverage ratio became effective as of January 1, 2018. As an Advanced Approaches banking organization, however, we were required to calculate and publicly disclose our supplementary leverage ratio beginning in the first quarter of 2015.
The Market Risk Rule supplements both the Basel III Standardized Approach and the Basel III Advanced Approaches by requiring institutions subject to the Market Risk Rule to adjust their risk-based capital ratios to reflect the market risk in their trading portfolios. The Market Risk Rule generally applies to institutions with aggregate trading assets and liabilities equal to the lesser of (i) 10% or more of total assets or (ii) $1 billion or more. As of June 30, 2018, the Company and CONA are subject to the Market Risk Rule. See “MD&A—Market Risk Profile” below for additional information.
In October 2017, the Federal Banking Agencies proposed certain limited changes to the Basel III Capital Rule. There is uncertainty regarding how any of the proposed changes may impact the Basel III Standardized Approach and the Basel III Advanced Approaches. Additionally, in December 2017, the Basel Committee finalized certain modifications to the international Basel III capital standards, which would require rulemaking in the United States prior to becoming effective for United States banking organizations. There is uncertainty around which of those changes may be adopted in the United States and how those changes may impact the United States capital framework.

 
 
29
Capital One Financial Corporation (COF)

Table 15 provides a comparison of our regulatory capital ratios under the Basel III Standardized Approach subject to the applicable transition provisions, the regulatory minimum capital adequacy ratios and the PCA well-capitalized level for each ratio, where applicable, as of June 30, 2018 and December 31, 2017.
Table 15: Capital Ratios under Basel III(1)(2)
 
 
June 30, 2018
 
December 31, 2017
 
 
Capital
Ratio
 
Minimum
Capital
Adequacy
 
Well-
Capitalized
 
Capital
Ratio
 
Minimum
Capital
Adequacy
 
Well-
Capitalized
Capital One Financial Corp:
 
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital(3)
 
11.1
%
 
4.5
%
 
N/A

 
10.3
%
 
4.5
%
 
N/A

Tier 1 capital(4)
 
12.6

 
6.0

 
6.0
%
 
11.8

 
6.0

 
6.0
%
Total capital(5)
 
15.1

 
8.0

 
10.0

 
14.4

 
8.0

 
10.0

Tier 1 leverage(6)
 
10.3

 
4.0

 
N/A

 
9.9

 
4.0

 
N/A

Supplementary leverage(7)
 
8.8

 
3.0

 
N/A

 
8.4

 
N/A

 
N/A

COBNA:
 


 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital(3)
 
15.2

 
4.5

 
6.5

 
14.3

 
4.5

 
6.5

Tier 1 capital(4)
 
15.2

 
6.0

 
8.0

 
14.3

 
6.0

 
8.0

Total capital(5)
 
17.6

 
8.0

 
10.0

 
16.9

 
8.0

 
10.0

Tier 1 leverage(6)
 
13.6

 
4.0

 
5.0

 
12.7

 
4.0

 
5.0

Supplementary leverage(7)
 
11.2

 
3.0

 
N/A

 
10.4

 
N/A

 
N/A

CONA:
 


 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital(3)
 
13.4

 
4.5

 
6.5

 
12.2

 
4.5

 
6.5

Tier 1 capital(4)
 
13.4

 
6.0

 
8.0

 
12.2

 
6.0

 
8.0

Total capital(5)
 
14.6

 
8.0

 
10.0

 
13.4

 
8.0

 
10.0

Tier 1 leverage(6)
 
9.2

 
4.0

 
5.0

 
8.6

 
4.0

 
5.0

Supplementary leverage(7)
 
8.1

 
3.0

 
N/A

 
7.7

 
N/A

 
N/A

__________
(1) 
Capital ratios are calculated based on the Basel III Standardized Approach framework, subject to applicable transition provisions, such as the inclusion of the unrealized gains and losses on securities available for sale included in accumulated other comprehensive income (“AOCI”) and adjustments related to intangible assets other than goodwill. The inclusion of AOCI and the adjustments related to intangible assets are phased-in at 80% for 2017 and 100% for 2018. Capital requirements that are not applicable are denoted by “N/A.”
(2) 
Ratios as of June 30, 2018 are preliminary. As we continue to validate our data, the calculations are subject to change until we file our June 30, 2018 Form FR Y-9C—Consolidated Financial Statements for Holding Companies and Call Reports.
(3) 
Common equity Tier 1 capital ratio is a regulatory capital measure calculated based on common equity Tier 1 capital divided by risk-weighted assets.
(4) 
Tier 1 capital ratio is a regulatory capital measure calculated based on Tier 1 capital divided by risk-weighted assets.
(5) 
Total capital ratio is a regulatory capital measure calculated based on total capital divided by risk-weighted assets.
(6) 
Tier 1 leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by adjusted average assets.
(7) 
Supplementary leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by total leverage exposure.
The Company exceeded the minimum capital requirements and each of the Banks exceeded the minimum regulatory requirements and were well capitalized under PCA requirements as of both June 30, 2018 and December 31, 2017.
The Basel III Capital Rule requires banks to maintain a capital conservation buffer, composed of common equity Tier 1 capital, of 2.5% above the regulatory minimum ratios. The capital conservation buffer requirement is being phased in over a transition period that commenced on January 1, 2016 and will be fully phased-in on January 1, 2019. The capital conservation buffer is 1.875% in 2018.
For banks subject to the Advanced Approaches, including the Company and the Banks, the capital conservation buffer may be supplemented by an incremental countercyclical capital buffer of up to 2.5% (once fully phased-in) composed of common equity Tier 1 capital and set at the discretion of the Federal Banking Agencies. As of June 30, 2018, the countercyclical capital buffer is zero percent in the United States. A determination to increase the countercyclical capital buffer generally would be effective twelve

 
 
30
Capital One Financial Corporation (COF)

months after the announcement of such an increase, unless the Federal Banking Agencies set an earlier effective date. The countercyclical capital buffer, if set to an amount greater than zero percent, would be subject to the same transition period as the capital conservation buffer, which commenced on January 1, 2016.
For 2018, the minimum capital requirement plus capital conservation buffer and countercyclical capital buffer for common equity Tier 1 capital, Tier 1 capital and total capital ratios is 6.375%, 7.875% and 9.875%, respectively, for the Company and the Banks. A common equity Tier 1 capital ratio, Tier 1 capital ratio, or total capital ratio below the applicable regulatory minimum ratio plus the applicable capital conservation buffer and the applicable countercyclical buffer (if set to an amount greater than zero percent) might restrict a bank’s ability to distribute capital and make discretionary bonus payments. As of June 30, 2018, the Company and each of the Banks were all above the applicable combined thresholds.
Additionally, banks designated as global systemically important banks (“G-SIBs”) are subject to an additional regulatory capital surcharge above the combined capital conservation and countercyclical capital buffers established by the Basel III Capital Rule. We are currently not designated as a G-SIB and therefore not subject to this surcharge.
Under the Basel III Capital Rule, when we complete our parallel run for the Advanced Approaches, our minimum risk-based capital requirement will be determined by the greater of our risk-weighted assets under the Basel III Standardized Approach and the Basel III Advanced Approaches. See “Part I—Item 1. Business—Supervision and Regulation” in our 2017 Form 10-K for additional information. Once we exit parallel run, based on clarification of the Basel III Capital Rule from our regulators, any amount by which our expected credit losses exceed eligible credit reserves, as each term is defined under the Basel III Capital Rule, will be deducted from our Basel III Standardized Approach numerator, subject to transition provisions. Inclusive of this impact, based on current capital rules and our business mix, we estimate that our Basel III Advanced Approaches ratios will be lower than our Basel III Standardized Approach ratios. However, there is uncertainty whether this will remain the case in light of potential changes to the United States capital rules.
Capital Planning and Regulatory Stress Testing
On April 5, 2018, we submitted our capital plan to the Federal Reserve as part of the 2018 CCAR cycle. On June 28, 2018, the Federal Reserve informed us that they had “no objection” to our CCAR 2018 Capital Plan submission. As a result of this non-objection to our capital plan, the Board of Directors authorized the repurchase of up to $1.2 billion of shares of our common stock beginning in the third quarter of 2018 through the end of the second quarter of 2019. The Board of Directors also authorized the quarterly dividend on our common stock of $0.40 per share. For the description of the regulatory capital planning rules we are subject to, see “Part I—Item 1. Business—Supervision and Regulation” in our 2017 Form 10-K.
Dividend Policy and Stock Purchases
In the first six months of 2018, we declared and paid common stock dividends of $395 million, or $0.80 per share, and preferred stock dividends of $132 million.The following table summarizes the dividends declared and paid per share on our various preferred stock series in the first six months of 2018.

 
 
31
Capital One Financial Corporation (COF)

Table 16: Preferred Stock Dividends Paid Per Share
Series
 
Description
 
Issuance Date
 
Per Annum Dividend Rate
 
Dividend Frequency
 
2018
 
2018
 
Q2
 
Q1
Series B
 
6.00%
Non-Cumulative
 
August 20, 2012
 
6.00
%
 
Quarterly
 
$
15.00

 
$
15.00

Series C
 
6.25%
Non-Cumulative
 
June 12, 2014
 
6.25

 
Quarterly
 
15.63

 
15.63

Series D
 
6.70%
Non-Cumulative
 
October 31, 2014
 
6.70

 
Quarterly
 
16.75

 
16.75

Series E
 
Fixed-to-Floating Rate Non-Cumulative
 
May 14, 2015
 
5.55% through 5/31/2020;
3-mo. LIBOR+ 380 bps thereafter

 
Semi-Annually through 5/31/2020; Quarterly thereafter
 
27.75

 
—

Series F
 
6.20%
Non-Cumulative
 
August 24, 2015
 
6.20

 
Quarterly
 
15.50

 
15.50

Series G
 
5.20%
Non-Cumulative
 
July 29, 2016
 
5.20

 
Quarterly
 
13.00

 
13.00

Series H
 
6.00%
Non-Cumulative
 
November 29, 2016
 
6.00

 
Quarterly
 
15.00

 
15.00

The declaration and payment of dividends to our stockholders, as well as the amount thereof, are subject to the discretion of our Board of Directors and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. As a bank holding company (“BHC”), our ability to pay dividends is largely dependent upon the receipt of dividends or other payments from our subsidiaries. Regulatory restrictions exist that limit the ability of the Banks to transfer funds to our BHC. As of June 30, 2018, funds available for dividend payments from COBNA and CONA were $2.5 billion and $2.1 billion, respectively. There can be no assurance that we will declare and pay any dividends to stockholders. Consistent with our 2017 Stock Repurchase Program, our Board of Directors authorized the repurchase of up to $1.85 billion of shares of common stock beginning in the third quarter of 2017 through the end of the second quarter of 2018. In December 2017, the Board of Directors reduced the authorized repurchases of our common stock to up to $1.0 billion for the remainder of the 2017 Stock Repurchase Program. Through the end of the second quarter of 2018, we repurchased approximately $1.0 billion of shares of our common stock under the 2017 Stock Repurchase Program.
The timing and exact amount of any future common stock repurchases will depend on various factors, including regulatory approval, market conditions, opportunities for growth, our capital position and the amount of retained earnings. Our stock repurchase program does not include specific price targets, may be executed through open market purchases or privately negotiated transactions, including utilizing Rule 10b5-1 programs, and may be suspended at any time. For additional information on dividends and stock repurchases, see “Part I—Item 1. Business—Supervision and Regulation—Dividends, Stock Repurchases and Transfer of Funds” in our 2017 Form 10-K.
RISK MANAGEMENT
Risk Framework
We use a risk framework to provide an overall enterprise-wide approach for effectively managing risk. We execute against our risk framework with the “Three Lines of Defense” risk management model to demonstrate and structure the roles, responsibilities and accountabilities in the organization for taking and managing risk.
The “First Line of Defense” is comprised of the business areas that through their day-to-day business activities take risk on our behalf. As the business owner, the first line is responsible for identifying, assessing, managing and controlling that risk. This principle places ultimate accountability for the management of risks and ownership of risk decisions with the CEO and business heads. The “Second Line of Defense” provides oversight of first line risk taking and management, and is primarily comprised of our Risk Management organization. The second line assists in determining risk appetite and the strategies, policies and structures for managing risks. The second line is both an “expert advisor” to the first line and an “effective challenger” of first line risk

 
 
32
Capital One Financial Corporation (COF)

activities. The “Third Line of Defense” is comprised of our Internal Audit and Credit Review functions. The third line provides independent and objective assurance to senior management and to the Board of Directors that first and second line risk management and internal control systems and its governance processes are well-designed and working as intended.
The risk framework is also used to guide design of risk programs and performance of risk activity within each risk category and across the entire enterprise.
There are eight elements that comprise the risk framework:
•
Establish Governance Processes, Accountabilities and Risk Appetites
•
Identify and Assess Risks and Ownership
•
Develop and Operate Controls, Monitoring and Mitigation Plans
•
Test and Detect Control Gaps and Perform Corrective Action
•
Escalate Key Risks and Gaps to Executive Management and, when Appropriate, the Board of Directors
•
Calculate and Allocate Capital in Alignment with Risk Management and Measurement Processes (including Stress Testing)
•
Support with the Right Culture, Talent and Skills
•
Enabled by the Right Data, Infrastructure and Programs
We provide additional discussion of our risk management principles, roles and responsibilities, framework and risk appetite under “MD&A—Risk Management” in our 2017 Form 10-K.
CREDIT RISK PROFILE
Our loan portfolio accounts for the substantial majority of our credit risk exposure. Our lending activities are governed under our credit policy and are subject to independent review and approval. Below we provide information about the composition of our loan portfolio, key concentrations and credit performance metrics.
We also engage in certain non-lending activities that may give rise to credit and counterparty settlement risk, including the purchase of securities for our investment securities portfolio, entering into derivative transactions to manage our market risk exposure and to accommodate customers, short-term advances on syndication activity (including bridge financing transactions we have underwritten), certain operational cash balances in other financial institutions, foreign exchange transactions and customer overdrafts. We provide additional information on credit risk related to our investment securities portfolio under “MD&A—Consolidated Balance Sheets Analysis—Investment Securities” and credit risk related to derivative transactions in “Note 9—Derivative Instruments and Hedging Activities.”
Loans Held for Investment Portfolio Composition
We provide a variety of lending products. Our primary products include credit cards, auto loans and commercial lending products. In the second quarter of 2018, we sold the substantial majority of our consumer home loan portfolio and the related servicing. We also transferred the remaining portfolio of $398 million to loans held for sale as of June 30, 2018. For information on our lending policies and procedures, including our underwriting criteria for our primary loan products, see “MD&A—Credit Risk Profile” in our 2017 Form 10-K.
Our loan portfolio consists of loans held for investment, including loans held in our consolidated trusts, and loans held for sale. Table 17 presents the composition of our portfolio of loans held for investment by portfolio segment as of June 30, 2018 and December 31, 2017. Table 17 and the credit metrics presented in this section exclude loans held for sale, which are carried at lower of cost or fair value and totaled $1.5 billion and $971 million as of June 30, 2018 and December 31, 2017, respectively.

 
 
33
Capital One Financial Corporation (COF)

Table 17: Loans Held for Investment Portfolio Composition
 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
Loans
 
% of Total
 
Loans
 
% of Total
Credit Card:
 
 
 
 
 
 
 
 
Domestic credit card
 
$
100,714

 
42.7
%
 
$
105,293

 
41.4
%
International card businesses
 
9,063

 
3.8

 
9,469

 
3.7

Total credit card
 
109,777

 
46.5

 
114,762

 
45.1

Consumer Banking:
 
 
 
 
 
 
 
 
Auto
 
55,781

 
23.7

 
53,991

 
21.2

Home loan
 
—

 
—

 
17,633

 
6.9

Retail banking
 
2,946

 
1.2

 
3,454

 
1.4

Total consumer banking
 
58,727

 
24.9

 
75,078

 
29.5

Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
28,292

 
12.0

 
26,150

 
10.3

Commercial and industrial
 
38,948

 
16.5

 
38,025

 
14.9

Total commercial lending
 
67,240

 
28.5

 
64,175

 
25.2

Small-ticket commercial real estate
 
369

 
0.1

 
400

 
0.2

Total commercial banking
 
67,609

 
28.6

 
64,575

 
25.4

Other loans
 
11

 
—

 
58

 
—

Total loans held for investment
 
$
236,124

 
100.0
%
 
$
254,473

 
100.0
%
Commercial Loans
Table 18 summarizes our commercial loans held for investment portfolio by industry classification as of June 30, 2018 and December 31, 2017. Industry classifications below are based on our interpretation of the North American Industry Classification System codes as they pertain to each individual loan.
Table 18: Commercial Loans by Industry
(Percentage of portfolio)
 
June 30,
2018
 
December 31,
2017
Real estate
 
42
%
 
41
%
Healthcare
 
13

 
14

Finance and insurance
 
13

 
13

Business services
 
5

 
5

Public administration
 
4

 
4

Educational services
 
4

 
4

Oil and gas
 
4

 
4

Retail trade
 
3

 
3

Construction and land
 
3

 
3

Other
 
9

 
9

Total
 
100
%
 
100
%

 
 
34
Capital One Financial Corporation (COF)

Credit Risk Measurement
We closely monitor economic conditions and loan performance trends to assess and manage our exposure to credit risk. Key metrics we track in evaluating the credit quality of our loan portfolio include delinquency and nonperforming asset rates, as well as net charge-off rates and our internal risk ratings of larger-balance commercial loans. Trends in delinquency rates are one of the primary indicators of credit risk within our consumer loan portfolios, particularly in our credit card loan portfolios, as changes in delinquency rates can provide an early warning of changes in credit losses. The primary indicator of credit risk in our commercial loan portfolios is our internal risk ratings. Because we generally classify loans that have been delinquent for an extended period of time and other loans with significant risk of loss as nonperforming, the level of nonperforming assets represents another indicator of the potential for future credit losses. In addition to delinquency rates, the geographic distribution of our loans provides insight as to the exposure of the portfolio to regional economic conditions.
We underwrite most consumer loans using proprietary models, which are typically based on credit bureau data, including borrower credit scores, along with application information and, where applicable, collateral and deal structure data. We continuously adjust our management of credit lines and collection strategies based on customer behavior and risk profile changes. We also use borrower credit scores for subprime classification, for competitive benchmarking and, in some cases, to drive product segmentation decisions.
The following table provides details on the credit scores of our domestic credit card and auto loans held for investment portfolios as of June 30, 2018 and December 31, 2017.
Table 19: Credit Score Distribution
(Percentage of portfolio)
 
June 30,
2018
 
December 31,
2017
Domestic credit card—Refreshed FICO scores:(1)
 
 
 
 
Greater than 660
 
68
%
 
66
%
660 or below
 
32

 
34

Total
 
100
%
 
100
%
Auto—At origination FICO scores:(2)
 
 
 
 
Greater than 660
 
50
%
 
51
%
621-660
 
19

 
18

620 or below
 
31

 
31

Total
 
100
%
 
100
%
__________
(1) 
Percentages represent period-end loans held for investment in each credit score category. Domestic card credit scores generally represent FICO scores. These scores are obtained from one of the major credit bureaus at origination and are refreshed monthly thereafter. We approximate non-FICO credit scores to comparable FICO scores for consistency purposes. Balances for which no credit score is available or the credit score is invalid are included in the 660 or below category.
(2) 
Percentages represent period-end loans held for investment in each credit score category. Auto credit scores generally represent average FICO scores obtained from three credit bureaus at the time of application and are not refreshed thereafter. Balances for which no credit score is available or the credit score is invalid are included in the 620 or below category.
We present information in the sections below on the credit performance of our loan portfolio, including the key metrics we use in tracking changes in the credit quality of our loan portfolio.
See “Note 4—Loans” in this Report for additional credit quality information and see “Note 1—Summary of Significant Accounting Policies” in our 2017 Form 10-K for information on our accounting policies for delinquent and nonperforming loans, net charge-offs and troubled debt restructurings (“TDRs”) for each of our loan categories.
Delinquency Rates
We consider the entire balance of an account to be delinquent if the minimum required payment is not received by the customer’s due date, measured at each balance sheet date. Our 30+ day delinquency metrics include all loans held for investment that are 30 or more days past due, whereas our 30+ day performing delinquency metrics include loans that are 30 or more days past due but are currently classified as performing and accruing interest. The 30+ day delinquency and 30+ day performing delinquency metrics

 
 
35
Capital One Financial Corporation (COF)

are the same for domestic credit card loans, as we continue to classify these loans as performing until the account is charged off, typically when the account is 180 days past due. See “Note 1—Summary of Significant Accounting Policies” in our 2017 Form 10-K for information on our policies for classifying loans as nonperforming for each of our loan categories. We provide additional information on our credit quality metrics above under “MD&A—Business Segment Financial Performance.”
Table 20 presents our 30+ day performing delinquency rates and 30+ day delinquency rates of our portfolio of loans held for investment, by portfolio segment, as of June 30, 2018 and December 31, 2017.
Table 20: 30+ Day Delinquencies
 
 
June 30, 2018
 
December 31, 2017
 
 
30+ Day Performing Delinquencies
 
30+ Day Delinquencies
 
30+ Day Performing Delinquencies
 
30+ Day Delinquencies
(Dollars in millions)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
3,341

 
3.32
%
 
$
3,341

 
3.32
%
 
$
4,219

 
4.01
%
 
$
4,219

 
4.01
%
International card businesses
 
307

 
3.39

 
320

 
3.53

 
344

 
3.64

 
359

 
3.80

Total credit card
 
3,648

 
3.32

 
3,661

 
3.33

 
4,563

 
3.98

 
4,578

 
3.99

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
3,105

 
5.57

 
3,362

 
6.03

 
3,513

 
6.51

 
3,840

 
7.11

Home loan
 
—

 
—

 
—

 
—

 
35

 
0.20

 
123

 
0.70

Retail banking
 
25

 
0.84

 
43

 
1.47

 
26

 
0.76

 
47

 
1.35

Total consumer banking
 
3,130

 
5.33

 
3,405

 
5.80

 
3,574

 
4.76

 
4,010

 
5.34

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
8

 
0.03

 
10

 
0.04

 
69

 
0.26

 
107

 
0.41

Commercial and industrial
 
18

 
0.05

 
122

 
0.31

 
18

 
0.05

 
158

 
0.42

Total commercial lending
 
26

 
0.04

 
132

 
0.20

 
87

 
0.14

 
265

 
0.41

Small-ticket commercial real estate
 
1

 
0.28

 
5

 
1.35

 
1

 
0.21

 
7

 
1.55

Total commercial banking
 
27

 
0.04

 
137

 
0.20

 
88

 
0.14

 
272

 
0.42

Other loans
 
0

 
0.01

 
0

 
0.01

 
2

 
3.28

 
4

 
6.29

Total
 
$
6,805

 
2.88

 
$
7,203

 
3.05

 
$
8,227

 
3.23

 
$
8,864

 
3.48

__________
(1) 
Delinquency rates are calculated by dividing delinquency amounts by period-end loans held for investment for each specified loan category, including purchased credit-impaired (“PCI”) loans as applicable.


 
 
36
Capital One Financial Corporation (COF)

Table 21 presents our 30+ day delinquent loans, by aging and geography, as of June 30, 2018 and December 31, 2017.
Table 21: Aging and Geography of 30+ Day Delinquent Loans
 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
Delinquency status:
 
 
 
 
 
 
 
 
30-59 days
 
$
3,386

 
1.43
%
 
$
3,945

 
1.55
%
60-89 days
 
1,770

 
0.75

 
2,166

 
0.85

> 90 days
 
2,047

 
0.87

 
2,753

 
1.08

Total
 
$
7,203

 
3.05
%
 
$
8,864

 
3.48
%
Geographic region:
 
 
 
 
 
 
 
 
Domestic
 
$
6,883

 
2.91
%
 
$
8,505

 
3.34
%
International
 
320

 
0.14

 
359

 
0.14

Total
 
$
7,203

 
3.05
%
 
$
8,864

 
3.48
%
__________
(1) 
Delinquency rates are calculated by dividing delinquency amounts by total period-end loans held for investment, including PCI loans as applicable.
Table 22 summarizes loans that were 90+ days delinquent as to interest or principal, and still accruing interest as of June 30, 2018 and December 31, 2017. These loans consist primarily of credit card accounts between 90 days and 179 days past due. As permitted by regulatory guidance issued by the Federal Financial Institutions Examination Council, we continue to accrue interest and fees on domestic credit card loans through the date of charge-off, which is typically in the period the account becomes 180 days past due. While domestic credit card loans typically remain on accrual status until the loan is charged off, we reduce the balance of our credit card receivables by the amount of finance charges and fees billed but not expected to be collected and exclude this amount from revenue.
Table 22: 90+ Day Delinquent Loans Accruing Interest
 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
Loan category:
 
 
 
 
 
 
 
 
Credit card
 
$
1,688

 
1.54
%
 
$
2,221

 
1.94
%
Commercial banking
 
4

 
0.01

 
12

 
0.02

Total
 
$
1,692

 
0.72

 
$
2,233

 
0.88

Geographic region:
 
 
 
 
 
 
 
 
Domestic
 
$
1,573

 
0.69

 
$
2,105

 
0.86

International
 
119

 
1.31

 
128

 
1.35

Total
 
$
1,692

 
0.72

 
$
2,233

 
0.88

__________
(1) 
Delinquency rates are calculated by dividing delinquency amounts by period-end loans held for investment for each specified loan category, including PCI loans as applicable.
Nonperforming Loans and Nonperforming Assets
Nonperforming assets consist of nonperforming loans, foreclosed properties and repossessed assets, and the net realizable value of certain partially charged off auto loans. Nonperforming loans include loans that have been placed on nonaccrual status. See “Note 1—Summary of Significant Accounting Policies” in our 2017 Form 10-K for information on our policies for classifying loans as nonperforming for each of our loan categories.

 
 
37
Capital One Financial Corporation (COF)

Table 23 presents comparative information on nonperforming loans, by portfolio segment, and other nonperforming assets as of June 30, 2018 and December 31, 2017. We do not classify loans held for sale as nonperforming, as they are recorded at the lower of cost or fair value. We provide additional information on our credit quality metrics above under “MD&A—Business Segment Financial Performance.”
Table 23: Nonperforming Loans and Other Nonperforming Assets(1)
 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
Amount
 
Rate
 
Amount
 
Rate
Nonperforming loans held for investment:(2)
 
 
 
 
 
 
 
 
Credit Card:
 
 
 
 
 
 
 
 
International card businesses
 
$
20

 
0.22
%
 
$
24

 
0.25
%
Total credit card
 
20

 
0.02

 
24

 
0.02

Consumer Banking:
 
 
 
 
 
 
 
 
Auto
 
308

 
0.55

 
376

 
0.70

Home loan
 
—

 
—

 
176

 
1.00

Retail banking
 
34

 
1.15

 
35

 
1.00

Total consumer banking
 
342

 
0.58

 
587

 
0.78

Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
4

 
0.01

 
38

 
0.15

Commercial and industrial
 
221

 
0.57

 
239

 
0.63

Total commercial lending
 
225

 
0.33

 
277

 
0.43

Small-ticket commercial real estate
 
4

 
1.18

 
7

 
1.65

Total commercial banking
 
229

 
0.34

 
284

 
0.44

Other loans
 
—

 
—

 
4

 
7.71

Total nonperforming loans held for investment(3)
 
$
591

 
0.25

 
$
899

 
0.35

Other nonperforming assets:(4)
 
 
 
 
 
 
 
 
Foreclosed property
 
$
40

 
0.02

 
$
88

 
0.03

Other assets
 
66

 
0.03

 
65

 
0.03

Total other nonperforming assets
 
106

 
0.05

 
153

 
0.06

Total nonperforming assets
 
$
697

 
0.30

 
$
1,052

 
0.41

__________
(1) 
We recognized interest income for loans classified as nonperforming of $11 million and $15 million in the first six months of 2018 and 2017, respectively. Interest income foregone related to nonperforming loans was $31 million and $34 million in the first six months of 2018 and 2017, respectively. Foregone interest income represents the amount of interest income that would have been recorded during the period for nonperforming loans as of the end of the period had the loans performed according to their contractual terms.
(2) 
Nonperforming loan rates are calculated based on nonperforming loans for each category divided by period-end total loans held for investment for each respective category.
(3) 
Excluding the impact of domestic credit card loans, nonperforming loans as a percentage of total loans held for investment was 0.44% and 0.60% as of June 30, 2018 and December 31, 2017, respectively.
(4) 
The denominators used in calculating nonperforming asset rates consist of total loans held for investment and total other nonperforming assets.

 
 
38
Capital One Financial Corporation (COF)

Net Charge-Offs
Net charge-offs consist of the unpaid principal balance of loans held for investment that we determine to be uncollectible, net of recovered amounts. We charge off loans as a reduction to the allowance for loan and lease losses when we determine the loan is uncollectible and record subsequent recoveries of previously charged-off amounts as increases to the allowance for loan and lease losses. Uncollectible finance charges and fees are reversed through revenue and certain fraud losses are recorded in other non-interest expense. Generally, costs to recover charged-off loans are recorded as collection expenses as incurred and included in our consolidated statements of income as a component of other non-interest expense. Our charge-off policy for loans varies based on the loan type. See “Note 1—Summary of Significant Accounting Policies” in our 2017 Form 10-K for information on our charge-off policy for each of our loan categories.
Table 24 presents our net charge-off amounts and rates, by portfolio segment, in the second quarter and first six months of 2018 and 2017.
Table 24: Net Charge-Offs (Recoveries)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
(Dollars in millions)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
1,166

 
4.72
 %
 
$
1,172

 
5.11
 %
 
$
2,487

 
4.99
 %
 
$
2,368

 
5.12
 %
International card businesses
 
94

 
4.14

 
84

 
4.08

 
150

 
3.32

 
159

 
3.88

Total credit card
 
1,260

 
4.67

 
1,256

 
5.02

 
2,637

 
4.85

 
2,527

 
5.02

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
182

 
1.32

 
215

 
1.70

 
390

 
1.42

 
414

 
1.67

Home loan
 
—

 
—

 
2

 
0.04

 
(1
)
 
(0.02
)
 
4

 
0.03

Retail banking
 
16

 
2.07

 
15

 
1.71

 
32

 
1.97

 
32

 
1.81

Total consumer banking
 
198

 
1.19

 
232

 
1.25

 
421

 
1.19

 
450

 
1.22

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
—

 
—

 
2

 
0.03

 
—

 
—

 
2

 
0.02

Commercial and industrial
 
(7
)
 
(0.07
)
 
134

 
1.34

 
12

 
0.06

 
156

 
0.78

Total commercial lending
 
(7
)
 
(0.04
)
 
136

 
0.81

 
12

 
0.04

 
158

 
0.47

Small-ticket commercial real estate
 
0

 
(0.40
)
 
0

 
(0.22
)
 
0

 
(0.29
)
 
1

 
0.43

Total commercial banking
 
(7
)
 
(0.04
)
 
136

 
0.80

 
12

 
0.04

 
159

 
0.47

Other loans
 
8

 
167.92

 
(6
)
 
(39.95
)
 
7

 
46.30

 
(8
)
 
(24.27
)
Total net charge-offs
 
$
1,459

 
2.42

 
$
1,618

 
2.67

 
$
3,077

 
2.51

 
$
3,128

 
2.59

Average loans held for investment
 
$
240,758

 
 
 
$
242,241

 
 
 
$
245,218

 
 
 
$
241,875

 
 
__________
(1) 
Net charge-off (recovery) rate is calculated by dividing annualized net charge-offs (recoveries) by average loans held for investment for the period for each loan category.

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

 
 
39
Capital One Financial Corporation (COF)

Table 25 presents our recorded investment of loans modified in TDRs as of June 30, 2018 and December 31, 2017, which excludes loan modifications that do not meet the definition of a TDR, and PCI loans, which we track and report separately.
Table 25: Troubled Debt Restructurings
 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
Amount
 
% of Total Modifications
 
Amount
 
% of Total Modifications
Credit card
 
$
835

 
46.7
%
 
$
812

 
36.9
%
Consumer banking:
 
 
 
 
 
 
 
 
Auto
 
383

 
21.4

 
481

 
21.9

Home loan
 
—

 
—

 
192

 
8.7

Retail banking
 
36

 
2.0

 
37

 
1.7

Total consumer banking
 
419

 
23.4

 
710

 
32.3

Commercial banking
 
535

 
29.9

 
679

 
30.8

Total
 
$
1,789

 
100.0
%
 
$
2,201

 
100.0
%
Status of TDRs:
 
 
 
 
 
 
 
 
Performing
 
$
1,580

 
88.3
%
 
$
1,850

 
84.1
%
Nonperforming
 
209

 
11.7

 
351

 
15.9

Total
 
$
1,789

 
100.0
%
 
$
2,201

 
100.0
%
In our Credit Card business, the majority of our credit card loans modified in TDRs involve reducing the interest rate on the account and placing the customer on a fixed payment plan not exceeding 60 months. The effective interest rate in effect immediately prior to the loan modification is used as the effective interest rate for purposes of measuring impairment using the present value of expected cash flows. If the customer does not comply with the modified payment terms, then the credit card loan agreement may revert to its original payment terms, generally resulting in any loan outstanding reflected in the appropriate delinquency category, and charged off in accordance with our standard charge-off policy.
In our Consumer Banking business, the majority of our loans modified in TDRs receive an extension, an interest rate reduction or principal reduction, or a combination of these concessions. In addition, TDRs also occur in connection with bankruptcy of the borrower. In certain bankruptcy discharges, the loan is written down to the collateral value and the charged off amount is reported as principal reduction. Impairment is determined using the present value of expected cash flows or a collateral evaluation for certain auto and home loans where the collateral value is lower than the recorded investment.
In our Commercial Banking business, the majority of loans modified in TDRs receive an extension, with a portion of these loans receiving an interest rate reduction or a gross balance reduction. The impairment on modified commercial loans is generally determined based on the underlying collateral value.
We provide additional information on modified loans accounted for as TDRs, including the performance of those loans subsequent to modification, in “Note 4—Loans.”
Impaired Loans
A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due from the borrower in accordance with the original contractual terms of the loan. Generally, we report loans as impaired based on the method for measuring impairment in accordance with applicable accounting guidance. Loans defined as individually impaired include larger-balance commercial nonperforming loans and TDRs. Loans held for sale are not reported as impaired, as these loans are recorded at lower of cost or fair value. Impaired loans also exclude PCI loans, which are accounted for based on expected cash flows because this accounting methodology takes into consideration future credit losses expected to be incurred.
Impaired loans totaled $1.9 billion and $2.4 billion as of June 30, 2018 and December 31, 2017, respectively. These amounts include TDRs of $1.8 billion and $2.2 billion as of June 30, 2018 and December 31, 2017, respectively. We provide additional

 
 
40
Capital One Financial Corporation (COF)

information on our impaired loans, including the allowance for loan and lease losses established for these loans, in “Note 4—Loans” and “Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments.”
Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments
Our allowance for loan and lease losses represents management’s best estimate of incurred loan and lease credit losses inherent to our held for investment portfolio as of each balance sheet date. The allowance for loan and lease losses is increased through the provision for credit losses and reduced by net charge-offs. We provide additional information on the methodologies and key assumptions used in determining our allowance for loan and lease losses under “Note 1—Summary of Significant Accounting Policies” in our 2017 Form 10-K.
Table 26 presents changes in our allowance for loan and lease losses and reserve for unfunded lending commitments for the second quarter and first six months of 2018 and 2017, and details by portfolio segment for the provision for credit losses, charge-offs and recoveries.

 
 
41
Capital One Financial Corporation (COF)

Table 26: Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity
 
 
Three Months Ended June 30, 2018
 
 
Credit Card
 
Consumer Banking
 
 
 
 
 
 
(Dollars in millions)
 
Domestic Card
 
International Card Businesses
 
Total Credit Card
 
Auto
 
Home
Loan(1)
 
Retail
Banking
 
Total
Consumer
Banking
 
Commercial Banking
 
Other(1)
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2018
 
$
5,332

 
$
394

 
$
5,726

 
$
1,137

 
$
53

 
$
63

 
$
1,253

 
$
587

 
$
1

 
$
7,567

Charge-offs
 
(1,549
)
 
(130
)
 
(1,679
)
 
(393
)
 
—

 
(21
)
 
(414
)
 
(7
)
 
(9
)
 
(2,109
)
Recoveries
 
383

 
36

 
419

 
211

 
—

 
5

 
216

 
14

 
1

 
650

Net charge-offs
 
(1,166
)
 
(94
)
 
(1,260
)
 
(182
)
 
—

 
(16
)
 
(198
)
 
7

 
(8
)
 
(1,459
)
Provision (benefit) for loan and lease losses
 
1,094

 
77

 
1,171

 
105

 
—

 
14

 
119

 
30

 
(47
)
 
1,273

Allowance build (release) for loan and lease losses
 
(72
)
 
(17
)
 
(89
)
 
(77
)
 
—

 
(2
)
 
(79
)
 
37

 
(55
)
 
(186
)
Other changes(1)(2)
 
—

 
(13
)
 
(13
)
 
—

 
(53
)
 
(1
)
 
(54
)
 
—

 
54

 
(13
)
Balance as of June 30, 2018
 
5,260

 
364

 
5,624

 
1,060

 
—

 
60

 
1,120

 
624

 
—

 
7,368

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2018
 
—

 
—

 
—

 
—

 
—

 
6

 
6

 
108

 
—

 
114

Provision (benefit) for losses on unfunded lending commitments
 
—

 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
 
4

 
—

 
3

Balance as of June 30, 2018
 
—

 
—

 
—

 
—

 
—

 
5

 
5

 
112

 
—

 
117

Combined allowance and reserve as of June 30, 2018
 
$
5,260

 
$
364

 
$
5,624

 
$
1,060

 
$
—

 
$
65

 
$
1,125

 
$
736

 
$
—

 
$
7,485

 
 
Six Months Ended June 30, 2018
 
 
Credit Card
 
Consumer Banking
 
 
 
 
 
 
(Dollars in millions)
 
Domestic Card
 
International Card Businesses
 
Total Credit Card
 
Auto
 
Home
Loan(1)
 
Retail
Banking
 
Total
Consumer
Banking
 
Commercial Banking
 
Other(1)
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
 
$
5,273

 
$
375

 
$
5,648

 
$
1,119

 
$
58

 
$
65

 
$
1,242

 
$
611

 
$
1

 
$
7,502

Charge-offs
 
(3,246
)
 
(258
)
 
(3,504
)
 
(803
)
 
—

 
(42
)
 
(845
)
 
(28
)
 
(8
)
 
(4,385
)
Recoveries
 
759

 
108

 
867

 
413

 
1

 
10

 
424

 
16

 
1

 
1,308

Net charge-offs
 
(2,487
)
 
(150
)
 
(2,637
)
 
(390
)
 
1

 
(32
)
 
(421
)
 
(12
)
 
(7
)
 
(3,077
)
Provision (benefit) for loan and lease losses
 
2,474

 
153

 
2,627

 
331

 
(6
)
 
28

 
353

 
25

 
(48
)
 
2,957

Allowance build (release) for loan and lease losses
 
(13
)
 
3

 
(10
)
 
(59
)
 
(5
)
 
(4
)
 
(68
)
 
13

 
(55
)
 
(120
)
Other changes(1)(2)
 
—

 
(14
)
 
(14
)
 
—

 
(53
)
 
(1
)
 
(54
)
 
—

 
54

 
(14
)
Balance as of June 30, 2018
 
5,260

 
364

 
5,624

 
1,060

 
—

 
60

 
1,120

 
624

 
—

 
7,368

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
 
—

 
—

 
—

 
—

 
—

 
7

 
7

 
117

 
—

 
124

Benefit for losses on unfunded lending commitments
 
—

 
—

 
—

 
—

 
—

 
(2
)
 
(2
)
 
(5
)
 
—

 
(7
)
Balance as of June 30, 2018
 
—

 
—

 
—

 
—

 
—

 
5

 
5

 
112

 
—

 
117

Combined allowance and reserve as of June 30, 2018
 
$
5,260

 
$
364

 
$
5,624

 
$
1,060

 
$
—

 
$
65

 
$
1,125

 
$
736

 
$
—

 
$
7,485


 
 
42
Capital One Financial Corporation (COF)

 
 
Three Months Ended June 30, 2017
 
 
Credit Card
 
Consumer Banking
 
 
 
 
 
 
(Dollars in millions)
 
Domestic Card
 
International Card Businesses
 
Total Credit Card
 
Auto
 
Home
Loan
 
Retail
Banking
 
Total
Consumer
Banking
 
Commercial Banking
 
Other(3)
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2017
 
$
4,670

 
$
388

 
$
5,058

 
$
1,028

 
$
60

 
$
75

 
$
1,163

 
$
761

 
$
2

 
$
6,984

Charge-offs
 
(1,454
)
 
(118
)
 
(1,572
)
 
(369
)
 
(3
)
 
(18
)
 
(390
)
 
(140
)
 
—

 
(2,102
)
Recoveries
 
282

 
34

 
316

 
154

 
1

 
3

 
158

 
4

 
6

 
484

Net charge-offs
 
(1,172
)
 
(84
)
 
(1,256
)
 
(215
)
 
(2
)
 
(15
)
 
(232
)
 
(136
)
 
6

 
(1,618
)
Provision (benefit) for loan and lease losses
 
1,327

 
70

 
1,397

 
253

 
1

 
14

 
268

 
141

 
(5
)
 
1,801

Allowance build (release) for loan and lease losses
 
155

 
(14
)
 
141

 
38

 
(1
)
 
(1
)
 
36

 
5

 
1

 
183

Other changes(2)
 
—

 
11

 
11

 
—

 
—

 
—

 
—

 
(8
)
 
—

 
3

Balance as of June 30, 2017
 
4,825

 
385

 
5,210

 
1,066

 
59

 
74

 
1,199

 
758

 
3

 
7,170

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2017
 
—

 
—

 
—

 
—

 
—

 
7

 
7

 
133

 
—

 
140

Benefit for losses on unfunded lending commitments
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1
)
 
—

 
(1
)
Balance as of June 30, 2017
 
—

 
—

 
—

 
—

 
—

 
7

 
7

 
132

 
—

 
139

Combined allowance and reserve as of June 30, 2017
 
$
4,825

 
$
385

 
$
5,210

 
$
1,066

 
$
59

 
$
81

 
$
1,206

 
$
890

 
$
3

 
$
7,309

 
 
Six Months Ended June 30, 2017
 
 
Credit Card
 
Consumer Banking
 
 
 
 
 
 
(Dollars in millions)
 
Domestic Card
 
International Card Businesses
 
Total Credit Card
 
Auto
 
Home
Loan
 
Retail
Banking
 
Total
Consumer
Banking
 
Commercial Banking
 
Other(3)
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2016
 
$
4,229

 
$
377

 
$
4,606

 
$
957

 
$
65

 
$
80

 
$
1,102

 
$
793

 
$
2

 
$
6,503

Charge-offs
 
(2,938
)
 
(235
)
 
(3,173
)
 
(708
)
 
(7
)
 
(39
)
 
(754
)
 
(166
)
 
—

 
(4,093
)
Recoveries
 
570

 
76

 
646

 
294

 
3

 
7

 
304

 
7

 
8

 
965

Net charge-offs
 
(2,368
)
 
(159
)
 
(2,527
)
 
(414
)
 
(4
)
 
(32
)
 
(450
)
 
(159
)
 
8

 
(3,128
)
Provision (benefit) for loan and lease losses
 
2,964

 
150

 
3,114

 
523

 
(2
)
 
26

 
547

 
135

 
(7
)
 
3,789

Allowance build (release) for loan and lease losses
 
596

 
(9
)
 
587

 
109

 
(6
)
 
(6
)
 
97

 
(24
)
 
1

 
661

Other changes(2)
 
—

 
17

 
17

 
—

 
—

 
—

 
—

 
(11
)
 
—

 
6

Balance as of June 30, 2017
 
4,825

 
385

 
5,210

 
1,066

 
59

 
74

 
1,199

 
758

 
3

 
7,170

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2016
 
—

 
—

 
—

 
—

 
—

 
7

 
7

 
129

 
—

 
136

Provision for losses on unfunded lending commitments
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3

 
—

 
3

Balance as of June 30, 2017
 
—

 
—

 
—

 
—

 
—

 
7

 
7

 
132

 
—

 
139

Combined allowance and reserve as of June 30, 2017
 
$
4,825

 
$
385

 
$
5,210

 
$
1,066

 
$
59

 
$
81

 
$
1,206

 
$
890

 
$
3

 
$
7,309

__________
(1) 
In the second quarter of 2018, we sold the substantial majority of our consumer home loan portfolio and the related servicing. We also transferred the remaining portfolio to loans held for sale as of June 30, 2018. The impact of these actions included a benefit for credit losses of $46 million which is reflected in the Other category.
(2) 
Represents foreign currency translation adjustments and the net impact of loan transfers and sales where applicable.
(3) 
Includes the legacy loan portfolio of our discontinued GreenPoint mortgage operations.

 
 
43
Capital One Financial Corporation (COF)

Table 27 presents the allowance coverage ratios as of June 30, 2018 and December 31, 2017.
Table 27: Allowance Coverage Ratios
 
 
June 30, 2018
 
December 31, 2017
Total allowance coverage ratio
 
3.12
%
 
2.95
%
Allowance coverage ratios by loan category:(1)
 
 
 
 
Credit card (30+ day delinquent loans)
 
153.61

 
123.36

Consumer banking (30+ day delinquent loans)
 
32.93

 
30.95

Commercial banking (nonperforming loans)
 
271.54

 
215.14

__________
(1) 
Allowance coverage ratios by loan category are calculated based on the allowance for loan and lease losses for each specified portfolio segment divided by period-end loans held for investment within the specified loan category.
Our allowance for loan and lease losses decreased by $134 million to $7.4 billion as of June 30, 2018 compared to December 31, 2017 primarily driven by an allowance release in our auto loan portfolio largely due to improvements in credit trends and an allowance release due to the sale of the substantial majority of our consumer home loan portfolio.
The allowance coverage ratio increased by 17 basis points to 3.12% as of June 30, 2018 from December 31, 2017 primarily driven by lower loan balances largely due to the sale of the substantial majority of our consumer home loan portfolio and seasonal paydowns in our domestic credit card loan portfolio, partially offset by allowance releases in our auto and domestic credit card loan portfolios.
LIQUIDITY RISK PROFILE
We have established liquidity practices that are intended to ensure that we have sufficient asset-based liquidity to cover our funding requirements and maintain adequate reserves to withstand the potential impact of deposit attrition or diminished liquidity in the funding markets. In addition to our cash position, we maintain reserves in the form of available for sale securities, held to maturity securities and certain loans that are either readily-marketable or pledgeable.
Table 28 below presents the composition of our liquidity reserves as of June 30, 2018 and December 31, 2017.
Table 28: Liquidity Reserves
(Dollars in millions)
 
June 30, 2018
 
December 31, 2017
Cash and cash equivalents
 
$
12,273

 
$
14,040

Investment securities portfolio:
 
 
 
 
Investment securities available for sale, at fair value
 
50,691

 
37,655

Investment securities held to maturity, at fair value
 
33,097

 
29,437

Total investment securities portfolio
 
83,788

 
67,092

FHLB borrowing capacity secured by loans
 
11,314

 
20,927

Outstanding FHLB advances and letters of credit secured by loans
 
(467
)
 
(9,115
)
Investment securities encumbered for Public Funds and others
 
(8,048
)
 
(8,619
)
Total liquidity reserves
 
$
98,860

 
$
84,325

Our liquidity reserves increased by $14.5 billion to $98.9 billion as of June 30, 2018 from December 31, 2017 primarily driven by a decrease in our FHLB advances outstanding as well as an increase in our investment securities portfolio. The increase in our investment securities portfolio and the decrease in our FHLB borrowing capacity secured by loans were primarily due to the sale

 
 
44
Capital One Financial Corporation (COF)

of the substantial majority of our consumer home loan portfolio in the second quarter of 2018. See “MD&A—Risk Management” in our 2017 Form 10-K for additional information on our management of liquidity risk.
Liquidity Coverage Ratio
We are subject to the Liquidity Coverage Ratio Rule (“LCR Rule”) as implemented by the Federal Banking Agencies. The LCR Rule requires us to calculate our LCR daily. Beginning in the second quarter of 2018, we are required to make quarterly public disclosure of our LCR and certain related quantitative liquidity metrics along with a qualitative discussion of our LCR. Our LCR during the second quarter of 2018 exceeded the LCR requirement of 100%. The calculation and the underlying components are based on our interpretations, expectations and assumptions of relevant regulations, as well as interpretations provided by our regulators, and are subject to change based on changes to future regulations and interpretations. See “Part I—Item 1. Business—Supervision and Regulation” in our 2017 Form 10-K for additional information.
Borrowing Capacity
We filed a shelf registration statement with the SEC in March 2018, which expires in March 2021. Under this shelf registration, we may periodically offer and sell an indeterminate aggregate amount of senior or subordinated debt securities, preferred stock, depositary shares, common stock, purchase contracts, warrants and units. There is no limit under this shelf registration to the amount or number of such securities that we may offer and sell, subject to market conditions. We also filed a shelf registration statement with the SEC in January 2016, which expires in January 2019 and allows us to periodically offer and sell up to $23 billion of securitized debt obligations from our credit card loan securitization trust.
In addition to our issuance capacity under the shelf registration statements, we also have access to FHLB advances. As of June 30, 2018, we pledged both loans and securities to FHLB to secure a maximum borrowing capacity of $20.9 billion, of which $20.4 billion was still available to us to borrow. The ability to draw down funding is based on membership status and the amount is dependent upon the Banks’ ability to post collateral. Our FHLB membership is secured by our investment in FHLB stock of $30 million and $360 million as of June 30, 2018 and December 31, 2017, respectively, which was determined in part based on our outstanding advances. We also have access to the Federal Reserve Discount Window through which we had a borrowing capacity of $6.1 billion as of June 30, 2018. Our membership with the Federal Reserve is secured by our investment in Federal Reserve stock, totaling $1.3 billion and $1.2 billion as of June 30, 2018 and December 31, 2017, respectively.
Funding
Our primary source of funding comes from deposits, which provide a stable and relatively low cost of funds. In addition to deposits, the Company raises funding through the issuance of senior and subordinated notes, securitized debt obligations and brokered deposits, as well as federal funds purchased and securities loaned or sold under agreements to repurchase, and FHLB advances secured by certain portions of our loan and securities portfolios. A key objective in our use of these markets is to maintain access to a diversified mix of wholesale funding sources. See “MD&A—Consolidated Balance Sheet Analysis—Funding Sources Composition” for additional information on our primary sources of funding.

 
 
45
Capital One Financial Corporation (COF)

Deposits
Table 29 provides a comparison of average balances, interest expense and average deposit interest rates for the three and six months ended June 30, 2018 and 2017.
Table 29: Deposits Composition and Average Deposits Interest Rates
 
 
Three Months Ended June 30,
 
 
2018
 
2017
(Dollars in millions)
 
Average
Balance
 
Interest
Expense
 
Average
Deposits
Interest Rate
 
Average
Balance
 
Interest
Expense
 
Average
Deposits
Interest Rate
Interest-bearing checking accounts(1)
 
$
40,329

 
$
60

 
0.60
%
 
$
45,380

 
$
57

 
0.50
%
Saving deposits(2)
 
150,150

 
378

 
1.01

 
144,883

 
234

 
0.65

Time deposits less than $100,000
 
25,604

 
153

 
2.40

 
19,932

 
76

 
1.52

Total interest-bearing core deposits
 
216,083

 
591

 
1.10

 
210,195

 
367

 
0.70

Time deposits of $100,000 or more
 
6,612

 
30

 
1.80

 
3,721

 
14

 
1.46

Foreign deposits
 
384

 
1

 
0.38

 
496

 
1

 
0.77

Total interest-bearing deposits
 
$
223,079

 
$
622

 
1.12

 
$
214,412

 
$
382

 
0.71

 
 
Six Months Ended June 30,
 
 
2018
 
2017
(Dollars in millions)
 
Average
Balance
 
Interest
Expense
 
Average
Deposits
Interest Rate
 
Average
Balance
 
Interest
Expense
 
Average
Deposits
Interest Rate
Interest-bearing checking accounts(1)
 
$
41,213

 
$
118

 
0.58
%
 
$
45,542

 
$
111

 
0.49
%
Saving deposits(2)
 
148,689

 
713

 
0.97

 
145,188

 
459

 
0.63

Time deposits less than $100,000
 
25,450

 
280

 
2.22

 
19,101

 
139

 
1.45

Total interest-bearing core deposits
 
215,352

 
1,111

 
1.04

 
209,831

 
709

 
0.67

Time deposits of $100,000 or more
 
5,648

 
49

 
1.74

 
3,375

 
25

 
1.45

Foreign deposits
 
384

 
1

 
0.41

 
490

 
1

 
0.39

Total interest-bearing deposits
 
$
221,384

 
$
1,161

 
1.05

 
$
213,696

 
$
735

 
0.69

__________
(1) 
Includes negotiable order of withdrawal accounts.
(2) 
Includes money market deposit accounts.
The FDIC limits the acceptance of brokered deposits by well-capitalized insured depository institutions and, with a waiver from the FDIC, by adequately-capitalized institutions. COBNA and CONA were well-capitalized, as defined under the federal banking regulatory guidelines, as of both June 30, 2018 and December 31, 2017. See “Part I—Item 1. Business—Supervision and Regulation” in our 2017 Form 10-K for additional information. We provide additional information on the composition of deposits under “MD&A—Consolidated Balance Sheets Analysis—Funding Sources Composition” and in “Note 8—Deposits and Borrowings.”
Short-Term Borrowings and Long-Term Debt
We access the capital markets to meet our funding needs through the issuance of senior and subordinated notes, securitized debt obligations, and federal funds purchased and securities loaned or sold under agreements to repurchase. In addition, we may utilize short-term and long-term FHLB advances secured by our investment securities, multifamily real estate loans, and commercial real estate loans. Substantially all of our long-term FHLB advances are structured with either a monthly or a quarterly call option at our discretion.

 
 
46
Capital One Financial Corporation (COF)

Our short-term borrowings include those borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. The short-term borrowings, which consist of federal funds purchased and securities loaned or sold under agreements to repurchase, decreased by $23 million to $553 million as of June 30, 2018 from December 31, 2017.
Our long-term debt, which primarily consists of securitized debt obligations, senior and subordinated notes, and long-term FHLB advances, decreased by $6.9 billion to $52.8 billion as of June 30, 2018 from December 31, 2017, primarily driven by a decrease in our FHLB advances outstanding, partially offset by senior and subordinated notes issuances.
The following table summarizes issuances of securitized debt obligations, senior and subordinated notes, and FHLB advances and their respective maturities or redemptions for the three and six months ended June 30, 2018 and 2017.
Table 30: Long-Term Funding
 
 
Issuances
 
Maturities/Redemptions
 
 
Three Months Ended June 30,
 
Three Months Ended June 30,
(Dollars in millions)
 
2018
 
2017
 
2018
 
2017
Securitized debt obligations
 
$
1,000

 
$
0

 
$
0

 
$
200

Senior and subordinated notes
 
2,000

 
2,500

 
0

 
500

FHLB advances
 
0

 
5,400

 
2

 
5,714

Total
 
$
3,000

 
$
7,900

 
$
2

 
$
6,414

 
 
Issuances
 
Maturities/Redemptions
 
 
Six Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2018
 
2017
 
2018
 
2017
Securitized debt obligations
 
$
1,000

 
$
3,000

 
$
1,250

 
$
3,483

Senior and subordinated notes
 
5,250

 
6,500

 
2,600

 
1,476

FHLB advances
 
0

 
5,400

 
8,607

 
20,464

Total
 
$
6,250

 
$
14,900

 
$
12,457

 
$
25,423

Credit Ratings
Our credit ratings impact our ability to access capital markets and our borrowing costs. Rating agencies base their ratings on numerous factors, including liquidity, capital adequacy, asset quality, quality of earnings and the probability of systemic support. Significant changes in these factors could result in different ratings.
Table 31 provides a summary of the credit ratings for the senior unsecured long-term debt of Capital One Financial Corporation, COBNA and CONA as of June 30, 2018 and December 31, 2017.
Table 31: Senior Unsecured Long-Term Debt Credit Ratings
 
 
June 30, 2018
 
December 31, 2017
 
 
Capital One
Financial
Corporation
 
COBNA
 
CONA
 
Capital One
Financial
Corporation
 
COBNA
 
CONA
Moody’s
 
Baa1
 
Baa1
 
Baa1
 
Baa1
 
Baa1
 
Baa1
S&P
 
BBB
 
BBB+
 
BBB+
 
BBB
 
BBB+
 
BBB+
Fitch
 
A-
 
A-
 
A-
 
A-
 
A-
 
A-
As of July 25, 2018, S&P and Fitch Ratings (“Fitch”) have us on a stable outlook. On November 8, 2017, Moody’s affirmed our senior unsecured long-term debt credit ratings and revised our outlook from stable to negative.

 
 
47
Capital One Financial Corporation (COF)

MARKET RISK PROFILE
Market risk is inherent in the financial instruments associated with our operations and activities, including loans, deposits, securities, short-term borrowings, long-term debt and derivatives. Below we provide additional information about our primary sources of market risk, our market risk management strategies and the measures we use to evaluate our market risk exposure.
Primary Market Risk Exposures
Our primary source of market risk is interest rate risk. We also have exposure to foreign exchange risk and customer-related trading risk, both of which we believe are minimal after considering the impact of our associated risk management activities discussed below.
Interest Rate Risk
Interest rate risk, which represents exposure to instruments whose yield or price varies with the volatility of interest rates, is our most significant source of market risk exposure. Banks are inevitably exposed to interest rate risk due to differences in the timing between the maturities or re-pricing of assets and liabilities.
Foreign Exchange Risk
Foreign exchange risk represents exposure to changes in the values of current holdings and future cash flows denominated in other currencies. Our primary exposure to foreign exchange risk is related to the operations of our international businesses in the U.K. and Canada. The largest foreign exchange exposure arising from these operations is the funding they are provided in the Great British pound (“GBP”) and the Canadian dollar (“CAD”), respectively. We also have foreign exchange exposure through our net equity investments in these operations and through the dollar-denominated value of future earnings and cash flows they generate.
Our intercompany funding exposes our consolidated statements of income to foreign exchange transaction risk, while our equity investments in our foreign operations result in translation risk exposure in AOCI and our capital ratios. We manage our transaction risk by entering into forward foreign currency derivative contracts to hedge our exposure to variability in cash flows related to foreign currency-denominated intercompany borrowings. We use foreign currency derivative contracts as net investment hedges to manage our AOCI exposure. We apply hedge accounting to both our intercompany funding hedges and our net investment hedges, with the primary net investments subject to hedging denominated in GBP.
We measure our total exposure from non-dollar-denominated intercompany borrowings to our international businesses by regularly tracking the value of the loans made to our foreign operations and the associated forward foreign currency derivative contracts we use to hedge them. We apply a 1% U.S. dollar appreciation shock against these exposures to measure the impact to our consolidated statements of income from foreign exchange transaction risk. The intercompany borrowings to our international businesses were 786 million GBP and 741 million GBP as of June 30, 2018 and December 31, 2017, respectively, and 6.2 billion CAD and 6.4 billion CAD as of June 30, 2018 and December 31, 2017, respectively.
We measure our total exposure in non-dollar-denominated equity by regularly tracking the value of net equity invested in our foreign operations, the largest of which is in our U.K. and Canadian operations. Our measurement of net equity includes the impact of net investment hedges where applicable. We apply a 30% U.S. dollar appreciation shock against these net investment exposures, which we believe approximates a significant adverse foreign exchange movement over a one-year time horizon. Our gross equity exposures in our U.K. and Canadian operations were 1.6 billion GBP as of both June 30, 2018 and December 31, 2017 and 1.1 billion CAD and 1.0 billion CAD as of June 30, 2018 and December 31, 2017, respectively.
As a result of our derivative management activities, we believe our net exposure to foreign exchange risk is minimal.
Customer-Related Trading Risk
We offer various interest rate, foreign exchange rate and commodity derivatives as an accommodation to customers within our Commercial Banking business and offset the majority of our exposures through derivative transactions with other counterparties. These exposures are measured and monitored on a daily basis. As a result of offsetting our customer exposures with other counterparties, we believe our net exposure to customer-related trading risk is minimal.

 
 
48
Capital One Financial Corporation (COF)

We employ value-at-risk (“VaR”) as the primary method to both measure and monitor the market risk in our customer-related trading activities. VaR is a statistical-based risk measure used to estimate the potential loss from adverse market movements in a normal market environment. We employ a historical simulation approach using the most recent 500 business days and use a 99 percent confidence level and a holding period of one business day. We use internal models to produce a daily VaR measure of the market risk of all customer-related trading exposures.
For further information on our customer-related trading exposures, see “Note 9—Derivative Instruments and Hedging Activities.”
Market Risk Management
We employ several techniques to manage our interest rate and foreign exchange risk, which include, but are not limited to, altering the duration and re-pricing characteristics of our various assets and liabilities and mitigating the foreign exchange exposure of certain non-dollar-denominated equity or transactions. Derivatives are the primary tools that we use for managing interest rate and foreign exchange risk. Use of derivatives is included in our current market risk management policies. We execute our derivative contracts in both over-the-counter and exchange-traded derivative markets and have exposure to both bilateral and clearinghouse counterparties. Although the majority of our derivatives are interest rate swaps, we also use a variety of other derivative instruments, including caps, floors, options, futures and forward contracts, to manage both our interest rate and foreign currency risk. The outstanding notional amount of our derivative contracts increased to $220.9 billion as of June 30, 2018 from $196.6 billion as of December 31, 2017 primarily driven by an increase in our hedging activities.
Market Risk Measurement
We have risk management policies and limits established by our market risk management policies and approved by the Board of Directors. Our objective is to manage our asset and liability risk position and exposure to market risk in accordance with these policies and prescribed limits based on prevailing market conditions and long-term expectations. Because no single measure can reflect all aspects of market risk, we use various industry standard market risk measurement techniques and analysis to measure, assess and manage the impact of changes in interest rates on our net interest income and our economic value of equity and the impact of changes in foreign exchange rates on our non-dollar-denominated earnings and non-dollar equity investments in foreign operations. We provide additional information below in “Economic Value of Equity.”
We consider the impact on both net interest income and economic value of equity in measuring and managing our interest rate risk. Due to recent increases in interest rates, we have incorporated a 150 basis points decline scenario into our interest rate sensitivity analysis. We use this 150 basis points decrease as our largest magnitude declining interest rate scenario, since a scenario where interest rates would decline by 200 basis points is unlikely. In scenarios where a 150 basis points decline would result in a rate less than 0%, we assume a rate of 0%.
Net Interest Income Sensitivity
This sensitivity measure estimates the impact on our projected 12-month baseline interest rate-sensitive revenue resulting from movements in interest rates. Interest rate-sensitive revenue consists of net interest income and certain components of other non-interest income significantly impacted by movements in interest rates, including changes in the fair value of free-standing interest rate swaps. In addition to our existing assets and liabilities, we incorporate expected future business growth assumptions, such as loan and deposit growth and pricing, and plans for projected changes in our funding mix in our baseline forecast. In measuring the sensitivity of interest rate movements on our projected interest rate-sensitive revenue, we assume a hypothetical instantaneous parallel shift in the level of interest rates of +200 basis points, +100 basis points, +50 basis points, -50 basis points, -100 basis points and -150 basis points to spot rates, with the lower rate scenario limited to zero as described above. At the current level of interest rates, our net interest income remains largely unchanged in most scenarios and decreases moderately in the -150 basis points scenario.
Economic Value of Equity
Our economic value of equity sensitivity measure estimates the impact on the net present value of our assets and liabilities, including derivative hedging activity, resulting from movements in interest rates. Our economic value of equity sensitivity measures are calculated based on our existing assets and liabilities, including derivatives, and do not incorporate business growth assumptions or projected plans for funding mix changes. In measuring the sensitivity of interest rate movements on our economic value of equity, we assume a hypothetical instantaneous parallel shift in the level of interest rates of +200 basis points, +100 basis points,

 
 
49
Capital One Financial Corporation (COF)

+50 basis points, -50 basis points, -100 basis points and -150 basis points to spot rates, with the lower rate scenario limited to zero as described above.
Calculating our economic value of equity and its sensitivity to interest rates requires projecting cash flows for assets, liabilities and derivative instruments and discounting those cash flows at the appropriate discount rates. Key assumptions in our economic value of equity calculation include projecting rate sensitive prepayments for mortgage securities, loans and other assets, term structure modeling of interest rates, discount spreads, and deposit volume and pricing assumptions.
Our current economic value of equity sensitivity profile demonstrates that our economic value of equity generally decreases as interest rates increase indicating that the economic value of our assets and derivative positions is more sensitive to interest rate changes than our liabilities.
Table 32 shows the estimated percentage impact on our projected baseline net interest income and economic value of equity calculated under the methodology described above as of June 30, 2018 and December 31, 2017.
Table 32: Interest Rate Sensitivity Analysis
 
 
June 30, 2018
 
December 31,
2017
Estimated impact on projected baseline net interest income:
 
 
 
 
+200 basis points
 
0.0
 %
 
(0.8
)%
+100 basis points
 
(0.3
)
 
(0.3
)
+50 basis points
 
(0.2
)
 
0.0

–50 basis points
 
0.1

 
(0.3
)
–100 basis points
 
(0.2
)
 
(1.3
)
–150 basis points
 
(1.0
)
 
N/A

Estimated impact on economic value of equity:
 
 
 
 
+200 basis points
 
(8.5
)
 
(7.5
)
+100 basis points
 
(3.9
)
 
(3.1
)
+50 basis points
 
(1.8
)
 
(1.2
)
–50 basis points
 
1.0

 
0.1

–100 basis points
 
1.0

 
(1.5
)
–150 basis points
 
(0.6
)
 
N/A

In addition to these industry standard measures, we will continue to factor into our internal interest rate risk management decisions, the potential impact of alternative interest rate scenarios, such as stressed rate shocks, as well as steepening and flattening yield curve scenarios.
Limitations of Market Risk Measures
The interest rate risk models that we use in deriving these measures incorporate contractual information, internally-developed assumptions and proprietary modeling methodologies, which project borrower and depositor behavior patterns in certain interest rate environments. Other market inputs, such as interest rates, market prices and interest rate volatility, are also critical components of our interest rate risk measures. We regularly evaluate, update and enhance these assumptions, models and analytical tools as we believe appropriate to reflect our best assessment of the market environment and the expected behavior patterns of our existing assets and liabilities.
There are inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. The sensitivity analysis described above contemplates only certain movements in interest rates and is performed at a particular point in time based on the existing balance sheet and, in some cases, expected future business growth and funding mix assumptions. The strategic actions that management may take to manage our balance sheet may differ significantly from our projections, which could cause our actual earnings and economic value of equity sensitivities to differ substantially from the above sensitivity analysis.

 
 
50
Capital One Financial Corporation (COF)

SUPERVISION AND REGULATION
The State of California passed the California Consumer Privacy Act of 2018 (the “CCPA”) on June 28, 2018. The CCPA enhances privacy rights for California residents. The CCPA requires, among other things, that companies covered by the CCPA disclose to individual customers upon their request information about any data collected about the individual and with whom the data is  sold or shared. Individuals may also have additional rights with respect to their data. The CCPA does not take effect until January 2020, and potential technical corrections are anticipated before the effective date. We are continuing to analyze the CCPA in order to determine its applicability and impact to our business.
United Kingdom
The U.K. Financial Conduct Authority (“FCA”) final rules and remedies on the Credit Card Market Study were published on March 1, 2018 and must be implemented by September 1, 2018. Under the FCA’s new “persistent debt” rules, firms are required to intervene in relation to those customers whose payments over the immediately preceding 18 months comprise a lower amount in principal than in interest, fees and charges. The final intervention, which is made at 36 months, may require Capital One (Europe) plc (“COEP”) to suspend customers’ use of the card or in some cases show customers forbearance, which may include reduction or cancellation of interest, fees or charges.
We provide additional information on our Supervision and Regulation in our 2017 Form 10-K under “Part I—Item 1. Business—Supervision and Regulation” and our Quarterly Report on Form 10-Q for the period ended March 31, 2018 under “MD&A—Supervision and Regulation.”
FORWARD-LOOKING STATEMENTS
From time to time, we have made and will make forward-looking statements, including those that discuss, among other things, strategies, goals, outlook or other non-historical matters; projections, revenues, income, returns, expenses, capital measures, accruals for claims in litigation and for other claims against us; earnings per share or other financial measures for us; future financial and operating results; our plans, objectives, expectations and intentions; and the assumptions that underlie these matters.
To the extent that any such information is forward-looking, it is intended to fit within the safe harbor for forward-looking information provided by the Private Securities Litigation Reform Act of 1995.
Numerous factors could cause our actual results to differ materially from those described in such forward-looking statements, including, among other things:
•
general economic and business conditions in the U.S., the U.K., Canada or our local markets, including conditions affecting employment levels, interest rates, collateral values, consumer income, credit worthiness and confidence, spending and savings that may affect consumer bankruptcies, defaults, charge-offs and deposit activity;
•
an increase or decrease in credit losses, including increases due to a worsening of general economic conditions in the credit environment, and the impact of inaccurate estimates or inadequate reserves;
•
compliance with financial, legal, regulatory, tax or accounting changes or actions, including the impacts of the Tax Act, the Dodd-Frank Act, and other regulations governing bank capital and liquidity standards;
•
developments, changes or actions relating to any litigation, governmental investigation or regulatory enforcement action or matter involving us;
•
the inability to sustain revenue and earnings growth;
•
increases or decreases in interest rates;
•
our ability to access the capital markets at attractive rates and terms to capitalize and fund our operations and future growth;

 
 
51
Capital One Financial Corporation (COF)

•
increases or decreases in our aggregate loan balances or the number of customers and the growth rate and composition thereof, including increases or decreases resulting from factors such as shifting product mix, amount of actual marketing expenses we incur and attrition of loan balances;
•
the amount and rate of deposit growth;
•
our ability to execute on our strategic and operational plans;
•
our response to competitive pressures;
•
changes in retail distribution strategies and channels, including the emergence of new technologies and product delivery systems;
•
the success of our marketing efforts in attracting and retaining customers;
•
changes in the reputation of, or expectations regarding, the financial services industry or us with respect to practices, products or financial condition;
•
any significant disruption in our operations or in the technology platforms on which we rely, including cybersecurity, business continuity and related operational risks, as well as other security failures or breaches of our systems or those of our customers, partners, service providers or other third parties;
•
our ability to maintain a compliance and technology infrastructure suitable for the nature of our business;
•
our ability to develop and adapt to rapid changes in digital technology to address the needs of our customers and comply with applicable regulatory standards, including our increasing reliance on third party infrastructure and compliance with data protection and privacy standards;
•
the effectiveness of our risk management strategies;
•
our ability to control costs, including the amount of, and rate of growth in, our expenses as our business develops or changes or as it expands into new market areas;
•
the extensive use, reliability and accuracy of the models and data we rely on in our business;
•
our ability to recruit and retain talented and experienced personnel;
•
the impact from, and our ability to respond to, natural disasters and other catastrophic events;
•
changes in the labor and employment markets;
•
fraud or misconduct by our customers, employees, business partners or third parties;
•
merchants’ increasing focus on the fees charged by credit card networks; and
•
other risk factors identified from time to time in our public disclosures, including in the reports that we file with the SEC.
Forward-looking statements often use words such as “will,” “anticipate,” “target,” “expect,” “estimate,” “intend,” “plan,” “goal,” “believe” or other words of similar meaning. Any forward-looking statements made by us or on our behalf speak only as of the date they are made or as of the date indicated, and we do not undertake any obligation to update forward-looking statements as a result of new information, future events or otherwise. For additional information on factors that could materially influence forward-looking statements included in this Report, see the risk factors set forth under “Part I—Item 1A. Risk Factors” in our 2017 Form 10-K. You should carefully consider the factors discussed above, and in our Risk Factors or other disclosure, in evaluating these forward-looking statements.

 
 
52
Capital One Financial Corporation (COF)

SUPPLEMENTAL TABLE
We include certain non-GAAP measures in the following table. We consider these metrics to be key financial performance measures that management uses in assessing capital adequacy and the level of returns generated. While these non-GAAP measures are widely used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies, our measures may not be comparable to similarly-titled measures reported by other companies. These non-GAAP measures are individually identified and calculations are explained in footnotes below the table. The following table presents reconciliations of these non-GAAP measures to the applicable amounts measured in accordance with GAAP.
Table A—Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures
(Dollars in millions, except as noted)
 
June 30, 2018
 
December 31, 2017
Tangible Common Equity (Period-End)
 
 
 
 
Stockholders’ equity
 
$
49,926

 
$
48,730

Goodwill and intangible assets(1)
 
(15,013
)
 
(15,106
)
Noncumulative perpetual preferred stock
 
(4,360
)
 
(4,360
)
Tangible common equity
 
$
30,553

 
$
29,264

Tangible Common Equity (Quarterly Average)
 
 
 
 
Stockholders’ equity
 
$
49,827

 
$
50,710

Goodwill and intangible assets(1)
 
(15,043
)
 
(15,223
)
Noncumulative perpetual preferred stock
 
(4,360
)
 
(4,360
)
Tangible common equity
 
$
30,424

 
$
31,127

Tangible Assets (Period-End)
 
 
 
 
Total assets
 
$
363,989

 
$
365,693

Goodwill and intangible assets(1)
 
(15,013
)
 
(15,106
)
Tangible assets
 
$
348,976

 
$
350,587

Tangible Assets (Quarterly Average)
 
 
 
 
Total assets
 
$
363,929

 
$
363,045

Goodwill and intangible assets(1)
 
(15,043
)
 
(15,223
)
Tangible assets
 
$
348,886

 
$
347,822

Non-GAAP Ratio
 
 
 
 
TCE(2)
 
8.8
%
 
8.3
%
Capital Ratios(3)
 
 
 
 
Common equity Tier 1 capital(4)
 
11.1
%
 
10.3
%
Tier 1 capital(5)
 
12.6

 
11.8

Total capital(6)
 
15.1

 
14.4

Tier 1 leverage(7)
 
10.3

 
9.9

Supplementary leverage(8)
 
8.8

 
8.4

Regulatory Capital Metrics
 
 
 
 
Risk-weighted assets(9)
 
$
285,223

 
$
292,225

Adjusted average assets(7)
 
349,222

 
348,424

Total leverage exposure(8)
 
409,730

 
407,832


 
 
53
Capital One Financial Corporation (COF)

(Dollars in millions)
 
June 30, 2018
 
December 31, 2017
Regulatory Capital Under Basel III Standardized Approach
 
 
 
 
Common equity excluding AOCI
 
$
47,359

 
$
45,296

Adjustments:
 
 
 
 
AOCI(10)(11)
 
(1,793
)
 
(808
)
Goodwill, net of related deferred tax liabilities
 
(14,368
)
 
(14,380
)
Intangible assets, net of related deferred tax liabilities(11)
 
(328
)
 
(330
)
Other
 
735

 
258

Common equity Tier 1 capital
 
31,605

 
30,036

Tier 1 capital instruments
 
4,360

 
4,360

Additional Tier 1 capital adjustments
 
—

 
—

Tier 1 capital
 
35,965

 
34,396

Tier 2 capital instruments
 
3,505

 
3,865

Qualifying allowance for loan and lease losses
 
3,612

 
3,701

Tier 2 capital
 
7,117

 
7,566

Total capital
 
$
43,082

 
$
41,962

__________
(1) 
Includes impact of related deferred taxes.
(2) 
TCE ratio is a non-GAAP measure calculated by dividing the period-end TCE by period-end tangible assets.
(3) 
Ratios as of June 30, 2018 are preliminary. As we continue to validate our data, the calculations are subject to change until we file our June 30, 2018 Form FR Y-9C—Consolidated Financial Statements for Holding Companies and Call Reports.
(4) 
Common equity Tier 1 capital ratio is a regulatory capital measure calculated based on common equity Tier 1 capital divided by risk-weighted assets.
(5) 
Tier 1 capital ratio is a regulatory capital measure calculated based on Tier 1 capital divided by risk-weighted assets.
(6) 
Total capital ratio is a regulatory capital measure calculated based on total capital divided by risk-weighted assets.
(7) 
Adjusted average assets, for the purpose of calculating our Tier 1 leverage ratio, represent total average assets adjusted for amounts that deducted from Tier 1 capital, predominately goodwill and intangible assets. Tier 1 leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by adjusted average assets.
(8) 
Supplementary leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by total leverage exposure. See “MD&A—Capital Management” for additional information.
(9) 
Includes credit and market risk weighted assets.
(10) 
Amounts presented are net of tax.
(11) 
Amounts based on transition provisions for regulatory capital deductions and adjustments of 80% for 2017 and 100% for 2018.

 
 
54
Capital One Financial Corporation (COF)

Glossary and Acronyms
2017 Stock Repurchase Program: On June 28, 2017, we announced that our Board of Directors had authorized the repurchase of up to $1.85 billion of shares of our common stock from the third quarter of 2017 through the end of the second quarter of 2018. In December 2017, the Board of Directors reduced the authorized repurchases of our common stock to up to $1.0 billion for the remaining 2017 CCAR period, which ended June 30, 2018.
2018 Stock Repurchase Program: On June 28, 2018, we announced that our Board of Directors authorized the repurchase of up to $1.2 billion of shares of our common stock from the third quarter of 2018 through the end of the second quarter of 2019.
Annual Report: References to our “2017 Form 10-K” or “2017 Annual Report” are to our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
Banks: Refers to COBNA and CONA.
Basel Committee: The Basel Committee on Banking Supervision.
Basel III Advanced Approaches: The Basel III Advanced Approaches is mandatory for those institutions with consolidated total assets of $250 billion or more or consolidated total on-balance sheet foreign exposure of $10 billion or more. The Basel III Capital Rule modified the Advanced Approaches version of Basel II to create the Basel III Advanced Approaches.
Basel III Capital Rule: The Federal Banking Agencies issued a rule in July 2013 implementing the Basel III capital framework developed by the Basel Committee as well as certain Dodd-Frank Act and other capital provisions.
Basel III Standardized Approach: The Basel III Capital Rule modified Basel I to create the Basel III Standardized Approach, which requires for Basel III Advanced Approaches banking organizations that have yet to exit parallel run to use the Basel III Standardized Approach to calculate regulatory capital, including capital ratios, subject to transition provisions.
Cabela’s acquisition: On September 25, 2017, we completed the acquisition from Synovus Bank of credit card assets and related liabilities of World’s Foremost Bank, a wholly-owned subsidiary of Cabela’s Incorporated.
Capital One: Capital One Financial Corporation and its subsidiaries.
Carrying value (with respect to loans): The amount at which a loan is recorded on the consolidated balance sheets. For loans recorded at amortized cost, carrying value is the unpaid principal balance net of unamortized deferred loan origination fees and costs, and unamortized purchase premium or discount. For loans that are or have been on nonaccrual status, the carrying value is also reduced by any net charge-offs that have been recorded and the amount of interest payments applied as a reduction of principal under the cost recovery method. For credit card loans, the carrying value also includes interest that has been billed to the customer. For loans classified as held for sale, carrying value is the lower of carrying value as described in the sentences above, or fair value. For PCI loans, carrying value represents the present value of all expected cash flows including interest that has not yet been accrued, discounted at the effective interest rate, including any valuation allowance for impaired loans.
CECL: In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected rather than incurred losses, with an anticipated result of more timely loss recognition. This guidance is effective for us on January 1, 2020, with early adoption permitted no earlier than January 1, 2019.
COBNA: Capital One Bank (USA), National Association, one of our fully owned subsidiaries, which offers credit and debit card products, other lending products and deposit products.
Common equity Tier 1 capital: Calculated as the sum of common equity, related surplus and retained earnings, and accumulated other comprehensive income net of applicable phase-ins, less goodwill and intangibles net of associated deferred tax liabilities and applicable phase-ins, less other deductions, as defined by regulators.
Company: Capital One Financial Corporation and its subsidiaries.

 
 
55
Capital One Financial Corporation (COF)

CONA: Capital One, National Association, one of our fully owned subsidiaries, which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.
Credit risk: The risk of loss from an obligor’s failure to meet the terms of any contract or otherwise fail to perform as agreed.
Derivative: A contract or agreement whose value is derived from changes in interest rates, foreign exchange rates, prices of securities or commodities, credit worthiness for credit default swaps or financial or commodity indices.
Discontinued operations: The operating results of a component of an entity, as defined by Accounting Standards Codification (“ASC”) 205, that are removed from continuing operations when that component has been disposed of or it is management’s intention to sell the component.
Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”): Regulatory reform legislation signed into law on July 21, 2010. This law broadly affects the financial services industry and contains numerous provisions aimed at strengthening the sound operation of the financial services sector.
Exchange Act: The Securities Exchange Act of 1934.
eXtensible Business Reporting Language (“XBRL”): A language for the electronic communication of business and financial data.
Federal Banking Agencies: The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation.
Federal Reserve: The Board of Governors of the Federal Reserve System.
FICO score: A measure of consumer credit risk provided by credit bureaus, typically produced from statistical modeling software created by FICO (formerly known as “Fair Isaac Corporation”) utilizing data collected by the credit bureaus.
Foreign currency derivative contracts: Agreements to exchange contractual amounts of one currency for another currency at one or more future dates.
Foreign exchange contracts: Contracts that provide for the future receipt or delivery of foreign currency at previously agreed-upon terms.
GreenPoint: Refers to our wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc., which was closed in 2007.
GSE or Agency: A government-sponsored enterprise or agency is a financial services corporation created by the United States Congress. Examples of U.S. government agencies include Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), Government National Mortgage Association (“Ginnie Mae”) and the Federal Home Loan Banks (“FHLB”).
Impaired loans: A loan is considered impaired when, based on current information and events, it is probable that we will not be able to collect all amounts due from the borrower in accordance with the original contractual terms of the loan.
Interest rate sensitivity: The exposure to interest rate movements.
Interest rate swaps: Contracts in which a series of interest rate flows in a single currency are exchanged over a prescribed period. Interest rate swaps are the most common type of derivative contract that we use in our asset/liability management activities.
Investment grade: Represents Moody’s long-term rating of Baa3 or better; and/or a Standard & Poor’s or DBRS long-term rating of BBB- or better; or if unrated, an equivalent rating using our internal risk ratings. Instruments that fall below these levels are considered to be non-investment grade.
Investor entities: Entities that invest in community development entities (“CDE”) that provide debt financing to businesses and non-profit entities in low-income and rural communities.

 
 
56
Capital One Financial Corporation (COF)

LCR Rule: In September 2014, the Federal Banking Agencies issued final rules implementing the Basel III Liquidity Coverage Ratio in the United States. The LCR is calculated by dividing the amount of an institution’s unencumbered high-quality liquid assets by its estimated net cash outflow, as defined and calculated in accordance with the LCR Rule.
Leverage ratio: Tier 1 capital divided by average assets after certain adjustments, as defined by the regulators.
Liquidity risk: The risk that the Company will not be able to meet its future financial obligations as they come due, or invest in future asset growth because of an inability to obtain funds at a reasonable price within a reasonable time period.
Loan-to-value (“LTV”) ratio: The relationship, expressed as a percentage, between the principal amount of a loan and the appraised value of the collateral (e.g., auto) securing the loan.
Managed presentation: A non-GAAP presentation of financial results that includes reclassifications to present revenue on a fully taxable-equivalent basis. Management uses this non-GAAP financial measure at the segment level, because it believes this provides information to enable investors to understand the underlying operational performance and trends of the particular business segment and facilitates a comparison of the business segment with the performance of competitors.
Market risk: The risk that an institution’s earnings or the economic value of equity could be adversely impacted by changes in interest rates, foreign exchange rates or other market factors.
Master netting agreement: An agreement between two counterparties that have multiple contracts with each other that provides for the net settlement of all contracts through a single payment in the event of default or termination of any one contract.
Mortgage-backed security (“MBS”): An asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans.
Mortgage servicing rights (“MSR”): The right to service a mortgage loan when the underlying loan is sold or securitized. Servicing includes collections for principal, interest and escrow payments from borrowers and accounting for and remitting principal and interest payments to investors.
Net interest margin: The result of dividing net interest income by average interest-earning assets.
Nonperforming loans: Loans that have been placed on nonaccrual status.
North Fork: North Fork Bancorporation, Inc., which was acquired by the Company in 2006.
Option-ARM loans: The option-ARM real estate loan product is an adjustable-rate mortgage loan that initially provides the borrower with the monthly option to make a fully-amortizing, interest-only or minimum fixed payment. After the initial payment option period, usually five years, the recalculated minimum payment represents a fully-amortizing principal and interest payment that would effectively repay the loan by the end of its contractual term.
Other-than-temporary impairment (“OTTI”): An impairment charge taken on a security whose fair value has fallen below the carrying value on the balance sheet and whose value is not expected to recover through the holding period of the security.
Public Fund deposits: Deposits that are derived from a variety of political subdivisions such as school districts and municipalities.
Purchased credit-impaired (“PCI”) loans: Loans acquired in a business combination that were recorded at fair value at acquisition and subsequently accounted for based on cash flows expected to be collected in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.
Purchase volume: Consists of purchase transactions, net of returns, for the period, and excludes cash advance and balance transfer transactions.
Rating agency: An independent agency that assesses the credit quality and likelihood of default of an issue or issuer and assigns a rating to that issue or issuer.
Recorded investment: The amount of the investment in a loan which includes any direct write-down of the investment.

 
 
57
Capital One Financial Corporation (COF)

Repurchase agreement: An instrument used to raise short-term funds whereby securities are sold with an agreement for the seller to buy back the securities at a later date.
Restructuring charges: Charges associated with the realignment of resources supporting various businesses, primarily consisting of severance and related benefits pursuant to our ongoing benefit programs and impairment of certain assets related to business locations and activities being exited.
Return on average assets: Calculated based on income from continuing operations, net of tax, for the period divided by average total assets for the period.
Return on average common equity: Calculated based on the sum of (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average common equity. Our calculation of return on average common equity may not be comparable to similarly-titled measures reported by other companies.
Return on average tangible common equity: A non-GAAP financial measure calculated based on the sum of (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; and (iii) less preferred stock dividends, for the period, divided by average tangible common equity. Our calculation of return on average tangible common equity may not be comparable to similarly-titled measures reported by other companies.
Risk-weighted assets: Consist of on- and off-balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default.
Securitized debt obligations: A type of asset-backed security and structured credit product constructed from a portfolio of fixed-income assets.
Subprime: For purposes of lending in our Credit Card business, we generally consider FICO scores of 660 or below, or other equivalent risk scores, to be subprime. For purposes of auto lending in our Consumer Banking business, we generally consider FICO scores of 620 or below to be subprime.
Tax Act: The Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 enacted on December 22, 2017.
Tangible common equity (“TCE”): A non-GAAP financial measure. Common equity less goodwill and intangible assets adjusted for deferred tax liabilities associated with non-tax deductible intangible assets and tax deductible goodwill.
Troubled debt restructuring (“TDR”): A TDR is deemed to occur when the Company modifies the contractual terms of a loan agreement by granting a concession to a borrower that is experiencing financial difficulty.
U.K. PPI Reserve: U.K. payment protection insurance customer refund reserve.
U.S. GAAP: Accounting principles generally accepted in the United States of America. Accounting rules and conventions defining acceptable practices in preparing financial statements in the U.S.
Unfunded commitments: Legally binding agreements to provide a defined level of financing until a specified future date.
Variable interest entity (“VIE”): An entity that (i) lacks enough equity investment at risk to permit the entity to finance its activities without additional financial support from other parties; (ii) has equity owners that lack the right to make significant decisions affecting the entity’s operations; and/or (iii) has equity owners that do not have an obligation to absorb or the right to receive the entity’s losses or return.

 
 
58
Capital One Financial Corporation (COF)

Acronyms
ABS: Asset-backed security
AFS: Available for sale
AML: Anti-money laundering
AOCI: Accumulated other comprehensive income
ARM: Adjustable rate mortgage
ASU: Accounting Standards Update
BHC: Bank holding company
bps: Basis points
CAD: Canadian dollar
CCAR: Comprehensive Capital Analysis and Review
CCP: Central Counterparty Clearinghouse, or Central Clearinghouse
CCPA: California Consumer Privacy Act of 2018
CDE: Community development entities
CECL: Current expected credit loss
CEO: Chief Executive Officer
CMBS: Commercial mortgage-backed securities
CME: Chicago Mercantile Exchange
COEP: Capital One (Europe) plc
COF: Capital One Financial Corporation
CVA: Credit valuation adjustment
DVA: Debit valuation adjustment
Fannie Mae: Federal National Mortgage Association
FASB: Financial Accounting Standards Board
FCA: Financial Conduct Authority
FCM: Futures commission merchant
FDIC: Federal Deposit Insurance Corporation
FHFA: Federal Housing Finance Agency
FHLB: Federal Home Loan Banks
FIRREA: Financial Institutions Reform, Recovery and Enforcement Act
Fitch: Fitch Ratings

 
 
59
Capital One Financial Corporation (COF)

FOS: Financial Ombudsman Service
Freddie Mac: Federal Home Loan Mortgage Corporation
FVC: Fair Value Committee
GBP: Great British pound
Ginnie Mae: Government National Mortgage Association
G-SIBs: Global systemically important banks
GSE or Agency: Government-sponsored enterprise
HELOCs: Home equity lines of credit
LCH: London Clearing House, or Clearnet
LCR: Liquidity coverage ratio
LIBOR: London Interbank Offered Rate
Moody’s: Moody’s Investors Service
MSR: Mortgage servicing rights
OCC: Office of the Comptroller of the Currency
OCI: Other comprehensive income
OTC: Over-the-counter
OTTI: Other-than-temporary impairment
PCA: Prompt corrective action
PCI: Purchased credit-impaired
PCCR: Purchased credit card relationship
PPI: Payment protection insurance
REO: Real estate owned
RMBS: Residential mortgage-backed securities
S&P: Standard & Poor’s
SEC: U.S. Securities and Exchange Commission
TARP: Troubled Asset Relief Program
TCE: Tangible common equity
TDR: Troubled debt restructuring
U.K.: United Kingdom
U.S.: United States of America
VAC: Valuations Advisory Committee

 
 
60
Capital One Financial Corporation (COF)

Item 1. Financial Statements and Notes
 
Page
Note 1—Summary of Significant Accounting Policies
Note 2—Business Developments and Discontinued Operations
Note 3—Investment Securities
Note 4—Loans
Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments
Note 6—Variable Interest Entities and Securitizations
Note 7—Goodwill and Intangible Assets
Note 8—Deposits and Borrowings
Note 9—Derivative Instruments and Hedging Activities
Note 10—Stockholders’ Equity
Note 11—Earnings Per Common Share
Note 12—Fair Value Measurement
Note 13—Business Segments and Revenue from Contracts with Customers
Note 14—Commitments, Contingencies, Guarantees and Others


 
 
61
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except per share-related data)
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
 
Loans, including loans held for sale
 
$
5,989

 
$
5,669

 
$
12,123

 
$
11,295

Investment securities
 
539

 
433

 
991

 
849

Other
 
68

 
26

 
119

 
54

Total interest income
 
6,596

 
6,128

 
13,233

 
12,198

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
622

 
382

 
1,161

 
735

Securitized debt obligations
 
124

 
82

 
231

 
151

Senior and subordinated notes
 
289

 
179

 
540

 
328

Other borrowings
 
10

 
12

 
32

 
37

Total interest expense
 
1,045

 
655

 
1,964

 
1,251

Net interest income
 
5,551

 
5,473

 
11,269

 
10,947

Provision for credit losses
 
1,276

 
1,800

 
2,950

 
3,792

Net interest income after provision for credit losses
 
4,275

 
3,673

 
8,319

 
7,155

Non-interest income:
 
 
 
 
 
 
 
 
Interchange fees, net
 
723

 
676

 
1,366

 
1,246

Service charges and other customer-related fees
 
391

 
418

 
823

 
789

Net securities gains (losses)
 
(1
)
 
(4
)
 
7

 
(4
)
Other
 
528

 
141

 
636

 
261

Total non-interest income
 
1,641

 
1,231

 
2,832

 
2,292

Non-interest expense:
 
 
 
 
 
 
 
 
Salaries and associate benefits
 
1,430

 
1,383

 
2,950

 
2,854

Occupancy and equipment
 
503

 
474

 
993

 
945

Marketing
 
425

 
435

 
839

 
831

Professional services
 
234

 
279

 
444

 
526

Communications and data processing
 
317

 
289

 
623

 
577

Amortization of intangibles
 
43

 
61

 
87

 
123

Other
 
472

 
493

 
1,061

 
992

Total non-interest expense
 
3,424

 
3,414

 
6,997

 
6,848

Income from continuing operations before income taxes
 
2,492

 
1,490

 
4,154

 
2,599

Income tax provision
 
575

 
443

 
894

 
757

Income from continuing operations, net of tax
 
1,917

 
1,047

 
3,260

 
1,842

Income (loss) from discontinued operations, net of tax
 
(11
)
 
(11
)
 
(8
)
 
4

Net income
 
1,906

 
1,036

 
3,252

 
1,846

Dividends and undistributed earnings allocated to participating securities
 
(12
)
 
(8
)
 
(23
)
 
(13
)
Preferred stock dividends
 
(80
)
 
(80
)
 
(132
)
 
(133
)
Net income available to common stockholders
 
$
1,814

 
$
948

 
$
3,097

 
$
1,700

Basic earnings per common share:
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
3.76

 
$
1.98

 
$
6.39

 
$
3.51

Income (loss) from discontinued operations
 
(0.02
)
 
(0.02
)
 
(0.02
)
 
0.01

Net income per basic common share
 
$
3.74

 
$
1.96

 
$
6.37

 
$
3.52

Diluted earnings per common share:
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
3.73

 
$
1.96

 
$
6.35

 
$
3.48

Income (loss) from discontinued operations
 
(0.02
)
 
(0.02
)
 
(0.02
)
 
0.01

Net income per diluted common share
 
$
3.71

 
$
1.94

 
$
6.33

 
$
3.49

Dividends declared and paid per common share
 
$
0.40

 
$
0.40

 
$
0.80

 
$
0.80


See Notes to Consolidated Financial Statements.
 
62
Capital One Financial Corporation (COF)


CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2018
 
2017
 
2018
 
2017
Net income
 
$
1,906

 
$
1,036

 
$
3,252

 
$
1,846

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on securities available for sale
 
(65
)
 
149

 
(650
)
 
185

Net changes in securities held to maturity
 
8

 
23

 
433

 
46

Net unrealized gains (losses) on cash flow hedges
 
(113
)
 
45

 
(431
)
 
(21
)
Foreign currency translation adjustments
 
(24
)
 
31

 
(17
)
 
48

Other
 
0

 
3

 
(1
)
 
8

Other comprehensive income (loss), net of tax
 
(194
)
 
251

 
(666
)
 
266

Comprehensive income
 
$
1,712

 
$
1,287

 
$
2,586

 
$
2,112


See Notes to Consolidated Financial Statements.
 
63
Capital One Financial Corporation (COF)


CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in millions, except per share-related data)
 
June 30,
2018
 
December 31,
2017
Assets:
 
 
 
 
Cash and cash equivalents:
 
 
 
 
Cash and due from banks
 
$
4,499

 
$
4,458

Interest-bearing deposits and other short-term investments
 
7,774

 
9,582

Total cash and cash equivalents
 
12,273

 
14,040

Restricted cash for securitization investors
 
1,023

 
312

Investment securities:
 
 
 
 
Securities available for sale
 
50,691

 
37,655

Securities held to maturity
 
33,464

 
28,984

Total investment securities
 
84,155

 
66,639

Loans held for investment:
 
 
 
 
Unsecuritized loans held for investment
 
201,222

 
218,806

Loans held in consolidated trusts
 
34,902

 
35,667

Total loans held for investment
 
236,124

 
254,473

Allowance for loan and lease losses
 
(7,368
)
 
(7,502
)
Net loans held for investment
 
228,756

 
246,971

Loans held for sale, at lower of cost or fair value
 
1,480

 
971

Premises and equipment, net
 
4,095

 
4,033

Interest receivable
 
1,493

 
1,536

Goodwill
 
14,531

 
14,533

Other assets
 
16,183

 
16,658

Total assets
 
$
363,989

 
$
365,693

 
 
 
 
 
Liabilities:
 
 
 
 
Interest payable
 
$
450

 
$
413

Deposits:
 
 
 
 
Non-interest-bearing deposits
 
25,620

 
26,404

Interest-bearing deposits
 
222,605

 
217,298

Total deposits
 
248,225

 
243,702

Securitized debt obligations
 
19,649

 
20,010

Other debt:
 
 
 
 
Federal funds purchased and securities loaned or sold under agreements to repurchase
 
553

 
576

Senior and subordinated notes
 
32,920

 
30,755

Other borrowings
 
188

 
8,940

Total other debt
 
33,661

 
40,271

Other liabilities
 
12,078

 
12,567

Total liabilities
 
314,063

 
316,963

Commitments, contingencies and guarantees (see Note 14)
 

 
 
Stockholders’ equity:
 
 
 
 
Preferred stock (par value $.01 per share; 50,000,000 shares authorized; 4,475,000 shares issued and outstanding as of both June 30, 2018 and December 31, 2017)
 
0

 
0

Common stock (par value $.01 per share; 1,000,000,000 shares authorized; 665,855,771 and 661,724,927 shares issued as of June 30, 2018 and December 31, 2017, respectively, 478,425,026 and 485,525,340 shares outstanding as of June 30, 2018 and December 31, 2017, respectively)
 
7

 
7

Additional paid-in capital, net
 
31,868

 
31,656

Retained earnings
 
33,626

 
30,700

Accumulated other comprehensive loss
 
(1,793
)
 
(926
)
Treasury stock, at cost (par value $.01 per share; 187,430,745 and 176,199,587 shares as of June 30, 2018 and December 31, 2017, respectively)
 
(13,782
)
 
(12,707
)
Total stockholders’ equity
 
49,926

 
48,730

Total liabilities and stockholders’ equity
 
$
363,989

 
$
365,693


See Notes to Consolidated Financial Statements.
 
64
Capital One Financial Corporation (COF)


CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in millions)
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
Stockholders’
Equity
Shares
 
Amount
 
Shares
 
Amount
 
Balance as of December 31, 2017
 
4,475,000

 
$
0

 
661,724,927

 
$
7

 
$
31,656

 
$
30,700

 
$
(926
)
 
$
(12,707
)
 
$
48,730

Cumulative effects from adoption of new accounting standards
 
 
 
 
 
 
 
 
 
 
 
201

 
(201
)
 
 
 
0

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
3,252

 
(666
)
 
 
 
2,586

Dividends—common stock
 
 
 
 
 
26,838

 
0

 
2

 
(395
)
 
 
 
 
 
(393
)
Dividends—preferred stock
 
 
 
 
 
 
 
 
 
 
 
(132
)
 
 
 
 
 
(132
)
Purchases of treasury stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,075
)
 
(1,075
)
Issuances of common stock and restricted stock, net of forfeitures
 
 
 
 
 
3,024,300

 
0

 
90

 
 
 
 
 
 
 
90

Exercises of stock options and warrants
 
 
 
 
 
1,079,706

 
0

 
20

 
 
 
 
 
 
 
20

Compensation expense for restricted stock awards, restricted stock units and stock options
 
 
 
 
 
 
 
 
 
100

 
 
 
 
 
 
 
100

Balance as of June 30, 2018
 
4,475,000

 
$
0

 
665,855,771

 
$
7

 
$
31,868

 
$
33,626

 
$
(1,793
)
 
$
(13,782
)
 
$
49,926


See Notes to Consolidated Financial Statements.
 
65
Capital One Financial Corporation (COF)


CAPITAL ONE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
 
Six Months Ended June 30,
(Dollars in millions)
 
2018
 
2017
Operating activities:
 
 
 
 
Income from continuing operations, net of tax
 
$
3,260

 
$
1,842

Income (loss) from discontinued operations, net of tax
 
(8
)
 
4

Net income
 
3,252

 
1,846

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for credit losses
 
2,950

 
3,792

Depreciation and amortization, net
 
1,132

 
1,131

Deferred tax provision (benefit)
 
95

 
(235
)
Net securities gains (losses)
 
(7
)
 
4

Gain on sales of loans
 
(433
)
 
(19
)
Stock-based compensation expense
 
108

 
111

Loans held for sale:
 
 
 
 
Originations and purchases
 
(3,838
)
 
(3,834
)
Proceeds from sales and paydowns
 
3,574

 
4,123

Changes in operating assets and liabilities:
 
 
 
 
Changes in interest receivable
 
43

 
5

Changes in other assets
 
(110
)
 
1,314

Changes in interest payable
 
37

 
49

Changes in other liabilities
 
(1,116
)
 
(1,264
)
Net cash from operating activities
 
5,687

 
7,023

Investing activities:
 
 
 
 
Securities available for sale:
 
 
 
 
Purchases
 
(9,460
)
 
(6,479
)
Proceeds from paydowns and maturities
 
3,763

 
3,604

Proceeds from sales
 
1,058

 
3,123

Securities held to maturity:
 
 
 
 
Purchases
 
(14,586
)
 
(2,893
)
Proceeds from paydowns and maturities
 
1,199

 
1,183

Loans:
 
 
 
 
Net changes in loans held for investment
 
13,896

 
(3,019
)
Principal recoveries of loans previously charged off
 
1,308

 
965

Net purchases of premises and equipment
 
(429
)
 
(483
)
Net cash from other investing activities
 
(364
)
 
(296
)
Net cash from investing activities
 
(3,615
)
 
(4,295
)
 
 
 
 
 
 
 
Six Months Ended June 30,
(Dollars in millions)
 
2018
 
2017
Financing activities:
 
 
 
 
Deposits and borrowings:
 
 
 
 
Changes in deposits
 
$
4,691

 
$
2,964

Issuance of securitized debt obligations
 
997

 
2,991

Maturities and paydowns of securitized debt obligations
 
(1,250
)
 
(3,483
)
Issuance of senior and subordinated notes and long-term FHLB advances
 
5,227

 
11,865

Maturities and paydowns of senior and subordinated notes and long-term FHLB advances
 
(11,207
)
 
(21,940
)
Changes in other borrowings
 
(96
)
 
(21
)
Common stock:
 
 
 
 
Net proceeds from issuances
 
90

 
79

Dividends paid
 
(393
)
 
(390
)
Preferred stock:
 
 
 
 
Dividends paid
 
(132
)
 
(133
)
Purchases of treasury stock
 
(1,075
)
 
(219
)
Proceeds from share-based payment activities
 
20

 
81

Net cash from financing activities
 
(3,128
)
 
(8,206
)
Changes in cash, cash equivalents and restricted cash for securitization investors
 
(1,056
)
 
(5,478
)
Cash, cash equivalents and restricted cash for securitization investors, beginning of the period
 
14,352

 
12,493

Cash, cash equivalents and restricted cash for securitization investors, end of the period
 
$
13,296

 
$
7,015

Supplemental cash flow information:
 
 
 
 
Non-cash items:
 
 
 
 
Net transfers from loans held for investment to loans held for sale
 
$
663

 
$
265

Interest paid
 
1,796

 
1,269

Income tax paid
 
171

 
467


See Notes to Consolidated Financial Statements.
 
66
Capital One Financial Corporation (COF)


CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Capital One Financial Corporation, a Delaware Corporation established in 1994 and headquartered in McLean, Virginia, is a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company”) offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of June 30, 2018, our principal subsidiaries included:
•
Capital One Bank (USA), National Association (“COBNA”), which offers credit and debit card products, other lending products and deposit products; and
•
Capital One, National Association (“CONA”), which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.
The Company is hereafter collectively referred to as “we,” “us” or “our.” COBNA and CONA are collectively referred to as the “Banks.”
We also offer products outside of the United States of America (“U.S.”) principally through Capital One (Europe) plc (“COEP”), an indirect subsidiary of COBNA organized and located in the United Kingdom (“U.K.”), and through a branch of COBNA in Canada. COEP has authority, among other things, to provide credit card loans. Our branch of COBNA in Canada also has the authority to provide credit card loans.
Our principal operations are organized for management reporting purposes into three major business segments, which are defined primarily based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. We provide details on our business segments, the integration of recent acquisitions, if any, into our business segments and the allocation methodologies and accounting policies used to derive our business segment results in “Note 13—Business Segments and Revenue from Contracts with Customers.”
Basis of Presentation and Use of Estimates
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”). The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and in the related disclosures. These estimates are based on information available as of the date of the consolidated financial statements. While management makes its best judgments, actual amounts or results could differ from these estimates. In the opinion of management, all normal, recurring adjustments have been included for a fair statement of this interim financial information. Certain prior period amounts have been reclassified to conform to the current period presentation.
These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements, and related notes thereto, included in Capital One Financial Corporation’s 2017 Annual Report on Form 10-K (“2017 Form 10-K”).

 
 
67
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Newly Adopted Accounting Standards
Accounting Implications of the Tax Cuts and Jobs Act
In March 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This ASU codifies into existing U.S. GAAP the SEC Staff views expressed in Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act. This guidance addresses situations where an entity’s accounting for the income tax effects of the Tax Act is incomplete upon issuance of the entity’s financial statements for the reporting period in which the Tax Act was enacted. In accordance with this guidance, we included certain provisional amounts for these effects in our consolidated financial statements as of and for the year ended December 31, 2017. See “MD&A—Accounting Changes and Developments” in our 2017 Form 10-K for more information. We continue to assess information relating to such provisional amounts including regulatory guidance, repatriation tax impacts to other jurisdictions, and other information. We expect to finalize our assessment and record any required adjustments to provisional amounts by December 2018. We did not have any significant measurement period adjustments in the three or six months ended June 30, 2018.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. U.S. GAAP requires the effects of changes in tax rates and laws on deferred tax balances to be recorded in income tax from continuing operations in the period of enactment. This requirement applies even in situations in which the related income tax effects of items in accumulated other comprehensive income (“AOCI”) were originally recognized in other comprehensive income (rather than in income from continuing operations), which results in certain tax effects being stranded in AOCI. This ASU allows a one-time reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Act. Additionally, this ASU requires entities to disclose their accounting policy for releasing stranded tax effects from AOCI, for which ours is to release the effects using a portfolio approach. This ASU provides entities the option to apply the guidance retrospectively or in the period of adoption. We early adopted this ASU in the first quarter of 2018, resulting in a decrease to AOCI and an increase to retained earnings of $173 million. Our reclassification included the effects of the reduction in the federal corporate income tax rate enacted by the Tax Act and the resulting impacts on the federal benefit of deducting state income taxes.
Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU amends hedge accounting guidance to better align hedge accounting with risk management activities, while reducing the complexity of applying and reporting on hedge accounting. Under this ASU, the concept of separately measuring and reporting hedge ineffectiveness has been eliminated and entities are required to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. In addition, for a closed pool of pre-payable financial assets, entities will be able to hedge an amount that is not expected to be affected by prepayments, defaults and other events under the “last-of-layer” method. The guidance permits a one-time reclassification of debt securities eligible to be hedged under the “last-of-layer” method from held to maturity to available for sale upon adoption.
We early adopted this ASU in the first quarter of 2018 under the prescribed modified retrospective transition method. As permitted by this ASU, and in order to optimize the investment portfolio management for capital and risk management considerations, we made a one-time election to transfer $9.0 billion of held to maturity securities eligible to be hedged under the “last-of-layer” method to the available for sale category, resulting in an increase to AOCI of $107 million. See “Note 3—Investment Securities” and “Note 9—Derivative Instruments and Hedging Activities” for additional information on the impacts of the transfer, as well as the disclosures required under the new guidance.
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU clarifies certain issues related to classification within the statement of cash flows with the objective of reducing existing diversity in practice. We adopted this ASU in the first quarter of 2018 under the retrospective transition method and our adoption did not have a material impact on our consolidated financial statements.

 
 
68
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The primary impact of this ASU to us is the requirement to measure equity investments at fair value with changes in fair value recorded through net income, except those accounted for under the equity method of accounting, or those that do not have a readily determinable fair value (for which a measurement alternative can be elected). We adopted this ASU in the first quarter of 2018 under the modified retrospective method and our adoption did not have a material impact on our consolidated financial statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 was amended through subsequent accounting standard updates that resulted in technical corrections, improvements and a one-year deferral of the effective date to January 1, 2018. Topic 606, as amended, is applicable to all entities and replaced significant portions of existing industry and transaction-specific revenue recognition rules with a more principles-based recognition model. Entities were given an option to apply either a full or modified retrospective method of adoption. Most revenue associated with financial instruments, including interest income, loan origination fees and credit card fees, is outside the scope of the guidance. Gains and losses on investment securities, derivatives and sales of financial instruments are similarly excluded from the scope. We determined interchange fees earned on credit and debit card transactions, net of any related customer rewards, are in the scope of the amended guidance. We assessed the impact of the new guidance by evaluating our contracts, identifying our performance obligations, determining when the performance obligations were satisfied to allow us to recognize revenue and determining the amount of revenue to recognize. As a result of this analysis, we determined our recognition, measurement and presentation of interchange fees net of customer rewards costs will not change. We adopted this guidance in the first quarter of 2018 under the modified retrospective transition method and our adoption did not have a material impact on our consolidated financial statements. See “Note 13—Business Segments and Revenue from Contracts with Customers” for the new disclosures required under this guidance.
Recently Issued but Not Yet Adopted Accounting Standards
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period to the earliest call date for certain purchased callable debt securities held at a premium. There is no change for accounting for securities held at a discount. Under the existing guidance, the premium is generally amortized as an adjustment to interest income over the contractual life of the debt security. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements. This guidance is effective for us on January 1, 2019, with early adoption permitted, using the modified retrospective method of adoption. We plan to adopt the standard on its effective date.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance in this ASU is intended to reduce the cost and complexity of testing goodwill for impairment by eliminating the second step from the current goodwill impairment test. Under the existing guidance, the first step compares a reporting unit’s carrying value to its fair value. If the carrying value exceeds fair value, an entity performs the second step, which assigns the reporting unit’s fair value to its assets and liabilities, including unrecognized assets and liabilities, in the same manner as required in purchase accounting. Under the new guidance, any impairment of a reporting unit’s goodwill is determined based on the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to the reporting unit. This guidance is effective for us on January 1, 2020, with early adoption permitted, using the prospective method of adoption. We are currently evaluating the overall impact of early adopting this ASU.

 
 
69
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected rather than incurred losses, with an anticipated result of more timely loss recognition. The CECL model is applicable to financial assets measured at amortized cost, net investments in leases that are not accounted for at fair value through net income and certain off-balance sheet arrangements. The CECL model will replace our current accounting for purchased credit-impaired (“PCI”) and impaired loans. This ASU also amends the available for sale (“AFS”) debt securities other-than-temporary impairment (“OTTI”) model. Credit losses (and subsequent recoveries) on AFS debt securities will be recorded through an allowance approach, rather than the current U.S. GAAP practice of permanent write-downs for credit losses and accreting positive changes through interest income over time.
This guidance is effective for us on January 1, 2020, with early adoption permitted no earlier than January 1, 2019, using the modified retrospective method of adoption. We plan to adopt the standard on its effective date. We have established a company-wide, cross-functional governance structure for our implementation of this standard. We are in the process of determining key accounting interpretations, data requirements and necessary changes to our credit loss estimation methods, processes and systems. We continue to assess the potential impact on our consolidated financial statements and related disclosures. Due to the significant differences in the revised guidance from existing U.S. GAAP, the implementation of this guidance may result in increases to our reserves for credit losses on financial instruments.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU requires lessees to recognize right of use assets and lease liabilities on their consolidated balance sheets and disclose key information about all their leasing arrangements, with certain practical expedients. This guidance is effective for us on January 1, 2019, with early adoption permitted, using the modified retrospective method of adoption. We plan to adopt the standard on the effective date. We are currently in the process of reviewing lease contracts, reviewing other contracts for potential embedded leases, implementing a new lease accounting and administration software solution, establishing new processes and internal controls and evaluating the impact of various accounting policy elections.
Upon adoption, we expect to record a right of use asset and a corresponding lease liability for our operating leases where we are the lessee. The potential impact on our consolidated financial statements is largely based on the present value of future minimum lease payments, the amount of which will depend upon the population of leases in effect at the date of adoption. Future minimum lease payments totaled $2.7 billion as of December 31, 2017, as disclosed in “Note 8—Premises, Equipment and Lease Commitments” of our 2017 Form 10-K. We do not expect material changes to the recognition of operating lease expense in our consolidated statements of income.

 
 
70
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2—BUSINESS DEVELOPMENTS AND DISCONTINUED OPERATIONS
Business Developments
Consumer Home Loan Portfolio Sale
In the second quarter of 2018, we sold the substantial majority of our consumer home loan portfolio and the related servicing. We also transferred the remaining portfolio of $398 million to loans held for sale as of June 30, 2018. These actions resulted in a net gain of $400 million, including a benefit for credit losses of $46 million, which is reflected in the Other category.
Restructuring Activities
We periodically initiate restructuring activities to support business strategies and enhance our overall operational efficiency. These restructuring activities have primarily consisted of exiting certain business locations and activities as well as the realignment of resources supporting various businesses, including the decisions within our Consumer Banking business to cease new originations of home loan lending products in the fourth quarter of 2017, to sell our online retail brokerage business in the first quarter of 2018 and to sell the substantial majority of our consumer home loan portfolio in the second quarter of 2018. The charges incurred as a result of these restructuring activities have primarily consisted of severance and related benefits pursuant to our ongoing benefit programs, which are included in salaries and associate benefits within non-interest expense in our consolidated statements of income, as well as impairment of certain assets related to business locations and activities being exited, which are generally included in occupancy and equipment within non-interest expense.
For the three and six months ended June 30, 2018, we recognized restructuring charges of $15 million and $34 million, respectively, which are reflected in the Other category of our business segment results. We had a liability of $41 million associated with restructuring activities, which is recorded in other liabilities on our consolidated balance sheets as of June 30, 2018. There were no significant restructuring charges incurred for the three and six months ended June 30, 2017. As of June 30, 2018, our online retail brokerage business had liabilities held for sale primarily consisting of customer deposits of $1.7 billion. When the transaction closes, we will transfer these customer deposits and an equal cash amount to the third-party purchaser.
Discontinued Operations
Our discontinued operations consist of the mortgage origination operations of our wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc. (“GreenPoint”) and the manufactured housing operations of GreenPoint Credit, LLC, a subsidiary of GreenPoint, both of which were acquired as part of the North Fork Bancorporation, Inc. (“North Fork”) acquisition in December 2006. Although the manufactured housing operations were sold to a third party in 2004 prior to our acquisition of North Fork, we acquired certain retained interests and obligations related to those operations as part of the acquisition. Separately, in the third quarter of 2007 we closed the mortgage origination operations of the wholesale mortgage banking unit. The results of both the wholesale banking unit and the manufactured housing operations have been accounted for as discontinued operations and are reported as income or loss from discontinued operations, net of tax, on the consolidated statements of income. Loss from discontinued operations, net of tax, was $11 million for both the three months ended June 30, 2018 and 2017. Loss from discontinued operations, net of tax, was $8 million for the six months ended June 30, 2018 and income from discontinued operations, net of tax, was $4 million for the six months ended June 30, 2017. As of June 30, 2018, we had no significant continuing involvement in the operations of our wholesale mortgage banking unit.
In the fourth quarter of 2017, we entered into an agreement with the third-party servicer under which we assumed the obligation to exercise the remaining clean-up calls as they become due on certain manufactured housing securitization transactions. See “Note 6—Variable Interest Entities and Securitizations” and “Note 14—Commitments, Contingencies, Guarantees and Others” for information associated with GreenPoint Credit, LLC manufactured housing operations and our mortgage representation and warranty exposure.

 
 
71
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3—INVESTMENT SECURITIES
Our investment securities portfolio consists primarily of the following: U.S. Treasury securities; U.S. government-sponsored enterprise or agency (“Agency”) and non-agency residential mortgage-backed securities (“RMBS”); Agency commercial mortgage-backed securities (“CMBS”); other asset-backed securities (“ABS”); and other securities. Agency securities include Government National Mortgage Association (“Ginnie Mae”) guaranteed securities, Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) issued securities. The carrying value of our investments in U.S. Treasury and Agency securities represented 96% and 95% of our total investment securities as of June 30, 2018 and December 31, 2017, respectively.
In the first quarter of 2018, we made a one-time transfer of held to maturity securities with a carrying value of $9.0 billion to available for sale as a result of our adoption of ASU No. 2017-12. See “Note 1—Summary of Significant Accounting Policies” and “Note 10—Stockholders’ Equity” for more information.
The table below presents an overview of our investment securities portfolio as of June 30, 2018 and December 31, 2017.
Table 3.1: Overview of Investment Securities Portfolio
(Dollars in millions)
 
June 30, 2018
 
December 31, 2017
Securities available for sale, at fair value
 
$
50,691

 
$
37,655

Securities held to maturity, at carrying value
 
33,464

 
28,984

Total investment securities
 
$
84,155

 
$
66,639

The table below presents the amortized cost, gross unrealized gains and losses, and fair value of securities available for sale as of June 30, 2018 and December 31, 2017.
Table 3.2: Investment Securities Available for Sale
 
 
June 30, 2018
(Dollars in millions)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses(1)
 
Fair
Value
Investment securities available for sale:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
8,603

 
$
44

 
$
(23
)
 
$
8,624

RMBS:
 
 
 
 
 
 
 
 
Agency
 
34,870

 
42

 
(1,170
)
 
33,742

Non-agency
 
1,563

 
378

 
(1
)
 
1,940

Total RMBS
 
36,433

 
420

 
(1,171
)
 
35,682

Agency CMBS
 
4,858

 
9

 
(104
)
 
4,763

Other ABS 
 
296

 
0

 
(2
)
 
294

Other securities(2)
 
1,331

 
4

 
(7
)
 
1,328

Total investment securities available for sale
 
$
51,521

 
$
477

 
$
(1,307
)
 
$
50,691


 
 
72
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
December 31, 2017
(Dollars in millions)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses(1)
 
Fair
Value
Investment securities available for sale:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
5,168

 
$
11

 
$
(8
)
 
$
5,171

RMBS:
 
 
 
 
 
 
 
 
Agency
 
26,013

 
67

 
(402
)
 
25,678

Non-agency
 
1,722

 
393

 
(1
)
 
2,114

Total RMBS
 
27,735

 
460

 
(403
)
 
27,792

Agency CMBS
 
3,209

 
10

 
(44
)
 
3,175

Other ABS
 
513

 
0

 
(1
)
 
512

Other securities(2)
 
1,003

 
4

 
(2
)
 
1,005

Total investment securities available for sale
 
$
37,628

 
$
485

 
$
(458
)
 
$
37,655

__________
(1) 
Includes non-credit-related OTTI that is recorded in AOCI of $1 million as of both June 30, 2018 and December 31, 2017. Substantially all of this amount is related to non-agency RMBS.
(2) 
Includes primarily supranational bonds and foreign government bonds.
The table below presents the amortized cost, carrying value, gross unrealized gains and losses, and fair value of securities held to maturity as of June 30, 2018 and December 31, 2017. In the first quarter of 2018, we made a one-time transfer of held to maturity securities with a carrying value of $9.0 billion to available for sale as a result of our adoption of ASU No. 2017-12. These securities had $535 million pre-tax ($407 million after-tax) of unrealized losses in AOCI prior to the transfer. See “Note 10—Stockholders’ Equity” for more information.
Table 3.3: Investment Securities Held to Maturity
 
 
June 30, 2018
(Dollars in millions)
 
Amortized
Cost
 
Unrealized Losses Recorded in AOCI
 
Carrying Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Agency RMBS
 
$
30,633

 
$
(256
)
 
$
30,377

 
$
207

 
$
(476
)
 
$
30,108

Agency CMBS
 
3,101

 
(14
)
 
3,087

 
9

 
(107
)
 
2,989

Total investment securities held to maturity
 
$
33,734

 
$
(270
)
 
$
33,464

 
$
216

 
$
(583
)
 
$
33,097

 
 
December 31, 2017
(Dollars in millions)
 
Amortized
Cost
 
Unrealized
Losses Recorded in AOCI
 
Carrying Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities
 
$
200

 
$
0

 
$
200

 
$
0

 
$
0

 
$
200

Agency RMBS
 
25,741

 
(761
)
 
24,980

 
565

 
(150
)
 
25,395

Agency CMBS
 
3,882

 
(78
)
 
3,804

 
70

 
(32
)
 
3,842

Total investment securities held to maturity
 
$
29,823

 
$
(839
)
 
$
28,984

 
$
635

 
$
(182
)
 
$
29,437


 
 
73
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Investment Securities in a Gross Unrealized Loss Position
The table below provides, by major security type, information about our securities available for sale in a gross unrealized loss position and the length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2018 and December 31, 2017.
Table 3.4: Securities in a Gross Unrealized Loss Position
 
 
June 30, 2018
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
(Dollars in millions)
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
1,166

 
$
(23
)
 
$
0

 
$
0

 
$
1,166

 
$
(23
)
RMBS:
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
17,799

 
(631
)
 
11,634

 
(539
)
 
29,433

 
(1,170
)
Non-agency
 
15

 
0

 
9

 
(1
)
 
24

 
(1
)
Total RMBS
 
17,814

 
(631
)
 
11,643

 
(540
)
 
29,457

 
(1,171
)
Agency CMBS
 
2,501

 
(55
)
 
987

 
(49
)
 
3,488

 
(104
)
Other ABS
 
128

 
(1
)
 
79

 
(1
)
 
207

 
(2
)
Other securities
 
554

 
(7
)
 
0

 
0

 
554

 
(7
)
Total investment securities available for sale in a gross unrealized loss position
 
$
22,163

 
$
(717
)
 
$
12,709

 
$
(590
)
 
$
34,872

 
$
(1,307
)
 
 
December 31, 2017
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
(Dollars in millions)
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
2,031

 
$
(8
)
 
$
0

 
$
0

 
$
2,031

 
$
(8
)
RMBS:
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
8,192

 
(67
)
 
13,175

 
(335
)
 
21,367

 
(402
)
Non-agency
 
10

 
0

 
10

 
(1
)
 
20

 
(1
)
Total RMBS
 
8,202

 
(67
)
 
13,185

 
(336
)
 
21,387

 
(403
)
Agency CMBS
 
880

 
(8
)
 
1,236

 
(36
)
 
2,116

 
(44
)
Other ABS
 
130

 
0

 
95

 
(1
)
 
225

 
(1
)
Other securities
 
371

 
(2
)
 
0

 
0

 
371

 
(2
)
Total investment securities available for sale in a gross unrealized loss position
 
$
11,614

 
$
(85
)
 
$
14,516

 
$
(373
)
 
$
26,130

 
$
(458
)
As of June 30, 2018, the amortized cost of approximately 1,360 securities available for sale exceeded their fair value by $1.3 billion, of which $590 million related to securities that had been in a loss position for 12 months or longer. As of June 30, 2018, the carrying value of approximately 370 securities classified as held to maturity exceeded their fair value by $583 million.

 
 
74
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Maturities and Yields of Investment Securities
The table below summarizes, by major security type, the contractual maturities and weighted-average yields of our investment securities as of June 30, 2018. Because borrowers may have the right to call or prepay certain obligations, the expected maturities of our securities are likely to differ from the scheduled contractual maturities presented below. The weighted-average yield below represents the effective yield for the investment securities and is calculated based on the amortized cost of each security.
Table 3.5: Contractual Maturities and Weighted-Average Yields of Securities
 
 
June 30, 2018
(Dollars in millions)
 
Due in
1 Year or Less
 
Due > 1 Year
through
5 Years
 
Due > 5 Years
through
10 Years
 
Due > 10 Years
 
Total
Fair value of securities available for sale:
U.S. Treasury securities
 
$
199

 
$
1,122

 
$
7,303

 
$
0

 
$
8,624

RMBS(1):
 
 
 
 
 
 
 
 
 
 
Agency
 
3

 
32

 
546

 
33,161

 
33,742

Non-agency
 
0

 
0

 
0

 
1,940

 
1,940

Total RMBS
 
3

 
32

 
546

 
35,101

 
35,682

Agency CMBS(1)
 
17

 
1,875

 
1,289

 
1,582

 
4,763

Other ABS(1)
 
30

 
238

 
0

 
26

 
294

Other securities
 
197

 
594

 
537

 
0

 
1,328

Total securities available for sale
 
$
446

 
$
3,861

 
$
9,675

 
$
36,709

 
$
50,691

Amortized cost of securities available for sale
 
$
447

 
$
3,901

 
$
9,660

 
$
37,513

 
$
51,521

Weighted-average yield for securities available for sale
 
1.25
%
 
2.16
%
 
2.26
%
 
2.77
%
 
2.61
%
Carrying value of securities held to maturity:
Agency RMBS(1)
 
$
0

 
$
0

 
$
55

 
$
30,322

 
$
30,377

Agency CMBS(1)
 
0

 
0

 
288

 
2,799

 
3,087

Total securities held to maturity
 
$
0

 
$
0

 
$
343

 
$
33,121

 
$
33,464

Fair value of securities held to maturity
 
$
0

 
$
0

 
$
341

 
$
32,756

 
$
33,097

Weighted-average yield for securities held to maturity
 
0.00
%
 
0.00
%
 
3.19
%
 
3.28
%
 
3.28
%
__________
(1) 
As of June 30, 2018, weighted-average expected maturities of RMBS, CMBS and other ABS are 6.7 years, 5.5 years and 1.1 years, respectively.
Other-Than-Temporary Impairment
We evaluate all securities in an unrealized loss position at least on a quarterly basis, and more often as market conditions require, to assess whether the impairment is other-than-temporary. Our OTTI assessment is based on a discounted cash flow analysis which requires careful use of judgments and assumptions. A number of qualitative and quantitative criteria may be considered in our assessment as applicable, including the size and the nature of the portfolio; historical and projected performance such as prepayment, default and loss severity for the RMBS portfolio; recent credit events specific to the issuer and/or industry to which the issuer belongs; the payment structure of the security; external credit ratings of the issuer and any failure or delay of the issuer to make scheduled interest or principal payments; the value of underlying collateral; our intent and ability to hold the security; and current and projected market and macro-economic conditions.
If we intend to sell a security in an unrealized loss position or it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis, the entire difference between the amortized cost basis of the security and its fair value is recognized in earnings. As of June 30, 2018, for any securities with unrealized losses recorded in AOCI, we do not intend to sell, nor believe that we will be required to sell, these securities prior to recovery of their amortized cost.

 
 
75
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For those securities that we do not intend to sell nor expect to be required to sell, an analysis is performed to determine if any of the impairment is due to credit-related factors or whether it is due to other factors, such as interest rates. Credit-related impairment is recognized in earnings, with the remaining unrealized non-credit-related impairment recorded in AOCI. We determine the credit component based on the difference between the security’s amortized cost basis and the present value of its expected cash flows, discounted based on the effective yield.
Realized Gains and Losses on Securities and OTTI Recognized in Earnings
The following table presents the gross realized gains and losses on the sale and redemption of securities available for sale for the three and six months ended June 30, 2018 and 2017. We also present the proceeds from the sale of securities available for sale for the periods presented. We did not sell any investment securities that are classified as held to maturity.
Table 3.6: Realized Gains and Losses on Securities and OTTI Recognized in Earnings
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2018
 
2017
 
2018
 
2017
Realized gains (losses):
 
 
 
 
 
 
 
 
Gross realized gains
 
$
0

 
$
0

 
$
8

 
$
5

Gross realized losses
 
(1
)
 
0

 
(1
)
 
(5
)
Net realized gains (losses)
 
(1
)
 
0

 
7

 
0

OTTI recognized in earnings:
 
 
 
 
 
 
 
 
Credit-related OTTI
 
0

 
(1
)
 
0

 
(1
)
Intent-to-sell OTTI
 
0

 
(3
)
 
0

 
(3
)
Total OTTI recognized in earnings
 
0

 
(4
)
 
0

 
(4
)
Net securities gains (losses)
 
$
(1
)
 
$
(4
)
 
$
7

 
$
(4
)
Total proceeds from sales
 
$
0

 
$
235

 
$
1,058

 
$
3,123

The cumulative credit loss component of the OTTI losses that have been recognized in our consolidated statements of income related to the securities that we do not intend to sell was $140 million and $207 million for the six months ended June 30, 2018 and 2017, respectively.
Securities Pledged and Received
As part of our liquidity management strategy, we pledge securities to secure borrowings from counterparties including Federal Home Loan Banks (“FHLB”). We also pledge securities to secure trust and public deposits and for other purposes as required or permitted by law. We pledged securities available for sale with a fair value of $2.9 billion and $2.8 billion as of June 30, 2018 and December 31, 2017, respectively. We also pledged securities held to maturity with a carrying value of $15.1 billion and $5.7 billion as of June 30, 2018 and December 31, 2017, respectively. We accepted pledges of securities with a fair value of $1 million as of both June 30, 2018 and December 31, 2017, primarily related to our derivative transactions.
Purchased Credit-Impaired Debt Securities
The table below presents the outstanding balance and carrying value of the purchased credit-impaired debt securities as of June 30, 2018 and December 31, 2017.
Table 3.7: Outstanding Balance and Carrying Value of Purchased Credit-Impaired Debt Securities
(Dollars in millions)
 
June 30, 2018
 
December 31, 2017
Outstanding balance
 
$
1,942

 
$
2,131

Carrying value
 
1,709

 
1,843


 
 
76
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in Accretable Yield of Purchased Credit-Impaired Debt Securities
The following table presents changes in the accretable yield related to the purchased credit-impaired debt securities for the three and six months ended June 30, 2018.
Table 3.8: Changes in the Accretable Yield of Purchased Credit-Impaired Debt Securities
(Dollars in millions)
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Accretable yield, beginning of period
 
$
794

 
$
826

Accretion recognized in earnings
 
(39
)
 
(78
)
Reduction due to payoffs, disposals, transfers and other
 
(2
)
 
(3
)
Net reclassifications from nonaccretable difference
 
15

 
23

Accretable yield, end of period
 
$
768

 
$
768


 
 
77
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4—LOANS
Loan Portfolio Composition
Our loan portfolio consists of loans held for investment, including loans held in our consolidated trusts, and loans held for sale, and is divided into three portfolio segments: credit card, consumer banking and commercial banking. Credit card loans consist of domestic and international credit card loans. Consumer banking loans consist of auto and retail banking loans and in prior periods also consisted of home loans. Commercial banking loans consist of commercial and multifamily real estate, commercial and industrial, and small-ticket commercial real estate loans. In the second quarter of 2018, we sold the substantial majority of our consumer home loan portfolio and the related servicing. We also transferred the remaining portfolio of $398 million to loans held for sale as of June 30, 2018.
Credit Quality
We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Trends in delinquency rates are an indicator, among other considerations, of credit risk within our loan portfolio. The level of nonperforming loans represents another indicator of the potential for future credit losses. Accordingly, key metrics we track and use in evaluating the credit quality of our loan portfolio include delinquency and nonperforming loan rates, as well as net charge-off rates and our internal risk ratings of larger-balance commercial loans. The credit metrics presented in this section exclude loans held for sale, which are carried at lower of cost or fair value.
The table below presents the composition and an aging analysis of our loans held for investment portfolio as of June 30, 2018 and December 31, 2017. The delinquency aging includes all past due loans, both performing and nonperforming.
Table 4.1: Loan Portfolio Composition and Aging Analysis
 
 
June 30, 2018
(Dollars in millions)
 
Current
 
30-59
Days
 
60-89
Days
 
> 90
Days
 
Total
Delinquent
Loans
 
PCI
Loans
 
Total
Loans
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
97,373

 
$
1,067

 
$
705

 
$
1,569

 
$
3,341

 
$
0

 
$
100,714

International card businesses
 
8,743

 
127

 
69

 
124

 
320

 
0

 
9,063

Total credit card
 
106,116

 
1,194

 
774

 
1,693

 
3,661

 
0

 
109,777

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
52,419

 
2,144

 
988

 
230

 
3,362

 
0

 
55,781

Retail banking
 
2,898

 
25

 
7

 
11

 
43

 
5

 
2,946

Total consumer banking
 
55,317

 
2,169

 
995

 
241

 
3,405

 
5

 
58,727

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
28,259

 
6

 
1

 
3

 
10

 
23

 
28,292

Commercial and industrial
 
38,480

 
15

 
0

 
107

 
122

 
346

 
38,948

Total commercial lending
 
66,739

 
21

 
1

 
110

 
132

 
369

 
67,240

Small-ticket commercial real estate
 
364

 
2

 
0

 
3

 
5

 
0

 
369

Total commercial banking
 
67,103

 
23

 
1

 
113

 
137

 
369

 
67,609

Other loans
 
11

 
0

 
0

 
0

 
0

 
0

 
11

Total loans(1)
 
$
228,547

 
$
3,386

 
$
1,770

 
$
2,047

 
$
7,203

 
$
374

 
$
236,124

% of Total loans
 
96.79
%
 
1.43
%
 
0.75
%
 
0.87
%
 
3.05
%
 
0.16
%
 
100.00
%

 
 
78
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
December 31, 2017
(Dollars in millions)
 
Current
 
30-59
Days
 
60-89
Days
 
> 90
Days
 
Total
Delinquent
Loans
 
PCI Loans
 
Total
Loans
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
101,072

 
$
1,211

 
$
915

 
$
2,093

 
$
4,219

 
$
2

 
$
105,293

International card businesses
 
9,110

 
144

 
81

 
134

 
359

 
0

 
9,469

Total credit card
 
110,182

 
1,355

 
996

 
2,227

 
4,578

 
2

 
114,762

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
50,151

 
2,483

 
1,060

 
297

 
3,840

 
0

 
53,991

Home loan
 
7,235

 
37

 
16

 
70

 
123

 
10,275

 
17,633

Retail banking
 
3,389

 
24

 
5

 
18

 
47

 
18

 
3,454

Total consumer banking
 
60,775

 
2,544

 
1,081

 
385

 
4,010

 
10,293

 
75,078

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
26,018

 
41

 
17

 
49

 
107

 
25

 
26,150

Commercial and industrial
 
37,412

 
1

 
70

 
87

 
158

 
455

 
38,025

Total commercial lending
 
63,430

 
42

 
87

 
136

 
265

 
480

 
64,175

Small-ticket commercial real estate
 
393

 
2

 
1

 
4

 
7

 
0

 
400

Total commercial banking
 
63,823

 
44

 
88

 
140

 
272

 
480

 
64,575

Other loans
 
54

 
2

 
1

 
1

 
4

 
0

 
58

Total loans(1)
 
$
234,834

 
$
3,945

 
$
2,166

 
$
2,753

 
$
8,864

 
$
10,775

 
$
254,473

% of Total loans
 
92.29
%
 
1.55
%
 
0.85
%
 
1.08
%
 
3.48
%
 
4.23
%
 
100.00
%
__________
(1) 
Loans, other than PCI loans, include unamortized premiums and discounts, and unamortized deferred fees and costs totaling $782 million and $773 million as of June 30, 2018 and December 31, 2017, respectively.
We pledged loan collateral of $16.9 billion and $27.3 billion to secure a portion of our FHLB borrowing capacity of $20.9 billion and $21.0 billion as of June 30, 2018 and December 31, 2017, respectively.
The following table presents the outstanding balance of loans 90 days or more past due that continue to accrue interest and loans classified as nonperforming as of June 30, 2018 and December 31, 2017. Nonperforming loans generally include loans that have been placed on nonaccrual status. PCI loans are excluded from the table below. See “Note 1—Summary of Significant Accounting Policies” in our 2017 Form 10-K for additional information on our policies for nonperforming loans and accounting for PCI loans.
Table 4.2: 90+ Day Delinquent Loans Accruing Interest and Nonperforming Loans
 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
> 90 Days and Accruing
 
Nonperforming
Loans
 
> 90 Days and Accruing
 
Nonperforming
Loans
Credit Card:
 
 
 
 
 
 
 
 
Domestic credit card
 
$
1,569

 
N/A

 
$
2,093

 
N/A

International card businesses
 
119

 
$
20

 
128

 
$
24

Total credit card
 
1,688

 
20

 
2,221

 
24

Consumer Banking:
 
 
 
 
 
 
 
 
Auto
 
0

 
308

 
0

 
376

Home loan
 
0

 
0

 
0

 
176

Retail banking
 
0

 
34

 
0

 
35

Total consumer banking
 
0

 
342

 
0

 
587


 
 
79
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
> 90 Days and Accruing
 
Nonperforming
Loans
 
> 90 Days and Accruing
 
Nonperforming
Loans
Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
$
0

 
$
4

 
$
12

 
$
38

Commercial and industrial
 
4

 
221

 
0

 
239

Total commercial lending
 
4

 
225

 
12

 
277

Small-ticket commercial real estate
 
0

 
4

 
0

 
7

Total commercial banking
 
4

 
229

 
12

 
284

Other loans
 
0

 
0

 
0

 
4

Total
 
$
1,692

 
$
591

 
$
2,233

 
$
899

% of Total loans
 
0.72
%
 
0.25
%
 
0.88
%
 
0.35
%
Credit Card
Our credit card loan portfolio is highly diversified across millions of accounts and numerous geographies without significant individual exposure. We therefore generally manage credit risk based on portfolios with common risk characteristics. The risk in our credit card loan portfolio correlates to broad economic trends, such as unemployment rates and home values, as well as consumers’ financial condition, all of which can have a material effect on credit performance. The primary indicators we assess in monitoring the credit quality and risk of our credit card portfolio are delinquency and charge-off trends, including an analysis of loan migration between delinquency categories over time.
The table below displays the geographic profile of our credit card loan portfolio as of June 30, 2018 and December 31, 2017.
Table 4.3: Credit Card Risk Profile by Geographic Region
 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Domestic credit card:
 
 
 
 
 
 
 
 
California
 
$
10,948

 
10.0
%
 
$
11,475

 
10.0
%
Texas
 
7,589

 
6.9

 
7,847

 
6.8

New York
 
6,981

 
6.4

 
7,389

 
6.4

Florida
 
6,518

 
5.9

 
6,790

 
5.9

Illinois
 
4,494

 
4.1

 
4,734

 
4.1

Pennsylvania
 
4,294

 
3.9

 
4,550

 
4.0

Ohio
 
3,706

 
3.4

 
3,929

 
3.4

New Jersey
 
3,427

 
3.1

 
3,621

 
3.2

Michigan
 
3,348

 
3.0

 
3,523

 
3.1

Other
 
49,409

 
45.0

 
51,435

 
44.8

Total domestic credit card
 
100,714

 
91.7

 
105,293

 
91.7

International card businesses:
 
 
 
 
 
 
 
 
Canada
 
5,967

 
5.5

 
6,286

 
5.5

United Kingdom
 
3,096

 
2.8

 
3,183

 
2.8

Total international card businesses
 
9,063

 
8.3

 
9,469

 
8.3

Total credit card
 
$
109,777

 
100.0
%
 
$
114,762

 
100.0
%

 
 
80
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below presents net charge-offs for the three and six months ended June 30, 2018 and 2017.
Table 4.4: Credit Card Net Charge-Offs
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
(Dollars in millions)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
Net charge-offs:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
1,166

 
4.72
%
 
$
1,172

 
5.11
%
 
$
2,487

 
4.99
%
 
$
2,368

 
5.12
%
International card businesses
 
94

 
4.14

 
84

 
4.08

 
150

 
3.32

 
159

 
3.88

Total credit card
 
$
1,260

 
4.67

 
$
1,256

 
5.02

 
$
2,637

 
4.85

 
$
2,527

 
5.02

__________
(1) 
Net charge-offs consist of the unpaid principal balance of loans held for investment that we determine to be uncollectible, net of recovered amounts. Net charge-off rate is calculated by dividing annualized net charge-offs by average loans held for investment for the period for each loan category. Net charge-offs and net charge-off rate are impacted periodically by fluctuations in recoveries, including loan sales.
Consumer Banking
Our consumer banking loan portfolio consists of auto and retail banking loans and in prior periods also consisted of home loans. Similar to our credit card loan portfolio, the risk in our consumer banking loan portfolio correlates to broad economic trends, such as unemployment rates, gross domestic product and home values, as well as consumers’ financial condition, all of which can have a material effect on credit performance. Delinquency, nonperforming loans and charge-off trends are key indicators we assess in monitoring the credit quality and risk of our consumer banking loan portfolio.

 
 
81
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below displays the geographic profile of our consumer banking loan portfolio as of June 30, 2018 and December 31, 2017.
Table 4.5: Consumer Banking Risk Profile by Geographic Region
 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
Amount
 
% of Total
 
Amount
 
% of
Total
Auto:
 
 
 
 
 
 
 
 
Texas
 
$
7,197

 
12.3
%
 
$
7,040

 
9.4
%
California
 
6,276

 
10.7

 
6,099

 
8.1

Florida
 
4,599

 
7.8

 
4,486

 
6.0

Georgia
 
2,727

 
4.6

 
2,726

 
3.6

Ohio
 
2,449

 
4.2

 
2,318

 
3.1

Louisiana
 
2,225

 
3.8

 
2,236

 
3.0

Illinois
 
2,182

 
3.7

 
2,181

 
2.9

Other
 
28,126

 
47.9

 
26,905

 
35.8

Total auto
 
55,781

 
95.0

 
53,991

 
71.9

Retail banking:
 
 
 
 
 
 
 
 
New York
 
875

 
1.5

 
955

 
1.3

Louisiana
 
807

 
1.4

 
953

 
1.3

Texas
 
655

 
1.1

 
717

 
0.9

New Jersey
 
201

 
0.3

 
221

 
0.3

Maryland
 
163

 
0.3

 
187

 
0.2

Virginia
 
135

 
0.2

 
154

 
0.2

Other
 
110

 
0.2

 
267

 
0.4

Total retail banking
 
2,946

 
5.0

 
3,454

 
4.6

Total home loan
 
0

 
0.0

 
17,633

 
23.5

Total consumer banking
 
$
58,727

 
100.0
%
 
$
75,078

 
100.0
%
In the second quarter of 2018, we sold the substantial majority of our consumer home loan portfolio and the related servicing. We also transferred the remaining portfolio to loans held for sale as of June 30, 2018.

 
 
82
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The tables below present net charge-offs in our consumer banking loan portfolio for the three and six months ended June 30, 2018 and 2017, as well as nonperforming loans as of June 30, 2018 and December 31, 2017.
Table 4.6: Consumer Banking Net Charge-Offs (Recoveries) and Nonperforming Loans
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
(Dollars in millions)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
 
Amount
 
Rate(1)
Net charge-offs (recoveries):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto
 
$
182

 
1.32
%
 
$
215

 
1.70
%
 
$
390

 
1.42
 %
 
$
414

 
1.67
%
Home loan
 
0

 
0.00

 
2

 
0.04

 
(1
)
 
(0.02
)
 
4

 
0.03

Retail banking
 
16

 
2.07

 
15

 
1.71

 
32

 
1.97

 
32

 
1.81

Total consumer banking
 
$
198

 
1.19

 
$
232

 
1.25

 
$
421

 
1.19

 
$
450

 
1.22

 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
Amount
 
Rate(2)
 
Amount
 
Rate(2)
Nonperforming loans:
 
 
 
 
 
 
 
 
Auto
 
$
308

 
0.55
%
 
$
376

 
0.70
%
Home loan
 
0

 
0.00

 
176

 
1.00

Retail banking
 
34

 
1.15

 
35

 
1.00

Total consumer banking
 
$
342

 
0.58

 
$
587

 
0.78

__________
(1) 
Net charge-off (recovery) rate is calculated by dividing annualized net charge-offs (recoveries) by average loans held for investment for the period for each loan category.
(2) 
Nonperforming loan rates are calculated based on nonperforming loans for each category divided by period-end total loans held for investment for each respective category.
Commercial Banking
We evaluate the credit risk of commercial loans using a risk rating system. We assign internal risk ratings to loans based on relevant information about the ability of the borrowers to repay their debt. In determining the risk rating of a particular loan, some of the factors considered are the borrower’s current financial condition, historical and projected future credit performance, prospects for support from financially responsible guarantors, the estimated realizable value of any collateral and current economic trends. The scale based on our internal risk rating system is as follows:
•
Noncriticized: Loans that have not been designated as criticized, frequently referred to as “pass” loans.
•
Criticized performing: Loans in which the financial condition of the obligor is stressed, affecting earnings, cash flows or collateral values. The borrower currently has adequate capacity to meet near-term obligations; however, the stress, left unabated, may result in deterioration of the repayment prospects at some future date.
•
Criticized nonperforming: Loans that are not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Loans classified as criticized nonperforming have a well-defined weakness, or weaknesses, which jeopardize the full repayment of the debt. These loans are characterized by the distinct possibility that we will sustain a credit loss if the deficiencies are not corrected and are generally placed on nonaccrual status.
We use our internal risk rating system for regulatory reporting, determining the frequency of credit exposure reviews, and evaluating and determining the allowance for loan and lease losses for commercial loans. Generally, loans that are designated as criticized performing and criticized nonperforming are reviewed quarterly by management to determine if they are appropriately classified/rated and whether any impairment exists. Noncriticized loans are also generally reviewed, at least annually, to determine the appropriate risk rating. In addition, we evaluate the risk rating during the renewal process of any loan or if a loan becomes past due.

 
 
83
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the geographic concentration and internal risk ratings of our commercial loan portfolio as of June 30, 2018 and December 31, 2017.
Table 4.7: Commercial Banking Risk Profile by Geographic Region and Internal Risk Rating
 
 
June 30, 2018
(Dollars in millions)
 
Commercial
and
Multifamily
Real Estate
 
% of
Total
 
Commercial
and
Industrial
 
% of
Total
 
Small-Ticket
Commercial
Real Estate
 
% of
Total
 
Total
Commercial Banking
 
% of
Total
Geographic concentration:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Northeast
 
$
16,367

 
57.8
%
 
$
7,422

 
19.1
%
 
$
229

 
62.1
%
 
$
24,018

 
35.6
%
Mid-Atlantic
 
3,003

 
10.6

 
4,291

 
11.0

 
13

 
3.5

 
7,307

 
10.8

South
 
3,641

 
12.9

 
14,544

 
37.3

 
21

 
5.7

 
18,206

 
26.9

Other
 
5,281

 
18.7

 
12,691

 
32.6

 
106

 
28.7

 
18,078

 
26.7

Total
 
$
28,292

 
100.0
%
 
$
38,948

 
100.0
%
 
$
369

 
100.0
%
 
$
67,609

 
100.0
%
Internal risk rating:(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncriticized
 
$
27,707

 
97.9
%
 
$
36,852

 
94.6
%
 
$
364

 
98.6
%
 
$
64,923

 
96.1
%
Criticized performing
 
558

 
2.0

 
1,529

 
3.9

 
1

 
0.3

 
2,088

 
3.1

Criticized nonperforming
 
4

 
0.0

 
221

 
0.6

 
4

 
1.1

 
229

 
0.3

PCI loans
 
23

 
0.1

 
346

 
0.9

 
0

 
0.0

 
369

 
0.5

Total
 
$
28,292

 
100.0
%
 
$
38,948

 
100.0
%
 
$
369

 
100.0
%
 
$
67,609

 
100.0
%
 
 
December 31, 2017
(Dollars in millions)
 
Commercial
and
Multifamily
Real Estate
 
% of
Total
 
Commercial
and
Industrial
 
% of
Total
 
Small-Ticket
Commercial
Real Estate
 
% of
Total
 
Total
Commercial Banking
 
% of
Total
Geographic concentration:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Northeast
 
$
14,969

 
57.3
%
 
$
7,774

 
20.4
%
 
$
250

 
62.4
%
 
$
22,993

 
35.7
%
Mid-Atlantic
 
2,675

 
10.2

 
3,922

 
10.3

 
15

 
3.8

 
6,612

 
10.2

South
 
3,719

 
14.2

 
14,739

 
38.8

 
22

 
5.5

 
18,480

 
28.6

Other
 
4,787

 
18.3

 
11,590

 
30.5

 
113

 
28.3

 
16,490

 
25.5

Total
 
$
26,150

 
100.0
%
 
$
38,025

 
100.0
%
 
$
400

 
100.0
%
 
$
64,575

 
100.0
%
Internal risk rating:(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncriticized
 
$
25,609

 
98.0
%
 
$
35,161

 
92.5
%
 
$
392

 
97.9
%
 
$
61,162

 
94.7
%
Criticized performing
 
478

 
1.8

 
2,170

 
5.7

 
1

 
0.3

 
2,649

 
4.1

Criticized nonperforming
 
38

 
0.1

 
239

 
0.6

 
7

 
1.8

 
284

 
0.4

PCI loans
 
25

 
0.1

 
455

 
1.2

 
0

 
0.0

 
480

 
0.8

Total
 
$
26,150

 
100.0
%
 
$
38,025

 
100.0
%
 
$
400

 
100.0
%
 
$
64,575

 
100.0
%
__________
(1) 
Geographic concentration is generally determined by the location of the borrower’s business or the location of the collateral associated with the loan. Northeast consists of CT, MA, ME, NH, NJ, NY, PA and VT. Mid-Atlantic consists of DC, DE, MD, VA and WV. South consists of AL, AR, FL, GA, KY, LA, MO, MS, NC, SC, TN and TX.
(2) 
Criticized exposures correspond to the “Special Mention,” “Substandard” and “Doubtful” asset categories defined by bank regulatory authorities.
Impaired Loans
The following table presents information on our impaired loans as of June 30, 2018 and December 31, 2017, and for the three and six months ended June 30, 2018 and 2017. Impaired loans include loans modified in troubled debt restructurings (“TDRs”), all nonperforming commercial loans and nonperforming home loans with a specific impairment. Impaired loans without an allowance generally represent loans that have been charged down to the fair value of the underlying collateral for which we believe no

 
 
84
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

additional losses have been incurred, or where the fair value of the underlying collateral meets or exceeds the loan’s amortized cost. PCI loans are excluded from the following tables.
Table 4.8: Impaired Loans
 
 
June 30, 2018
(Dollars in millions)
 
With an
Allowance
 
Without
an
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
 
Net
Recorded
Investment
 
Unpaid
Principal
Balance
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
653

 
$
0

 
$
653

 
$
200

 
$
453

 
$
640

International card businesses
 
182

 
0

 
182

 
89

 
93

 
177

Total credit card(1)
 
835

 
0

 
835

 
289

 
546

 
817

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
Auto(2)
 
319

 
64

 
383

 
28

 
355

 
541

Retail banking
 
55

 
7

 
62

 
8

 
54

 
66

Total consumer banking
 
374

 
71

 
445

 
36

 
409

 
607

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
47

 
0

 
47

 
5

 
42

 
47

Commercial and industrial
 
374

 
230

 
604

 
87

 
517

 
658

Total commercial lending
 
421

 
230

 
651

 
92

 
559

 
705

Small-ticket commercial real estate
 
4

 
0

 
4

 
0

 
4

 
6

Total commercial banking
 
425

 
230

 
655

 
92

 
563

 
711

Total
 
$
1,634

 
$
301

 
$
1,935

 
$
417

 
$
1,518

 
$
2,135

 
 
December 31, 2017
(Dollars in millions)
 
With an
Allowance
 
Without
an
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
 
Net
Recorded
Investment
 
Unpaid
Principal
Balance
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
639

 
$
0

 
$
639

 
$
208

 
$
431

 
$
625

International card businesses
 
173

 
0

 
173

 
84

 
89

 
167

Total credit card(1)
 
812

 
0

 
812

 
292

 
520

 
792

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
Auto(2)
 
363

 
118

 
481

 
30

 
451

 
730

Home loan
 
192

 
41

 
233

 
15

 
218

 
298

Retail banking
 
51

 
10

 
61

 
8

 
53

 
66

Total consumer banking
 
606

 
169

 
775

 
53

 
722

 
1,094

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
138

 
2

 
140

 
13

 
127

 
143

Commercial and industrial
 
489

 
222

 
711

 
63

 
648

 
844

Total commercial lending
 
627

 
224

 
851

 
76

 
775

 
987

Small-ticket commercial real estate
 
7

 
0

 
7

 
0

 
7

 
9

Total commercial banking
 
634

 
224

 
858

 
76

 
782

 
996

Total
 
$
2,052

 
$
393

 
$
2,445

 
$
421

 
$
2,024

 
$
2,882


 
 
85
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2018
 
June 30, 2018
(Dollars in millions)
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Credit Card:
 
 
 
 
 
 
 
 
Domestic credit card
 
$
653

 
$
16

 
$
648

 
$
32

International card businesses
 
183

 
3

 
180

 
6

Total credit card(1)
 
836

 
19

 
828

 
38

Consumer Banking:
 
 
 
 
 
 
 
 
Auto(2)
 
408

 
11

 
432

 
24

Home loan
 
112

 
0

 
153

 
1

Retail banking
 
61

 
1

 
61

 
1

Total consumer banking
 
581

 
12

 
646

 
26

Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
60

 
0

 
86

 
1

Commercial and industrial
 
679

 
4

 
690

 
10

Total commercial lending
 
739

 
4

 
776

 
11

Small-ticket commercial real estate
 
5

 
0

 
6

 
0

Total commercial banking
 
744

 
4

 
782

 
11

Total
 
$
2,161

 
$
35

 
$
2,256

 
$
75

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2017
 
June 30, 2017
(Dollars in millions)
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Credit Card:
 
 
 
 
 
 
 
 
Domestic credit card
 
$
588

 
$
16

 
$
586

 
$
31

International card businesses
 
152

 
2

 
146

 
5

Total credit card(1)
 
740

 
18

 
732

 
36

Consumer Banking:
 
 
 
 
 
 
 
 
Auto(2)
 
491

 
11

 
501

 
26

Home loan
 
342

 
1

 
346

 
2

Retail banking
 
56

 
0

 
58

 
1

Total consumer banking
 
889

 
12

 
905

 
29

Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
125

 
1

 
121

 
2

Commercial and industrial
 
1,173

 
5

 
1,246

 
8

Total commercial lending
 
1,298

 
6

 
1,367

 
10

Small-ticket commercial real estate
 
8

 
0

 
7

 
0

Total commercial banking
 
1,306

 
6

 
1,374

 
10

Total
 
$
2,935

 
$
36

 
$
3,011

 
$
75

__________
(1) 
The period-end and average recorded investments of credit card loans include finance charges and fees.
(2) 
Includes certain TDRs that are recorded as other assets on our consolidated balance sheets.
Total recorded TDRs were $1.8 billion and $2.2 billion as of June 30, 2018 and December 31, 2017, respectively. TDRs classified as performing in our credit card and consumer banking loan portfolios totaled $1.2 billion and $1.3 billion as of June 30, 2018 and December 31, 2017, respectively. TDRs classified as performing in our commercial loan portfolio totaled $425 million and

 
 
86
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$574 million as of June 30, 2018 and December 31, 2017, respectively. Commitments to lend additional funds on loans modified in TDRs totaled $272 million and $241 million as of June 30, 2018 and December 31, 2017, respectively.
As part of our loan modification programs to borrowers experiencing financial difficulty, we may provide multiple concessions to minimize our economic loss and improve long-term loan performance and collectability. The following tables present the major modification types, recorded investment amounts and financial effects of loans modified in TDRs during the three and six months ended June 30, 2018 and 2017.
Table 4.9: Troubled Debt Restructurings
 
 
Total Loans
Modified(1)
 
Three Months Ended June 30, 2018
 
 
Reduced Interest Rate
 
Term Extension
 
Balance Reduction
(Dollars in millions)
 
% of
TDR
Activity(2)
 
Average
Rate
Reduction
 
% of
TDR
Activity(2)
 
Average
Term
Extension
(Months)
 
% of
TDR
Activity(2)
 
Gross
Balance
Reduction
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
96

 
100
%
 
15.90
 
0
%
 
0
 
0
%
 
$
0

International card businesses
 
43

 
100

 
26.79
 
0

 
0
 
0

 
0

Total credit card
 
139

 
100

 
19.22
 
0

 
0
 
0

 
0

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto(3)
 
44

 
64

 
4.10
 
85

 
9
 
1

 
1

Retail banking
 
4

 
12

 
11.56
 
34

 
6
 
0

 
0

Total consumer banking
 
48

 
60

 
4.22
 
81

 
9
 
1

 
1

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
17

 
0

 
0.00
 
100

 
8
 
0

 
0

Commercial and industrial
 
86

 
0

 
2.00
 
61

 
17
 
0

 
0

Total commercial lending
 
103

 
0

 
2.00
 
67

 
15
 
0

 
0

Small-ticket commercial real estate
 
0

 
0

 
0.00
 
0

 
0
 
0

 
0

Total commercial banking
 
103

 
0

 
2.00
 
67

 
15
 
0

 
0

Total
 
$
290

 
58

 
16.63
 
37

 
13
 
0

 
$
1


 
 
87
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
Total Loans
Modified(1)
 
Six Months Ended June 30, 2018
 
 
Reduced Interest Rate
 
Term Extension
 
Balance Reduction
(Dollars in millions)
 
% of
TDR
Activity(2)
 
Average
Rate
Reduction
 
% of
TDR
Activity(2)
 
Average
Term
Extension
(Months)
 
% of
TDR
Activity(2)
 
Gross
Balance
Reduction
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
209

 
100
%
 
15.81
%
 
0
%
 
0
 
0
%
 
$
0

International card businesses
 
93

 
100

 
26.82

 
0

 
0
 
0

 
0

Total credit card
 
302

 
100

 
19.19

 
0

 
0
 
0

 
0

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto(3)
 
106

 
57

 
3.92

 
88

 
8
 
1

 
1

Home loan
 
6

 
28

 
1.78

 
83

 
214
 
0

 
0

Retail banking
 
6

 
12

 
11.11

 
49

 
5
 
0

 
0

Total consumer banking
 
118

 
53

 
3.94

 
86

 
18
 
0

 
1

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
19

 
0

 
0.00

 
100

 
8
 
0

 
0

Commercial and industrial
 
97

 
0

 
1.79

 
65

 
17
 
0

 
0

Total commercial lending
 
116

 
0

 
1.79

 
71

 
15
 
0

 
0

Small-ticket commercial real estate
 
2

 
0

 
0.00

 
0

 
0
 
0

 
0

Total commercial banking
 
118

 
0

 
1.79

 
69

 
15
 
0

 
0

Total
 
$
538

 
68

 
16.56

 
34

 
16
 
0

 
$
1

 
 
Total Loans
Modified(1)
 
Three Months Ended June 30, 2017
 
 
Reduced Interest Rate
 
Term Extension
 
Balance Reduction
(Dollars in millions)
 
% of
TDR
Activity(2)
 
Average
Rate
Reduction
 
% of
TDR
Activity(2)
 
Average
Term
Extension
(Months)
 
% of
TDR
Activity(2)
 
Gross
Balance
Reduction
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
87

 
100
%
 
14.36
%
 
0
%
 
0
 
0
%
 
$
0

International card businesses
 
39

 
100

 
26.50

 
0

 
0
 
0

 
0

Total credit card
 
126

 
100

 
18.12

 
0

 
0
 
0

 
0

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto(3)
 
61

 
52

 
3.65

 
99

 
7
 
0

 
0

Home loan
 
6

 
47

 
3.14

 
87

 
233
 
5

 
0

Retail banking
 
4

 
18

 
0.10

 
59

 
13
 
0

 
0

Total consumer banking
 
71

 
49

 
3.54

 
96

 
25
 
0

 
0

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
24

 
0

 
0.00

 
10

 
4
 
0

 
0

Commercial and industrial
 
134

 
18

 
2.23

 
47

 
9
 
0

 
0

Total commercial lending
 
158

 
15

 
2.23

 
41

 
9
 
0

 
0

Small-ticket commercial real estate
 
1

 
0

 
0.00

 
0

 
0
 
0

 
0

Total commercial banking
 
159

 
15

 
2.23

 
41

 
9
 
0

 
0

Total
 
$
356

 
52

 
13.35

 
37

 
17
 
0

 
$
0


 
 
88
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
Total Loans
Modified(1)
 
Six Months Ended June 30, 2017
 
Reduced Interest Rate
 
Term Extension
 
Balance Reduction
(Dollars in millions)
% of
TDR
Activity(2)
 
Average
Rate
Reduction
 
% of
TDR
Activity(2)
 
Average
Term
Extension
(Months)
 
% of
TDR
Activity(2)
 
Gross
Balance
Reduction
Credit Card:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic credit card
 
$
184

 
100
%
 
14.09
%
 
0
%
 
0
 
0
%
 
$
0

International card businesses
 
83

 
100

 
26.33

 
0

 
0
 
0

 
0

Total credit card
 
267

 
100

 
17.92

 
0

 
0
 
0

 
0

Consumer Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auto(3)
 
136

 
52

 
3.85

 
93

 
7
 
6

 
7

Home loan
 
14

 
54

 
2.49

 
83

 
227
 
2

 
0

Retail banking
 
6

 
30

 
1.19

 
62

 
11
 
0

 
0

Total consumer banking
 
156

 
51

 
3.66

 
91

 
25
 
5

 
7

Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
26

 
8

 
0.02

 
17

 
5
 
0

 
0

Commercial and industrial
 
281

 
9

 
1.23

 
32

 
18
 
0

 
0

Total commercial lending
 
307

 
9

 
1.13

 
31

 
17
 
0

 
0

Small-ticket commercial real estate
 
1

 
0

 
0.00

 
0

 
0
 
0

 
0

Total commercial banking
 
308

 
9

 
1.13

 
31

 
17
 
0

 
0

Total
 
$
731

 
51

 
13.68

 
32

 
22
 
0

 
$
7

__________
(1) 
Represents the recorded investment of total loans modified in TDRs at the end of the quarter in which they were modified. As not every modification type is included in the table above, the total percentage of TDR activity may not add up to 100%. Some loans may receive more than one type of concession as part of the modification.
(2) 
Due to multiple concessions granted to some troubled borrowers, percentages may total more than 100% for certain loan types.
(3) 
Includes certain TDRs that are recorded as other assets on our consolidated balance sheets.
TDRs—Subsequent Defaults of Completed TDR Modifications
The following table presents the type, number and recorded investment of loans modified in TDRs that experienced a default during the period and had completed a modification event in the twelve months prior to the default. A default occurs if the loan is either 90 days or more delinquent, has been charged off as of the end of the period presented or has been reclassified from accrual to nonaccrual status.

 
 
89
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Table 4.10: TDRs—Subsequent Defaults
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2018
 
June 30, 2018
(Dollars in millions)
 
Number of
Contracts
 
Amount
 
Number of
Contracts
 
Amount
Credit Card:
 
 
 
 
 
 
 
 
Domestic credit card
 
14,206

 
$
30

 
30,545

 
$
64

International card businesses
 
15,354

 
27

 
29,293

 
53

Total credit card
 
29,560

 
57

 
59,838

 
117

Consumer Banking:
 
 
 
 
 
 
 
 
Auto
 
1,793

 
21

 
3,600

 
42

Home loan
 
0

 
0

 
3

 
1

Retail banking
 
1

 
0

 
9

 
0

Total consumer banking
 
1,794

 
21

 
3,612

 
43

Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
0

 
0

 
0

 
0

Commercial and industrial
 
7

 
10

 
13

 
45

Total commercial lending
 
7

 
10

 
13

 
45

Small-ticket commercial real estate
 
0

 
0

 
0

 
0

Total commercial banking
 
7

 
10

 
13

 
45

Total
 
31,361

 
$
88

 
63,463

 
$
205

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2017
 
June 30, 2017
(Dollars in millions)
 
Number of
Contracts
 
Amount
 
Number of
Contracts
 
Amount
Credit Card:
 
 
 
 
 
 
 
 
Domestic credit card
 
13,222

 
$
25

 
26,027

 
$
51

International card businesses
 
13,761

 
27

 
25,186

 
43

Total credit card
 
26,983

 
52

 
51,213

 
94

Consumer Banking:
 
 
 
 
 
 
 
 
Auto
 
2,533

 
30

 
4,712

 
55

Home loan
 
8

 
3

 
19

 
6

Retail banking
 
9

 
2

 
20

 
3

Total consumer banking
 
2,550

 
35

 
4,751

 
64

Commercial Banking:
 
 
 
 
 
 
 
 
Commercial and multifamily real estate
 
0

 
0

 
0

 
0

Commercial and industrial
 
21

 
89

 
35

 
108

Total commercial lending
 
21

 
89

 
35

 
108

Small-ticket commercial real estate
 
1

 
0

 
2

 
1

Total commercial banking
 
22

 
89

 
37

 
109

Total
 
29,555

 
$
176

 
56,001

 
$
267


 
 
90
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5—ALLOWANCE FOR LOAN AND LEASE LOSSES AND RESERVE FOR UNFUNDED LENDING COMMITMENTS
Our allowance for loan and lease losses represents management’s best estimate of incurred loan and lease losses inherent in our loans held for investment portfolio as of each balance sheet date. In addition to the allowance for loan and lease losses, we also estimate probable losses related to unfunded lending commitments, such as letters of credit, financial guarantees and binding unfunded loan commitments. The provision for losses on unfunded lending commitments is included in the provision for credit losses in our consolidated statements of income and the related reserve for unfunded lending commitments is included in other liabilities on our consolidated balance sheets. See “Note 1—Summary of Significant Accounting Policies” in our 2017 Form 10-K for further discussion of the methodology and policy for determining our allowance for loan and lease losses for each of our loan portfolio segments, as well as information on our reserve for unfunded lending commitments.
Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity
The table below summarizes changes in the allowance for loan and lease losses and reserve for unfunded lending commitments by portfolio segment for the three and six months ended June 30, 2018 and 2017.
Table 5.1: Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments Activity
 
 
Three Months Ended June 30, 2018
(Dollars in millions)
 
Credit Card
 
Consumer
Banking(1)
 
Commercial Banking
 
Other(1)
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2018
 
$
5,726

 
$
1,253

 
$
587

 
$
1

 
$
7,567

Charge-offs
 
(1,679
)
 
(414
)
 
(7
)
 
(9
)
 
(2,109
)
Recoveries
 
419

 
216

 
14

 
1

 
650

Net charge-offs
 
(1,260
)
 
(198
)
 
7

 
(8
)
 
(1,459
)
Provision (benefit) for loan and lease losses
 
1,171

 
119

 
30

 
(47
)
 
1,273

Allowance build (release) for loan and lease losses
 
(89
)
 
(79
)
 
37

 
(55
)
 
(186
)
Other changes(1)(2)
 
(13
)
 
(54
)
 
0

 
54

 
(13
)
Balance as of June 30, 2018
 
5,624

 
1,120

 
624

 
0

 
7,368

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2018
 
0

 
6

 
108

 
0

 
114

Provision (benefit) for losses on unfunded lending commitments
 
0

 
(1
)
 
4

 
0

 
3

Balance as of June 30, 2018
 
0

 
5

 
112

 
0

 
117

Combined allowance and reserve as of June 30, 2018
 
$
5,624

 
$
1,125

 
$
736

 
$
0

 
$
7,485

 
 
Six Months Ended June 30, 2018
(Dollars in millions)
 
Credit Card
 
Consumer
Banking(1)
 
Commercial Banking
 
Other(1)
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
 
$
5,648

 
$
1,242

 
$
611

 
$
1

 
$
7,502

Charge-offs
 
(3,504
)
 
(845
)
 
(28
)
 
(8
)
 
(4,385
)
Recoveries
 
867

 
424

 
16

 
1

 
1,308

Net charge-offs
 
(2,637
)
 
(421
)
 
(12
)
 
(7
)
 
(3,077
)
Provision (benefit) for loan and lease losses
 
2,627

 
353

 
25

 
(48
)
 
2,957

Allowance build (release) for loan and lease losses
 
(10
)
 
(68
)
 
13

 
(55
)
 
(120
)
Other changes(1)(2)
 
(14
)
 
(54
)
 
0

 
54

 
(14
)
Balance as of June 30, 2018
 
5,624

 
1,120

 
624

 
0

 
7,368

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
 
0

 
7

 
117

 
0

 
124

Benefit for losses on unfunded lending commitments
 
0

 
(2
)
 
(5
)
 
0

 
(7
)
Balance as of June 30, 2018
 
0

 
5

 
112

 
0

 
117

Combined allowance and reserve as of June 30, 2018
 
$
5,624

 
$
1,125

 
$
736

 
$
0

 
$
7,485


 
 
91
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
Three Months Ended June 30, 2017
(Dollars in millions)
 
Credit Card
 
Consumer
Banking
 
Commercial Banking
 
Other(3)
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2017
 
$
5,058

 
$
1,163

 
$
761

 
$
2

 
$
6,984

Charge-offs
 
(1,572
)
 
(390
)
 
(140
)
 
0

 
(2,102
)
Recoveries
 
316

 
158

 
4

 
6

 
484

Net charge-offs
 
(1,256
)
 
(232
)
 
(136
)
 
6

 
(1,618
)
Provision (benefit) for loan and lease losses
 
1,397

 
268

 
141

 
(5
)
 
1,801

Allowance build (release) for loan and lease losses
 
141

 
36

 
5

 
1

 
183

Other changes(2)
 
11

 
0

 
(8
)
 
0

 
3

Balance as of June 30, 2017
 
5,210

 
1,199

 
758

 
3

 
7,170

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2017
 
0

 
7

 
133

 
0

 
140

Provision (benefit) for losses on unfunded lending commitments
 
0

 
0

 
(1
)
 
0

 
(1
)
Balance as of June 30, 2017
 
0

 
7

 
132

 
0

 
139

Combined allowance and reserve as of June 30, 2017
 
$
5,210

 
$
1,206

 
$
890

 
$
3

 
$
7,309

 
 
Six Months Ended June 30, 2017
(Dollars in millions)
 
Credit Card
 
Consumer
Banking
 
Commercial Banking
 
Other(3)
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2016
 
$
4,606

 
$
1,102

 
$
793

 
$
2

 
$
6,503

Charge-offs
 
(3,173
)
 
(754
)
 
(166
)
 
0

 
(4,093
)
Recoveries
 
646

 
304

 
7

 
8

 
965

Net charge-offs
 
(2,527
)
 
(450
)
 
(159
)
 
8

 
(3,128
)
Provision (benefit) for loan and lease losses
 
3,114

 
547

 
135

 
(7
)
 
3,789

Allowance build (release) for loan and lease losses
 
587

 
97

 
(24
)
 
1

 
661

Other changes(2)
 
17

 
0

 
(11
)
 
0

 
6

Balance as of June 30, 2017
 
5,210

 
1,199

 
758

 
3

 
7,170

Reserve for unfunded lending commitments:
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2016
 
0

 
7

 
129

 
0

 
136

Provision (benefit) for losses on unfunded lending commitments
 
0

 
0

 
3

 
0

 
3

Balance as of June 30, 2017
 
0

 
7

 
132

 
0

 
139

Combined allowance and reserve as of June 30, 2017
 
$
5,210

 
$
1,206

 
$
890

 
$
3

 
$
7,309

__________
(1) 
In the second quarter of 2018, we sold the substantial majority of our consumer home loan portfolio and the related servicing. We also transferred the remaining portfolio to loans held for sale as of June 30, 2018. The impact of these actions included a benefit for credit losses of $46 million which is reflected in the Other category.
(2)    Represents foreign currency translation adjustments and the net impact of loan transfers and sales where applicable.
(3)    Includes the legacy loan portfolio of our discontinued GreenPoint mortgage operations.
Components of Allowance for Loan and Lease Losses by Impairment Methodology
The table below presents the components of our allowance for loan and lease losses by portfolio segment and impairment methodology as of June 30, 2018 and December 31, 2017. See “Note 1—Summary of Significant Accounting Policies” in our 2017 Form 10-K for further discussion of allowance methodologies for each of the loan portfolios.

 
 
92
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Table 5.2: Components of Allowance for Loan and Lease Losses by Impairment Methodology
 
 
June 30, 2018
(Dollars in millions)
 
Credit Card
 
Consumer Banking
 
Commercial Banking
 
Other
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
Collectively evaluated
 
$
5,335

 
$
1,084

 
$
532

 
$
0

 
$
6,951

Asset-specific
 
289

 
36

 
92

 
0

 
417

Total allowance for loan and lease losses
 
$
5,624

 
$
1,120

 
$
624

 
$
0

 
$
7,368

Loans held for investment:
 
 
 
 
 
 
 
 
 
 
Collectively evaluated
 
$
108,942

 
$
58,303

 
$
66,585

 
$
11

 
$
233,841

Asset-specific
 
835

 
419

 
655

 
0

 
1,909

PCI loans
 
0

 
5

 
369

 
0

 
374

Total loans held for investment
 
$
109,777

 
$
58,727

 
$
67,609

 
$
11

 
$
236,124

Allowance coverage ratio(1)
 
5.12
%
 
1.91
%
 
0.92
%
 
0.00
%
 
3.12
%
 
 
December 31, 2017
(Dollars in millions)
 
Credit Card
 
Consumer Banking
 
Commercial Banking
 
Other
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
Collectively evaluated
 
$
5,356

 
$
1,158

 
$
529

 
$
1

 
$
7,044

Asset-specific
 
292

 
53

 
76

 
0

 
421

PCI loans
 
0

 
31

 
6

 
0

 
37

Total allowance for loan and lease losses
 
$
5,648

 
$
1,242

 
$
611

 
$
1

 
$
7,502

Loans held for investment:
 
 
 
 
 
 
 
 
 
 
Collectively evaluated
 
$
113,948

 
$
64,080

 
$
63,237

 
$
58

 
$
241,323

Asset-specific
 
812

 
705

 
858

 
0

 
2,375

PCI loans
 
2

 
10,293

 
480

 
0

 
10,775

Total loans held for investment
 
$
114,762

 
$
75,078

 
$
64,575

 
$
58

 
$
254,473

Allowance coverage ratio(1)
 
4.92
%
 
1.65
%
 
0.95
%
 
1.72
%
 
2.95
%
__________
(1) 
Allowance coverage ratio is calculated by dividing the period-end allowance for loan and lease losses by period-end loans held for investment within the specified loan category.
We have certain credit card partnership arrangements, that qualify for net accounting treatment, in which our partner agrees to share a portion of the credit losses. The expected reimbursements from these partners, which are netted against our allowance for loan and lease losses, result in reductions to net charge-offs and provision for credit losses. See “Note 1—Summary of Significant Accounting Policies” in our 2017 Form 10-K for further discussion of our card partnership agreements.

 
 
93
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below summarizes the changes in the estimated reimbursements from these partners for the three and six months ended June 30, 2018 and 2017.
Table 5.3: Summary of Loss Sharing Arrangements Impacts
(Dollars in millions)
 
Estimated Reimbursements from Loss Sharing Partners
Balance as of March 31, 2018
 
$
388

Amounts due from partners which reduced net charge-offs
 
(92
)
Amounts estimated to be charged to partners which reduced provision for credit losses
 
96

Balance as of June 30, 2018
 
$
392

 
 
 
Balance as of March 31, 2017
 
$
235

Amounts due from partners which reduced net charge-offs
 
(67
)
Amounts estimated to be charged to partners which reduced provision for credit losses
 
95

Balance as of June 30, 2017
 
$
263

(Dollars in millions)
 
Estimated Reimbursements from Loss Sharing Partners
Balance as of December 31, 2017
 
$
380

Amounts due from partners which reduced net charge-offs
 
(189
)
Amounts estimated to be charged to partners which reduced provision for credit losses
 
201

Balance as of June 30, 2018
 
$
392

 
 
 
Balance as of December 31, 2016
 
$
228

Amounts due from partners which reduced net charge-offs
 
(132
)
Amounts estimated to be charged to partners which reduced provision for credit losses
 
167

Balance as of June 30, 2017
 
$
263



 
 
94
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6—VARIABLE INTEREST ENTITIES AND SECURITIZATIONS
In the normal course of business, we enter into various types of transactions with entities that are considered to be variable interest entities (“VIEs”). Our primary involvement with VIEs has been related to our securitization transactions in which we transferred assets from our balance sheet to securitization trusts. We have primarily securitized credit card loans, which have provided a source of funding for us and enabled us to transfer a certain portion of the economic risk of the loans or related debt securities to third parties.
The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE. The majority of the VIEs in which we are involved have been consolidated in our financial statements.
Summary of Consolidated and Unconsolidated VIEs
The assets of our consolidated VIEs primarily consist of cash, credit card loan receivables and the related allowance for loan and lease losses, which we report on our consolidated balance sheets under restricted cash for securitization investors, loans held in consolidated trusts and allowance for loan and lease losses, respectively. The assets of a particular VIE are the primary source of funding to settle its obligations. Creditors of these VIEs typically do not have recourse to our general credit. Liabilities primarily consist of debt securities issued by the VIEs, which we report under securitized debt obligations. For unconsolidated VIEs, we present the carrying amount of assets and liabilities reflected on our consolidated balance sheets and our maximum exposure to loss. Our maximum exposure to loss is estimated based on the unlikely event that all of the assets in the VIEs become worthless and we are required to meet our maximum remaining funding obligations.
The tables below present a summary of certain VIEs in which we had continuing involvement or held a variable interest, aggregated based on VIEs with similar characteristics as of June 30, 2018 and December 31, 2017. We separately present information for consolidated and unconsolidated VIEs.
Table 6.1: Carrying Amount of Consolidated and Unconsolidated VIEs
 
 
June 30, 2018
 
 
Consolidated
 
Unconsolidated
(Dollars in millions)
 
Carrying
Amount
of Assets
 
Carrying
Amount of
Liabilities
 
Carrying
Amount
of Assets
 
Carrying
Amount of
Liabilities
 
Maximum 
Exposure to
Loss
Securitization-Related VIEs:
 
 
 
 
 
 
 
 
 
 
Credit card loan securitizations(1)
 
$
34,898

 
$
20,439

 
$
0

 
$
0

 
$
0

Home loan securitizations
 
0

 
0

 
302

 
212

 
730

Total securitization-related VIEs
 
34,898

 
20,439

 
302

 
212

 
730

Other VIEs:(2)
 
 
 
 
 
 
 
 
 
 
Affordable housing entities
 
231

 
11

 
3,941

 
1,199

 
3,941

Entities that provide capital to low-income and rural communities
 
1,638

 
130

 
0

 
0

 
0

Other
 
0

 
0

 
304

 
0

 
304

Total other VIEs
 
1,869

 
141

 
4,245

 
1,199

 
4,245

Total VIEs
 
$
36,767

 
$
20,580

 
$
4,547

 
$
1,411

 
$
4,975


 
 
95
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
December 31, 2017
 
 
Consolidated
 
Unconsolidated
(Dollars in millions)
 
Carrying
Amount
of Assets
 
Carrying
Amount of
Liabilities
 
Carrying
Amount
of Assets
 
Carrying
Amount of
Liabilities
 
Maximum
Exposure to
Loss
Securitization-Related VIEs:
 
 
 
 
 
 
 
 
 
 
Credit card loan securitizations(1)
 
$
34,976

 
$
20,651

 
$
0

 
$
0

 
$
0

Home loan securitizations
 
0

 
0

 
455

 
390

 
1,057

Total securitization-related VIEs
 
34,976

 
20,651

 
455

 
390

 
1,057

Other VIEs:(2)
 
 
 
 
 
 
 
 
 
 
Affordable housing entities 
 
226

 
10

 
4,175

 
1,284

 
4,175

Entities that provide capital to low-income and rural communities
 
1,498

 
129

 
0

 
0

 
0

Other
 
0

 
0

 
318

 
0

 
318

Total other VIEs
 
1,724

 
139

 
4,493

 
1,284

 
4,493

Total VIEs
 
$
36,700

 
$
20,790

 
$
4,948

 
$
1,674

 
$
5,550

__________
(1) 
Represents the carrying amount of assets and liabilities owned by the VIE, which includes the seller’s interest and repurchased notes held by other related parties.
(2) 
In certain investment structures, we consolidate a VIE which in turn holds as its primary asset an investment in an unconsolidated VIE. In these instances, we disclose the carrying amount of assets and liabilities on our consolidated balance sheets in the unconsolidated VIEs to avoid duplicating our exposure, as the unconsolidated VIEs are generally the operating entities generating the exposure. The carrying amount of assets and liabilities included in the unconsolidated VIE columns above related to these investment structures were $2.2 billion of assets and $858 million of liabilities as of June 30, 2018 and $2.2 billion of assets and $901 million of liabilities as of December 31, 2017.
Securitization-Related VIEs
In a securitization transaction, assets are transferred to a trust, which generally meets the definition of a VIE. Our primary securitization activity is in the form of credit card securitizations, conducted through securitization trusts which we consolidate. Our continuing involvement in these securitization transactions mainly consists of acting as the primary servicer and holding certain retained interests.
We transfer multifamily commercial loans that we originate to the government-sponsored enterprises (“GSEs”) and retain the right to service the transferred loans pursuant to the guidelines set forth by the GSEs. Subsequent to such transfers, these loans are commonly securitized into CMBS by the GSEs. We also hold RMBS, CMBS and ABS in our investment portfolio, which represent an interest in the respective securitization trusts employed in the transactions under which those securities were issued. We do not consolidate the securitization trusts employed in these transactions as we do not have the power to direct the activities that most significantly impact the economic performance of these securitization trusts. We may have exposure associated with contractual obligations to repurchase previously transferred loans due to breaches of representations and warranties. See “Note 14—Commitments, Contingencies, Guarantees and Others” for more information related to our mortgage representation and warranty exposure. Our maximum exposure to loss as a result of our involvement with these VIEs is the carrying value of mortgage servicing rights (“MSRs”) and investment securities on our consolidated balance sheets. See “Note 7—Goodwill and Intangible Assets” for information related to our MSRs associated with these multifamily commercial loan securitizations and “Note 3—Investment Securities” for more information on the securities held in our investment securities portfolio. We exclude these VIEs from the tables within this note because we do not consider our continuing involvement with these VIEs to be significant; we either invest in securities issued by the VIE and were not involved in the design of the VIE or no transfers have occurred between the VIE and us. In addition, where we have certain lending arrangements in the normal course of business with entities that could be VIEs, we have also excluded these VIEs from the tables presented in this note. See “Note 4—Loans” for additional information regarding our lending arrangements in the normal course of business.


 
 
96
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below presents our continuing involvement in certain securitization-related VIEs as of June 30, 2018 and December 31, 2017.
Table 6.2: Continuing Involvement in Securitization-Related VIEs
 
 
 
 
Mortgage
(Dollars in millions)
 
Credit
Card
 
Option-
ARM
 
GreenPoint
HELOCs
 
GreenPoint
Manufactured
Housing
June 30, 2018:
 
 
 
 
 
 
 
 
Securities held by third-party investors
 
$
19,649

 
$
1,102

 
$
35

 
$
409

Receivables in the trust
 
34,902

 
1,140

 
28

 
412

Cash balance of spread or reserve accounts
 
0

 
8

 
N/A

 
110

Retained interests
 
Yes

 
Yes

 
Yes

 
Yes

Servicing retained
 
Yes

 
Yes

 
No

 
No

December 31, 2017:
 
 
 
 
 
 
 
 
Securities held by third-party investors
 
$
20,010

 
$
1,224

 
$
42

 
$
508

Receivables in the trust
 
35,667

 
1,266

 
35

 
511

Cash balance of spread or reserve accounts
 
0

 
8

 
N/A

 
116

Retained interests
 
Yes

 
Yes

 
Yes

 
Yes

Servicing retained
 
Yes

 
Yes

 
No

 
No

Credit Card Securitizations
We hold certain retained interests in our credit card securitizations and continue to service the receivables in these trusts. As of both June 30, 2018 and December 31, 2017, we were deemed to be the primary beneficiary, and accordingly, all of these trusts have been consolidated in our financial statements.
Mortgage Securitizations
Option-ARM Loans
We had previously securitized option adjustable-rate mortgage (“option-ARM”) loans by transferring these loans to securitization trusts that had issued mortgage-backed securities to investors. The outstanding balance of debt securities held by third-party investors related to these mortgage loan securitization trusts was $1.1 billion and $1.2 billion as of June 30, 2018 and December 31, 2017, respectively.
We continue to service a portion of the remaining mortgage loans in these securitizations. We also retain rights to future cash flows arising from these securitizations including interest-only bonds issued by the trusts. We generally estimate the fair value of these retained interests based on the estimated present value of expected future cash flows, using our best estimates of the key assumptions which include credit losses, prepayment speeds and discount rates commensurate with the risks involved. For the mortgage loans that we continue to service, we do not consolidate the related trusts because we do not have the right to receive benefits nor the obligation to absorb losses that could potentially be significant to the trusts. For the remaining trusts, for which we no longer service the underlying mortgage loans, we do not consolidate these entities since we do not have the power to direct the activities that most significantly impact the economic performance of the trusts.

 
 
97
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In connection with the securitization of certain option-ARM loans, a third party is obligated to advance a portion of any “negative amortization” resulting from monthly payments that are less than the interest accrued for that payment period. We have an agreement in place with the third party that mirrors this advance requirement. The amount advanced is tracked through mortgage-backed securities retained as part of the securitization transaction. As advances occur, we record an asset in the form of negative amortization bonds, which are held at fair value in other assets on our consolidated balance sheets. Our maximum exposure is affected by rate caps and monthly payment change caps, but the funding obligation cannot exceed the difference between the original loan balance multiplied by a preset negative amortization cap and the current unpaid principal balance. For the transactions where the negative amortization funding agreements have been terminated, incremental negative amortization is funded through the available cash flow in each transaction.
We have also entered into certain derivative contracts related to the securitization activities. These are classified as free-standing derivatives, with fair value adjustments recorded in non-interest income in our consolidated statements of income. See “Note 9—Derivative Instruments and Hedging Activities” for further details on these derivatives.
GreenPoint Mortgage Home Equity Lines of Credit (“HELOCs”)
Our discontinued wholesale mortgage banking unit, GreenPoint Mortgage Funding, Inc. (“GreenPoint”), previously sold HELOCs in whole loan sales that were subsequently securitized by third parties. GreenPoint acquired residual interests in certain of those securitization trusts. We do not consolidate these trusts because we either lack the power to direct the activities that most significantly impact the economic performance of the trusts or because we do not have the right to receive benefits or the obligation to absorb losses that could potentially be significant to the trusts. As the residual interest holder, GreenPoint is required to fund advances on the HELOCs when certain performance triggers are met due to deterioration in asset performance. On behalf of GreenPoint, we have funded cumulative advances of $30 million as of both June 30, 2018 and December 31, 2017. We also have unfunded commitments of $3 million and $4 million related to those interests for our non-consolidated VIEs as of June 30, 2018 and December 31, 2017, respectively.
GreenPoint Credit Manufactured Housing
We previously had certain retained interests and obligations related to the discontinued manufactured housing operations of GreenPoint Credit, LLC, a subsidiary of GreenPoint. Such discontinued operations, including the related recourse obligations, servicing rights and the primary obligation to execute clean-up calls in certain securitization transactions were sold to a third party in 2004. These securitization trusts were not consolidated because we did not have the power to direct the activities that most significantly impact the economic performance of the trusts as we did not service the loans.
The unpaid principal receivables balances of these manufactured housing securitization transactions were $412 million and $511 million as of June 30, 2018 and December 31, 2017, respectively. In the fourth quarter of 2017, we entered into an agreement with the third-party servicer under which we assumed the obligation to exercise the remaining clean-up calls as they become due on certain securitization transactions, and a forward sale agreement pursuant to which we will sell the underlying loans to a third-party purchaser as the clean-up calls are exercised. Accordingly, we recognized loans held for sale and a corresponding liability on our consolidated balance sheets. We recorded $139 million and $283 million of these loan receivables, with the corresponding liability, which is included as a component of other debt, as of June 30, 2018 and December 31, 2017, respectively.
We were required to fund letters of credit to cover losses on certain manufactured housing securitizations. We have the right to receive any funds remaining in the letters of credit after the securities are released. The fair value of these letters of credit are included in other assets on our consolidated balance sheets and totaled $71 million and $75 million as of June 30, 2018 and December 31, 2017, respectively. We also have credit exposure on an agreement that we entered into to absorb a portion of the risk of loss on certain manufactured housing securitizations not subject to the funded letters of credit. Our expected future obligation under this agreement included in other liabilities on our consolidated balance sheets was $4 million and $10 million as of June 30, 2018 and December 31, 2017, respectively.

 
 
98
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other VIEs
Affordable Housing Entities
As part of our community reinvestment initiatives, we invest in private investment funds that make equity investments in multi-family affordable housing properties. We receive affordable housing tax credits for these investments. The activities of these entities are financed with a combination of invested equity capital and debt. We account for certain of our investments in qualified affordable housing projects using the proportional amortization method if certain criteria are met. The proportional amortization method amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is recognized as a component of income tax expense attributable to continuing operations. For the six months ended June 30, 2018 and 2017, we recognized amortization of $250 million and $230 million, respectively, and tax credits of $321 million and $238 million, respectively, associated with these investments within income tax provision. The carrying value of our equity investments in these qualified affordable housing projects was $3.9 billion as of both June 30, 2018 and December 31, 2017, respectively. We are periodically required to provide additional financial or other support during the period of the investments. Our liability for these unfunded commitments was $1.3 billion and $1.4 billion as of June 30, 2018 and December 31, 2017, respectively. Predominantly all of this liability is expected to be paid from 2018 to 2020.
For those investment funds considered to be VIEs, we are not required to consolidate them if we do not have the power to direct the activities that most significantly impact the economic performance of those entities. We record our interests in these unconsolidated VIEs in loans held for investment, other assets and other liabilities on our consolidated balance sheets. Our maximum exposure to these entities is limited to our variable interests in the entities which consisted of assets of approximately $3.9 billion and $4.2 billion as of June 30, 2018 and December 31, 2017, respectively. The creditors of the VIEs have no recourse to our general credit and we do not provide additional financial or other support other than during the period that we are contractually required to provide it. The total assets of the unconsolidated VIE investment funds were approximately $11.1 billion and $11.5 billion as of June 30, 2018 and December 31, 2017, respectively.
Entities that Provide Capital to Low-Income and Rural Communities
We hold variable interests in entities (“Investor Entities”) that invest in community development entities (“CDEs”) that provide debt financing to businesses and non-profit entities in low-income and rural communities. Variable interests in the CDEs held by the consolidated Investor Entities are also our variable interests. The activities of the Investor Entities are financed with a combination of invested equity capital and debt. The activities of the CDEs are financed solely with invested equity capital. We receive federal and state tax credits for these investments. We consolidate the VIEs in which we have the power to direct the activities that most significantly impact the VIE’s economic performance and where we have the obligation to absorb losses or right to receive benefits that could be potentially significant to the VIE. We have also consolidated other investments and CDEs that are not considered to be VIEs, but where we hold a controlling financial interest. The assets of the VIEs that we consolidated, which totaled approximately $1.6 billion and $1.5 billion as of June 30, 2018 and December 31, 2017, respectively, are reflected on our consolidated balance sheets in cash, loans held for investment and other assets. The liabilities are reflected in other liabilities. The creditors of the VIEs have no recourse to our general credit. We have not provided additional financial or other support other than during the period that we are contractually required to provide it.
Other
Other VIEs include variable interests that we hold in companies that promote renewable energy sources and other equity method investments. We were not required to consolidate these entities because we do not have the power to direct the activities that most significantly impact their economic performance. Our maximum exposure to these entities is limited to the investment on our consolidated balance sheets of $304 million and $318 million as of June 30, 2018 and December 31, 2017, respectively. The creditors of the other VIEs have no recourse to our general credit. We have not provided additional financial or other support other than during the period that we are contractually required to provide it.

 
 
99
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7—GOODWILL AND INTANGIBLE ASSETS
The table below presents our goodwill, intangible assets and MSRs as of June 30, 2018 and December 31, 2017. Goodwill is presented separately, while intangible assets and MSRs are included in other assets on our consolidated balance sheets.
Table 7.1: Components of Goodwill, Intangible Assets and MSRs
 
 
June 30, 2018
(Dollars in millions)
 
Carrying
Amount of
Assets
 
Accumulated Amortization
 
Net
Carrying
Amount
Goodwill
 
$
14,531

 
N/A

 
$
14,531

Intangible assets:
 
 
 
 
 
 
Purchased credit card relationship (“PCCR”) intangibles
 
2,086

 
$
(1,888
)
 
198

Core deposit intangibles
 
1,149

 
(1,141
)
 
8

Other(1)
 
291

 
(163
)
 
128

Total intangible assets
 
3,526

 
(3,192
)
 
334

Total goodwill and intangible assets
 
$
18,057

 
$
(3,192
)
 
$
14,865

Commercial MSRs(2)
 
$
403

 
$
(151
)
 
$
252

 
 
 
 
 
 
 
 
 
December 31, 2017
(Dollars in millions)
 
Carrying
Amount of
Assets
 
Accumulated Amortization
 
Net
Carrying
Amount
Goodwill
 
$
14,533

 
N/A

 
$
14,533

Intangible assets:
 
 
 
 
 
 
PCCR intangibles
 
2,105

 
$
(1,844
)
 
261

Core deposit intangibles
 
1,149

 
(1,133
)
 
16

Other(1)
 
300

 
(156
)
 
144

Total intangible assets
 
3,554

 
(3,133
)
 
421

Total goodwill and intangible assets
 
$
18,087

 
$
(3,133
)
 
$
14,954

MSRs:
 
 
 
 
 
 
Consumer MSRs(3)
 
$
92

 
N/A

 
$
92

Commercial MSRs(2)
 
355

 
$
(126
)
 
229

Total MSRs
 
$
447

 
$
(126
)
 
$
321

__________
(1) 
Primarily consists of intangibles for sponsorship relationships, brokerage relationship intangibles, partnership and other contract intangibles and trade name intangibles.
(2) 
Commercial MSRs are accounted for under the amortization method on our consolidated balance sheets.
(3) 
Consumer MSRs were carried at fair value on our consolidated balance sheets as of December 31, 2017. In the first quarter of 2018, we sold the substantial majority of these MSRs.
Amortization expense for amortizable intangible assets, which is presented separately in our consolidated statements of income, totaled $43 million and $87 million for the three and six months ended June 30, 2018, respectively, and $61 million and $123 million for the three and six months ended June 30, 2017, respectively.

 
 
100
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill
The following table presents changes in the carrying amount of goodwill as well as goodwill attributable to each of our business segments as of June 30, 2018 and December 31, 2017.
Table 7.2: Goodwill Attributable to Business Segments
(Dollars in millions)
 
Credit Card
 
Consumer
Banking
 
Commercial Banking
 
Total
Balance as of December 31, 2017
 
$
5,032

 
$
4,600

 
$
4,901

 
$
14,533

Other adjustments(1)
 
(2
)
 
0

 
0

 
(2
)
Balance as of June 30, 2018
 
$
5,030

 
$
4,600

 
$
4,901

 
$
14,531

__________
(1)    Represents foreign currency translation adjustments.

 
 
101
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8—DEPOSITS AND BORROWINGS
Our deposits, which are our largest source of funding for our assets and operations, consist of non-interest-bearing and interest-bearing deposits, which include checking accounts, money market deposit accounts, negotiable order of withdrawals, savings deposits and time deposits.
We use a variety of other funding sources including short-term borrowings, senior and subordinated notes, securitized debt obligations and other borrowings. In addition, we utilize FHLB advances, which are secured by certain portions of our loan and investment securities portfolios. Securitized debt obligations are presented separately on our consolidated balance sheets, as they represent obligations of consolidated securitization trusts, while federal funds purchased and securities loaned or sold under agreements to repurchase, senior and subordinated notes and other borrowings, including FHLB advances, are included in other debt on our consolidated balance sheets.
The following tables summarize the components of our deposits, short-term borrowings and long-term debt as of June 30, 2018 and December 31, 2017. Our total short-term borrowings consist of federal funds purchased and securities loaned or sold under agreements to repurchase. Our long-term debt consists of borrowings with an original contractual maturity of greater than one year. The carrying value presented below for these borrowings include unamortized debt premiums and discounts, net of debt issuance costs and fair value hedge accounting adjustments.
Table 8.1: Components of Deposits, Short-Term Borrowings and Long-Term Debt
(Dollars in millions)
 
June 30,
2018
 
December 31,
2017
Deposits:
 
 
 
 
Non-interest-bearing deposits
 
$
25,620

 
$
26,404

Interest-bearing deposits(1)
 
222,605

 
217,298

Total deposits(2)
 
$
248,225

 
$
243,702

Short-term borrowings:
 
 
 
 
Federal funds purchased and securities loaned or sold under agreements to repurchase
 
$
553

 
$
576

Total short-term borrowings
 
$
553

 
$
576

 
 
June 30, 2018
 
 
(Dollars in millions)
 
Maturity
Dates
 
Stated Interest Rates
 
Weighted-
Average
Interest Rate
 
Carrying Value
 
December 31,
2017
Long-term debt:
 
 
 
 
 
 
 
 
 
 
Securitized debt obligations
 
2018-2025
 
1.33 - 3.01%
 
2.15
%
 
$
19,649

 
$
20,010

Senior and subordinated notes:
 
 
 
 
 
 
 
 
 
 
Fixed unsecured senior debt
 
2018-2028
 
1.85 - 4.75
 
2.98

 
24,824

 
22,776

Floating unsecured senior debt
 
2018-2023
 
2.75 - 3.51
 
3.15

 
3,646

 
3,446

Total unsecured senior debt
 
3.00

 
28,470

 
26,222

Fixed unsecured subordinated debt
 
2019-2026
 
3.38 - 8.80
 
4.09

 
4,450

 
4,533

Total senior and subordinated notes
 
32,920

 
30,755

Other long-term borrowings:
 
 
 
 
 
 
 
 
 
 
FHLB advances
 
2018-2023
 
4.44 - 5.36
 
4.87

 
2

 
8,609

Other borrowings
 
2018-2035
 
1.00 - 16.75
 
7.16

 
186

 
331

Total other long-term borrowings
 
188

 
8,940

Total long-term debt
 
$
52,757

 
$
59,705

Total short-term borrowings and long-term debt
 
$
53,310

 
$
60,281

__________
(1) 
Includes $2.7 billion and $1.3 billion of time deposits in denominations in excess of the $250,000 federal insurance limit as of June 30, 2018 and December 31, 2017, respectively.
(2) 
Includes approximately $1.7 billion of held for sale deposits as of June 30, 2018 associated with the anticipated sale of our online retail brokerage business.

 
 
102
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Use of Derivatives
We manage asset and liability positions and market risk exposure in accordance with market risk management policies that are approved by our Board of Directors. Our primary market risks stem from the impact on our earnings and economic value of equity from changes in interest rates and, to a lesser extent, changes in foreign exchange rates. We employ several techniques to manage our interest rate sensitivity, which include changing the duration and re-pricing characteristics of various assets and liabilities by using interest rate derivatives. Our current policies also include the use of derivatives to hedge exposures denominated in foreign currency which we use to limit our earnings and capital ratio exposures to foreign exchange risk. We execute our derivative contracts in both the over-the-counter (“OTC”) and exchange-traded derivative markets. Under the Dodd-Frank Act, we are required to clear eligible derivative transactions through Central Counterparty Clearinghouses (“CCPs”) such as the Chicago Mercantile Exchange (“CME”) and London Clearing House (“LCH”), which are often referred to as “central clearinghouses.” The majority of our derivatives are interest rate swaps. In addition, we may use a variety of other derivative instruments, including caps, floors, options, futures and forward contracts, to manage our interest rate and foreign exchange risks. We offer various interest rate, foreign exchange rate and commodity derivatives as an accommodation to our customers within our Commercial Banking business, and offset the majority of our exposure through derivative transactions with other counterparties.
Derivatives Counterparty Credit Risk
Derivative instruments contain an element of credit risk that arises from the potential failure of a counterparty to perform according to the terms of the contract. Our exposure to derivative counterparty credit risk, at any point in time, is equal to the amount reported as a derivative asset on our balance sheet, assuming no recoveries of underlying collateral.
We clear certain OTC derivatives with central clearinghouses through futures commission merchants (“FCMs”) as part of the regulatory requirement. The use of the CCPs and the FCMs reduces our bilateral counterparty credit exposures while it increases our credit exposures to CCPs and FCMs. We are required by CCPs to post initial and variation margin to mitigate the risk of non-payment through our FCMs. Our FCM agreements governing these derivative transactions generally include provisions that may require us to post more collateral or otherwise change terms in our agreements under certain circumstances. For CME-cleared OTC derivatives, we characterize variation margin cash payments as settlements. Effective January 16, 2018, LCH amended its rulebook to legally characterize variation margin payments as settlements. We adopted this rule change in the first quarter of 2018. As a result, the balances for LCH-cleared derivatives are reduced to reflect the settlement of these positions.
We also enter into legally enforceable master netting agreements and collateral agreements, where possible, with certain derivative counterparties to mitigate the risk of default on a bilateral basis. These bilateral agreements typically provide the right to offset exposures and require one counterparty to post collateral on derivative instruments in a net liability position to the other counterparty. Certain of these bilateral agreements include provisions requiring that our debt maintain a credit rating of investment grade or above by each of the major credit rating agencies. In the event of a downgrade of our debt credit rating below investment grade, some of our counterparties would have the right to terminate the derivative contract and close out the existing positions.
We record counterparty credit risk valuation adjustments (“CVAs”) on our derivative contracts to properly reflect the credit quality of the counterparty. We consider collateral and legally enforceable master netting agreements that mitigate our credit exposure to each counterparty in determining the counterparty credit risk valuation adjustment, which may be adjusted in future periods due to changes in the fair value of the derivative contracts, collateral and creditworthiness of the counterparty. We also record debit valuation adjustments (“DVAs”) to adjust the fair value of our derivative liabilities to reflect the impact of our own credit quality. We calculate this adjustment by comparing the spreads on our credit default swaps to the discount benchmark curve.
Accounting for Derivatives
Our derivatives are designated as either qualifying accounting hedges or free-standing derivatives. Qualifying accounting hedges are designated as fair value hedges, cash flow hedges or net investment hedges. Free-standing derivatives primarily consist of customer accommodation derivatives and economic hedges that do not qualify for hedge accounting.
•
Fair Value Hedges: We designate derivatives as fair value hedges when they are used to manage our exposure to changes in the fair value of certain financial assets and liabilities, which fluctuate in value as a result of movements in interest rates. Changes in the fair value of derivatives designated as fair value hedges are recorded and presented in the same line item as

 
 
103
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the earnings effect of the hedged item on our consolidated statements of income. Our fair value hedges consist of interest rate swaps that are intended to modify our exposure to interest rate risk on various fixed-rate assets and liabilities.
•
Cash Flow Hedges: We designate derivatives as cash flow hedges when they are used to manage our exposure to variability in cash flows related to forecasted transactions. Changes in the fair value of derivatives designated as cash flow hedges are recorded as a component of AOCI. Those amounts are reclassified into earnings in the same period or periods during which the forecasted transactions impact earnings and are presented in the same line item on our consolidated statements of income as the earnings effect of the hedged items. Our cash flow hedges use interest rate swaps and floors that are intended to hedge the variability in interest receipts or interest payments on some of our variable-rate assets or liabilities. We also enter into foreign currency forward derivative contracts to hedge our exposure to variability in cash flows related to intercompany borrowings denominated in a foreign currency.
•
Net Investment Hedges: We use net investment hedges to manage the foreign currency exposure related to our net investments in foreign operations that have functional currencies other than the U.S. dollar. Changes in the fair value of net investment hedges are recorded in the translation adjustment component of AOCI, offsetting the translation gain or loss from those foreign operations. We execute net investment hedges using foreign exchange forward contracts to hedge the translation exposure of the net investment in our foreign operations under the forward method.
•
Free-Standing Derivatives: We use free-standing derivatives to economically hedge the risk of changes in the fair value of mortgage loan origination and purchase commitments, as well as other interests held. We also categorize our customer accommodation derivatives and the related offsetting contracts as free-standing derivatives. Changes in the fair value of free-standing derivatives are recorded in earnings as a component of other non-interest income.

 
 
104
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Balance Sheet Presentation
The following table summarizes the notional and fair values of our derivative instruments as of June 30, 2018 and December 31, 2017, which are segregated by derivatives that are designated as accounting hedges and those that are not, and are further segregated by type of contract within those two categories. The total derivative assets and liabilities are adjusted on an aggregate basis to take into consideration the effects of legally enforceable master netting agreements and any associated cash collateral received or pledged. Derivative assets and liabilities are included in other assets and other liabilities, respectively, on our consolidated balance sheets.
Table 9.1: Derivative Assets and Liabilities at Fair Value
 
 
June 30, 2018
 
December 31, 2017
 
 
Notional or
Contractual
Amount
 
Derivative(1)(4)
 
Notional or
Contractual
Amount
 
Derivative(1)
(Dollars in millions)
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives designated as accounting hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges
 
$
69,476

 
$
49

 
$
34

 
$
56,604

 
$
102

 
$
164

Cash flow hedges
 
75,850

 
4

 
111

 
77,300

 
30

 
125

Total interest rate contracts
 
145,326

 
53

 
145

 
133,904

 
132

 
289

Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
5,827

 
148

 
7

 
6,086

 
19

 
75

Net investment hedges
 
2,649

 
82

 
12

 
3,036

 
1

 
164

Total foreign exchange contracts
 
8,476

 
230

 
19

 
9,122

 
20

 
239

Total derivatives designated as accounting hedges
 
153,802

 
283

 
164

 
143,026

 
152

 
528

Derivatives not designated as accounting hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts covering:
 
 
 
 
 
 
 
 
 
 
 
 
Customer accommodation
 
59,995

 
1,105

 
1,316

 
48,520

 
848

 
727

Other interest rate exposures(2)
 
5,779

 
27

 
12

 
3,857

 
40

 
8

Total interest rate contracts
 
65,774

 
1,132

 
1,328

 
52,377

 
888

 
735

Other contracts
 
1,327

 
1

 
22

 
1,209

 
0

 
5

Total derivatives not designated as accounting hedges
 
67,101

 
1,133

 
1,350

 
53,586

 
888

 
740

Total derivatives
 
$
220,903

 
$
1,416

 
$
1,514

 
$
196,612

 
$
1,040

 
$
1,268

Less: netting adjustment(3)
 
(533
)
 
(880
)
 
 
 
(275
)
 
(662
)
Total derivative assets/liabilities
 
$
883

 
$
634

 
 
 
$
765

 
$
606

__________
(1) 
Derivative assets and liabilities presented above exclude valuation adjustments related to non-performance risk. As of June 30, 2018 and December 31, 2017, the cumulative CVA balances were $3 million and $2 million, respectively, and the cumulative DVA balances were less than $1 million as of both June 30, 2018 and December 31, 2017.
(2) 
Other interest rate exposures include mortgage-related derivatives, interest rate swaps and to-be-announced derivatives.
(3) 
Represents balance sheet netting of derivative assets and liabilities, and related payables and receivables for cash collateral held or placed with the same counterparty.
(4) 
Reflects a reduction in derivative assets of $522 million and a reduction in derivative liabilities of $624 million on our consolidated balance sheets as a result of adopting the LCH variation margin rule change in the first quarter of 2018.

 
 
105
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the carrying value of our hedged assets and liabilities in fair value hedges and the associated cumulative basis adjustments included in those carrying values as of June 30, 2018.
Table 9.2: Hedged Items in Fair Value Hedging Relationships
 
 
June 30, 2018
 
 
Carrying Amount
Assets/(Liabilities)
 
Cumulative Amount of Basis Adjustments Included in the Carrying Amount
(Dollars in millions)
 
 
Total
Assets/(Liabilities)
 
Discontinued-Hedging Relationships
Line item on our consolidated balance sheets in which the hedged item is included:
 
 
 
 
 
 
Investment securities available for sale(1)(2)
 
$
18,425

 
$
(193
)
 
$
0

Interest-bearing deposits
 
(14,140
)
 
383

 
0

Securitized debt obligations
 
(11,890
)
 
242

 
0

Senior and subordinated notes
 
(29,274
)
 
664

 
356

__________
(1) 
These amounts include the amortized cost basis of our investment securities designated in hedging relationships for which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. As of June 30, 2018, the amortized cost basis of this portfolio was $10.3 billion, the amount of the designated hedged items was $4.1 billion, and the cumulative basis adjustment associated with these hedges was $31 million.
(2) 
Carrying value represents amortized cost.
Offsetting of Financial Assets and Liabilities
Derivative contracts and repurchase agreements that we execute bilaterally in the OTC market are governed by enforceable master netting arrangements where we generally have the right to offset exposure with the same counterparty. Either counterparty can generally request to net settle all contracts through a single payment upon default on, or termination of, any one contract. We elect to offset the derivative assets and liabilities under netting arrangements for balance sheet presentation where a right of setoff exists. For derivative contracts entered into under master netting arrangements for which we have not been able to confirm the enforceability of the setoff rights, or those not subject to master netting arrangements, we do not offset our derivative positions for balance sheet presentation.
We also maintain collateral agreements with certain derivative counterparties. For bilateral derivatives, we review our collateral positions on a daily basis and exchange collateral with our counterparties in accordance with standard International Swaps and Derivatives Association documentation and other related agreements. Agreements with certain bilateral counterparties require both parties to maintain collateral in the event the fair values of derivative instruments exceed established exposure thresholds. For centrally cleared derivatives, we are subject to initial margin posting and daily variation margin settlement with the central clearinghouses. Acceptable types of collateral are typically in the form of cash or high quality liquid securities.
The exchange of collateral is dependent upon the fair value of the derivative instruments as well as the fair value of the pledged collateral. When valuing collateral, an estimate of the variation in price and liquidity over time is subtracted in the form of a “haircut” to discount the value of the collateral pledged.

 
 
106
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents as of June 30, 2018 and December 31, 2017 the gross and net fair values of our derivative assets and liabilities and repurchase agreements, as well as the related offsetting amounts permitted under U.S. GAAP. The table also includes cash and non-cash collateral received or pledged associated with such arrangements. The collateral amounts shown are limited to the extent of the related net derivative fair values or outstanding balances, thus instances of over-collateralization are not shown.
Table 9.3: Offsetting of Financial Assets and Financial Liabilities
 
 
Gross
Amounts
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts as Recognized
 
Securities Collateral Held Under Master Netting Agreements
 
 
(Dollars in millions)
 
 
Financial
Instruments
 
Cash Collateral Received
 
 
 
Net
Exposure
As of June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets(1)(2)
 
$
1,416

 
$
(219
)
 
$
(314
)
 
$
883

 
$
0

 
$
883

As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets(1)
 
1,040

 
(202
)
 
(73
)
 
765

 
0

 
765

 
 
Gross
Amounts
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts as Recognized
 
Securities Collateral Pledged Under Master Netting Agreements
 
 
(Dollars in millions)
 
 
Financial
Instruments
 
Cash Collateral Pledged
 
 
 
Net
Exposure
As of June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities(1)(2)
 
$
1,514

 
$
(219
)
 
$
(661
)
 
$
634

 
$
0

 
$
634

Repurchase agreements(3)
 
553

 
0

 
0

 
553

 
(553
)
 
0

As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities(1)
 
1,268

 
(202
)
 
(460
)
 
606

 
0

 
606

Repurchase agreements
 
576

 
0

 
0

 
576

 
(576
)
 
0

__________
(1) 
We received cash collateral from derivative counterparties totaling $436 million and $91 million as of June 30, 2018 and December 31, 2017, respectively. We also received securities from derivative counterparties with a fair value of $1 million as of both June 30, 2018 and December 31, 2017, which we have the ability to re-pledge. We posted $1.4 billion and $966 million of cash collateral as of June 30, 2018 and December 31, 2017, respectively.
(2) 
Reflects a reduction in derivative assets of $522 million and a reduction in derivative liabilities of $624 million on our consolidated balance sheets as a result of adopting the LCH variation margin rule change in the first quarter of 2018.
(3) 
Represents customer repurchase agreements that mature the next business day. As of June 30, 2018, we pledged collateral with a fair value of $564 million under these customer repurchase agreements, which were primarily agency RMBS securities.
Income Statement and AOCI Presentation
Fair Value and Cash Flow Hedges
The net gains (losses) recognized in our consolidated statements of income related to derivatives in fair value and cash flow hedging relationships are presented below for the three and six months ended June 30, 2018 and 2017. Prior period amounts were not reclassified to conform to the current period presentation.

 
 
107
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Table 9.4: Effects of Fair Value and Cash Flow Hedge Accounting
 
 
Three Months Ended June 30, 2018
 
 
Net Interest Income
(Dollars in millions)
 
Investment Securities
 
Loans, Including Loans Held for Sale
 
Other
 
Deposits
 
Securitized Debt Obligations
 
Senior and Subordinated Notes
Total amounts presented in our consolidated statements of income
 
$
539

 
$
5,989

 
$
68

 
$
(622
)
 
$
(124
)
 
$
(289
)
Fair value hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Interest recognized on derivatives
 
(9
)
 
0

 
0

 
(21
)
 
(18
)
 
4

Gains (losses) recognized on derivatives
 
83

 
0

 
0

 
(37
)
 
(17
)
 
(154
)
Gains (losses) recognized on hedged items(1)
 
(81
)
 
0

 
0

 
32

 
15

 
129

Net income (expense) recognized on fair value hedges
 
(7
)
 
0

 
0

 
(26
)
 
(20
)
 
(21
)
Cash flow hedging relationships:(2)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Realized gains (losses) reclassified from AOCI into net income
 
(2
)
 
(17
)
 
0

 
0

 
0

 
0

Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Realized gains reclassified from AOCI into net income
 
0

 
0

 
11

 
0

 
0

 
0

Net income (expense) recognized on cash flow hedges
 
$
(2
)
 
$
(17
)
 
$
11

 
$
0

 
$
0

 
$
0

 
 
Six Months Ended June 30, 2018
 
 
Net Interest Income
(Dollars in millions)
 
Investment Securities
 
Loans, Including Loans Held for Sale
 
Other
 
Deposits
 
Securitized Debt Obligations
 
Senior and Subordinated Notes
Total amounts presented in our consolidated statements of income
 
$
991

 
$
12,123

 
$
119

 
$
(1,161
)
 
$
(231
)
 
$
(540
)
Fair value hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Interest recognized on derivatives
 
(17
)
 
0

 
0

 
(23
)
 
(23
)
 
14

Gains (losses) recognized on derivatives
 
183

 
0

 
0

 
(197
)
 
(118
)
 
(511
)
Gains (losses) recognized on hedged items(1)
 
(180
)
 
0

 
0

 
187

 
113

 
474

Net income (expense) recognized on fair value hedges
 
(14
)
 
0

 
0

 
(33
)
 
(28
)
 
(23
)
Cash flow hedging relationships:(2)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Realized gains (losses) reclassified from AOCI into net income
 
(4
)
 
(9
)
 
0

 
0

 
0

 
0

Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Realized gains reclassified from AOCI into net income
 
0

 
0

 
19

 
0

 
0

 
0

Net income (expense) recognized on cash flow hedges
 
$
(4
)
 
$
(9
)
 
$
19

 
$
0

 
$
0

 
$
0


 
 
108
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

_________
(1) 
Includes amortization expense of $16 million and $6 million for the three and six months ended June 30, 2018, respectively, related to basis adjustments of the discontinued hedges.
(2) 
See “Note 10—Stockholders’ Equity” for the effects of cash flow and net investment hedges on AOCI and amounts reclassified to net income, net of tax.
(Dollars in millions)
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
Derivatives designated as fair value hedges:
 
 
 
 
Fair value interest rate contracts:
 
 
 
 
Gains recognized in net income on derivatives
 
$
138

 
$
93

Losses recognized in net income on hedged items
 
(132
)
 
(93
)
Net fair value hedge ineffectiveness gains (losses)
 
6

 
0

Derivatives designated as cash flow hedges:
 
 
 
 
Gains (losses) reclassified from AOCI into net income:
 
 
 
 
Interest rate contracts
 
24

 
61

Foreign exchange contracts
 
5

 
8

Subtotal
 
29

 
69

Gains (losses) recognized in net income due to ineffectiveness:
 


 


Interest rate contracts
 
4

 
3

Net derivative gains (losses) recognized in net income
 
$
33

 
$
72

In the next 12 months, we expect to reclassify to earnings net after-tax losses of $148 million recorded in AOCI as of June 30, 2018. These amounts will offset the cash flows associated with the hedged forecasted transactions. The maximum length of time over which forecasted transactions were hedged was approximately six years as of June 30, 2018. The amount we expect to reclassify into earnings may change as a result of changes in market conditions and ongoing actions taken as part of our overall risk management strategy.
Free-Standing Derivatives
The net impacts to our consolidated statements of income related to free-standing derivatives are presented below for the three and six months ended June 30, 2018 and 2017. These gains or losses are recognized in other non-interest income on our consolidated statements of income.
Table 9.5: Gains (Losses) on Free-Standing Derivatives
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2018
 
2017
 
2018
 
2017
Gains (losses) recognized in other non-interest income:
 
 
 
 
 
 
 
 
Interest rate contracts covering:
 
 
 
 
 
 
 
 
Customer accommodation
 
$
16

 
$
6

 
$
26

 
$
16

Other interest rate exposures
 
9

 
17

 
21

 
24

Total interest rate contracts
 
25

 
23

 
47

 
40

Other contracts
 
0

 
0

 
(20
)
 
0

Total
 
$
25

 
$
23

 
$
27

 
$
40


 
 
109
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10—STOCKHOLDERS’ EQUITY
Preferred Stock
The following table summarizes the Company’s preferred stock issued and outstanding as of June 30, 2018 and December 31, 2017.
Table 10.1: Preferred Stock Issued and Outstanding(1)
 
 
 
 
 
 
Redeemable by Issuer Beginning
 
Per Annum Dividend Rate
 
Dividend Frequency
 
Liquidation Preference per Share
 
 
 
Carrying Value
(in millions)
Series
 
Description
 
Issuance Date
 
 
 
 
 
Total Shares Outstanding
 
June 30, 2018
 
December 31, 2017
Series B
 
6.00%
Non-Cumulative
 
August 20, 2012
 
September 1, 2017
 
6.00
%
 
Quarterly
 
$
1,000

 
875,000

 
$
853

 
$
853

Series C
 
6.25%
Non-Cumulative
 
June 12, 2014
 
September 1, 2019
 
6.25

 
Quarterly
 
1,000

 
500,000

 
484

 
484

Series D
 
6.70%
Non-Cumulative
 
October 31, 2014
 
December 1, 2019
 
6.70

 
Quarterly
 
1,000

 
500,000

 
485

 
485

Series E
 
Fixed-to-Floating Rate Non-Cumulative
 
May 14, 2015
 
June 1, 2020
 
5.55% through 5/31/2020;
3-mo. LIBOR+ 380 bps thereafter

 
Semi-Annually through 5/31/2020; Quarterly thereafter
 
1,000

 
1,000,000

 
988

 
988

Series F
 
6.20%
Non-Cumulative
 
August 24, 2015
 
December 1, 2020
 
6.20

 
Quarterly
 
1,000

 
500,000

 
484

 
484

Series G
 
5.20%
Non-Cumulative
 
July 29, 2016
 
December 1, 2021
 
5.20

 
Quarterly
 
1,000

 
600,000

 
583

 
583

Series H
 
6.00%
Non-Cumulative
 
November 29, 2016
 
December 1, 2021
 
6.00

 
Quarterly
 
1,000

 
500,000

 
483

 
483

Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
4,360

 
$
4,360

__________
(1) 
Except for Series E, ownership is held in the form of depositary shares, each representing a 1/40th interest in a share of fixed-rate non-cumulative perpetual preferred stock.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income primarily consists of accumulated net unrealized gains or losses associated with available for sale securities, the changes in fair value of derivatives designated as cash flow hedges, unrealized gains and losses on securities held to maturity on the transfer date from the available for sale category and foreign currency translation adjustments. Unrealized gains and losses for securities held to maturity are amortized over the remaining life of the security with no expected impact on future net income as amortization of these gains or losses will be offset by the amortization of premium or discount created from the transfer of securities from available for sale to held to maturity.

 
 
110
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table includes the AOCI impacts from the adoption of accounting standards and the changes in AOCI by component for the three and six months ended June 30, 2018 and 2017. See “Note 1—Summary of Significant Accounting Policies” for more information.
Table 10.2: Accumulated Other Comprehensive Income
 
 
Three Months Ended June 30, 2018
(Dollars in millions)
 
Securities
Available
for Sale
 
Securities Held to Maturity
 
Cash Flow
Hedges
 
Foreign
Currency
Translation Adjustments(1)
 
Other
 
Total
AOCI as of March 31, 2018
 
$
(565
)
 
$
(212
)
 
$
(662
)
 
$
(131
)
 
$
(29
)
 
$
(1,599
)
Other comprehensive income (loss) before reclassifications
 
(65
)
 
0

 
(119
)
 
(24
)
 
1

 
(207
)
Amounts reclassified from AOCI into earnings
 
0

 
8

 
6

 
0

 
(1
)
 
13

Net other comprehensive income (loss)
 
(65
)
 
8

 
(113
)
 
(24
)
 
0

 
(194
)
AOCI as of June 30, 2018
 
$
(630
)
 
$
(204
)
 
$
(775
)
 
$
(155
)
 
$
(29
)
 
$
(1,793
)
 
 
Six Months Ended June 30, 2018
(Dollars in millions)
 
Securities
Available
for Sale
 
Securities Held to Maturity
 
Cash Flow
Hedges
 
Foreign
Currency
Translation Adjustments(1)
 
Other
 
Total
AOCI as of December 31, 2017
 
$
17

 
$
(524
)
 
$
(281
)
 
$
(138
)
 
$
0

 
$
(926
)
Cumulative effects from adoption of new accounting standards
 
3

 
(113
)
 
(63
)
 
0

 
(28
)
 
(201
)
Transfer of securities held to maturity to available for sale(2)
 
(325
)
 
407

 
0

 
0

 
0

 
82

Other comprehensive income (loss) before reclassifications
 
(319
)
 
0

 
(426
)
 
(17
)
 
1

 
(761
)
Amounts reclassified from AOCI into earnings
 
(6
)
 
26

 
(5
)
 
0

 
(2
)
 
13

Net other comprehensive income (loss)
 
(650
)
 
433

 
(431
)
 
(17
)
 
(1
)
 
(666
)
AOCI as of June 30, 2018
 
$
(630
)
 
$
(204
)
 
$
(775
)
 
$
(155
)
 
$
(29
)
 
$
(1,793
)
 
 
Three Months Ended June 30, 2017
(Dollars in millions)
 
Securities
Available
for Sale
 
Securities Held to Maturity
 
Cash Flow
Hedges
 
Foreign
Currency
Translation Adjustments(1)
 
Other
 
Total
AOCI as of March 31, 2017
 
$
32

 
$
(598
)
 
$
(144
)
 
$
(205
)
 
$
(19
)
 
$
(934
)
Other comprehensive income before reclassifications
 
147

 
0

 
74

 
31

 
4

 
256

Amounts reclassified from AOCI into earnings
 
2

 
23

 
(29
)
 
0

 
(1
)
 
(5
)
Net other comprehensive income
 
149

 
23

 
45

 
31

 
3

 
251

AOCI as of June 30, 2017
 
$
181

 
$
(575
)
 
$
(99
)
 
$
(174
)
 
$
(16
)
 
$
(683
)
 
 
Six Months Ended June 30, 2017
(Dollars in millions)
 
Securities
Available
for Sale
 
Securities Held to Maturity
 
Cash Flow
Hedges
 
Foreign
Currency
Translation Adjustments(1)
 
Other
 
Total
AOCI as of December 31, 2016
 
$
(4
)
 
$
(621
)
 
$
(78
)
 
$
(222
)
 
$
(24
)
 
$
(949
)
Other comprehensive income before reclassifications
 
183

 
0

 
48

 
48

 
11

 
290

Amounts reclassified from AOCI into earnings
 
2

 
46

 
(69
)
 
0

 
(3
)
 
(24
)
Net other comprehensive income (loss)
 
185

 
46

 
(21
)
 
48

 
8

 
266

AOCI as of June 30, 2017
 
$
181

 
$
(575
)
 
$
(99
)
 
$
(174
)
 
$
(16
)
 
$
(683
)

 
 
111
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

__________
(1) 
Includes other comprehensive gain of $123 million and loss of $58 million for the three months ended June 30, 2018 and 2017, respectively, and other comprehensive gain of $63 million and loss of $80 million for the six months ended June 30, 2018 and 2017, respectively, from hedging instruments designated as net investment hedges.
(2) 
In the first quarter of 2018, we made a one-time transfer of held to maturity securities with a carrying value of $9.0 billion to available for sale as a result of our adoption of ASU No. 2017-12. This transfer resulted in an after-tax gain of $82 million ($107 million pre-tax) to AOCI.
The following table presents the impacts on net income of amounts reclassified from each component of AOCI for the three and six months ended June 30, 2018 and 2017.
Table 10.3: Reclassifications from AOCI
 
 
 
 
Amount Reclassified from AOCI
(Dollars in millions)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
AOCI Components
 
Affected Income Statement Line Item
 
2018
 
2017
 
2018
 
2017
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest income
 
$
0

 
$
(4
)
 
$
8

 
$
(4
)
 
 
Income tax provision (benefit)
 
0

 
(2
)
 
2

 
(2
)
 
 
Net income/(loss)
 
0

 
(2
)
 
6

 
(2
)
Securities held to maturity:(1)
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
(10
)
 
(37
)
 
(34
)
 
(73
)
 
 
Income tax benefit
 
(2
)
 
(14
)
 
(8
)
 
(27
)
 
 
Net loss
 
(8
)
 
(23
)
 
(26
)
 
(46
)
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
Interest income
 
(19
)
 
39

 
(13
)
 
97

Foreign exchange contracts:
 
Interest income
 
12

 
7

 
20

 
13

 
 
Non-interest income
 
(1
)
 
0

 
(1
)
 
0

 
 
Income (loss) from continuing operations before income taxes
 
(8
)
 
46

 
6

 
110

 
 
Income tax provision (benefit)
 
(2
)
 
17

 
1

 
41

 
 
Net income/(loss)
 
(6
)
 
29

 
5

 
69

Other:
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest income and non-interest expense
 
1

 
2

 
2

 
4

 
 
Income tax provision
 
0

 
1

 
0

 
1

 
 
Net income
 
1

 
1

 
2

 
3

Total reclassifications
 
$
(13
)
 
$
5

 
$
(13
)
 
$
24

__________
(1) 
The amortization of unrealized holding gains or losses reported in AOCI for securities held to maturity will be offset by the amortization of premium or discount created from the transfer of securities from available for sale to held to maturity, which occurred at fair value. These unrealized gains or losses will be amortized over the remaining life of the security with no expected impact on future net income.

 
 
112
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below summarizes other comprehensive income activity and the related tax impact for the three and six months ended June 30, 2018 and 2017.
Table 10.4: Other Comprehensive Income (Loss)
 
 
Three Months Ended June 30,
 
 
2018
 
2017
(Dollars in millions)
 
Before
Tax
 
Provision
(Benefit)
 
After
Tax
 
Before
Tax
 
Provision
(Benefit)
 
After
Tax
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on securities available for sale
 
$
(86
)
 
$
(21
)
 
$
(65
)
 
$
237

 
$
88

 
$
149

Net changes in securities held to maturity
 
10

 
2

 
8

 
37

 
14

 
23

Net unrealized gains (losses) on cash flow hedges
 
(149
)
 
(36
)
 
(113
)
 
72

 
27

 
45

Foreign currency translation adjustments(1)
 
15

 
39

 
(24
)
 
(3
)
 
(34
)
 
31

Other
 
(1
)
 
(1
)
 
0

 
5

 
2

 
3

Other comprehensive income (loss)
 
$
(211
)
 
$
(17
)
 
$
(194
)
 
$
348

 
$
97

 
$
251

 
 
Six Months Ended June 30,
 
 
2018
 
2017
(Dollars in millions)
 
Before
Tax
 
Provision
(Benefit)
 
After
Tax
 
Before
Tax
 
Provision
(Benefit)
 
After
Tax
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on securities available for sale
 
$
(857
)
 
$
(207
)
 
$
(650
)
 
$
283

 
$
98

 
$
185

Net changes in securities held to maturity
 
569

 
136

 
433

 
73

 
27

 
46

Net unrealized losses on cash flow hedges
 
(567
)
 
(136
)
 
(431
)
 
(32
)
 
(11
)
 
(21
)
Foreign currency translation adjustments(1)
 
3

 
20

 
(17
)
 
1

 
(47
)
 
48

Other
 
(2
)
 
(1
)
 
(1
)
 
12

 
4

 
8

Other comprehensive income (loss)
 
$
(854
)
 
$
(188
)
 
$
(666
)
 
$
337

 
$
71

 
$
266

__________
(1) 
Includes the impact from hedging instruments designated as net investment hedges.

 
 
113
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11—EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per common share.
Table 11.1: Computation of Basic and Diluted Earnings per Common Share
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars and shares in millions, except per share data)
 
2018
 
2017
 
2018
 
2017
Income from continuing operations, net of tax
 
$
1,917

 
$
1,047

 
$
3,260

 
$
1,842

Income (loss) from discontinued operations, net of tax
 
(11
)
 
(11
)
 
(8
)
 
4

Net income
 
1,906

 
1,036

 
3,252

 
1,846

Dividends and undistributed earnings allocated to participating securities
 
(12
)
 
(8
)
 
(23
)
 
(13
)
Preferred stock dividends
 
(80
)
 
(80
)
 
(132
)
 
(133
)
Net income available to common stockholders
 
$
1,814

 
$
948

 
$
3,097

 
$
1,700

 
 
 
 
 
 
 
 
 
Total weighted-average basic shares outstanding
 
485.1

 
484.0

 
485.9

 
483.1

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options
 
1.6

 
2.4

 
1.9

 
2.6

Other contingently issuable shares
 
1.0

 
1.0

 
1.1

 
1.2

Warrants(1)
 
0.6

 
0.7

 
0.7

 
0.8

Total effect of dilutive securities
 
3.2

 
4.1

 
3.7

 
4.6

Total weighted-average diluted shares outstanding
 
488.3

 
488.1

 
489.6

 
487.7

Basic earnings per common share:
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
3.76

 
$
1.98

 
$
6.39

 
$
3.51

Income (loss) from discontinued operations
 
(0.02
)
 
(0.02
)
 
(0.02
)
 
0.01

Net income per basic common share
 
$
3.74

 
$
1.96

 
$
6.37

 
$
3.52

Diluted earnings per common share:(2)
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
3.73

 
$
1.96

 
$
6.35

 
$
3.48

Income (loss) from discontinued operations
 
(0.02
)
 
(0.02
)
 
(0.02
)
 
0.01

Net income per diluted common share
 
$
3.71

 
$
1.94

 
$
6.33

 
$
3.49

__________
(1) 
Represents warrants issued as part of the U.S. Department of Treasury’s Troubled Assets Relief Program. There were 943 thousand and 1.4 million warrants to purchase common stock outstanding as of June 30, 2018 and 2017, respectively.
(2) 
Excluded from the computation of diluted earnings per share were 24 thousand shares and 65 thousand shares related to awards for the three and six months ended June 30, 2018, respectively, and 310 thousand shares related to options with exercise prices ranging from $82.08 to $86.34, and 266 thousand shares related to options with exercise prices ranging from $82.08 to $86.34 for the three and six months ended June 30, 2017, respectively, because their inclusion would be anti-dilutive.

 
 
114
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12—FAIR VALUE MEASUREMENT
Fair value, also referred to as an exit price, is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value accounting guidance provides a three-level fair value hierarchy for classifying financial instruments. This hierarchy is based on the markets in which the assets or liabilities trade and whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. The fair value measurement of a financial asset or liability is assigned a level based on the lowest level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are described below:
Level 1:
 
Valuation is based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:
 
Valuation is based on observable market-based inputs other than Level 1 prices, such as quoted price for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3:
 
Valuation is generated from techniques that use significant assumptions not observable in the market. Valuation techniques include pricing models, discounted cash flow methodologies or similar techniques.
The accounting guidance for fair value measurements requires that we maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The accounting guidance provides for the irrevocable option to elect, on a contract-by-contract basis, to measure certain financial assets and liabilities at fair value at inception of the contract and record any subsequent changes in fair value in earnings. We have not made any material fair value option elections as of or for the periods disclosed herein.
The determination and classification of financial instruments in the fair value hierarchy is performed at the end of each reporting period. We consider all available information, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs. For additional information on the valuation techniques used in estimating the fair value of our financial assets and liabilities on a recurring or nonrecurring basis and for estimating the fair value for financial instruments that are not recorded at fair value, see “Note 17—Fair Value Measurement” in our 2017 Form 10-K.
Fair Value Governance and Control
We have a governance framework and a number of key controls that are intended to ensure that our fair value measurements are appropriate and reliable. Our governance framework provides for independent oversight and segregation of duties. Our control processes include review and approval of new transaction types, price verification and review of valuation judgments, methods, models, process controls and results.
Groups independent of our trading and investing functions participate in the review and validation process. Tasks performed by these groups include periodic verification of fair value measurements to determine if assigned fair values are reasonable, including comparing prices from vendor pricing services to other available market information.
Our Fair Value Committee (“FVC”), which includes representation from business areas, Risk Management and Finance divisions, provides guidance and oversight to ensure an appropriate valuation control environment. The FVC regularly reviews and approves our fair valuations to ensure that our valuation practices are consistent with industry standards and adhere to regulatory and accounting guidance.
We have a model policy, established by an independent Model Risk Office, which governs the validation of models and related supporting documentation to ensure the appropriate use of models for pricing and fair value measurements. The Model Risk Office validates all models and provides ongoing monitoring of their performance.
The fair value governance process is set up in a manner that allows the Chairperson of the FVC to escalate valuation disputes that cannot be resolved by the FVC to a more senior committee called the Valuations Advisory Committee (“VAC”) for resolution. The VAC is chaired by the Chief Financial Officer and includes other members of senior management. The VAC is only required to convene to review escalated valuation disputes.

 
 
115
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table displays our assets and liabilities measured on our consolidated balance sheets at fair value on a recurring basis as of June 30, 2018 and December 31, 2017. During the six months ended June 30, 2018, we had minimal movements between Levels 1 and 2.
Table 12.1: Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
 
June 30, 2018
 
 
Fair Value Measurements Using
 
Netting Adjustments(1)
 
 
(Dollars in millions)
 
Level 1
 
Level 2
 
Level 3
 
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
8,624

 
$
0

 
$
0

 
—

 
$
8,624

RMBS
 
0

 
35,240

 
442

 
—

 
35,682

CMBS
 
0

 
4,752

 
11

 
—

 
4,763

Other ABS
 
0

 
294

 
0

 
—

 
294

Other securities
 
192

 
1,131

 
5

 
—

 
1,328

Total securities available for sale
 
8,816

 
41,417

 
458

 
—

 
50,691

Other assets:
 
 
 
 
 
 
 
 
 
 
Derivative assets(2)
 
0

 
1,373

 
43

 
$
(533
)
 
883

Other(3)
 
289

 
0

 
164

 
—

 
453

Total assets
 
$
9,105

 
$
42,790

 
$
665

 
$
(533
)
 
$
52,027

Liabilities:
 
 
 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
 
 
 
Derivative liabilities(2)
 
$
0

 
$
1,466

 
$
48

 
$
(880
)
 
$
634

Total liabilities
 
$
0

 
$
1,466

 
$
48

 
$
(880
)
 
$
634

 
 
December 31, 2017
 
 
Fair Value Measurements Using
 
Netting Adjustments(1)
 
 
(Dollars in millions)
 
Level 1
 
Level 2
 
Level 3
 
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
5,171

 
$
0

 
$
0

 
—

 
$
5,171

RMBS
 
0

 
27,178

 
614

 
—

 
27,792

CMBS
 
0

 
3,161

 
14

 
—

 
3,175

Other ABS
 
0

 
512

 
0

 
—

 
512

Other securities
 
320

 
680

 
5

 
—

 
1,005

Total securities available for sale
 
5,491

 
31,531

 
633

 
—

 
37,655

Other assets:
 
 
 
 
 
 
 
 
 
 
Derivative assets(2)
 
1

 
1,002

 
37

 
$
(275
)
 
765

Other(3)
 
281

 
0

 
264

 
—

 
545

Total assets
 
$
5,773

 
$
32,533

 
$
934

 
$
(275
)
 
$
38,965

Liabilities:
 
 
 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
 
 
 
Derivative liabilities(2)
 
$
1

 
$
1,243

 
$
24

 
$
(662
)
 
$
606

Total liabilities
 
$
1

 
$
1,243

 
$
24

 
$
(662
)
 
$
606


 
 
116
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

__________
(1) 
Represents balance sheet netting of derivative assets and liabilities, and related payable and receivables for cash collateral held or placed with the same counterparty. See “Note 9—Derivative Instruments and Hedging Activities” for additional information.
(2) 
Does not reflect $2 million recognized as a net valuation allowance on derivative assets and liabilities for non-performance risk as of both June 30, 2018 and December 31, 2017. Non-performance risk is included in the derivative assets and liabilities which are part of other assets and liabilities on the consolidated balance sheets and offset through non-interest income in the consolidated statements of income.
(3) 
As of June 30, 2018, other includes retained interests in securitizations of $164 million, deferred compensation plan assets of $288 million and equity securities of $1 million. As of December 31, 2017, other includes consumer MSRs of $92 million, retained interests in securitizations of $172 million and deferred compensation plan assets of $281 million.
Level 3 Recurring Fair Value Rollforward
The table below presents a reconciliation for all assets and liabilities measured and recognized at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2018 and 2017. When assets and liabilities are transferred between levels, we recognize the transfer as of the end of the period. Generally, transfers into Level 3 were primarily driven by the usage of unobservable assumptions in the pricing of these financial instruments as evidenced by wider pricing variations among pricing vendors and transfers out of Level 3 were primarily driven by the usage of assumptions corroborated by market observable information as evidenced by tighter pricing among multiple pricing sources.
Table 12.2: Level 3 Recurring Fair Value Rollforward
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Three Months Ended June 30, 2018
 
 
 
 
Total Gains (Losses)
(Realized/Unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized
Gains (Losses)
Included in Net
Income Related to Assets and
Liabilities Still Held as of
June 30, 2018(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Balance,
April 1,
2018
 
Included
in Net
Income(1)
 
Included in OCI
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
Into
Level 3
 
Transfers
Out of
Level 3
 
Balance,
June 30,
2018
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RMBS
 
$
614

 
$
9

 
$
9

 
$
0

 
$
0

 
$
0

 
$
(21
)
 
$
4

 
$
(173
)
 
$
442

 
$
7

CMBS
 
13

 
0

 
0

 
0

 
0

 
0

 
(2
)
 
0

 
0

 
11

 
0

Other securities
 
5

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
5

 
0

Total securities available for sale
 
632

 
9

 
9

 
0

 
0

 
0

 
(23
)
 
4

 
(173
)
 
458

 
7

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retained interests in securitizations
 
176

 
(12
)
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
164

 
(12
)
Net derivative assets (liabilities)(2)
 
(9
)
 
(2
)
 
0

 
0

 
0

 
6

 
(1
)
 
0

 
1

 
(5
)
 
(2
)

 
 
117
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Six Months Ended June 30, 2018
 
 
 
 
Total Gains (Losses)
(Realized/Unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized
Gains (Losses)
Included in Net
Income Related to Assets and
Liabilities Still Held as of
June 30, 2018(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Balance,
January 1,
2018
 
Included
in Net
Income(1)
 
Included in OCI
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
Into
Level 3
 
Transfers
Out of
Level 3
 
Balance,
June 30,
2018
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RMBS
 
$
614

 
$
18

 
$
7

 
$
0

 
$
0

 
$
0

 
$
(42
)
 
$
65

 
$
(220
)
 
$
442

 
$
13

CMBS
 
14

 
0

 
0

 
0

 
0

 
0

 
(3
)
 
0

 
0

 
11

 
0

Other securities
 
5

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
5

 
0

Total securities available for sale
 
633

 
18

 
7

 
0

 
0

 
0

 
(45
)
 
65

 
(220
)
 
458

 
13

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer MSRs
 
92

 
3

 
0

 
0

 
(97
)
 
2

 
0

 
0

 
0

 
0

 
0

Retained interests in securitizations
 
172

 
(8
)
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
164

 
(8
)
Net derivative assets (liabilities)(2)
 
13

 
(24
)
 
0

 
0

 
0

 
7

 
(2
)
 
0

 
1

 
(5
)
 
(24
)
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Three Months Ended June 30, 2017
 
 
 
 
Total Gains (Losses)
(Realized/Unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized
Gains (Losses)
Included in Net
Income Related to Assets and
Liabilities Still Held as of
June 30, 2017(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Balance,
April 1,
2017
 
Included
in Net
Income(1)
 
Included in OCI
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
Into
Level 3
 
Transfers
Out of
Level 3
 
Balance, June 30, 2017
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RMBS
 
$
449

 
$
8

 
$
10

 
$
0

 
$
(5
)
 
$
0

 
$
(24
)
 
$
159

 
$
(168
)
 
$
429

 
$
8

CMBS
 
78

 
0

 
0

 
0

 
0

 
0

 
(1
)
 
0

 
(60
)
 
17

 
0

Other securities
 
9

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
9

 
0

Total securities available for sale
 
536

 
8

 
10

 
0

 
(5
)
 
0

 
(25
)
 
159

 
(228
)
 
455

 
8

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer MSRs
 
86

 
(5
)
 
0

 
0

 
0

 
5

 
(1
)
 
0

 
0

 
85

 
(5
)
Retained interests in securitizations
 
195

 
(7
)
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
188

 
(7
)
Net derivative assets (liabilities)(2)
 
22

 
1

 
0

 
0

 
0

 
15

 
(8
)
 
0

 
(5
)
 
25

 
1



 
 
118
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Six Months Ended June 30, 2017
 
 
 
 
Total Gains (Losses)
(Realized/Unrealized)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Unrealized
Gains (Losses)
Included in Net
Income Related to Assets and
Liabilities Still Held as of
June 30, 2017(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Balance,
January 1,
2017
 
Included
in Net
Income(1)
 
Included in OCI
 
Purchases
 
Sales
 
Issuances
 
Settlements
 
Transfers
Into
Level 3
 
Transfers
Out of
Level 3
 
Balance, June 30, 2017
 
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RMBS
 
$
518

 
$
17

 
$
18

 
$
0

 
$
(5
)
 
$
0

 
$
(46
)
 
$
212

 
$
(285
)
 
$
429

 
$
17

CMBS
 
51

 
0

 
0

 
60

 
0

 
0

 
(2
)
 
0

 
(92
)
 
17

 
0

Other securities
 
9

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
9

 
0

Total securities available for sale
 
578

 
17

 
18

 
60

 
(5
)
 
0

 
(48
)
 
212

 
(377
)
 
455

 
17

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer MSRs
 
80

 
(4
)
 
0

 
0

 
0

 
12

 
(3
)
 
0

 
0

 
85

 
(4
)
Retained interests in securitizations
 
201

 
(13
)
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
188

 
(13
)
Net derivative assets (liabilities)(2)
 
18

 
1

 
0

 
0

 
0

 
27

 
(15
)
 
0

 
(6
)
 
25

 
1

__________
(1) 
Gains (losses) on securities available for sale, retained interests in securitizations and consumer MSRs are reported as a component of non-interest income in our consolidated statements of income. Gains (losses) on derivatives are included as a component of net interest income or non-interest income in our consolidated statements of income.
(2) 
Includes derivative assets and liabilities of $43 million and $48 million, respectively, as of June 30, 2018, and $57 million and $32 million, respectively, as of June 30, 2017.
Significant Level 3 Fair Value Asset and Liability Input Sensitivity
Changes in unobservable inputs may have a significant impact on fair value. Certain of these unobservable inputs will, in isolation, have a directionally consistent impact on the fair value of the instrument for a given change in that input. Alternatively, the fair value of the instrument may move in an opposite direction for a given change in another input. In general, an increase in the discount rate, default rates, loss severity and credit spreads, in isolation, would result in a decrease in the fair value measurement. In addition, an increase in default rates would generally be accompanied by a decrease in recovery rates, slower prepayment rates and an increase in liquidity spreads.
Techniques and Inputs for Level 3 Fair Value Measurements
The following table presents the significant unobservable inputs used to determine the fair values of our Level 3 financial instruments on a recurring basis. We utilize multiple vendor pricing services to obtain fair value for our securities. Several of our vendor pricing services are only able to provide unobservable input information for a limited number of securities due to software licensing restrictions. Other vendor pricing services are able to provide unobservable input information for all securities for which they provide a valuation. As a result, the unobservable input information for the securities available for sale presented below represents a composite summary of all information we are able to obtain. The unobservable input information for all other Level 3 financial instruments is based on the assumptions used in our internal valuation models.

 
 
119
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Table 12.3: Quantitative Information about Level 3 Fair Value Measurements
 
 
Quantitative Information about Level 3 Fair Value Measurements
(Dollars in millions)
 
Fair Value at
June 30,
2018
 
Significant
Valuation
Techniques
 
Significant
Unobservable
Inputs
 
Range
 
Weighted
Average
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
RMBS
 
$
442

 
Discounted cash flows (vendor pricing)
 
Yield
Voluntary prepayment rate
Default rate
Loss severity
 
2-10%
0-28%
0-8%
0-90%
 
5%
4%
3%
64%
CMBS
 
11

 
Discounted cash flows (vendor pricing)
 
Yield
 
3%
 
3%
Other securities
 
5

 
Discounted cash flows
 
Yield
 
3%
 
3%
Other assets:
 
 
 
 
 
 
 
 
 
 
Retained interests in securitization(1)
 
164

 
Discounted cash flows
 
Life of receivables (months)
Voluntary prepayment rate
Discount rate
Default rate
Loss severity
 
1-59
2-13%
4-5%
2-6%
51-116%
 
N/A
Net derivative assets (liabilities)
 
(5
)
 
Discounted cash flows
 
Swap rates
 
3%
 
3%
 
 
Quantitative Information about Level 3 Fair Value Measurements
(Dollars in millions)
 
Fair Value at
December 31,
2017
 
Significant
Valuation
Techniques
 
Significant
Unobservable
Inputs
 
Range
 
Weighted
Average
Securities available for sale:
 
 
 
 
 
 
 
 
 
 
RMBS
 
$
614

 
Discounted cash flows (vendor pricing)
 
Yield
Voluntary prepayment rate
Default rate
Loss severity
 
2-9%
0-15%
0-8%
0-90%
 
5%
4%
3%
62%
CMBS
 
14

 
Discounted cash flows (vendor pricing)
 
Yield
Voluntary prepayment rate
 
3%
0%
 
3%
0%
Other securities
 
5

 
Discounted cash flows
 
Yield
 
2%
 
2%
Other assets:
 
 
 
 
 
 
 
 
 
 
Consumer MSRs
 
92

 
Discounted cash flows
 
Total prepayment rate
Discount rate
Option-adjusted spread rate
Servicing cost ($ per loan)
 
7-30%
14%
200-1,500 bps
$75-$100
 
16%
14%
458 bps
$76
Retained interests in securitization(1)
 
172

 
Discounted cash flows
 
Life of receivables (months) Voluntary prepayment rate
Discount rate
Default rate
Loss severity
 
6-79
2-12%
3-10%
1-6%
3-115%
 
N/A
Net derivative assets (liabilities)
 
13

 
Discounted cash flows
 
Swap rates
 
2%
 
2%
__________
(1) 
Due to the nature of the various mortgage securitization structures in which we have retained interests, it is not meaningful to present a consolidated weighted average for the significant unobservable inputs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We are required to measure and recognize certain assets at fair value on a nonrecurring basis on the consolidated balance sheets. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, from the application of lower of cost or fair value accounting or when we evaluate for impairment).

 
 
120
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the carrying value of the assets measured at fair value on a nonrecurring basis and still held as of June 30, 2018 and December 31, 2017, and for which a nonrecurring fair value measurement was recorded during the six and twelve months then ended.
Table 12.4: Nonrecurring Fair Value Measurements
 
 
June 30, 2018
 
 
Estimated Fair Value Hierarchy
 
Total
(Dollars in millions)
 
Level 2
 
Level 3
 
Loans held for investment
 
$
0

 
$
82

 
$
82

Loans held for sale
 
348

 
0

 
348

Other assets(1)
 
0

 
99

 
99

Total
 
$
348

 
$
181

 
$
529

 
 
December 31, 2017
 
 
Estimated Fair Value Hierarchy
 
Total
(Dollars in millions)
 
Level 2
 
Level 3
 
Loans held for investment
 
$
0

 
$
182

 
$
182

Loans held for sale
 
177

 
1

 
178

Other assets(1)
 
0

 
35

 
35

Total
 
$
177

 
$
218

 
$
395

__________
(1) 
As of June 30, 2018, other assets included equity investments accounted for under measurement alternative of $17 million, foreclosed property and repossessed assets of $75 million and long-lived assets held for sale of $7 million. As of December 31, 2017, other assets included foreclosed property and repossessed assets of $17 million and long-lived assets held for sale of $18 million.
In the above table, loans held for investment are generally valued based in part on the estimated fair value of the underlying collateral and the non-recoverable rate, which is considered to be a significant unobservable input. The non-recoverable rate ranged from 0% to 76%, with a weighted average of 19%, and from 0% to 77%, with a weighted average of 21%, as of June 30, 2018 and December 31, 2017, respectively. The significant unobservable inputs and related quantitative information related to fair value of the other assets are not meaningful to disclose as they vary significantly across properties and collateral.
The following table presents total nonrecurring fair value measurements for the period, included in earnings, attributable to the change in fair value relating to assets that are still held at June 30, 2018 and 2017.
Table 12.5: Nonrecurring Fair Value Measurements Included in Earnings
 
 
Total Gains (Losses)
 
 
Six Months Ended June 30,
(Dollars in millions)
 
2018
 
2017
Loans held for investment
 
$
(65
)
 
$
(116
)
Loans held for sale
 
(3
)
 
(3
)
Other assets(1)
 
(47
)
 
(6
)
Total
 
$
(115
)
 
$
(125
)
__________
(1) 
Other assets include fair value adjustments related to equity investments accounted for under measurement alternative, foreclosed property, repossessed assets and long-lived assets held for sale.

 
 
121
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Financial Instruments
The following table presents the carrying value and estimated fair value, including the level within the fair value hierarchy, of our financial instruments that are not measured at fair value on a recurring basis on our consolidated balance sheets as of June 30, 2018 and December 31, 2017.
Table 12.6: Fair Value of Financial Instruments
 
 
June 30, 2018
 
 
Carrying
Value
 
Estimated
Fair Value
 
Estimated Fair Value Hierarchy
(Dollars in millions)
 
 
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
12,273

 
$
12,273

 
$
4,499

 
$
7,774

 
$
0

Restricted cash for securitization investors
 
1,023

 
1,023

 
1,023

 
0

 
0

Securities held to maturity
 
33,464

 
33,097

 
0

 
33,056

 
41

Net loans held for investment
 
228,756

 
232,276

 
0

 
0

 
232,276

Loans held for sale
 
1,480

 
1,495

 
0

 
1,417

 
78

Interest receivable
 
1,493

 
1,493

 
0

 
1,493

 
0

Other investments(1)
 
1,341

 
1,341

 
0

 
1,341

 
0

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits with defined maturities
 
33,761

 
33,662

 
0

 
33,662

 
0

Securitized debt obligations
 
19,649

 
19,735

 
0

 
19,735

 
0

Senior and subordinated notes
 
32,920

 
33,236

 
0

 
33,236

 
0

Federal funds purchased and securities loaned or sold under agreements to repurchase
 
553

 
553

 
0

 
553

 
0

Other borrowings(2)
 
141

 
141

 
0

 
141

 
0

Interest payable
 
450

 
450

 
0

 
450

 
0

 
 
December 31, 2017
 
 
Carrying
Value
 
Estimated
Fair Value
 
Estimated Fair Value Hierarchy
(Dollars in millions)
 
 
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
14,040

 
$
14,040

 
$
4,458

 
$
9,582

 
$
0

Restricted cash for securitization investors
 
312

 
312

 
312

 
0

 
0

Securities held to maturity
 
28,984

 
29,437

 
200

 
29,217

 
20

Net loans held for investment
 
246,971

 
251,468

 
0

 
0

 
251,468

Loans held for sale
 
971

 
952

 
0

 
949

 
3

Interest receivable
 
1,536

 
1,536

 
0

 
1,536

 
0

Other investments(1)
 
1,689

 
1,689

 
0

 
1,680

 
9

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
243,702

 
243,732

 
26,404

 
217,328

 
0

Securitized debt obligations
 
20,010

 
20,122

 
0

 
20,122

 
0

Senior and subordinated notes
 
30,755

 
31,392

 
0

 
31,392

 
0

Federal funds purchased and securities loaned or sold under agreements to repurchase
 
576

 
576

 
0

 
576

 
0

Other borrowings(2)
 
8,892

 
8,892

 
0

 
8,892

 
0

Interest payable
 
413

 
413

 
0

 
413

 
0

__________
(1) 
Other investments as of June 30, 2018 include FHLB and Federal Reserve stock. Other investments as of December 31, 2017 include FHLB and Federal Reserve stock, as well as cost method investments. These investments are included in other assets on our consolidated balance sheets.
(2) 
Other borrowings excludes capital lease obligations.

 
 
122
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13—BUSINESS SEGMENTS AND REVENUE FROM CONTRACTS WITH CUSTOMERS
Our principal operations are organized into three major business segments, which are defined primarily based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio, asset/liability management by our centralized Corporate Treasury group and residual tax expense or benefit to arrive at the consolidated effective tax rate that is not assessed to our primary business segments, are included in the Other category.
Basis of Presentation
We report the results of each of our business segments on a continuing operations basis. See “Note 2—Business Developments and Discontinued Operations” for a discussion of our discontinued operations. The results of our individual businesses reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources.
Business Segment Reporting Methodology
The results of our business segments are intended to present each segment as if it were a stand-alone business. Our internal management and reporting process used to derive our segment results employs various allocation methodologies, including funds transfer pricing, to assign certain balance sheet assets, deposits and other liabilities and their related revenue and expenses directly or indirectly attributable to each business segment. Our funds transfer pricing process provides a funds credit for sources of funds, such as deposits generated by our Consumer Banking and Commercial Banking businesses, and a funds charge for the use of funds by each segment. Due to the integrated nature of our business segments, estimates and judgments have been made in allocating certain revenue and expense items. Transactions between segments are based on specific criteria or approximate third-party rates. We regularly assess the assumptions, methodologies and reporting classifications used for segment reporting, which may result in the implementation of refinements or changes in future periods. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 18—Business Segments” in our 2017 Form 10-K.
Segment Results and Reconciliation
We may periodically change our business segments or reclassify business segment results based on modifications to our management reporting methodologies or changes in organizational alignment. In the first quarter of 2018, we made a change in how revenue is measured in our Commercial Banking business to include the tax benefits of losses on certain tax-advantaged investments. These tax benefits are included in revenue on a taxable-equivalent basis within our Commercial Banking business, with an offsetting reduction in the Other category. This change in measurement of our Commercial Banking revenue did not have any impact to the consolidated financial statements.

 
 
123
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present our business segment results for the three and six months ended June 30, 2018 and 2017, selected balance sheet data as of June 30, 2018 and 2017, and a reconciliation of our total business segment results to our reported consolidated net income from continuing operations, loans held for investment and deposits.
Table 13.1: Segment Results and Reconciliation
 
 
Three Months Ended June 30, 2018
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial
Banking(1)(2)
 
Other(1)(2)(3)
 
Consolidated
Total
Net interest income
 
$
3,396

 
$
1,609

 
$
549

 
$
(3
)
 
$
5,551

Non-interest income
 
884

 
175

 
209

 
373

 
1,641

Total net revenue
 
4,280

 
1,784

 
758

 
370

 
7,192

Provision (benefit) for credit losses
 
1,171

 
118

 
34

 
(47
)
 
1,276

Non-interest expense
 
1,904

 
963

 
409

 
148

 
3,424

Income from continuing operations before income taxes
 
1,205

 
703

 
315

 
269

 
2,492

Income tax provision
 
282

 
164

 
73

 
56

 
575

Income from continuing operations, net of tax
 
$
923

 
$
539

 
$
242

 
$
213

 
$
1,917

Loans held for investment
 
$
109,777

 
$
58,727

 
$
67,609

 
$
11

 
$
236,124

Deposits
 
0

 
194,962

 
31,078

 
22,185

 
248,225

 
 
Six Months Ended June 30, 2018
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial
Banking(1)(2)
 
Other(1)(2)(3)
 
Consolidated
Total
Net interest income
 
$
6,954

 
$
3,224

 
$
1,085

 
$
6

 
$
11,269

Non-interest income
 
1,741

 
349

 
396

 
346

 
2,832

Total net revenue
 
8,695

 
3,573

 
1,481

 
352

 
14,101

Provision (benefit) for credit losses
 
2,627

 
351

 
20

 
(48
)
 
2,950

Non-interest expense
 
3,943

 
1,963

 
812

 
279

 
6,997

Income from continuing operations before income taxes
 
2,125

 
1,259

 
649

 
121

 
4,154

Income tax provision (benefit)
 
495

 
294

 
151

 
(46
)
 
894

Income from continuing operations, net of tax
 
$
1,630

 
$
965

 
$
498

 
$
167

 
$
3,260

Loans held for investment
 
$
109,777

 
$
58,727

 
$
67,609

 
$
11

 
$
236,124

Deposits
 
0

 
194,962

 
31,078

 
22,185

 
248,225

 
 
Three Months Ended June 30, 2017
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial
Banking(1)
 
Other(1)
 
Consolidated
Total
Net interest income
 
$
3,294

 
$
1,578

 
$
569

 
$
32

 
$
5,473

Non-interest income
 
875

 
183

 
183

 
(10
)
 
1,231

Total net revenue
 
4,169

 
1,761

 
752

 
22

 
6,704

Provision (benefit) for credit losses
 
1,397

 
268

 
140

 
(5
)
 
1,800

Non-interest expense
 
1,918

 
1,059

 
381

 
56

 
3,414

Income (loss) from continuing operations before income taxes
 
854

 
434

 
231

 
(29
)
 
1,490

Income tax provision (benefit)
 
301

 
158

 
85

 
(101
)
 
443

Income from continuing operations, net of tax
 
$
553

 
$
276

 
$
146

 
$
72

 
$
1,047

Loans held for investment
 
$
101,590

 
$
74,973

 
$
67,672

 
$
67

 
$
244,302

Deposits
 
0

 
186,607

 
33,153

 
20,003

 
239,763



 
 
124
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
Six Months Ended June 30, 2017
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial
Banking(1)
 
Other(1)
 
Consolidated
Total
Net interest income
 
$
6,640

 
$
3,095

 
$
1,135

 
$
77

 
$
10,947

Non-interest income
 
1,613

 
378

 
341

 
(40
)
 
2,292

Total net revenue
 
8,253

 
3,473

 
1,476

 
37

 
13,239

Provision (benefit) for credit losses
 
3,114

 
547

 
138

 
(7
)
 
3,792

Non-interest expense
 
3,847

 
2,101

 
772

 
128

 
6,848

Income (loss) from continuing operations before income taxes
 
1,292

 
825

 
566

 
(84
)
 
2,599

Income tax provision (benefit)
 
468

 
301

 
207

 
(219
)
 
757

Income from continuing operations, net of tax
 
$
824

 
$
524

 
$
359

 
$
135

 
$
1,842

Loans held for investment
 
$
101,590

 
$
74,973

 
$
67,672

 
$
67

 
$
244,302

Deposits
 
0

 
186,607

 
33,153

 
20,003

 
239,763

__________
(1) 
Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate (21% and 35% for all periods presented in 2018 and 2017, respectively) and state taxes where applicable, with offsetting reductions to the Other category.
(2) 
In the first quarter of 2018, we made a change in how revenue is measured in our Commercial Banking business to include the tax benefits of losses on certain tax-advantaged investments. These tax benefits are included in revenue on a taxable-equivalent basis within our Commercial Banking business, with an offsetting reduction to the Other category. In addition, all revenue presented on a taxable-equivalent basis in our Commercial Banking business was impacted by the reduction of the federal tax rate set forth in the Tax Act. The net impact of the measurement change and the reduction of the federal tax rate was a decrease of $28 million and $56 million in revenue in our Commercial Banking business in the second quarter and first six months of 2018, respectively, with an offsetting impact to the Other category.
(3) 
In the second quarter of 2018, we sold the substantial majority of our consumer home loan portfolio and the related servicing. We also transferred the remaining portfolio to loans held for sale as of June 30, 2018. These actions resulted in a net gain of $400 million, including a benefit for credit losses of $46 million, which is reflected in the Other category.
Revenue from Contracts with Customers
In the first quarter of 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) under the modified retrospective transition method. The majority of our revenue from contracts with customers consists of interchange fees in our Credit Card business and service charges on deposits and other customer-related fees in our Consumer Banking and Commercial Banking businesses. Revenue from contracts with customers is included in non-interest income in our consolidated statements of income.
The following table presents revenue from contracts with customers and a reconciliation to non-interest income by business segment for the three and six months ended June 30, 2018.
Table 13.2: Revenue from Contracts with Customers and Reconciliation to Segments Results
 
 
Three Months Ended June 30, 2018
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial
Banking(1)
 
Other(1)
 
Consolidated
Total
Contract revenue:
 
 
 
 
 
 
 
 
 
 
Interchange fees, net(2)
 
$
669

 
$
47

 
$
8

 
$
(1
)
 
$
723

Service charges and other customer-related fees
 
2

 
123

 
35

 
(1
)
 
159

Total contract revenue
 
671

 
170

 
43

 
(2
)
 
882

Revenue from other sources
 
213

 
5

 
166

 
375

 
759

Total non-interest income
 
$
884

 
$
175

 
$
209

 
$
373

 
$
1,641


 
 
125
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
Six Months Ended June 30, 2018
(Dollars in millions)
 
Credit
Card
 
Consumer
Banking
 
Commercial
Banking(1)
 
Other(1)
 
Consolidated
Total
Contract revenue:
 
 
 
 
 
 
 
 
 
 
Interchange fees, net(2)
 
$
1,263

 
$
89

 
$
15

 
$
(1
)
 
$
1,366

Service charges and other customer-related fees
 
4

 
250

 
67

 
(1
)
 
320

Total contract revenue
 
1,267

 
339

 
82

 
(2
)
 
1,686

Revenue from other sources
 
474

 
10

 
314

 
348

 
1,146

Total non-interest income
 
$
1,741

 
$
349

 
$
396

 
$
346

 
$
2,832

__________
(1) 
Some of our commercial investments generate tax-exempt income, tax credits or other tax benefits. Accordingly, we present our Commercial Banking revenue and yields on a taxable-equivalent basis, calculated using the federal statutory tax rate of 21% and state taxes where applicable, with offsetting reclassifications to the Other category.
(2) 
Interchange fees are presented net of customer reward expenses.

 
 
126
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14—COMMITMENTS, CONTINGENCIES, GUARANTEES AND OTHERS
Commitments to Lend
Our unfunded lending commitments primarily consist of credit card lines, loan commitments to customers of both our Commercial Banking and Consumer Banking businesses, as well as standby and commercial letters of credit. These commitments, other than credit card lines, are legally binding conditional agreements that have fixed expirations or termination dates and specified interest rates and purposes. The contractual amount of these commitments represents the maximum possible credit risk to us should the counterparty draw upon the commitment. We generally manage the potential risk of unfunded lending commitments by limiting the total amount of arrangements, monitoring the size and maturity structure of these portfolios and applying the same credit standards for all of our credit activities.
For unused credit card lines, we have not experienced and do not anticipate that all of our customers will access their entire available line at any given point in time. Commitments to extend credit other than credit card lines generally require customers to maintain certain credit standards. Collateral requirements and loan-to-value (“LTV”) ratios are the same as those for funded transactions and are established based on management’s credit assessment of the customer. These commitments may expire without being drawn upon; therefore, the total commitment amount does not necessarily represent future funding requirements.
We also issue letters of credit, such as financial standby, performance standby and commercial letters of credit, to meet the financing needs of our customers. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party in a borrowing arrangement. Commercial letters of credit are short-term commitments issued primarily to facilitate trade finance activities for customers and are generally collateralized by the goods being shipped to the client. These collateral requirements are similar to those for funded transactions and are established based on management’s credit assessment of the customer. Management conducts regular reviews of all outstanding letters of credit and the results of these reviews are considered in assessing the adequacy of reserves for unfunded lending commitments.
The following table presents contractual amount and carrying value of our unfunded lending commitments as of June 30, 2018 and December 31, 2017. The carrying value represents our reserve and deferred revenue on legally binding commitments.
Table 14.1: Unfunded Lending Commitments: Contractual Amount and Carrying Value
 
 
Contractual Amount
 
Carrying Value
(Dollars in millions)
 
June 30,
2018
 
December 31,
2017
 
June 30,
2018
 
December 31,
2017
Credit card lines
 
$
336,003

 
$
351,481

 
N/A

 
N/A

Other loan commitments(1)
 
31,983

 
31,840

 
$
80

 
$
84

Standby letters of credit and commercial letters of credit(2)
 
1,909

 
2,046

 
40

 
43

Total unfunded lending commitments
 
$
369,895

 
$
385,367

 
$
120

 
$
127

__________
(1) 
Includes $973 million and $1.0 billion of advised lines of credit as of June 30, 2018 and December 31, 2017, respectively.
(2) 
These financial guarantees have expiration dates ranging from 2018 to 2025 as of June 30, 2018.
Loss Sharing Agreements and Other Obligations
Within our Commercial Banking business, we originate multifamily commercial real estate loans with the intent to sell them to the GSEs. We enter into loss sharing agreements with the GSEs upon the sale of the loans. At inception, we record a liability representing the fair value of our obligation which is subsequently amortized as we are released from risk of payment under the loss sharing agreement. If payment under the loss sharing agreement becomes probable and estimable, an additional liability may be recorded on the consolidated balance sheets and a non-interest expense may be recognized in the consolidated statements of income. The liability recognized on our consolidated balance sheets for our loss sharing agreements was $48 million and $60 million as of June 30, 2018 and December 31, 2017, respectively.

 
 
127
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In the fourth quarter of 2017, we entered into an agreement with our third-party servicer under which we assumed the obligation to exercise the remaining clean-up calls as they become due on certain securitization transactions related to our discontinued manufactured housing operations of GreenPoint Credit, LLC, a subsidiary of GreenPoint. We also entered into a forward sale agreement pursuant to which we will sell the underlying loans to a third-party purchaser as the clean-up calls are exercised. Accordingly, we recognized loans held for sale and a corresponding liability on our consolidated balance sheets. Based on the current information and estimates, we expect that we will incur losses associated with this exposure and have recorded a liability of $69 million and $78 million as of June 30, 2018 and December 31, 2017, respectively. See “Note 6—Variable Interest Entities and Securitizations” for information related to these transactions.
U.K. Payment Protection Insurance
In the U.K., we previously sold payment protection insurance (“PPI”). In response to an elevated level of customer complaints across the industry, heightened media coverage and pressure from consumer advocacy groups, the U.K. Financial Conduct Authority (“FCA”), formerly the Financial Services Authority, investigated and raised concerns about the way the industry has handled complaints related to the sale of these insurance policies. For the past several years, the U.K.’s Financial Ombudsman Service (“FOS”) has been adjudicating customer complaints relating to PPI, escalated to it by consumers who disagree with the rejection of their complaint by firms, leading to customer remediation payments by us and others within the industry. On March 2, 2017, the FCA issued a statement that sets out final rules and guidance on the PPI complaints deadline, which has been set as August 29, 2019. The statement also provides clarity on how to handle PPI complaints under s.140A of the Consumer Credit Act, including guidance on how redress for such complaints should be calculated. The final rules and guidance came into force on August 29, 2017.
In determining our best estimate of incurred losses for future remediation payments, management considers numerous factors, including (i) the number of customer complaints we expect in the future; (ii) our expectation of upholding those complaints; (iii) the expected number of complaints customers escalate to the FOS; (iv) our expectation of the FOS upholding such escalated complaints; (v) the number of complaints that fall under s.140A of the Consumer Credit Act; and (vi) the estimated remediation payout to customers. We monitor these factors each quarter and adjust our reserves to reflect the latest data.
Management’s best estimate of incurred losses related to U.K. PPI totaled $157 million and $249 million as of June 30, 2018 and December 31, 2017, respectively. For the six months ended June 30, 2018, we added $49 million to our reserve in response to sustained higher complaint volume. Other movements were due to a combination of utilization of the reserve through customer refund payments and foreign exchange movements. Our best estimate of reasonably possible future losses beyond our reserve as of June 30, 2018 is approximately $100 million.
Litigation
In accordance with the current accounting standards for loss contingencies, we establish reserves for litigation related matters that arise from the ordinary course of our business activities when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated. None of the amounts we currently have recorded individually or in the aggregate are considered to be material to our financial condition. Litigation claims and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. Below we provide a description of potentially material legal proceedings and claims.
For some of the matters disclosed below, we are able to estimate reasonably possible losses above existing reserves, and for other disclosed matters, such an estimate is not possible at this time. For those matters below where an estimate is possible, management currently estimates the reasonably possible future losses beyond our reserves as of June 30, 2018 is approximately $500 million, which includes estimates related to mortgage representation and warranty exposure. Our reserve and reasonably possible loss estimates involve considerable judgment and reflect that there is still significant uncertainty regarding numerous factors that may impact the ultimate loss levels. Notwithstanding our attempt to estimate a reasonably possible range of loss beyond our current accrual levels for some litigation matters based on current information, it is possible that actual future losses will exceed both the current accrual level and the range of reasonably possible losses disclosed here. Given the inherent uncertainties involved in these matters, especially those involving governmental agencies, and the very large or indeterminate damages sought in some of these matters, there is significant uncertainty as to the ultimate liability we may incur from these litigation matters and an adverse outcome in one or more of these matters could be material to our results of operations or cash flows for any particular reporting period.

 
 
128
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interchange
In 2005, a number of entities, each purporting to represent a class of retail merchants, filed antitrust lawsuits against MasterCard and Visa and several member banks, including our subsidiaries and us, alleging among other things, that the defendants conspired to fix the level of interchange fees. The complaints seek injunctive relief and civil monetary damages, which could be trebled. Separately, a number of large merchants have asserted similar claims against Visa and MasterCard only (together with the lawsuits described above, “Interchange Lawsuits”). In October 2005, the class and merchant Interchange Lawsuits were consolidated before the U.S. District Court for the Eastern District of New York for certain purposes, including discovery. In July 2012, the parties executed and filed with the court a Memorandum of Understanding agreeing to resolve the litigation on certain terms set forth in a settlement agreement attached to the Memorandum. The class settlement provides for, among other things, (i) payments by defendants to the class and individual plaintiffs totaling approximately $6.6 billion; (ii) a distribution to the class merchants of an amount equal to 10 basis points of certain interchange transactions for a period of eight months; and (iii) modifications to certain Visa and MasterCard rules regarding point of sale practices. In December 2013, the district court granted final approval of the proposed class settlement, which was appealed to the Second Circuit Court of Appeals in January 2014. On June 30, 2016, the Second Circuit vacated the district court’s certification of the class, reversed approval of the proposed class settlement, and remanded the litigation to the district court for further proceedings, ruling that some of the merchants that were part of the proposed class settlement were not adequately represented. Because the Second Circuit ruling remands the litigation to the district court for further proceedings, the ultimate outcome in this matter is uncertain. Several merchant plaintiffs also opted out of the class settlement before it was overturned, and some of those plaintiffs have sued MasterCard, Visa and various member banks, including Capital One. The opt-out cases are consolidated before the U.S. District Court for the Eastern District of New York for certain purposes, including discovery. Visa and MasterCard have settled a number of individual opt-out cases, requiring non-material payments from all banks, including Capital One. Separate settlement and judgment sharing agreements between Capital One, MasterCard and Visa allocate the liabilities of any judgment or settlement arising from the Interchange Lawsuits and associated opt-out cases. Visa created a litigation escrow account following its IPO of stock in 2008, which funds any settlements for its member banks, and any settlements related to MasterCard allocated losses are reflected in Capital One’s reserves.
Mortgage Representation and Warranty
We face residual exposure related to subsidiaries that originated residential mortgage loans and sold these loans to various purchasers, including purchasers who created securitization trusts. In connection with their sales of mortgage loans, these subsidiaries entered into agreements containing varying representations and warranties about, among other things, the ownership of the loan, the validity of the lien securing the loan, the loan’s compliance with any applicable criteria established by the purchaser, including underwriting guidelines and the existence of mortgage insurance, and the loan’s compliance with applicable federal, state and local laws. Each of these subsidiaries may be required to repurchase mortgage loans, or indemnify certain purchasers and others against losses they incur, in the event of certain breaches of these representations and warranties.
The substantial majority of our representation and warranty exposure has been resolved through litigation, and our remaining representation and warranty exposure is almost entirely litigation-related. Accordingly, we establish litigation reserves for representation and warranty losses that we consider to be both probable and reasonably estimable. The reserve process relies heavily on estimates, which are inherently uncertain, and requires the application of judgment. Our reserves and estimates of reasonably possible losses could be impacted by claims which may be brought by securitization trustees and sponsors, bond-insurers, investors, and GSEs, as well as claims brought by governmental agencies under the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”), the False Claims Act or other federal or state statutes.
In May, June and July 2012, the Federal Housing Finance Agency (“FHFA”) (acting as conservator for Freddie Mac) filed three summonses with notice in the New York state court against GreenPoint, on behalf of the trustees for three RMBS trusts backed by loans originated by GreenPoint with an aggregate original principal balance of $3.4 billion. In January 2013, the plaintiffs filed an amended consolidated complaint in the name of the three trusts, acting by the respective trustees, alleging breaches of contractual representations and warranties regarding compliance with GreenPoint underwriting guidelines relating to certain loans (“FHFA Litigation”). Plaintiffs seek specific performance of the repurchase obligations with respect to the loans for which they have provided notice of alleged breaches as well as all other allegedly breaching loans, rescissory damages, indemnification, costs and interest. On March 29, 2017, the trial court granted GreenPoint’s motion for summary judgment and dismissed plaintiff’s claims as untimely. In May 2017, the plaintiff appealed the dismissal to the Second Circuit.

 
 
129
Capital One Financial Corporation (COF)

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Anti-Money Laundering
Capital One is being investigated by the New York District Attorney’s Office (“NYDA”), the Department of Justice (“DOJ”) and the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury with respect to certain former check casher clients of the Commercial Banking business and Capital One’s anti-money laundering (“AML”) program. Capital One is cooperating with all agencies involved in the investigation.
In addition, Capital One is subject to an open consent order with the Office of the Comptroller of the Currency (“OCC”) dated July 10, 2015 concerning regulatory deficiencies in our AML program.
Other Pending and Threatened Litigation
In addition, we are commonly subject to various pending and threatened legal actions relating to the conduct of our normal business activities. In the opinion of management, the ultimate aggregate liability, if any, arising out of all such other pending or threatened legal actions, is not expected to be material to our consolidated financial position or our results of operations.

 
 
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Capital One Financial Corporation (COF)

Item 3. Quantitative and Qualitative Disclosures about Market Risk
For a discussion of the quantitative and qualitative disclosures about market risk, see “MD&A—Market Risk Profile.”
Item 4. Controls and Procedures
Overview
We are required under applicable laws and regulations to maintain controls and procedures, which include disclosure controls and procedures as well as internal control over financial reporting, as further described below.
(a) Disclosure Controls and Procedures
Disclosure controls and procedures refer to controls and other procedures designed to provide reasonable assurance that information required to be disclosed in our financial reports is recorded, processed, summarized and reported within the time periods specified by the U.S. Securities and Exchange Commission (“SEC”) rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we must apply judgment in evaluating and implementing possible controls and procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”), our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30, 2018, the end of the period covered by this Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2018, at a reasonable level of assurance, in recording, processing, summarizing and reporting information required to be disclosed within the time periods specified by the SEC rules and forms.
(b) Changes in Internal Control Over Financial Reporting
We regularly review our disclosure controls and procedures and make changes intended to ensure the quality of our financial reporting. There were no changes in internal control over financial reporting that occurred in the second quarter of 2018 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
 
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Capital One Financial Corporation (COF)

PART II—OTHER INFORMATION
Item 1. Legal Proceedings
The information required by Item 103 of Regulation S-K is included in “Note 14—Commitments, Contingencies, Guarantees and Others.”
Item 1A. Risk Factors
We are not aware of any material changes from the risk factors set forth under “Part I—Item 1A. Risk Factors” in our 2017 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information related to repurchases of shares of our common stock for each calendar month in the second quarter of 2018. Commission costs are excluded from the amounts presented below.
(Dollars in millions, except per share information)
 
Total
Number
of Shares
Purchased(1)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
 
Maximum
Amount That May
Yet be Purchased
Under the Plan
or Program(2)
April
 
1,754

 
$
95.44

 
—

 
$
800

May
 
3,546,870

 
94.61

 
3,527,200

 
466

June
 
4,885,300

 
95.43

 
4,885,300

 
—

Total
 
8,433,924

 
95.09

 
8,412,500

 
 
__________
(1) 
Comprises mainly repurchase of common stock under the 2017 Stock Repurchase Program. There were 1,754 and 19,670 shares withheld in April and May, respectively, to cover taxes on restricted stock awards whose restrictions have lapsed. For additional information including our 2018 Stock Repurchase Program, see “MD&A—Capital Management—Dividend Policy and Stock Purchases”.
(2) 
In December 2017, the Board of Directors reduced the authorized repurchases of our common stock to up to $1.0 billion for the remaining 2017 Comprehensive Capital Analysis and Review (“CCAR”) period, which ended June 30, 2018.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
An index to exhibits has been filed as part of this Report and is incorporated herein by reference.

 
 
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Capital One Financial Corporation (COF)

EXHIBIT INDEX
CAPITAL ONE FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
DATED JUNE 30, 2018
Commission File No. 1-13300
The following exhibits are incorporated by reference or filed herewith. References to the “2003 Form 10-K” are to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, filed on March 5, 2004.
Exhibit No.
 
Description
3.1
 
3.2
 
3.3.1
 
3.3.2
 
3.3.3
 
3.3.4
 
3.3.5
 
3.3.6
 
3.3.7
 
4.1.1
 
4.1.2
 
4.1.3
 
4.2
 
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt are not filed. The Company agrees to furnish a copy thereof to the SEC upon request.
10.1*
 
12.1*
 
31.1*
 
31.2*
 
32.1*
 
32.2*
 
101.INS*
 
XBRL Instance Document.
101.SCH*
 
XBRL Taxonomy Extension Schema Document.
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document.
__________
*
Indicates a document being filed with this Form 10-Q.
**
Information in this Form 10-Q furnished herewith shall not be deemed to be “filed” for the purposes of Section 18 of the 1934 Act or otherwise subject to the liabilities of that section.

 
 
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Capital One Financial Corporation (COF)

SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
CAPITAL ONE FINANCIAL CORPORATION
 
 
 
 
 
 
 
Date: July 27, 2018
 
By:
 
/s/ R. SCOTT BLACKLEY
 
 
 
 
 
R. Scott Blackley
 
 
 
 
 
Chief Financial Officer
 

 
 
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Capital One Financial Corporation (COF)